Good morning, and welcome to Hilton's First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's prepared remarks, there will be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Thank you, Chad. Welcome to Hilton's first quarter 2021 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. 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 first quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone. And thanks for joining us today. It has been a little over a year since the pandemic started. Over that time, we acted swiftly to address the challenges we face so we could quickly turn our focus to best positioning ourselves towards recovery and beyond. I'm really proud of how we've set up the company for the future. And most importantly, I'm grateful to our team members who have continued to lead with hospitality and to all of our stakeholders for their ongoing support. In the first quarter, system-wide RevPAR decreased 38% year-over-year and 53% versus 2019. Rising COVID cases and tightening travel restrictions particularly across Europe and Asia Pacific weighed on demand through January and most of February. March marked a turning point as we lapped the start of the U.S. lockdowns. RevPAR turned positive by more than 23% year-over-year. System-wide occupancy reached 55% by the end of the month, driven by strong leisure demand. As expected, recovery in group and corporate transit continued to lag, but both segments showed sequential improvement versus the fourth quarter. Overall, this positive momentum has continued into the second quarter. While recovery varies by region and country, we can see the light at the end of the tunnel.

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR declined 38.4% versus the prior year on a comparable and currency-neutral basis as rising COVID cases and reinstated travel restrictions and lockdowns disrupted the demand environment, especially across Europe and Asia Pacific. However, occupancy improved sequentially throughout the quarter, increasing more than 20 points. Adjusted EBITDA was $198 million in the first quarter, down 45% 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 franchise fees decreased 34%, less than RevPAR decreased as franchise fee declines were somewhat mitigated by better-than-expected license fees and development fees. Additionally, results were helped by continued cost control at both the corporate and property levels. Our ownership portfolio posted a loss for the quarter due to the challenged demand environment, reinstated lockdowns and travel restrictions in Europe and Japan coupled with temporary hotel closures and fixed operating costs including fixed rent payments at some of our leased properties weighed on our performance. Continued cost control mitigated segment losses. For the quarter diluted earnings per share adjusted for special items was $0.02.

Thank you. We will now move to our question-and-answer session. And the first question will come from Carlo Santarelli with Deutsche Bank.

So Chris, Kevin, you guys gave some helpful data points around kind of the acceleration that you saw throughout the first quarter. And speaking more on the U.S. front, could you guys maybe talk a little bit about March, and maybe to the extent you're willing to April, and how kind of not only RevPAR trends, I know you gave some data points on occupancy, with the 55% exit rate coming out of March, kind of what you've seen from a fee generation on the U.S. side as it pertains to the occupancy gains? And then, perhaps how you're thinking about beyond people coming back into the office, the aspect of pent-up demand within the business and corporate traveler as we get maybe it's probably a fourth few event, I think most of us would assume at this point. But how do you guys think about that?

That's a lot of questions wrapped into one. I will address some parts of it, and maybe Kevin will add a few points. We might save some questions for later, as I’m sure many will have similar inquiries. Thank you for that. I believe that’s the key question. As both Kevin and I mentioned, we saw significant improvements as we progressed through the quarter, and that trend continued into April. In terms of the global data, it’s best to compare it to 2019, as looking at 2020 right now is not very helpful. In January and February, globally, including the U.S., we were down about 55% to 60% compared to RevPAR in 2019. By March, we improved to the mid-40s, and then in April, we made further gains into the low 40s. It’s still early to make conclusions, but we believe this upward trend will continue based on forward bookings. On the leisure transient side, which will dominate the second quarter, we are optimistic about continued growth. If we break down room nights by segments compared to 2019, leisure in the first quarter was nearly at 90% of 2019 levels. Business travel was around 50%, and group travel was about 35 to 40%. As we look ahead for the year, our expectation is that every region will show some variance. I will hold off on specific regional insights for others to address because I don’t want to dominate the conversation with one question. Looking forward, I anticipate a very strong leisure-driven summer. We expect leisure demand to significantly exceed 2019 peak levels. As the summer progresses and into the fall, many companies are planning to bring employees back to the office, albeit possibly on a flexible basis. It’s likely that by the fall, we will see a notable increase in business travel, especially in areas where restrictions have been lifted, such as parts of China and the U.S. currently seeing business travel volumes at 75% of 2019 levels. As school resumes in the fall, we expect a considerable increase in business transients. Regarding group bookings, the trend shows a positive uptick mainly in smaller meetings happening this year with larger gatherings being booked for next year. We believe we will see a significant rise in realized group business in the latter half of this year. By the time we reach the fourth quarter, while the second quarter will be primarily leisure-driven, the third quarter will represent a transitional period. Our forecasts, based on extensive data, indicate that leisure room nights may reach 2019 levels while prices may not fully recover to those heights. We anticipate business transient travel being around 70% of 2019 levels by the fourth quarter, still lower than RevPAR levels since high-rated business travel will take longer to return. We believe group travel can rebound to about half of 2019 levels, but high-rated groups will likely return next year. Overall, we anticipate improvements in RevPAR levels month by month compared to 2019. By year-end, we could reach around 70% of 2019 levels, which is not complete recovery, but much better than previous states. We’re fortunate to see a steeper recovery slope than previously anticipated since our last call, though we still need to monitor business trends closely. There’s a noticeable uptick in demand, particularly for both leisure and business travel. This need will only increase as people recognize the importance of in-person collaboration to get work done effectively. We’re on a solid recovery path, but we must continue to pay attention to vaccination trends, infection rates, and other ongoing developments. I hope I covered most of your questions while leaving some room for further inquiries from others.

Yes. I don’t drive corporate tunnel for writing. So I appreciate the response. Thank you very much.

And the next question will be from Joe Greff with JPMorgan.

I believe most of my questions regarding recovery were answered earlier. I would like to discuss the development pipeline, which looks promising as it has improved on a quarter-over-quarter basis. We've noticed that the non-U.S. segment is increasing as a proportion of the pipeline. How much of the non-U.S. component consists of limited service? How does that composition compare to a year ago? Additionally, in terms of the average fee per room in your development pipeline now versus a year ago, has that average fee increased or decreased?

Yes, that's a good question. I think those trends are not changing dramatically in the short term, right? They sort of stay, we've got a pretty good development pipeline, both in full service and limited service, you have seen growth, I mean, primarily through our master limited partnerships in China with Hampton and Home2. But also, as we deploy Hilton Garden Inn and other brands around the world, you are seeing slightly faster growth in limited service. So for it to change the overall trajectory of fees per room, it will take a really long time. And so that has been pretty steady, as has the mix between full service and limited service generally speaking in both the pipeline of rooms under construction, I think it's about 60:40, full service to limited service. And that stayed pretty constant. All the other way, sorry, 40:60.

Next question is from Shaun Kelley with Bank of America.

Chris, or Kevin, maybe to stick with the same development topic. Inflation has become a big theme around all the markets recently. And I just want to get your thoughts on specifically what this could mean for the hotel development side? Are you seeing or hearing about any changes or delays that could be out there as a result of things like materials inflation? Is this particular concern to you at all, and how you're underwriting or what you're starting to hear back from your development teams?

Yes, it's definitely a concern. We are facing inflation not only in input costs but also in labor. As a result, costs for opening and operating hotels are increasing. However, we are implementing various strategies to enhance efficiencies within our hotels, which I believe will help offset these rising costs. The expenses associated with construction are on the rise, and financing is not easily accessible even for strong owners. While new construction projects are being initiated in the U.S. and worldwide, I anticipate that in the U.S. we will see a cycle where new construction numbers drop significantly, which, in the long run, is healthy for the industry. The positive aspect for us is that the global market is diverse, and different regions experience varying pressures. For instance, the Asia Pacific region, particularly China, is where we see substantial growth opportunities, and the financial environment there is much more favorable. Similar to how we adapted after the Great Recession, our focus now is to remain resilient. We are equipped with a broader range of tools to navigate these changes, such as increasing our focus on conversions. We are well-prepared to capitalize on growth opportunities in markets that are thriving, like China. I anticipate that the pressures on construction costs will ease relatively soon, and financing markets will become more accessible, presenting significant opportunities for new development in the U.S. As we've demonstrated over the past 15 years, despite various global challenges, we have consistently achieved strong growth by adapting to differing market conditions. We are mindful of the current challenges but have a solid plan in place to tackle them, which is reflected in our growth expectations.

Next question will be from Stephen Grambling from Goldman Sachs.

On capital allocation, what are the key factors you are considering and bringing back the dividend and/or buyback and thinking through just capital allocation priorities more broadly?

Yes, the second part is somewhat clearer. Our overall perspective on capital allocation remains the same. We have paused dividends and buybacks to maintain liquidity during the pandemic, but our broad approach has not changed. Specifically regarding your first question, we want to see more progress in the recovery and consistently generate positive free cash flow while reducing our leverage levels. Unless unexpected events occur, we anticipate this will happen throughout the year, and we will discuss it with our board in the second half of the year as the recovery evolves. We believe it is highly likely that we will resume capital returns next year.

And the next question is from Thomas Allen from Morgan Stanley.

Hearing your earlier comments, the slope of recoveries are better than expected, Chris, what's your latest thinking on when RevPAR gets back to 2019 levels?

Yes. That's a great question. Actually, Thomas, thanks for asking. It is one that we were debating over the last few days ourselves. And there are varying opinions on it even in our own shop. I mean, I've been saying 2023 or 2024, as you know, on these calls publicly, and I still believe that. I think with the slope of the recovery I'd probably be on the earlier end of that, rather than the later, as we have a little bit more visibility. I think there is a chance from a room night point of view, certainly on a run rate basis that we get back next year. But I think to get both room nights and rate and the compression we need requires certainly in the U.S. that broadly requires the bigger groups to be back. And while I think they're coming back and certainly they want to be back, the planning and all of that say it's on a lag. So I think that takes some time next year. So I still say 2023, 2024, but I'd probably lean towards the earlier end of that rather than the later.

The next question will be from Smedes Rose with Citi.

I kind of along the same lines, do you see the acceleration in RevPAR, in your conversations, really on the corporate side, for groups less on the association side? Do you sense any hesitancy on the part of corporates to move back in terms of having enjoyed a year of essentially no travel budgets, any kind of pushback that you think in terms of the amount of people they put on the road? Or the amount of people they put into groups? Or is that not really an issue and it just put a pegging off this idea of impairment?

It's another reason I think it takes time to get back to 2019 levels, sort of picking up my earlier answer is because I do think, not only people cut budgets, not everybody, was Amazon or whatever and that has really benefited during this time a lot. Most businesses by number have been really negatively impacted by the pandemic and they need to cut expenses. And so I'm highly confident, as is the case with any cyclical downturn and recovery, when this happens that those budgets will build back, but it will take some time. Now, I think in the second half of this year, I think, number one, there's a huge amount of pent-up demand. And by definition, they only have half a year to spend whatever they have anyway, because nobody's going to doing a ton of traveling in the first half of the year. So I think, ironically, I think there's plenty of budget capacity, I look at our own budget, there's plenty of budget capacity, when you talk to businesses for the rest of this year. I think as you go into next year, if we're in a full-scale recovery, while people are going to, for a period of time, want to be thrifty. I think in the end, it'll just be what the opportunity set is. And if we're in a robust recovery, what I have seen again, I can't prove it, but I've seen it in every other cycle, as you get into that, the rope gets, businesses let the rope through their hands because they have to deliver alpha, they have to compete against other businesses that are trying to do the same thing. And so, their people have to get out on the road, they have to have meetings, they have to build their culture, innovate, collaborate, get out, get their sales forces out and do all the things they do. So, the steeper the slope of the recovery, like in every other cyclical recovery and that's when we get through the pandemic, we're done largely with the health, then you're in a cyclical economic recovery, the steeper the slope, the faster it comes back. That's just the way it's always worked. I don't think it'll be any different here. But that's why I said 2023, 2024, I, again, I said probably I'd take the earlier of that rather than the later given the current slope of what we're seeing. But that's why it takes longer, we will get back to room nights, I think faster, because we'll still find room nights that are lower rated business, because we've gotten really good at that. But we're going to want to shift the mix out over the next couple of years to the higher-rated business, get more compression from groups to ultimately get back there. So I think budgets will normalize, sort of between now and 2023, if the slope of the recovery is what we think, is what we're seeing.

Next question comes from David Katz with Jefferies.

Covered a lot of territory already. But I wanted to just talk about the development in general. And, we have not talked much about the degree to which the interactions with owners maybe changed either temporarily or permanently. We've been so focused on the demand recovery, which obviously is worthy of consuming our attention. But is there any semi-permanent or permanent change in the manner in which you deal with the development community and sort of how those monies and risks are managed long term?

It's a complicated response. When you break it down, I don't foresee any significant changes. There is, however, a short to intermediate-term shift as many of our owners are facing tough circumstances. Most owners are struggling, though some are faring better due to their portfolios being in rapidly recovering markets, like the resort areas in the southern U.S. While the owner community has been hurting, we have also been impacted along with the entire industry. It hasn't been easy for any of us. We have implemented numerous measures to support our owners, and those efforts are ongoing as we work hard for government support in the necessary areas. I believe that as we enter a genuine recovery, opportunities will arise for real stimulus to help restart growth. We are continually focused on those efforts as the situation progresses. In the short term, we've made significant changes to provide broad relief to help owners manage through these challenging times. I briefly mentioned our initiative, "hotel of the future," where we are closely examining every one of our brands. While we’re not finished with this project, we have completed a substantial amount of work to ensure that when we emerge from this period, we can provide an exceptional experience for our customers that maintains the high premiums we've achieved, which are at the highest levels in our history. Additionally, we are working to make our operations more cost-efficient for our owners. Despite the labor pressures we are encountering in the U.S., I am confident that we will ultimately achieve higher margins. If you consider that demand levels might return to those seen in 2018 or 2019 within the next couple of years, even with ongoing cost pressures, we believe we have engineered a method to enhance returns. Therefore, while the current climate is challenging, when we come out on the other side, both existing assets and new development opportunities for our owners should be better than before the pandemic, as we will be executing our plans more effectively. To summarize, I don’t anticipate substantial differences overall, even though some owners may experience variations. The majority of the diverse community we work with, which consists of about 10,000 owners globally, primarily focuses on owning and operating on a franchise basis. While this doesn't apply to all, for most, their business involves hotel ownership and operation. If we can continue to deliver the increasing premiums and help owners retain more profits, I don’t believe they will abandon their business model. They want to continue, but it does require time. This has been a very hard period, which is why we are working diligently to create pathways for support, both from what we can provide and what government assistance may be available. In particular, in the U.S., I believe the pressures facing owners will slow down the new development side until we return to pre-pandemic levels, but I do expect that growth to resume. Ultimately, I think our relationship with owners will remain largely unchanged. In the meantime, we are innovating globally to enhance our network effect and to increase the number of hotels and fees we generate.

The next question is from Richard Clarke with Bernstein.

Just a quick question on the owned and leased portfolio, obviously, that seems to have driven the most volatility in the quarter. Where do your ambitions with that particular division stand? Are you looking to transition that more rapidly towards asset light now? And where do you think the cost savings in that segment can land in the longer term?

We're focused on cost savings across all areas of our operations, as any hotel owner would in this environment. Our ownership in the portfolio has historically been around 7% to 8% of our overall EBITDA, similar to 2019. We have about 60 hotels, mostly leased. Twenty are strategic and essential to us, while we plan to exit around 20 legacy deals with fixed lease payments in weaker markets when the leases expire. The remaining 20 are in negotiation, and we'll either continue or exit based on mutually beneficial arrangements. We've typically phased out three to four leases annually, but we anticipate transitioning six to eight this year, whether through management agreements, franchise agreements, or outright exits. In the coming years, we expect our ownership to drop to less than 5% of our overall EBITDA, which aligns with our overall strategy.

In the next few years, particularly starting in the second half of the year, we anticipate a boost in our overall growth. Unfortunately, the ownership segment, which is largely composed of fixed rent, has been heavily concentrated in the U.K., Europe, and Japan—regions that have faced significant challenges. The RevPAR numbers in those areas have been particularly poor, showing results that are twice as bad in the first quarter compared to the overall performance. As these markets start to reopen, we expect those historically weak numbers to become a major contributor to our growth.

Yes. And we think that happens over the course of the second half of the year.

And the next question will be from Robin Farley with UBS.

Great. Yes, I had a question going back to the unit growth topic. One is, I wonder if you have thoughts about 2022 unit growth. The rate, you mentioned U.S. new construction, obviously, would be lower, kind of how that would compare to this year's 4.5% to 5%. And then, also on that topic, the conversions in this quarter, I think we're 20 some percent of openings. Do you see that moving higher? In other words, are you in the early stages of budget conversions that maybe will come out later this year? I know you've talked in the past about how pressures in the business can lead to a greater rate of conversion. So wondering if that's teeing up for later this year? And then, could that offset the lower new construction growth next year? Thanks.

Yes, sure, Robin, good questions. I think, look, in the first part, I think we've said several times publicly that we think over the next several years, it'll be between 4% and 5%. And, sort of the range there is meant to capture sort of all of the things we've been talking about, right, the timing of openings, the timing of conversions, the timing of removals, the trajectory that we're seeing in new construction. So we still think 4% to 5%, it'll be within that range for the next few years. And then, the second half on conversions, yes, we do you think conversions will pick up over time. In the last cycle, it got to something in the 40% range of overall deliveries probably doesn't get and we've think we've said this publicly as well, probably doesn't get back to that level. This cycle just because the denominator likely won't contract that dramatically, but we do think conversions will continue to be bigger contributor, it'll be a little bit lumpy, a lot of them are larger hotels, some of the things we're working on now are bigger deals either portfolio deals or larger individual hotels that sort of require a transaction to happen for the conversion to happen. So I don't know if that happens later this year or next year, but it definitely will pick up over time.

The next question is from Bill Crow from Raymond James.

Looking globally, how important is outbound Chinese travel to the recovery in Europe? And are there any comments you can make on the trends about on Chinese travel to that?

We've been actively discussing industry dynamics, particularly in China. I recently attended a meeting with Premier Li of China where this was a key topic. Analyzing our business metrics shows that in the U.S., inbound travel represents about 4% of our business, while globally it accounts for around 10%. Other regions, especially Europe, rely more on inbound travel, and it could be significantly higher than 10%, primarily due to China being a major market. As Europe starts to reopen, I expect it to mirror global trends, focusing on regional travel, which is seeing good demand, similar to the U.S. Despite limited inbound and no outbound travel currently, Europeans enjoy traveling, especially in the summer, and will do so when they feel safe, primarily within their own countries or regions. In the long run, once the world stabilizes, efforts will be made to establish safe travel corridors. I had recent discussions with the White House and the Chinese administration about how to enable safe travel as vaccination rates increase globally, albeit unevenly. Conversations are ongoing about establishing these corridors, with the hope that we will see bilateral or multilateral agreements formed in the second half of this year. While vaccination remains a priority worldwide, we anticipate an increase in vaccine supply that could ease travel and economic recovery as we move into the summer months. China is already seeing some recovery, and I believe that as the U.S. progresses, opportunities for reopening travel corridors will arise. Based on my discussions with various administrations, it seems unlikely that there will be a sudden, complete reopening. Instead, we expect agreements between the U.S., U.K., EU, and China to facilitate this process, ensuring there is enough flight capacity and that testing and vaccination protocols are established. While navigating this complex landscape will take time, I am hopeful that by the second half of the year, we will see some progress in opening these travel corridors. In the meantime, even if travel corridors remain closed, people will be eager to travel locally as soon as they feel safe, helping to maintain that pent-up demand.

The next question is from Patrick Scholes with Truist.

One of the issues of the moment at the property level is with staffing and wages. I'm wondering your thoughts on this? Do you see that as a temporary issue that hotels can get by the summer without having to raise wages to attract employees? Or do you see wage inflation inevitable to meet the staffing challenges? Thank you.

It's a challenging situation, especially when speaking with the ownership community. We communicate with them daily as we manage numerous properties. While labor issues are not the only challenge during a global pandemic, they are among the most critical. It's particularly tough in the U.S. to find labor, which is hindering recovery as there's not enough staff to attend to the properties. In the short term, I anticipate wage pressure and inflation; however, I expect it to stabilize as the year progresses. This issue is complex, involving people’s ongoing health concerns, especially in communities where we need to encourage a return to work. It requires time for vaccinations and outreach to make those communities feel safe about returning to the workplace. Additionally, many workers are managing childcare because schools, which act as daycare, are still disrupted. The federal government has provided necessary support through enhanced unemployment benefits and relief checks, which were sensible responses at the time. However, with the demand for jobs rising, there seems to be less urgency for many to return to work. The federal boost to unemployment benefits is set to expire in September, and while it could be extended, I hope it won’t be, not out of disregard for people's needs but because there are sufficient job opportunities available. I believe that by September, a significant number of those in the hospitality sector could easily be reemployed due to the expected demand. This situation is better for everyone, including the country as a whole and individual team members. The convergence of these factors makes for a tough period, and while I anticipate difficulties leading up to September, I think by then, mass vaccinations will have progressed, children will be back in school, and people will feel secure in returning to work. Consequently, I expect the situation to stabilize as we move into the latter part of the year.

Thank you, Chris for your complex and evolving…

Thank you, Chad, and to everyone who joined us today. We appreciate your time. It's difficult to express how pleased we are with our current situation considering the challenges we've faced over the past year and that we are still navigating a pandemic. However, I remain confident in our business model and in people's ongoing desire to travel for various reasons. The actions we've taken in response to the crisis have notably strengthened our business. We are achieving higher market shares and margins while operating with a lower cost structure. As we begin to see positive signs indicating the end of the health crisis, we notice the world starting to return to normal. The reasons I believed people wanted to travel are becoming evident, and while we still have a journey ahead, we feel optimistic about our current position, which is definitely better than in the previous couple of quarters. Thank you again, and we look forward to updating you after our second quarter.

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