Hilton Worldwide Holdings Inc. (HLT) Q2 2022 Earnings Report, Transcript and Summary

Good morning and welcome to the Hilton’s Second Quarter 2022 Earnings Conference Call. 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 2022 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 risk factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K and first quarter 10-Q. 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 and the company’s outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our second quarter results and discuss expectations for the year. Following their remarks, we will be happy to take your questions. With that, I am pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone and thanks for joining us today. As our second quarter results demonstrate, we have a lot to be proud of. System-wide RevPAR achieved 98% of 2019 peak levels with all major regions except for Asia-Pacific, exceeding 2019 RevPAR. We continued to execute on our strong development story reaching 7,000 hotels globally and grew our industry-leading RevPAR premiums, all while maintaining good cost discipline. Coupled with the resiliency of our asset-light fee-based business model, these accomplishments enabled us to deliver EBITDA 10% higher than the second quarter of 2019, with margins of nearly 70%, up more than 800 basis points above 2019 levels. As a result, we continued returning meaningful capital to shareholders after resuming our capital return program last quarter. Turning specifically to results, we reported RevPAR adjusted EBITDA and adjusted EPS above the high-end of our guidance for the second quarter. System-wide RevPAR increased 54% year-over-year and was just 2% below 2019 levels, improving each month throughout the quarter with June RevPAR surpassing prior peaks. All segments improved quarter-over-quarter led by business transient and group. Leisure transient trends remained robust as consumer spending continued to shift from goods to services, particularly travel and entertainment. Weekend RevPAR was up approximately 14% compared to 2019 driven by robust rate gains. In June, weekend ADR was up 20% versus prior peaks. Business transient demand continued to improve throughout the quarter, driving weekday occupancy up 6 points from April to June, weekday RevPAR was 95% of 2019 levels, with ADR exceeding prior peaks. U.S. business transient RevPAR surpassed prior peak levels in June with demand improving across nearly all industries. On the group side, RevPAR in the quarter was roughly 85% of 2019 levels. Full year group position improved meaningfully throughout the quarter with strong forward bookings across all location types and nearly all major categories. Group mix is beginning to normalize with the percentage of company meetings increasing. Bookings for company meetings strengthened each month of the quarter, with tentative pipeline for the year, up materially versus 2019 boosted by high-teens rate increases. In the U.S., total group position is nearly at prior peak levels for the third quarter and exceeds prior peaks for the fourth quarter. With continued improvement in these segments and positive momentum across all regions, we remain optimistic for continued recovery throughout the balance of the year. As a result, we are raising our expectations for the full year to reflect the quarter’s strong results and better anticipated trends in the back half with RevPAR surpassing 2019 levels. For the full year, we expect to deliver adjusted EBITDA above 2019 and to generate the highest level of free cash flow in our history. We expect to return between $1.5 billion and $1.9 billion to shareholders in the form of buybacks and dividends or approximately 5% of our market cap at the midpoint. Turning to unit growth, we continue to drive a disproportionate share of global development, with nearly 1 in every 5 rooms under construction around the world slated to join our system. Additionally, our development market share is more than 3x larger than our existing share meaningfully higher than our peers given our industry leading RevPAR premiums. This is reflected in the more than 14,000 rooms we opened in the quarter. We signed more than 23,000 rooms bringing our development pipeline to a record 413,000 rooms. With nearly half of our pipeline under construction, we remain on track to deliver approximately 5% net unit growth for the year. According to Star, our year-to-date net additions are higher than all major branded competitors. Our conversion openings totaled more than 3,400 rooms in the quarter, representing roughly 24% of total openings. One of the most notable conversion openings in the quarter was the Waldorf Astoria Washington D.C. inspired by the legacy of the Old Post Office Building. The property brings Waldorf’s iconic history, stunning design and unforgettable experience experiences to our nation’s capital. Our disciplined development strategy continues to enhance our network effect, enabling us to serve more guests across more destinations for any stay occasion. During the second quarter, we celebrated the opening of our 2,800th Hampton hotel, 60,000 embassy rooms and several key luxury announcements, including the openings of Conrad properties in Nashville and Sardinia, and the signings of the Waldorf Astoria Sydney and Waldorf Astoria Kuala Lumpur. Earlier this month, we celebrated the highly anticipated opening of the Conrad Los Angeles, anchored within The Grand LA, the spectacular 305-room hotel marks the brand’s debut in California and makes LA the second U.S. city alongside Las Vegas to feature all three of our luxury brands. The openings of the Hilton Maldives Amingiri Resort & Spa and the Hilton Tulum Riviera Maya, an all-inclusive resort were two of the latest additions to our rapidly expanding portfolio of resort properties in prime beachfront destinations. With 400 unique hotels and resorts open and in the pipeline, our conversion-friendly brands, Curio and Tapestry, continue to provide an attractive value proposition for owners. By providing authentic and curated experiences and drawing inspiration from their local communities, these brands enable owners to retain their own unique identities while also benefiting from the power of our commercial engines. During the quarter, we opened the Royal Palm Galapagos marking the first international hotel brand in the Galapagos Islands and making Ecuador the 30th country in Curio’s growing portfolio. Tapestry opened its 10,000th room in the quarter, including the Hotel Marcel New Haven, which is anticipated to be the first net-zero hotel in the U.S. and one of less than a dozen LEED Platinum certified hotels in the country. All of these openings continue to expand the offerings available to our Hilton Honors members. In the quarter, Honors membership grew 17% to 139 million members and accounted for approximately 62% of occupancy, up 350 basis points year-over-year and roughly in line with 2019. To address the evolving needs of guests who want to travel with their pets, we have expanded our partnership with Mars Petcare to now include 7 of our brands, including all our focus service and All Suites Brands as well as Canopy. Through these expanded partnerships, guests will have access to virtual support from the Mars Pet expert team and have more than 4,600 pet friendly hotels to choose from. We continue to double down on the importance of the guest experience and their stay. Earlier this week, we launched our first ever global platform to focus on what has been missing from hotel advertising, the Stay. Hilton For the Stay places the hotel front and center. It goes without saying that our team members continue to be at the heart of that stay experience. I am extremely proud that earlier in the quarter, Hilton was inducted in DiversityInc.’s Hall of Fame for our continued commitment to building an inclusive and welcoming environment. And now, I will turn the call over to Kevin for a few more details on the quarter and the expectations for the rest of the year.

Thanks, Chris and good morning, everyone. During the quarter, system-wide RevPAR grew 54.3% versus the prior year on a comparable and currency neutral basis. System-wide RevPAR was down 2.1% compared to 2019. Growth was driven by continued strength in leisure demand through the start of the summer travel season as well as stronger than expected recovery in business transient and group travel. Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $679 million in the second quarter exceeding the high-end of our guidance range and up to 70% year-over-year. Outperformance was driven by better than expected fee growth, particularly across the Americas and EMEA regions. Management and franchise fees grew 54% driven by meaningful RevPAR improvement and strong Honors license fees. Cost control further benefited results. For the quarter, diluted earnings per share adjusted for special items, was $1.29 exceeding the high-end of our guidance range and increasing 130% year-over-year. Turning to our regional performance, second quarter comparable U.S. RevPAR grew 47% year-over-year and was up 1% versus 2019. Performance continued to be led by robust leisure trends and was further boosted by significant RevPAR recovery in business transient group, up 16 and 20 percentage points respectively from the first quarter. In the Americas outside of the U.S., second quarter RevPAR increased 140% year-over-year and was up nearly 5% versus 2019. Performance was driven by strong leisure demand, particularly at resort properties. In Europe, RevPAR grew 283% year-over-year and was up 1% versus 2019. Performance benefited from reduced travel restrictions and greater than expected international inbound arrivals. In the Middle East and Africa region, RevPAR increased 68% year-over-year and was up 4% versus 2019. The region continued to benefit from robust domestic leisure demand and strong international inbound travel, particularly from Europe. In the Asia-Pacific region, second quarter RevPAR was down 5% year-over-year and down 39% versus 2019. RevPAR in China was down 47% compared to 2019 as strict COVID policies and lockdowns in Shanghai and Beijing continue to weigh on travel demand early in the quarter. Demand recovered quickly once restrictions eased, with occupancy in China recovering from 37% in April to approximately 60% in June, less than 6 points shy of 2019 levels. The rest of the Asia-Pacific region saw improvement as countries outside of China benefited from border reopenings. RevPAR for Asia-Pacific ex-China improved 12 percentage points throughout the second quarter, with April down 29% versus 2019 and June down 17%. We remain optimistic about continued recovery across the entire APAC region, including China as COVID-related policies continued to ease and additional countries opened their borders for international travel. Turning to development, our pipeline grew year-over-year and sequentially totaling over 413,000 rooms at the end of the quarter, with 60% of pipeline rooms located outside the U.S. and roughly half under construction. While macroeconomic uncertainty and variability across regions persist, owner and development – owner and developer interest remains healthy. The development community continues to preference our industry leading brands and strong commercial engines. For the full year, we still expect net unit growth of approximately 5% and signings to exceed 100,000 rooms. Moving to guidance, for the third quarter, we expect system-wide RevPAR growth to be between 25% and 30% year-over-year year or up 1% to 5% compared to third quarter 2019. We expect adjusted EBITDA of between $660 million and $690 million and diluted EPS adjusted for special items to be between $1.16 and $1.24. For full year 2022, we expect RevPAR growth between 37% and 43%. Relative to 2019, we expect RevPAR to be down 1% to 5%. We forecast adjusted EBITDA of between $2.4 billion and $2.5 billion, with margins for the full year more than 600 basis points higher than 2019 levels. Our adjusted EBITDA forecast represents a year-over-year increase of more than 50% at the midpoint and exceeds 2019 adjusted EBITDA. We forecast diluted EPS adjusted for special items of between $4.21 and $4.46. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the second quarter for a total of $41 million. Our board also authorized a quarterly dividend of $0.15 per share in the third quarter. Year-to-date, we have returned more than $800 million to shareholders in the form of buybacks and dividends. For the full year, we expect to return between $1.5 billion and $1.9 billion to shareholders in the form of buybacks and dividends. Further details on our second 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 to all of you this morning. So, we ask that you limit yourself to one question. Chad, can we have our first question please?

Thank you. And our first question comes from the line of Carlo Santarelli from Deutsche Bank. Please go ahead.

Hey, Chris, Kevin, Jill, everyone. Chris, maybe this one is best for you. Just in terms of how you are thinking about the rest of the year? What is it that that you guys see here at the end of July? I am sure you have a pretty good look in August, but clearly, the September-October busier business travel season, group season, etcetera, what is it that you see in this period that kind of gives you the confidence in the guidance raise for the rest of the year and how do you kind of think about or feel when you look out to 2023?

Carlo thanks for the question. That obviously is the prime question, I think on everybody’s mind. And I think it would be – it would be sort of best to start by saying, as everybody on this call knows that there is certainly a lot of uncertainty in the world. And I think we have to sort of be mindful of that as everybody has. I mean, we have been, as much as we see what’s going on and we are watching the broader environment and lots of talk of slowdown and seeing it in certain industries. Certainly, I think predominantly industries that had reached high watermarks that were had favorable impacts from COVID, but nonetheless, starting to see slowdown. We have been looking very carefully at our business as you would guess that all the segments that sort of any forward-looking trends that we can see. And I would say, what we are seeing still is very positive. We see as Kevin and I both said in our prepared comments, continued strength in leisure, we expect to see that continue into the fall and higher rates than normal, I mean, lower rates than summer, like always, but higher rates than you would have typically seen pre-COVID, just because of increased leisure business, business transient continues to recover, led by recovery in the big corporates, which are not back to where they are, but they are back to sort of 80% of where they were. And the SMB side of the business that has been quite robust. I mean, in the second half of the year, based on the trends we have been seeing, our expectation is business transient is going to be sort of on a revenue basis equal to 2019 levels. And then when we think about the group side, while we don’t think in the second half, we will get all the way back to where we were ‘19, we are going to get awfully close. And as I said, in my prepared comments, if we look at the booking position in third and fourth quarter, second half of the year, it’s over ‘19 levels and our sales teams tell – keep telling me, they can hardly keep up with the demand. Now, reality is, again, we are in an uncertain world. The booking windows are short. So our visibility is limited, certainly on transient business. We can’t really look too deeply into the fall on transient. Again, we can on the group side and those stats are good, but the current trajectory is good looking at July. June as we said was over ‘19 levels. July is trending in a very good way and it will be over ‘19 and improve over and above what we saw in June. So everything we are seeing sort of real-time, everything we have in terms of sightlines into the future, all feel pretty good, recognizing it’s – there is a lot of macro uncertainty and recognizing that our booking windows and sightlines are not that far out, I think what is causing it like sort of as you see other industries sort of being impacted everyday, including today is a big reporting day, again, I think a lot of what you see coming, sort of going the wrong way are industries that were at crazy peaks, because they were huge beneficiaries, many of them of COVID and the pandemic, we were obviously not a big beneficiary. I think that’s a fairly nice way of putting it. And our industry got hammered. And so what we are benefiting from, I think is sort of a handful of things. One, there is a lot of pent-up demand. We hear it all the time. I mean, while I don’t have tremendous sightlines in the sense of real transient booking data to give you, just because it doesn’t exist, we talked to our customers all the time, not just the group customers, we are talking to all of our customers and we are in a regular dialogue with our SMBs, with the big corporates. And the anecdotal feedback that we are getting as we go into the fall is people have to travel more, more offices are open, more people are back in the office, while people are worried about where the macro environment is going. They have got to run the businesses. And in fact, the more worried they are, the more they realize they sort of got to get out there and make sure they are hustling. So, there is an element of pent-up demand. There is clearly and I’m not going to say I was right, but I’ve been right, there is clearly a massive shift in spending patterns right, away from goods into services. I said in my prepared comments, I have been saying since the beginning of the pandemic that the world is not going to go upside down that it may go upside down for a while, but it will normalize and that’s exactly what we are seeing. And so not only do you have pent-up demand, you just have new demand that’s coming as people are sort of shifting their spending patterns. That means leisure business group, their people are shifting back to a more normalized lifestyle. Maybe it’s not exactly the way it was, but it’s more like it was than it was. It’s more like it was pre-COVID than it is during COVID. And so we are the beneficiary that you have. Infrastructure, people don’t talk about it. We passed a nearly $1 trillion infrastructure package last year. Very little of that has been spent traditionally. You would start to see spending in the second, third and fourth year. So we are just sort of coming into the zone over the next 2 or 3 years on a $1 trillion of spending. I have said this so many times you guys are tired of hearing it. The highest R-squared correlation to demand growth in hotel rooms is NRFI, Non-Residential Fixed Investment, AKA Infrastructure. So I think – we think we feel good about sort of that being sort of underpinning broadly, Asia recovery, Kevin talked about it. Asia has been way behind. It’s not recovering as quickly as we would have thought, particularly China, but I do – but it is recovering. And I think that provides some benefits, not just the rest of this year, but into next year. And then probably last but not least, if we look at our customers, certainly like our Honors base, which are driving the disproportionate share of our system-wide revenues. At the moment, they are still in pretty good shape. I mean, the median income of our higher end Honors members is significantly over $100,000 median income. And so, at the moment, they are still in pretty good shape and we haven’t really yet seen any real cracks in the armor in terms of their spending pattern. So, I know that’s a filibuster of sorts, but I think it gives – to answer the question, it gives you color, but as we sat in the very room, we are sitting in and thought about, how do we feel about the rest of this year? That’s how we sort of – that’s how we came up with our forecast in our outlook. And as we think about next year, listen I’d be silly to say, I know, because nobody knows this. We are in pretty much uncharted waters as the smartest economist I talked to or saying the same thing. So I don’t know. But I think a bunch of those things that I described are pretty good wind in our sails against what is obviously going to be a slowing U.S. and global economy, because that’s what central banks are going to do. But we have some things that I think sort of our winds blowing the other way. And so I think as we get into the first half of next year, we are feeling like that, that is going to be helpful to us how we think the whole year will play out. Obviously, it’s premature for us to judge and when we get a little bit closer to it, we will have a little bit more precise view.

Great. Chris, that’s very helpful. And then I want to be courteous to everyone on the call, but just quickly to clarify some of the comments from earlier, as you guys talked about, group and 4Q being greater or being up year-over-year, I should say, was that a revenue position comment you were making…

Revenue, revenue, revenue…

Could you talk about from an occupancy or occupied room night perspective, how group compares?

Yes, I think system-wide second half of the year, we think it will be in the 90s. It will probably be 5 points off with the difference being made up in rate.

Got it. Thank you, sir. Take care.

Yes. Thank you.

And the next question is from Sean Kelly from Bank of America. Please go ahead.

Hey, good morning, everyone. Chris, maybe just to dig in, I mean, obviously, you covered sort of most of the subjects in that last answer. So maybe to go slightly or deeper, if we just think about the acceleration between kind of what you are implying for the third quarter and what you actually saw in the second, what are some of the biggest, variances they are going to drive that things that come to mind are obviously international and then the continued improvement, you probably saw sequentially on business transient, but could you help unpack that a little bit?

Yes. I mean, sorry, I did give a bit of a filibuster, but just wanted to give the whole thing context and not have it be chopped up. So, my apologies for answering what are probably a bunch of your questions, but I do think I sort of covered that. We certainly expect international travel to pick up. We don’t think that’s going to move the needle in necessarily in a huge way in the second half of the year. It really is what we described is what I already described, which is continuing strength and leisure, because weekend business we think is still going to remain strong, consumers still has desire and capacity to do it. They are traveling more from combination of the leisure business, of business in leisure. So we think that will mean leisure business will ultimately be at elevated levels relative to what we saw in pre-pandemic times. And we do think from a revenue point of view, business transient is on track largely because of the success we have had in SMB in the second half of the year, just on a revenue basis be back to 2019 levels. Now, that depends – we don’t have all those bookings on that are confirmed at this point, but if you look again at June and July, you talk to the customers, look – we look at detailed data on sort of how they are behaving right now. We feel good about that and group I covered. I mean, we think group will not recover to where we were in ‘19. There is just not enough time, but we think it’s going to get awfully close. And we think there is a lot of momentum in the group side going into next year. So, I think, net-net, Sean, probably repeating myself, what it depends on is more of what we have been saying just grinding up on business. I mean, we are at – for the whole quarter, we were at 95% on business transient. So we are getting awfully close in June in the U.S. We hit ‘19 level. So it doesn’t – the rest of the year. It doesn’t – it’s sort of – it – what the rest of the year suggests is the strengthening and group based on our real position of group room nights on the books. And similar to what we have seen in June and July, in business transient and normal – strength on weekends for leisure, but normal pattern of leisure backing off during the midweek as you go into the fall.

Thank you very much.

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

Good morning, everybody.

Good morning, Jeff.

If you go back and you look at the last 2.5 years it’s been remarkable that your same-store RevPAR growth rate and your management and franchise fee growth rate have mirrored each other almost to a one-to-one relationship. And over that timeframe, you have grown your room count north of 10%. The relationship between RevPAR growth and say fee growth or that sensitivity change going forward, where maybe there is if RevPAR were to experience a decline that sensitivity to the downside is maybe more favorable than what it would have been the last couple of years, just because of the growth in the room count?

I think the – well, I think the answer is yes. And what largely would drive it is what you are saying the non-RevPAR related fees are growing as a percentage of the fee base. And then the impact on the downside was accentuated because of the extremes. So in a normal like sort of normal recessionary environment, you don’t see those sort of extreme impacts in terms of declines, RevPAR to EBITDA. So we think in a normal kind of environment, yes, it would be more one for one and we would get the benefit of the things that you described.

Great, thank you.

The next question is from David Katz from Jefferies. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. Congrats on the quarter. I wanted to just touch on the owned and leased portion of the model, which I think swung to positive. This quarter was a little earlier than what we anticipated. Can you just talk about what’s driving that? Is there a strong business component to that and give us some help with the rest of the year and sort of what’s in there and how we might think about that?

Yes, David. I think that we look first of all, I would say, yes, you are right, it did swing to a profit. We have been saying for a while that the growth rate would be more than the overall portfolio. In fact, that was the case when the numbers were still negative. It was in a weird way, it was still growing faster in improving the growth rate of the company. It’s all fundamentals though. I mean, if you look at where the portfolio was located in this particular quarter, the real strength regions were UK, particularly London and Central Europe. Japan, still a little bit further behind. So as APAC recovers, you have even a little bit more of a tailwind there from that part of the portfolio, but the RevPAR growth in the quarter was significantly ahead of even where I gave the Europe the EMEA – I gave the Europe number in my prepared remarks. The RevPAR for this portfolio was even further ahead of that. And so that’s where it’s coming from. And we expect those trends to continue again particularly as Japan is a little bit further behind on recovery. So, we expect going forward that, that portfolio. Well, remember, it’s a small part of the business. And over time, it will continue to be a smaller part of the business, but it will be a tailwind to our growth rate for a while as those regions recover.

Can – if I may, not to overstate my welcome, but should we perhaps look at the ‘19 levels or any past levels of profitability and how might those guide us as we think about the future?

Yes, I think it’s there is no reason why it won’t get back to or even exceed prior levels. You got to remember, the portfolio does get a little bit smaller over time. We exited 7 of those assets last year, 3 of which came into the system and shifted over to paying fees, but 4 of which went away altogether. That’s not going to make a huge difference on that. But I would – so I would say keeping in mind that the portfolio continues to get smaller, I would say that recovering to where it was on a lag is a good way to think about it.

Excellent. Thanks.

Sure.

And the next question is from Smedes Rose from Citi. Please go ahead.

Hi, thanks. I just wanted to ask you just a little bit on the pipeline, you continue to see sequential growth in there and significant signings and it just seems a little bit kind of lot of crosscurrents going on keep hearing about developer challenges. And I am just wondering if you could speak to where you are seeing the growth, I know you have spoken about China, but how is it looking in the U.S. and what sort of challenges maybe your developers facing and is Hilton helping at all in terms of loans or anything of that sort?

Yes, really good question. And yes, I mean, what’s going on, essentially and let me just sort of everywhere, but China is that demand on the – from owners to sign new deals, has actually moved up pretty nicely. And you would say why with all the swirling winds and all the uncertainty? Well, I mean, look at, like they own assets and they are at, look at the results we are delivering and what we think we will deliver for the year and where we are relative to ‘19. You think about margins, not our margins, but with all the changes we have made in the hotels. I mean, the reality is not every single – in every single case, but in many, many cases, the hotels that our owners own are performing extraordinarily well, they are at high RevPARs with higher margins than they had pre-COVID. And so listen, this is what they do for a living, they are seeing great success, they are seeing tremendous flow-through they are seeing incredible rate in sort of pressure and that makes them want to do more of what they do. And so as Kevin said, we will sign – we won’t get to our peak in signings, but we will get – we are getting closer. We will get over 100,000 rooms. And again, I think it’s just positive. So that’s without China. China, actually, we will open more rooms in China this year, but we won’t sign as many simply, because there – with the way they are addressing COVID with the lockdowns and the likes, have slowed development activity there. We have every confidence that when they reopen, it will pick up at a fast pace, but from a cultural point of view, they really – you really don’t get signings done when things are closed. It’s just not the way things happen and it’s been a little delayed. So, I think the reality is when you – with the demand in the rest of the world, when you get that part of the engine firing as well, the numbers are going to feel pretty good and then it has to translate. And I think that will translate over time as sort of the world settles down a bit and people have a little bit more visibility on what’s going on. But the demand is there market share, I shouldn’t, we are not going to be – we are out of the business of describing exactly what our market share is for a whole bunch of competitive reasons. But I will say, market share is up, again, in a meaningful way, significantly above 2019 levels significantly above where all our competitors are and that’s helping drive disproportionate interest, not only do people want to build more, but I think they want to – I think they want to build more with us, because we are doing a better job in terms of driving share to help them drive profitability.

Thanks. And let’s just quickly you guys are announcing a new ad campaign with a different kind of focus, but I was just wondering I should know this, but it’s not essentially supported by or funded by owners or is there corporate implications as well for that?

That is funded by the system, which means essentially, it’s funded by owners. We have, I mean, the grossly simplified explanation is people will either pay us a management fee or franchise fee and then we have corporate expenses and then they pay system fees for a bunch of things marketing, technology, brand, essentially system charges and those that we manage, on a dollar – on a not for profit basis, if you will, on their behalf. And all of the marketing dollars that we are talking about in our campaign come out of that. They are not corporate dollars. They are for the benefit of the system.

Okay, great. Thanks a lot. Appreciate it.

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

Great, thanks. Just one follow-up on your comments on the demand from owners and kind of the record level of signings, some others in the industry have talked about getting record signings, but that construction starts have been matching the signings. And I know your rooms under construction currently are ahead of 2018, which is a great achievement. I am wondering if you are seeing though new rooms starts which would not impact your unit growth this year, but might have implications for ‘23 or ‘24, just kind of what you are seeing on the construction start front? Thanks.

Yes, happy to answer that. And then Kevin can jump in if he wants to add anything. First of all, just to be clear, I didn’t say we are hitting records on signings, I’d say we are over 100,000. I think our peak was 116 – 115, 116, something like that. So we are getting closer and we are getting over 100 without as much help as we would like from China. On the start side, we do believe starts will go down again this year, given all of the things that are going on in the world with supply chain labor, financial markets, fears over the macro and recession, we think that they will have down. Having said that, our best estimates at this point, we have talked about this on prior calls is that we will probably have hit the floor in starts in the U.S. last year. We think we will be up modestly this year and probably hit the floor outside the U.S. this year. And our expectation is, given what I described before in terms of just where we are with RevPAR, where we are with margins, owner desire to do things that all things being equal, we are of the mind that next year – that this year would be the low point in starts and that they would start moving back up. And that puts us in a position to do as we have been expecting and suggesting we would do, which is for the next couple of years deliver in the mid-single digit.

Okay. Great. Thank you. And then just one quick follow-up on the margin performance, up 600 basis points, I think that you have guided before that you would hold on to 400 basis points of that, do you think it’s looking like you are at the higher end or maybe even above that at this point?

We are doing better on margins, faster recovery, even better cost discipline that we assume. So, we are doing better on margins than we had suggested before.

In terms of holding on to that into 2023?

Yes. And we – actually, if you recall, we thought just because of the recovery in the real estate, we will get lower margins, it would help EBITDA growth, but it might just the arithmetic would hurt margins. And we had thought that we might sort of be flat or even a little bit down as we got through that this year. Obviously, with the guidance we gave you were 100 basis points, 150 basis points above what we did last year, which was meaningfully above ‘19, which is getting us to the higher end of the 600 basis points. And we think we are going to be able to continue to drive margin growth from there.

Yes. I think last thing that Chris said is important in the sense that when we gave you that number that was sort of just helping people model sort of recovery and where it was going to go. It was not meant to be sort of a stopping point between the mix continuing to grow over time towards these non-RevPAR driven fees and cost control, we think margins will continue to grow over time.

Yes. On average, if you just do the math and your model, my guess is it will be similar to ours. It’s 50 basis point to 100 basis point natural accretion in margin every year, just based on the business model.

Great. Thanks very much.

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

Hi, good morning. Thanks for taking my question. Just may be sort of I am picking it a bit too much here. But if I look at your sort of Q3 and then your full year RevPAR guidance and maybe some of your commentary, it looks to me you are sort of saying the Q3 is going to be better than Q2. And then maybe Q4 will be a slight pullback, that you are only expecting leisure demand sort of run through the full and obviously with group being stronger in Q4, are you expecting some elements maybe just to step back a little bit in Q4, or am I reading a little bit too much into your guidance?

I think you are reading a little too much into it. But I think at this point, we sort of view the second half of the year, third quarter and fourth quarter in a very similar way. Obviously, the third quarter is a much, much bigger, more important quarter in the sense of all forms of travel. So, you have sort of seasonal things going on. But in terms of the basic breakdown of what we think in performance of the segments, we don’t – we are not forecasting any difference any meaningful…

Thanks. Maybe just a quick follow-up to the last question. I think in the full year results, you specifically sort of guided, you are hoping for 66,000 construction starts this year. I think you gave a number in response to that. Is that still what you are looking to get to this year?

No, I think we had said that in the past and on prior calls. I think Chris said we expect starts to be down a little bit this year, there is a lot of year left. So, we are not sure exactly where it’s going to play out, but probably be a little bit less than that.

Okay. Thanks very much.

The next question is from Chad Beynon with Macquarie. Please go ahead.

Good morning. Thanks for taking my question. When you think about some of the restrictions with flight capacity that we hear about in the U.S. and in Europe not being able to keep up with consumer demand, do you believe any of this presents a risk to any parts of your recovery, or is it negligible and just more of kind of a soundbite for the airline industry?

We have been watching that as you would guess really carefully and studying our data, along with the airline data and we haven’t seen any real impact. We just can’t find it. So, we feel pretty good about it. I mean talking to the not just listening, but I know most of the CEOs in the airline space and talking to them, I think they are making pretty darn good progress in terms of getting capacity back, getting the teams that they need in terms of pilots, flight attendants, maintenance crew, getting them trained. So, I mean it’s not done by any means. But I think every day, it gets a little better. And so I think we feel like, we will be fine. I mean if you look at the patterns, like in the in the second quarter, I was actually surprised. And it’s directional, I can’t – I am not going to tell you like we have perfect data on this. But it’s pretty good directional, and it’s consistent with what –the same way we would have analyzed it pre-COVID. In a normal world, like 60% of our business was fly-to and 40% of it was drive-to. In the second quarter, we think it was two-thirds drive-to, one-third fly-to. So, part of what’s going on is people are with restricted capacities, they are just driving more, they are driving longer distances, but – and they are staying in a tighter – they may be driving further, but they are not going cross country or whatever. It’s more regional and local business, but that works. So at the moment, while the airlines are sort of working their issues out, I think people are acting sort of accordingly in terms of how they are getting places. And we are not seeing any impact. We don’t talk to customers, we don’t think that it’s going to impair the rest of the year.

Thanks Chris. Appreciate it.

Yes.

And the next question is from Vince Ciepiel with Cleveland Research Company. Please go ahead.

Great. Thanks for taking my question. I am curious how you are thinking about planning the business over the course of the next 12 months. It clearly sounds like the trend lines in corporate and group are getting better. Obviously, you believe leisure is continuing to fetch healthy ADRs and remain pretty stable at the high levels. As you think about like an efficient mix within those three buckets of demand, how are you approaching that and how are you handling pricing out the corporate and the group business as it comes back?

Yes. I mean the truth is, we are doing it with a lot of flexibility, because while we have a belief, which we have articulated in a bunch of different ways on this call, we know that we may not be perfectly right. So, as we – I think proven during COVID, our teams, including our sales teams, our commercial teams are unbelievably quick on their feet. We retooled everything when we had to in COVID. We have retooled a dozen times through COVID as demand patterns have sort of been normalizing. So, I think what we will be set up for and then ready to pivot is a world that I described, which is a world that is getting reasonably close to pre-COVID normalization. I mean just like in Q2, by way of example, if you look at the segments compared to 2019, 55% – in 2019, 55% of our overall system revenue came from business transient, 25% from leisure transient and 20% from group. If you look at the depths of COVID, it probably the most extreme times it went to like 35%, business, 55% leisure, and 10% group. In the second quarter, it was almost 50% business transient. It was like 34%, 35% leisure and 16% or 17% group. So as I have said before, we have sort of expected that as much as everybody wants to think everything is different. We sort of have been planning throughout and taking it in steps for a normalization to maybe not be exactly where we were pre-pandemic, but more looking like that than where we were, and that’s what’s happening. And so, that’s what will be set up for. But as I have said, the key here always is, flexibility and be prepared to pivot. On the margin, I do think we will continue to have higher levels of leisure than we had pre-pandemic. My guess is we will have potentially a surge in group just because of so much pent up demand as well. And so what are we doing, we are making sure we are staying super aggressive on leisure strategies, making sure that we are staying super aggressive on – with our group sales team, and they were all over every opportunity. And that we are focused on that. And then on the business transient side, while we love our big corporates, and we continue to work with them, we have had a lot of success with the SMBs. In the end, we think that when we normalize, we will have lower big corporates and higher SMB at a higher rate. And so we have deployed accordingly in our sales teams across the board to make sure that we are working those SMB accounts that we are covering a lot more of those in a very thoughtful way to continue to build that business. So, those will be at a high level, that’s sort of when we are sitting at this table talking about how we are going to deploy over the next 12 months, that’s how we are thinking about it. But if the world pivots, we will pivot very quickly with it. But my guess is, that’s how the world is going to play out, little bit more leisure, a lot more group, a bunch more business transient and for us with a with a real focus on the SMBs.

That’s helpful high level color there. And maybe just a little bit more specifically, on that larger corporate, I would imagine a lot of that falls under the corporate negotiated rates. Can you remind us where those have been through COVID? Are they flattish with ‘19 levels?

They have been flat. They have been almost – all of our large corporate clients during COVID agreed to keep rates flat to 2019 levels. And now in those negotiations, again, keeping it in perspective, it’s like 7% of the business right now, maybe 7% and a little bit of change. So, like, just keep that in perspective. But I think, what we are indicating is probably mid-single digit kind of increases for those accounts. And again, in a lot of hotels, the reason we want that even though SMB is maybe at higher rate is it provides a base of business, just like we put a basic group business on the books. It’s another way to put a base of business on. So, it’s hotel – it will be hotel-by-hotel, will be some hotels, and we will take any of it with some hotels, it will take some of it because they need the base. But I would suspect while it’s way early to judge, it’s sort of mid-single digit, the goals would be, to have dynamic pricing with all those accounts and that the end result will be somewhere in the mid-single digits. And that, when we are all said and done, it will be 6% or 7% – 6% to 8% of the business, where it used to be 10%.

Thank you. And the next question will be from Patrick Scholes from Truist Securities. Please go ahead.

Hi. Good morning everyone.

Good morning.

Kind of following up on that question on corporate rates, we are starting to get into negotiation season and I know, you are like, tell me, if you are going to see corporate rates up 50% next year, but how do you think about group and corporate rates increasing next year as it relates to negotiated rates? And as I keep that in mind with inflation next year, probably 20% higher than where it was in 2019.

Yes. I mean – it’s hard to say and we are not here giving guidance on next year. There is a long way, if you are there and there is a lot of uncertainty in the world. But I mean probably the best, I gave you a little bit is said, although we are not in those negotiations in earnest yet with the big corporates where that would be. I think the way we would think about – the way we would think about unmanaged business transient business would be somewhere in the 5% to 10% range to keep pace with inflation. And I think we would think about the group, our group bookings the same way. In fact all the group bookings that like we were doing generally new group bookings that we did in the second quarter for ‘23, we are in the high-single digit rate increases, I mean as the data point.

Okay. And thoughts on Airbnb supply, certainly we are seeing in some of those really hot leisure markets, whether it’s Vail, Aspen, Miami, a ton of Airbnb supply with everybody realizing how high the room rates are that they are going to rent out their units some, what sort of impact are you seeing, if any in those markets?

None. Now, in some of those markets, we may not be in them. But as you can see kind of the numbers that we are posting at least what we are forecasting, what we are seeing in booking patterns, we are not seeing any impact. I mean I think what they do is they serve a certain customer need and we serve another customer need. I have said it for a long time, there is plenty of room for us to coexist given what we are delivering is very different. And it’s generally for different types of stay occasions. So, we are not – there is zero discernible impact from Airbnb side.

Okay. Thank you for the color.

And the next question is from Duane Pfennigwerth from Evercore ISI. Please go ahead.

Hey. Thanks for the time. Maybe a short-term and a longer term, short-term, which international geographies surprised you the most in 2Q? And then longer term, how do you think about the pacing of China reopen 2023 and beyond, what is your planning assumption at this point?

Yes. I will offer an answer. Maybe Kevin will come over and offer a different one. But I would say Europe was the big surprise for me. Europe is on fire, huge surge in business. I mean the big cities, London, everything are raging this summer. In Q2 and they are raging in Q3. So, that’s been and Europe is now trending above ‘19. I think for the full year, Europe will be not just for the second half, Europe was above in Q2. I think Europe will be ahead for the full year of 2019, in terms of RevPAR. So, that’s been a pleasant surprise. And China, the honest answer is we don’t know. I would have thought, I mean we are making progress. Kevin gave the data points. I mean we have moved from in the 30s to 60. And I think we are probably above that now. You have things ebbing and flowing. I saw this morning they are locking down part of Wuhan, a million people. So, we are hopeful by the – and I have been saying this, and I have been consistent by the time they have the party congress, which is in October, that they are at a different place. I think that is, as we talk to our teams there, I think there is a lot of belief that, as we get to the fall, things are going to normalize rapidly there. I do think it will be a while and what do I know for the record for anybody listening, I do think it will be a while before we have a ton of Chinese travelers traveling internationally or any of us going to China. I am hopeful that that would be next year. I haven’t been since 2000 – the end of 2019 and I am dying to go. But the reality is, as we saw in the early recovery of COVID where they lead the world, when China opens up, China, in China, for China, just Chinese travelers moving around China, the business can boom in a very big way, because they are not leaving, they are staying and they love to travel within China and see the destinations there. So, I think as we get into October and the rest of the year, I would hope and I do think and our teams think that you are going to see a lot of activity in terms of what’s going on and opening and travel within China. And I do think that will then start to restart in a big way the development engine that wants to go and people want to do, it’s just, it’s been kind of hard to get it chugging again.

Thank you.

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

As always, we appreciate you guys taking an hour out of your life to join us. We are obviously really pleased with the results in second quarter. We see the recovery, not just to happening, but happening at an even faster pace than we thought. We know the world has got a lot going on, but as I have said, bunch of different ways. As to Kevin, we feel quite good. We are cautiously optimistic. We feel quite good about the momentum we have and the wind we have in our sales through the rest of this year and into the first part of next year. And we look forward to giving you an update after we finish the third quarter. Thanks and have a great day.

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