Hilton Worldwide Holdings Inc. (HLT) Earnings Call Transcript & Summary

I'm Thomas Allen, Morgan Stanley's U.S. gaming lodging and leader analyst. I'm very happy this morning to be joined by Kevin Jacobs, the CFO of Hilton Hotels. Before we get into our Q&A of what life after COVID is going to be like for Hilton, I'm going to do a quick disclosure. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative today.

So Kevin, going right into it. Thank you again. Can you describe the impact COVID has had on your business? And where are you in terms of -- now in terms of the recovery?

Yes. Thanks for having me, Thomas. As it's -- as we were talking before, it's a distinguished list of companies that you guys have for this life-after-COVID event. So we're happy to be here. Yes, look, obviously, our business -- we're in the travel business. So our business relies a lot on mobility. And so the impact that COVID had early in the crisis when people -- when the economies of the world started shutting down due the lockdowns was that almost overnight, our revenues went down 85% to 90%. We finished the second quarter with same-store sales down 81%. So third quarter, that we just reported, same-store sales were down 60%. So obviously, that's -- you and I have both been covering this business for a long time. Those are numbers that were inconceivable. Minus $60 million was inconceivable prior to 2020 in our business, but it turns out it's 20 points better than the second quarter was. So that -- it feels like -- and really to break that down, what happened over the course of really the second quarter, sort of, if April was the low, over the course of May and June, in the second quarter, we were adding about 10 occupancy points a month. For the first 2 months of the third quarter, we were adding about 5 occupancy points per month. And then what happened in September, and that trend has continued into October, is we've sort of leveled off there. And the reason for that is our business in normal times is about 70% corporately driven one way or the other, whether that's corporate individual travelers or corporate groups, and that's been turned on its head, right now. Leisure is the predominant travel segment. You have some business travel and a little bit of group, mostly recovery-related business, first responders and the like or sports teams, things like that. Obviously, you don't have big group conventions or big corporate conventions at the moment, but what happened is, as you get into the end of the summer in the Northern Hemisphere, you had some of that leisure drop off, not all of it, but some of it. And then you had a little bit of incremental business travel that sort of filled in the leisure one for one. And now we're sort of flattish for a little while here. And obviously, we had news yesterday around the vaccine. That was pretty good. The stocks responded accordingly, but now we have to build. It's still going to be a while before people feel safe, congregating. And so that's -- that will be the next -- what we think will be the next step change in our business is when you can kind of get back to having medium to large groups in the hotels.

So a lot of focus there on the short-term and you being at kind of the whim of the market and market demand. Can you talk about some of the things that Hilton has done to kind of change people's comfort with traveling in this current environment? I know you have this Hilton Clean Stay program. You've been talking about Workspaces by Hilton. Can you talk a little bit about them? And then do you think -- can you -- do you have any metrics around if they've been successful?

Yes. I mean the core -- look, the core of it is what we call the Hilton Clean Stay, right? So that is -- we've -- obviously, we've always had very high levels of cleanliness and hygiene in our properties, and customers have been able to rely on that. It's one of the reasons they keep coming back. I'm sure there's people on the webcast today who have had less than perfect experiences in one of our hotels. And so feel free to call me about that, if you want, but I think we've always been really good at that, but with COVID, it's about being even better. So we did the partnership with Lysol and -- the makers of Lysol and Mayo Clinic early on in the crisis because we wanted to say -- we want to do everything we could to make people comfortable. So when you come into one of our hotels, if you are traveling, first of all, thank you for that if you are. Secondly, you're going to see people wearing PPE. You're going to see Plexiglass shields. You're going to see distancing markers, all the normal stuff that everybody is getting used to in their lives, and then in Clean Stay, it's about an extra level of cleanliness in the room using Lysol's products, which are obviously top of the line and people feel very comfortable with. And then things like the door seal, once the housekeeper leaves the room and it sanitizes, we put the seal on the door that you break when you come in. Everything sort of builds off of that. So then we have what -- we sort of customize that program for meetings, we call it EventReady, but it's really based on the same standards with some additional protocols for how do you deal with having people in the room? And how do you deal with the technology side of hybrid events. And then the workspace is just a way, look, we have a lot of capacity, we have a lot of nonutilized hotel rooms. So we have capacity, and we have people that are now not able to go to their offices and maybe for whatever reason, they want to get out of their house and a hotel room is a great place to do that. So the event -- the workspace is just around taking that environment we've built that at the moment, with demand way down, we have capacity in just being able to -- our job is to get whatever business in the hotels we can for our hotel owners. And so it's just another way for our hotel owners to make money.

You said earlier, thank you for people who are coming to stay. And obviously, demand is severely impacted. Are you seeing a lot of difference between kind of loyalty and nonloyalty customers? And I guess also like road warriors versus nonroad warriors, like are the road warriors just not traveling or if you used to be a road warrior, you're coming a little?

Yes. I think it's a -- I think it's more the latter where there are business people -- I mean, in fact, we think 45 -- I mean, just to sort of level set a little bit. In the second quarter, we think -- we estimate that 60% of the occupancy was leisure. About 30% was business and 10% was group. In the third quarter, it was really balanced between leisure and business. It was about 45% leisure, 45% business. Now again, some of that was because as you got past the summer and into September, there's just less people going on -- fewer people going on vacation. The business traveler that's out there, yes, is, I think, the road warrior, meaning, obviously, big companies like Morgan Stanley and the tech companies, your people -- those people are not traveling. If you're a small business owner and you have to go somewhere and get some sales done to survive, you're getting in your car and you're driving and you're going and trying to sell your product. And a lot of -- and we're doing a lot more same day, a lot more day of arrival business. And a lot of people that just go out on the road and they drive up to a hotel when they get tired and say, hey, can I have a room for the night? So it's kind of like the old school roadside motel business, that's just a lot of what's out there. And so it is -- there is more of that than maybe people would guess.

If it helps, I've stayed at a couple of hotels since the pandemic had hit. So I'm supporting the industry.

Hiltons, of course, right?

Only Hilton [indiscernible]. We have expensive tastes here at Morgan Stanley. So what do you see as the long-term structural headwinds, tailwinds to the hotel business? We've done a couple of corporate travel manager surveys, which have found that corporate travel managers expect to ship about 20% of the travel to virtual meetings in the long term. Do you think that, that's a fair expectation? And then on the flip side, we all work more remotely, I'm working out of Houston right now. I'm going to go back to New York, and I'm potentially going to need a place to stay in a hotel, for example, do you think that, that could be a big driver of upside in the future?

Yes. So look, I -- it depends on what your definition of permanent is. I read your report. As always, I thought it was thoughtful. You obviously don't just make stuff up, you do a lot of research, and I have no reason to judge the validity of your conclusions. I just think there are more conclusions for the now. I think in the end, when we're really past this, the business will look more -- a lot more like it did before than it does today. And I think that the -- we're not big believers in new normal. We don't have our heads in the sand. I think -- we think hybrid meetings is a thing. I mean, most of the people we talk to about hybrid meetings, in the long run, my guest/our guest, is that's not going to reduce capacity of meetings, it's actually going to increase the capacity of meeting. And what you're going to have is a certain number of people that come live and then more people that -- I mean, I can tell you the meeting planners and the associations and people that run events for a living are trying to use hybrid or thinking along the lines of using it to grow their business, not to shrink their business, right, or not to hang on, right? So I do think you'll have hybrid for a while, but I think you'll get back to capacity. I do think we've learned a lot about lower impact and lower value travel, meaning there are interactions or there are business trips that can now be done virtually. There's a lot of things we've built some muscle memory about virtual, but we think in the end that, that means the low impact or low value trips get replaced with higher value trips. So people spend more of their available travel time on research and development and using kind of grow the top end of the funnel of their business versus just more transactional stuff. And so we don't think there will be permanent headwinds in our business.

Yes. So I --

We realize we're biased in that.

And so look, someone who's not biased, and his job is to be objective. Like, our general view is that there will be some shift, but it's very easy to say here and now right now. Like we're doing a virtual conference right now. And so it will be very interesting to see how those respondents change in a couple of months once I want it out on the road. If your competitors are out on the road, for my job -- if my competitor is going to see your accounts in Boston, and I'm the only one left not going, that's not going to help my career, right? So what we generally view virtual meeting shifts is more of a potential impact on the margin than it is likely like a massive...

And if there's a -- look, and the other thing we have to remember is we are going to be in a recession when this is -- I mean, look, quarter-over-quarter, you're going to have all kinds of growth because you're off of a lower base, but you're going to need to build the business back. And especially in our business, you got to build the group business back, and that always comes back on a lag. So I'm not saying that demand snaps back to 2019 levels overnight, but in that interim period where demand remains a little bit lower, you're going to need fewer hotels. And so I think our growth -- and you haven't asked about it, but we can launch into that whenever you want. I mean, our growth rate will be relatively sustained because we'll take more share, but fewer hotels will get built during this interim period where you need less capacity. So that's actually -- the flip side of that is that that's good for fundamentals, right? I mean that if you have capacity additions constrained for a while, that helps the existing hotels and our existing owners do better in the interim. And so that means fundamentals will be supported on the flip side.

So broadly, U.S. unit growth has been growing at about 2% a year historically. And then in the past few years, Hilton has...

Well, historically, meaning that's the long-term average that we had just gotten back to...

Oh, good point.

Just in time for it to flip-over, we had just gotten back to the long-term average. So I know they're -- I know there are people -- there are more generalists on the line here today than the people who cover our business. We had just gotten back to the long-term average before it flipped -- before now it's going to flip over.

Yes. And so Hilton grew at 6% to 7%. On our estimates, you had 13% of all hotel rooms in the U.S. and 24% of the future pipeline. And then you're growing exponentially internationally. So that's why you're growing so much faster than the industry as a whole. Can you talk a little...

I mean just to market a little bit. So I mean, in the U.S., which is a much more developed market, we're taking 2x our share, right? So our -- your numbers are plus or minus our numbers. I mean we think we're more like 11% or 12% of the installed base, and we're something like 24% of the rooms under construction, but directionally, 2x. And then globally, it's 4.5. I mean, we're 5% of the installed base, and we're almost 20% of the rooms under construction. So it's approaching 4x outside the U.S.

So the crux of the question is, talk about future rooms growth. I mean, you talked on your last earnings call about hitting close to the 5 this year and seeing the sustainability of that, I think a lot of us -- a lot of generalists would say, how are you doing that, right? Like who's building a new hotel now? You just went through this pandemic. I think that people would think the closures are a lot more likely than new openings. And so can you just talk a little bit about that, and how you're continuing to kind of be a leader?

Yes. No, I appreciate that. I mean, look, first of all, I'd say you don't have, at least in the parts of the business or at the price points and the chain scales that we operate at, you don't really usually have a lot of closures. I mean, at the upper end of the business, when you have sort of negative supply growth or declines in capacity, it's usually driven by a push, very strong residential markets. And so you see hotels convert -- in cities you see hotels convert to multifamily residential, probably not going to see a lot of that this cycle. So I don't think there's going to be a lot of removals. Who's building hotels now are people that have already been under construction, right? So remember, the whole thing's on a lag. And so yes, the world's going to be risk off from a development perspective for a little while. And so -- now, by the way, we think signings are only going to be down about 20% this year, right? And I'll come back around to who are the 80% of run rate that are still signing deals. So if you're under construction, you're going to keep going and then the development cycle is on a lag. So there wants to be a little bit of a lower rate of growth 2 or 3 years out from these demand shocks. And our job is to fill in more with the lower end brands that they deliver more quickly because they less -- the hotels themselves take less time to build and then conversions, right? And so we convert -- we always, in any given year, about 20% of our new openings are conversions. In down markets, we tend to do more conversions because our commercial engines are strong. And there's more of a flight to quality where owners say, okay, I had an independent hotel. I thought I could go it alone, but I really need a brand now, so they convert. Or I have a weaker brand and I want to convert to a stronger brand. So we do more conversions, but then we'll still do -- we'll still sign a lot of deals, and we'll still start a lot of hotels under construction. We'll start fewer than -- for a couple of years, we think we'll start fewer than we were, of course, because the world's risk off and development capital is harder to come by, et cetera, et cetera, but the really smart people in our business and the people that have the financial wherewithal, they know that the best time to build a hotel is during a recession and during a down market because you'd rather be under construction. One, it's going to cost you less to build it because there's less demand for general contractors and labor and materials; your cost of capital is going to be less because rates are lower; and then three, by the -- usually, by the time you build the hotel, you open your hotel into the next bull market. And so the people that can actually build hotels during recessions are the -- they tend to make more money. And fortunately, for us, we have a lot of those development partners in our stable of developers, and they're going to keep doing deals. It's just going to be at a lower rate of growth for a little while than it had been pre crisis.