Hilton Worldwide Holdings Inc.

Good morning and welcome to the Hilton fourth quarter and full year 2020 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be a question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Vice President, Investor Relations. Please go ahead.

Thank you, Chad. Welcome to Hilton's fourth quarter and full year 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 a discussion of some of the 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 10-Q filed on November 4th, 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 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 fourth quarter and full year results. Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill, and good morning, everyone. We certainly appreciate you all joining us today, and I hope everybody is staying well. I want to start with something difficult. I want to start by extending my most heartfelt condolences to the Sorensen family. and the thousands of Marriott associates around the world following the heartbreaking news of Arnie's passing. To say I'm deeply saddened by that loss would be an understatement. I had, as many of you know, had the opportunity to work with Arnie in a number of capacities throughout my career, including earlier on at Host. I think it's very fair to say he was an exceptional leader, but also an incredible person. and a great friend. Our industry is better because of him, and I am a better professional and a better person because of him. On behalf of everyone at Hilton, his family and the entire Marriott family are in our thoughts. As we all know, this past year has presented unique challenges, including a pandemic that devastated lives, communities, and businesses across the world, widespread economic declines and acts of social injustice. Due to the extraordinary levels of disruption, our industry experienced demand declines we've never seen before in our 101-year history. Guided by our founding purpose to make the world a better place through the light and warmth of hospitality, we acted quickly to ensure the safety and well-being of our people. We also took steps to protect our business by right-sizing our cost structure and enhancing our liquidity position while continuing to drive net unit growth and increase our network effect. As a result of these moves, we expect to recover from the pandemic as a stronger, higher margin business that is even better positioned to deliver performance for our owners and strong free cash flow for our shareholders. While it's certainly been a very difficult year, we're proud of everything we've accomplished, but we certainly could not have done it without the support of all of our stakeholders. For that, I'd like to extend a heartfelt thank you to all of our loyal customers, our important owner partners, our communities who supported us and enabled us to support them, our team members who gave their hearts and souls to our business, and our shareholders who stood by us. Because of our amazing people, we've been able to lean on our award-winning culture, which earned the number one best place to work in the United States for the second consecutive year and the number three world's best workplace to help get us through these trying times. Turning to results, for the full year, system-wide REVPAR declined 57% with adjusted EBITDA down only modestly more. illustrating the resiliency of our fee-based model. We also demonstrated the strength of our brands and power of our customer-centric strategy by achieving market share gains across every region, even in a distressed business environment. For the quarter, system-wide REVPAR declined 59%, relatively in line with our expectations. The positive momentum and demand that we saw through the summer and early fall was disrupted in November, December by rising COVID cases tightening travel restrictions, and further hotel suspensions, particularly in Europe. Similar to the third quarter, drive-to leisure travel drove an outsized portion of demand. Business transient and group trends showed modest sequential improvement versus the prior quarter, but overall demand remained quite muted. As we look to the year ahead, we remain optimistic that accelerating vaccine distribution will lead to easing government restrictions and unlock pent-up travel demand. For the first quarter, overall trends so far appear to be similar to the fourth quarter, with modest increases in demand in the U.S., offsetting stalled recoveries in Europe and Asia Pacific. We expect improving fundamentals heading into spring, with essentially all system-wide rooms reopened by the end of the second quarter. We expect a more pronounced recovery in the back half of the year, driven by increased leisure demand and meaningful rebounds in corporate transient and group business. Over the last year, the personal savings rate in the United States has nearly doubled, increasing by more than $1.6 trillion to $2.9 trillion, with the potential to go even higher given additional stimulus. We expect this to drive greater leisure demand as travel restrictions ease and markets reopen to tourism. Additionally, conversations with our large corporate customers, along with sequential upticks in business transient booking pace year to date, indicate that there is pent-up demand for business travel that should drive a recovery in corporate transient trends as the year progresses. On the group side, We saw a meaningful step up in new group demand in January with our back half group positions showing significant sequential improvement versus the first half of the year. With roughly 70% of bookings made within a week of travel, overall visibility remains limited. However, we continue to see signs of optimism. In fact, the vast majority of our large corporate accounts agreed to extend 2020 negotiated rates into this year. Despite the challenges in 2020, we opened more than 400 hotels totaling nearly 56,000 rooms and achieved net unit growth of 5.1%, slightly ahead of guidance. Fourth quarter openings were up nearly 30% year over year, largely driven by new development in China where our focus service brands continue to command a disproportionate share of industry growth. We also celebrated Our one millionth room milestone and the openings of our 300th hotel in China, our 600th DoubleTree Hotel, and our 900th Hilton Garden Inn. We ended up the year with 397,000 rooms in our development pipeline, up 3% year over year. While market disruption weighed on new development signings, conversion signings increased more than 30% versus the prior year. As owners look to benefit from the strength of our network, we anticipate continued positive momentum and conversion activity, particularly through Doubletree and our collection brands. During the quarter, we signed agreements to expand our Curio collection in Mexico and bring our Tapestry collection to Portugal. This marks one of several new Tapestry hotels scheduled to open across Europe this year. We also announced plans to debut LXR in the Seychelles with Mango House Seychelles. The property will deliver a truly unique hospitality experience with spacious guest rooms and suites and five world-class food and beverage venues. Scheduled to open in the coming months, the hotel underscores our commitment to further expanding our resort portfolio. Building on that momentum, we kicked off 2021 with an agreement to bring LXR to Bali. Additionally, we celebrated the openings of Oceana Santa Monica, which marked LXR's U.S. debut, as well as the Waldorf Astoria Monarch Beach Resort and the Hilton Vancouver Downtown, which was converted from a competitor brand. With these notable openings and many exciting development opportunities in front of us, we are confident in our ability to continue delivering solid growth over the next several years. The pandemic rapidly changed guest behaviors, priorities, and concerns. We listened to our customers and moved quickly to launch modifications to our Honors Loyalty Program, deliver industry-leading standards of cleanliness and hygiene with Hilton CleanStay, and provide flexible, distraction-free environments for remote work with workspaces by Hilton. Additionally, with an even stronger focus on recovery, last month we implemented Hilton Event Ready Hybrid Solutions, an expanded set of resources to help event planners address the dramatic shift towards hybrid meetings as group business rebounds. Our flexibility and innovation drove continued growth in our honors network, ending the year with more than 112 million members who accounted for approximately 60% of of system-wide occupancy. Throughout 2020, we also remain focused on our corporate responsibility and our commitment to our ESG initiatives. We're proud to contribute to our communities, and we're honored to be named the Global Industry Leader in the Dow Jones Sustainability Index for the second year in a row. In a year marked by challenge and change, we effectively executed our crisis response strategy, carefully managed key stakeholder relationships, and continue to press forward on strategic opportunities. I'm confident that there are brighter days ahead and that we are in a stronger, more resilient, and we are better positioned than ever before. With that, I'm going to turn the call over to Kevin for a few more details on the fourth quarter and the full year.

Thanks, Chris, and good morning, everyone. Before I begin, I'd like to echo Chris's sentiments about ARNI. My thoughts are certainly with his family and with my many friends at Marriott who I know are hurting this morning. During the quarter, system-wide REF PAR declined 59.2% versus the prior year on a comparable and currency-neutral basis as the pandemic continued to disrupt the demand environment. Relative to the third quarter, occupancy was modestly lower, partially due to seasonality and further tempered by rising COVID cases and associated travel restrictions. Adjusted EBITDA was $204 million in the fourth quarter, down 65% year over year. Results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter. Management and franchise fees decreased 50%, less than REVPAR decreased, as franchise fee declines were somewhat mitigated by better-than-expected honors license fees and development fees. Overall, revenue declines were mitigated by continued cost control at both the corporate and property levels. For the full year, our corporate G&A expenses were down nearly 30% year-over-year at the high end of our expectations. Our ownership portfolio posted a loss for the quarter due to the challenging demand environment, temporary closures in Europe, and fixed operating costs, including fixed rent payments at some of our leased properties. Continued cost control measures coupled with one-time items mitigated segment losses. For the quarter, diluted loss per share adjusted for special items was 10 cents. Turning to our balance sheet, we continued to enhance our liquidity position and preserve our financial flexibility. Over the last few months, we opportunistically refinanced $3.4 billion of senior notes to extend our maturities at lower rates. In January, we also repaid $250 million of the outstanding balance under our $1.75 billion revolving credit facility. On a pro forma basis, taking these transactions into effect as of year-end 2020, we've lowered our weighted average cost of debt to 3.6%. and extended our weighted average maturity to 7.2 years. We have no major debt maturities until 2024 and maintain a well-staggered maturity ladder thereafter. Further details on our fourth quarter and full year 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 questions?

Certainly. We will now begin our question and answer session. And 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 Joe Greff with JP Morgan. Please go ahead.

Good morning, guys. Nice to hear your voices. Good morning, Joe. Chris, I just want to start off with a big-picture question. I'm sure you'll get a lot of questions about 2021 NetRoom's growth and how you're thinking about pipeline growth from here. But, Chris, I'd love to hear your thoughts on how you're thinking about your business three years out post-vaccine. What's different – about your business in terms of individual business, transient travel, group travel, leisure travel relative to pre-COVID? What's different do you think about full service and limited service development in the future relative to pre-COVID?

Yeah, it's a great question. So a lot to unpack there. But I think, you know, Joe, when you go out, and obviously you could debate this, and I've debated it ad nauseum with a lot of people. I think if you go out, you know, three years, whatever, you know, three or four years, I think demand is going to look a lot like it did in 17, 18, and 19. And meaning the makeup of the business as between business transient, leisure transient, and group at that point in time I think will look quite similar. Now, certain of the, you know, types of if you get underneath the demand, particularly in business transient, and the group side might be for different reasons than then. I mean, there'll be a substitution effect, clearly, in certain types of travel being substituted with, you know, sort of the new, you know, the Zoom calls and, you know, digital opportunities. But they'll be replaced with other forms of travel. And, you know, we've seen this throughout history. I mean, if you go back, you know, and, you know, it wasn't really around, but the telephone and the internet and telepresence and you know, voicemail. There are always the arguments that this is going to truncate the need to travel and congregate. And the reality is what it typically does is it accelerates it, right? Because it just gives more efficiency. It speeds, it ultimately speeds things up. It ultimately continues to connect the world and speed up globalization. And as a result, people need to congregate. They need to travel. They need to build relationships. They need to build cultures. They need to innovate. And those things really, you know, cannot be done as well without face-to-face opportunities, both, you know, in a group setting as well as, you know, individual business travel type needs. And so I, you know, having, you know, done it longer than I'd like to admit, you know, 35, 40 years, we've been debating this. I don't, you know, again, I think there will be some substitution effect. But I think it will look a lot like it did. And then our business, you know, a couple of comments since you asked. You know, our business is going to be a better business and a stronger business and a faster-growing, higher-margin business. Why? Because, listen, throughout the next three years, we're going to continue to grow 4% or 5% unit growth. So we're going to be a bigger company. The units that we had pre-COVID, if you believe what I believe, which is you'll have similar demand levels, we'll be producing – like they were. You'll have all these new units that are then going to also be producing, and you have a lower cost structure because, you know, we've taken a significant amount of cost out on a cash basis, sort of, you know, if you look at on a run rate in this year, sort of on a cash basis in the mid-teens, something like that, maybe a little bit better, and we're going to be incredibly disciplined as we always have been. I think we've been on a G&A basis, you know, at the low end of of spending in the industry, but we got even better last year. And that's going to, when you put all the same flows of fees through the system with more units and a lower cost structure, it's simple math. It's a, you know, it's a higher margin business. And so I know it's, you know, sort of an odd time to be, you know, pounding the table with optimism. And so I probably shouldn't, but, you know, as we sit around this table, I'm at our board table and we talk about it. It's been a hard year, the hardest any of us have ever endured. But as a result of it, we put ourselves in about the best position we could have. And honestly, I think the business is going to be better for it. And I think it's going to produce higher margins and more free cash flow, which is going to allow us to return even more capital than we were pre-COVID to our shareholders, which you think over the very long term is going to drive incredible returns. the last point was on, you know, limited service, full service, and I'm not, you know, I'm covering a lot of territory, I know, but you asked these things, and I think it's an important note, because it's something I talked a lot about pre-COVID that, you know, frankly, I don't think got enough attention, which is the mega trend in our, in the industry, in every market in the world, there is not an exception, is the mid-market, right? That's, why is that? Because That's where the bulk of the population is. That's where the bulk of the population growth is, particularly in the emerging markets. And so what can those people afford? Mid-market brands. I would say, I know I'm sort of patting us. We have the best mid-market brands in the world. I mean, is being proven out in the growth of those brands in, you know, both in the U.S. but outside the U.S., outstripping the competition in Europe, outstripping the competition in Asia Pacific, particularly China. Um, and that's not by luck. We've been very purposeful over the last 10 years and making sure that we take the best brands here and we adapt those and refine those from a product and service, um, uh, point of view. We pick great development partners, um, like we've done in China to make sure that these are, that these are, you know, uh, adapted to those environments. what the customers want, you know, what the development community in those environments, in those regions want that, you know, has allowed us, you know, to show really strong growth and continue to. So, you know, the mega trend, which was before COVID, and I would say as a result of the economic distress that this has caused, only gets, you know, sort of accentuated in a post-COVID world is the mid-market, and I feel that really, really good about the work that we've done to put ourselves in a good position. And I think it's showing up. I think it's showing up in the numbers of our unit growth, right? You know, because the bulk of that unit growth, I mean, we have lots of great things going on in luxury. You know, we're making tremendous progress there. Lots of great things going on, you know, in the upper upscale and all that. But, you know, the bulk of, you know, you see, particularly in this environment, the bulk of the growth all over the world is really coming in limited service. And, you know, I've been saying it for years. If you wake up in 20 years and you look back and say, where was the bulk of the growth in demand and thus the bulk of the growth in rooms, it's going to be in the mid-market. And that's why we've been focused on everything but so intensely focused on that because, in the end, that's what's going to drive a higher growth rate. That is what having the best brands in that space that we adapt to the local market conditions is what's going to deliver alpha for us the real alpha over the next 10 or 20 years.

Great. That's helpful. Appreciate it, Chris. Thank you.

The next question comes from Carlo Santorelli with Deutsche Bank. Please go ahead.

Hey, guys. Good morning, and thanks for taking my time. Hey, Carlo.

Carlo, we can't hear you very well. Can you speak up a little? Sorry.

I'm sorry, guys. Do you hear me a little better?

Yeah, yeah, yeah.

Sorry. I appreciate you taking my question. If you could, you spent some time talking about how you're thinking about pipeline. And my guess is kind of conversions look like they were maybe about 19% of units this year in 2020, so 80. How do you see conversion activity representing the growth algorithm over the next 12 to 24 months? Obviously, they will be used to augment. Where can you kind of see that conversion percentage as a percentage of your growth? It's kind of peeking out over the next two years.

I think I got all that. You are kind of cutting in and out, so I'll answer what I think I heard, and if I missed something, come back and remind me. So, you know, in terms of NUG, you know, we feel the same way we have felt, you know, over the last couple of quarters. We obviously delivered a little bit better, you know, at 5.1 because we had a huge fourth quarter in terms of deliveries. But we've said over the next few years we think we'll deliver 4% to 5%, and I still feel really good about that. You know, I think this year it will probably be more the – midpoint to the high end of that, similar to last year. But I think over the next few years, we feel comfortable with that. And in part, leading to what I heard as the second part of your question, is success that we're having on the conversion side. We've always been focused on conversions. And in downturns, as everybody knows, that's very fertile ground. Over the past five or six years, we've gone from having essentially one conversion brand, really, that was the big engine, which was Doubletree, to now having four between our three soft brands and Doubletree, all of which are producing for us and I think will continue to escalate. I mentioned in my prepared comments, you know, our signings for conversions were up 30% last year. Our starts, which I did not mention, probably should have, were up 40%. In our fourth quarter, our opens were up about 44%. So what you see happening is sort of natural, like it takes a little bit of time to ramp. You're right, we were circa 20% of overall NUG and conversions. That was up 300 or 400 basis points versus the prior year. And I think what you'll see over the next few years is that will become a larger and larger number. component of overall NUC. How high will it go, you know, which maybe would be the next question, so I'll answer it. Unclear. I mean, we, you know, in the Great Recession, it went into the 40s. I don't think it will go that high because I honestly think we have so many other engines firing, you know, particularly in China with all of our limited service growth. um, as compared to the great recession that I don't think it'll go that higher, but I think it could clearly go into the upper twenties, low thirties, uh, over the next few years. And so we have tremendous amount of focus on it, um, as you would guess, you know, and, and, uh, the development teams are, you know, are aligned around those goals. And I think you are starting to see with some of the numbers that I described, the natural ramp up in that and very, very good progress there. So I think, I think things are coming along really nicely. Did I miss any, did I miss anything in your question?

No, sir.

You handled it all. Thanks very much. Great. Thanks, Carla.

The next question is from Sean Kelly with Bank of America. Please go ahead.

Hi, good morning, everyone, and thanks for all the remarks. Chris or Kevin, maybe sort of going down the same path as you just did for net units on digging in on the G&A cadence a little bit more. Obviously, I think there's some noise with stock-based comp, but Chris, I think you referred to overall kind of cash expense savings in a higher margin profile or structure looking out a few years. Could you just help us kind of build on that a little bit as you kind of look out a little further, what's either the right, you know, run rate to think about relative to 2019 levels for 2021, or just maybe even more strategically, you know, how much more efficient, you know, do you think we are a few years out from now versus, you know, where we ended 2019?

Yeah, Sean, I'll take that one. I think, you know, you sort of pointed out some of it, right, on the GAAP G&A side includes, you know, stock comp that's non-cash, right? So over the course of last year, We wrote down our plans, and then we put in a new plan in place in the fourth quarter. So you saw some things bounce around. And then overall, it ended up at 30. On a cash basis, we ended up, I can't remember if, Chris, you said this in your first answer, but on a cash basis, we ended up about 20% better, you know, 2020 over 2019. And then I know Chris did say this. We think 21 versus 2019 will be down in the mid-teens on a cash basis. And so, you know, how can that trend going forward? I think, look, overall wages and benefits have been growing in excess of core inflation. You know, over time, that's probably not going to trend. But we've, look, we're adding no new heads in the business this year. And so we think for several years, we're going to remain disciplined as we always have. And there's, you know, there's no reason to think that we can't. you know, grow cash overhead at, you know, sort of slightly ahead of inflation. There's slightly more than inflation because that's probably what wages and benefits wants to grow over the next few years. And there's nothing that we see in the future that says we can't, you know, continue to get back to scaling the business, you know, without having step changes in growth and overhead.

Thank you very much.

Sure.

The next question comes from David Katz with Jefferies. Please go ahead.

Hi, good morning, everyone. Good to hear everyone's voices.

You too, David.

Thank you. Chris, in your comments, you talked about pent-up demand for corporate travel, and you made some comments around group. And I'm hoping that you might be able to, you know, go just a little bit further and talk about, you know, how broad-based that might be, any industries, etc., It's obviously quite intuitive that leisure would have a lot of pent-up demand, but we spend a lot of time debating those other segments and would just love a little more depth if you have it available.

Yeah, I'll give you what I do have. I mean, I talked about in my prepared comments, David, the leisure side, and I think we can all kind of stipulate that people want to get out of their basements and they want to travel. And while people have been starting to do that, Not that many have, and certainly the higher end leisure businesses has not really been out and about. And so I think, you know, as you get through what is going to be a mass vaccination, you know, period of time over the next 90 days, I think when you get to late spring and summer, you know, everything I'm hearing, talking to the Biden administration, which you're now reading in the papers too, but we're having pretty direct conversations. I think maybe even sooner. I think the president said last night, I heard that, you know, by the end of July, every American will be able to be vaccinated. My own belief based, if you look at the manufacturing curve and expectation of J&J getting approved probably by the end of this month, that that could be much, that could be sooner than the middle of the summer. So I think once you get there, I think people have a lot of savings, even though they've been buying stuff like crazy, as we know, because a lot of the retail and, you know, car business and homes and all that have been doing well. They want to get out. They want to get out more than ever, talk to anybody, talk to any of your friends, and you get the answer. And so I think the trend line there will be quite good when you get a bit of the all clear sign, which I think will be hopefully by spring, certainly no worse than summer. On the business transient, there are data points, but a lot of it is admittedly anecdotal in the sense of just discussions that we're having with our big customers and trends that we're seeing. As we're having discussions with our customers, as we've been renegotiating all of our you know, corporate negotiated accounts. I mean, clearly there is massive pent-up demand. I mean, they may, you know, by the way, they're obviously in businesses that are hurting. They're going to have cutbacks for maybe their run rate numbers of 18 and 19. But the reality is they just, in the short term, they have so many things that they need to do when you talk to them about collecting their people, you know, innovation, you know, just team meetings, you know, getting out with clients and customers and the like that, you know, it's just, it's been over a year. By the time they're out, it'll been 15 months, you know, and forget the fact they want to see people. They need to see people. And so you're starting to see that even though we're in the, you know, you see the infection rate coming down. I mean, we're still not through the crisis for sure. And you're starting to see it in the booking trends. I mean, the, the, the, uh, business transient trends are clearly. Sort of week by week are marching up even in the middle of all this, even though we don't have the all, you know, an all clear sign. So, you know, not tons of data other than real booking data suggests, you know, short-term it's moving the right direction, but lots of conversations. with customers, you know, are saying that and lots of surveying that we're doing, you know, is suggesting, you know, like it was, you know, that people are more interested in travel for leisure and business, you know, as our polling goes, like over 80% of them say they, you know, they got to get back out on the road, which is the highest number obviously we've seen since this mess began. So that's good on the group side. That's going to take longer, but the trend lines are good. If you look at our lead volume, sort of fourth quarter versus January, January was up 35%. If you look at it January versus December, it was up 50%. I give you the quarter because normally January would step up from December because of the holidays, so I want to I think a better number would probably be sort of the average over the whole fourth quarter, but that's up by more than a third. A stat that I – as I go through with the team that I thought was very encouraging on the group side was that our first half position for 2021 versus 19, so let's forget – 20 because it was a washout. I mean, you know, the comparability is not relevant. If you look at it versus a stabilized year of 19, first half position on the group side system-wide is down 80%. The second half of the year versus the second half of 19 is down by 32%. So, again, it's still off, but, you know, by a lot lesser margin. And that's a result of people saying, I've got to get out. I want to get out. I've got to have team meetings. I've got to have small group, medium-sized group. Conventions are starting to book again because they're going to go out of business if they don't get booking again with an expectation, obviously, by the time you get to the second half of the year, that it's safe and they can do it from a health point of view. And so we need this. My belief is we will get there, but we need this vaccination effort between now and, you know, June, July to, you know, to really ramp up. And it, and it feels like day by day that that's happening. So that's a little bit of, you know, color, obviously, you know, we got, we got to play out the next few months and have the right things fall into place. But I think there's a, I think there's a real opportunity for this. You know, I, I said this publicly, I think I'm Bloomberg or somewhere, but I do think there's a great opportunity for the second half of the year to be better than any of us think, you know, because, When, you know, it's like everything. When you're at the top of a cycle, you always think everything's going to stay good forever and it's a new norm. And when you're looking from the bottom, the depths of doom, you're sort of trendlining off, you know, off a lot of negativity. And eventually this thing's going to flip and people want to get out no matter what anybody says. They want to travel. And when the all clear sign is sort of given, which is the lights at the end of the tunnel and I think coming soon, You know, I think there's a huge amount of pent-up demand, and I think we could all like what we see in the second half of the year.

Appreciate it. And if I may, for just a very quick follow-up, on the subject of, you know, hybrid segment or bleasure, any thoughts, strategies, or marketing efforts to that end?

Yes, I mean, all of our efforts on the marketing side, I mean, to keep it short and simple so we can let other folks ask questions, all of our efforts have been focused on fishing where the fish are. And right now, you know, where the fish are at the moment is in, you know, sort of value-based leisure and bleasure business. So, you know, and it's really, you know, the bleasure part of it is small businesses that really – don't have the choice, you know, but to travel to keep their businesses going. And they are sort of, you know, mixing it with leisure opportunities because they have more mobility in a sense. They're not, you know, locked into, their kids aren't locked into necessarily being in schools and they're not locked into being in an office. So all of our efforts across what we're doing with honors, what we're doing with promotions, what we're doing with our marketing spend have been focused on that. Now, that's all going to obviously shift If all goes well and I'm right, you know, and we're obviously working on the plans to not go immediately back, you know, to where we were, but to start to migrate back to, you know, sort of a more normal approach as demand patterns become more normalized.

Thanks very much. Good luck.

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

Good morning. Thanks for taking the questions. Good morning. On your comments on the second half 21 trends, those are all helpful, but perhaps coming at it from another angle, how did leisure business and group segments fare in China in the fourth quarter before incremental lockdowns, and how would you compare and contrast that market to the U.S. as you think about how it may inform the trajectory of a recovery once cases are reined in? And perhaps as a related follow-up, are you seeing any signs of that substitution of trips that you're referencing in that market?

Obviously, China, as you've implied in your question, sort of backed up with what's going on, particularly in the north of China more than the south of China in the first quarter. In the fourth quarter, I would say, I don't have all the data in front of me, but I would say anecdotally from lots of conversations with our Asia PAC and our China team, it was very rapidly sort of approaching normalcy, meaning We weren't fully back. There was still a little bit heavier leisure component, but there always is in China, by the way. I mean, it's a heavier leisure market broadly, but we weren't too terribly far off of our business transient and our group trends. But it was following the same pattern I would expect here. Leisure leads, business transient is a close second. And the groups, just because they're by nature of group business, it's a little bit longer lead time is a little bit more planning, you know, was lagging a bit, but they, you know, China, you know, we were, we were running like 10 points off, something like that. So we were getting, you know, before they backed up, we were getting to, to, I think, very normalized levels of demand. We were not seeing any material as far as we could tell, you know, with the data we had any sort of substitution effect. reality is China was sort of going back to the, you know, normal trends that it had very rapidly before COVID. And so I think while China's different, you know, and lots of, in lots of ways, you know, I think humans are humans. And I think it's why my belief is that as we sort of come out of this, leisure will lead, business trends will be a fast follow, group will take a little bit longer to develop because of lead times. But But the demand patterns will, over a couple of years, return and look a lot like they did pre-COVID.

And one very quick follow-up. Can you remind us what percentage of the China business is normally international inbound, which I imagine you'd have to overcome to get to that 10 points off?

Yeah, it's about 10 points, 10%. Awesome.

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

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

Good morning, Chris and Kevin. Good morning, Bill. I've got a two-parter on unit growth, if I might. The first part of it is simply, are there economic differences to Hilton between adding a conversion double tree or, say, opening a Hampton Inn that is newly built and And maybe that's a year one versus year three question.

Yeah, I mean, the difference is, I think you already answered sort of implied, it's just timing. I mean, you know, conversions just happen faster, you know, not always in the year for the year, but typically between signing and, you know, getting them in the system and paying fees, it happens very rapidly, usually within six to 12 months. And signing of, you know, of new builds, depending on where in the world you are, takes anywhere from 12 to, you know, 48 months. And so conversions produce faster. I'd say in terms of ramps and, you know, underlying economics, I mean, I'm looking at Kevin Rund's development. Not a material difference as I think about it. I don't have the data in front of me, but anecdotally we're involved. Kevin and I were involved in all these deals. I don't think there's any real difference in terms of – I think it just comes faster. I think the basic fee structures are quite similar.

Yeah, that's right. I just think, look, Doubletrees are full-service hotels, so it's market-specific, but the absolute level of fees tends to be a little bit higher. But generally speaking, the return profile is very similar.

Perfect, perfect. The follow-up or the second part is whether you think the $15 national minimum wage would impact – development economics for select service, say your true hotels, which tend to be in smaller markets where maybe the labor rate is much lower?

It could. You know, I've been talking to lots of folks, you know, about this issue. And broadly, I think, you know, many, including me, are supportive over time that the minimum wage needs to move up. But as I've said to a number of people in the administration, time and place, you know, sort of how you do it and when you do it matters. And so, you know, I think the likely outcome, you know, is, I don't know that it'll end up in this first bill. I do think that there, you know, I think that is probably not highly likely based on what I'm hearing, possible, but not highly likely, but it will not be an issue that goes away. And I think that the you know, the how and the, you know, and the when then become important. And so how being that, first of all, even in what's being proposed now, it's not all to $15. It's staged in over basically five years. And so I think, you know, that creates a ramp that allows people to adjust and create, you know, we're obviously working with our owners on creating even more efficiencies. So You know, it's not like overnight, you know, you go across the country to $15. By the way, there are a whole bunch of markets that are already $15, and so they've been dealing with it. I would also like to think that, you know, if people really spend the time figuring out that not every market's the same, that living in Poughkeepsie is not the same as living in New York City, and, you know, that these can be indexed. And then, you know, when do you start to, you know, sort of move it up, I think, is a big issue. My personal worry and concern is The hospitality industry has been more impacted from a jobs point of view than any industry in the country. And it's the slowest in recovery in terms of bringing jobs back. And I don't think raising the minimum wage, no matter how you look at the analysis, is going to help. I think it will slow the rehiring of people in the industry. And so, you know, I am hopeful that in the end, you know, that, you know, people will be rational, rational thinking will, will prevail. And as a result, this will not be, you know, a major issue, certainly in the short to intermediate term. I think we should all assume that the minimum wage is going to be going up, going up over time, in fact, because it, it needs to. But again, I think, I think it's, I am hopeful that it will be done in a staged way. And, and there'll be other mechanisms built in to the, to the timing and the, geographical approach that will make it make sense on all sides. So that's the long answer, Bill. The short answer is I don't think in the short to intermediate term there's any meaningful impact as a result of it. Good.

And, Bill, I'll just add – I mean, that obviously covers the ground on the issue really well. I'll just add as a quick plug for our products, right? And so our products, you know, on a relative basis, if you start with revenue premiums and then our more modern – you know, prototypical, particularly you referenced True, that, you know, even though if wage and benefits costs go up, that does make it more expensive for developers. But on a relative basis, our products are more efficient. So it should continue to give us an opportunity to differentiate ourselves from a product person.

And the last point, not to, you know, hit it too hard, is that the work we're doing right now in every one of our brands, including True and Hampton and everything else, is about taking, you know, making them higher margin businesses and taking – creating more labor efficiencies, particularly in the areas of housekeeping, food and beverage and other areas. So they're going to, when we get out of the crisis, those businesses will be higher margin and require less labor than they did pre-COVID. So that will, you know, also sort of factored for in my commentary. But I think that, you know, hopefully the net of it is, as it goes up, it's done over a longer period of time. And it's done, you know, in a sort of thoughtful way.

Thank you for your time. Appreciate it.

Next question comes from Patrick Schultz with Truist Securities. Please go ahead.

Hi. Good morning, everyone.

Morning, Patrick.

My question – good morning, morning. I'm curious as to your interest at the moment in tuck-in brand acquisitions today versus sort of your historical – normal strategy of building brands from scratch, you know, specifically interested in perhaps buying international brands or international private brands? Thank you.

Yeah, thanks, Patrick. A good question and one we certainly we get frequently. I don't think my views changed at all. I mean, I think I've been saying for 13 years since we bought nothing. We've gone from a family of nine brands to 18 brands, so we've doubled it in the time I've been here, and we haven't bought one of them. We've organically developed every single one of them. So for my entire time here, I've been saying never say never, right? You've heard my speech. If it passes all the right filters, we'd consider it. But nothing has, and so I think not necessarily the past is indicative of the future, but it sort of tells you our predisposition. And so I would say never say never, but the filter is a very tight filtration system, which is we think we've got the best brand portfolio in the business. We think that can be proven scientifically by the fact that every one of our brands is a market share leader. Everyone that we've developed we think is purpose-built around exactly what customers want, and we like that. And so anything that we would look to acquire would have to sort of meet that profile. Like we don't want to go backwards because we don't have to. We have pretty much every category covered. If something's not covered, we could launch it. I don't think you'll see us launch a whole lot of new brands in the short term. Um, but you know, why, why would we do that? We have all, you know, all the segments generally covered. Do we want to cover, we have the best brands. Why would we pick up something that wasn't, you know, superb in the same way that we then have to be distracted trying to fix, uh, and that we paid a lot of money for the, you know, which leads me to the next filter, which is economics. You know, if you do simple math, we're developing these brands for nothing, you know, not to make it. And so we have an infinite yield. Every time we do it, every time we do a true or a home to, and these things become mega brands, they become billion, you know, multi-billion dollar businesses over time. It's an infinite return because we've effectively invest just, you know, sweat equity. So something, but not much. So, you know, when we look at buying stuff, we haven't found anything that, you know, is perfect. That doesn't require a lot of elbow grease and, and you're paying a lot of money for it. So we just, you know, not again, never say never, but, That's sort of how we think about it. Now, you know, your comment, your question also implied like region, you know, sort of regional process. That's where maybe I hate to say it and have it become a headline because I think the likelihood is we're not going to do, do that. But, you know, there are, you know, sort of smaller regional brands and places where maybe we want to, you know, stronger foothold that, you know, aren't, that don't show up a whole lot on the radar, but for what they are very, very good. And so, yeah, we've looked at a bunch of those over time. And we'll continue to do that. The net result has been, while we've looked at a bunch of them, we haven't done any. And, you know, again, I would say, I wouldn't, I would condition everybody to say, we like what we got. We think we got the, no offense to our competitors, maybe we had the best setup for the future in the industry. And the last thing we want to do is botch it by either bringing brands that, you know, like my father used to say, you hang with the dogs, you get the fleas. We, you know, we don't want to bring stuff. We don't want to bring stuff in that, that messes up the portfolio, and we're intensely focused on good capital allocation. You know, those are my origins in business, being, you know, a good capital allocator. And so when you put it together, I think, you know, not high likelihood, but never impossible.

Thank you.

The next question will come from Robin Farley with UBS. Please go ahead.

Great. Thank you. I actually have two half questions since they're both follow-ups. One is just on the group commentary, and you talked about how much better the second half looks. I've got to think that for 22, there will be group events that haven't at that point taken place in three years. I've got to think your volume for 22 would be better than 19. Is it just too early to see that?

It's too early. I think when we get into the second half of this year that my own belief, I should hardly say this, but it's like I said to our team the other day, do not give away space in 2022 too cheap. Because I think there's going to be gargantuan demand and, as a result, more pricing power than people think just because people have accumulated all sorts of needs that are going to get released and it takes time to plan. So what you're going to see in the second half of this year is, is I think the big uptick will be in the Smurf business because you, you know, those are smaller groups. They can have, you know, the planning, you know, is not, is not as, uh, time consuming. The lead times aren't, you know, the big stuff, it takes time when you're doing thousand person or multi thousand person conventions, even if you're doing it hybrid, uh, takes a lot of planning. And so that's really almost at this point, got to start to fall in the next year. So yes, I think if all goes according to plan in the first half of this year with vaccinations, and there's a reality, you know, that that people feel like they can start to congregate again, being intelligent about it, but do it in a safe way. I think you'll in the second half of this year, you'll see a bunch of demand that we'll dump into next year on stuff that requires planning.

Great. Super helpful. And then my other follow-up was on the unit growth comments. And I think your comments about next year were maybe better than what some had worried about. Maybe 21 is benefiting from some of the construction and 20 that had been delayed. So I guess when you talked about 4% to 5% for the next few years and this year being at the higher end of that. Does that sound like that maybe 22 would be at the lower end, you know, that there's maybe going to be a little bit of an air pocket for new development that would have started in the last 12 months? Is that how we should kind of think about this?

Yeah, I don't think it would be that low. I think, you know, we are definitely – I mean, we had 5.1 last year. We delivered a lot more than we thought. Just as we look at this year, there's a lot of stuff in production we think, again – We have really good momentum on conversions, which is going to help us more this year than last. It'll help again even more so in 22. And then there's just stuff that's moving through that was under construction or was put under construction that's going to help us. I think next year, I mean, we still put 75,000 rooms under construction last year, and most of that is not going to deliver this year. It's going to deliver in the next year. And as I said, we're ramping on conversions. So I do think that 2022 could be lower than 2021, but not by the degree that you're suggesting. I still think that ultimately our goal is to be sort of in that 4% to 5% range in all those years.

Okay, great. Thanks very much.

Next question will be from Richard Clark with Bernstein. Please go ahead.

Thanks for taking my questions. Just a couple of questions on your conversations with owners. You used to talk about some upside on the take rate as you sort of rolled contracts over. And just wondering, as we've gone through this pandemic, are you able to enact on that and push the sort of fee percentages up? And also, you gave them some CapEx holidays. How urgent is it that they kind of begin that renovation process? And when would you expect that to restart?

Both good questions. So on the first, our published rates, you would say if you average all our brands, it's about 5.6% in license fees. We're about 5% right now in terms of effective rate, in terms of where people are in the cycle. We're not going to anytime soon be increasing those rates in an absolute sense, but By definition, every time a contract turns, it goes to the new rate. I'm not saying anybody likes it, but that's sort of the standard within the industry. It's certainly what we've always done, and we'll continue to do that. So you'll see that sort of grind up about 10, 15 basis points a year. And then when we get to the other side of this, depending on the economics and, you know, ultimate market share and all those things. Obviously, we can look at what we do with our fee structures, but we're going to sort of keep, we think that they are good where they are and we'll keep our effective rates, we'll keep grinding up as you have natural rollover. On the CapEx side, it's really important, you know, it's a delicate balance. The obvious one, which is you got to keep the portfolio. We have the market share leaders in every one of these categories. Part of that is obviously service. a part of its product and part of that product is about having, you know, fresh product, you know, consistent, high quality product. We're very religious about it. We have given, you know, a lot of relief. Um, thankfully we went into the crisis in a really good position because we've been unbelievably diligent and disciplined and our, uh, and our owner community over time has recognized that to get those premiums, they have to keep their assets up. And so we, we went into the crisis, you know, a year ago in a good place. We have the ability, we think, to give them a bit of grace for a period of time and not have a significant impact with our customer base. But as we get to the other side of this, yes, we're going to have to get back to having that kind of discipline, which is not just in our interest, it's in our owner's interest if they want to continue to drive results. I suspect, you know, that that's going to be next year and not this year, just in the sense that while I think the second half We're going to be in a very different world. We're going to have to let folks get back on their feet. And I think given, again, the quality on average of our brands and the upkeep of the brands and the individual hotels going into this, I think we can do that without it being harmful.

Wonderful. Thanks very much.

The next question will be from Smeeds Rose with Citi. Please go ahead.

Hi, thanks. Hi. I want to just follow up on, you talked about some of the group bookings improving sequentially, and I know it's too early to talk about 22, but on your patterns that you're seeing, is there anything just from a geographic perspective in the U.S. that's showing up so far in terms of maybe shifting away from, you know, higher cost cities that had already been underperforming from a rev par perspective into lower cost or?

Yeah, the geography is exactly what I think you're implying in the question and what you would think. You know, it right now is less in the primary markets and more in the secondary and tertiary, just because of, you know, what's been going on in a lot of the big cities and the greater density of population. And reality is, as I said, a lot of the uptick that we're seeing into the second half of the year is Smurf business. And the nature of that business lends itself more and more to those geographies. I fully expect, as I said, when we sort of get a bit of the all clear and people start to think about group in a very different way, and I hope that's in the second half of the year, you'll start to see those patterns normalize. But given that it is, you know, more in the Smurf segment, it by definition ends up being more, you know, disproportionately outside of the big urban centers as compared to normal demand patterns at the moment.

Okay, thank you. And then just a very quick follow-up. I'm sorry if I missed this, but what was the impairment charge that you took in the quarter that was an ad back? I was just wondering what that was related to.

Yeah, mostly almost entirely in the ownership segment. This was announced in the pre-announcement for the bond deal as well on what we thought it was going to be, but it was mostly goodwill related to the ownership segment, just having to do with the duration of the crisis and the recoverability of those assets. And obviously all on cash. Thank you. Sure.

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.

Again, thank you guys for joining us today. 2020 will go in the record books for sure. Not the greatest year for our company, our 101-year history or the industry, certainly. But as I said in my prepared comments, we are proud of what we were able to accomplish. We think the business is in a terrific position. We are certainly of the mind and hopeful, as I've described in many ways, that as we get to spring and summer, and certainly in the second half of the year, we're going to be in a very different place. And we'll look forward after the first quarter, which will get us to the early spring, to hopefully be able to comment on those positive trends. Thanks again, and everybody stay well.

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