Hilton Worldwide Holdings Inc.

Good morning, and welcome to the Hilton first quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal star and zero for an operator. After today's prepared remarks, there will be a question and answer session. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. And at this time, I'd like to turn the comments call over to Jill Slattery, Vice President, Investor Relations. Ma'am, please go ahead.

Thank you, Jamie. Welcome to Hilton's first quarter 2020 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 publicly update or revise these statements. For discussion of some of the risk factors that could cause actual results to differ, please see the risk factor section of our most recently filed Form 10-K as supplemented by our Form 8-K filed on April 16, 2020. 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 releases and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then review our first quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. As I think we can all agree and certainly probably have all been saying a lot lately, these are truly unprecedented times. COVID-19 has created challenges that our industry has never encountered before. On behalf of Hilton's entire leadership team, I'd like to express our deepest sympathies to those who have lost loved ones during this devastating pandemic. I'd also like to extend our sincere gratitude to the millions of workers on the front lines across many industries and in many roles working selflessly to help keep us all safe. I also want to thank our team members around the world for their remarkable dedication, hard work, and sacrifice. Many of our own team members have been personally impacted by this crisis, and yet, through this adversity, They've continued to spread the light and warmth of hospitality. Across every region, we've adapted quickly to provide hospitality in new ways in our communities. In London, several of our properties are hosting the National Health Service and other key workers. The Hilton Orlando has been hosting the National Guard and working to distribute essential items to community residents in need. And over 500 hotels around the world are being used for recovery efforts. Our properties have also donated thousands of pounds of food and supplies to local food banks. Through the Hilton Effect Foundation, we are providing disaster response grants for organizations and communities fighting the spread of COVID-19. As part of this effort, our Hilton Honors members have donated more than 6.5 million points to these causes. In partnership with American Express and our ownership community, we committed to donating up to one million room nights to frontline medical professionals in the United States to support those who are putting their lives on the line to protect us. Since its launch just four weeks ago, tens of thousands of medical professionals have booked hundreds of thousands of rooms through the program. Further building on this initiative, just this week, we at American Express announced a partnership with World Central Kitchen to deliver freshly prepared meals at no charge from restaurants in local communities to frontline responders staying at our hotels. Already active in three major markets, there are plans to expand this initiative in the coming weeks. Turning to the business, to ensure we effectively navigate this challenging time, we've focused our priorities on three core areas, protect our people, protect our core business, and prepare for recovery. While our long-term goal remains the same, to drive loyalty across all of our stakeholders, the current situation requires greater levels of responsiveness and preparedness in the near term. With this in mind, we've worked closely with industry associations and the administration to advocate on behalf of our team members, and hotel owners and to help shape the broader recovery. Given our leadership team's extensive crisis management experience, coupled with the global nature of our business, we had a relatively early glimpse of the impact this pandemic started to have in the Asia-Pacific region. In response, we took swift action to protect our business and ensure that we have sufficient liquidity to operate in these unprecedented times. With travel demand at record lows, we currently have suspended operations at approximately 950 or 16% of our hotels globally, including approximately 10% of our hotels in the Americas, 60% of our hotels in Europe, the Middle East, and Africa, and 15% of our hotels in Asia Pacific. At the hotel level, we acted quickly at the beginning of the crisis to make decisions to help our owners respond, including suspending hotel operations, temporarily suspending brand and operating standards, deferring capital expenditure requirements, eliminating quality assurance audits, and allowing the use of FF&E reserves for operating expenses. Going forward, we are working closely with our ownership community to define the hotel operating model of the future with the goal of developing operating standards that will keep our customers safe, and drive enhanced efficiency and profitability while continuing to deliver products and service that customers will pay a premium for. At the corporate level, we've reduced executive salaries, furloughed nearly two-thirds of our corporate workforce, eliminated other non-essential expenses, including capital expenditures, and suspended share buybacks and dividends. Further, as a precautionary measure, To preserve financial flexibility, we drew down on the remaining amount under our credit facility, pre-sold Hilton Honors Points to American Express, and successfully executed a bond offering, all of which resulted in a pro forma cash position of $3.8 billion at the end of the quarter, which we believe is more than adequate liquidity to get us through the crisis. Turning to the quarter... RevPAR declined 23% with performance through February largely in line with our expectations, excluding the Asia-Pacific region. RevPAR in March dropped 57% as the virus spread across Europe and the U.S. Overall, we do not think our first quarter results provide clear insight into the current environment as the timing of the pandemic, and we expect a much more dramatic impact on our second quarter results. With travel at a virtual standstill, we expect system-wide RevPAR declined roughly 90% in April. With that being said, we are starting to see glimmers of travel resuming and economies reopening. In China, nearly all 150 hotels that have been closed due to the pandemic have since reopened, with occupancies reaching more than 50% during the May Day holiday this past weekend. up significantly from 9% in early February. Additionally, the majority of our previously halted construction projects in China have restarted. In the U.S. and Europe, we're starting to see sensible and staged reopenings of economies. We think temporary hotel suspensions have plateaued, and we are now seeing reopening requests. Our sales teams are engaged with customers today on business for the back half of the year and into 2021 and beyond. In the last week alone, we booked tens of billions of dollars in group business in the Americas. In addition, we are starting to see double-digit increases in digital traffic and booking activity across all segments. Global occupancy levels have gone from a low point of 13% to 23% currently. Assuming we start to see mobility and we don't have a significant recurrence, demand should slowly rebuild in the third quarter. These green shoes allow us to keep our eye on what the future of hospitality may look like. As we carefully consider what travelers' needs will be in a post-COVID-19 world, we are proud to announce a partnership with Lysol and the Mayo Clinic last week to introduce Hilton CleanStay, a new program that will deliver an industry-defining standard of cleanliness at all of our properties around the world. We believe this program is the first of many steps we can take to build on the trust and loyalty of our more than 106 million Hilton Honors members as they begin to travel again. A full recovery will take time, and it could take several years to return to the hotel demand levels we experienced in 2019. But as we shift our focus to the future, we are incredibly confident about the long-term prospects of the business and our model. Our industry leading brands, powerful commercial engines, and innovative technology platforms should enable us to continue delivering incremental value to guests, owners, and shareholders for years to come. With that, I'll turn the call over to Kevin for details on the first quarter.

Thanks, Chris, and good morning, everyone. In the first quarter, system-wide RESPAR declined 23% versus the prior year on a comparable and currency-neutral basis. RESPAR is down across all regions with the weakest results in Asia Pacific. Decreases were primarily driven by occupancy declines with rate pressure from lower-rated business further impacting results. Adjusted EBITDA was $363 million in the first quarter, declining 27% year-over-year. Results reflect significant reductions in travel demand and the temporary suspension of operations at a number of hotels across the world. While the decline was somewhat mitigated by greater cost control, more significant measures were largely implemented after quarter end. Management franchise fees decreased 18% to $422 million, driven by rev part declines and roughly flat license fees. Given the extremely challenging operating environment, which included the suspension of operations at 35 of our leased hotels during the quarter, our ownership segment posted a loss due to higher levels of operating leverage and fixed rent structures at some of our leased properties. Diluted earnings per share adjusted for special items was $0.74. During the quarter, we opened nearly 9,000 rooms, meaningfully lower than prior expectations due to postponed openings driven by COVID-19. Approvals and construction starts increased ahead of our expectations, largely due to the signing of our largest development deal to date, an agreement with Resorts World for a 3,500-room tri-branded hotel resort on the Las Vegas Strip. Much like the rest of our business, development activity for the balance of the year will depend on a number of factors, However, we do expect that our ultimate rate of net unit growth for the year will be significantly lower than our pre-crisis expectations, likely around half the rate or a bit better. Turning to liquidity, as Chris mentioned earlier, we have taken a number of actions to enhance our position and increase our financial flexibility, including executing on the bond transaction that Chris referenced earlier. We were very pleased with the outcome of that transaction, through which we issued two $500 million tranches of senior notes at pricing that was very attractive relative to other transactions executed in the same timeframe. At the time, it also marked the first eight-year high-yield financing done since the crisis, which allowed us to continue to enhance our maturity schedule. We continued to have no debt maturities prior to 2024 and a well-staggered maturity ladder thereafter. Factoring for the senior note issuance as well as the $1 billion Hilton Honors points presale, we ended the quarter with cash and cash equivalents of $3.8 billion on a pro forma basis, which we think should provide us with ample liquidity to navigate the current environment and prepare for recovery. Further details on our first quarter can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. Jamie, can we have our first question, please?

Ladies and gentlemen, at this time, if you would like to ask a question, please press star and one. To withdraw yourself from the question queue, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset in order to ensure the best sound quality. And our first question today comes from Joe Greff from J.P. Morgan. Please go ahead with your question.

Good morning, Chris, Kevin, and Bill. Good morning. Good to hear your voices.

Yes. Someday we'll see you again. Same here, Joe.

I was hoping to get a better understanding of your operating sensitivities in this environment. And as we kind of look at these unbelievable communities, we talk about the magnitude of these rev par declines. But given these pretty steep rev par declines, how do you see the relationships to base and franchise fees? How do you see that relationship, if I can guess, on the incentive management fee side? How are you thinking about your run rate G&A from here? If you give us some sort of, you know, some points on understanding the components of your monthly cash flow, and I think that would be helpful to us.

Wow, that's... That's about 20 questions in there, Joe. Good job.

Don't ask me to repeat it. I can't remember all the questions.

I can't either. So I'll think. The whole model, Joe? Yeah. Yeah, we can't. As we said, we're not giving guidance, so we'll answer what we can. But happy to talk about the sensitivities at a high level. You know, I would say, as we look at the, you know, what I think would be helpful is sort of rev part of EBITDA relationship, The way I would think about it, you know, in terms of sensitivities, and there's thousands of assumptions, as you would guess, that go into this, is if you had REBPAR declines, and we're not giving guidance, so we're not going to suggest what we think they are for the year, but you guys have views. You know, I would say the model is such that up to around 30% REBPAR declines The whole company, Red Party EBITDA, is a bit better than one-to-one. And when it goes over 30, it's a bit worse than one-to-one, but not materially so. The base fee business throughout that continuum is better than one-to-one. And what obviously hurts it the higher you go is a certain level of negative operating leverage because no matter how much you cut corporate costs, which we've done a lot of, there's a limit to how far you can go and keep the system going. And then the real estate, the lower the rev par is given that these are leased assets with some degree of fixed rent structure, you know, that creates a tailwind. But, again, that's a very small part of the business overall and has been. So – It keeps us even, you know, I've seen the industry sort of numbers I've seen from a bunch of folks, I think, including you, are sort of minus 50 for the year. It's sort of funny to hear myself say that, but I've been doing this for 35-plus years. But that's what the industry thinks. I think, as I said, our ratio, even the overall ratio, would be a little bit, a touch above one-to-one. The base fee business would be better even at those levels. levels. On G&A, you know, sort of the G&A as we see it on a gap basis, given the mitigation that we have done with an assumption that as you get into the third and fourth quarter, you will have some sort of, you will start to see recovery. I mean, the truth is, while it's slow, we're starting to see it now. We've gone from 13 to 23% already. Not a lot to be thankful for, but we do believe once you get through the the epicenter of the crisis, which it feels like from a health point of view we are, and you get into reopening parts of the world that haven't reopened, including the United States, you'll start to improve in the third and fourth quarter. You know, I think when you net all that out, you know, probably, you know, G&A is 20, you know, 25 to 30% lower. Remembering for us, and it's a point worth making, Our G&A for the last three years has basically been flat. We are, we believe, always very disciplined about our G&A. And coming into the year, we were actually guiding before pre-COVID-19 to a modest decline in G&A. Obviously, that decline, given the mitigation that we have – gone through to sort of, you know, right-size the business for the operating environment will be much greater than what we would have suggested pre-COVID-19, but sort of in the ranges that I talked about. On cash burn, you know, we have already as part of the bond deal and otherwise put out public information on that. You know, I think the way to think about it is in the environment, we're sort of in the second quarter, which I said I don't believe we, you know, we will maintain that level of performance. You know, I think, you know, I think the third quarter will be the worst of it, even at those levels that are sort of circa 80% to 90% off. We think we have at least 24 months of liquidity. And if you take sort of industry, you know, the industry view that I'm seeing broadly that I discussed earlier, actually at that level of performance, we are better than cash flow positive. So that hopefully gives you sort of a bit of a range. Again, recognizing we're not giving specific guidance, but just trying to give you a general trajectory. Kevin, what did I miss out of his laundry list?

I think you covered most of it. I think overall, you know, embedded in that cash burn, those cash burn guidances is obviously an assumption of pretty extensive mitigation on our gross controllable expenses outside of G&A. And I'd say, you know, on an overall basis, we think we can over the course of the year mitigate about 60% of the gross controllable expenses. But that's all embedded in the cash burn assumption. And I think you actually said the third quarter was going to be the worst, but we think the second quarter.

Second quarter. I did say that? Yeah. Second quarter. I've already skipped a quarter. Yeah. Second quarter.

That's all helpful, guys.

Fourth quarter recovery. That's all. To a degree. Yeah.

Great. Thank you.

Thanks, Joe.

Our next question comes from Carlos Santorelli from Deutsche Bank. Please go ahead with your question.

Hey, guys. Thank you very much for your prepared remarks and obviously the color you just provided. Kevin, acknowledging that you mentioned kind of nub half of the six to seven you were previously looking for for this year, how much of that call it 300 to 350 basis points of nug erosion for this year relates to just delays in the pipeline that we will see come through presumably next year. And how much of that is just stuff that maybe was early and, you know, has a lower likelihood at this point of getting finished. So more or less, even if you wanted to take a bigger picture approach, when you think about the opportunities for conversions and whatnot, looking out to 21, 22, 23, et cetera, are you still reasonably comfortable in kind of a mid-single-digit net unit growth baseline for those years?

Yeah, so here's what I would say, Carlo, you know, and obviously a good question. Virtually all of the decline in our outlook for NUG for this year is due to delays related to COVID-19, meaning, you know, we do have, you know, in our guidance is always an embedded assumption for conversions, And I'll come back to that. I know that's part of your question. But, you know, the decline is really entirely related to delays because going into the year, even for a limited service hotel, if something's expected to open this year, it's going to be under construction this year, right? So as of about a third of the hotels that we had under construction that we expected to open this year went into some form of suspension, you know, over the last month or so as part of the crisis. About half of those that went under suspension are already back under construction, but they're going to be somewhat delayed, right, obviously because they suspended. And about half of them, the other half we think will resume construction, largely every project we think will resume construction over the balance of the year. There certainly will be, you know, onesies, twosies of things where, you know, a deal might not make sense. But generally once a hotel starts construction, it opens, right? And so what that means is almost all of it, we'll push into next year. So as a result, we think that whatever this year ends up being will be the bottom and that we'll climb back from there. And yeah, on a run rate basis, once we get back to normal, we're more than comfortable with a mid single digit growth rate. And we think that, you know, conversions, there'll be some period of time where, you know, obviously at the moment, although we are working on some conversions, you know, as we speak, we're working on a bunch of them actually, but at the moment, transaction activity is relatively limited. But in general, we think the crisis will probably create, you know, more opportunities than it hurts. And so hopefully that covers the language.

Yeah, that did, Kevin. Thank you very much. And if I could just – one quick follow-up. When you guys think about the financial crisis and the resumption, obviously it was different circumstances and whatnot. But speaking specifically to the group elements of the business – When you think about the recovery in that era on the group side relative to now and based on, obviously, the positive traction you guys have had with rebookings and some sales progress on future periods, et cetera, what are you hearing or what do you view as being kind of the key differentiators between that group recovery and getting kind of adequate pricing back on the books, et cetera, in this period relative to that period?

Yeah. There are going to be a lot of similarities, Carlo, and then some differences, as you might guess. I mean, you know, I think that, you know, the economic fallout we'll see. I mean, I think the economic fallout here is likely to be greater. And then you put on top of that a mobility issue and a health and hygiene issue, which is, you know, people not wanting to for a period of time until maybe there's a vaccine or therapeutics or we get past this. not wanting to congregate in large groups. So, you know, I mean, I think being pragmatic about it and straightforward about it, I think group always is the last to recover. You know, in the 30 whatever years I've been doing this and going through these ups and downs, group is the last to recover, you know, for no other reason than it's a longer lead business, right? So it's sort of logical. You know, I think here it will be a little longer than normal because of those factors. I think the economic impact is going to be greater than most of what we've seen in my time. And we have to get, you know, people are going to have to sort of not only just come out of their foxholes, but ultimately, you know, get comfortable congregating again. All of that, you know, I think will happen. By the way, I think the business, when you get two or three years out, will look a lot more like it did 90 days ago than it looks right now. I think it will look very, very similar to it. But I think it's going to take time. and progression. It's going to depend on what happens with reopening. It's going to depend on what happens with, you know, how we fight COVID-19. It's going to depend on things that are unknowns today, which is where we end up with vaccines and therapeutics. I'm super optimistic based on the people I'm talking to about those things, but I'm not a health expert, and I'm not in the pharma business, and I don't know. But those things are all sort of variables that it's just too early to judge. So, you know, the simple answer would be I think the contours of this recovery, like prior recoveries to a degree with a little bit of nuance, will be leisure transient first, business transient second, and group third. I think they're all going to be a little bit different in contour than prior cycles for obvious reasons of the impact of COVID-19 being different in terms of the impact that it has on people and business. But I think that is the progression. And while you didn't ask it, I'll say it. You know, I do think, you know, as we get into correcting, thank you for correcting me, Kevin. You know, I do think Q2 is going to be, you know, very bad because we know that. I do think you will start, as you get reopenings around the world and in America, you know, moving again. if the federal government and state governments are responsible. I've been on the council for reopening, and so I think there's a sensible dialogue going on there. You know, you will start to see a recovery as you get into Q3, in my opinion, and Q4. I think that, you know, the initial stages of that, just given how very low Q2 is, will look like a pretty decent snapback. But trying to, you know, but I don't want to be Pollyannish. Getting back to sort of the levels of occupancy, you know, like for us that were in the low mid-70s in 2019, which were all-time highs, that's going to take time. I think you will see, you know, the down. You'll see a bit of a snap back as you get mobility off of very low levels. And then I think you're going to sort of, you know, slowly recover again. as people get more comfort and businesses start to, you know, get back in business, start to think about hiring and investing and all those fun things. And that, as I said in my prepared comments, that's going to take, you know, two or three years, you know, to get back, you know, in my opinion, to those levels. And that's my honest view. The truth is this thing is moving really fast. And there are a lot of unknowns, as I just said. So that's my view. based on what I see, and I've seen a lot and talked to a lot of people, but time will tell, which is exactly why we haven't given guidance, because it's just too early to know. But everybody on this call knows I'm a born optimist, and that will never change. So I feel spectacularly good about the long term for the industry. I feel spectacularly good about our model and the long term opportunities for Hilton. And we just sort of have to go through a period of time to rebuild and get back on our feet as an industry and a company to get back to where we were.

That's great, Terry. Thank you, Chris.

And our next question comes from Harry Curtis from Inspinet. Please go ahead with your question.

Hi, Chris. Given your vast experience through prior recessions, let's – Let's go back to 2008 and 2009, where there was a significant amount of hand-wringing about the impact of video conferencing on corporate travel, and it didn't really pan out. Do you think it pans out in the recovery? I know it's It's anybody's guess, but is it different this time, do you think?

It's anybody's guess. I mean, certainly, you know, I've done more WebEx meetings and Zoom than I ever want to do in my life. I don't know about all of you. Maybe it's I'm now in a little curmudgeon. I'm tired of it. The last thing I'm going to want to do when I get done with this is do another video conference. And I'm, by the way, hearing that from a lot of people. So the honest answer is I don't know. I would say – You know, on the margin, yeah, there's going to be certain trip occasions where maybe because people have become more accustomed to this out of necessity to sort of be able to function that they'll think, well, I can do that. I don't have to do a trip. But I think much like the debate that I've been part of for the last 20 or 30 years as this has evolved, I think it is an unstoppable force that people want to travel and see each other and need to to build relationships, whether that is personal or or related to business. I don't think that will change. I don't think globalization is going to stop. I don't think the need for people to travel the world is going to stop. And I am highly confident we can all wake up in two or three years and you can tell me I was right or wrong. But I'm highly confident, as I said, when you wake up in two or three years, the world's going to – it's hard to see it now. The world is going to look an awful lot like it did 90 days ago in terms of customer behavior and demand patterns. and the like. There will be some differences. As I said, maybe on the margin there's some business transient where people do it, but I think they're going to want to see people. There are going to be other things that happen, you know, that change, but it's going to be things I think that we're sort of forming where it will accelerate other things. Like, you know, our digital key, digital check-in, which we've had great adoption. I think we'll have massive adoption. Connected room where you're in a room, you don't have to mess with the remote control or touch switches. You know, I think people will sort of adopt those things. So, you know, I think, you know, the digital world, you know, was already very important to us. I think it's going to get more important because some of those trends are going to be accelerated. But I do not, you know, I wake up at night thinking about a lot of things these days. I do sleep, but I get up awfully early, as I told Kevin. But I do not worry that people are not going to want to see each other, meet with each other, and ultimately congregate. I think that is the human condition. And I think there is an argument that on the margin I described it could take some certification. There's also, I think, an even better argument that people are going to want to see people more than ever. They just need to feel safe, right? And I think when they feel safe, they will go back largely to their own patterns and behaviors. Looking at the great – looking at, you know, prior activities, I think 9-11 is – is probably the most instructive. While it's not the same, you know, because none of these, this is, you know, unprecedented as we keep saying, you know, there's some lessons that were learned there. Like, you know, basically everybody said, well, you know, after 9-11 nobody traveled. Video conferencing wasn't as good, but they figured out other ways to do things because they were afraid to get on planes and travel and go out. You know, you fast forwarded, you know, two or three years. We had figured out how to manage the world and figured out how to not get rid of terrorism but manage it. And people went back largely to their prior behaviors. You know, it did accelerate a few things that were not, frankly, I would argue, harmful that were probably helpful. I think, you know, the same thing is going to happen here. I think as we get through this and we realize that, you know, COVID-19 and, you know, These types of viruses are part of our future. They have been. We have dealt with the seasonal flu. There was a time where dealing with the seasonal flu felt like this, that we will figure out as a global community how to deal with this. We will hopefully have a vaccine. Time will tell. We will certainly have more therapeutics. We will certainly have better practices and procedures to make sure that we protect the very small part of the global population that is really, truly most impacted by this. And I think as people then start to feel like this is a safe environment, they are going to go back largely to their old behaviors. I would bet a lot of money on it. And that's what history would tell you.

I appreciate that. And as a quick follow-up, what are your peers in the airline industry telling you about the pace of their restart?

Yeah. I would say I have been talking to a lot of my peers, but looking at the data, to be honest, I thought, you know, at least in the last couple weeks and these days, it's like every week makes a difference. But, you know, based on the conversations I have had over the last couple, you know, You know, I think, you know, while we're not in some – let's be clear, we're not in the, you know, showing robust recovery trends right now. We're – you know, I said we are like teeny – I mean, in China we are, but the rest of the world it's like teeny tiny, you know, steps forward. I think airlines are way behind. And, you know, if you just look at the passenger, you know, mile data, you know, how many employments, they're just way behind. And here's the thing. That's because people – you know, those that are willing to travel are only willing to go so far from home. So, you know, as I think about our teams, you didn't ask but I'll answer because we're spending an immense amount of time on recovery. I spent, you know, I had all 500 of our commercial leaders around the world on a Zoom call yesterday and talking about how we're retooling our approach to go to market over the next 6, 12, whatever it takes, 18 months, and that is going to be really much more about local business and a lot more in the beginning about drive-to business, right? So if you think about it, I mean, sort of the natural human reaction is, like, I want to move. I want to get out. I'm starting to feel safe. I'm going to get out of my house. I'm going to go to my neighborhood. Maybe I'll, you know, sort of, you know, move around the region. Maybe I'll go to the region next door. Eventually I'm going to cross the country. I'm going to get on a plane and go around the world. But I think it's in that progression. And so if you think about it that way, while we've seen a little bit of pickup, you know, I would argue almost all of it has been in drive, too. And we thankfully, we have a big portfolio. We have a lot of brands. We have a lot of drive. You know, we have, you know, in the world, 2,000, 600 or 700 Hampton Inns. And, you know, we have thousands, I think, you know, limited service hotels in the U.S. We have almost 4,000 of them. and they are very, you know, well set up for, you know, that sort of local street corner type business and drive-thru business. So I think there's a little bit of a disconnect, and there will be for a period of time, where I think we will likely show, I think, recovery at a faster pace because we can accommodate types of demand that don't require air travel. Ultimately, we need the airlines. We need people to get on planes. To get to the nirvana, which is back to more normal patterns of demand, obviously that has to happen. But in the short term, I think it's going to be a little bit more local, a little bit more drive-to. And our industry, if you can accommodate that business, is going to be ahead of the airlines.

I appreciate the thoughts.

Thanks. Our next question comes from Sean Kelly from Bank of America. Please go ahead with your question.

Hi, good morning, everyone, and it's good to hear everybody's voices again. So, Chris, I wanted to switch the subject a little bit to kind of the franchisee side of the world here. I was just wondering if you could give us a little bit more color on how some of those conversations are going with your franchise partners. If it's possible, and I appreciate it's both early stage and it may be hard to give these numbers, but any sort of sense of magnitude of either you know, asks of how many of your franchisees are looking for any form of fee relief or what that dialogue is kind of looking like right now?

Sure. So this is something I commented on for good reason in my prepared comments because we're spending, as you would guess, a huge amount of time with our franchise and broader ownership community because, you know, they are the engine of our growth and they're, you know, our most important partners in business. Um, and, and times are difficult for everybody, but times are more difficult for them given, you know, the situation, which is no, essentially no demand or very little demand yet, you know, even with furloughs and all those things, they still have to pay debt service. They still have to, you know, pay, you know, for insurance and real estate taxes and, you know, utilities and all that fun stuff. So we've had a multi-tiered approach. Um, I'd say first and foremost, and I talked about it a little bit, a very little bit, you know, we and I have been deeply involved in what's been going on with the federal government, both with the administration and on the Hill, to try and get liquidity relief for the industry, which is our ownership community. and, frankly, trying to get relief for our frontline team members that have been furloughed and not in any way relief for Hilton. We don't need it. We have not asked for it in any way, shape, or form. But we have been pushing really hard with the administration, Treasury. You know, I've had lots of conversations with all the right people, including the President, Secretary Mnuchin, throughout the PPP. Reality is, you know, I could go on a long time. You don't want me to. You know, PPP is a really good program, and we, you know, Congress and the administration should be given a lot of credit for moving that fast and getting that much money into the system that will help owners and small business folks and ultimately employees keep, you know, stay on the payroll. Reality is for our industry it hasn't been as big just because of the complexity of ownership structures and the like. It has not been that helpful. The second wave, hopefully, you know, is more helpful. But the Fed is getting ready to launch a Main Street lending program, you know, which we're working very hard on to make sure that there is more access. And so a bunch of our owners, by the way, lots and lots, dozens and dozens have had access to PPP. We're hoping that a much larger set of them get access to the Main Street lending program. And so, you know, that is an important part of what we're doing because they need a bridge, right? I mean, ultimately, we're also working with the administration on stimulus for the industry when we get to the other side to get demand going and people reemployed. But right now, our owners need a bridge. So we've been working very hard in that regard. We also, as I mentioned in my prepared comments, have done tons of things. In terms of, by the way, suspending operations at 950 hotels, we've never done that, right? In the 100 years we've been around other than closing a hotel to tear it down or whatever, we've never done that. We've suspended massive amounts of our brand standards, operating standards, capital programs, and a whole bunch of other things to sort of really take, you know, give them huge flexibility in in how they operate, which I think they have appreciated. As I also mentioned, one of the most important things that we're doing right now, which I'm spending and our team is spending an immense amount of time on, which I mentioned very lightly, is the hotel operating model of the future. You know, we're working with all of our owners, franchisees across every brand, every category to figure out, we've already done the short term, but intermediate and long term, how do we use this Time, you know, necessity, as I like to say, does become the mother of invention. To think about, you know, things that we've been exploring or thinking about and that we think make sense to create more efficiency, what better time to sort of think about our standards and sort of, you know, put them all in the bucket and really, really put a bright light on them. And so we're doing that with deep involvement of our owner advisory councils. We kicked this off a couple weeks ago. and we're in full swing. And that's incredibly important work as we, again, get to the other side and hopefully get stimulus from the government, which I think we will, and that we create an opportunity in the intermediate term for them to be able to operate at lower demand levels and still have profitability, and then longer term, as we get back to normal, have even greater levels of profitability than when we went into it. In terms of fee relief, you know, I would say, you wouldn't be surprised to hear that there have been owners that have asked for fee relief, but not, you know, hand over fist. And the reality is I think there's a real simple reason. Our fee structures, as you know, which is, you know, different for different players in the industry, all of our fee structures, whether it's the franchise fee or management fee or the system charges, they're all based on a percentage of revenue. So we have given the ultimate fee relief, meaning when you're, you know, 90% off, there really aren't many fees because there's not much revenue. And so I think, you know, most of the owners, everybody would like every bit of help that they can get. I think most of the owners that I have talked to sort of understand that the fees have been right-sized with the demand in the business, that they're not at the moment, you know, sadly for us, and sadly for them, they're not paying us a lot of fees. in any event. So that, you know, we will continue to look at all options with our owner community. As I said, there is no more important partner and stakeholder that we have. They are the engine of opportunity for us. They're investing all the capital they have then. And I believe they will, as Kevin noted, with the pipeline and NUG numbers, they will continue to do so. And so, you know, we are literally and personally I'm in daily conversations with with huge numbers of them. And I think you can ask them yourself. And while we're never going to be perfect, you know, so far, the feedback I get from our owner community, and you can validate it is very high marks that we were we were there earlier than most understanding the severity of this. We took very decisive and bold action to provide relief early. And, again, while we're not perfect, my impression in the owners I'm talking to, and I'm talking to hundreds of them, is while they're hurting, they are certainly appreciating the partnership that we have provided.

Great. Thanks for all the detail, Chris. And then maybe a little bit more of a specific one for Kevin, I guess. Kevin, could you outline for us a little bit more on maybe just this kind of point in time working capital drag that we could potentially see as it relates to mismatching on the reimbursed costs. You know, primarily I think it's the system fund, but anything else that maybe investors should be aware of just given, you know, the situation we're in when the music stops and drops as much as it is, you know, kind of where cash should be trapped for a period of time and then how you expect to recover that down the road.

Yeah, sure. Obviously, it's a question that's on a lot of people's minds, so it's a good one. You know, I think to take a step back, if you think about – there's really three buckets of receivables that we have, right? In hotels that we manage, you know, which is a minority of the system, right? Roughly 70% of the system is franchised. But in hotels that we manage, the owner is responsible for the working capital and all the obligations. And some of those, you know, ultimately are paid by us and then reimbursed by owners. So there's, you know, an opportunity there. Then you have license fees and then system charges, as Chris mentioned in his buildup. So those are the three primary buckets. What I would say in terms of sizing it, first of all, it's really early, right? So if you think about the crisis really starting in March, you don't even bill these things until the following month, and then you give people 30 days to pay. And so we're sort of just getting into it. So anything we would say there would be speculative. But that said, embedded – I think it's probably obvious but worth saying – embedded in the discussion that we've given you both publicly and in Chris's – some of Chris's commentary earlier is a working capital drag, whereas we've said if things stay the way they are, meaning circa 90% down in revenue and in this environment, we have – at least 24 months of liquidity, and you've got our cash balance. And so you can sort of just do the math and realize that if things stay the way they are, there is an embedded cash drag in there that could be, you know, in the hundreds of millions of dollars ultimately. But, of course, it depends on duration of the cycle, how it plays out. And ultimately, you know, we believe, as Chris just got done explaining, that the business is healthy. It's going to come back. And when it comes back, we think we're going to get paid.

Thank you very much.

And our next question comes from Anthony Powell from Barclays. Please go ahead with your question.

Hi. Hello. Good morning, everyone. Morning. So longer term, how do you think this event changes the financing market for new hotel construction? Do you think lenders may require higher equity contributions or higher cash reserves? And could this be a headwind for construction and your net unit growth over the medium to longer term?

Yeah, it's a good question, Anthony, and the reality is, you know, we don't really know, but what I think is that generally when you come out of these crises, you know, lenders get appropriately more cautious, although I would say that, you know, even pre-COVID, we were pretty deep into an economic cycle, and so you were starting to see caution. That said, over the long term, I would say, you know, for construction companies, You know, most of the hotels that get built in our system are not actually even financed aggressively. When you talk about, like, big full-service hotels and luxury hotels, sometimes they use more leverage. But the lion's share of the hotels that get built in our system are not actually financed all that aggressively. You're talking about, like, 50% loan-to-cost. And I would say, you know, personally, I think that when the business recovers, the lending community will be there. And, you know, as long as hotels are productive – and profitable investments that they'll be able to be financed. And then I think the last thing I'd add is you have to remember the amount of liquidity that is in the system. You know, pre-COVID, you're talking about, like, tripling plus of the money supply from quantitative easing and then even more capital being injected into systems globally. There's going to be plenty of capital, you know, looking for productive yields. And I would say, you know, for some period of time, it will be a distressed environment, and as it always does, it will recover back to normal.

Got it. Maybe just one more. You mentioned that you relaxed brand standards across the board to help owners. How do you manage that with customer expectations as you start to see recovery? You know, Hilton Honors has been known for a very consistent, you know, experience across the board. Customers are going to be returning to seeing no breakfast buffets and whatnot. How do you manage that going forward?

It's a really good question. I think in the short term, you know, as we've been talking to customers and serving customers, they, you know, everybody gets what's going on in the world, so they're incredibly lenient. And so we have not, you know, we're not serving, sadly, that many customers, but those that we are who are mostly on the front lines of recovery efforts, have been fine with all of the standard changes and suspension of certain elements of the service. The work that I described that we're doing is sort of, you know, in the intermediate and long term in making sure that we, one, create the most efficient operating model, and two, obviously continue, as you implied, as implied your question, to drive premium market share. I mean, we're not, you know, we continue to have deep premium market share in the industry. We have no plan to give that up. You know, the trick is, as we transition from the intermediate to the longer term, what are the things that you basically put back in to, you know, the standards and what do you take, what do you leave out and or change? And that's sort of, you know, I can't give you the answer and not because I don't want to. I don't have it yet. I mean, that's the work that we are doing right now. I suspect that, you know, what we will do is, you know, test a whole bunch of different things. I know we will, as will others, during the intermediate timeframe when customers are very forgiving. And what we're going to do is iterate, you know, with the objective of making sure that we are delivering premium product and service always to get our market share premiums. but we want to drive efficiency. So short term is easy. Intermediate term, I think, will be a significant opportunity for testing when you're still in a relatively low demand environment where customers are still quite, you know, sort of accepting of things that are different. And then I think what we learn in that intermediate timeframe, we will, you know, sort of institute as our longer-range standards. And we're working – We're working through all of that. I think there will be a whole bunch of things that we'll do that will be more efficient long-term, and there are going to be some standards that our customers are going to want in a more normalized environment, and we're going to reinstitute.

Thank you.

Our next question comes from Stephen Gramling from Goldman Sachs. Please go ahead with your question.

Good morning, everyone. Two related follow-ups. First, on the working capital drag you cited in the hundreds of millions of dollars potentially, you mentioned it depends on how long this will last. So on the cash burn and month of liquidity you provided in the debt deal, I think you were assuming that this is – or maybe you can elaborate on whether you're assuming this is a consistent drag each quarter or if that would potentially moderate even if things remain weak. And then second, can you talk a little bit more about what you're seeing from consumers as it relates to the loyalty program? via some of the partnerships you have, and how that may impact the model both during this period and then also how you ensure customer engagement to position yourselves to use this asset to take share in an eventual recovery.

Yeah, so on the working capital, Stephen, I would say, look, the assumptions that we gave publicly, which, again, just to make sure everyone's clear, you know, as part of the bond deal, we said 18 to 24 months. That was pre-money for the bond deal period. and we ended up upsizing that deal. So that's sort of how you get to the longer end of that range. I would say that, again, when the crisis is new, you know, things are a little sharper. So the way I'd characterize it is, you know, the first month, you know, second quarter of this year probably would be the worst on that front, and then it would moderate from there.

But, again, the assumptions in that analysis are – basically you have little or no revenue.

From that perspective, again, I said it would be a little bit harsher at the beginning and then it would be relatively flat. Again, under those assumptions, with any kind of recovery curve, it gets better from there.

And then on the loyalty program side, just any color you can provide them with.

Yeah, we have done a bunch of things. If you look at it, I'd say, first of all, not that we have a lot of business, but our honors occupancy with the modest business we have has skyrocketed. So, you know, it was already very high, and now it's a lot higher because they, you know, seemingly they are more willing to travel than, I guess, non-honors members. But what we've been focused on during this time frame, and you can see it in a lot of the things I talked about and that you would see publicly, is people aren't traveling that much. So, What can we do to build loyalty? You know, we can give them flexibility. You know, so we in the industry, we were the first ones, I believe, certainly we were very early to come out and give very significant cancellation flexibility. We were definitely the first to come out and give status, you know, allow people to remain, keep their status. We were definitely the first to come out and say we're not going to have points expire. We did a bunch of things to say to our honors members that, No fault of your own. You can't travel, and we're not going to hold that against you. We've been communicating with them regularly, and so far I'd say that's going well. The work that we're doing in the community, we're doing that because we want to be part of the solution, not part of the problem. So our Million Room Nights with AMEX, their first responders for free, our World Central Kitchen work, all of the other work that we're doing, is about sort of continuing to build our brand, the honors brand, with consumers who are sitting around and can't move but are watching a lot of TV and reading a lot and doing a lot of social media and they're seeing these things. The net result is, you know, in terms of our numbers, our marketing team has been looking at it, you know, like intent to consider purchase of our product, net promoter score, whatever, Those numbers have gone way up through the crisis, you know, as a result of, you know, people realizing, you know, we're doing the right things. And so, you know, my attitude, you know, which is the way I think about life when you go into this, just like the way I thought about it when we went into the Great Recession, which was different but similar, is when everything is good – it's really hard to differentiate yourselves. I mean, I think we have. I think we've done a great job. But, you know, you get caught up in an arms race. When everything is bad, you know, people peel off and go different directions, and you have a real opportunity to differentiate yourself. And so what I've said from the day we got in this crisis is as much as we need to, you know, solidify the core and deal with liquidity, which Kevin and the team have done an amazing job on, and, you know, and protect, you know, and deal with the cost structure and all those things. We have been crazy focused on making sure we are listening to customers, you know, particularly honors members, and doing the right thing for them, that we are crazy focused on our owners, as I've already talked a lot about, to do everything we can for them, that we're crazy involved, you know, in our communities so that people remember that, you know, we were part of the solution because that will continue to build loyalty. And obviously, as impactful as it has been to our team members, as we're impacting them, we're doing it in the right way, in a way that, you know, is really taking care of them as best we can. And so my attitude is, well, this is all painful. You know, there's no other way to describe it. What we do now will determine our future, and we are absolutely committed as a team and a company to continue to differentiate ourselves with all of our stakeholders and to come out the other side of this stronger, including with our honors members. And so far, we're, I think, doing a very good job doing that.

That's great. Thanks so much.

Our next question comes from Bill Crow from Raymond James. Please go ahead with your question.

Hey, good morning, folks. Chris, based on your discussion, I think it was with Harry earlier, it sounds like your view is that the primary gating factor for travel is not the hotel, it's the airplane, the airline. And if that's the case, is it fair to suggest that no matter how much they discount fares, it's probably not going to be as stimulative as it would have been in in prior downturns? And then the second part of that is, does that also mean that larger coastal gateway markets come back far later than the rest of the country?

Well, to a degree, yes. But let me reframe it a little bit. But what I was saying, which is right, that to get back to full recovery – I think the airlines are a gating issue. People have to be comfortable to get on planes. Planes have to be flying. You know, there's a bunch of the business, particularly in the big, you know, in the major markets that are, you know, that is fly-to. And so to get the full recovery, you have to have that. I absolutely believe you can get a significant amount of recovery before you get there. I think it's, Bill, you know, I wish I had all the answers. I think it's wrapped up in a whole bunch of different things that relate to what's going on with vaccines, therapeutics, you know, human nature, you know, and just a comfort factor. My own belief is as you continue to get more testing, which is what I've been reinforcing with the White House and everybody that will listen, including antibody testing, that you are going to understand that, because the data is pretty clear, that while this is a terrible virus and it's affecting people's lives and it is killing people, which is horrific and every life is important, when you get down to it, it has infected a lot more people than we know and the mortality rate is much, much lower than people have thought. And the real data suggests you know, there's a very small part of the population that is really at risk. I think the more of the testing data that comes out, even without a vaccine or a therapeutic, the more people are going, particularly those that are not as at risk, the more comfort that they are going to have. With a vaccine and or therapeutic, I think you, you know, I think it's game-changing. And so, I'm not trying to be evasive. I just think it's going to be iterative. I think you're going to have drive-to business. You're going to have some, you know, fly-to business. You know, people are going to, you know, socially space, wear masks and all that. And there will be people that go out. The more they understand the real mortality rate, the more therapeutics and or vaccine progress we have. I think it will, as I said, two or three different times. I think, you know, when you wake up in a couple of years, it'll feel a lot more like it did 90 days ago than it does now. And the path depends on a whole bunch of variables that are not particularly well known. But I think that it will progress. We will recover first with more drive to some, some, fly to, and that will happen. I mean, people are, you know, you're going to, this summer, you start looking at the airline numbers, and you're going to see a big shift up. It's not going to be anywhere near, you know, where it was, but in my opinion, this summer, you will see a heck of a lot more people getting on planes and in airports than you see right now. So I think it's just going to be a progression.

I hope you're right. Chris, if I could just follow up with one other question that I'm not sure you can answer, but... As you look out, you're talking about two, three, four years out, using this period for innovation and whatnot, do you think the operating cost or cost per occupied room will be lower or higher as we start to stabilize this industry?

Lower, for sure. Lower. I mean, just because all the things that we're working on, I can't tell you how much lower because I don't have the answers yet. But clearly – Clearly, you know, I mean, there are a few things, Bill, as you might guess, that are going to cost a little bit more, like our clean-stay standard working with Lysol and Mayo. You know, yeah, I mean, Lysol products may be a little more expensive than some of the products we use. That's relatively insignificant. The other things that we're thinking about in terms of gardening efficiencies, you know, vastly outweigh that. So I think when we wake up on a stabilized basis, operating costs are going to go down. Well, thank you.

Wish we could see you in person here soon.

It won't be long.

All right. Thanks, Chris.

Thanks.

Our next question comes from Robin Farley from UBS. Please go ahead with your question.

Great. Thank you. Most of my questions have been asked, but I did want to follow up on the unit growth question, and I appreciate how difficult it is to have visibility on this. You were talking about financing, that there will be capital available. But I guess just thinking about it from a perspective of owner appetite, and when you kind of look at historic downturns, you know, anything under construction, as you pointed out, would open, and the decline or, I guess, slower rate of growth typically in supply would usually come a year or two later because of those new projects. So I wonder if you could – talk about kind of owner appetite, it seems like given even what you're saying about how it could take a couple of years to get back to 2019 levels, that maybe an owner or developer that hasn't put a shovel in the ground yet would be rethinking anything that's not under construction, that then we would see, you know, something much lower than mid-single-digit growth in terms of pipeline kind of a year or so out from now.

Yeah, I think, listen, it's a good point, Robin, and certainly that is generally how it worked last time, although not really. I mean, I think the first year after the great financial crisis was the low point, and then it sort of started building from there. There was another year in 2012 where it sort of stayed low slash went down a touch because of what you're describing. The difference this time is it's delayed, right? I mean, it's a different crisis, and you've just got construction that's being suspended. Things are going to take longer, and it's going to push. And then the other thing is you've had, you know, this is coming at the end of a cycle, so you've had a bunch of deliveries, and there are existing hotels, and there's going to be a little bit less demand for a while, and we think more demand for our engines, so we do think we'll drive a higher level of conversions going forward. And thus, we think a growing trajectory from here. Well, you know, we'll see what happens, but that's what we think.

Okay, no, great. That's helpful. And then one other sort of point on the same topic is, you know, we looked at all the data historically for hotel removals, right, hotels that close and never reopen in previous downturns. And, like, interestingly, that doesn't go up a lot. Even in 2009, that wasn't really that much above average. I would assume that you don't expect removals to be at a higher rate this year with this issue as well? But tell me if that's not true.

No, that's accurate. That's accurate. We think removals will be very normal.

Great. Thank you very much.

And our next question comes from Thomas Allen from Morgan Stanley. Please go ahead with your question.

Hey, good morning. Just in terms of buybacks, so in the prepared remarks in the press release, it said, Hilton formally suspended your buyback program, but the program remains authorized, and you may resume share repurchases in the future at any time. How are you thinking about the buyback program? How are you thinking about the leverage levels? Any clarity there would be helpful. Thank you.

Yeah, a really good question, and I'd say, You know, a little bit early, given where we are, to have, you know, sort of be this positive about it. But I don't think long-term we have a – in the short term, you know, we're not going to be doing dividends and buybacks. We've made that pretty clear. As we get back to, you know, recovery and a more normalized environment, I don't think our capital allocation strategy has really changed. You know, one might argue, even though, you know, I think from a liquidity point of view, we find ourselves in a really good position, and, you know, we did the right things not just post-crisis but pre-crisis in terms of having credit available, you know, maturity schedule that was very attractive. You know, those weren't, you know, those weren't – you know, lucky. I mean, we knew we were at the end of a business cycle, and those are things that we planned out to make sure that we had all the financial flexibility we would need. Now, did we know we would have COVID-19? Of course not. But we knew we were at the end of a business cycle, and we wanted to have, you know, be really set up well for it. And so we are. And so I'd say, you know, this should hopefully be the greatest test of all time for a balance sheet. It's hard to believe another one could be worse, given what's happened. And I think, you know, I think we feel like we're in a really good position to sort of pass that test and, you know, have the liquidity and the credit profile to get through it. So I don't think when we get back to a normalized environment we have too much of a different view. What I was going to say is you could argue, you know, about would you be a little bit lower leverage, you know, than you might have been. I'm sure we will debate that, and this isn't the time to conclude that. But more broadly, we will definitely resume at some point when we get to a normalized environment. You know, I believe our intention would be to resume sort of where we left off in terms of our capital allocation strategy.

Thank you.

Okay. I think that's it. Well, it's an interesting call and interesting times. We appreciate everybody's time. I know we've been talking with lots of people sort of as this has been going on. Obviously happy to continue doing that as we work our way through this. As we said in our comments, second quarter will not be pretty, but hopefully third quarter and fourth we'll be back on the road to recovery. So everybody stay safe, stay well, and we're going to keep working awfully hard to do the right things here, and we'll look forward to catching up with you and updating you on where we are after the second quarter.

Ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for joining. You may now disconnect your lines.