Q3 2021 Hilton Worldwide Holdings Inc Earnings Call
Good morning, and welcome to the Hilton third 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 today's prepared remarks, there will be a question and answer session.
To ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Jill Slattery, Senior Vice President Investor Relations and corporate development you may begin.
Thank you Chad welcome to Hilton's third quarter 2021 earnings call.
Before we begin we'd like to remind you that our discussions. This morning will include forward looking statements.
Actual results could differ materially from those indicated in the forward looking statements and forward looking statements made today.
Speak only to our expectations as of today, 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 in our earnings press release.
And on our website at IR Dot Hilton Dot com.
This morning Christmas that out our president and Chief Executive Officer will provide an overview of the current operating environment, Kevin Jacobs, Our Chief Financial Officer, and President of Global Development will then review our third quarter results. Following their remarks, we'll be happy to take your questions with that I'm pleased to turn the call over to Chris. Thank you Jim.
Good morning, everyone and thanks for joining US today, we are pleased to report another quarter of very solid results that demonstrate continued recovery and the resiliency of our business model.
Increases in vaccination rates and consumer spending coupled with improving business activity continued to drive solid travel demand.
The summer and into the fall as global borders reopen and the travel environment recovers. We remain we remain extremely encouraged by People's desire to travel and connect more than ever before in the third quarter system wide Revpar grew 99% year over year.
Compared to 2019, Revpar was down roughly 19% improving 17 percentage points versus the second quarter with system wide rates down just 2.5% versus 2019, adjusted EBITDA totaled approximately $519 million up a 100.
32% year over year and down 14% versus 2019 performance was primarily driven by strong leisure trends with leisure room nights roughly in line with 2019 levels with leisure rates exceeding 2019 levels business travel continue to gain.
Momentum with midweek occupancy and rates improving meaningfully versus the second quarter.
In the quarter business transient room nights were roughly 75% of prior peak levels group continued to lag, but showed significant sequential improvement versus the second quarter boosted by strength in social events for the quarter group Revpar was approximately 60% of 2019 level.
<unk>, improving 21 percentage points from the second quarter overall system wide Revpar versus 2019 peaked in July at 85% with the rates just shy of prior peaks as expected recoveries slowed modestly later in the quarter due to typical seasonality in <unk>.
Customer mix shift, but overall trends remain solid both August and September Revpar achieved roughly 80% of 2019 levels driven by continued strength in leisure and upticks in business travel post labor day as offices and schools reopen these.
These trends improved modestly into October with month to date Revpar at approximately 84% of 2019 levels and rates in the U S. Nearly back to prior peaks roughly 40% of system wide hotels have exceeded 2019 revpar levels in October.
To date. Additionally.
Additionally, bookings for all future periods, or just 8% below 2019 with.
With loosening travel restrictions and strong nonresidential fixed investment forecast, we remain optimistic for future travel demand TSA reported third quarter travel numbers, where nearly 80% of 2019 with demand picking up further following the announcements of the U S border reopening and the Lyft.
Of the international travel ban for vaccinated travelers.
Additionally, studies show that nearly 70% of U S businesses are back on the road up 28 points from the end of the second quarter with roughly 80% of our typical corporate mix coming from small and medium sized businesses and with a lagging recovery of larger corporate travel we've.
Taken the opportunity to continue our work from before Covid to further increase our focus on this segment of demand. This demand is higher rate into more resilient. The resilient, which has helped us recover more quickly than business transient and should drive rate compression in the future as larger corporate travel.
<unk> picks up on.
On the group side are positioned for the rest of the year remains fairly steady with Ford bookings sentiment improving as varian concerns taper. Additionally, the recent reopening of some of our large urban properties like the New York Hilton Midtown increase our confidence in our positioning as group recovers turning to development.
We added nearly a 100 hotels in 15000 rooms across all major regions and delivered strong net unit growth of six 6% in the third quarter conversions represented roughly a third of openings year to date, we've added more than 42000 net rooms globally higher than all of our major branded competitor.
Our performance reflects the success of our disciplined growth strategy the strength of our brands network effect and commercial engines across the world. It also illustrates our increasing confidence and a strong recovery in global tourism in the months and years to come.
During the quarter, we launched our large scale franchise model in China, enabling independent owners to explore franchising opportunities with our Hilton Garden Inn brand with a prototype developed specifically for the Chinese market to date, we have signed more than 100 deals to develop Hilton Garden Inn properties in China.
Strengthening our confidence in the long term growth of our focused service brands and our ability to cater to a growing middle class.
Following our recently announced exclusive license agreement with country Garden, we were thrilled to open our first time two suites in China.
With plans to grow to more than 1000 properties, we look forward to leveraging our partnership to capture the rapidly growing demand for mid scale hotels in China. We also celebrated the opening of our 500th home two suites. Following the brand's launch just 10 years ago, making it one of the fastest growing.
[noise] brands in industry history, and boasting the industry's largest pipeline in North America with more than 400 hotels and development, our luxury and lifestyle footprint also continued to expand globally globally with the debut of the canopy by Hilton in Spain and.
The highly anticipated opening of the Mango house, Alex are in the Seychelles.
Another important milestone in its global expansion, Alex our celebrated its debut in Asia Pacific with the opening of the Roku Kyoto.
In the quarter, we signed nearly 24000 rooms up approximately 40% year over year, driven by strength in the Americas and Asia Pacific regions.
Driving our positive momentum in luxury we announced the signing of the Conrad Los Angeles, the brand's first property in California. The 300 room hotels expected to open in 2022 as part of the Grand L. A mixed use development.
With approximately 404000 rooms in development more than half of which are under construction. We expect positive development trends to continue driven by both new development and conversion opportunities.
For the full year, we expect net unit growth in the five to five 5% range and we continue to expect mid single digit growth for the next several years.
For our guest flexibility has always been important but the pandemic has made choice and control even more critical we were excited to launch several new commercial programs and loyalty extensions, including the launch of digital key share a first for a major hospitality company. This feature allow.
<unk> more than one guests to have access to their rooms digital key additional.
Additional technology enhancements have enabled our elite honors members to begin enjoying automatic room upgrades gold and diamond members may be notified of a complimentary upgrade prior to arrival, enabling guests to choose their upgraded room directly by using their Hilton honors app.
We continue to focus on new opportunities to further engage our 123 million honors members and are thrilled to see engagement is nearly back to 2019 levels in the quarter membership grew 11% year over year honors members accounted for 59% of occupancy.
With the U S at 66% just two points below 2019 levels during.
During the pandemic approximately 23 million U S House household brought home, a new pet, including my own and.
And like so many others my family loves travelling with our new dog Miller in the coming months Homewood suites will join home too and becoming a 100% pet friendly in the U S. With plans for all limited service brands to be pet friendly by the first quarter of next year and thanks to our exciting partnership with.
Mars Pet care, we're offering new pet focused programming and benefits our guests are eager to travel with their furry little friends and by making that simpler we're able to capture demand and bring new business into the system.
As the global travel environment improves I continued to be impressed by our team members' dedication to providing exceptional experiences to our guests. That's why I'm, particularly proud of last week. We were named the number three world's best workplace by Fortune and great place to work after six consecutive years.
Being ranked Hilton was the only hospitality company on the list. We truly believe that Hilton continues to be an engine of opportunity for all of our stakeholders around the world and are very optimistic for the future with that I'll turn the call over to Kevin for a few more details on our results in the quarter.
Thanks, Chris and good morning, everyone. During the quarter system wide Revpar grew 98, 7% versus the prior year on a comparable and currency neutral basis as the recovery continues to accelerate driven by strong leisure demand, particularly in the U S and across Europe performance was driven by both occupancy and rate growth as Chris mentioned.
System wide Revpar was down 18, 8% compared to 2019.
Adjusted EBITDA was $519 million in the third quarter up 132% year over year results reflect the broader recovery in travel demand.
Management and franchise fees grew 93% driven by strong Revpar improvement in honors license fees. Additionally results were helped by continued cost control at both the corporate and property levels.
Our ownership portfolio performed better than expected in the third quarter driven by the accelerating recovery in Europe, The Tokyo Olympics and ongoing cost controls for.
For the quarter diluted earnings per share adjusted for special items was <unk> 78.
Turning to our regional performance third quarter comparable U S. Revpar grew 105% year over year and was down 14% versus 2019.
Robust leisure demand and improving business transient trends drove strong performance in July.
Trends modestly slowed later in the quarter due to seasonality U S occupancy averaged nearly 70% for the quarter with overall rate largely in line with 2019 levels.
In the Americas outside the U S third quarter, Revpar increased 168% year over year and was down 30% versus 2019.
The region benefited from easing travel restrictions and strong leisure demand over the summer period, Canada also saw a noticeable step up in demand in August after reopening their borders to vaccinated Americas.
In Europe, Revpar grew 142% year over year, it was down 35% versus 2019.
Travel demand accelerated across the region in the third quarter as vaccination rates increased and international travel restrictions loosen.
In the Middle East and Africa region, Revpar increased 110% year over year and was down 29% versus 2019 performance benefited from strong domestic leisure demand in international inbound travel from Europe.
In the Asia Pacific Region third quarter, Revpar grew 5% year over year and was down 41% versus 2019.
Revpar in China was down 25% as compared to 2019 as a rising COVID-19 cases led to re imposed restrictions and lockdowns across the country.
China has recovered steadily into October with occupancy nearing 60% for the month and the rest of the Asia Pacific region, Prolong Lockdowns in Australia, and New Zealand offset upside from the Tokyo Olympics.
Turning to development as Chris mentioned in the third quarter. We grew net unit six 6% our pipeline grew sequentially totaling 404000 rooms at the end of the quarter was 62% of pipe pipeline rooms, located outside the U S.
Development activity continues to gain momentum across the globe as the recovery progresses.
Testament to the confidence owners and developers have and our strong commercial engines and industry, leading brands for the full year. We now expect signings to increase in the mid to high teens range year over year, and expect net unit growth of 5% to five 5%.
Turning to the balance sheet, we ended the quarter with $8 $9 billion of long term debt and $1 $4 billion in total cash and cash equivalents were proud of the financial flexibility we demonstrated over the past 18 months and looking ahead, we remain confident in our balance sheet management as we continue to progress through the recovery and <unk>.
Move closer towards our target leverage.
Further details on our third quarter can be found in 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.
I'd like to speak with all of you. This morning. So we ask that you limit yourself to one question.
<unk> can we have our first question. Please.
And to ask a question today you May Press Star then one on your Touchtone phone and if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
And the first question will come from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, Chris Kevin everybody. Thanks, Dave Good morning, Carlos Good morning.
Chris gave a lot of color is as did you Kevin in your prepared remarks, but one thing I just wanted to kind of ask around was was how you guys are seeing or believes the cadence of business transient travel will play out here in the fourth quarter.
Our kind of or how you're thinking about the sequencing through 2022.
Yes.
Great question Carlo and obviously, one everybody is interested in so maybe I'll talk about all of the segments of it because it's hard to do one one without the other so sure.
Grossly over simplify which.
You know I'd like to do occasionally.
The way I would see it is as we have been seeing through the third quarter and what I think we will see in the fourth quarter is a continued uptick in business transient travel I think that will come.
Come from all segments of business transient, but again probably continued to be led this you know in this this year in the fourth quarter by a small and medium.
Some of your small and medium enterprises.
I don't think Youll see a huge tick up but I think you'll see a modest pick up at the same time, just because people are you know increasingly.
Increasingly back in offices.
And kids are definitely mostly if not entirely back in school I think youll see a little bit of a tick down in leisure business now the weekends will continue to rage I think the weekends have been extraordinary but you know the the midweek leisure travel will continue to tick down and I think those two will largely offset each.
Other than the fourth quarter I think group.
We'll remain pretty consistent obviously, you know we had a big uptick in the summer and then delta variance sort of slid out the.
The the momentum a little bit on on group people think you know there's advanced planning people have to spend money and so while there is plenty of group occurring it's really largely sports and social at this point I think that continues about.
Like what we've seen in the third quarter into the fourth.
Because people are you know all the pent up demand is there but people are sort of advanced planning more into next year, just to sort of finally get through delta and hopefully to the endemic stage of Covid, which are which sort of feels like is we're in the process of doing as we speak as I as we think about 2002.
Two with all of those segments, you know what I would say is.
Is.
I think leisure will remain elevated.
Elevated relative to historical standards.
Obviously my belief is kids will still be back in school more offices, they're gonna open. So mid week, we'll get back to more normalized levels, but I think the weekends people Wanna be out you know that it turns out they didn't like being locked in their closets in basements.
And attics and so they're going to want to get out and we've seen this pattern of very high demand on weekends I think that will continue and so I think on the margin you know leisure will be continue to be stronger than we've historically seen sort of in pre Covid times I think business transient will continue to move up.
Youll continue to see great strength in small and medium enterprises, which arent fully back to pre COVID-19, but getting pretty close and my own belief is you'll start to see the large corporate step into the game I mean, they're already in the game, but.
There is still sort of like 40% off of 19 levels I think you'll see a step change in the large corporates, which which which will contribute along with Smes to continued.
Upticks in business transient and then I think group is clearly going to be better next year than this year. I think reality is the first quarter, probably you know is typically a slow group quarter I don't think it'll be different in that way I think people are going to want to sort of clear the mechanism of getting past the winter.
Just cuz concerns of flu seasons, and all of that given what we've all been through but I think as you get into Qs two three and four.
Both booked business and realized business on on the on the groups that are going to be better. So you know I think 2022 is sizing up to be.
I think the fourth quarter as sizing up to be fairly similar to the third to the third quarter and I think 2022 is sizing up to be another big step forward on recovery to more normalized times.
Thank you Chris that's helpful. That's it for me.
Thanks Carlo.
And the next question comes from Joe Greff from JP Morgan. Please go ahead.
Good morning, Chris.
Kevin NGL.
You guys were at some interesting comments on the development side and obviously positive there.
Chris when do you think hotel constructions.
<unk> start to trough when do you think new signings or have they.
Yeah.
We spent a lot of time looking at that through the last couple of quarters and been very recently.
Here's what I'd say I.
I gave you a sense, so I won't repeat what both Kevin and I said about nug.
Kevin we both talked about it this year I give you a sense in our prepared comments that we think will be in the mid single digits for the next couple of years.
Obviously that requires a lot of work it requires signing deals starting construction that then ultimately lands Atlanta, and our nug numbers I think when you look back two years you know from now at this period of time.
Hum.
The mind and reasonably confident that we will see as the trough in deal signings was last year as Kevin mentioned, we're going to be up in the mid to high single digits in signings. This year, we think I mean, we're we're not done with the year, we always have a good flurry of activity at the end, but we got a lot of it on the books.
And so we're pretty damn confident we're going to be up nicely and I don't see why next year, given what's going on in the environment in terms of particularly you know operating recovery pricing power, which I'm sure we'll come to will do it maybe in another question.
That we're gonna see more deals signed next year. So I think last year was probably in my mind the trough for signings I think this year for those same exact reasons will be the trough and construction starts starts always will lag the signings a little bit.
We're definitely going to be a little bit.
Modestly down in signings this year after being down last year, our expectation is that will turnaround next year and that's why we think will be sort of in the mid single digits for a couple of years and then back on track being in the six to seven range just because starting this year, we're signing more starting next year we're.
Hurting more we're obviously filling in a lot and you saw in the second quarter, a third of our nug was conversion. So we're filling in and so you know between all of those factors. We think ultimately when we get out past a couple of years, we're back where we're back the goal is to be back in the six to seven and I think given what I see.
In the environment.
That that we feel pretty good about that I mean, and I'll probably stop there was the only comment being the you know things are going to come back faster than prior recoveries here and that's because.
The thing that's very different than every other cycle I've seen in my 40 years and I'll leave it at this and somebody will I'm sure have a question is just pricing power I mean, the reality is you know typically it's like a grind to build back occupancy and end up in rate lag significantly right is right is leading the charge.
And that obviously flows really nicely we've done a bunch of things as you know and we've talked about a lot to create higher margin businesses out of all of these brands and when you flush all that through even with labor cost up and all of those fun things. These are higher margin businesses and part of this is just we're in an inflationary environment.
Ironman and guess, what we can reprice our product every second of every day, where we're a very good hedge in that way to inflation and we're being very thoughtful about.
Power, how we're pricing our product and so I think I think when we all look back on it this will be.
A faster recovery on the development side than we've seen in prior cycles and and.
So I think we're gonna be we're gonna be back on a on a very nice trajectory next year.
Thank you.
The next question will be from Shaun Kelley from Bank of America. Please go ahead.
Hi, good morning, everyone.
Hey, Chris I think there are a couple of fat pitches, there on the pricing environment, So maybe I'll bite.
But I guess my twist would be could you give us a little color specifically on the business pricing side I think we all see the leisure rates are exceptional.
And so maybe your thoughts on how long leisure can continue.
Pricing like it is your thoughts on the recovery of business pricing and then any headwind from large corporates, you've done a great job of delineating small and large so how much of a headwind as large corporate is that does that priced any differently is that a is that a factor at all.
Yeah, a great question, yes, I did sort of serve that up so I guess I shouldn't be surprised.
Lesson you you embedded in the question as part of the answer but obviously, we feel you know first of all let me not be pedantic, but you know say what I say a lot. When I'm asked this question the laws of economics are alive, and well right and that's what's going up you know you know why is leisure.
It was strong and rate why are we able to price above historically high levels, because they're crazy amounts of demand like our weekend demand is off the charts, we're running 85% to 90%.
System wide in the U S on the weekends and where pricing over 19 levels. Obviously, because you know we have a lot of demand.
I do think that will you know that.
That leisure.
Pricing power will continue because what I said before I believe that leisure demand is going to remain at elevated levels.
Secondly, on the weekends and that that's going to give us nice pricing power even though.
Obviously the recovery in business transient has lagged as I said in the quarter, we were 75%, but it's sort of a tale of.
Two cities, which is.
Implied it a little bit you have the big corporates were still 40% off but then you have small and medium which are only maybe 10% you could even argue maybe five or 10% off.
So we have a fair amount of pricing power in the biggest piece and the biggest segments and they are less.
Less.
Price sensitive. So you know broadly your biggest you know it's not everybody. Your biggest corporate customers can end up with sort of off bar 10, or 20% small and medium I might end up at five or 7%. So that's why we were working so hard on accessing more of that.
Demand base pre Covid and has helped us during COVID-19 and so when you put it all together.
And you look at like even in the quarter, where we're at 90% of 2000 and business transient combined we're already at 90% of 2019 levels, even though we still have a ways to go to build back demand. So you know I feel that's a long way to was I feel pretty good about where that's going because we're going to.
Keep pushing on small medium that's almost back my guess is that will exceed prior levels and then the corporates are going to come in.
And that's going to allow us to put more on the top of the funnel to price you have more demand allows us to price more aggressively I think when it's all said and done if we were 80 20 before and I don't know exactly where it'll be but I suspect we will probably never go back to 80 20 in reality because.
We have been successful at finding other segments that we think are going to be there, they're going to be more resilient and they're gonna be higher priced. So my guess is we will be managing you know to probably a 90 10 world or something you know something like that but we do think pricing power is not in business transient what it is in leisure, but it's not far off.
And then group.
Group is is sort of in the year for the year similar to business transient, but as you look forward.
Because there's so much pent up demand and as I've talked about at least on the last call. We're actually pricing already over 19 level. So there is pricing power and you'd say well Wow. If group is still way off from a consumed revenue point of view whats going on whats going on his group as you know very you know the one cell.
At books way in advance and there's a limited amount of meeting space in the world and in the United States. We happened to have a lot of it you know I mean, there are a few of us that are that are very big players in that space a lot of people wanted and so the reality is again laws of economics are alive and well people want it there is not.
Enough of it you have huge pent up demand, that's sort of getting all change events that didn't happen that need to happen new events and that's pushing into next year and so even though in the moment group.
Group revenues arent, what they were on a forward looking basis. There is a good amount of pricing power, which is why.
All of our advanced bookings into next year, our pricing over 19 levels at this point, so again back to bet I put out there I guess you know it's unusual like that you know I hate to admit how long I've been doing this a long time I guess I said it before but it just hasn't really happened. This way now there are a lot of reasons.
We're better right, we got much more sophisticated.
Management systems, we're much more on top of it I think than we've ever been obviously, we're in a more inflationary environment broadly. Thank you Federal reserve and you know the U S Congress for fiscal and monetary stimulus, we get debate transitory or otherwise, but you know those things are translating.
Into broadly a.
More highly inflationary environment, and and that applies to that applies to us too and that that obviously has.
As helping from a pricing power point of view.
Thank you very much.
The next question will be from Thomas Allen from Morgan Stanley. Please go ahead.
Thanks, Good morning.
So a strategic question you talked in your prepared remarks about starting to open franchising for Hilton Garden Inn in China that was an interesting change because with Hampton Inn.
Mr franchise agreement can you just talk about that.
The rationale thank you.
Yeah, it's very straightforward we've done to the one you mentioned with Latino with Hampton Inn, and then more recently I mentioned in my comments, we just actually opened our first home two suites by Hilton in China on the road to doing a thousand of them with country Garden, one of the largest players in China.
As another master license agreements. So we've done we've done those two.
Never say never on my team, but the idea was to really help you know get help from very large local players that knew how to.
Garner scale very quickly to help build our network effect in China, and then ultimately come back in with our other brands and do it ourselves and so that's exactly what we're doing with Hilton Garden Inn, we obviously have a massive franchise system here in the United States and frankly, you know in Europe, now where are you now.
The bulk of the business here is franchise increasingly I think we're now the majority of the business in Europe is franchise, it's been a much smaller part of the business in China.
And in Asia Pacific. So, we historically haven't had the same level of resources and so what we've done during Covid has made some strategic investments to build out more infrastructure. So that we can take other brands in our of our 18.
Brand.
Hamley of brands and.
And do it ourselves and so you know we're trying to be very sort of balanced then and balance all the risks associated with with our expansion around the world and we think it's great to work with third parties, we love the country Garden folks in both so you know they've been incredibly important partners. We will continue to be for a long long time, but it's also important.
That we have that skill set ourselves in franchising does it you know while it's similar in China, It's not exactly the same and so you know we've learned a lot and I think built to.
Building, a good infrastructure and a good muscle set to be able to take a bunch of other brands and do just what we've done here in the U S Europe and other places.
And sorry, just a follow up to this question any updated thinking on the potential Tam for the select service brands in China.
I didn't hear the question.
How many of these hotels do you think you can open in China.
Addressable market.
Oh Tam total Okay. You go on Tech Army I Love that I love them, we do look at Tam.
I mean, I'm not going to give you, though it's thousands right in thinking of it in the following way we have limited service hotels in the U S. Probably 4500, we have a population of 320 million people you have one 3 billion people there so.
No. There is no limit in my lifetime at least probably not your younger than me, but I'm not that old so probably not in your lifetime either.
Thousands and thousands you get a you could easily have 10 or 20000 or more.
So I think theres growth opportunities in the mid market as far as the eye can see in China. So our.
While we have done some Tam work in China every time, we come back you know when you look at the numbers. They are just they are off the charts.
There are no no rational limitations given what our footprint is what the population is and the growth in their middle class.
Helpful. Thank you.
The next question will be from Smedes Rose from Citi. Please go ahead.
Hi, Thanks.
Chris I was wondering if you could talk a little bit about.
What your owners are telling you about.
And what are you asking kind of how they're handling staffing.
And maybe just to sort of IGF slimmed down operating models versus trying to get back to you.
Okay.
With that.
I mean, I had a hard time hearing some of that but I think I captured it.
Labor costs, and what owners are telling us that a bit it's obviously been a big issue in and one that we spent a lot of time on.
It's a complex issue in terms of what sort of underneath the problem. What I would say is obviously there is no one owner group the different owners in different parts of the country.
In the world for that matter have different views, but if I sort of homogenize. It all which is hard to do but if I do it in my head I would say, while it's still a very difficult issue. We've started to see easing in terms of access to labor.
I think we have a ways to go you know there are a bunch of things we're doing to help from a technology point of view to access pools of of labor that maybe we hadn't accessed historically, but broadly more labor is coming back in and some of those pressures are easing obviously labor is more expense.
<unk> pretty much everywhere I think you know that is that's a reality.
Settles out I think it's a little early to know, but I think it is sort of settling down as people are gradually coming back into the workforce I think the end of the question, which is a really important one which I sort of touched on earlier in one of my other filibusters was.
How is it going to look for owners on the other side and again, it's hard to you know some owners it depends on location product you know 1000 factors, but broadly and we're already seeing it I think you know I think I said this.
Broadly I think when we get to the other side of this.
Across the system margins are going to be higher and you. You know why you know with input costs going up labor costs going up and all of those fun things theyre going to be you know margins are going to be higher because rates going to be a lot higher ultimately when we get past. This for all the reasons I talked about in terms of the pricing power that we have in the broader inflationary environment.
That's very helpful to the business at the same time, particularly in the Mega categories, which is where the bulk of the hotels are with our with our ownership community. We did a bunch of really important work.
And did a lot of testing and learning and made a bunch of changes in the hotels in the end.
We think to create a better experience for our customers, but to do it in a more efficient way to drive higher margins. So we're pretty confident and we have pretty good evidence, which I'll talk about that even with the you know when labor comes back and you have to pay labor more given where rates structures are going to be in most places.
And given the efficiencies that we've been able to garner that these are you know our owners are going to end up with higher margin businesses and by the way. Many many of them not all of them. So for those that haven't gotten there that are listening you know.
The phase, but many many owners are already there some of it is unsustainable, meaning part of it is they can't get enough labor and so they don't have enough people.
Costs were unusually low, but even even.
Even in places, where they are able to get the labor back for the reasons I described meaning more efficiencies on our standards.
And pricing power on the topline theyre driving very good margins and so you know we've had you know.
The owners are have been in pain, I don't want to minimize it theres still many of them and a lot of pain, but.
We're doing our level best to get them to the other side and make sure their businesses are stronger both because that's what we should do as a fiduciary to them, but also ultimately if we want to continue to be able to grow.
We have to give them an investment alternative that continues to make sense from a return point of view and so we're hyper focused on it and I would say I feel really good and as I said I think the development cycle will flip faster than we've seen in prior cycles for these reasons I just think that the economics that you know the laws of economics are alive, and well said it now twice.
Our three times, you know that if people can get great returns because of the conditions macro and micro macro world going on micro the things were doing then theyre going to want to build this more hotels and.
Obviously with the signings being up in the mid <unk>.
Double.
Mid mid teens to you know plus we we think that's pretty good prime efficient evidence that that's what's going on.
Great. Thank you I appreciate it.
And the next question will be from Stephen Grambling with Goldman Sachs. Please go ahead.
Thanks. This is a bit of a multi parter, but you mentioned that the majority of the pipeline is outside the U S. Can you just remind us of what that split maybe it looks like within some of the major markets. How the contribution from international room growth to compare and contrast, with the U S. As we translate nug to fees and then if you could just talk to any kind of incremental signing opportunities that youre seeing that.
Thats surfaced in new markets as a result of the pandemic that could be longer lasting.
Yes, Stephen it's Kevin I'll start I'll try to take those in order I think that the mix of rooms under construction.
Is just over some kind of between 60 and 65% outside the U S versus inside the U S. I think in terms of look we're always trying to enter new markets. I think we have 20, something 25 to 30, new new countries embedded in the pipeline that we don't that we don't have today right. So we're always trying to enter new markets.
I'm not sure really anything of that any of that has been opened up by the pandemic I think it is just sort of the course of the growth of our business over time.
And then trajectory really has a lot to do with how it places are coming out of the pandemic, meaning we've been we've even though theres been spikes up and down in Revpar in China for instance, as they go into Lockdowns. The development trajectory. There has actually continued to be pretty solid and continued to improve but in places like Europe, where.
Traditionally it's more of a face to face development environment. The less people who've been able you know the less our teams and the owners have been able to get on planes and move around country to country. Those signings have lagged a little bit so I actually see that as a tailwind coming out of the pandemic, whereas with Theres a lot of pent up demand for development in EMEA broadly and I think that it's just.
Require a little bit more more mobility to surface that but the rest of it is.
Over time as you know Chris has talked about this as you are a rapidly developing middle class.
With.
More demand for mid market products, youre going to see a little bit more of that demand over time I mean, the full service business is not dead by any means but you're just going to see on the margin. The capital flows more to the limited service hotels. So we're going to do more deals where the capital flows and then as we bring franchising, which has been very successful for us.
This one Chris went through it so I won't go through it again, but as we bring franchising to different parts of the world, particularly Asia Pacific.
We're just gonna do more franchise deals over time, youre not going to see I don't think big step changes, you're just going to see a gradual growth over time and more limited service mix and more franchise mix.
Did that cover all of the.
Pardon.
One very quick follow up from a net unit growth standpoint, then I guess the fees that you're getting from the international market, maybe ends up being a little bit lower because of the revpar, but on the flip side. It sounds like youre doing more direct so theres a potential for that to actually improve within that mix does that mathematically rate the lower the lower price point.
It will it will blend in over time again, it will not change dramatically we've modeled it every which way and it's really hard to make that fee per room number move but mathematically it has to move over time and the reality is is look it's very high margin. Its you know its a 100% margin once we have scale in these parts of the world, It's 100% margin an infill.
And it yielded so we'll take it.
Awesome. Thank you so much sure.
The next question will be from Robin Farley with UBS. Please go ahead.
Great. Thanks, a lot of my questions have been asked already one just to circle back and I Hope I didn't Miss this in the opening comment I, the opic or pulling out of the call from it a bit when you talked about group and the expectation that there'll be a lot of pent up volume for 'twenty two.
Can you give us a sense of where it is.
And I think that it's a reasonable expectation, but kind of where.
Where.
<unk> on the books for next year versus 19 like in other words.
It's likely to be higher.
Maybe not in Q1, but kind of how that's pacing with what you have on the books for group 22 in the quarter or first half second half yeah, I mean, it would be weighted to Qs two through four first of all for the reasons I covered it in a prior answer just meaning people want to get through the winter one too.
The first quarter is never a big group quarter. So you put those two things together and it trends heavily to Qs two three and four were in the 75%, 75%, 80% on the books for.
Which is about consistent with where.
We were in the last quarter.
And what happened is I think if you hadn't had the delta variance spike we'd probably be somewhat further along but you had the delta variant sort of slowed it cooled off the <unk>.
Vance bookings on the group side, which have now which have now picked back up the other thing going on of course is you know we.
We do believe there's going to be a lot of group potential, particularly in Qs two three and four and we don't want to commit there's a level of of of lack of desire on our part to commit too much space. When we know that there'll be a lot of pricing power. So it's sort of a.
Bit of a delicate balancing act.
Okay, great. Thank you.
And the next question will be from Richard Clarke from Bernstein. Please go ahead.
Thanks. Good morning, Thanks for taking my question just on your cost reimbursement revenue has exceeded your the cost reimbursement expense for the first time really since the pandemic began.
And you've lost obviously not underlying you've lost about sort of $500 million.
And through that Delta.
As the pandemic is going on is this the beginning potentially being able to claw that back.
And could this be sort of boost to cash flow over the next.
The next few quarters.
Yeah Richard.
Wouldn't necessarily describe it as a clawback I think what happened early in the pandemic. As you know you had sort of rough numbers, yet revenue go down kind of 85% to 90% overnight and we did a really good job of taking expenses down, but we can only take expenses down call. It 60 or 65%. So we basically were funding.
From our balance sheet, the all of the commercial engines and the websites and all of the funded part of the business and so those things are really are our giant co ops theyre going to breakeven overtime. So now what you're seeing is you know revenues and by the way all the fees all the sources of funds for those programs are funded as a percentage of revenue. So as revenue is.
Is climbing our receipts are going up and we will ultimately.
We will ultimately bring those funds back to breakeven and we will recover those deficits and at the moment, you're seeing it as surpluses, but I wouldn't necessarily think of it as clawbacks those funds run surpluses and deficits from time to time, So I think you'll see it run a surplus for a little while and yes. The cashes co mingled, but it's our owners' money at the end of the day and week.
Spend it all on them.
Okay that makes sense. Thanks.
The next question will be from Bill Crow from Raymond James. Please go ahead.
Hey, good morning, good morning.
Chris.
Wondering how much risk there really is when we think about the combination of the return to office the absence of government checks much higher costs from inflation for the consumer and probably pretty considerable pent up outbound international demand. So I'm thinking about your comments on rates and leisure.
Leisure in particular.
Are we at risk.
Setting ourselves up for disappointment next year.
I don't think so you heard my view so you can.
We can have a.
A debate about it but I don't think so for the following reason I think the mid week is already being bled out now. So I don't you know I think most people. Most kids are back in school, which then truncates mobility, even if people aren't in the office so while more offices, they're gonna open through the rest of this year and into next year.
What we've seen in the pattern of leisure during the midweek, it's already sort of washed out a large part of that already.
I, maybe wrong, but I believe the weekends are going to remain strong simply because I still think if you look at the three trillion dollars of incremental savings during COVID-19, there's a long way to go to spend it all and I think people still want to do they want that experiences that they were starved for and now it.
Gets concentrated more on weekends, which is what we're seeing now I believe that will continue.
I don't know.
The elevated so the net of it is.
In my view just to be clear is that relative to a normalized like 19 level of leisure demand I think we're getting back more towards that with a little bit better because I think the weekends are going to be a little bit better I'm not.
I agree with you I don't think that the mid week leisure is gonna be raging and that's not sort of built in is built into my expectations in terms of <unk>.
Outbound near the World is opening up but then there's inbound to particularly for the cities that you're the big cities top 25 markets that that historically depend on 20% of their business from inbound international travel they've had zero and starting you know next week or week. After you know the.
The floodgates are going to open on that so yeah, youre going to have some people going outbound, but you're going to have a lot of people that want to come see America.
That is going to offset that and particularly with the top 25 markets broadly, but particularly the top 25 markets that are that are going to come in again.
We're still in the middle of budgets and we're still debating all of this.
And where it ends up.
Yeah.
I'm, just giving you my opinion and my sense of it.
Inc. Leisure will remain when we wake up.
Next year and the following year and you compare it to the amount of leisure business that we did which was probably 25 or 30% of our overall segmentation pre COVID-19 I think it'll be higher than that and I think it'll be higher than that because people want to get out more.
Theres plenty of incremental savings in the world that has not gotten anywhere close to being spent and the weekend business. While we were doing better on weekends than we had historically I think it'll stay even more elevated than that.
Great and Chris can I can I give you the opportunity to maybe update.
Update us on the <unk>.
I mean for potential capital returns.
Buybacks, yeah, we don't have anything new but to repeat what I said last time, we are very interested in getting back to returning capital.
We firmly believed in our capital allocation strategy pre Covid, which was we were producing a lot of free cash flow that we didn't we can continue to grow the business and an industry leading way without the use of much of it.
And we wanted to as a result to give it back to our shareholders. Because there was no reason for us to hoard it or do dumb things with it and a disciplined capital allocation. We believe is a hallmark of long term delivering great returns for shareholders are my belief hasnt been changed through Covid. The only thing that changes we.
Didn't have a lot of free cash flow during the heat of the crisis. We are obviously getting past that we're cash flow positive we want to just give it a little bit more time as I said on the last on the last call sort of finish out the year end.
If things go as we expect and consistent with what we have been seeing.
We're gonna reinstate you know a return of capital program in the first half of next year and my guess is it'll look quite similar I mean, we're still having that discussion with our board, who obviously has a as I say it but I think I think if I had to pick and why do I think it'll look a lot like what we were doing pre COVID-19 and we're very focused on it and very angst.
Just to get back to it and so I would direct you I would say first half of next year.
Perfect. Thank you.
The next question will be from Patrick Scholz with Truest Securities. Please go ahead.
Alright.
Good morning, Good morning Christian.
Our labor costs and specifically.
Corporation's labor cost cost.
Any change in your expectations for G&A and trajectory of your G&A versus what you've said in the past and correct me if I'm wrong I have in my notes here.
You talked about sensitivity of EBITDA to Revpar.
<unk> growth about one three times Revpar growth is that still your.
Thoughts on that trajectory.
Yeah, I think what we said Patrick is that in the context of when Revpar levels are elevated the revpar growth is elevated the way. It is it'll be in that zone. I think you know it should be it should be you know obviously, 90% of the business from fees that should be about one to one as things normalize. We think we can do a little bit better.
Net unit growth cost discipline license fees things like that maybe a little bit better than one to one over time, but I think the one three is more of when Revpar is elevated and then no change short answer is no change in our views on G&A right. We've been very disciplined I think what we've said to you guys is that cash G&A.
<unk> to be down this year in the mid to high teens from 2019 levels, we actually might do a little bit better than that this year, because we've got pretty good cost discipline gap is different but you've got a lot of moving pieces, particularly in the third quarter of this year, we're lapping over.
The write downs of stock comp from last year, and then going forward you know again no real change I think we all understand that with with more business activity is going to come a little bit more expense and you know just like we're in an inflationary environment, that's going to help on the revenue side, we're gonna be paying people a little bit more along the way, but we do think we're going to maintain.
Discipline the changes that we've made to our structure are going to hold going forward and we feel still feel the same way.
Okay, Alright, thank you Kevin.
Sure.
The next question will be from Vincent <unk> with Cleveland Research Company. Please go ahead.
Great. Thanks question on distribution you guys have done a nice job driving direct business with I think loyalty contribution around 60% pre.
Pre COVID-19 I know Otas contribution fell from high teens to about low doubles, while reducing commissions along that path. So a lot of exciting things happening on the distribution front I'm curious on the other side of this how youre thinking about otas contribution as well as how high that loyalty contribution.
Yes.
Yes, really good question I don't.
I don't feel really a lot different than I did pre COVID-19 I mean, we we believe there's an efficient frontier and <unk>.
We've calculated it as best we can.
You know by individual market property, you know what.
Based on what they can deliver at that price point versus what we can deliver how do we deliver the highest index.
The highest revenue for the lowest distribution costs and we do believe and that's why we've had a good relationship with the Otas that they play a part in that.
It's traditionally been in the you know in the sort of 10 or 12% range.
And that's historically, where we've been doing during COVID-19.
That went up but.
We wanted it to go up we partnered I think quite successfully with our O T. A.
<unk> partners, knowing that the biggest segment of demand that was out there for most of Covid was.
Lower rated leisure, which is what they are particularly good at you know non loyalty non loyal type customer base and so it has crept it crept up a bit but not too terribly much and we've already seen that sort of peak and start to come down and so while we'll look at the efficient frontier as we always do.
Do periodically and maybe if you think leisure is going to be a little bit higher component overall, maybe it goes up a little but not much and it didn't move that much. So the net of all that is I think when we wake up in a couple of years it'll look an awful lot like it did before.
And and.
We obviously feel good about the contractual terms that we have with the Otas now and our ability to continue to have attractive terms going forward as it relates to honors.
Then my honors team is probably listening in.
I may need a diaper.
This but.
Where we maxed out in the you know in the 63, 64% system wide and.
We're already in the U S. As I mentioned in my prepared comments not that far off of that globally, we're coming back as our more of our number.
Number one we've accessed more travelers that weren't loyal so some of these leisure travelers that we didn't have access to we've now access and more of our core customer is getting back on the road, we're getting back to normal but.
Im not going to put a number out there because I'll give my team will have a heart attack, but I believe that there is a lot of room to grow I think the supermajority of if we're doing our job the Super majority of our customers wanted to be honors members. It's a it's a proposition that they get benefits that you just don't.
Get and they're meaningful you can go through them they get discounts they get technology, they get experiences money can't buy they get points that our currency they can shop on Amazon and Lyft and buy tickets at live nation.
There is no reason as we continue coming out of this to actively engage with our customer base, where it shouldn't be we shouldn't be able to push it meaningfully higher than where we were we maxed out before now that will take time and so to my honors team don't freak out we're going to give you the time, but our.
<unk>, there, which I'm not going to state publicly or are meaningfully higher.
And then where we were which by the way is meaningfully higher than.
And then any of our competitors already.
Thanks.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the call back to Kristin setup for any additional or closing remarks.
Thanks, everybody for the time today I know, it's a busy earnings season, we're obviously quite pleased given what we've all lived through over the last 20 months to be able to report.
The progress that we were able to report for the third quarter as you could tell from the call I remain quite optimistic about.
This recovery is going and what the opportunities are in the industry, but particularly for for our business and the growth of our business and we will look forward.
So reporting fourth quarter and full year.
After the new year look forward to seeing many of you when we're out on the road and have a terrific.
Day, and holiday, if I don't see it.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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Sure.
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