Hilton Worldwide Holdings Inc.

Good morning and welcome to the Hilton Third Quarter 2020 Earnings Conference Call. All participants will be in listening mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press the star then one on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Vice President, Investor Relations. Please go ahead.

Thank you, Chad. Welcome to Hilton's third 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 factors that could cause actual results to differ, please see the risk factors section of our most recently filed Form 10-K, as supplemented by our 10-Q filed on August 6, 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 on today's call in our earnings press release 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 Chief Financial Officer and President, Global Development, will then review our third quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill, and good morning, everybody. We appreciate you joining us today, particularly after what might have been a very late night for many that are on the call. Our third quarter results continue to reflect the impact of COVID-19. However, I'm encouraged by the progress we've made over the last several months. Travel demand is gradually picking up around the world, and occupancy is meaningfully up from the lows we saw in April. As a result of these improvements, I'm pleased to say that we were able to welcome back most of our furloughed corporate team members last month, and we've been able to successfully navigate the first phase of reopening our corporate offices. We've reached important milestones with the vast majority of our properties around the world now open, development deals continuing to pick up, and customers starting to feel more comfortable traveling again. We remain focused on sustaining our recovery and driving better results for our owners. Turning to the quarter, REVPAR declined approximately 60% year-over-year with performance in urban. Full-service hotels remaining particularly challenged due to the lack of meetings and events. negligible international travel and local COVID protocols. System-wide occupancy increased sequentially throughout the quarter, with all major regions showing improvement. However, momentum slowed in September, with occupancy only slightly better than August levels. In the U.S., occupancy increased roughly five points month over month in both July and August, but remained largely steady in September. Over Labor Day weekend, roughly half of our properties achieved occupancy levels of 80% or higher given strong leisure demand. As expected, we saw leisure trends slow post-summer, offset by a modest uptick in business transient into the fall. Asia-Pacific led the recovery, driven largely by domestic leisure travel in China, with occupancy levels reaching nearly 70% in August. the highest since December 2019. Performance in China was further boosted by local corporate transient and domestic group. In Europe, positive summer momentum stalled in September, given a rise in coronavirus cases and tightening government restrictions, resulting in relatively stable occupancy levels of around 35% in August and September. Overall, these trends have generally continued into the fourth quarter, with fairly steady occupancy as more hotels reopen and ramp, tempered by continued uncertainty surrounding the virus. With more than 97% of our global hotels open and operating, we estimate the vast majority of those hotels are running at break-even occupancy levels or better. As we look to the balance of the year, we expect trends to remain relatively steady, resulting in fourth-quarter red-part declines generally in line with the third quarter. On the development side, activity continues to pick up. In the quarter, we signed over 17,000 rooms boosted by better-than-expected conversions, which increased approximately 50% year-over-year and accounted for roughly 20% of our total signings. Year-to-date, we command an industry-leading share of global conversion signings with more than 9,300 rooms signed, representing one in five deals. Recent notable signings included the Waldorf Astoria Monarch Beach in California and the Conrad Abu Dhabi Idiot Towers. These conversions plus new development projects like the Conrad Rabat Arzana in Morocco will further enhance our global luxury and resort footprints. In new development, we continue to see strong interest across our focus service brand with signings up roughly 32% versus the second quarter. Additionally, we recently celebrated our 500th Hampton signing in China. At quarter end, our development pipeline totaled 408,000 rooms, representing an 8% increase versus prior year. Additionally, the high quality of our pipeline with more than half of our rooms under construction gives us confidence in our ability to continue delivering solid net unit growth for several years. We opened more than 17,000 rooms in the third quarter and achieved net unit growth of 4.7%. Openings in the Americas were up more than 31% year-over-year, driven primarily by conversions. Notable openings in the quarter included the Conrad Punta de Mita in Mexico and the Hilton Beijing Tongzhu in China. Additionally, we were thrilled to open the Motto by Hilton in Washington, D.C., marking our first hotel under the motto brand. For the full year 2020, we now expect net unit growth to be 4.5% to 5% with continued positive momentum and conversions. Additionally, we look forward to celebrating our one millionth room milestone in coming weeks. Since our team came in and implemented the company's transformation, Thirteen years ago, we've doubled our size in rooms and number of brands, driven entirely by organic growth. Our commitment to delivering on our customers' evolving needs and preferences is even more important now than ever before and calls for even greater innovation and agility in the current environment. To that end, we were excited to launch workspaces by Hilton, which provides guests a clean, flexible, and distraction-free environment for productive remote working. Each of our day-use rooms includes a spacious desk, a comfortable ergonomic chair, free Wi-Fi, plus the use of all available business and leisure amenities. We also announced further enhancements to previous Hilton Honors Program modifications that will increase flexibility for our more than 110 million members, including reducing 2021 status qualifications, and extending status and points expiration. Decisive actions, relentless determination, and unwavering commitment to our core values have helped us successfully navigate what has been a challenging and uncertain environment. They have also helped position us well for recovery. We're confident that our business model... coupled with our discipline strategy, will enable us to further differentiate ourselves in the industry and emerge stronger and more efficient than ever before. With that, I'll turn the call over to Kevin for more details on the third quarter.

Thanks, Chris, and good morning, everyone. In the quarter, as Chris mentioned, system-wide RESPAR declined 60% versus the prior year on a comparable and currency-neutral basis, with decreases across all chain scales and regions. Occupancy drove the majority of the declines, with rate pressure due largely to customer mix further hampering performance. However, we saw sequential improvement throughout the quarter, driven by hotel reopenings, loosening travel restrictions in most areas, and a pickup in summer leisure demand, particularly in China and the U.S. Adjusted EBITDA was $224 million in the third quarter, declining 63% year over year. Results reflect the continued reduction in global travel demand due to the pandemic and related temporary suspensions at some of our hotels during the quarter. Management franchise fees decreased 53% driven by red part declines. Overall revenue declines were mitigated by greater cost control at both the corporate and property levels, with corporate G&A expense down approximately 38% year over year. Our ownership portfolio posted a loss for the quarter due to temporary closures, fixed operating costs, and fixed rent payments at some of our leased properties. Cost control measures mitigated losses across the portfolio. Diluted earnings per share adjusted for special items was $0.06. Turning to liquidity, we ended the quarter with total cash in equivalence of nearly $3.5 billion. Our cash burn rate improved in the third quarter, giving gradual recovery in the macro environment. further helped by continued cost discipline and better-than-expected collection. As we look ahead, we remain confident in our liquidity position and ability to navigate the current environment and recovery. Further details on our third quarter can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with all of you this morning, so we ask that you limit yourself to one question. Chad, can we have our first question, please?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And the first question will come from Carlos Santorelli with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking my question. Sure. Good morning, Carlos. morning. Guys, just in terms of the pipeline, it obviously you guys talked about kind of three and a half to four percent was the expectation for this year. Obviously spoke to the high end of that range. You know, now obviously looking for more. Chris, you spoke a lot in your prepared remarks about kind of the impact of conversions and that the percentage of conversions, I believe you said was 20 percent of the 17,000 in the quarter of As we move out further into 2021, 2022, et cetera, can you talk a little bit about the role that you're foreseeing for what conversions need to net unit growth? And maybe potentially also talk about kind of what changed this year? Is it just more construction timing and things kind of getting back started in terms of, you know, hotels that were close to the finish line, you know, maybe a little bit in advance of what you thought they would?

Sure. There's a bunch there, but let me unpack it. I think I can pretty succinctly do that. Starting with this year, you know, our numbers have been moving up, you know, over the last, you know, three or four months on net unit growth. Now it's being four and a half to five, and that is exactly what you suggested in the question. That's because things have gotten back under construction more rapidly than we were initially assuming, and that means that we're just delivering more this year than we thought we would, which is a good thing. And in conversions, while the bulk of that benefit is going to be seen, I think, in 21 and 22, just because of the lag effect, we are seeing more conversions in the year for the year than we had been anticipating, which was reflected in, you know, signings being up in the third quarter by 50%. And so the flow through of that is how we're getting to the four and a half to five. I think as you think about conversions going forward, you know, last year, It was, you know, and I'll do this directionally because it's very early, and obviously we're not giving specific guidance, but directionally, you know, last year we were in the high teens in terms of the percentage of our NUG that was in conversions. This year we obviously will see an uptick, 400 or 500 basis points on that. Again, recognizing that there's a lag, even though these happen a lot faster than new builds, there is time to renovate properties in many cases, get them into our systems. and the like. So we'll be, you know, if we were in the teens, we'll be in the low to mid-20s. And I think that number will keep creeping up. You know, I've said many times over the years, in the last, in the last, in the Great Recession, I think we peaked out close to 40%. I don't think we will get that high, even though in this world we have more brands to play with, in the sense that then we really had one and double three. Now we have double three and three soft brands. You know, we're bigger, you know, we have a broader development story than we did from a global point of view in those days. And so I do think it will grow from, you know, low to mid-20s, beyond that in 21 and 22. And you sort of asked it, and I know it's on everybody's mind, so while I'm on development and nug, I'll finish the story. It's very early, and I wouldn't take this as, like, hard guidance, but I would take it like everything else. in COVID world as good direction, and we've done a lot of work around it. As we think about NUG, and as we've talked about, you know, certainly, you know, in the last call, over the next few years, we think it's probably best we can tell in the four to five percent range. We're going to be, you know, a little bit, obviously, better than that this year. You know, next year, you know, we have a bunch of stuff that'll deliver that's been in motion, conversions, but You know, we feel comfortable in that range because even though we will have a drop-off, obviously, and naturally as a result of fewer things getting put under construction because of the financing markets right now, we still have a lot that already is in production and coming through, and we will supplement that with conversions, which by definition effectively have already been financed. So I think that's the way I would think about this year. That's the way I think about the next few years, that we're sort of somewhere in that four to five zone range. Trying to be more precise than that at this point I think would be difficult, but we'll obviously keep you updated as time goes on.

Chris, just a quick follow-up on your response there. That 4% to 5% range, is there an air pocket anywhere in there as you think about kind of maybe refinancing glut that could potentially kind of impact the 2022 or 2023, whatever it may be in the lead time? Or do you think that's pretty consistent and steady?

Yeah, Carlo, I, you know, depends on how much success we have in filling what will be, you know, a decline in new builds with conversions. And it's just looking that far out is hard to do. That's why I would just direct you to, at the moment, you know, the four to five and And I think, you know, best that we can model it, and that's all it is for us, but it's based on a lot of experience and the trajectory we see and what's already in the pipeline and what's already under construction and what we see in activity and conversions. We think the next few years will be within those boundaries. It doesn't mean it will be in the middle every year. It could bounce up and down a little bit based on our projections, but that's about as precise as we can be, you know, in the moment.

Got it.

Thank you, sir. Mm-hmm.

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

Good morning, guys. Chris, Kevin, you did a commendable job and have been doing a commendable job on controlling G&A costs. And I know you have some of the furlough impacts in the G&A line not replicating themselves going forward. And not so much for the fourth quarter, but just maybe over the next couple of years, Maybe you can just talk about big picture. How do you think, you know, in a rev part and fee recovery scenario, how you bring back incremental G&A expenses? What is that relationship? So, I don't know if you want to think of it this way. In other words, if we think about 2022, if you're at 80%, 85%, 90%, whatever that number is, of 22 red part as a percentage of 2019, what is that, you know, relationship-wise for G&A looking back at 2019 as a baseline?

Yeah, I think, look, obviously it's a very fair question. I think you've identified some of the offsetting things, right? I mean, I think if you think about, you know, I know you didn't ask about the fourth quarter, but if you think about the fourth quarter, it's a similar dynamic for, you know, 21 and 22, right, where you sort of lose the benefit of the furloughs that we had over the course of the second and third quarter. but you gain the run rate benefit of the reductions in force that we've had and some of the other cost control measures that we've put in place. So I'd say, look, I mean, sort of similar answer to Nug. It's a little bit early to be giving you a refined look at 2021 and certainly 2022. But the way we're thinking about it is that most of these savings should be semi-permanent, meaning there will be a point at which the business grows significantly. to the point, you know, a few years from now where you have to start adding back. But for the foreseeable future, most of the savings should be semi-permanent, and we ought to grow plus or minus inflation over the next couple of years, and that's probably as much guidance as we're comfortable giving you at this point.

Great. Fair enough. Thank you.

Sure.

The next question is from Sean Kelly for Bank of America Merrill Lynch. Please go ahead.

Hi. Good morning, everyone. Good morning. Good morning, Chris. So, Kevin, in your prepared remarks, you talked a little bit about just sort of where we are with the cash burn piece. And I was just wondering, can you just kind of lay out for us, you know, directly or clearly, is the corporate entity sort of on a run rate or monthly basis? Are you guys at, you know, cash burn, you know, neutral or even positive at this point? Or what does it take to get there? And then Maybe as the follow-up, you know, just straight up, it would be, you know, how are kind of the broader working capital and franchisee collections going? How's that relationship with franchisees, you know, playing out? And how would you characterize some of the, you know, risk around any collections at this point?

Yeah, sure. Thanks, Sean. Look, I think the – I'll take the second part first. I think the answers are, you know, obviously pretty very related here. you know, the relationship we have with our owners I'd describe as really positive. I mean, just to put that framework out there, I think everybody's doing the best they can. And I think people, to the extent that they can pay us, are paying us. And obviously, you saw over the third quarter with a burn of plus or minus $100 million, that was sort of, I think, better than most people's expectations, including our own. So, so far, we're having a very good experience on collections. And again, everybody's doing the best they can. In terms of You know, going forward, are we at break-even? I'd say we're getting there. I think all things being equal on collections and if we have a similar experience over the course of the fourth quarter, you know, I'd say we'll be equal to or maybe slightly better than the third quarter will be the fourth quarter experience. Again, if things kind of go the way we think they're going to go or they go the way they've been going. We do have a couple of timing items like, you know, we have pretty large interest expense payments that just hit in October and things like that. But, again, I think all things being equal, it'll be, you know, equal to or better than the third quarter and the fourth quarter. And what does it take to get to cash flow positive? We're almost there, probably just a little bit more, you know, a little bit better demand and a little bit better operating performance, and you're there.

Thank you.

The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

Hey, good morning. Maybe combining both Carlo and Carlo's question earlier, you had obviously really solid net unit growth and solid cost control. If we put these two together, you know, what level of VETPAR decline versus 2019 would you think you would be back to 2019 EBITDA levels, or perhaps taking it one step further to 2019 levels of free cash flow? And what are some of the other puts and takes to think about that might influence that?

Thanks for the question. Obviously, it's a little bit difficult to be precise with you in the sense of building the model for you as much as I'd like to. And we do have a model. And if you put those two things together, I think that, you know, sort of implied in your question is you will get to free cash flow and EBITDA. levels of 19 before you necessarily get back to demand levels of 19 because you have created a much more efficient cost structure. I think that is a reasonable assumption, and that is certainly what our models would show, that when we get to the other side, because of what Kevin said and what I said, we will keep growing throughout. We will have more units producing, you know, on more normalized levels of demand against the lower cost base. The math is pretty easy. That means we're, you know, when we get to the other side of this, and we're in a more normal time, we're a meaningfully higher margin business, you know, because we have cut a lot of costs, and we're going to continue to keep those costs out of the business with some basic inflationary pressures on growth. And so I can't give you a number. You know, we're not going to give, you know, guidance of any sort, particularly multiple years out, but I think if you, you know, do basic math and assume – what we've already said publicly, you can pretty easily get there. You can see what we're saying in Unicros. You can make your assumptions on RevPAR. We've given pretty solid guidance on, you know, we think our G&A structure is going to be down 25% to 30% this year. My guess is it will be towards the higher end of that when it's all said and done. And then it's just arithmetic after that. So we're not going to finish the arithmetic part of it. We'll let you do it. But I think your baseline – I think what is implied in the question is correct. We will get to even in free cash flow of 19 before we would get to demand levels of 19 for those reasons.

Right. And I guess one other just quick follow-up is just as we think about working capital or other components of cash flow, whether it's CapEx or otherwise, is there anything there that we should be cognizant of that could be different relative to where you were trending kind of pre-COVID?

I don't think so. No, I don't think so. I mean, obviously, on CapEx, we've reduced CapEx numbers in this environment, like pretty much everybody on Earth, certainly in our industry and most industries. I think as we get back that, you know, I think that will normalize and be more like it was, but there will be efficiencies I think will garner in that. And I think, again, when you get to a normalized environment, I think the working capital things sort of go back to the way they were.

Fair enough. I'll jump back in the queue. Thanks so much. Okay.

The next question is from Thomas Allen of Morgan Stanley. Please go ahead.

Thank you. So thank you for the color earlier that you kind of expect fourth quarter red card trends to be similar to third quarter. But can you just give us a little bit more color on what you're seeing right now by region? You know, obviously we can look at third quarter results, but You're seeing increased closures in Europe. You know, I'd be curious to hear how, if APEC continue to improve or not. And then just related, you know, corporate rate negotiations, they should be going on right now. Kind of what are you hearing through those conversations? Thank you.

Okay. Yeah, Thomas. Yeah, there's a lot there too, but let me unpack it and see if I can't. I'm not one for being succinct, as you know, but let me try and do. So regionally, it's pretty much what you guys have been writing about, what you've been seeing. The here and now, is that notwithstanding, you know, what's going on in the US, forget the election, but, you know, resurgence in coronavirus cases, we've seen here sort of steady, steady as she goes, so to speak. We haven't seen any, you know, material backward activity in terms of mobility and demand. Now, depending on what happens, you could, but we have, we've seen it remain reasonably steady. I'd say Europe and Middle East is going backwards modestly for the reasons that you would expect. And so if we think about the fourth quarter, we've more recently been sort of knocking our numbers and expectations down because of lockdowns. It's sort of obvious. If you look at Latin America, you know, I would say so goes the U.S., sort of Latin America is generally in keeping in terms of trajectory. And then Asia Pacific really led by China. I think You know, outside of China, Asia Pacific feels a lot like what's going on in the U.S. I hate to, you know, make it all one big bucket, but if you put it all together, it sort of does. And then China, as has been well documented, continues to sort of motor along. And, you know, we continue to see, you know, pickup in travel in all segments. And so when you put it all together – You know, Europe is definitely going a bit backwards. Asia continues to move a little bit forward. The U.S. is sort of steady, and that's kind of why we get to a fourth quarter that's about where we are. If we look at October numbers, which we don't have final numbers, but that sort of supports it, you know, there is risk in it. I'm not going to deny. I mean, depending on what goes on here in the U.S. and other parts of the world with the virus, there's risk. It could go backwards. Our best sense of it at the moment is, you know, people are sort of figuring out how to manage their own risk profile, and as a result, they're getting, you know, there's a lot of data and information out there. As long as their countries aren't locking them down, and I think it's unlikely the U.S. will lock down the whole country, you know, there is some level of mobility that I think will likely allow us to maintain this level of sort of operations that we've been seeing for a period of time. And then, you know, the You know, the next step is, you know, like when do you see the next step change? And, you know, my own view is I think you see that in the spring. I think we sort of hold our own between here and there. I think that, you know, we'll get an election behind us, which will take some of the air out of the balloon regardless of outcome. I believe that you will start to see, you know, a lot coming out of the vaccine world particularly, maybe more out of the therapy world. but vaccines in multiple cases that will have some level of effectiveness that will be able to be mass produced sometime late this year, early next year. You get through the winter season, the flu season, and I think there's a real opportunity for a step change in attitude and, as a result, a step change in performance. As we look at our segments, they're sort of reflective of that, you know, Not necessarily they all agree with me, but it's sort of that's what you see going on. Leisure is sort of, you know, coming off the summer season on the last call, we said we thought leisure would be stronger into the fall than normally just because people aren't open, offices aren't open. In a lot of cases, kids aren't back at school, so people have more mobility for leisure purposes. That's exactly what's happened. You know, we've seen continued strength, not as much as the summer, but continued strength. We've definitely seen a pickup in the third quarter and in the fourth quarter of business travel. It's not the traditional customer, you know, en masse that we would typically be housing. But, you know, business travel is picking up. And group, you know, there is group. I mean, in the third quarter, you know, we did about 10% group, which is probably about half of what we've normally done. The groups are different. They're more related to the crisis. you know, sports teams, things like that, but there is some group. But, you know, the big return of the group, I think, doesn't really occur until hopefully you get to that moment that I talked about next spring where we're sort of shifting into a different gear in terms of the health crisis and vaccines. As it relates to the last question, I think I unpacked it all, incorporating negotiations. You know, we've actually done really well. I mean, I think the biggest issue on corporate rate negotiations is really how many people are going to show up. Less to me about the rate, although obviously rates are important, but like how many people are going to show up under those programs next year. Pretty mature to say I think we'll follow the trends broadly, macro trends that I just described that I think, you know, at least are what I believe. In terms of rate negotiations, we've had great success. Everybody knows this is a really difficult time. We're now through the majority of those negotiations, and in the majority of cases, our customers have agreed to keep the 2020 rate structure. Not in every case, but in the majority of the cases, they've agreed to do that, recognizing, you know, the difficulties of the times. And so we feel actually pretty good about that. Hopefully that answers your questions, plus a little color.

That's great. Thank you very much.

And the next question is from David Katz with Jefferies. Please go ahead.

Hi, good morning, and thanks for taking my question. Good to hear you all well. You have largely addressed the two major buckets that I wanted to ask you about, but I'd like to just take the prior question a little bit further. How much thinking have you sort of put into flexible strategies around what-ifs if, you know, the timings on therapeutics and so forth or the effectiveness or distribution, et cetera. And I mean specifically around, you know, the buckets of demand, which, you know, have include a majority from, you know, business versus leisure and how you sort of fill up your buckets should you have to as things move forward.

It's a great question. And one we talk about around the table I'm sitting at every Monday morning when we have our executive committee meeting. I mean, the reality is, as you might guess, David, while that is, I gave you a view of what I think and I think most of our team thinks will be the sort of the contour of the recovery from this point forward. We're not counting on that. That is what we think. That is what we hope. Time will tell. I mean, as my father used to say, sunfish where the fish are and right now the fish are where they are which is you know certain a lot of leisure you know frankly not the typical leisure customers the lower rated leisure still and business travel is a different type of business smaller business sales forces um you know um frontline folks um responding to the crisis um the group business again isn't the traditional group but there are groups out there that are having to meet you know we're We're housing a lot of people aren't back in offices, so they need to have places to congregate to have meetings since they're not in their office. You heard me talk about workspaces by Hilton using rooms as workspaces, particularly for people that need to get out of the house and need Wi-Fi and need some space and privacy. And so I can keep going. All our marketing campaigns, you know, have shifted as you've seen if you've been watching that. All our efforts with honors have shifted and pivoted. So we're quite mindful of what is going on, where the fish are, to use my metaphor, and intensely focused with our commercial teams on delivering and getting more than our fair share, which I'm happy to say we are. If I look at our, you know, our relative results in this environment, We're doing very well vis-a-vis share. So we will continue doing that. But then the trick is this isn't going to last forever. And so it's not like this will be our new strategy forever. It's great. We're honing some new skills that we didn't need to have. And when we get to the other side of this and we get back to a more normal demand environment, we won't have let those muscles atrophy. But now we'll have other skills, other tools in our toolkit and You know, pricing is all about generating a lot of demand. The more demand you can generate, the higher the price you can charge. And so as we think about it, it's sort of like really dig in and refine this toolkit. And as we get back to more normal times, take the best of both worlds to put more demand in the funnel to ultimately, you know, intermediate and longer term, yield a price accordingly. So we're super crazy focused. And think about it. We're a fiduciary company. for thousands of owners that are in the most difficult circumstances in their careers because this is the worst thing our industry has seen. And our job is to make sure that we're helping them build the bridge to the other side of this. And so it's one foot in the here and now, one foot in the future, but both solidly planted.

Got it. Thank you very much. Appreciate it.

Mm-hmm.

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

Great. Thanks. I wanted to go back to the topic of unit growth because I know you mentioned conversions were 20% of total signings in the quarter. I'm just wondering what percent of openings they were in the quarter, just given the increase in your unit growth. since last quarter.

I'm wondering if that's conversions driving... They were about 20 in the quarter, and they'll be, as I think I already suggested in a prior comment, a bit more than that for the full year. But we do expect that those percentages will creep up in 21 and 22.

So the increase in your unit growth for this year from just a quarter ago sequentially, is that more just construction projects getting back on track faster.

It's both. We're doing more. I mean, while most of the benefit of conversions is going to happen in 21 and 22, we're getting some deals done that the world's opening up fast enough where we're going to open a bunch of incremental conversion hotels in the year for the year that we didn't think we'd open. Plus, yes, now I'd say, you know, the vast majority of things that were under construction, 90 plus percent of what was under construction was When we went into the crisis, it's back under construction, and they're making really good progress. So we assume sort of a lag effect that when things got up and going, it would take a while for things to wind back up. But honestly, the construction trades around the world, particularly here in the U.S., were ready to go, and they've been ready to work. And so activity picked up a lot faster. So those two reasons are why we're delivering more this year.

And then just when we think about – maybe some that did get pushed into next year just from your kind of, you know, pre-COVID original guidance. It sounded like your guidance for next year is in that kind of 4% to 5% range. Are there some things that were originally in next year's openings that just have kind of fallen off that didn't end up going forward? Yes.

Not much, no. I don't think much changed. A little bit more will open this year, which would have probably, we would have assumed, would have pushed into next year. So that pulls a little bit of that out of next year into this year. But we still feel, as I said, not being evasive. It's just really early to be, you know, hyper-precise. I mean, we can do – at this point, we're deep enough in the year that four and a half to five, we can be pretty precise because – you know, some stuff might fall in or out. But over the next few years, that's what I said, we think we're in the four to five range and we're not, you know, you'll have to give it some time to ultimately get a little bit closer to be more precise.

Yeah, Rob, and I just add a little bit to that. I mean, I think the way you're thinking about it logically makes perfect sense. I think, though, you've got to think about When we first said, you know, half or a little bit better, we were at the very beginning of the crisis in the depths of it and a lot of construction and scripts that had been suspended, and we really didn't know when it was going to come back, you know, online. So we're further into it. We've had a better experience with construction getting back up and running than we thought, and, you know, I wouldn't sort of overthink the way it affects the future years.

Okay, great. Thanks very much.

The next question will come from Bill Crow with Raymond James. Please go ahead.

Yeah, thanks. Good morning, everybody. Hey, Chris. Given the positive comments from Kevin on the cash burn nearing zero and your discussion of cost cuts and margins going forward, I'm just wondering how much confidence level you could provide that you might return to share repurchases as we look forward to 2021.

I think it's a really good question. I think it's a little bit premature. We have not changed long-term our philosophy on return of capital, and that is we believe when we're back in a more normalized environment that we're going to produce gargantuan amounts of free cash flow. We don't need a lot of that to grow because we've got the best brands in the business and we think we can continue to grow organically. Thus, that capital is best given back to our shareholders largely in the form of buybacks. our philosophy hasn't changed. You know, it's a little bit premature to say exactly when we get back on that program. Obviously, our leverage levels have gone up as a result. You know, if you look at our net debt, it actually won't have gone up your rear, but our EBITDA, as you guys can calculate in your models, even though we haven't given you guidance, has gone way down. So, you know, we're going to want to see our debt to EBITDA levels come down before we start back up with a share repurchase program. That doesn't mean, by the way, that it has to come necessarily all the way back down to the ranges that we've historically said, but we want to see that we are solidly two feet in the ground in the next stages of recovery and that our debt to EBITDA levels are headed towards a more normalized level. given where we are now, which is in, you know, feeling really good about where we are and great about our liquidity and thinking, you know, the spring is going to be when we shift gears, I think all those things, I said all those things, but we want to see those things happen. So I think it's a fabulous question. I know people want to know. Hopefully that gives you some context to think about it, but we're not, you know, we're not in a position at this moment to say when exactly that will be.

Understood. Appreciate the time. Thanks.

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

Hi, thanks. I just wanted to ask you, you noted about 97% of the rooms are open, so I realize it's a small percentage of the room base that's closed. But is that skewing, that chunk of like 25,000, 30,000 rooms, is that skewing towards the owned and leased portfolio, or is there more across the board? And do you see any of those maybe not reopening?

Yeah, I think the vast majority will open to answer the last one first. There may be a few here and there that don't, but I think it skews very heavily to urban destinations in the U.S. and then Europe. That's what it skews very heavily towards. I mean, obviously, with Europe going backwards, we still had more to open in Europe, and now they've gone back in lockdown, so our progress there is slowed. We may have some hotels go back into suspension. in Europe, and then in the U.S., it's almost entirely big urban, you know, big urban hotels, the big urban markets that are suffering the most.

So does that – so I guess then it would skew also to kind of the owned and leased portfolio, which I know is small, but it just – Well, no, we don't – actually, all of our owned and leased hotels are open at the moment.

Now, we do have some hotels that are in some of the parts of the world that are going back on lockdown, so we could – in Europe and the UK.

So we could have some that go back, but at the moment, all of our... It skews heavily towards the management franchise. I would say very heavily towards management to a lesser degree franchise.

All right. Thank you, guys.

The next question is from Richard Clark with Bernstein. Please go ahead.

Good morning. Thanks for taking my question. I just want to ask a question on loyalty. How much has loyalty been a boost to your cash flow through the last couple of quarters? Are you still getting money in from the credit cards? And I suppose as a follow-up to that, you'll probably come out of this crisis with a bigger loyalty liability than you normally would have. And how do you think about managing that with regard to cash flow over the next couple of years? And how does that feed into your thoughts about what the balance sheet should look like?

Yeah, Richard, I'd say generally I don't think we will come out of this with a materially higher liability than we have. If you think about the, you know, it's a complicated equation of, you know, what we take in and what we put on the balance sheet in terms of the liability. But it does self-regulate in the sense that, you know, when rates are lower, the cost of redemptions is lower, the folio charges are lower, you know, and we run the whole thing generally break-even. And so it's not a material contributor either way to our there is a portion of the credit card remuneration that is ours. As you can imagine, credit card spend is down. So that remuneration is down, although not nearly as much as REVPAR. So it's not a big swing one way or the other.

Great. Thank you.

Sure. Our next question is from Patrick Scholes with Truist. Please go ahead.

Hi. Good morning, everyone. Morning. I wonder if you could comment about what you're observing for group booking and cancellation trends for both 1Q and 2Q of next year. Thank you.

Yeah. Well, it's probably not going to shock you. I mean, we are booking business, by the way, in the year for the year still and not in significant amounts. But as I said, said earlier, it's for unique types of group meetings, smaller corporate meetings in lieu of people being in the office, you know, sports-related group, and groups related to recovery efforts, you know, and crisis-related efforts. As you look at more traditional group bookings or rebookings, because obviously our objective is to try and rebook everything humanly possible that's that is getting canceled this year, and we've done, I think, a very good job of doing that. I would say at this point, while we're booking a lot of booking and rebooking increasingly significant business into next year, I would say very little of it is into Q1. Some of it is into Q2, and the bulk of it is into Q3 and Q4. And that's for the reasons that sort of have been implied in most of what I've said. I think everybody's sort of like, on hold for the winter season. Let's get through the flu season. Let's get these vaccines sort of out through phase three, you know, and see if we can't start putting shots in people's arms. And so if you're, you know, planning a big group meeting, you know, you just at this point that you're in November, you're not doing it in the first quarter. You're a little hesitant on second quarter, although some of that's happening, but The bulk of what we're booking, which is picking up at a pretty good velocity, is into second half of next year and beyond.

Okay. Thank you for the call.

Yep.

The next question is from Anthony Powell with Barclays. Please go ahead.

Hi. Good morning. Good morning. You mentioned that you saw increased interest in your select service brands. Could you maybe – tell from whom, whether it's from new developers, different types of owners, and given kind of the relative resilience of that segment, this cycle, could that lead to more interest in those brands going forward and a higher share for you in the development pipeline at a peak of the next cycle?

Yeah, I think it's, you know, commonsensically the reason we're seeing it is because I do believe, you know, we have a lot of owners that are still very, very strong. I think they're of the mind that If you're going to build, the best time to build is during down cycles so that you deliver things into an up cycle. I think many of them fall into our, you know, sort of select service, you know, development community, and they're looking at this as an opportunity to maybe pick better sites, you know, with the best brands and sort of lock their position in and then go out and see if they can get it financed and get it going with the belief that they'll deliver, you know, deliver into, you know, a significant market. And so I would say there's certainly some, I mean, I let Kevin answer this, there's certainly some new owners, but I'd say it's really our, you know, almost all of it, my sense is anecdotally, is from our existing owner base. The other thing is this is the stuff that can get done, right? I mean, by the way, this was the trend pre-COVID. The bulk of it, if you look at the U.S. particularly, the bulk of what was getting done in the U.S. was all, in the limited service space. That was true then. It's even more true now just in terms of the economic model behind it, the margins that they can run, cost to build, and all that fun stuff. So I don't think it's a particularly new thing. I think our brands are really, really strong. They deliver incredible share. I think people want to take advantage of the crisis to position themselves with the best opportunities for when they get to the other side.

Yeah, and probably just worth adding, Anthony, we did mention that in the prepared remarks. That was quarter-over-quarter growth, I think, in signings in focused service. I'd say, you know, broadly speaking, the skew between existing owners and new owners, probably a little bit more existing because I just think you have to be pretty well-heeled in the development world to get something done at this point. But worth noting that both our approvals and signings over the course of the third quarter were We're about, you know, one-third full service, two-thirds select service or focus service, and pretty well distributed geographically. And that's all pretty consistent with, you know, prior – what we – our experience in prior quarters and prior years. So not a lot new there. Thank you. Sure.

The next question is from Jared Shojian with Wolf Research. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. Good morning. Can you just talk about how occupancy trends have evolved in China, specifically where is business travel versus leisure travel today versus the prior peak? And then just one unrelated clarification, when you say G&A down 25% to 30%, does that mean the entire year in 2020 is down 25% to 30% or should we assume fourth quarter is also down 25% to 30% and that's the run rate level going forward?

That is the full year of 2020, and I'll let Kevin talk about China.

Yeah, in China for, you know, during the third quarter, China was about 50% leisure, 30% corporate, 20% group. So that was a little bit, you know, a little bit less leisure and a touch more group than in prior quarters. I actually don't have in front of me where it was the prior peak. I suspect, you know, still skewed more towards leisure than it would have been on a normalized basis.

Okay. Thank you.

Sure.

And the next question is from Vince Siepel with Cleveland Research. Please go ahead.

Great, thanks. I wanted to touch a bit on distribution. Could you talk about what you've seen over the last couple quarters in terms of direct business versus OTA share and if coming through this pandemic, as you evaluate the distribution going into next year or years into the future on a recovery of demand, you've made great strides driving more direct business and just curious if this changes that at all or further accelerates the gains you've seen on that path?

Yeah, I don't think. I mean, what's interesting is long-term, I don't think it changes anything. I think if you looked at like our OTA percentages through Q2, they were tracking pretty consistent with where we've been over the last couple of years. Q3, they were up as we would have expected just given the base of business, which was non-frequent, non-loyal leisure business, you know, during the summer that was, you know, that is, you know, more OTA oriented. So it was up, not in any, you know, alarming way, but it was up and we expected it. And we wanted it to be up in the sense that we wanted access to those customers. You know, our attitude on, you know, the long-term hasn't changed. You know, our attitude with the OTAs is they've been good partners for certain types of business. We love working with them. You know, through the crisis, there's been plenty of pockets of demand that have been helpful to us and our ownership community to work with them on. But at the same time, as you point out, we've been on a long-term trajectory, and during COVID, similarly, to build more direct relationships, build more loyalty, give customers more reasons through what we're doing with our digital platform, what we're doing with Honors. value proposition and the like to what we're doing now with clean staying, cleanliness and hygiene and all of the things that have come out of the COVID crisis, you know, to give people more reason to want to come directly to us. And so, you know, in a more normalized demand environment, I think, you know, the things that we've done in the crisis are going to put us in a really, really good position to continue down the path of building even more direct relationships, even more direct business, In the interim, we're going to obviously do a bit more business with the OTAs because it's the right thing to do. In terms of distribution mix, the majority of our distribution comes from direct channels. Almost three-quarters of it comes from direct channels. I mean, the thing that's been interesting, there's been some shift outs, which wouldn't surprise you. I mean, if you had asked me, this, you know, a year ago, I would have said, gosh, it's hard to imagine. But what's happened is, you know, our percentage of direct has stayed about the same. It's just shifted where hotel direct has gone way up and digital channels, other channels have gone down, which seems crazy, but it's just a type of business. And people, you know, literally we have We have two-thirds of our business is booked within seven days, and like 40% of it almost is booked within the day. And so it's a lot of like drive-to business. People pick up the phone and call like the old days. Obviously, that won't be maintained. And then the OTAs swap out. So the OTAs have gone up a little bit, but what has gone down is the GDS on the other side. You know, we could argue about GDS sort of effectively being a direct channel the way we think about it, but we don't. But what has happened is, you know, the GDS has gone down because the traditional corporate business that comes through that has evaporated to a large extent. And it's been replaced by OJ type business. So, ironically, when you net it all out, we're almost in the exact same place. But, you know, but sort of a funny world for the moment. I have every expectation as we get, you know, to more typical demand levels that those things will all go back to more normal levels. a more normal trajectory and I feel very good about what we're doing vis-a-vis honors and our customers to keep building direct relationships.

Appreciate that.

The next question will be from Rich Hightower with Evercore. Please go ahead.

Hey, good morning, guys. Thanks for taking the question here. I was hoping to get you to opine a little bit on short-term rentals and when you think about the the recovery and maybe some share gains in that segment over the course of the summer and through Labor Day. Did that surprise you at all? And, you know, Chris, you've made comments in the past about how it's not precisely the same customer that Hilton is going after. But, you know, would you make that same statement today? Thanks.

Really good question, and it doesn't really change my view in the sense that I won't make you suffer through the whole thing because you guys know it, but I do believe that it's fundamentally a different business. We're in the branded business where we take very consistent product, very consistent service delivery, amenities wrapped in with a product, loyalty wrapped in all together. and we sell it for a premium versus something that satisfies the customer's needs but is not going to have the consistency, the service, the amenities, could have loyalty but at the moment doesn't really have loyalty, and as a result more of a value proposition. I just think we fundamentally believe we're in the hospitality business and we get the premiums we get because we do something different. and that our business is good and that their business is good, right? And while they're related, they're fundamentally we're trying to do different things. Now, I'm not at all surprised. I had every expectation that this would be good for them. Just think about what I said about where the business is coming from. The bulk of the business this summer was value-oriented leisure business. That is like a bullseye for those platforms. And so that's great for them. And if you had an expectation that that is all the demand that was going to be available, that this was a secular shift, it would be an issue. I do not believe that. I believe that when we wake up in two or three years and incrementally over those two or three years, we will get back to a more normalized environment in terms of demand and that what we do, that people have been willing to pay a big premium for, they will continue to as we get through this crisis, to want to stay with us and pay us that premium. They will also, for certain stay occasions, want to stay with them for a different type of value proposition. So it wasn't surprising to us at all. It makes all the sense in the world just given the, if you look at the bucket of demand, the biggest bucket of demand that's out there at the moment.

Great. Thanks for the comments.

You bet.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Nassetta for any closing remarks.

Well, thank you, everybody, for joining us. I hope everybody that didn't get rest gets some rest today. We'll see what happens with all of these crazy elections here in the U.S. We appreciate the time. Obviously, a lot going on in the world, a lot going on with the business. We feel, as I said in my comments, really good about the progress. I think we're set up, you know, certainly from a liquidity point of view, at a really good place. But I also think in terms of what we've been doing, for our ownership community, what we've been doing with our customers, how we've been taking care of our teams, what we've been doing from a cost structure point of view. I do believe in my heart of hearts that when we get to the other side of this, we're a bigger, better, stronger, more efficient, higher margin business. And so we'll look forward to continuing to update you as the journey unfolds. Thanks, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.