Q1 2022 Hilton Worldwide Holdings Inc Earnings Call
[music].
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 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 first quarter 2022 earnings call before we begin we would like to remind you that our discussion. This morning will include forward looking statements actual results could differ materially from those indicated in the forward looking statements.
Forward looking statements made today speak only to our expectations as of today, we undertake no obligation to update or revise these statements for a discussion of some of the risk 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 data, our President and Chief Executive Officer will provide an overview of the current operating environment and the company's outlook, Kevin Jacobs, Our Chief Financial Officer, and President Global Development will then review our first quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions.
With that I am pleased to turn the call over to Chris. Thank you Jill good morning, everyone and thanks for joining US today before we begin I'd like to take a minute to express our sadness at the tragic events continuing to unfold in Ukraine.
Our hotels have always been a part of the fabric of the communities, we serve and we take our promise to make those communities better places to live and work very seriously along with the steps we've taken to protect our team members and guests. We've also partnered with American Express and our ownership community to donate up to 1 million room nights across Europe to <unk>.
Support Ukrainian refugees and humanitarian relief efforts. Additionally, the Hilton Global Foundation has contributed the world Central Kitchen and project hope to further assist with humanitarian aid we were keeping our Hilton family and everyone impacted by these horrific events in our thoughts and hope for a peaceful resolution.
To this crisis, our Hilton values and purpose led culture have led us through uncertainty as well as recovery our team members around the world have worked hard to effectively navigate the challenges over the last two years and as a result have positioned Hilton even stronger for the future as.
As we look to the year ahead, we are optimistic that our industry, leading revpar premiums and fee based capital light business model, coupled with further demand recovery, we will continue to drive strong performance and meaningful free cash flow, which will enable us to return significant capital to shareholders in a disciplined way.
With recent performance exceeding our expectation we were pleased to have resumed our capital return program earlier than anticipated beginning share repurchases in March through April we had completed approximately $265 million of buybacks. Additionally, we have declared a <unk> 15 per share.
Orderly dividend further heightened highlighting the confidence and continued recovery in the strength of our model for the year, we expect to return $1 4 billion to $1 $8 billion to shareholders in the form of buybacks and dividends.
Turning to results in the quarter system wide revpar increased more than 80% year over year driving adjusted EBITDA up 126% Revpar was approximately 83% of 2019 levels with adjusted EBITDA at 90%.
Despite a choppy start to the year, given omicron related demand pressures trends picked up meaningfully month over month with Revpar declines versus 2019, improving approximately 17 percentage points from January to March down only 9% to 2019 driven by acceleration.
Across all segments in March system wide rates were up 3% compared to 2019 strong leisure transient trends continued to boost weekend performance with revpar in the quarter exceeding 2019 levels and rates up approximately 9% versus prior peak.
Acceleration in business transient and group trends drove meaningful improvement mid week.
U S business transient revpar increased sequentially versus the fourth quarter with March down only 9% compared to 2019 levels.
Improving trends from large accounts along with continued strength from SME has boosted results in March revenue from large accounts was just 12% below 2019 overall business transient now comprises 45% of total segment mix, just 10 point shy of pre.
Pandemic levels for April overall U S transient booked revenue for all future periods was up 17% versus 2019 levels with rates up 10% and room nights up 7% weekday booked revenue was up 9% compared to 2009.
<unk> and weak and booked revenue was up 38% driven largely by strong rate gains.
On the group side, social and smaller events continued to leave recovery, while demand for company meetings and conventions improved meaningfully throughout the quarter in March total group Revpar was more than 75% of 2019 levels, improving approximately 25 points versus January .
Additionally group revenue booked in the first quarter for all future periods was down just 4% relative to 2019 levels and total lead volume for all future periods was up three 5% compared to 2019, our tentative booking revenue is up significantly.
<unk> with rate gains for company meetings up more than 13%.
Additionally rates on new group bookings for in year arrivals are strong up in the high single digits versus 2019, as we look to the balance of the year. We remain optimistic positive momentum has continued into the second quarter with April revpar tracking at roughly 95%.
Of 2019 levels, while macro risks and uncertainty exists forecast for economic growth remained healthy. Additionally, our ability to reprice rooms in real time creates a natural inflation hedge we think there is a good likelihood that we will reach 2019 system wide revpar levels during.
The third quarter.
For the full year, we expect leisure revpar to exceed 2019 peak levels, given excess consumers savings a strong a strong job market and pent up demand, we expect business transient to be roughly back to 2019 levels by year end with expectations supported by rising.
Corporate profits rebounding demand from big businesses and loosening travel restrictions on.
On the group side, we expect revpar to be at approximately 90% of 2019 levels by year end as demand for company meetings and convention business accelerates into the back half of the year on.
On the development front, our leading Revpar index premiums and powerful commercial engines continued to drive out performance in the quarter, we added more than 13000 rooms, and achieved 5% net unit growth. We continued to deliver on our commitment to disciplined and strategic growth celebrating important milestones across <unk>.
<unk> and geographies, we opened our 500th Homewood in the U S are 50, as Hilton Garden Inn in Asia Pacific.
And debuted our largest hotel in the Asia Asia Pacific region with the opening of the thousand 80 room Hilton Singapore Orchard.
With a contemporary design innovative dining experiences experiences and extensive meeting space. The property is a fantastic representation of our flagship brand. It puts us in an even stronger position in Asia to Usher in a new era of travel building on last quarter's momentum. We also continue to.
Spanning our lifestyle portfolio with the openings of the canopy Boston downtown in the canopy New Orleans.
Even with strong openings, we grew our pipeline to more than 410000 rooms up year over year and versus the fourth quarter. We continued to lead the industry in new development signings with whom to suite, surpassing all other competitor brands globally, we demonstrated our commitment to further expand our <unk>.
And lifestyle portfolios in the world's most sought after destination with the signing of the Waldorf Astoria, Sydney, The Conrad Austin Hotel <unk> residences.
Canopy properties and con and downtown Nashville wed.
We look forward to delivering world class service and unforgettable experiences in these exciting destinations conversion signings in the quarter were up 15% year over year and represented nearly 20% of overall signings in recent months, we signed agreements to bring our conversion friendly brands cured.
Oh, and tapestry to exciting destinations like the Galapagos Islands.
San Sebastian, Spain, Maui in Sonoma County, California, Doubletree has continued to lead the way for European upscale growth with new conversion properties across France, Germany, and the Netherlands.
While rising costs are pressuring construction starts we are on track to deliver 5% net unit growth for the year and remain confident in our ability to return to a 6% to 7% growth rate over the next few years.
Reliable and friendly service are at the heart of our promise to our guests and we continue to leverage our direct channels to offer them, even more personalized experiences direct bookings continued to grow in the quarter, but represent rough.
Roughly 75% of our total bookings led by growth in digital direct OTA mix continued to decline and is approaching pre pandemic levels as increases in business transient and group demand shifted customer mix in the quarter Hilton honors membership grew 15%.
To more than 133 million members.
<unk> members accounted for 60% of occupancy flat versus the first quarter of 2019 and average nights per member were up 11% year over year as engagement continued to grow.
As we continue recovering from the impacts of the pandemic I'm inspired every day by the dedication of our team members as we welcome more guests back to our hotels.
It's because of them and our culture of hospitality that we continue to be recognized as a great place to work in fact Hilton was recently named the number two best company to work for in the United States by Fortune and great place to work something I'm truly proud of.
And now I'll turn the call over to Kevin for more details on our results in the quarter and our expectations for the year Kevin.
Thanks, Chris and good morning, everyone. During the quarter system wide Revpar grew 85% versus the prior year on a comparable and currency neutral basis system wide Revpar was down 17% compared to 2019 impacted by the <unk> variant.
Following a seasonally slow start to the year demand picked up across all segments and regions in March driven by continued strength in leisure demand and loosening corporate travel restrictions.
<unk> was driven by both occupancy and rate growth.
Adjusted EBITDA was $448 million in the first quarter results reflect the continued recovery in travel demand management and franchise fees grew 79% driven by meaningful Revpar improvement and strong owners license fees.
Continued cost control further benefited results.
Our ownership portfolio posted a loss for the quarter due to the more challenging operating environment, particularly at the start of the year in Europe , and Japan, where the portfolio is concentrated in fixed.
Fixed rent payments at some of our leased properties also pressured results.
However performance improved throughout the quarter driven by strengthening demand across Europe in March rebounding fundamentals, coupled with cost discipline should continue to drive significant growth in operating performance going forward.
For the quarter diluted earnings per share adjusted for special items was <unk> 71.
Turning to our regional performance first quarter comparable U S. Revpar grew 77% year over year and was down 13% versus 2019, while the omicron variant weighed on demand at the beginning of the year Revpar improved 17 percentage points over the course of the quarter, which mark with March down less than 6% versus 2019.
Leisure travel continued to lead the recovery with segment Revpar exceeding 2019 levels for the quarter.
Upticks in business transient and group travel, particularly in March also contributed to solid performance in the quarter.
In the Americas outside of the U S first quarter, Revpar increased 137% year over year and was down 17% versus 2019 the.
The omicron variant suppressed demand in January and February but rebounded in March led by strong leisure demand, particularly at resort properties during the spring break season.
In Europe , Revpar grew 349% year over year and was down 30% to 2019.
Travel demand accelerated following the omicron outbreak with March Revpar down, 13% compared to 2019 the.
The region benefited from easing travel restrictions and an increase in cross border travel.
In the Middle East and Africa region, Revpar increased 121% year over year and was up 8% versus 2019 performance continued to benefit from strong domestic leisure demand and greater international inbound travel is travel restrictions across Europe Lucent.
In the Asia Pacific Region first quarter, Revpar grew 11% year over year and was down 47% versus 2019.
Revpar in China was down 45% compared to 2019 as travel restrictions and re imposed lockdown suppressed demand.
The rest of the Asia Pacific region saw a modest improvement in demand recovery is more countries loosen border on arrival controls in March.
Turning to development as Chris mentioned in the first quarter. We grew net units, 5% our pipeline grew sequentially totaling over 410000 rooms at the end of the quarter with 60% of pipeline rooms, located outside the U S and roughly half under construction.
We continue to see robust demand for Hilton branded properties, demonstrating owner and developer confidence in our strong commercial engines and industry leading brands.
For the full year, we expect signings to increase in the mid to high single digit range year over year, and we expect net unit growth of approximately 5%.
Moving to guidance for the second quarter, we expect system wide revpar growth to be between 45, and 50% year over year or down 5% to 10% compared to second quarter 2019, we expect adjusted EBITDA of between $590 million and $610 million and diluted EPS adjusted for special items to beta.
To be between 98.
And $1 <unk>.
For the full year 2022, we expect revpar growth between 32% and 38% relative to 2019, we expect revpar growth to be down 5% to 9%.
We forecast adjusted EBITDA of between $2 25 billion and $2 three 5 billion representing.
Representing a year over year increase of more than 40% at the midpoint and essentially recovered to peak 2019 adjusted EBITDA.
We forecast diluted EPS adjusted for special items of between $3 77, and $4 in <unk>. Please.
Please note that our guidance ranges do not incorporate future share repurchases.
As Chris mentioned, we reinstated our share repurchase program in March which had been suspended during the pandemic year to date.
Through April we completed approximately $265 million in buybacks and our board also authorized a quarterly cash dividend of <unk> 15 per share in the second quarter.
For the full year, we expect to return between $1 4 billion and $1 8 billion to shareholders in the form of buybacks and dividends based on our adjusted EBITDA forecast and assuming the high end of our target leverage range of three to three five times.
After demonstrating the strength and resiliency of our business model during the pandemic, we continue to evaluate the possibility of a modestly higher target leverage range in the future.
Overall, we are proud of how we navigate the pandemic and remain confident in our ability to continue generating substantial free cash flow and delivering meaningful shareholder returns through buybacks and dividends.
Further details of our first quarter results 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 we would like to speak with all of you. This morning. So we ask that you limit yourself to one question Chad.
Chad can we have our first question certainly we will begin the question and answer session to ask a question you May Press Star then one new 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.
And the first question will be from Joe Greff from JP Morgan. Please go ahead.
Good morning, everyone. Good morning, Joe.
Chris how much of your second quarter and full year.
Revpar guidance is occupancy driven versus rate driven.
As moderating growth in leisure volume.
Given the tough comparison and relatively higher growth in business transient group volumes impacted blend of ADR and ADR growth in the second half.
Gave a lot of commentary on rate growth.
Sense of giving you as much visibility as we had to represent the strength that we're seeing I mean, we're a wonderful as I said in my prepared comments inflation hedge because we can reprice every minute of every day.
As demand has picked up we have certainly been able to do that and we expect that we will continue to be able to do that I think as the year goes on we expect the largest part of revpar growth to come from rate growth. We obviously.
We expect to see occupancy growth as well, but I think net net.
It will be majority driven by buy rate in terms of the segments.
Leisure broadly.
<unk> quite strong I mean, right now I think the number is.
Tumors still have $2 five trillion dollars of excess savings that the accumulated during the pandemic in their pockets while people have been out traveling a lot more than they had maybe a year ago.
There's still a lot of people that haven't and a lot of people that really want to get out and have experiences and so.
We have pretty full employment people have a lot of money in their bank accounts and I think now feel quite safe.
<unk> certainly here in the U S not everywhere in the world, obviously world's big place, but in the western World feel safe going out and so we expect to see very strong leisure continue I mean, we think we will probably have the biggest leisure summer we've ever had only to be only to surpassed last summer, which is the biggest leisure summer we've ever seen.
Prior to what I think we will see this summer.
And then as we get into the fall and the as people go back more in the office, which we certainly are seeing now and expect to see more of.
We're seeing as as I articulated and Kevin as well, we're seeing a very nice uptick in return to business transient and return on the group side and the group side lags a little bit as we know there's more planning involved in that but we think the second half of the year is it going to get stronger and stronger than business transient even over the last couple of months.
We've seen pick up in notably in something I commented on in my in my prepared remarks, we've even seen the large corporates starting to come back where March was only 12% down.
Sure.
In April .
You can assume was better or we don't have all the data on the breakdown in April but certainly broadly business transient was was even better.
In April so.
Businesses have a lot of pent up demand needs for travel balance sheets are very very strong profits a very strong liquidity is very very strong.
So I think the combination of.
That with what's going on with the consumer and then sort of the icing on the cake is the group side, where theres just so much.
New demand, but then pent up demand all of which I think will start to converge here in the second half of this year and into next year I think puts us in.
A place where we feel we feel really good about the short to intermediate term.
Both the demand side, but particularly the rate side.
Again, the reason I gave the stats I did about forward looking booking trends on the transient side, which obviously only has so far out but on the group side.
We really are seeing the ability to drive pricing power like a lot of industries are but.
Certainly makes us gives us the optimism that has led to two our judgments on both giving guidance, but also on our return of capital program and the like.
Thank you.
And the next question will be from Carlo Santarelli from Deutsche Bank. Please go ahead.
Hi, everybody. Thank you.
Chris you talked a little bit about kind of business transient back at 45% versus I believe that was probably closer to 55 pre pandemic and obviously group is probably a couple of hundred basis points below its normal mix.
That stuff comes back and you think about maybe a full year 2023 and occupancy in general.
What kind of pricing power do you think you have at occupancy levels that are kind of commensurate with 2019 levels, which I believe were kind of $1 43 144 ish.
Yes, well, let me first in terms of the mix, it's probably worth stating because.
Commented a teeny bit in my prepared comments youre right business transient sort of the mix pre COVID-19.
Plus or minus 55 business transient twenty-five leisure transient in 'twenty.
Group.
If you look at sort of what I would sort of call the bottom of the.
The recession driven by the pandemic. It went to 35 business transient 55, leisure and 10 grew.
Group now, it's 45 business transient 39.
Leisure and 16 group and I had been.
I've been saying this so.
Pretty much for two years in the beginning people, maybe thought I was crazy but.
When we wake up in this sort of flushes through the system and we get fully on the other side of it that business mix is going to look an awful lot like it did pre COVID-19 and I think we're on our way to that and so I think when we look maybe not I think leisure transient will probably remain elevated for a while but I think it will it is rigs.
Regressing to the mean and it will look more like it did then like it has looked.
In 'twenty, three and certainly in 'twenty four in terms of broader pricing pressure is all of that comes back not to be pedantic about it but it's sort of the laws of supply and demand.
Economics, which is if we have a product that's in high demand, an increasing demand and theres not a lot more there's not enough supply and not a lots being added which is sort of the case in terms of what's going on with all of our segments increasingly so and mid week and that's only going to increase and then you compound that.
With getting a decent group base starting in the second half of the year into next year. I think we'll have I think we will have meaningful pricing power next year, just because of the laws of supply and demand suggest we should and I think they are alive and well.
Fair enough. Thank you.
The next question comes from Shaun Kelley from Bank of America.
Hi, good morning, everyone.
Not to probably overly dig into this but Chris I think in the prepared comments you mentioned that April was running down only about 5%. That's obviously already kind of at the top end of the guidance you provided for the second quarter. So I think we all get to the background sounds pretty.
Pretty optimistic but could you just help us kind of reconcile that and maybe just some of the puts and takes around what it would take for things to be.
Better than a little bit better than maybe what you've laid out in the guidance.
What factors.
Might've led you to be a little bit more conservative yes.
The guidance. We gave is the guidance. We gave first of all I mean, I think John there are so good question I think there are some comp issues in <unk> and <unk>.
Certain months.
But honestly if you listen if you replay what I just said in response to Carlos question. We believe that we're going to continue to see a very strong leisure demand base and an increasingly strong leisure business transient and group base as we March through the next few <unk>.
<unk> of this year and into next year. So we're.
We're not trying to signal in our guidance that we think theres something going on from a weakening point of view, we think things are strengthening.
Okay. Thank you I'm, sorry to split hairs there.
Just as a quick follow up probably for Kevin.
Could you just talk a little bit about obviously the capital return guidance is.
Super encouraging.
Does that have you holding a specific leverage target or.
You've mentioned a couple of times in the past about possibly revisiting what that target would be but what's sort of implied in the one four to $1 8 billion that we're getting here and does that leave you a little bit of room to go even higher still should you reevaluate it.
Yes, Sean I mentioned this in my prepared remarks that <unk> may have been a little garbled, but it implies at the high end of the range.
Implies three five times, so embedded in that.
We have said and I said it in my prepared remarks that we continue to think about potentially increasing leverage modestly over time, we think the balance sheet has shown that it can handle the higher level of leverage in the business can handle a higher level of leverage given what we just went through and but theres still a lot of uncertainty in the world and so we're starting with effectively a 25.25 time.
<unk> increase at the midpoint by saying we're at the high end of the range and we will take it from there.
Thank you very much.
And the next question is from Thomas Allen from Morgan Stanley . Please go ahead.
Thank you and good morning.
Just a couple of follow up questions on our growth.
What's your level of confidence in the 5% guide this year any updated thoughts on timing or came back to fix it.
And just how our development in China growing thank you.
Yes sure no problem look we work, we're giving you the guidance. So we're highly confident that we can achieve it obviously a lot of the stuff that's going on and that's going to deliver this year as construction in progress and we have a pretty good handle on that I mean getting back to where we were before being Chris said it in his prepared remarks over the next few years getting back to 6% to 7% is going to.
That starts need to need to start getting back to where they were now starts. This year, we think will be about flat, maybe slightly down and that will be down in the U S up in international which is consistent with what we've been saying, we're still going to start 66000 rooms for construction this year.
<unk>, which we think is.
Which we think is still a pretty good rate of conversions and then we think that on a run rate basis.
Some of that is going to be filled in by conversions. I mean, we mentioned some of that in our prepared remarks convergence, we think are going to be up.
You were up 35% in the first quarter quarter year over year, we think theyre going to be up.
Around 25% to about 25% or higher of our deliveries. This year. So that will help fill in and then we think we will get back to that run rate on a run rate basis sometime in 2024, we think we'll get back to the 6% to 7%.
And then sorry, if I was just China, Oh, yes, sorry, China sorry.
Yes look China, what's going on now is that's very much in that part of the world of face to face culture right. So the fact that theyre locked down in Shanghai, a little bit in Beijing and other places is stopping.
<unk> temporarily but we still think we're going to be up slightly in terms of construction starts and we think we're going to open about 20% more rooms in China. This year than we did last year and so we think that once you get past kind of what's going on there on the ground that theres plenty of pent up demand for the product and once people can start moving around will be back to sort of businesses.
One China.
Alright, Thank you very much.
The next question is from Stephen Grambling from Goldman Sachs. Please go ahead.
Alright. Thank you on the contract acquisition cost side it looks like in your guidance, maybe ticked up a bit versus pre pandemic levels. How should we think about this level versus a normalized run rate over the next few years and as that investment coming in the form of.
Loans and mezzanine equity or is it just straight investment in the deals that are future interest. Thanks.
Yes, sure I think look it is this year's guidance implies a little bit lower than last year.
It is up over 2019, it's largely a good news story as we've talked about on prior calls right.
And it's almost entirely key money, it's not to say that we never do a little bit of credit support or a little bit of a handful of mezz loans here and there, but it is almost entirely key money.
That has that elevated from pre pandemic levels. There is some great deals last year like monarch Beach and.
Our all inclusive and to loom and deals like that last week.
Resorts World Las Vegas was one of the big ones and so those are great deals to win some of the merchant sometimes they're conversions as in monarch Beach and so they are in the year for the year deals and they get a little bit of expensive at the high end as we've talked about this year's guidance implies a little bit lower.
And then last year and we'd like to think it will be around there for the next couple of years, because we'd like to think we continue to win.
More than our fair share fair share of these great deals and I think what I'd say overall in closing is I think it's still it's still only 10% of our deals 90% of our deals require no capital support from us whatsoever, and I think that our contract acquisition costs still holds up pretty well versus our competitors.
Great. Thanks, I'll jump back in the queue.
Sure.
The next question is from David Katz from Jefferies. Please go ahead.
Hi, Good morning, I just wanted to go back.
To the notion of no and construction starts et cetera.
Because we do continue to here.
Bits and pieces around.
<unk> chain.
Bill ability and cost of materials can you just elaborate maybe a bit more on what youre baking into your guide and your thoughts from that perspective, yes, happy too David I think that look the.
The.
The.
Factors are well known right input costs are up you've got tightness in the labor markets, you've got input prices in terms of commodities, you've got you've got financing.
All of which has been the case for a while and believe it or not despite what you read it's actually easing a little bit at the moment, but it's still elevated.
And Thats all baked into the guidance right. That's why construction starts will be flat to slightly down this year, otherwise they would probably be up materially they're down 25% roughly to where they were in 2019 demand for the product based on based on the optimism in the outlook demand for the product is actually up I mean, we think our signings will be up in the mid to high single digit.
This year and there is that same level of optimism in terms of people wanting to get the project started it just being held back by the factors that you are talking about so those factors are there they will probably be there for some period of time, and we think like all things through cyclical they will ease over time and then the fact that our signings are up is what gives us the confidence to believe that our.
<unk> that our starts will will go back to where they were roughly in 2019 and that our nug will go back to 6% 7%.
I think that's right the only thing I'd sort of add to that and Kevin.
Earlier in his comment is inflation is our friend and it's our owners Fred So if you look at what we've done in the system during Covid as a result of sort of going through every granular standard.
For every single brand, we've been able to drive a lot of efficiency at the hotel level.
At the same time.
Obviously labor costs have been going up but when you put all of it into the.
Gunky later, so to speak with the savings we've created with the inflationary pressures, which are driving their rate up and obviously expenses arent, 100% of revenues so they've got.
A positive they've got positive leverage there even in the face of increased labor costs, we are very confident that across all of our brands.
Sort of comparable basis margins are higher so the enthusiasm at our owner community and why because Kevin rightly pointed out we think signings are going to be up is that our brands are doing great. They are driving great share and people are optimistic with the recovery, but theyre also looking at an equation, where theyre going to be able to drive high.
Margins on the other side now we have to have the financing market sort of continue the input costs all of that which will take a little bit of time and in the meantime.
We're having great success.
And the conversion world, we're going to probably Kevin said increased conversions this year relative to last by 600 basis points of total nug delivery. So.
We feel pretty good about where we are.
Okay. If I may just follow up quickly and use your Gunky later, one more time.
<unk> leased.
Back to the model.
It looks like it really has two sides to it one which is kind of a friend in this recovery and the other of that.
Strikes me as a bit more challenging.
Are there potential.
Potential ways in the future that you can deal with the more challenging aspects of it.
Turn them into a positive in some way.
Well sure I mean look first of all I'll start out with.
Implied this or I said this in my prepared remarks that portfolio. The performance in that portfolio is improving that is starting to turnaround its been concentrated in parts of the world that have been a little bit behind from a COVID-19 recovery perspective, Central Europe, and Japan in particular as that portfolio recovers it will contribute.
Meaningfully to our growth rate, meaning the EBITDA in that portfolio is going to grow at a much higher rate over the next couple of years, then the overall fee businesses and so it's going to contribute positively to our growth. So finding finding a positive there to your question.
And we think that from an EBIT perspective over the course of this year, it's going to turn positive and then we actually think it'll be positive slightly positive as an EBIT contributor. This year and then I think what we can do is what we've been doing right. I mean, we have quite a large portfolio of leased assets when we inherited the company.
<unk>.
We've chipped away at it such that it used to be 9%, 10% of the EBIT of the business on a stabilized basis is going to be sub 5% of the but even when it recovers over the next few years at a higher rate than the overall business. The fee business continues to grow we shrink the lease portfolio over time, it's going to be less than 5% of the.
Business overtime, we got out of seven leases last year, we allowed four of them to expire and then because we couldnt come to terms with the landlord on renewing them or we didn't want to be there and we converted three of them to management or franchise agreements. So they stayed in the system and they move from the capital heavy part of the business for the capital light part of the business. So we will.
You need to take those opportunities over time.
<unk>.
I will end up being a positive as we shrink that business and grow the rest of the business overtime.
Got it thank you very much I appreciate it.
The next question is from Smedes Rose from Citi. Please go ahead.
Hi, Thanks.
I wouldn't ask you when you think about your guidance for the year and it's great that you have visibility to to provide that.
Hello, how are you thinking specifically about.
The factory in China, and Europe over the balance of the year you touched on that a little bit with Europe , I guess I will now comment maybe just a little more.
Color on how you think that could shape, yes.
Yes, I think at a high level of Smedes.
The way I would think about Europe , as Europe's recovering quite nicely not eastern Europe . The bulk of our business in Europe is driven by Western Europe , and Europe is not quite as far along as the United States, but as Ben motoring along Kevin gave you a few of the stats that I think support that so we expect like the U S.
Europe Western Europe to continue to recover our expectation is eastern Europe for the foreseeable future is going to be quite challenged but again, a very very small.
Insignificant part of the portfolio being impacted by that in China, Obviously, a more complex situation. We have a view we have forecast, which is why we can build it in and give guidance I think our expectation is in the second half of the year as China goes through a process of locking down some of the majors.
Cities, and then reopening them that China is going to reopen for China at a minimum not necessarily China opening for international arrivals, but as we saw in the early stages.
The pandemic when China got way ahead of the rest of the world when China opens for China in China business, our business does quite well and can recover very very rapidly. So our expectation is.
Second half of the year, you will see China start to reopen really with more benefit in the fourth quarter and then the next year than in the third quarter.
Thank you.
The next question is from Robin Farley from UBS. Please go ahead.
Great Yes.
Some quick ones.
Can you talk a little bit about the book.
<unk> window I feel like last fall it was down to sort of less than a week.
And maybe pre pandemic have been more like 30 days, just kind of where are we now with that visibility.
Windows are extending as you might guess I think within seven days, it's now it had gotten to be.
A vast majority at the worst of Covid.
<unk> booked within seven days I think we're approaching an April 50, 50, plus or minus like 50% of the business within seven days, 50% longer.
<unk> huge huge improvement from where we were.
Great and then on the OTC business.
The distribution mix you mentioned it was down which makes sense as business comes back.
With that.
15%, you mentioned, 85% direct which I assume includes I guess.
70%, 75% drag we didn't give an LTA percentage, we typically would but we're in sort of the pre pandemic. We were in the very low teens, which is what we sort of believe the efficient frontier is for the business to to be able to drive the best results for our ownership community.
<unk>.
And I would say in the quarter were basically there plus or minus.
Okay great.
And then.
I guess the last thing on the group and you kind of addressed a lot of it in your opening remarks, I think you said you expected by the end of the year to be at 90% or 19 level. It's fair to say that you expect 23 to be kind of back at 2019 levels and then also I don't know if he gave.
Pacing for like what percent of 'twenty three room nights your book compare to like what was booked at this time pre pandemic just to thank them, we did and I think the answer to the first question is yes.
I do think 'twenty three we will be back for.
<unk> group will be back at 19 levels, we did not give a stat I think this stat from the best.
My memory is about 15% down.
Versus <unk> 19 at the moment for 'twenty, three but as I articulated in the prepared comments our sales folks can hardly keep up with all of the leads that are coming in for the second half of this year and particularly into next year and so I think just given the trajectory of how this recovery has occurred and what we've seen.
In the year for the year business.
Read a whole lot into.
Being 15 down for next year, we have plenty of time to book that and importantly.
The rates are basically low double digits at the moment. The book business is low double digit higher than 19, and so part of what we're obviously trying to do is maximize the outcome rate flows really nicely for our ownership community. So we're not we really don't want to rush too much in.
This kind of inflationary environment, because we know the business is going to be there and we want to put it on the books at the highest rates possible and so we're sort of we're sort of taking our time and metering. It out I suspect as I said next year, we will be at volume similar to 2019 when were done with 2023 and at rates.
Much higher than 2000, and then 2019.
Okay, great. That's it for me thanks.
Okay.
The next question is from Patrick Scholes from <unk> Securities. Please go ahead.
Alright. Thank you good morning, everyone. Good morning.
For your net unit growth guidance of approximately 5% how does those percent how did those percentages breakdown by global region.
Basically what are those percentages.
Growth rates by different regions. Thank you.
Yes, it should be Patrick it should be pretty similar to the rooms under construction are about 80% of international I don't have the sub breakdown in front of me right now.
Where it breaks out, but it ought to deliver above plus or minus what the rooms under construction are 20% in the U S about 80% outside the U S.
Okay do you happen to have handy.
Indeed.
What.
The expectation is for the China growth rate.
Yes, well for openings I think I said in one of my earlier answers, we think that openings or rooms opened in China. This year going to be 20% up year over year.
Okay. Okay. Thank you.
Sure.
And the next question is from Bill Crow from Raymond James. Please go ahead.
Hey, good morning, Chris.
<unk> continued to be.
Good morning, I continue to be really fascinated by this interplay between the brands.
Owners at a time when hawk.
Occupancy rates are ramping up with labor continues to be kind of short.
Wondering what youre seeing with guest satisfaction scores and then if you have any concerns about that as we head into the busy summer months.
Yes, I mean, I'd say first on the labor front.
There are still significant issues that we're seeing both in what we manage in and as we talk to our franchise community, what they're saying over the last six months.
Seen a very significant increase in labor coming back into the labor force and our ability to get folks in the hotels, which obviously.
Our needed given the demand profile and the increases in demand across all segments as I already described so we're not we're not all the way anywhere near where we want to be but.
The issues are not.
They're not as extreme as they had been at other points in the pandemic, including recently.
In terms of customer satisfaction, I think listen I think all service industries have suffered and we're right there along with the rest of them. We've been intensely monitoring and we have all sorts of ways to do that both through social but our own tracking systems.
We call salt satisfaction and <unk>.
Royalty tracking and what I've seen is those numbers that had sort of bottomed out in the middle of the pandemic have started to come back and go the other way as we've been able to get labor and bring some of the services back our social scores I think lead the last I saw we lead the industry and have been.
Moving up in a positive way so we're not satisfied with.
With what we're doing right now I think the team sitting at this table would say.
Pounding the table a lot.
We like what we're doing we're on a good trajectory we need to get.
More labor back in we need to restore more services.
Good food and beverage back on track and other services and we're obviously sensitive very sensitive as you sort of implied in your question to the cost structure.
For our owner community, but the reality is the demand is there and we're charging for it so we have to deliver the experience or ultimately.
We're going to impair our ability to continue to drive rate. If we don't deliver the basic experience. So I'm confident we will our owner community broadly you talked to a lot of them, but I talked to tons of them theyre broadly understanding of it they're supportive there seeing the pricing pressure and they realize that we have to work together to get.
There we have been as I mentioned in my earlier response, we have been Super Crazy focused on making sure that when we get to the other side of this this is a better setup for our owner community than what than what we had before the pandemic and we continue to work really hard on that and we're confident on a on a comparable basis that that they will be.
In a better place and that inflation is their friend, it's our friend and cost savings and initiatives that we that we that we pursued and implemented during COVID-19 are going to pay dividends for a long time to come.
Okay. Thank you.
The next question is from Chad Beynon from Macquarie. Please go ahead.
Hi, Thanks, Good morning, we've heard a lot about airline price increases recently.
Upcoming in the next couple of months.
It seems like the operators are pushing through the fuel increases to the consumer and I know in your prepared remarks, you noted that March and spring break were strong for the leisure customer. So it doesn't sound like there's been any pushback at this point, but can you talk about I guess, what you've seen during different cycles as gas prices have remained elevated and if you think that could.
<unk> kind of the mindset of the leisure customer for the rest of 'twenty two.
Been doing this a long time and we've been studying this a long time and in fact, our team to update our squared on this just so we could be technically accurate numbers.
And the reality is if you go back over.
Long periods of history, there is not a very high R. Squared there is not a very high correlation.
Fact, theres, a very low correlation between what's going on with.
Fuel prices and demand in our business you can go back to like the OE to nine <unk>.
<unk> had 150, plus a barrel we went and looked at all of those periods.
Theres not theres not a very high correlation I think I think it has a lot to do with the consumer psychology, which at the moment.
Certainly lots of fear and uncertainty about where the world goes but at the moment as I said, the consumer as an abundant amount of savings as two businesses.
Burning desire to sort of get out there and do business <unk> experienced the world having been locked up a lot more than they would have liked to so we're not really we're not really seeing any of it now theres also a phenomena that is will shift around but if you looked at our business pre pandemic.
Roughly two thirds of the business 60, 60% two thirds were fly to and the rest were drive to that that's flipped around during during the pandemic and it's still disproportionately the majority right now even with where we are in recovery.
Our people driving part of this is there is no now gas prices are going up too but.
Maybe not proportionately as much as the airline ticketing. So there is there is a little bit of a substitution effect that I suspect is going on.
With people deciding what will drive a little further I think they kind of get used to go with like.
Pay it might've been a two or three hour sort of limit before and now it's a 567 hour limit for what they are willing to endure.
Drive and so so long weighted way of saying, we have not seen seen resistance and we do not and looking at very detailed analysis of our square, we do not historically you'd see a lot of.
A high correlation.
Helpful. Appreciate it thanks.
The next question comes from Richard Clarke from Bernstein. Please go ahead.
Good morning, Thanks for taking my question just one thing I noticed is the number of managed rooms has actually come down quarter on quarter by over 2000, which is the biggest drop I can find in some quite big drops by brands Doubletree Waldorf Astoria.
Is this a strategy are you moving away from franchise towards.
It's Martin.
To manage towards more franchise then if that's the case, maybe why are you leaning away from the incentive fees in our recovery or is this more of an owner.
Ed shift.
Yes look Richard it's a good question I don't have quarter over quarter shifts in front of me Youre, probably right. If youre looking at it that it's a relatively big shift some of that as things converting to franchise right. They're staying in the system, they're not necessarily coming out and it's not strategic we still our rooms under construction.
Like I said earlier, 80% outside the U S. That's 50 50 managed versus franchise outside the U S. So the reality is as we go where the demand is in the developed world Theres, a little bit more demand at the lower end right now for new construction right in new deliveries and so we fish, where the fish are right and so the market takes us there, there's more customer demand and more <unk>.
Demand a little bit again in the developed world towards franchising and in the developing world. It's about 50 50.
And just you just mentioned that you've seen some shift from managed to franchise why does that process take place.
Where does it take place.
Why why did why I.
One our demand customer demand for the product at the lower end and owner demand for for franchising. So.
If you look at the regions of the World I mean, the U S has always been a predominantly sort of franchise oriented environment. If you look at our makeup here.
Majority vast majority of its franchise.
10 years ago, there was no franchising going on in Europe today. They are at so we have a much more sort of blended approach. It's like 50 50. If you went to Asia Pacific five years ago seven years ago was zero franchise now franchising is particularly in China is growing and it's an opportunity for.
US, particularly with mid market brands to be able to create a network effect much much faster and we feel super confident in our ability to manage the franchise system I don't think there's anybody better in terms of delivering great product and great service to customers. So it's driven a lot by sort of the the.
<unk> owner.
Desires and sort of the evolution of the <unk>.
Business around the world as it as different parts of the world mature.
Thanks very much.
The next question is from Vince <unk> with Cleveland Research. Please go ahead.
Thanks, I had a question on cross border could you remind us how much international arrivals as a percentage of your U S room nights I think it's pretty small, but kind of how that business is performing today versus pre COVID-19 and if you've seen recent progress there and then kind of the other way around when you look.
Say your European business, and North American guests heading there for the summer can you describe kind of what you've seen with booking behavior in the last few months.
Sure.
Yes, sure on a normalized basis.
Pre COVID-19 the U S. About 95 five for AG is about 95% of the customers come from inside the U S. 5% outside now in Big cities like New York, San Francisco L. A that could be up to 20% for cross border that obviously plummeted during COVID-19 right to near zero and now is actually approach.
<unk> pretty close to a normalized mix both in the U S and Europe Europe is more.
About two thirds, one third within the region and outside of the region and again Thats actually back to approaching levels, where it was pre COVID-19 as the worlds opening up.
Great. Thank you.
Sure.
Okay.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Christopher setup for any additional or closing remarks.
Thank you Chad and thank you all for joining us today. Thank.
Thank you you probably hear the enthusiasm in our voice.
It's been quite a couple of years, but.
I do believe that the decisions we made the actions we took during the pandemic have put Hilton in the best position, it's ever been in from the standpoint of driving performance margins driving free cash flow.
Returning capital to shareholders in the years to come.
We're super excited about what we think is going to play out for the rest of the year and we'll look forward. After the second quarter to updating you on that progress. Thanks again for the time today.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
[music].
Yeah.