Good morning, and welcome to the Hilton Second 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 Second 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 are effective only 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 Factors section of our most recently filed Form 10-K. In addition, we will refer to certain non-GAAP financials 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 of Global Development will then review our second quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. As I think our second quarter results demonstrate, we continue to make significant progress towards recovery, working hard to serve all of our stakeholders. For our guests to deliver reliable and friendly experiences in a very demanding environment, for our team members to maintain an award-winning culture by creating an inclusive, safe and welcoming environment full of opportunities, for our owners to drive value through premium market share and efficient and effective operating models, for our communities to remain a positive force for good at a time when it is needed most, and finally, for our shareholders to maximize profits, free cash flow and overall total returns. We're pleased to see that our diligence and determination are beginning to pay off. As much of the world reopens, the pent-up demand for travel we've been anticipating is happening. While the pace of recovery varies and COVID variants remain a risk, we are seeing significant sequential improvement in every major region. In the second quarter, system-wide RevPAR grew 234% year-over-year. Compared to 2019, RevPAR was down 36%, improving 17 percentage points versus the first quarter, with June RevPAR improving 24 percentage points versus the first quarter, and down only 29 points versus 2019.

Thanks, Chris and good morning everyone. During the quarter, system-wide RevPAR grew 233.8% versus the prior year on a comparable and currency-neutral basis, as recovery accelerated driven by strong global vaccine rollouts, relaxed government restrictions and surging leisure demand, particularly in the U.S. As Chris mentioned, system-wide RevPAR was down 36.1% compared to 2019. Performance was largely balanced between occupancy and rate growth. Adjusted EBITDA was $400 million in the second quarter and those results reflect relaxed travel restrictions and strengthening global demand. Management and franchise fees grew 220%, demonstrating the resiliency of our fee-based business model. Additionally, results were helped by continued cost control at both the corporate and property levels.

Thank you. We will now begin the question and answer session. And the first question will come from Stephen Grambling with Goldman Sachs. Please go ahead.

Thanks. You gave some great color on NUG, but I'd like to peel back the onion a bit more. Specifically, can you discuss how net unit growth expectations have evolved over the quarter as we look around the world? Where your increased confidence comes from across things like brands, ads, leases, conversions? And how the financing environment is changing, as we consider not only this year but sustained growth beyond? Thanks.

Thank you for the question, Stephen. I appreciate the opportunity to provide more details. When considering development globally, the recovery trajectory is closely tied to our development prospects. Our upgraded outlook for the year is primarily based on the quicker recovery we are observing in the U.S. and China, which are the main contributing factors. The recovery is showing a steeper slope in these regions, whereas Europe is lagging, but we expect to see improvement as the U.K. and Europe continue to reopen. Overall, there is increased activity in development, including both signings and openings, as momentum builds. In terms of conversions, they are showing modest improvement. Historically, we've had high hopes for conversions, given our strong conversion brands and the system's top performance in terms of market share. This is a good sign for attracting independents and weaker brands to join us, and we are seeing positive movement in this area, slightly exceeding our expectations. We anticipated a pickup in conversions this year and into next, with some signings taking time due to capital expenditures and property improvements. Regarding the financing environment, it's improving significantly. The U.S. and China markets are recovering most quickly, as efficient markets respond to lifting performance, with occupancy and rate levels rebounding rapidly. Lenders are gaining confidence, and with low interest rates, they are willing to take calculated risks, which is reflected in the strong financing markets in China, while the U.S. still has room for growth. As we head into fall, I believe we will see continued robust recovery, leading to a gradual increase in available financing in the U.S., although Europe may take longer to catch up. While financing is far from pre-pandemic levels, it is clearly on an upward trend from last year's lows.

Thank you.

Next question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for taking my question. Chris, could you talk a little bit about how you guys plan to use key money in development spend? And obviously, in light of the financing environment that you just talked about and the way that's coming around, is it something you guys maybe rely on a little bit more in the near term and then start to wean away from it as we get more comfortable with kind of the outlook for new unit growth and things of that nature?

That's a great question. We've seen a slightly higher key money expenditure this quarter than usual. However, I don't foresee any significant changes; over 90% of our deals are still dry deals, and we're not utilizing the balance sheet. The recent increase in key money spending is actually a positive sign, indicating that long-term projects we've been pursuing and new opportunities arising from the pandemic have come together uniquely this year. For instance, some of our larger expenditures involve iconic assets for our portfolio, particularly resort-oriented investments that will last for decades, such as the Waldorf Astoria in Monarch Beach and Laguna, which I've been involved with for about 20 years. Additionally, Resorts World on The Strip, which has 3,500 rooms and a substantial meetings platform, has been a project we've pursued for several years. While it requires more key money than usual, it remains modest compared to our typical expenditures. Furthermore, the three deals in Mexico that provide 1,500 rooms in Puerto Vallarta and Tulum are remarkable assets that became viable due to COVID. This situation allowed us to enter development areas that would have taken years to arrange otherwise. While I expect our spending to increase this year and next compared to 2020, which was a low point, I believe our capital expenditures will align more closely with our usual ranges from 2017 to 2019. Overall, we anticipate that over 90% of our deals will remain dry, and even the unique opportunities that involve key money offer excellent returns and are strategically beneficial to our portfolio.

Thanks Chris. That’s super helpful. I appreciate it.

The next question will be from Joe Greff with JPMorgan. Please go ahead.

Good morning Chris, good morning Kevin. Good morning Jill.

Good morning Joe.

Good morning Joe.

Given significant progress we've seen in the operating environment given your balance sheet and where your leverage ratios are heading by the end of this year I was hoping you could give us an update on how you're thinking about what you're looking at which might be obvious but and how you're looking at the timing of resuming capital return.

Great question. Thank you. I know this is on everyone’s mind, and we’ve talked about it quite a bit. Ultimately, this will be a decision we take to our board in an upcoming meeting. We've had broader discussions, but we haven't finalized anything yet. I mentioned on the last call that I was confident we would reinstate our return of capital program next year, and I still feel that way. The pace of recovery is improving, so I believe we will be able to do this in the first half of next year. The specific timing will be determined after we talk to our Board. You should take a look at our second quarter results and the commentary from Kevin and me, along with any additional insights provided, to understand our optimism. We're aware of the challenges, including the Delta variant and global events, but we are confident that we will push through. The real-time trends we are seeing are strong and improving, and we feel good about the upcoming fall. Each passing quarter gives us more confidence in the recovery, and this should eventually allow us to start returning capital as we anticipate generating significant free cash flow next year. Our belief remains that we can continue to grow without heavily relying on our own balance sheet, and we plan to return excess capital to our shareholders. Therefore, I expect that we will resume the capital return program in the first half of next year and will discuss this with our Board very soon.

Thank you very much.

The next question comes from Shaun Kelley with Bank of America. Please go ahead.

Hi, good morning everyone.

Good morning Shaun.

Good morning Chris. You mentioned a couple of times now just talking about that recovery in the fall. So, I was hoping we could dig in there a little bit. I know you're sort of probably right at the cusp of when you have too much color you can actually share on the corporate side. But can you talk about how that is starting to firm up be it September-October and what data you have? And then last quarter you talked a little bit about an exit trajectory for the year of possibly something in the down 30% range and I appreciate it may be a little early to give an update to that but kind of how are you thinking about that relative to maybe where we were three months ago?

That's a very valid question and one that many are considering. We have gathered some data points that I can share along with my personal insights. As Kevin and I have mentioned in our comments, the recovery we are experiencing is quite strong across the board, particularly in leisure travel, but also showing significant improvement in business travel, despite still needing progress in group travel. For instance, last night, our system-wide US occupancy was at 74%. This figure includes urban markets where some hotels remain closed. Notably, many of our hotels cater to business travelers, which is reflected in the mid-week occupancies we are seeing. Since Memorial Day, there has been a clear increase in weekday occupancy by 10% to 20%, predominantly driven by small and medium-sized businesses, which have historically accounted for 80% of our business travel. Looking ahead, I believe in August, we will continue to see a strong surge in leisure travel, even with concerns surrounding the Delta variant. Consumer behavior shows no significant impacts from it. However, it's typical for business transient travel to dip as people prioritize vacations during this time of year. Once we enter the fall, I anticipate that more children will be back in school, and offices will reopen, which encourages travel for business purposes. We have anecdotal evidence that suggests an increased willingness to travel as people balance parental responsibilities and work commitments. In the fall, I expect leisure travel to decrease as school resumes, while still remaining elevated due to the ongoing hybrid work environment. Business transient travel will rebound, and group travel, although slower to recover, is expected to improve significantly as we approach the third and fourth quarters. While I previously projected we would return to around 70% of 2019 levels by year's end, my outlook has improved. We are currently estimating that demand will reach around 85% of pre-pandemic levels, with RevPAR showing a similar trend of recovery globally. The pace of this recovery has exceeded our expectations. Demand recovery has been more rapid than anticipated, and surprisingly, room rates have rebounded quickly as well. This reinforces the idea that market dynamics are strong, and we are strategically positioning our pricing to reflect this demand. Looking back, the swift return of room rates during this recovery phase stands out as one of the most notable aspects compared to past experiences throughout my nearly 40 years in the industry.

Thank you for all the detail.

Yes.

The next question is from Smedes Rose with Citi. Please go ahead.

Hi, thanks. I just wanted to follow up on that. I wanted to follow up a little bit on that. I think in your opening remarks you said that your group bookings are trending greater now in 2022 than they were in 2019, which I think is a pretty big positive increase sequentially from what you've mentioned on your first quarter call. And I was just hoping you could maybe talk a little bit more about the composition of those groups and what you're seeing on the rate side. And maybe just kind of a little more color around folks' willingness to book group at this point.

Yes. Still – great question still building. What I said is that all of our bookings for 2022 are at rates that are greater than 2019. So to be specific rate. I didn't say volume. Volume is still a bit off just because it takes time to build the book. So my expectation is we get closer to next year and in the next year. In the year for the – later in this year, particularly when you get past this Delta, the Delta wave and then in the year for the year we'll be a barn burner year bigger than anything we've ever seen in the year for the year simply because people have to meet. It takes time to plan it. They want to sort of get through their budget season before they know how much money they have. But I'm not worried about the volumes next year. Again they're a bit – they're not where we were at 2019. They're close but they're not there but the rate is above. And so what I've been – honestly, what I've been saying to our teams is be really careful like we – there's going to be a monumental amount of demand we don't want to give it away. We want to make sure that we're pricing. Even though we're not at the volumes now, my expectation very strongly is it's all going to fill in. It just takes it a little bit longer given what's the reason for this recession being a health issue. And sort of getting through the final stages of that in my opinion is required before you really get the momentum on the volume. And so that's why rates are up is because we're being super disciplined recognizing that there's a limited amount of meeting space, there's going to be a gargantuan amount of demand and we can be a bit patient I think given what's going on.

Okay. Thank you.

Next question is from Thomas Allen with Morgan Stanley. Please go ahead.

Thanks. So on net unit growth, you've obviously seen some great progression in terms of your guide and you gave some helpful color earlier. But do you think you can get back to the 6% to 7% unit growth you were putting up pre-COVID? And if so when?

Yes I do. And I think it's probably sometime between 2023 and 2024 Kevin?

Yes.

Kevin is also Head of Development. So I want to make sure he's – before I commit to him. Yes, I think it's sometime in 2023, 2024. Probably more 2024 just because you got to get through the – if you look at starts last year, you'd look at – I mean if you look at the progression you'll see when we're done last year we were down in starts. This year we'll be down modestly, not nearly as much as last year in starts. And I think that's the bottom. And then I think next year we'll be ramping up in starts. And I think if you just play that through that's what gets us in the mid-single digits for the next sort of couple of years two or three and then I think you're back in business in the 6% to 7% range.

Yes. if the average construction time or gestation period in the pipeline is 2.5 or three years, you've got to be 2.5 or three years past the bottom, before you get back to your old run rate.

Okay. Thank you.

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

Great. Yes, I wanted to ask you about the pipeline as well. You mentioned that conversions were I think you said 30% of signings. I'm wondering what percent of openings that was in Q2 and maybe what you expect it to be for the full year? And then just on the theme of pipeline, you mentioned mid-single digits for the next two or three years. I think last quarter you had said that 2022 might be kind of in the 4% to 5% range but maybe lower than this year just given that there was some kind of construction catch up this year. So I'm wondering with the higher unit growth rate here in 2021. Does that carry through to sort of continued acceleration into 2022, or in fact is it bringing forward some things you thought would open in 2022 that kind of bring forward into 2021 and so maybe we'd still see that slightly lower rate closer to 4% next year than the 5% for 2022? Thanks.

Yes, Robin, thanks for your questions. I'll address them in order. Regarding conversions, openings were lower at about 10% for the quarter, down from around 19% to 20% last year. However, I anticipate that this year will be at similar levels, possibly even slightly higher due to the number of signings in the second quarter. We are indeed seeing more conversions, and I'm pleased with the mix of hard brands, soft brands, and conversions from independents and other brands. While our pace of delivering new builds is increasing, which makes it a bit more challenging for that percentage to shift, it's all incorporated into our outlook. Moving on to 2022, I believe it will align with our expectations, possibly with some timing adjustments replaced by more conversions. So, we still see 2022 in the same range as before. You also mentioned our guidance of 4% to 5% growth for the next several years; we weren't indicating a specific year for that range. We're now saying mid-single digits, which includes 4% to 5%. Overall, while the figures are consistent, there's increased optimism about net unit growth moving forward based on recent developments.

Great. Thank you very much.

Sure.

The next question is from Richard Clarke from Bernstein. Please go ahead.

Hi, thanks for taking my question. Just wanted to ask your sort of opinion your thoughts on labor shortages in the US. And there's been some commentary around drops in service levels. Obviously, it's across the whole industry. But how much truth is there in that, or is this working the other way you actually being able to realize some sort of bigger efficiencies by working with less on the hotel side level?

Thank you, Rick. It's a great question. Labor shortages are a significant issue, probably the biggest challenge we face, not just for Hilton but for the entire industry, including all service sectors and manufacturing, as well as the supply chain problems you read about daily. Everything is interconnected due to insufficient labor. I believe this situation will mostly resolve itself in the next few quarters, as there are various complex factors at play. Some of these are health-related; many individuals, particularly with the Delta variant, are hesitant to return to work due to health concerns. Additionally, with schools closed, many parents, especially women, have had to stay home to care for their children, which has greatly affected workforce participation. Some government programs that were critical during the worst of the crisis are no longer as relevant with ample employment opportunities, such as the federal unemployment insurance top-up that will end in early September. I think once schools reopen, we move past the Delta wave, and unemployment benefits conclude in the early fall, we will start to see a significant easing of labor issues. Regarding the impact on margins, despite the service challenges we all face, we are making tremendous efforts to provide excellent service, and I believe we are succeeding under tough circumstances. We are doing this with fewer employees, which is somewhat ironic because demand is strong, and we can set prices accordingly; thus, margins remain surprisingly high due to the prevailing rates and lower labor costs. However, this is a temporary situation. We will eventually have more staff in the hotels. Long-term, we have implemented several measures during the crisis to test and learn how to modify our operating model, especially concerning housekeeping and food and beverage, among other areas, enabling us to deliver an exceptional experience for our customers more efficiently. Once we navigate through the current labor challenges, we believe we will have developed a strategy for higher-margin operations across all our major brands. It is indeed a significant issue that we are closely addressing, but as the saying goes, this too shall pass.

Thanks very much.

And the next question is from Bill Crow with Raymond James. Please go ahead.

Thanks. Good morning, Jill. A clarification and a question. The clarification is I think you mentioned that RevPAR was down 29% in June relative to 2019 numbers. And did you say that it was going to be closer to 20% down in the fourth quarter as we pivot to business travel? That's the clarification.

Yes I did.

The question relates to your comments about rate being the biggest surprise. I'm wondering if we have reached a point where we can confidently say we have achieved success in rate integrity, perhaps for the first time during this recovery, or if we need to wait until business travel resumes to really understand what is happening beyond this surge in leisure travel.

Yes, on the first question, I apologize if I was talking over you. I tend to under promise and over deliver, so I don't want to say we've succeeded yet on rates. I've been in this industry for a long time and have seen many recessions, and what I'm observing now is quite unusual. I believe that into the fall and next year, we will continue to see strong demand and improvement. As I mentioned earlier, when we look back on this period, the rate situation will likely be a key difference in our recovery, but I’m hesitant to declare victory just yet. We all remember George W. Bush's declaration on the aircraft carrier, which didn’t turn out well.

It didn't work out so well.

It's nice to see, but it's really just a matter of demand and being smart about how to price that demand.

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

Hi. Good morning everyone.

Good morning.

Quick question here and this is just, sort of, looking for a ballpark answer. But with the labor issue out there, what percentage of your hotels right now are unable to sell full inventory due to staffing shortages?

I don't have a scientific answer for you. Atmospherically, I think it's a relatively small percentage of our portfolio. There are definitely some hotels that can't operate at full capacity. Labor was the main topic of discussion among owners I met with recently, as it's what everyone's concerned about. I'm just reflecting on the situation. I don't have specific data on it, but I believe it's an issue, though not a major one. Interestingly, this situation is also positively affecting rates because some markets are reducing their capacity, which is helping drive rates. There might be an opportunity for us to reflect on how well we've managed rate recovery and occupancy to maximize profitability. In the hotels facing these challenges, some owners have reported success in moderating occupancy levels and driving revenue, leading to higher profitability compared to when they were fully staffed and had more capacity. So, it's not entirely negative. Long-term, we do need to address the labor issues; I believe we will find solutions. We are taking several steps to ensure our system can access labor and provide the service we strive for, and it's clear we need more labor in the hotels. However, from the perspective of many owners, while some are limiting capacity, it's still a relatively small percentage.

Okay. Thank you for the color. Thanks.

Yeah.

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

Hi, good morning everyone. Thanks for taking my question. I have two questions if I may. Within the franchise fees line item, it seems that modeling has become quite challenging for both of us. However, this particular line item was significantly larger than we anticipated, and I understand there are several components involved. It should be straightforward to understand franchise fees, but Kevin, could you provide some insight into the other elements included? There are credit card fees and some royalties, and a little modeling on how those fit in would be appreciated.

Yes, David, it’s both challenging and straightforward. Overall fee growth was somewhat lower than the overall RevPAR growth, which answers your question. The simple answer is that license fees are indeed growing, and they are growing significantly. In fact, license fees increased by about 80% in the second quarter, but that is significantly less than the RevPAR growth of 234%. So, the overall math results in fee growth being a bit lower. Ideally, in the long term, it should balance out to a one-to-one ratio, which is the best way I can explain it.

Got it.

Like, we said it's hard to model though. Sorry about that.

That's fine. I'm open to any insights you have. If I could ask a related question about owned and leased properties, although it's not the largest component of your model, I would appreciate any information you could share about how that might recover and grow in the future.

Yes, it's totally fair question. I mean, it's sort of telegraphed a little bit in our prepared remarks again pretty straightforward. I mean that portfolio is concentrated in places like the UK, Central Europe and Japan in particular that are just behind in the trajectory of recovery. So all the things we talked about there's nothing structural there. It's just it's behind. It obviously was loss-making this quarter. It probably will be loss-making next quarter just because of the level of recovery and what's going to be needed in those parts of the world. And we think it's sort of breakeven-ish in Q4. We'll see what happens. Again it's dependent on recovery and the world opening up a little bit. And then the last thing I'd say is obviously it's going to grow more quickly than the core business. So it's going to contribute positively to our growth going forward because it's going to be growing off of a much lower base.

Perfect. Appreciate the help. Thanks.

Sure.

The next question is from Vince Ciepiel with Cleveland Research. Please go ahead.

Thanks for taking my question. I wanted to come back to the Honors contribution which sounded really high. I think you said around 60%, which is maybe a few points under 2019. And that's all while business transient is still I think 30 points off. I think that usually over-indexes to brand direct. So just curious how you think this direct contribution evolves through the pandemic. Usually there's a narrative that OTAs take share, but it seems like your direct business is really impressive. How do you think it evolves over the course of the next year?

It's difficult to predict the next year. However, over the coming years, our goal is to enhance the value of our Honors program so that it becomes essential for everyone to join. Members enjoy access to technology, discounted rates, points that can be used for purchases on platforms like Amazon, concert tickets, travel, dining, and spa experiences. It's crucial that non-members understand they are missing out on significant value. We've worked hard to make the program relevant for both frequent and infrequent travelers, which has been transformative for us. This approach has helped us lead the industry in occupancy percentage from loyalty over the past five years, appealing not only to those who travel frequently but also to those who travel just a few times a year. We're aiming to raise our membership levels beyond pre-COVID times, which were already in the 60s. While COVID did set us back, it also created new opportunities. By May, we noticed that even with our core travelers not fully returning, we were only a couple of points away from pre-pandemic levels. This is due to the return of our core travelers in May and June and our efforts to shift our marketing strategies to attract new customers during COVID. We encouraged non-core customers to see the benefits of joining Honors, leading many to sign up and appreciate the value we offer. Our focus during the pandemic has been to reach out to these customers and ensure they understand our value proposition, which will benefit us when our core customers return. Our aim is not just to return to our previous status, but to surpass it, ultimately providing a better experience for our customers. Enhancing the value proposition improves customer satisfaction, and as technology evolves, it makes for a happier ownership experience as well, helping lower distribution costs. We strive to strengthen direct relationships with our customers, and although COVID has been challenging, it has also fast-tracked some of our initiatives.

Thanks.

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

Thank you everyone for your time today. We covered a lot of ground, and as you can gather from my comments, we are pleased with Q2 considering the industry's overall performance and our own. We acknowledge that there are risks, but we believe they are manageable. We are optimistic not only about the second half of the year but also about recovery as we move into 2022 and beyond. We appreciate your time and look forward to updating everyone after we complete our third quarter. Take care and have a great day.

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