Q2 2022 Hilton Worldwide Holdings Inc Earnings Call

[music].

Good morning, and welcome to the Hilton second quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays prepared remarks, there will be a question and answer session 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 Todd welcome to help banks second quarter 2022 earnings call before we begin we would 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 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 and first quarter 10-Q. 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 in today's.

Call in our earnings press release and on our website at IR Dot helped him dotcom.

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 of Global Development will then review our second quarter results and discuss expectations for the year. Following their remarks, we'll be happy to take your questions with that I am pleased to.

Turning the call over to Chris. Thank you Jill good morning, everyone and thanks for joining us today as our second quarter results demonstrate we have a lot to be proud of system wide revpar achieved 98% of 2019 peak levels with all major regions, except for Asia Pacific exceeding 2019 Revpar.

We continued to execute on our strong development story, reaching 7000 hotels globally and grew our industry.

Leading revpar premiums all while maintaining good cost discipline.

Coupled with the resiliency of our asset light fee based business model. These accomplishments enabled us to deliver EBITDA at 10% higher than the second quarter of 2019.

With margins of nearly 70% up more than 800 basis points above 2019 levels.

As a result, we continued returning meaningful capital to shareholders. After resuming our capital return program last quarter, turning specifically to results, we reported revpar adjusted EBITDA and adjusted EPS above the high end of our guidance for the second quarter system wide Revpar increased 54% year over year. It was just two per se.

At below 2019 levels, improving each month throughout the quarter with June revpar, surpassing prior peaks.

All segments improved quarter over quarter led by business transient and group.

Leisure transient trends remained robust as consumer spending continued to shift from goods to services, particularly travel and entertainment weekend Revpar was up approximately 14% compared to 2019, driven by robust rate gains in June weekend ADR was up.

20% versus prior peaks.

Business transient demand continued to improve throughout the quarter driving weekday occupancy up six points from April to June weekday Revpar was 95% of 2019 levels with ADR exceeding prior peaks U S business transient revpar surpassed prior peak levels.

In June with demand improving across nearly all industries.

On the group side Revpar in the quarter was roughly 85% of 2019 levels full year group position improved meaningfully throughout the quarter was strong forward bookings across all location types in nearly all major categories group mix is beginning to normalize with a percentage of company.

Meetings, increasing bookings for company meeting strengthened each month of the quarter with tentative pipeline for the year up materially versus 2019 boosted by a high teens rate increases in the U S. Total group position is nearly at prior peak levels for the third quarter and exceed.

Prior peaks for the fourth quarter.

With continued improvement in these segments.

Positive momentum across all regions, we remain optimistic for continued recovery throughout the balance of the year. As a result, we are raising our expectations for the full year to reflect the quarter's strong results in better anticipated trends in the back half with Revpar, surpassing 2019 levels for the full.

All year, we expect to deliver adjusted EBITDA above 2019 and to generate the highest level of free cash flow in our history. We expect to return between one five and $1 $9 billion to shareholders in the form of buybacks and dividends or approximately 5% of our market cap at the mid <unk>.

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Turning to two unit growth, we continue to drive a disproportionate share of.

Global development with nearly one in every five rooms under construction around the world slated to join our system.

Additionally, our development market share is more than three times larger than our existing share meaningfully higher than our peers given our industry, leading revpar premiums. This is reflected in the more than 14000 rooms, we opened in the quarter, we signed more than 23000 rooms, bringing our development pipeline to a record four.

113000 rooms, with nearly half of our pipeline under construction, we remain on track to deliver approximately 5% net unit growth for the year.

According to star.

Our year to date net additions are higher than all major branded competitors are conversion openings totaled more than 3400 rooms in the quarter, representing roughly 24% of total openings one of the most notable conversion openings in the quarter and the quarter was the Waldorf Astoria, Washington D C and <unk>.

Spired by the legacy of the old Post office building the property brings Walters iconic history studying design, an unforgettable experience experiences to our nation's capital.

Our disciplined development strategy continues to enhance our network effect, enabling us to serve more guests across more destinations for any stay occasion during the second quarter. We celebrated the opening of our 20, 800th Hampton Hotel 60000 embassy rooms, and several key luxury and now announcing.

Including the openings of Conrad properties in Nashville in Sardinia.

And the signings of the Waldorf Astoria, Sydney, and Waldorf Astoria, Kuala Lumpur.

Earlier this month, we celebrated the highly anticipated opening of the Conrad Los Angeles anchored within that Grand L. A the spectacular 305 room hotel marks the brand's debut in California, and make makes L. A the second U S City alongside Las Vegas to feature all three of our luxury brands.

The openings of the Hilton Maldives, I'm, Gary resort, and Spa and the Hilton to Limber Riviera, Maya and all inclusive resort, where two of the latest additions to our rapidly expanding portfolio of resort properties in prime beachfront destinations with 400 unique hotels and resorts OPE.

And in the pipeline our conversion friendly brands Curio, and tapestry continue to provide an attractive value proposition for owners.

By providing authentic and curated experiences and drawing inspiration from their local communities. These brands enable owners to retain their own unique identities. While also benefiting from the power of our commercial engines during the quarter, we opened the Royal Palm Galapagos, marking the first international home.

Tell brand in the Galapagos Islands, and making Ecuador, the 30th country in curios growing portfolio tapestry opened its 10000th room in the quarter, including the hotel Marseille, New Haven, which is anticipated to be the first net zero hotel in the U S.

One of less than a dozen LEED platinum certified hotels in the country.

All of these openings continue to expand the offerings available to our Hilton honors members in the quarter honors membership grew 17% to 139 million members and accounted for approximately 62% of occupancy.

Up 350 basis points year over year and roughly in line with 2019.

To address the evolving needs of guests, who want to travel with their pets. We have expanded our partnership with Mars Petcare to now include seven of our brands, including all our focused service and all suites brands as well as canopy through this expanded partnerships guests will have access to virtual support from them.

Mars pet expert team and have more than 4600 pet friendly hotels to choose from.

We continue to double down on the importance of the guest experience and their stay earlier. This week, we launched our first ever global platform to focus on what has been missing from hotel advertising the stay Hilton for the stay places the hotel front and center it goes without saying that our team.

Members continued to be at the heart of that stay experience I'm extremely proud that earlier in the quarter Hilde was inducted and diversity Inc's Hall of Fame.

For our continued commitment to building, an inclusive and welcoming environment and now I'll turn the call over to Kevin for a few more details on the quarter and the expectations for the rest of the year.

Thanks, Chris and good morning, everyone. During the quarter system wide Revpar grew 54, 3% versus the prior year on a comparable and currency neutral basis system wide Revpar was down two 1% compared to 2019 growth was driven by continued strength in leisure demand through the start of the summer travel season, as well as stronger than expected.

<unk> recovery in business transient and group travel performance driven by both occupancy and rate growth adjusted EBITDA was $679 million in the second quarter exceeding the high end of our guidance range and up 70% year over year.

Our outperformance was driven by better than expected fee growth, particularly across the Americas and EMEA regions management and franchise fees grew 54% driven by meaningful Revpar improvement and strong honors license fees.

Cost control further benefited results for the fourth for the quarter diluted earnings per share adjusted for special items was $1.29 exceeding.

Exceeding the high end of our guidance range, and increasing 130% year over year.

Turning to our regional performance second quarter comparable U S. Revpar grew 47% year over year and was up 1% versus 2019.

Performance continued to be led by robust leisure trends and was further boosted by significant revpar recovery in business transient and group up 16% and 20 percentage points, respectively from the first quarter.

In the Americas outside of the U S second quarter, Revpar increased 140% year over year and was up nearly 5% versus 2019 performance was driven by strong leisure demand, particularly at resort properties.

In Europe , Revpar grew 283% year over year and was up 1% versus 2019 performance benefited from reduced travel restrictions and greater than expected international inbound arrivals.

In the Middle East and Africa region, Revpar increased 68% year over year and was up 4% versus 2019. The region continued to benefit from robust domestic leisure demand and strong international inbound travel, particularly from Europe and.

In the Asia Pacific Region second quarter, Revpar was down 5% year over year and down 39% versus 2019, Revpar in China was down 47% compared to 2019 as strict COVID-19 policies and Lockdowns in Shanghai and Beijing continued to weigh on travel demand early in the quarter.

Amanda recovered quickly once restrictions eased with occupancy in China recovering from 37% in April to approximately 60% in June less than six points shy of 2019 levels.

The rest of the Asia Pacific region saw improvement as countries outside of China benefited from border reopening.

Revpar for Asia Pacific ex China improved 12 percentage points throughout the second quarter with April down, 29% versus 2019 and June down 17%.

We remain optimistic about continued recovery across the entire APAC region, including China as Covid related policies continued to ease and additional countries open their borders for international travel.

Turning to development, our pipeline grew year over year and sequentially totaling over 413000 rooms at the end of the quarter with 60% of pipeline rooms, located outside the U S and roughly half under construction.

While macroeconomic uncertainty and variability across regions persists owner and development owner and developer interest remains healthy the development community continues to preference our industry, leading brands and strong commercial engines for the full year, we still expect net unit growth of approximately 5% and signings to exceed 100000 rooms.

Yeah.

Moving to guidance for the third quarter, we expect system wide revpar growth to be between 25, and 30% year over year or up 1% to 5% compared to third quarter 2019, we.

We expect adjusted EBITDA of between 660, and $690 million and diluted EPS adjusted for special items to be between $1 16 and $1.24.

For full year 2022, we expect revpar growth between 37, and 43% relative to 2019, we expect revpar to be down 1% to 5%.

We forecast adjusted EBITDA of between $2 4 billion and $2 $5 billion with margins for the full year more than 600 basis points higher than 2019 levels.

Our adjusted EBITDA forecast represents a year over year increase of more than 50% at the midpoint and exceed 2019 adjusted EBITDA, we forecast diluted EPS adjusted for special items of between $4 in 'twenty one.

And $4.46.

Please note that our guidance ranges do not incorporate future share repurchases.

Moving on to capital return, we paid a cash dividend of <unk> 15 per share during the second quarter for a total of $41 million. Our board also authorized a quarterly dividend of <unk> 15 per share in the third quarter year.

Year to date, we have returned more than $800 million to shareholders in the form of buybacks and dividends.

For the full year, we expect to return between $1 5 billion and $1 9 billion to shareholders in the form of buybacks and dividends.

Further details on our second 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 to all of you. This morning. So we ask that you limit yourself to one question.

Chad can we have our first question. Please. Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, 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 our first question comes from the line of Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey, Chris Cabbage Hello, everyone.

Chris maybe this one is best for you.

In terms of how youre thinking about the rest of the year. What is it that you guys see here at the end of July I'm sure you have a pretty good look into August , but you know clearly this.

Timber October a busier business travel season group season et cetera, what is it that you see in those periods that kind of gives you the confidence in the guidance raise for the rest of the year and how you kind of think about her feel when you look out to 2023.

Carlos Thanks for the question that obviously is the prime question I think on everybody's mind, and I think it would be it would be.

Sort of best to start by saying as everybody on this call knows that there's certainly a lot of uncertainty in the world and I you know I.

Thank you know we have to sort of be mindful of that as everybody has I mean, we have been as much as we see what's going on and we're watching the broader environment and lots of talk of slow down and seeing it in certain industries and certainly I think predominantly industries that had reached high.

Watermark set where you know had favorable impacts from COVID-19, but nonetheless, you know starting to see slowdown.

We have been looking very carefully at our business as you would guess at all of the segments that you know sort of any forward looking trends that we can see and I would say you know what we're seeing still is very positive. We see you know as Kevin and I. Both said in our prepared comments continued strength in leisure we expect.

To see that continue into the fall at higher rates than normal I mean lower rates than summer like always but higher rates than you would have typically seen pre COVID-19 just because of increased believes your business.

Business transient.

<unk> is that you know to to recover led by recovery in the big corporates, which are not back to where they are but you know they're back to sort of 80% of where they were in the SMB side of the business that has been quite robust I mean in the second half of the year based on the trends we've been seeing our expectation has been.

Transient is going to be sort of on a revenue basis equal to 2019 levels and then you know when we when we think about the group side, while we don't think in the second half, we'll get all the way back to where we were a 19, we're gonna get off we're gonna get awfully close and as I said in my prepared comments, if we look at the booking position in third and fourth.

Quarter of second half of the year, it's over 19 levels and our sales teams. You know tell you know keep telling me you know they can hardly keep up with the demand now reality is again, we're in an uncertain world. The booking windows are short so our visibility is limited certainly on trend.

<unk> business, we can't really look too deeply into the fall and transient.

Again, we can on the on the group side in those and those stats are good.

But the current trajectory is good looking at July June is as we said was over 19 levels July is trending in a very good way and it will be over 19 and improve.

Over and above what we saw in June .

So we you know everything we're seeing sort of real time every everything we have in terms of sight lines and into the future all feel pretty good recognizing it's not you know there's a lot of macro uncertainty and recognizing that our booking windows in sight lines or you know are not.

<unk> are not that far out I think what it was.

Is causing it sort of as you see other industries, you know sort of being impacted every day, including today is a big reporting day again, I think a lot of what you see coming sort of going the wrong way or industries that we're at crazy peaks because they were huge beneficiaries many of them of Covid.

And the pandemic, we were obviously not a big beneficiary I think that's a.

A fairly nice way of putting it and we you know our industry got hammered and so what we're benefiting from I think is.

Sort of a handful of things one there's a lot of pent up demand we hear it all the time I mean, while I don't have tremendous sightlines in the sense of real transient booking data to give you you know it just because it doesn't exist you know we talked to our customers. All the time not just the group customers, we're talking to all of our customer.

And we're in a regular dialogue with the with our Smbs with a big corporates.

And you know and you know that.

Anecdotal feedback that we're getting as we go into the fall is people have to travel more you know more offices are open more people are back in the office. While people are worried about where the macro environment is going they've got to run the businesses and in fact, the more worried they are the more they realize they sort of got to get out there and make sure they're they're hustling.

There is an element of pent up demand there is clearly.

And I'm not going to say I was right, but I've been right. There's clearly a massive shift in spending patterns right away from goods into services I said it might prepared comments I've been saying since the beginning of the pandemic that the world is not going to go upside down that it may go upside down for a while but it will normalize and that's exactly.

What we're seeing and so.

Not only do you have a pent up demand, but you just have new demand that's coming as people are sort of shifting their spending patterns that means leisure business group. There are people are shifting back to a more normalized lifestyle, maybe its not exactly the way it was but it's more like it was then then you know then than it was it's more like it was pre cup.

Other than it is during COVID-19 and so we're we're the beneficiary of that you have.

Infrastructure and people don't talk about it we passed it nearly trillion dollar infrastructure package last year.

Very little of that has been spent traditionally you would start to see spending in the second third and fourth year. So we're just sort of coming into the zone. You know over the next two or three years on a trillion dollars of spending I've said. This so many times you guys are tired of hearing it but the the highest R squared correlation to demand growth in hotel rooms.

As an RFID nonresidential fixed investment investment 8-K E infrastructure.

So I think we think we feel good about sort of that being sort of a underpinning broadly Asia recovery, Kevin talked about it Asia has been way behind it.

It's not recovering as quickly as we would have thought, particularly China, but you know, but I do but it is recovering and I think that provides some benefit not just the rest of this year.

But but into next year, and then probably last but not least if we look at our customers certainly like our honors base, which are driving the you know the disproportionate share of our of our system wide revenues.

At the moment there is still you know and in pretty good shape I mean, the the median income of our of our of our higher end honors members is significantly over $100000 median income and so at the moment, they're still they're still in pretty good shape and we haven't really.

Yet seen any real cracks in the armor in terms of their spending patterns. So I know that's a filibuster of sorts, but I think it gives you know.

Answer the question. It gives you color as we sat in the very room, we are sitting in and thought about how do we feel about the rest of this year.

That's how we sort of you know that's how we came up with our forecast and our and our outlook and as as we think about next year listen I'd be silly to say I know because nobody knows this as they were in pretty pretty much uncharted waters is the smartest economist I talked to you are saying the same thing so.

Yeah, I don't know, but I think a bunch of those things that I described are pretty good wind in our sales against what is obviously going to be a slowing U S and global economy, because that's what central banks are going to do but we have some things that I think sort of you know our.

Winds blowing the other way and so I think as we get into the first half of next year.

We're feeling like that.

That that is going to be helpful to us how we think the whole year will play out obviously, it's premature for us to judge and.

When we get little bit closer to it.

We will have a little bit more precise.

Great Chris that that's very helpful and then.

I want to be courteous to everyone on the call, but just quickly to clarify some of the comments earlier.

You guys talked about group and and for Q being greater or being up year over year I should say what was that a revenue position comment you were making revenue.

Revenue and you talked about from an occupied occupancy or occupied room night perspective, Tao group compares yeah, I think system wide second half of the year, we think there'll be in the nineties, you know it'll probably be you know.

<unk>.

Five points off with the with the difference being made up in rate.

Got it thank you Sir.

Take care.

Thank you.

And the next question is from Shaun Kelley from Bank of America. Please go ahead.

Hey, good morning, everyone.

Chris maybe just to dig in I mean, obviously, you covered sort of most of the subjects in that and then that last answer so maybe to go.

A slightly or deeper if we just think about either the acceleration between.

Kind of what you're implying for the third quarter and what you actually saw in the second what are some of the biggest.

Maryann says, they're going to drive that things that come to mind are obviously international and then Nick can you improve it you probably saw sequentially on business transient, but can you help unpack that a little bit.

Yeah, I mean, sorry, I did I did give a bit of a filibuster, but just wanted to give the whole thing context and not have it be chopped up.

My apologies for answering what are probably a bunch of your questions, but I do think I sort of I do think I sort of covered that we certainly expect international travel to to pick up we don't we don't think that's going to move the needle and up necessarily in a huge way in the second half of the year. It really is what what we described what I already described which is continuing.

<unk> strength in leisure.

Because you know weekend business, we think it's still going to remain strong consumers still as desire and capacity to do it.

They are traveling more you know from.

Combination believes your business a business in leisure. So we think that will that will mean leisure business will ultimately be at elevated levels relative to what we saw in pre pandemic times and we do think you know from a revenue point of view business transient is on track.

Largely because of the success we've had in an S. M. B in the second half of the year just so on a revenue basis be back you know back to 2019 levels now that depends on you know we don't have all those bookings on you know that are confirmed at this point, but if you look again at June and July you talked to.

The customers Yeah look we look at the detailed data on on.

Sort of how they're behaving right now.

We feel good about that and you know group buy I covered I mean, we think group will not recover to where we were a 19 theres just not not enough time, but we think it's gonna get.

Awfully close.

And we think Theres a lot of momentum in the group side.

Going into next year, So I think net.

Net net Sean probably repeating myself, what it depends on is more of what we've been saying.

Get out just grinding up on business I mean, we were at for the whole quarter. We were at you know 95% on business transient. So we're getting awfully close in June in the U S. You know we hit we hit 19 level. So it doesn't you know the rest of the year. It doesn't you know it's sort of it.

What the rest of the year suggest is the strengthening and group based on a real position of group room nights on the books.

And.

Similar to what we've seen in June and July and business business transient and normal strength on weekends for leisure, but normal pattern.

Leisure backing off during the mid week as you go into the fall.

Thank you very much.

The next question will come from Joe Greff from J P. Morgan. Please go ahead.

Hey, good morning, everybody Hi, Jeff.

If you go back and you look at the the last two and a half years, it's been remarkable that your.

Same store revpar growth rate.

And your management and franchise fee growth rate had mirroring each other almost to a one to one relationship.

And over that timeframe, you've grown your room counts you know north of 10%.

Does the relationship between Revpar growth and the fee growth, where that sensitivity change going forward where may be there.

If revpar were to experience a decline that sensitivity to the downside is maybe more favorable than what it would have been the last couple of years, just because of the growth in our in.

In the room count.

I think the well I think the answer's, yes.

And what largely would drive it is what you're saying the non revpar related fees are growing as a percentage of the fee base and then you know the impact on the downside you know it was accentuated because of the extremes so in a normal normal.

You know sort of you know, but you know no normal recessionary environment, you don't see those sort of extreme impacts in terms of declines revpar to you know revpar to EBITDA. So we we think in a normal kind of environment. Yeah. It would be it would be more one for one and.

We'd get the benefit of the things that you described.

Great. Thank you.

The next question is from David Katz from Jefferies. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question Congrats on the quarter I wanted to just touch on the owned and leased portion of the model, which I think swung to positive this quarter. It was a little earlier than what we anticipated.

Can you just talk about what's driving that is there a strong business component to that.

Give us some help with the rest of the year and sort of what's in there and how we might think about that.

Yeah, David I think the what look first of all I would say, yes, you're right. It did swing to a profit we've been saying for a while that the growth rate would be more than the overall portfolio. In fact that was that was the case when the numbers were still negative it was.

The weird way was still growing faster and improving the growth rate of the company. It's all fundamentals, though I mean, if you look at where the portfolio is located.

You know in this particular quarter, the real strength regions, where U K, particularly London and Central Europe , Japan still a little bit further behind so as APAC recoveries, you have even a little bit more of a tailwind there from that part of the portfolio, but the revpar growth in the quarter was significantly ahead of even where.

I gave the Europe . The EMEA number I gave the Europe number in my prepared remarks, the Revpar for this portfolio was even further ahead of that.

And so that's where it's coming from and we expect those trends to continue to continue again, particularly as Japan is a little bit further behind on recovery. So we expect going forward that that portfolio well remember, it's a small part of the business and over time, we'll continue to be a smaller part of the business, but it will be a tailwind to our growth rate for a while.

As those regions recover.

Can I, if I may not Overstaying my welcome but should.

Should we perhaps look at the 19 levels or any past levels of profitability.

It might those guide us as we think about the future. Yeah. I think it's you know there's no reason why it won't get back to or even exceed prior levels. You got to remember the portfolio does get a little bit smaller over time, we exited seven of those assets last year, three of which came into the system and shifted over to paying fees, but four of which went away altogether.

Not going to make a huge difference on that but I would so I would say you know keeping in mind that the portfolio continues to get smaller I would say that recovering to where it was on a lag as a good way to think about it.

Excellent thanks sure.

And the next question is from Smedes Rose from Citi. Please go ahead.

Alright. Thanks.

Wanted to ask you just a little bit on the.

On the pipeline you continue to see sequential growth and is there any significant signings and it just seemed a little bit.

Kind of a lot.

Crosscurrents going on keep hearing about developer challenges.

I'm wondering if you could speak to where you're seeing the growth I know you've spoken about China, but you know hows. It looking in the U S and what sort of challenges may be hurt developers.

And as Hilton, helping at all.

In terms of.

Loans or anything of that sort.

Yeah really good question and yes, I mean whats going on essentially.

Let me, let me just sort of everywhere, but China is that demand on the from owners to sign new deals has actually moved up pretty nicely and you would say why with all the swirling winds and all the uncertainty well I mean look at you know like they own assets in there and look at the results, we're delivering and what we.

We'll deliver you know for the year and where we are relative to 19.

[noise] about margins not our margins, but with all the changes we've made in the hotels I mean, the reality is not every single in every single case, but in many many cases the hotels that are owners own are performing extraordinarily well there high revpar is with higher margins than they had pre COVID-19 and so listen this is what they do for a living.

They're they're they're they're seeing great success, they're seeing tremendous.

Flowed through they're seeing incredible rate and you know sort of pressure and that makes them want to do more of what they do and so as Kevin said, we'll sign we won't get to our pekin signings.

We'll get you know, we're getting closer we will get over over 100000 rooms.

Again, I think I think it's just positive seven now what that's without China, China actually we will open more rooms in China. This year, but we won't sign as many simply because you know the you know there are.

Well the way they are addressing COVID-19 with the Lockdowns and the like.

Have slowed development activity there we have every confidence that when they reopen it will pick up at a fast pace, but from a cultural point of view. They really you really don't get signings done when things are closed it's just not not the way things happen and it's been a little delayed. So I think the reality is when you you know with the demand.

And the rest of the world when you get that you know when you get that part of the engine firing as well you know the numbers the numbers going to are going to feel pretty good and then it has to translate and I think you know that will translate over time is sort of the world you know settles down a bit and people have a little bit more visibility on what's going on but the demand is there market share.

Shouldn't we're not going to be we were out of the business of describing exactly what our market share is.

For a whole bunch of competitive reasons, but I will say you know market share is up.

And in a meaningful way.

<unk> above 2019 levels significantly above where all of our competitors are and you.

You know and that is helping you know drive disproportionate interest not only do people want to build more but I think they want to they want to build more with us because we're you know we're doing a better job in terms of driving share to help them drive profitability.

Thanks, and let's just quickly add a tower you guys are announcing a new AD campaign.

With a different kind of focus but I just wondering I should know this but is that essentially supported by our funded by owners or corporate implications as well.

That is funded by the system, which means essentially it's funded by owners we have.

I mean, the grossly simplified explanation is people will either pay us a management fee or franchise fee and then we have corporate expenses and then they pay system fees for a bunch of things marketing technology brand, you know essentially system charges and those that we manage.

On a dollar.

A not for profit basis, if you will.

On their behalf and all of the marketing dollars that we're talking about in our campaign to come out of that Theyre not theyre not corporate dollars there for the benefit of the system.

Okay, great. Thanks, a lot appreciate it yeah.

And the next question is from Robin Farley from UBS. Please go ahead.

Great. Thanks.

So one follow up on your comments on the demand from owners and kind of record level of signings and.

Some others in the industry have talked about you know getting record signings, but that construction starts.

And then matching the signings and I know I know youre rooms under construction. Currently are ahead of 2019, which which is which is a great achievement and I'm wondering if you're seeing no new starts which would not impact your unit growth this year, but.

Might have implications for 'twenty, three or 'twenty, four just kind of what you're seeing on the construction start.

Happy to answer that and then Kevin can jump in if he wants to add anything first of all just to be clear I didn't say, we're hitting records on signings I said wherever 100000, I think our peak was 116 115, one <unk> something like that so we're getting closer and we're getting over 100 without as much help as we'd liked from China on the <unk>.

<unk> side, we do believe starts will go down.

Again this year given all of the things that are going on in the world with supply chain Labor financial markets, you know fears over their macro and recession.

We we think that they will have down having said that as you know our best estimates at this point.

We've talked about this on prior calls is that we will probably have hit the floor and starts in the U S. Last year, we think will be up modestly this year and probably hit the floor outside the U S. This year and our expectation is given what I described before in terms of just where we are with revpar.

Our where we are with margins the owner desire.

To do things that all things being equal we are we are of the mind that next year that this year would be the low point in starts and that they would start moving back up and that puts us in a position to do.

As we have been expecting and suggesting we would do which is for the next couple of years deliver in the mid single digit nug.

Okay, great. Thank you and then just one quick follow up.

<unk>.

The margin performance up 600 basis points I think that you have guided before that you would hold onto.

600 basis points of that do you think it's looking like you're at the higher end or maybe even above that at this point.

Okay.

Doing better on margins faster recovery, even better cost discipline them, we assume so we're doing better on margins than we had suggested before.

But in terms of holding on to that in 2023.

Actually if you recall, we thought just because of the recovery in the real estate because at lower margins. It would help EBITDA growth, but it might just.

The arithmetic would hurt margins and we had thought that we might sort of be flat or even a little bit down as we got through that this year, obviously with the guidance. We gave you were 100 150 basis points above what we did last year, which was meaningfully above 19, which is getting us to the higher end of the 600 then.

You know, we think we're gonna be able to continue to drive margin growth from there.

Yes, that's a great thing that Chris said is important in the sense that when we gave you that number that was sort of just helping people model sort of a recovery and where it was gonna go. It was not meant to be sort of a stopping point you know between the mix continue to continuing to grow over time towards fees non revpar driven fees and cost control, we think we think margins.

We'll continue to grow over time, yeah on average if you just do the math in your model and my guess is it will be similar to ours. Its a 50 to 100 basis point.

Natural accretion in margin every year, just based on the business model.

Great. Thanks very much.

The next question is from Richard Clarke from Bernstein. Please go ahead.

Hi, Good morning, Thanks for taking my question, just maybe sort of picking up a bit too much here, but if I. If I look at your sort of Q3, and then your full year Revpar guidance and maybe some of your commentary it looks to me sort of saying that Q3 is going to be better than Q2, and then maybe Q4 will be a slight a slight pullback on that.

You're already expecting leisure demand as sort of run through the food.

And obviously with group being stronger in Q4 are you expecting some elements, maybe just to step back a little bit in Q4 or am I am I reading, a little bit too much into your guidance. There I think youre reading a little too much into it but I think at this point, we sort of view the second half of the year third and fourth quarter in a very similar way obviously, the third quarter is a much much bigger more.

Important corner in the sense of all forms of travel. So you have sort of seasonal things going on but in terms of the basic breakdown of what we think and performance of the segments. We don't we are not forecasting any difference any meaningful.

Thanks, and maybe just a quick follow up to the last question I think at the full year results you specifically sort of guided to I think the 66000 construction starts this year.

I think you gave a number in response to that is that still the what you're looking to get to this year.

No I think we had we had said that in the past and in prior calls I think Chris said, we expect starts to be down a little bit this year Theres a lot of year left so we're not sure exactly where it's going to play out, but probably be a little bit less than that.

Okay.

Thanks very much.

The next question is from Chad Beynon with Macquarie. Please go ahead.

Thanks for taking my question.

When you think about some of the restrictions with flight capacity that we hear about in the U S and in Europe , not being able to keep up with the consumer demand do you believe any of this presents a risk to any parts of your recovery or is it negligible and just more of a kind of a soundbite for the airline industry.

We've been watching that as you would guess really carefully and studying our data.

Along with the airline data and we haven't seen we haven't seen any real impact. We just we just can't find it. So we feel we feel pretty good about it I mean talking to the not just listening, but I know I know most of the Ceos in the airline space and talking to them I think I think they are making pretty darn good progress in terms of getting capacity back.

The teams that they need in terms of pilots flight attendants.

Maintenance crew getting them trained so I mean, it's not done by any means but I think every day it gets a little better.

And so I think we feel like we'll be fine I mean, if you look at the patterns like in the in the second quarter I was actually surprised and it's you know it's directional I can't I'm not going to tell you like we have perfect data on this but it's pretty good directional and it's consistent with what you know the same way we would have analyzed it pre COVID-19.

In a normal world like 60% of our business was fly to and 40% of it was drive too in the second quarter. We think it was two thirds drive to one third flight two so part of what's going on as people are with with restricted capacity, they're just driving more they're driving.

Longer distances.

But they're in they're staying in a tighter you know they may be driving further, but they're not going cross country or whatever it's more you know regional and local business, but that that works. So at the moment you know while the airlines are sort of working their you know their issues out I think people are acting you know sort of accordingly in terms of.

Of how Theyre getting places.

And we're not seeing we're not seeing any impact we don't talking to customers. We don't we don't think that it's going to impair the the rest of the year.

Thanks, Chris I appreciate it.

And the next question is from Vince C pool with Cleveland Research Company. Please go ahead.

Great. Thanks for taking my question I'm curious.

How youre thinking about planning the business over the course of the next 12 months. It clearly sounds like the trend lines in corporate and group or getting better. Obviously, you believe leisure is continuing to fetch healthy 80, ours and remained pretty stable at high levels.

As you think about like an efficient mix within those three buckets of demand how are you approaching that and how are you handling.

Reising out the corporate and group business as it comes back.

Yeah, I mean, the truth is we're doing it with a lot of flexibility because while we have a belief, which we've articulated and a bunch of different ways. On this call. We know that we may not be perfectly right. So as we've I think proven during Covid you know are our teams, including our sales team.

Our commercial teams are unbelievably quick on their feet.

You know, we retooled everything when we had doing COVID-19, we've retooled and you know it doesn't time through covered us as demand patterns have sort of been normalizing. So I think you know what we what we will be set up for and then ready to pivot is a world that I described which is a world that is getting.

Reasonably close to pre Covid normalization I mean, just like in Q2 by way of example, if you look at the segments.

Compared to 2000 1955 in 2019, 55% of our overall system revenue.

I'm from business transient twenty-five from leisure transient in 'twenty from group. If you look at the depths of Covid you know it probably the most extreme times it went to like 35% business, 55% leisure and 10 group.

In the second quarter. It was almost 50 business transient. It was like you know 34 35 leisure in 16 or 17 groups. So that you know as I said before we've sort of expected that you know as much as everybody wants the thing everything is different.

We sort of had been planning throughout and taking it in steps for a normalization to maybe not be exactly where we were pre pandemic, but more looking like that than where we were and that's what's happening and so you know that that's what we'll be set up for but as I said.

The key here always as you know flexibility and be prepared to pivot on the margin I do think you know we will continue to have higher levels of leisure than than we had pre pandemic.

You know my guess is we will have potentially a surge in group just because of so so much pent up demand as well and so you know what are we doing we're making sure we're staying super aggressive on leisure strategies, making sure that we're staying super aggressive on you know on with our with our group sales.

Team and they were all over every opportunity.

And that we are we are focused on.

You know on that and then on the business transient side, while we love our big Corporates and we continue to work with them. We've had a lot of success with the S. N B's in the end, we think that when we normalize we will have lower big corporates and higher S. M. B at a higher rate and so we have deployed accordingly, and our sales team.

<unk> across the board to make sure that we're working those SMB accounts that were covering a lot more of those in a very thoughtful way to continue to build that business. So those those are at a high level, that's sort of when we are sitting at this table talking about how we're going to deploy over the next 12 months, that's how we're thinking about it but.

If the World you know pivots, we'll we'll pivot very quickly with it but my guess is that's how the world is going to play out a little bit a little bit more leisure a lot more group.

A bunch more business transient and for us with a with a real focus on the Smbs.

That's some helpful high level color, there and maybe just a little bit more specifically on that larger corporate I would imagine a lot of that falls under the corporate negotiated rates can you remind us where those have been through COVID-19 or are they flattish with 90 day levels that they've been almost you know all of our large corporate.

Clients during Covid agreed to keep rates flat to 2019 levels and now in those negotiations again, keeping it in perspective, it's like 7% of the business right now, maybe seven and a little bit of change. So like just keep that in perspective, but I think you know what what.

We're indicating is probably mid single digit kind of increases for those accounts.

And again, you know in a lot of hotels.

Reason, we want that even though S. M. B is maybe at a higher rate as it provides a base of business just like we put a base of group business on the books, it's another way to put a base of business on.

So its hotel, it's it'll be a hotel by hotel there'll be some hotels and won't take any of it with some hotels that'll take take some of it because they need need debase, but I would suspect while it's way early to judge it sort of mid single digit the goals would be.

To have dynamic pricing with all of those accounts and that the end result will be.

Somewhere in the mid single digits and that when we're all said and done it'll be.

Six or seven 6% to 8% of the business.

Where it used to be where it used to be 10.

Thank you and the next question will be from Patrick Scholes from Truest Securities. Please go ahead.

Okay.

Hi, good morning, everyone.

Good morning.

Kind of following up on that question on corporate rates and were starting to get into negotiation.

Susan.

Right.

You'd like to tell me, you're going to see corporate rates.

50% next year, but how do you think about.

Group and corporate rates, increasing next year as it relates to negotiated rates.

And so I keep that in mind.

Inflation next year, probably 20% higher than.

Where it was and.

2019.

Yeah, I mean, yeah, it's hard to say and we're not here, giving guidance on next year, there's a long way.

There and there's a lot of uncertainty in the world, but I mean, probably the best I gave you a little bit of sense, although we're not in those negotiations.

Ernest yet with the with the big corporates, where that would be I think the way we would think about the way we would think about it.

Unmanaged.

Business transient business would be somewhere in the 5% to 10% range to keep pace with inflation and I think we would think about the group.

Our group bookings the same way in fact, all of the group bookings that like we were doing generally new group bookings that we did in the second quarter for 'twenty three and for 23 were in the high single digit rate increases.

As a data point.

Okay.

And.

Thoughts on.

Airbnb supply certainly we're seeing in some of those really hot leisure markets, whether it's you know Vale Aspen.

A ton of.

Airbnb supply with everybody realizing how high the room rates are that they're going to run out their unit. Some what sort of impact are you seeing if any.

In those markets.

None.

Now in some of those markets, we may not be in them, but as you can see that.

The numbers that we're posting that at least what we're forecasting what we're seeing in booking patterns.

We're not seeing any impact I mean, I think what what they do is they serve a certain customer need and we serve another customer need.

I've said it for a long time, there's plenty of room for us to co exist given what we're delivering.

It's very different and it's generally for a different type of stay occasions. So we are not but there is.

Zero discernible impact from any airbnb supply.

Okay.

For the color.

Yeah.

And the next question is from Duane <unk> from Evercore ISI. Please go ahead.

Hey, thanks, Thanks for the time.

Maybe a short term and a longer term short term, which international geographies surprised you the most into Q.

And then longer term how do you think about the pacing of of China reopened you know 2023 and beyond what is what is your planning assumption at this point, yeah, I'll I'll offer an answer maybe Kevin will come over the top off or a different one but I would say Europe was the big surprise for me.

Europe's on fire.

Huge surge in business I mean, the big cities, London, and everything are reaching this this summer in Q2 and then they're raging in Q3. So that's been you know what.

Europe is now trending you know above 19, I think for the full year Europe will be not just for the second half Europe was above in Q2, I think Europe will be ahead for the full year.

2019 in terms of Revpar, So that's been a pleasant surprise in China.

The honest answer is we don't know I would've thought I mean, we are making progress Kevin gave the data points. I mean, we've moved to you know from in the thirties to six.

60, and I think were probably above that now you have things ebbing and flowing I saw this morning, they're locking down part of Wuhan a million people. So.

I you know, we're we're hopeful but by the and I've been saying this and I've been consistent by the time they have the party Congress, which is in October .

Now that they're at a different place I think you know that that is you know as we talked to our teams. There I think there is a lot of belief that as we get into the fall things are going to normalize rapidly there.

I do think it will be a while and what do I know for the record for anybody listening [laughter].

I do think it'll be a while before you know we have a ton of Chinese travelers traveling internationally or any of us are going to China I'm hopeful that that would be next year I haven't been since 2000, the end of 2019 and I'm dying to go but the reality is as we saw in the early recovery of Covid, where they lead the world.

When China opens up China in China for China, just Chinese travelers moving around China. The business the business can boom in a very big way, because if they're not leaving their staying and they love It love to travel.

China in either of the destinations there. So I think as we get into October November October and the rest of the year I would I would I would hope and I do think that our teams think that youre going to youre going to see a lot of activity in terms of what's going on in opening and travel within China and I do think that will then.

To read restart in a big way the development engine that wants to go and people want to do it. It's just it's been kind of hard to get it going again.

Thank you.

Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Christmas setup for any additional or closing remarks as always we appreciate you guys, taking an hour out of your life to join us.

We're obviously really pleased with the results in second quarter, you know, we see the recovery not just happening, but happening at an even faster pace than we thought we know the world's got a lot going on but as I said in a bunch of different ways as did Kevin we feel we feel quite good.

We are we are cautiously optimistic we feel quite good about the momentum we have in the win we have in our sales through the rest of this year and into the first part of next year.

And we'll look forward to giving you an update after we finished the third quarter, thanks and have a great day.

Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

Okay.

Yeah.

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