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spk11
Good morning and welcome to the Hilton first quarter 2023 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be a question and answer session. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Brian Cusai, Senior Director, Investor Relations. You may begin.
spk07
Thank you, Chad. Welcome to Hilton's first quarter 2023 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. we undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factor section of our most recently filed Form 10-K. In addition, we 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 and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President Global Development, will then review our first quarter results and discuss our expectations for the year. Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.
spk08
Thanks, Brian. Good morning, everyone, and thanks for joining us today. We're pleased to report that demand for travel remains strong, maintaining the trend that we saw in the back half of last year, which led to both our top and bottom line results, finishing the quarter above the high end of our guidance. As we move forward, fundamentals remain strong, and we expect secular tailwinds to continue to support growth. Despite continued macroeconomic uncertainty, we're optimistic that the power of our network effect, our industry-leading REVPAR premiums, and our fee-based capital-light business model will continue to drive strong operating performance unit growth and meaningful cash flow, enabling us to return an increasing amount of capital to shareholders. In the first quarter, Systemwide rev par grew 30% year over year and 8% compared to 2019. Rate continued to drive growth up 11% compared to 2019 and systemwide occupancy reached 68% up from the prior quarter and just two points shy of peak levels. Globally, all segments outperformed expectations and the lifting of COVID restrictions in China drove significant recovery in demand across Asia Pacific throughout the quarter. As a result, REVPAR in the month of March exceeded 2019 levels across all regions and segments for the first time since the pandemic began. Given our strong results and positive momentum, we're raising both top and bottom line guidance for the full year, which Kevin will cover in more detail in just a few minutes. Turning to the segment details, leisure trends remain strong throughout the quarter, with REVPAR surpassing 2019 by approximately 15% ahead of prior quarter performance. Strong leisure transient demand continued to drive rates up in the mid-teens above 2019, and occupancy fully recovered back to 2019 levels, driven by the surge in travel in Asia Pacific. Business transient also continued to improve, with REVPAR up 4% from 2019, reflecting the resiliency of business travel, particularly for small and medium-sized businesses, which remained roughly 85% of our segment mix. Recovery in group remains robust, with REVPAR finishing roughly in line with 2019, with steady improvement each month in the quarter and March exceeding 2019 by 5%. Demand for future bookings also remains strong with full year group position up 28% year over year and 3% versus 2019. Additionally, new group leads ended in the quarter 13% higher than 2019, an increase of six points compared to prior quarter. Looking at the full year based on the better than expected Q1 results, the accelerated demand across Asia, and continued positive momentum in group, we now expect full year system-wide top line growth between 8 and 11% versus 2022, assuming some slowdown in the back half of the year due to macroeconomic uncertainty, particularly in the U.S. Turning to development, in the first quarter, we opened 64 properties totaling over 9,000 rooms, celebrating several milestones, including the opening of our 500th hotel in China, our 100th addition to the tapestry collection, and the opening of the Canopy Toronto Yorkville, the lifestyle brand's debut in Canada. We also opened two new Embassy Suite resort properties in Virginia Beach and Aruba. with the Aruba edition marking the brand's 10th international property. And after recently being ranked the number one hotel franchise in Entrepreneur Magazine's Franchise 500 for a record-breaking 14th year in a row, Hampton by Hilton expanded its global presence to 37 countries with the brand's first property in Ecuador. While we expect to see some impact from the current financing environment, we're encouraged by the progress on the signings and starts front. We signed approximately 25,000 rooms during the quarter, growing our pipeline to a record 428,000 rooms, more than half of which are currently under construction. Signings in the quarter outpaced prior year across all regions, And conversion signings in the quarter were 24% higher than prior year, benefiting in part from the rollout of our newly launched brand, Spark by Hilton. The initial interest in Spark has been tremendous. We currently have more than 300 deals in various stages of negotiation, and our teams are working hard to deliver this exciting new premium economy conversion brand with hotels opening later this year. Hilton Garden Inn also continues to be an engine of global growth with 14 new signings across six countries in the quarter and over 60 working deals in 22 countries. Additionally, in April, we announced the signing of the Walter Pastore Jaipur, marking the debut of the brand in India and further demonstrating our commitment to expanding our world-class luxury brands across the globe. Construction starts for the quarter totaled over 19,000 rooms, up nearly 20% from prior year. And starts in the U.S., we're up more than 50% year over year. Our global under construction pipeline is up 8% compared to March 2022. And per SDR, we continue to lead the industry in total rooms under construction. Taking all this into account, we still expect to deliver net unit growth within our guidance range this year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years. On the loyalty front, Hilton Honors grew to more than 158 million members, a 19% increase year over year, and remains the fastest growing hotel loyalty program. In the quarter, Hilton Honors members accounted for 62% of occupancy, an increase of 200 basis points year over year. Additionally, in an effort to further provide our loyal guests with an elevated wellness experience, in April, we announced the international expansion of our partnership with Peloton, bringing Peloton bikes to properties across the UK, Germany, Canada, and Puerto Rico, building on our existing partnership to make Peloton bikes available in all US hotels. As one of the world's largest hospitality companies, we recognize Hilton has a responsibility to protect the planet and to support the communities we serve to ensure our hotel destinations remain vibrant and resilient for generations of travelers to come. In early April, we published our 2022 travel with purpose report outlining our latest progress towards our 2030 environmental, social, and governance goals, including our efforts to reduce our environmental impact while creating engines of opportunity within our communities and preserving the beautiful destinations where we live, work, and travel. We remain committed to driving responsible travel and tourism globally while furthering positive environmental and social impact and sound governance across our operations and our communities. All of our success would not be possible without the dedicated efforts of our talented team, and we continue to be recognized for our remarkable workplace culture. Recently, Great Place to Work and Fortune ranked Hilton the number two workplace in the U.S., our eighth consecutive year on the list, and once again, the top-ranked hospitality company, an accomplishment I am truly proud of. Overall, despite macroeconomic uncertainty, We believe that our world-class brands, dedicated team members, and resilient business model have us incredibly well positioned for the future. Now, I'll turn the call over to Kevin for a few more details on the quarter and our expectations for the full year.
spk09
Thanks, Chris, and good morning, everyone. During the quarter, system-wide REF PAR grew 30% versus the prior year on a comparable and currency-neutral basis and increased 8% compared to 2019. Growth was driven by strong demand in APAC, as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $641 million in the first quarter, up 43% year over year and exceeding the high end of our guidance range. Outperformance was driven by better than expected fee growth across all regions, as well as strong performance in Europe and Japan benefiting our ownership portfolio. Management and franchise fees grew 30% year over year, driven by continued REVPAR improvement. Continued good cost discipline further benefited results. For the quarter, diluted earnings per share adjusted for special items was $1.24, increasing 75% year over year and exceeding the high end of our guidance range. Turning to our regional performance, first quarter comparable U.S. REVPAR grew 21% year over year, with performance continuing to be led by strong leisure demand. Both Business Transient and Group REF PAR finished above 2019 peak levels for the second consecutive quarter, driven by strong rate growth. In the Americas outside the US, first quarter REF PAR increased 56% year-over-year and 35% versus 2019. Performance was driven by strong leisure demand at resort properties where REF PAR was up over 60% compared to peak levels. In Europe, REF PAR grew 68% year-over-year and was 13% higher than 2019. Performance benefited from continued strength in leisure demand and recovery in international inbound travel, particularly from the U.S. In the Middle East and Africa region, REVPAR increased 32% year-over-year and 42% versus 2019, led by strong rate growth and group demand. In the Asia Pacific region, first quarter REVPAR was up 91% year-over-year and down only 4% versus 2019. REVPAR in China was down 5% compared to 2019, 32 points better than prior quarter, as demand recovery accelerated due to the lifting of COVID restrictions. The rest of the Asia Pacific region also saw significant improvement, with REVPAR excluding China up 19% versus 2019, representing an 11-point improvement versus prior quarter. Turning to development, our pipeline grew year-over-year and sequentially and now totals 428,000 rooms, with nearly 60% located outside the U.S. and over half under construction. Looking at the full year, despite the near-term macroeconomic uncertainty, we still expect net unit growth between 5% and 5.5%. Moving to guidance, for the second quarter, we expect system-wide RFPR growth to be between 10% and 12% year-over-year. We expect adjusted EBITDA of between $770 million and $790 million, and diluted EPS adjusted for special items to be between $1.54 and $1.59. For full year 2023, we expect REVPAR growth of between 8% and 11%. We forecast adjusted EBITDA of between $2.875 billion and $2.95 billion. We forecast diluted EPS adjusted for special items of between $5.68 and $5.88. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of 15 cents per share during the first quarter for a total of $41 million. Our board also authorized a quarterly dividend of 15 cents per share in the second quarter. Year to date, we have returned more than $600 million to shareholders in the form of buybacks and dividends, and we expect to return between $1.8 billion and $2.2 billion for the full year. Further details on our first quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question, please. Chad, can we have our first question?
spk11
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 is from Carlos Santorelli from Deutsche Bank. Please go ahead.
spk04
Good morning, Chris. Good morning, Kevin. Good morning. Chris, just in terms of the way you guys are thinking about the year, your guidance obviously from a rep-par perspective up about 350 basis points at the midpoint. First quarter, you know, obviously contributes some of that lift. You guys spoke to a tougher – macroeconomic situation in the second half of the year on your fourth quarter call. How much has your outlook on the second half changed as obviously, you know, you get some contribution from the first quarter, you have a lot of visibility in the second quarter, just trying to understand within the context of that guidance, if you've had any kind of change or pushing out of when you guys believe or when you're interpreting the macroeconomic conditions will toughen.
spk08
Yeah, a really good question. Obviously, you know, I think I used the macroeconomic uncertainty two or three times for a reason because there is an uncertainty environment. I mean, what we're seeing today is, as you heard in, you know, what you saw in our numbers and in the prepared comments, is very good strength across all our segments. Leisure continues to be super strong. Business transient. in the quarter, both demand and pricing, you know, has returned to prior peak levels. And group is motoring on its way just, you know, longer in gestation to get there. But it, you know, based on the trends, is going to get there, you know, in the second half of the year, I think, with a great deal of certainty. So, you know, we are not – you didn't really ask it this way, but I think part of it is we're not seeing any cracks in terms of demand patterns. There is a lot of momentum. I sit at this very table every Monday morning with my entire executive committee representing every region of the world, and the first question I ask, are you seeing any cracks? Any issues with demand broadly? Any issues regionally? Any issues from a segment point of view? And the truth is, we're just not seeing it. We know here in the U.S. and in many other places around the world, there's an inflation issue. Now, you know, it's being, you know, it is being managed. It's becoming, you know, it is in the process of normalizing, particularly here in the U.S., but it's not there. And the Fed, you know, has said it's going to deal with it. I believe I take them at their word. And I think ultimately that means you're going to continue to have a slowing of the broader economic environment that at some point has to have some impact on us. It hasn't yet for a bunch of reasons I suggested. One, I still think we have a lot of pent-up demand. Two, we are still benefiting from a secular shift in spending patterns broadly. So while people may have a little less to spend, they're spending more of it on experiences and a lot less of it on things. You see that throughout the economy. And international travel is, you know, finally with China opening up, while it's not, you know, back anywhere near where it has been, international travel is really on a steep upslope. And all of those things, you know, are keeping, you know, the momentum in demand in the business, recognizing also, by the way, that capacity additions are at historical lows and are probably going to stay there for a while. So when I said You know, very quickly in my comments, fundamentals remain strong. I mean, fundamentals are supply and demand. Demand is good for the reasons I suggested. Supply in the industry is anemic. Thankfully, we get a lot more than our fair share of the supply, so that's good for us. But the basic fundamentals in the business are good. Having said all of that, we do expect things will slow down. You asked a question, which I'm actually going to answer, which is do I feel any differently than I did sitting here a quarter ago? And I would say yes. I would say, number one, the economy appears to be more resilient. Inflation is being tamed. I have a higher degree of confidence at this point. I'm not the right person to ask, but, well, I'll tell you what I think. I have a higher degree of confidence that the Fed will land the plane reasonably well and that we're not going to have, you know, a deep, dark kind of recession. We're going to have a slowdown, maybe a recession. It feels a lot more like it will be reasonably modest at this point. So I feel better about that. And I definitely feel like things have been pushed out a little bit. One, just time has gone by. We have now a quarter under our belt. We're deep into understanding half of the year. I mean, we're not done. There's a bunch of the second quarter left. But we have pretty good sight lines at this point in the Q2. And that feels like the momentum is continuing. So you get a half a year sort of under your belt. It gives you more confidence. And so, yeah, I feel better about thus why we, you know, we increased our guidance on the top line and bottom line because I feel like there's enough momentum in our business. The economy broadly is pretty resilient. There's more confidence in the Fed being able to sort of do this without wreaking too much havoc. So I'd say net, yeah, I feel a bit better. Having said that, we did, and I said it intentionally in the prepared comments, we do assume because we are sentient and, you know, we know what's going on that at some point you will see some slowing. I think realistically it's more late third quarter and into the fourth quarter. I honestly think there's a chance it kicks, you know, it kicks into next year given the broader momentum and the strength of the consumer broadly. But I don't know. And so what we've tried to do in our guidance is build in an expectation that these efforts of the Fed here and in other parts of the world will eventually work and that we're going to see some at least modest slowdown. And so that's sort of what, you know, we feel better than we did. We still think there's a lot of uncertainty. And we've tried to factor for that in our guidance in the second half of the year.
spk04
Great. Thank you, Chris. And then if I could just one quick follow-up. In the period, obviously, I think managed franchise REVPAR was 29%. Unit growth on the franchise side was 4.4%. The franchise fees grew about 23%. I'm assuming that that's a comp issue with some ancillary non-REVPAR fees in the 1Q22? Okay.
spk08
I mean, the way to think about those is those are – normalizing in growth rate above algorithm growth, above, you know, typical growth you would assume sort of on a same-store basis. But, you know, we're still, particularly because of Omicron, on the fee side, we have a supercharged fee growth rate in the first quarter. But I think the way to think about, you know, over the intermediate, even longer term, is we think all of those ancillary fees license fees and otherwise are going to grow better than our typical algorithm growth. You have some year-over-year normalization going on in Omicron impact. Thank you, guys. And a little bit of mix as well.
spk09
So the franchise business is a little more concentrated in the U.S., where our growth has not been as robust as outside the U.S.
spk11
Yep, makes sense. Thank you both.
spk09
Sure.
spk11
And the next question is from Joe Greff from J.P. Morgan. Please go ahead.
spk05
Hey, good morning, guys. Chris, I'd love to hear your views and your understanding of what developers are feeling right now just given changes in the credit markets and the banking environment, particularly with maybe limited service developers that are more reliant on regional bank for financing. Are they requesting more capital help from you guys? Do you think maybe they're pulling forward some deals, maybe in an effort to circumvent future tightening? Can you talk about what your expectation is for maybe pipeline growth for the balance of the year? And then I have a follow up. Thank you.
spk08
Yeah, I mean, it's early. So we've obviously been talking to a lot of our ownership community as the banking issues have sort of taken hold. And I would say there's a broad range that, you know, anecdotally go from we haven't seen much impact. We're still getting financed. As you can see in our numbers and starts in the U.S. being so far up now, part of that was before, you know, the banking, you know, the regional local banking set of issues. But part of it was after. You know, they're still getting the best. owners with the best relationships are getting their deals done, and, you know, our market share in a tougher environment goes up. So, you know, proportionally relative to others in the industry, we typically do even better. But we also have folks that are saying very hard to find the money, and some in the middle that are saying, like, they're talking to their banks, and their banks are saying, hey, we're going to be there for you. Just give me, like, 90 days. Let me see how this all plays out. And so I think it's early to know. I think, you know, being objective about it, which I always am trying to be, you know, I think, you know, the Fed seems to be managing through this reasonably well. You know, there's some ongoing things today, you know, or this week going on. But I think the Fed, you know, I think is pretty committed to making sure there isn't sort of a run on regional banks broadly. So I think we're in reasonably good shape that way. But I think that the net result is for a period of time, there'll be less credit available. Okay, I still think we'll get more than our fair share of it because our brands are better performing and we'll see our share go up as we historically do when times get tougher for financing, et cetera. But it's hard to believe that in the short to intermediate term, there's not going to be some impact. It hasn't shown up, it didn't show up in the first quarter. We haven't seen it yet. But I think in terms of pipeline, people, you know, I think our expectation at this point for the year is the pipeline is going to keep growing. You know, the bigger question is going to be, you know, the conversion to under construction in the first quarter, it was very, very good, as you heard, in the data, I think that'll get more challenging, I think, I think it just stands to reason that will get more challenging. And so, listen, the good news for us is, you know, we tend to get our share goes up. It's a big world. While China has been a little bit slower to sort of pick up steam on the development side, it is picking up steam. I think, you know, particularly as we think about next year, I think it's going to be a big net contributor. And conversions have been and continue to be a big focus of ours. You know, we think we'll do meaningfully more as a percentage of overall delivery this year, as conversions somewhat aided by this year a little bit, but a lot I think next year by SPARC, which is 100% conversion, very low cost of entry in a relative sense, very, very lightly if dependent at all on the banking community. That's not why we did SPARC. We did SPARC for all the right reasons to better serve, you know, create a bigger and better network effect. But just in time management, the timing of it actually is quite good. As I said, it's not going to do a lot for this year, but I think starting next year and beyond, it will add significantly. But the net of all that, Joe, is, again, answering, you know, trying to give a little bit of color across the board. You know, we do expect that what's going on in the banking system, particularly for limited service, which is, you know, disproportionately financed by the regional and local banks, that they're going to pull in their horns. They're going to survive if, you know, most of them are going to get through this, but there's going to be less credit available, and that's going to slow things down a bit.
spk05
Great. Thank you for that, Chris. Yep. My follow-up question is this. System-wide REF PAR is flat, which is sort of what's baked into the second half guidance. But if we just think about it, you know, for the intermediate term, not that you're guiding to anything beyond the second half, do you think fee growth can be in excess of REF PAR growth, just given the room's growth in the last few years?
spk08
Should be, yeah. Should be, mathematically, yeah. Thank you very much, guys. You know, the algorithm is... Yes, as you know, you know, sort of same store plus unit growth. And, you know, we've been delivering on average, even through COVID, you know, five-ish, maybe a tick over, you know, even in an environment that, you know, is being impacted by some of the things I just described. We believe we'll continue to do that as we manage our way over the next couple of years back up to the six to seven. And so... even in a no-growth same-store environment, which is not certainly what we're experiencing now for the right period, as you can see. But even in that environment, fees would continue to grow with unit growth.
spk11
Thank you. And the next question is from Sean Kelly from Bank of America. Please go ahead.
spk03
Hi. Good morning, everyone, and thanks for taking my question. Chris, I kind of wanted to stick with the development activity, but maybe let's just go out a little bit longer term. And if you could help us pull from, you know, a little bit of your experience of how this played out during the global, you know, financial crisis a little bit. Just help us think about, you know, if we think about some of the – there's kind of three drivers, I think, about it. Domestic unit growth, obviously decently reliant on the financial system. The conversion activity where you've got a pretty interesting pipeline of brands that might even be stronger than back then. and then the international side, can you help us think about sort of buckets two and three? And as we get down to 24 and 25, you know, how much could those help carry the weight and how protected do you think, let's call it a broad mid single digit net unit growth target should be in a variety of different scenarios as people are just trying to think about broader fallout here from, you know, financing and again, a more difficult macro broadly?
spk08
Yeah, I mean, that's the right question to ask. And that's why I said, yeah, we do expect to see some impact. But I also said, maybe I backed into it, but I'll say it more directly. We feel good about being in that range that you just described. You know, we've been around five through the toughest down cycle, you know, in recorded history through COVID. We've stayed sort of five-ish or a tick above. And we think, you know, over the next period of time, as these things sort of work their way through the system that we'll be able to stay there. How are we going to do it? Well, one, we're going to gain share because our products perform better and we have the highest market share brands in the business. We're going to keep pushing market share higher until while there's going to be potentially less new build activity domestically, we will plan to work hard to get an even larger share of that. Conversions, we do believe that were uniquely suited, certainly relative to the Great Recession by having not only more shots on goal in terms of brands, but Spark, again, there's long term, we think Spark is probably the most disruptive thing that we'll have ever done. But you know, in terms of giving customers at that price point, a really good product, but it's also the timing of it is convenient and helpful, because it depends very little on financing. You know, most of the other conversions still depend on financing. A lot of conversions, not all, but a lot of conversions do happen around asset transactions where people say I'm a buyer and a seller and I'm going to change brands and upgrade properties. We'll still, you know, convert a bunch of other types of properties where they're not changing ownership. But, you know, a lower change of ownership puts a little pressure on that. But SPARC, is a gift that we'll keep giving in the sense of unit growth. Because again, you're talking about 20,000 a room, you're talking about a $2 million sort of bogey, you know, for somebody to convert and get into our system, versus even at the lowest price point, you know, new builds that require financing and or writing checks of, you know, 10, 15 million, or most cases much higher than that. you know, conversions will play a big part in it. And as I already said, it's a big world. So, you know, what's going on here in the US is, you know, with the banking system is unlike the great, you know, the Great Recession, where the whole financial system around the world, you know, was sort of imperiled in freefall. This really, at the moment, is more of a US thing, obviously touched you know, Europe a little bit with, you know, and Switzerland, but it has largely been, you know, sort of contained to be a US thing. And so you have the opportunities around the whole rest of the world, notably, as I said, China, in the sense that, you know, China is probably taking a quarter or two more. So I think China won't contribute what I would have hoped it would this year. But I think it'll be made up for next in 24 and 25, because the engines are really cranking up. It's just, you know, it's just a process. So it will be, you know, it will be, it will be conversions, international growth, and increase market share of, of what does get done in the US. The other thing that that is going on is, you know, we, we, we launched Spark, we're getting ready, and I'll maybe tickle the ivories a little bit, we're getting ready to launch another brand sort of at the in the extended stay space at the lower end of mid-scale, very low end of mid-scale, below home two, that we have been working with our ownership community and customers on, that while it will be a new build product, it will be a very efficient build cost. So, again, the things, my history of this, living through the Great Recession and all that is, your lower cost to build products that are very high margin because people make the most money doing it and they're the lowest risk and they're the easiest financed, those are the ones that get going the fastest. And so, again, we didn't develop this brand that we're getting ready to launch hopefully in the next 30 or 60 days because of this. We launched it because customers want it, owners want to build it. But again, it won't have any effect this year, but starting probably the latter part of 24, more likely 25, as people look at a brand that can deliver just astronomical margins on a very efficient per unit build cost, we think it will build a lot of excitement. Home 2 has been off the hook since. in demand, you know, throughout, you know, all the COVID and otherwise, because people make so it's such customers love it. It's very high margin. We think customers are going to love this. It's something different. It's at a lower price point, but the margins are much even higher than that. And so again, you know, it will take time to gestate that, but we think that is a mega brand opportunity for us that as we think about more likely 25, 26, even in an environment that's been more challenging, is more challenging from a financing point of view, as the financing markets come back, and they always do, it's those products that really get done fastest. And so we feel good about, you know, being, you know, around five and headed back to six to seven over the next couple of years, and it'll be, you know, a combo platter of all of those things that you said and that I just spoke to.
spk11
Thank you very much. And the next question is from Smedes Rose from Citi. Please go ahead.
spk02
Hi, thanks. I just wanted to ask you quickly on that extended stay launch. You know, we've seen a lot of products from different brands being launched into the extended stay segment. And I'm just curious, what do you think is driving so much interest from customers? And are they abandoning another segment of mid-scale? You know, we don't get data, or at least in our case, we don't get extended stay data specifically. We just see the chain scale data. I'm just wondering what sort of shifts you're seeing within that, that, you know, it's leading so many people to launch into that sector.
spk08
We were already seeing it pre-COVID where there was just, you know, a demand for workforce housing and people, you know, more mobility in their lives. And they, you know, they wanted to be places and work from different places and, You know, they, you know, they didn't, they were going to be there long enough to commit to like get an apartment and pay a, you know, pay, you know, a, you know, one year's deposit and all that fun stuff. And so we were already seeing demand that was outstripping supply. And then COVID hit. And while a lot of things have normalized, and I've talked about this on prior calls a bunch of times, The one thing that happened is it accelerated the idea of mobility. You know, while, you know, the office environment is normalizing, a lot of people are going back. It's not exactly what it was. You know, more people are going to be remote as a percentage of the workforce permanently. More are going to have flexibility, you know, and sort of, you know, different times of year, times of the week, you know, Mondays and Fridays. And all of that is continuing to just, as those patterns shift, you know, it's building more and more demand against a limited amount of supply. And so the fundamentals we think are just great. The way I think about the product that we're developing, and I'm getting ahead of myself, but it's coming really soon. I mean, we've built it, we've done, you know, 99% of the work. It's almost a hybrid. It's like an apartment efficiency meets hotel. And I'd say it's You know, it's almost like 60-40. It's more apartment efficiency. There's so many, you know, workforce housing needs that are just unmet with this kind of product where somebody needs to be somewhere 30, 60, 90, 120 days. So you're talking about average length of stay of probably 20 to 30 days on average versus most of the core extended stay brands are like 5 to 10 maybe. you know, somewhere in that range, if you look at the industry. So it's a different demand base, different types of locations, which is why we love it, because we're not serving it. Meaning it's not competitive with what we're doing with Home 2 and certainly not competitive with Homewood, because it's serving a totally different need, mostly in totally different markets. And as I said, we, you know, okay, You know, I didn't intend to go this far. Sorry. But, you know, this is hundreds and hundreds and hundreds of hotels over time. This is not like we're going to do 50 or 100 of these. I mean, you'll wake up over time in 10 years, and it'll be like home, too. We'll have, you know, four, five, six. We'll have a lot of these because we think the need is there now and growing. And while a lot of people are doing things, in this arena, I think we've proven by launching brands that we do uniquely have done it pretty well to launch brands and get to scale and build network effect, not just broadly for the company, but within brands. And we've done that, I think, as well or better than anybody. And I, you know, I think, you know, I think we have an opportunity to do it here. And our system, you know, delivers, the system delivers the highest market share in the business. So as You know, if you're an owner thinking about I'm going to build a similar product somewhere else, I mean, you're going to look at the system strength. And ultimately, I think, you know, historically people vote with their feet. They vote with, you know, a product that they think will work better from a customer point of view, ultimately higher margins and drive higher share. And so we've got to do it again, but we've got a pretty good track record of doing this stuff. We've spent a lot of time on this. And hopefully, by the next time we talk, it'll be out of the chute. We'll be talking about how many deals we got lined up.
spk02
Thank you. And can I just ask you a quick other question? The difference between the gross room additions in the first quarter and the net room just seemed kind of wider than what we've seen. Is that sort of a seasonal thing, or was there something in particular on the deletion side that you can call out?
spk09
You're talking about the difference between Q if you do Q1 and the guidance, Smeets?
spk02
Well, just the first quarter gross room additions and then the net room additions. Oh, no.
spk09
No, the removal is right in line with normal. We'll end up about 1%, 1% change for the year. Just the gross rooms from a timing perspective, I mean, I think I don't want to repeat what Chris said earlier in the call, but I think from a timing perspective for the full year gross room additions were lower in the first quarter and deletions were about the same. So that's the difference.
spk11
Okay. All right. Thank you. Thank you. And the next question is from Steven Grambling from Morgan Stanley. Please go ahead.
spk06
Hey, thanks. Maybe following up on some of your comments about the new brand launches, Spark, and then it sounds like another one in the extended stay. When you think about growing into some of these lower-end chain scales, I think many of the peers often see higher attrition rates or deletion rates. What can you do to ensure that the attrition rates from your brands are more resilient long-term? And have you seen any evidence of that from your current lower chain scale brands, which is true?
spk08
No. You mean attrition, meaning losing hotels out of the system? No. I mean, here's the – listen, not to be too simplistic about it, but, you know, what we do is really made much easier by delivering commercial performance. So having great brands – that resonate with customers, loyalty that connects the dots that customers are engaged with, product and service in those particular brands, you know, that really resonates with customers, and ultimately, our commercial engines and commercial strategies that deliver the highest level of market share. And so if you look at our, frankly, if you look at like, you know, True or Hampton, almost, I would say, almost a hundred percent, I don't know, 90 to a hundred percent of the deals that exit the system within those brands. And I don't think any truths have exited the system that I'm aware of. It's a relatively new brand. I probably insignificant, probably none, but Hampton is by our choice, meaning, you know, that their time is up. They're in a location or they're, you know, in a, in a physical state that, you know, that we just don't think, you know, works anymore. And so, you know, that's by our choice. We have very little attrition. And back to where I started, the reason we have very little attrition is our mega category brands are category killers. They drive incredibly high shares. So as we think about Spark, as we think about, you know, our new extended stay brand, we have to get it right, which we will. We have to drive really high share, which we will. The product has to really work for customers, which is what drives that. and people don't want to leave, right? So our history is super, super good in the mega categories. If you go through the whole list of all our extent, you know, Home 2, Homewood, Hampton, True, you know, the attrition there is almost all, you know, the vast, vast majority of it is by our choice.
spk06
It's helpful context, and that's my one question. Thanks so much.
spk08
You bet.
spk11
The next question is from David Katz from Jefferies. Please go ahead.
spk13
Morning, everybody. Thanks for taking my questions. I wanted to just go back to Spark, because obviously a lot of enthusiasm and success, and it's unlike things that you've done before. If we look at the makeup of the deals that you've put together, I'd love some color on what's in there. Are those independents that are you know, looking for a brand, are those, you know, switching from other brands for one reason or another? Or are any of the hotels, you know, switching within your system into it that may have otherwise departed for one reason or another?
spk08
Yeah, of the 300, I'll get this direction of the 300 being around, it's, I would say, almost all, it's very little of us. So, you know, there are, there are, a few Hamptons of the 300. So a teeny, teeny number of Hamptons that we would probably otherwise say will exit the system that we think for Spark will work, even though they wouldn't work for Hampton, but that's a teeny tiny amount. The rest of it is almost, there's a little bit of independent of that data format, but it's almost all coming from other brands in the economy space and spread around. what you would guess, but, you know, and I have some of that data, but I'm not sharing it.
spk13
Fair enough and understood. My follow-up is when we look at, you know, the revenue intensity of, you know, adding in this category, how does that measure up with, you know, your other brands? Obviously, the upper upscale, you know, a unit is generating more, right? But how does the fee structure and the revenue intensity of this you know, measure up and add to your system.
spk08
Yeah, the fee structure is quite similar to other fee structures. They, you know, they are smaller and it is at a lower rate. We think, you know, the rate here is probably $80 to $90, you know, versus, you know, the net true, which is, you know, 120 in the 120s with Hampton being at like 140. So it's, they're a similar size. So a lot of the trues in Hampton's, They're at a lower ADR by design. And so, yeah, you know, per pound fees will be a little bit less and certainly versus upscale. But the thing you have to remember in our world is, you know, we're trying to create a network effect. You know, this is a massive customer acquisition tool for us. There's 70 or 80 million people traveling in this segment. half of whom are younger people that travel and this is all they can afford. And while we serve some of them, we're not serving many of them. So the opportunity is for us to get them hooked on our system early by giving them the best product that they can find in the economy space because every single hotel, every customer-facing element of the hotel has to be done or it doesn't get our name. And we regulate the gates. Nobody comes in. Nobody passes through the gates. until that's done. And so the other thing to remember is it's an infinite yield. So we build, we bring in, you know, tens of millions of new customers that are going to trade up. They're going to grow up and they're going to use our other products. They're going to trade in and around our products. And, you know, we built this brand, you know, with a lot of, you know, with a lot of hard work and elbow grease, you know, from the standpoint of, you know, the deals that we're getting, while they may be per pound a little lighter, we're not paying for them. I mean, you know, that's the infinite yield. There's no investment. We continue to build, you know, these incremental fee streams. And when you add up what the potential, I mean, I suspect, you know, 30 years ago, somebody said that about Hampton. Well, I mean, you know, Hampton at that time was a $50 rate and it's 100, 120 room hotel, how much money can that make you? Well, Hampton is a value well into the billions of dollars because it turns out when you do a few thousand of them, it adds up. And the ultimate potential of Spark is bigger than Hampton because it's a bigger slice of the pie. So we're very excited about it. We think it is going to add... not just new unit growth, but it's going to add significantly to earnings as it ramps up and ultimately, you know, to the overall value of the company.
spk13
Sounds like no meaningful key money there either.
spk09
Nope. Yeah, I think David just added just a little bit and, you know, Chris covered it. Yeah, I mean, the capital intensity in our business is much higher at the upper end, right? So the higher you go in the chain scale, the more the deals are competitive in your contributing capital. And the other thing I'd say is where I think, you know, sort of working with you for a while, I think where you were headed with that. I think, you know, from a revenue intensity perspective, Chris described it. As you layer in these lower fee per room hotels, mathematically, of course, your fee per room does go down. But when we model it out over a long period of time, you'd be surprised. The fees per room do not go up. They keep going up over time. And we continue to grow at what we often talk about as algorithms. So if you take same-store sales plus NUG, the fees per room and the fee growth continues at that pace. And part of that is because of the non-REF part-driven fees that Chris mentioned earlier in the call, which we think will continue to grow at a higher rate than algorithms. So you put that all in your model. And, you know, it's surprisingly steady slash continues to grow.
spk08
There is no year where fees per room are going down just because of the arithmetic. And, you know, you continue to have rev par growth on the existing pool of assets that's, you know, that continues to go up. And, yeah, fees per room as we model it five, ten years out just keep going up.
spk11
Appreciate it.
spk13
Thank you.
spk11
The next question is from Robin Farley from UBS. Please go ahead.
spk01
Great. Thanks. I wanted to ask a little bit about the business transient performance in the quarter. I know you talked about REVPAR being ahead of 2019 levels, but I wonder if you could give us a sense of where either occupancy or number of business transient nights in the quarter compared to Q1 of 19. It seemed like from kind of broader industry trends that Q4 didn't show that much sequential improvement from Q3 in terms of that change versus 2019. And maybe you'll say, of course, it may not matter at all when you have power performance as strong as what you have. So I'm certainly not saying it's not a strong quarter, but I'm kind of curious what's going on with that Business Transient Night piece of it. Thanks.
spk08
Yeah. On a global basis, Business Transient actually, you know, fourth quarter to first quarter ticked up. So on a, you know, it was about in the fourth quarter about 103 and it went to 104. But importantly, on an aggregate occupancy basis in the first quarter, for the first time, it actually got back or slightly above where it was at the prior peak. Now, that's not a U.S., that's a global number. So why is that happening in the face of everything you're reading? And it's really simple, which is why I said it in the comments, it's SMEs. It's like what we're all filtering through is, you know, big corporate America, big corporate America, you know, is worried about the world, you know, all the uncertainty, and maybe curbing some of their appetite for travel. Having said that, I've met with, we had a big customer event, and I didn't get that impression even out of big corporate America. I think incrementally, year over year, they're all traveling more, but maybe not as much as they would have thought. But the SMEs continue, which are 85% of our business, continue to perform really, really well. And the big corporates weren't really back in any event. And so since they had not come back to prior levels, while they may recover more slowly, they're not my impression from talking to a bunch of them and they're not really cutting because they already had cut so much and they hadn't built it back. They're just maybe it's flattening for them. said it many times over the last few years, we were always quite dependent, 80% of our business was SMEs. It's 85% now by choice, meaning we have shifted our mix because it's higher rated business, it's more resilient in the sense that it's more fragmented by the very nature of what it is. You know, the business transient is alive and well, and I'd say, you know, in the first quarter, you know, both the price was above and volume was, you know, at or slightly above, and that trend continues into Q2, although, you know, we're early in Q2.
spk01
Okay. Very helpful. Thanks. And then just another question, kind of a small one, is your distribution, Through OTAs, I have to imagine that as business champion is coming back, that your OTA distribution is moving down compared to last year, just given that leisure is not as big a percent of total.
spk08
It's normalizing. It's slightly elevated relative to pre-COVID, but not much. And it's come down a bunch. And we expect probably by the end of the year, certainly in the next, it will be normalized with where it was, which is where we want it to be.
spk01
Okay, great. Thank you.
spk11
The next question is from Brant Montour from Barclays. Please go ahead.
spk10
Hey, good morning, everybody. Thanks for taking my question. I was wondering if you could just dig in a little bit to the drivers of the conversion activity, taking SPARC out of it. Chris, you mentioned potentially lower hotel transaction activity from financing putting pressure with as well as financing being a headwind in and of itself for doing non-spark higher-end conversions. I guess could you stack that up against some of the maybe positive tailwinds, perhaps enforcement of brand standards across the industry, forcing more trade down or even more independence, getting more nervous looking for brands? How do you look at all those factors on a net basis later into the year?
spk09
Yeah, I'll take this one, Brian. I think outside of Spark, because we've covered that, I think you've got a couple of factors. One is, yeah, in sort of an environment where people are expecting demand to soften, they tend to seek out brands more often, and obviously they tend to seek out the stronger brands. So it's being driven by somewhat of demand for independent hotels converting to brands. And then I think the other factor is in an environment where credit's tighter and a cash flowing hotel, right? So acquiring a hotel and that's already cash flowing is easier to finance than new construction. So I think those are the two primary drivers. And then you think about, you know, some of the things that are going on around the world, but they're generally driven by transactions and you generally in a softening demand environment, easier to finance and more demand for the branded systems.
spk10
Great. Thanks so much.
spk09
Sure.
spk11
The next question is from Bill Crow from Raymond James. Please go ahead.
spk12
Good morning, Chris and Kevin. Good morning, Bill. As we think about the change to your guidance for 2023, how much of that is driven by areas outside the U.S.? And has there really been any change or any positive change to U.S. expectations?
spk09
Yeah, I think, Bill, what you're seeing is it's kind of across the board. It's positive change. to all regions, largely, I think Chris covered this earlier than Carl, largely concentrated with, you know, the demand strength continuing into the second quarter and us taking the second quarter up a little bit, a little bit in the third quarter, and then, you know, and if you think about pushing out the anticipated slowdown in the back half of the year. But there is improvement in the outlook in all regions, including the US. All right.
spk12
Thanks. For a follow-up, I'm going to actually switch my follow-up. And I want to actually address something you just said, Chris, which is that large corporates seem to be flattening in their demand. And I'm just curious whether this early in the recovery, and I know there are issues going on in tech and financial services in particular, but does this, you know, give credence to that argument that business travel never fully recovers?
spk08
I don't think so. Number one. prima facie evidence it has. So, I mean, you know, Bill, what I just finished on a couple of questions ago in the data in the first quarter, business travel has already recovered. I think what it means for us is, you know, in the intermediate term, as you get more certainty in the environment, there's upside in business travel, meaning we've done a good job of shifting to SMEs, With that shift, we're sort of on a volume basis back to where we were, rate basis higher. The big corporates still have to travel. You know, by the way, the big corporates are also not one size fits all. It's really where you see the impact is technology, banking, consulting. If you look at a lot of the other big corporate sectors, they're still growing, but those sectors weighted down. As those sectors stabilize, and start to think about the future and being competitive and getting their sales forces back out and get out of cost-cutting mode, which they will, they always do, I look at it as upside. So I think when you wake up, you know, in a year or two and we're in a little, you know, whenever we get to a more certain environment, hopefully it's sooner than later, I think the opportunity will be that businesses travel both volume and price will be higher than the prior peak. I think the same thing for the group business. I think this has done, what's happened in the last three years has done nothing but reinforce. I mean, we're definitely benefiting from a lot of pent up demand, but it's done nothing but reinforce as I talk to all of our group customers and the like that the need for people to be congregating to do the things that they do and culture and collaboration and innovation and all of those fun things. You know, I kind of famously said when we get through this in like April, May of 2020, I think it'll look a lot more like it did than it does. And I think that's, I still think that. And I think the data largely supports it. If you look at the business mix, like this quarter versus pre-COVID and, you know, the big segments of business transient, leisure transient and groups, we're within a point i mean right now the only difference is leisure's a point higher and groups a point lower otherwise it's about where where it was right and that's because you know group takes time to sort of you know to come back and in the meantime leisure's been strong but ultimately as we get strong high-rated groups back we will continue to mix more of that in so um I do not personally believe there is credence to that argument. I think the data supports that argument at this moment.
spk12
Thanks, Chris. Look forward to seeing you early next month.
spk08
Yeah, same.
spk11
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the call back to Chris Nassetta for any additional or closing remarks.
spk08
Thank you, Chad. Thanks, everybody, for the time today. Interesting times with all, you know, the word of the day is uncertainty. But, you know, as you can see, we feel very good about what we delivered in the first quarter. We feel great about the second quarter. Frankly, we feel pretty good about the full year. We're making sure that we're keeping our eyes wide open about what's going on in the world. But, you know, we continue to do well and deliver. Most importantly, return more and more capital, which we'll continue to do. So thank you for the time, and we'll look forward to catching up with you after the quarter.
spk11
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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