Q1 2021 Hilton Worldwide Holdings Inc Earnings Call
Good morning, and welcome to the Hilton and first quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays prepared remarks, there will be a question and answer session.
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And withdraw your question, Please press star and chip.
Please note this event is being recorded.
I would now like turn the conference over to Jill Slattery, Senior Vice President Investor Relations and corporate development you may begin.
Thank you Chad welcome to Hilton first quarter 2021 earnings call.
Before we begin and we would like to remind you that our discussions. This morning will include forward looking statements.
Actual results could differ materially from those indicated and the forward looking statements and forward looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise these statements.
For a discussion of some of the factors that could cause actual results to differ please see the risk factors section of our most recently filed form 10-K.
In addition, we will refer to certain non-GAAP financial measures on this call you can find reconciliations of non-GAAP to GAAP financial measures discussed on today's call and our earnings press release and on our website at IR Dot Hilton Dot com.
This morning Christmas better, our President and Chief Executive Officer will provide an overview of the current operating environment and Kevin Jacobs, Our Chief Financial Officer, and President of Global Development will then review our first quarter results. Following their remarks, we'll be happy to take your questions with that I am pleased to turn the call over to crash and thank you Joe and good morning every.
And thanks for joining us today.
And it's been a little over a year since the pandemic started over that time, we acted swiftly to address the challenges we face. So we could quickly turn our focus to best positioning ourselves towards recovery and beyond and I'm really proud of how we've set up the company for the future and most importantly.
Grateful to our team members, who have continued to lead with hospitality and to all of our stakeholders for their ongoing support.
And the first quarter system wide revpar decreased 38% year over year and 53% versus 2019.
Rising COVID-19 cases, and tightening travel restrictions, particularly across Europe, and Asia Pacific weighed on demand through January and most of February and March marked a turning point as we lap the start of the U S. Lockdowns Revpar turned positive up more.
And then 23 per cent year over year system wide occupancy reached 55 per cent by the end of the month driven by strong leisure demand as expected recovery and group and corporate transient continued to lag, but both segments segment showed sequential improvement versus the fourth.
Quarter.
Overall this positive momentum has continued into the second quarter, well recovery varies by region and country. We can see the light at the end of the tunnel and the U S more than 50% of adults have received at least one dose of a COVID-19 vaccine as a result, we're seeing a significant lift and Ford.
<unk> and occupancy, which is now around 60 per cent as well as lengthening booking windows. This mirrors trends and other countries around the world for for instance, China is running and the low Seventy's occupancy we do expect this momentum to continue.
<unk> seen distribution, coupled with relaxed travel restrictions.
And increasing consumer confidence should drive further revpar improvements in the coming months and quarters and fact, we're on pace to see record leisure demand and the U S. Over the summer months with April bookings for this summer exceeding 2019 peak levels by nearly 10% we are.
Also expect continued corporate office re openings to drive the meaningful pick up and business transient demand towards the back half of the year based on what we've seen and China and pockets of the U S. Once restrictions are lifted and offices reopen business travel returns and the first quarter business trends.
And net revenue was roughly 75 per cent of 2019 levels and states that were further along and their reopening process and.
Additionally, recent forecast for nonresidential fixed investment are up more than three percentage points.
From prior projections to seven 8%, indicating even greater optimism around business spending and the group side forward booking activity continues to improve month over month.
Group bookings made in the first quarter for the back half of the year were roughly flat with 2019 booking activity suggests and customers are increasingly optimistic about safety measures and loosening pandemic restrictions near term group bookings continue to be driven largely by social events and smaller.
Group meetings, but we are seeing a slow shift back to a more normal mix of business with corporate group leads up more than 70 per cent for future periods.
Associations and trade shows have also started opening up housing and registration sites for events. Later this year further signs of moving forward with in person group meetings as we look out to next year. Our group position is roughly 85% of peak 2019 level.
And with rate increases versus 2019 group bookings were up in the mid teens for 2020 three versus 2019 and.
In fact last week I was in Mexico to chair the World travel and Tourism Council Global Summit.
We're more than 800 participants from all over the world attended in person.
And thousands more attended virtually the conference demonstrated that it is possible to meet and a safeway and hybrid events can be incredibly effective and expanding participation and enhancing collaboration it was great to be and the same room with other hospitality and government leaders talking about the bright future that lies ahead for our industry.
Free event made me, even more optimistic for a recovery and confident that we are beginning to see a new era of travel emerge.
Turning to development during the quarter, we added 105 hotels totaling more than 16005 hundred rooms to our system and achieve net unit growth of five 8%. We celebrated the opening of our hundreds curio and our 50th tapestry hotel demonstrating the strength of our conversion friendly brands overall conversions accounted for.
<unk>, 24% of additions in the quarter.
We also continued to enhance our resort footprint during the quarter with the openings of the 1500 room Virgin Hotel in Las Vegas, The Hilton Abu Dhabi Island.
The all inclusive Yucatan resort Playa del Carmen and the six spectacular properties, along the California coast customers have even more opportunities to stay with us as travel resumes.
Building on our already impressive portfolio and the world's most desirable locations during the quarter, we signed agreements to bring our Waldorf Astoria and canopy brands to the Seychelles. The properties are scheduled to open in 2020 three joining the mango House Seychelles, Alex Our hotel and resort set to open later.
This summer in the quarter and we signed nearly 22000 rooms modestly ahead of our expectations.
This included our first Cigna hotel. Additionally, through our strategic partnership with country Garden to introduce the <unk> suites brand in China, we added more than 5000 rooms to our pipeline. We're excited for the opportunities. This partnership provides with one of our fastest growing brands home too.
Recently celebrated its 10th anniversary, marking the milestone with nearly 1000 hotel rooms.
<unk> open and in the pipeline and entrepreneur magazine's annual franchise 500 list, which featured 11 of our 18 brands home too was the number two hotel brand ranking only behind the Hampton.
Overall, we are very happy with our development progress and excited for additional growth opportunities.
And with more than half of our 399000 room pipeline under construction, we're confident and our ability to grow net units. The mid single digit rain range for the next several years and continue to expect growth and the 4.5% to 5% range and 2021 and.
And environment, where safety and cleanliness are top priorities for travelers, we continue to create more opportunities for our guests to enjoy a contactless experience from pre arrival the post checkout, our digital key feature which enables guests to bypass the front desk and go straight to their rooms is now available and the vast majority.
And of our hotels worldwide. Additionally, we joined forces with Lyft to mobilize honors members to contribute to the Lyft vaccine access initiative, which funds rides for those in need of reliable transportation to their vaccine appointment.
Excited to continue the momentum of our partnership with Lyft by supporting this important cost during the quarter. We also launched two new co branded credit cards, and Japan building on our 25 year partnership with American Express and marking the first time, our co branded cards have been made available to customers outside the U.
And states. These cards are designed with both frequent and occasional travelers and mind and offer customers the opportunity to earn Hilton honors bonus points on everyday spending as well as at our properties worldwide. As a result of our strong partnerships industry, leading brands and unmatched value proposition.
And our loyalty program continues to attracting new members. We ended the first quarter with more than 115 million honors members up roughly 8% year over year with membership increasing across every major region, despite lower demand due to the pandemic.
As I reflect on the quarter and the past year I'm very proud of the determination and creativity and hospitality that our Hilton team members have demonstrated this earned us recognition by fortune and great place to work is the number one best Big company to work for and number three best company work for and the.
And I did states.
Overall, I'm pleased with our first quarter results and feel very good about the momentum for the remainder of the year I'm optimistic for the future of travel and for Hilton as we emerge stronger and better position continuing to drive value for our guests our owners our communities and of course, our shareholders with that and we'll turn the call over to Kevin.
And to give more details on our results for the quarter.
Thanks, Chris and good morning, everyone. During the quarter system wide Revpar declined 38, 4% versus the prior year on a comparable and currency neutral basis, as rising COVID-19 cases, and reinstated and travel restrictions and lockdowns disrupted the demand environment, especially across Europe and Asia Pacific. However.
Occupancy improved sequentially throughout the quarter, increasing more than 20 points.
Adjusted EBITDA was $198 million and the first quarter down 45% year over year <unk>.
Results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter.
Management and franchise fees decreased 34% less and Revpar decrease this franchise fee declines were somewhat mitigated by better than expected license fees and development fees. Additionally.
Additionally results were helped by continued cost control at both the corporate and property levels.
Our ownership portfolio posted a loss for the quarter due to the challenged demand environment reinstated lockdowns and travel restrictions and Europe, and Japan, coupled with temporary hotel closures and fixed operating costs, including fixed rent payments at some of our leased properties weighed on our performance.
<unk> cost control and mitigated segment losses.
For the quarter diluted earnings per share adjusted for special items was two sets.
Turning to our regional performance first quarter comparable U S. Revpar declined nearly 37% year over year and 50% versus 2019.
Demand improved sequentially throughout the quarter with March occupancy, 62% higher than January and ending at 55% the.
The highest level since the pandemic began.
Leisure travel continued to lead the recovery, particularly on weekends with warm weather destinations benefiting the most.
And the Americas outside the U S first quarter, Revpar declined 55% year over year and 63% versus 2019.
Performance recovered in March, but lagged the broader system due to the regions greater dependence on international travel, which remain constrained by tightened and travel restrictions and.
And Europe, Revpar fell 76% year over year, and 82% versus 2019.
Declines were driven by increasing COVID-19 cases, and reinstated lockdowns across both the United Kingdom and Continental Europe.
Delays and vaccination distribution also disrupted recovery.
And the Middle East and Africa region, Revpar was down 32% year over year, and 46% versus 2019 performance and the region benefited from strong domestic demand and the easing of restrictions.
And the Asia Pacific region, first quarter, Revpar fell 7% year over year and 49% versus 2019.
As rising infections, Lockdowns and border closures weighed on performance early in the quarter.
Revpar in China increased 64% year over year with occupancy levels, increasing from roughly 35% to roughly 65% during the quarter, both leisure and business transient demand rebounded quickly as restrictions eased with March occupancy and China exceeding 2019 levels.
Turning to development as Chris mentioned and the first quarter. We grew net units five 8% driven primarily by the Americas and Asia Pacific.
Tightening restrictions and lockdowns across Europe delayed openings and the region. However, we expect an uptick and development activity as countries continue to reopen.
For the full year, we continue to expect net unit growth of four and 5% to five per cent.
Signings and the quarter decreased year over year due to pre pandemic comparisons, but exceeded our expectations due to greater than expected signings and China, particularly for our home two suites brand for the year, we expect signings to increase mid single digits versus 2020.
Turning to the balance sheet during the quarter, we took steps to further enhance our liquidity position and preserve financial flexibility, we repaid $500 million of the outstanding balance under our $1 75 billion revolving credit facility and Opportunistically executed a favorable debt refinancing transaction to extend our maturities at low.
Sure rates as we look ahead, we remain confident and our balance sheet and liquidity positions as we continue to focus on recovery.
Further details on our first quarter can be found and the earnings release, we issued earlier. This morning. This completes our prepared remarks, we would now like to open the line for any questions. You may have we would like to speak with all of you. This morning. So we ask that you limit yourself to one question.
Chad can we have our first question.
Thank you we will now move to a question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, and we'll just pause momentarily to assemble our roster.
And the first question will come from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, good morning, guys and thank you very low.
So Chris Kevin you guys gave some helpful data points around kind of the acceleration that you saw throughout the first quarter and and speaking more maybe on the U S front and you guys, maybe talk a little bit about March and and maybe to the extent you're willing to April and how kind of you know not only revpar trends.
And he gave some data points on occupancy with a 55% exit rate coming out of March kind of what you've seen from a fee generation.
And <unk> side as it pertains to the occupancy gains.
And then perhaps how you're thinking about beyond people coming back into the office the aspect of pent up demand within the business.
Corporate traveler as we get maybe probably a <unk> event and I think most of US would assume at this point, but.
And how do you guys think about that.
Boy, that's a lot of questions all embedded and one but that is that is probably the most important and I'll cover parts of it and maybe Kevin will.
And throw some things and and we'll save a little bit maybe for later because I'm sure others of similar questions, but thank you and I do think debt that is the question does your obviously is both Kevin and I covered Carlo we saw a pretty marked improvement as we march through the quarter and that and that continued into April.
And <unk>.
In terms of the global data I think the best way to look at it is against and.
And 19 comparison, because looking at it against you know 2020, particularly right now as you were and the early stages of the pandemic has is relatively useless and so if you look at January and February you were globally and the U S was similar you know you know.
If you look at it.
You were sort of and the 55% to 60% down from a revpar revpar point of view.
And you know you picked up about 10 points.
Going down into the sort of the mid Forty's.
Down in March and then in April we you add another another step up and Youre now into the low forties.
And obviously made the little early to say, but I would say the trajectory you know and our mine continues if we look at forward bookings.
<unk>.
On the transient and.
Leisure transient side, which is what's going to dominate the second quarter. It feels like we're going to continue marching on and if you look at it by segments, which I. Obviously have spent a lot of time and this is sort of get to some of our views on the business transient and the group side.
If you look at your breakdown room nights by by segments relative to 2019, and again I'm focusing on room nights to sort of take rate for the moment out of it.
Leisure and the first quarter was already close to 90% of of 19 by the way.
And for what it's worth you know much lower based on lower rated business, but just again room nights and.
And business.
It was about 50% and in the first quarter again, lower if you look at it.
Now on a on a revpar basis and group group was about 30 35 to 40 and as you March through <unk>.
Our expectation for the year.
Our belief is and globally in every region it will be a little bit different and I'll save a regional question for somebody else because I don't want to do too much of a filibuster and one question but.
If you March through the year and my expectation is youre going to have and incredibly robust leisure driven summer. So we're going to continue to see good progress. We believe this summer will be meaningfully over 2019 peak levels of leisure demand as we get into the fall and every day you read.
<unk>, the same things and I'm reading, but I'm also as I'm sure you are talking to a lot of Ceos of.
You know a large companies that that we deal with or that are friends of mine and I think clearly as you get into the summer and many people are starting to bring folks back in the office certainly as you get into the fall all things being equal in terms of trajectory.
Vaccination, most businesses are going to be bringing folks back maybe not fully and probably not fully but on some flexible basis, but you know a whole lot different and what we've been experiencing.
We do believe that and we do see it both in China as I said in my prepared comments, we do see it in parts of the United States, where restrictions have been lifted earlier I mentioned in my prepared comments business travel volumes are already 75% of what they were and 19 and those markets. So I think it is.
Even though even though not fully through and not fully open anywhere I think it is really good evidence that as people get back to work as kids and the fall I'll go back to school, which at this point I think is very highly likely youre going to see a step.
<unk> change into the third and fourth quarter in business transient and I also see it in our booking pace on the group side that you will see a pretty good step change.
And the group side.
Dave you some stats, so I won't repeat them at the moment. It is more smurf kind of related business and small meetings in the second half of this year with the bigger meetings really some happening, but really those getting booked more into it into next year and at a high volume, but we do believe that.
That we will have a lot of realized group business a lot more of it and we've been experiencing in the second half of the year. So if you sort of jumped to the fourth quarter recognized in Q2 is going to be largely leisure Q3 is going to sort of be a transition on a room night basis.
You know our our forecasting.
Is all it is but it's based on a lot of data and then based on the current trajectory that we're on we think room nights and leisure will be at 19 levels.
We don't think rate will be back to 19 levels. So sort of you know revpar levels and the and the leisure sort of and the 80 low 80%, we think business transient and by the time you get to the fourth quarter based on what we're seeing and markets that are recovering on a room night basis will be about 70% ish.
And being reasonably precise obviously, but you know these are these are sort of our sense of estimates.
And obviously lower than that on a revpar basis, because we're still not going to have the highest all the highest rated business travel back and Thats why it takes time to sort of get back to 19 levels and we think group from a volume point of view could be.
Could be halfway back to 19 levels again, it won't be the highest rated groups those will start coming next year when we when we are.
And when we get to a place where we have the larger groups Association et cetera that are that are typically are paying so that's sort of that's how we think the year is going to play out.
And we think that the as.
As a result revpar levels every month as we go versus 19 are going to get better by the time. We end. The year you know I think we could be back you know somewhere around 70% or something you know ish.
Of 19 levels on a on a run rate basis, which is and all the way home, but is a heck of a lot.
Better than where we were and what I would say not to be pollyannish about it you know what I would say as you know the recovery of late certainly since we had our last call. The recovery slope of the recovery has been steeper than what we would've thought and in all regards now a lot of it has to come on the business transient although we're seeing some as I described and not like we have.
None and we're seeing a pretty decent uptick but that is sort of a false expectation, but I would say broadly.
As you can probably tell from my comments Theres, a bunch of data to support it we think the slope of the recovery has steepened.
Since the last time, we talked and thus you know.
Our reason for optimism that things the things that are on a good path.
You asked about fee generation that will follow me and I don't think Theres, a whole lot more to say that you know as the business recovers sogo sogo, our fees and that's how we get paid and.
And I do think sort of built into my expectations that I gave is sort of my my view and our view of pent up demand I think theres, a huge amount of pent up demand and my guess is every single person that you guys talked to whether they run a business whether you talk to them. They are a friend of years you see him on the beach or wherever you are that theyre talking about.
Needing to and wanting to get out both for leisure, but increasingly needing to and wanting to to get out for business and the congregate and groups. There are a lot of but a lot of and important work that gets done and in the east and these.
And these group settings that I think you know after a while people realize that that is not possible to keep going without it. So I do think there is a you know I think I think we're on a on a very good slope, we need the vaccination and trends and the infection rates and all of the fun stuff that we're all looking at every minute of every day because it's all in the media.
As covering obviously, we need all of that to progress.
But.
Our view is you know we're on a solid a very solid road to recovery.
Get most of what you want.
I left a few nuggets for somebody else to ask about.
I hope I have carpal tunnel and writing so I appreciate the response, thank you very much alright and Carla.
And the next question will be from Joe Greff with JP Morgan. Please go ahead.
Good morning, guys, Thanks, Karen and Jeff question.
I think most of my demand related debt recovery related questions were sufficiently answered before.
And I guess I could talk about and the development pipeline.
Nice to see that up sequentially on a quarter over quarter basis.
And what we've been seeing for a while now with debt.
The non U S component and it's becoming a bigger percentage of the pipeline.
How much of the non U S.
And is limited service and how does that composition.
And how does that compare to maybe a year ago, and maybe where I'm going with this question is when you look at the average fee per room and your development pipeline now versus a year ago is that average fees per room up or down.
Yeah. Good question and I think those trends are not changing dramatically and the short term rate they sort of day sort of stay you know we've got we've got a pretty good development pipeline. Both in full service and limited service you have seen growth primarily through our master limited partnerships and China.
Hampton and home too, but also as we deploy Hilton Garden Inn and and other brands around the World you are seeing slightly faster growth and limited service. So far it could change the overall trajectory of fees per room. It will take a really long time, and so that that has been pretty steady as has the mix between.
Full service and limited service generally speaking and both the pipeline of rooms under construction I think it's about 60 40 full service limited service and that stayed pretty constant.
Or the other way sorry, 40 60.
Thank you.
The next question is from Shaun Kelley with Bank of America. Please go ahead.
Hi, good morning, everybody.
Chris or Kevin maybe just stick with the same development topic inflation has become.
A big theme around all of the markets recently.
And I just want to get your thoughts on specifically what this can mean for the hotel development side.
Are you seeing or hearing about any changes or delays that could be out there as a result of things like materials inflation is this particular concern to you at all and and how you're underwriting and what Youre starting to hear back from your development teams yeah.
Of course, it's a concern I mean, we haven't sort of inflation going on not just in the input costs, but you know labor as well so when they ultimately when people need to operate open and operate the costs are higher and now we've done a bunch of things and are doing a bunch of things to bring costs down inside the hotels by creating really good efficiencies that I.
Think will more than offset that component of it but you know cost to build are going up and financing is not.
It really readily available for the best owners. It is and people are starting newbuild projects in the U S and around the world.
Suspect and sort of built in.
And to our expectations and unit growth is that the U S. You will see a cycle, where particularly in the U S. The new construction numbers are going to be much much lower and Thats, obviously long term healthy for the for the industry.
But the good news for US is the world is a big place and the pressures are not the same and all places and the world, particularly recognizing that the places where we get the second biggest chunk of our growth is Asia Pacific and China in particular and those are those pressures are very different and the sense that they're less.
And there's a lot more financing available et cetera, et cetera, and so not unlike coming out of the great recession. Our job is to be really resilient and this is the benefit of a you know a and investment and a big Global company I think we're really good at this and sort of.
Anticipating and and adapting to the trends and like after that.
The great recession, the same thing happened and the U S. For you know there wasn't so much and inflationary issue and there's just a dearth of capital and new construction starts went way down and that's what's happening here that will be healthy for the industry and what did we do we pivoted then the same way.
We're pivoting now just with more tools and the toolkit, meaning conversion has become a much larger part of what we're doing and.
And we have we are much further along in terms of the relationships we have around the world and in the areas of the world that are continuing.
And to not only.
Motor along but pick up steam and I think in China. As an example in our second biggest market, we're going to assign more start more and open more deals.
And then then I think we ever have this year right and so.
And so.
Diversifications and powerful thing ultimately I do believe the pressures on the cost to build will will abate over a period of time and I don't think it'll be that long a period of time I'm highly confident that the financing markets have been easing up and will continue to ease up and in the U S and <unk>.
Terms of.
Of new development or new construction starts will be a huge engine of opportunity for us as it always has been and pay.
And then pick up a lot of steam and I'm sure other things around the world will happen over time, where they slow down but.
We're very quick on our feet, you know not to Patterson and the back too much but I think we've been able for 15 years to continue to drive really good growth in a while.
Lots of Crazy things are going on around the world because because you know there are different conditions and there's ways to continue to grow and.
And so you know, while we do starting finishing with where I started we do worry about it I think we have a plan to address it I think we've built that into the expectations that we provided to you guys in terms of where we think growth will be.
Thank you very much.
Next question will be from Stephen Grambling from Goldman Sachs. Please go ahead.
Hey, good morning, Thanks for taking the questions and add color Steven.
On capital allocation what are the key factors, you are considering and bringing back a dividend or buyback and thinking through capital allocation priorities more broadly.
Yeah, I think look the second part and maybe there's a little more straightforward. Our overall view on capital allocation hasn't changed obviously, we've suspended dividend and buyback to preserve liquidity during the pandemic, but the way we think about it broadly hasnt changed and I think the way we think about it more specifically on the first part of your question as you know we want to get a little further.
And of the recovery a little bit further into reliably generating free cash positive free cash flow and having our leverage levels start to come down.
And you know and so that unless something crazy happens, we think that happens over the course of the year, we will talk to our board about it sort of and the second half of the year as the recovery takes shape and we'd say, it's highly likely that starting next year, we get back into the capital return business.
Helpful. Thanks, so much sure.
And the next question is from Thomas Allen from Morgan Stanley. Please go ahead.
Hearing your earlier comment the slope of recovery and even better than expected Chris What's your latest thinking on web Revpar gets back to 2019 levels yeah.
Yeah that's.
That's a great question and actually Thomas and thanks for asking and it is one that we were debating over the last few days ourselves and they're very they're varying opinions on it even insider owned shop, I mean, I've been saying 23 or 24 as you know on these calls publicly and.
I still believe that I think I think from a you know.
I think with the slope of the recovery I'd, probably beyond the earlier and of that debt rather than the later as we have a little bit more visibility I think there is a chance from a from a room night point of view certainly on a run rate basis that we get back next year, but I think to get both room night and <unk>.
<unk> and the compression we need requires.
Certainly in the U S, but broadly requires the bigger groups to be back and while I think they are coming back and certainly they want to be back.
Planning and all of that it's on a lag. So I think that takes some time next year. So.
You know I would still say 'twenty, three 'twenty, four but I'd, probably err towards the you know the.
Earlier and of that.
Alright, Thank you yep.
The next question will be from Smedes Rose with Citi. Please go ahead.
Alright. Thanks.
I kind of along the same lines you can see this acceleration.
Revpar in Europe.
And on the corporate side for groups on the Association side do you sense any hesitancy on the part of corporates to move back and terms.
Having enjoyed a year of essentially no travel budgets any kind of income.
Pushback on that.
And that you think in terms of and the amount of people. They put on the road with the amount of people they put into groups or is that not really an issue.
And then just sort of picking up this idea of and Paramount.
Is there and it's another reason I think it takes time to get back you know 2019 levels.
<unk>.
Sort of picking up and my earlier answer is because I do think you know not only and people kept budgets not everybody you know as Amazon or whatever and that has really benefited during this time a lot and most businesses by number I've been really negatively impacted by the pandemic and they need to cut expenses and.
No.
And I'm highly confident as is the case with any cyclical downturn and recovery. When this happens that those budgets will build back but it but it will take it will take some time now I think and the second half of this year I think number one there's a huge amount of pent up demand and by definition. They only have half a year to spend whatever they have anyway, because nobody's going to do.
And a ton of traveling and the first half of the year. So I think you know.
Ironically, I think theres plenty of budget capacity I look at our own budget and there's plenty of budget capacity. When you talk to businesses for the rest of this year I think as you go into next year. If we're in a full scale recovery, while people are going to for a period of time want to be thrifty.
And the and it'll just be what the opportunity set is and if they were and a robust recovery, but I have seen again I can't prove it but I've seen it and every other cycle as you get into that.
The rope kits. They they let you know businesses, let the rope through their hands because they have to they have to deliver alpha they asked to compete against other businesses and debt or tried to do the same thing and so they ask that there people have to get out on the road. They have to have meetings and they have to build their culture and innovate collaborate get.
And they get their sales forces out and do all the things they do so the steeper the slope of the recovery.
And every other cyclical recovery and that when we get through the pandemic, we're done largely with the health and you're in a cyclical economic recovery.
And the steeper the slope the fast the faster it comes back.
It's just the way, it's always worked and I don't think it will be I don't think it'd be any different here, but that's why I said 'twenty three 'twenty four I again, I said, probably I would take the.
The earlier of that rather than the later given the current slope of what we're seeing.
But that's why it takes longer we will get back to room nights I think faster because we'll still find room nights that are lower rated business because we've gotten really good at that.
But we're going to want to shift the mix out over the next couple of years to the higher rated business get more compression from groups to ultimately get back there. So I think budgets will normalize.
And you know sort of between now and 2023, if the slope of the recovery is what we think is what we're saying.
Thank you.
The next question comes from David Katz with Jefferies. Please go ahead.
Hi, good morning.
And covered a lot of territory already but I wanted to just talk about the development and general and.
We have not talked much about the degree to which the interactions with owners who.
Maybe changed either temporarily or permanently.
We've been so focused on the demand recovery, which obviously is worthy of consuming our attention but is there any.
Semi permanent or permanent change and the manner in which you deal with the development community and.
Sort of how those monies and risks are managed long term.
Yeah.
It's a complicated answer I think when you boil it down I don't think there is going to be any material shifts I do believe and.
And obviously short to intermediate term there is a shift because like everybody not all of our owners with most of our owners are dealing with a very difficult situation.
The 99, 9% now some of them are much further along and recovery because their portfolios are in markets that have had rapid recovery resort markets, Southern and U S and they've and Theyre.
And they're doing pretty well, but broadly you know the owner community and obviously has been hurting as have we.
As you know have the whole industry, there is not and it's not like it's been easy on any of US. We obviously have deployed a hole you know a whole host of things to be supportive of the owner community and those are still fully deployed in the sense of working very hard with a lot of folks on.
On behalf of the industry for government support and in the rate areas and we don't we have not stopped those efforts and I do believe as we get to a real recovery theres opportunities to help get help with real stimulus to get get people moving again and so we continue to work.
Good day and night.
And on those efforts as things evolve and obviously, we've done a whole bunch of work and the short term to provide massive amounts of relief from standards.
Across the board so that.
Net owners could make manage their way, we could all manage our way to the other side I mentioned it in passing.
But it's worth mentioning again, we call it our hotels the future work, we're looking and a very granular way across every one of our brands.
And we're not done with the work, but we're done with a lot of the work to figure out when we get to the other side how do we deliver.
And incredible experience for the customer that continues to drive the premiums that we've had by the way which are at the highest levels and our history at this moment.
But also do it in a way that's more cost efficient.
For our ownership community and I'm highly confident as I said, even with the labor pressures that debt that we are are going to experience here and the U S, particularly that when it's all said and done we're going to be able to drive higher margins and so on a like for like basis. If you believe which I do that when you get out a couple of years youre going to have similar demand levels to 18 or 19.
<unk>, even with the cost pressures, we believe that we have that we have engineered a way to be able to drive even greater returns. So our owners, while it's difficult now and we get the other side both their existing assets and their opportunity set for doing new development. We think are going to be better than what we had pre pandemic.
Thank you.
Just doing a better and we're going to do we are and will continue to do a better job and so that's a long winded way of.
Getting to the answer which I gave you at the beginning so as a result of that.
Don't think there'll be a meaningful difference I mean with some owners.
There may be but I would say in the main I don't think so I think the owner community that we deal with woods and immensely diversified community. We have 10000 owners around the world that we deal with the vast majority of them. This is their business. This is what they do own and operate on a.
Franchise basis.
And it's all they do it's not the case across all 10000 owners, but the bulk of our system. This is what people do and I don't think if we can if we can deliver for them. The premiums we've delivered which have only gone up and do it in a way where they can get more of the bottom line that they're going to abandon their business model I think theyre going to want it.
They're going to want to carry on but it takes some time right and is being pragmatic because this has been really.
Difficult and which is why we've worked so hard to sort of help create the bridges, both and what we could do what the government can do to get them. The other side and why I said and Mike you know honestly my and my earlier comments, particularly in the U S, where I think the new development side all of these pressures and just the pressures of owners.
Broadly is going to me and it's going to take a little time for the new construction side of of development to pick up to be.
It was pre pandemic, but that will have that will happen in my opinion and I think the relationship will be.
And much more similar than different.
What it was and as I said before and the meantime.
It's a big World and we've pivoted and we're doing and doing some really cool things around the world to make sure that we continue to to enhance our network effect and deliver more hotels and more fees.
Okay. Appreciate it thanks for taking my question.
The next question is from Richard Clarke with Bernstein. Please go ahead.
Good morning, Thanks, very much for taking my question just a quick question on the owned and leased portfolio, obviously that seems to have driven the most volatility and the quarter.
And to your ambitions with that particular division stand and Youre looking to transition that more rapidly towards asset light now and where do you think the cost savings and that segment can.
And and the longer term.
Well the cost savings look it's everything across the board just like any other hotel owner would be doing in times like this we're looking for cost savings and sort of literally every aspect of the operations I think our ambitions in that portfolio. We are we are pretty capital light right. So even in normal times debt ownership was down to 7% to eight per.
<unk> of our overall EBITDA something like that in 2019, and we've been saying for a long time that if we think about we think about our portfolio. It's about 60 hotels, primarily leases about 20 of them are strategic.
We will be and those leases no matter what over time. They have good coverage there important hotels, we've got 20 at the bottom where you know there is sort of legacy their legacy deals that we inherited fixed lease payments and markets that arent as robust those we will exit and no matter what when the leases are up.
And then Theres about 20 that are in the middle where when the leases roll and we sit down with the landlord and if we can work out and the arrangement that we think makes sense for us to continue we continue if we don't we'd get out and we've sort of enrolling our way out of three to four of them a year. We think it's actually probably more like six to eight of them. This year that will transition out of <unk>.
They're transitioning them to management agreements or franchise agreements are just getting out and over time, you'll wake up a few years from now and it will be something like less than 5% of our overall EBITDA and that will remain the trajectory.
Having said having said that in.
And the next starting in the second half of the year and into the next couple of years. This will will accelerate our overall growth just because sadly the ownership segment given a lot of the fixed rent nature of it and where it's been which has been concentrated and U K.
Europe, and Japan, which have been impacted dramatically.
And more impacted if you look at the Revpar numbers and those markets and and the segment are twice as bad and the first quarter.
As the overall as you get those markets open.
Youre going to take that.
Those numbers, which have been terrible.
We will become a significant contributor to growth.
And we think that happens over the course of the second half of the year.
Alright, Thank you very much.
And the next question will come from Robin Farley with UBS. Please go ahead.
Great question going back to the unit growth topic, one is I wonder.
If you have thoughts about 'twenty two unit growth the rate.
You mentioned.
New construction, obviously with the lower kind.
And how that would compare to this years four and a half to five per cent and then also.
On that topic, the conversions and this quarter I think we're 20 some percent of openings do you see that moving higher in other words are you and the early stages of a bunch of conversions that maybe it will come out later this year and <unk>.
And the past about how.
Pressures and the.
Our business can lead to greater rate of conversion and so I'm wondering if that's teeing up for later this year and then you could.
That offset the lower new construction growth next year. Thanks, Yes, sure Robin and good questions I think look the first and the first part we've I think we've said several times publicly that we think over the next several years it will be between four and 5% and you know sort of the range. There is meant to capture sort of all of the things we've been.
And talking about rate the timing of openings the timing of.
Conversions and the timing of removals, the trajectory that we're seeing and new construction. So we still think 4% to 5% and.
It will be within that range for the next few years and then the second half and conversions, yes, we do think conversions will pick up over time.
And the last cycle it got to something in the 40% range of overall deliveries probably doesn't get and we think we've said this publicly as well probably doesn't get back to that level. This cycle, just because the denominator likely won't won't contract that dramatically, but we do think conversions will continue to be a bigger contributor and it'll be a little bit lumpy.
A lot of them are larger hotels some of the things. We're working on now are bigger deals out there either portfolio deals or larger individual hotels that sort of require a transaction to happen for the conversion to happen. So I don't know if that happens later this year or next year, but it definitely will pick up over time.
Okay, great. Thank you.
The next question is from Bill Crow from Raymond James. Please go ahead.
Hey, good morning Bill.
And Bill looking good morning, looking globally, and how important is outbound Chinese travel to the recovery in Europe and.
Are there any any comments you can make on the trends about non Chinese travel to that.
Yeah.
We've been having a lot of discussion within the industry and within within China and in fact I participated.
And our meeting with the Premier.
Premier Li of China.
Just a couple of weeks ago and this is one of the topics that we talked about.
If you look at our business.
And using some metrics and our business like and the U S. In bad globally internationally and bounds only about 4% of the business. If you look at our business globally, it's about 10% and it does weight, obviously more heavily inbound business and other parts of the world, particularly in Europe, which depends.
It depends on it more so it would be higher than than 10% a large theater market is is China I mean, it's other parts of the world as well, but is China.
And so I think as Europe opens up obviously theyre going to be like the rest of the world I think theyre going to be doing.
Within region and travel.
Which given all of the pent up demand is actually.
I think Ben reasonably good just like we're seeing and the U S. Even though we don't have much inbound travel going on and we don't have any outbound going on and so I think in the end and the Europes.
Europe's opportunity for the early stages of recovery are robust for the same reason, while they're not gonna have inbound from China or other markets theyre not going to have any outbound and Europeans likes to travel and particularly and summer like to go on vacations and when it's open and they can they will and they will stay within the confines of either their countries.
Sure.
For the region. So I think I think it can be fine obviously longer term.
And you get some more stabilized world do you want to open up these travel quarters. We you know I had a meeting with the White House last last week, maybe the week before as I said with the Premier League and China. The week before that and we were talking about a lot of topics, but that was a was a primary topic both of the Chinese administration and the U S.
Ministration on trying to figure out how do we figure out as the world is getting vaccinated and its a little uneven but as certain countries are getting heavily vaccinated and getting to a reasonable level of herd immunity. How do we open up safe travel quarters. Europe has is doing the same thing those discussions are.
Ongoing we're trying to get those discussions going with the U S. They're obviously already starting to have those discussions with China and so that will take some time I think it's I think you will start to see some bilateral agreements or multilateral agreements and the second half of this year I think we're at a stage right now.
Now everybody is still focused non vaccination to get their herd immunity, but the overwhelming amount of supply of vaccines, which arent all distributed perfectly around the world are even around our country at this point, but the numbers are becoming overwhelming the surpluses are going to be come as we get into the summer.
And my sense is overwhelming and we're going to be able to have a shifting of those resources around the world to the market's most in need as we get into July and June July August September and into the latter part of the year that is going to allow for.
A reasonably hopefully a reasonable trajectory in terms of <unk>.
Some of the some of these economies getting to a better place China, China is obviously already and a reasonably good place. So as the U S sort of has a few more months and Europe. I think there are real opportunities to start opening travel quarters I do think it'll it'll happen that way just based on the discussions that we're having with multiple administrations and.
And our teams are having.
I don't think its going to be like one day the world is open.
Everybody I think it's gonna be agreements between like.
The U S and the UK, EU and China, the U S and China that will.
That will allow for you know for those quarters to open up and make sure that theres flight capacity that the regime for vaccination testing and all of that is sort of is bolted down so thats a long answer because it needs to be it's complicated I think and the second half of the year.
My hope is and belief is that youre going to start to see some of those quarters open up we're pushing everybody really hard but in the meantime, I think we're fine just because if a quarter is not open as I said people are restrained and leaving their country or their territory and they're going to they're going to start traveling when they feel safe and youre going to youre going to youre going to keep all of that.
Pent up demand and your local market.
Thank you.
The next question is from Patrick Scholes with Truest. Please go ahead.
Hi, Yes, good morning, everyone.
Morning.
The.
Issues of the moment and at the property level is.
Is.
Staffing and wages I'm wondering your thoughts on this do you see that as a temporary issue debt hotels can perhaps get by this summer.
And without having to raise.
Rate wages to attract employees.
Or do you see wage inflation and inevitable to meet the staffing challenges. Thank you.
Yeah, it's a difficult issue as I am sure. If you were talking to the ownership community Youre hearing and listen we talk to them every day and we operate a lot of properties. It is singularly at the moment I wouldn't say the only issue one year and a global pandemic. There is lots of issues, but it's one of the most important issues because you know it is.
And is very difficult, particularly here in the U S to get labor and it is constraining recovery on it at certain times, because you just can't get and you can't get enough people to service the properties.
And I do think and the short term I've already said it and it's implied in earlier questions. There is gonna be wage pressure and wage inflation I do think it will stabilize and.
And it work itself out as we get later into the year. It's a complex issue that is at the intersection of.
People being concerned about their health still you know.
Particularly in some of the communities that we need to get focus back.
And coming back to work.
And that that's going to take some time both vaccination.
And marketing to and a number of those communities to get vaccinated and getting it done and getting them to a place where they feel safe being and a workplace. So that's part of it and then the other part of it is getting getting kids back in school because a lot of people you know and.
And the work force.
And are taking care of kids and they don't there's no day care school becomes day care.
And the federal government and for all the rate reasons the way back when.
Did.
Top up of unemployment insurance and on top of the state unemployment insurance, and obviously sent out $1400 checks and they did all these things to support people who are in harm's way, all all of which made sense at the time you know.
And maybe some of it makes a little bit less sense now in the sense that demand is there and the jobs are there.
Yes.
And people people don't have as much of a need to come back to it so.
But that you know that in theory on September whatever six.
Federal top up expires I guess it could be extended my impression is it will not be my hope is that we will not be not because I don't care about the people and I think theres just enough jobs.
And we literally I think.
And there are three 3 million.
<unk> not Hilton, but industry folks still out of work I think by the time you get to September October I think the vast majority of those could easily be re employed given what I think demand will be and the business and that's best for everybody Hi, It's best for the country. It's best for the individual team members to but it's that the convergence of all of them.
So I think it's going to be tough IV and talking with tons of our own and I guess it would be tough between now and September I think when we by the time you get to September mass vaccination will hopefully be behind us kids will be back in school and.
And.
People will feel safe, but that it's safe to go back and they.
And they want to get back and be.
And be earning earning a paycheck and so I think it will then stabilize as we get into the latter part of the year.
Thank you Christopher complex and Paul.
Trust me, we're spending a lot of there's no silver bullet and the short term, we're spending a lot of time on it and I think this is one of those you just have to sort of you just have to work through it. It will it will work out because all of those things are going to be changing and so the conditions are going to change pretty materially.
As we get to the fall, but between here and there.
It's going to be incremental and then I think it'll be a sea change in the fall.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back to Christopher Center, and additional or closing remarks.
Chad Thank you and to everybody that joined US today, we appreciate the time as always.
And it's hard to say, we're really pleased with where things are given what we've been through over this last year and that we're still in the middle or towards hopefully the end of a pandemic, but we are pleased.
I've always had confidence in the business model of ours, I've always had confidence and People's desire to travel for all the reasons I've always wanted to travel I think the evidence is pretty clear one that.
I think the decisions that we made as a result of the crisis have made our business stronger.
It will we're driving higher market share is higher margins, you don't want a lower cost structure and.
And then as we see the telltale signs of getting past the health crisis.
And we're starting to see the world come back to life and all of the all the reasons I thought people wanted to travel.
Think playing out the way the way and we had hoped for we have a ways to go so I don't want to be pollyanna about it but but we feel good about where we are and definitely incrementally better than we did over the last couple of quarters. So thanks again and we.
We'll look forward to reporting back after we finish our second quarter.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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