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

Thank you, Chad. Welcome to Hilton's first quarter 2021 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factor section of our most recently filed Form 10-K. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our first quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

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

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

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

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

Boy, that's a lot of questions all embedded into one. But that is probably the most important; I'll cover parts of it. Maybe Kevin will throw some things in. And we'll save a little bit maybe for later, because I'm sure there is a lot of similar questions, but thank you. And I do think that is the question, obviously as both Kevin and I covered Carlo, we saw, pretty marked improvement, as we march through the quarter. And that continued into April. In terms of the global data, I think the best way to look at it is against, a 19 comparison, because looking at it against, 2020, particularly right now, as you were in the early stages of the pandemic is relatively useless. And so, if you look at January and February, you were globally and the U.S. was similar, if you look at it, you were sort of in the 55% to 60%, down from a RevPAR power point of view. And you picked up about 10 points, going down into the -- sort of the mid 40s down in March. And then, in April, you had another step up and into the low 40s. Obviously, made a little early to say but I would say that trajectory in our mind continues if we look at forward bookings both. On the leisure transient side, which is what's going to dominate the second quarter, it feels like we're going to continue marching on. If you look at it by segments, which I you know, obviously, it's been a lot of time and this will sort of get to some of our views on the business transient and the group side. If you look at it, you break down room nights by segments relative to 2019. Again, I'm focusing…

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

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

I think most of my demands related, recovery related questions were sufficiently answered before. So I just like to talk about the development pipeline, nice to see that up sequentially, on a quarter-over-quarter basis. What we've been seeing for a while now is that the non-U.S. component is becoming a bigger percentage of the pipeline. How much of the non-U.S. is limited service? And how did that composition -- how did that compared to maybe a year ago? And maybe where I'm going with this question is when you look at the average fee per room, in your development pipeline now versus a year ago? Is that average fee per room up or down?

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

Next question is from Shaun Kelley with Bank of America.

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

Yes, I mean, of course, it's a concern. I mean, we haven't sort of inflation going on, not just in the input costs, but labor as well. So when they ultimately -- when people need to operate, open and operate, the costs are higher. Now we've done a bunch of things and are doing a bunch of things to bring costs down inside the hotels by creating really good efficiencies that I think will more than offset that component of it. But costs to build are going up and financing is not particularly readily available for the best owners it is and people are starting new build projects in the U.S. and around the world. But, I suspect and sort of built in, Shawn, to our expectations on the unit growth is that the U.S., you will see a cycle where particularly in the U.S., the new construction numbers are going to be much, much lower, that's obviously long-term healthy for the industry. But the good news for us is the world is a big place and the pressures are not the same in all places in the world, particularly recognizing that the place where we get the second biggest chunk of our growth is Asia Pacific and China in particular. And those, those pressures are very different in the sense that they're less and there's a lot more financing available, etc, etc. And so, not unlike coming out of the Great Recession, our job is to be really resilient. This is the benefit of an investment in a big global company. I think we're really good at this and sort of anticipating and adapting to the trends. And like, after the Great Recession, the same thing happened in the U.S., there wasn't so much an inflationary so there was…

Next question will be from Stephen Grambling from Goldman Sachs.

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

Yes, I think, look, the second part maybe is a little more straightforward. Our overall view on capital allocation hasn't changed. Obviously, we've suspended dividend and buyback to preserve liquidity during the pandemic, but the way we think about it broadly hasn't changed. And I think the way we think about it, more specifically on the first part of your question is, we want to get a little further into the recovery, a little bit further into reliably generating free cash -- positive free cash flow and having our leverage levels start to come down. And so that, unless something crazy happens, we think that happens over the course of the year, we'll talk to our board about it sort of in the second half of the year as the recovery takes shape. And we'd say it's highly likely that starting next year, we get back into the capital return business.

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

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

Yes. That's a great question. Actually, Thomas, thanks for asking. It is one that we were debating over the last few days ourselves. And there are varying opinions on it even in inside our own shop. I mean, I've been saying 23 or 24, as you know, on these calls publicly and I still believe that I think with the slope of the recovery I'd probably be on the earlier end of that, rather than the later, as we have a little bit more visibility. I think there is a chance from a room night point of view, certainly on a run rate basis that we get back next year. But I think to get both room nights and rate and the compression we need requires certainly in the U.S. that broadly requires the bigger groups to be back. And while I think they're coming back and certainly they want to be back, the planning and all of that, say it's on a lag. So I think that takes some time next year. So I still say 23, 24, but I'd probably hear towards the earlier end of that.

The next question will be from Smedes Rose with Citi.

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

It's another reason I think it takes time to get back to 19 levels, sort of picking up my earlier answer is because I do think, not only people cut budgets, not everybody, was Amazon or whatever and that has really benefited during this time a lot. Most businesses by number have been really negatively impacted by the pandemic and they need to cut expenses. And so I'm highly confident, as is the case with any cyclical downturn and recovery, when this happens that those budgets will build back, but it will take some time. Now, I think in the second half of this year, I think, number one, there's a huge amount of pent up demand. And by definition, they only have half a year to spend whatever they have anyway, because nobody's going to doing a ton of traveling in the first half of the year. So I think, ironically, I think there's plenty of budget capacity, I look at our own budget, there's plenty of budget capacity, when you talk to businesses for the rest of this year. I think as you go into next year, if we're in a full scale recovery, while people are going to, for a period of time, want to be thrifty. I think in the end, it'll just be what the opportunity set is. And if we're in a robust recovery, what I have seen again, I can't prove it, but I've seen it in every other cycle as you get into that, the rope gets, businesses let the rope through their hands, because they have to, they have to deliver alpha, they have to compete against other businesses that are trying to do the same thing. And so, their people have to get out on the road, they have to…

Next question comes from David Katz with Jefferies.

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

It's a complicated answer, I think when you boil it down, I don't think there is going to be any material shift. I do believe, obviously, short to intermediate term, there's a shift because like everybody, not all of our owners, but most of our owners are dealing with a very difficult situation, I would say that 99.9% now, some of them are much further along in recovery, because their portfolios are in markets that have had rapid recovery resort market, southern U.S., and they're doing pretty well. But broadly, the owner community, obviously, has been hurting, as have we, as have the whole industry, there's not -- it's not like, it's been easy on any of us. We obviously have deployed a whole host of things to be supportive of the owner community and those are still fully deployed, in the sense of working very hard with a lot of folks on behalf of the industry for government support in the right areas and we don't -- we have not stopped those efforts. And I do believe as we get to a real recovery there's opportunities to get help with real stimulus to get people moving again. And so we continue to work, day and night, on those efforts as things evolve. And obviously, we've done, a whole bunch of work in the short-term to provide massive amounts of relief from standards across the board, so that owners could -- make manage their way, we could all manage our way to the other side, I've mentioned it in passing. But it's worth mentioning, again, we call it our hotel, the future work, we were looking in a very granular way across every one of our brands. We're not done with the work but we were done with a lot…

The next question is from Richard Clarke with Bernstein.

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

Well, the cost savings, look, it's everything across the board, just like any hotel owner would be doing in times like this, we're looking for cost savings in sort of literally every aspect of the operations. I think our ambitions in that portfolio, we are pretty capital aid, right? So even in normal times, that ownership was down to 7% to 8% of our overall EBITDA, something like that in 2019. And we've been saying for a long time that if we think about -- we think about our portfolio, it's about 60 hotels, primarily leases, about 20 of them were strategic, we'll be in those leases, no matter what, over time, they have good coverage, they're important hotels, we've got 20 at the bottom, where they're sort of legacy -- their legacy deals that we inherited fixed lease payments in markets that aren't as robust, those we will exit no matter what, when the leases are up. And then, there's about 20, that are in the middle, where when the leases roll, we sit down with the landlord, and if we can work out an arrangement that we think makes sense for us to continue, we continue, if we don't, we get out. And we've sort of enrolling our way out of three to four of them a year, we think it's actually probably more like six to eight of them this year, that will transition out of either transitioning them to management agreements, or franchise agreements, or just getting out. And over time, you'll wake up a few years from now and it'll be something like less than 5% of our overall EBITDA and that will remain the trajectory.

Having said that, in the next -- starting in the second half of the year and into the next couple of years, this will accelerate our overall growth, just because, sadly, the ownership segment given a lot of the fixed rent nature of it and where it's been, which has been concentrated in U.K., Europe and Japan, which have been impacted, dramatically, more impacted. If you look at the RevPAR numbers in those markets and in the segment are twice as bad in the first quarter as the overall. As you get those markets open, you're going to take those numbers, which have been terrible, will become a significant contributor to growth.

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

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

Great. Yes, I had a question going back to the unit growth topic. One is, I wonder if you have thoughts about 22 unit growth. The rate, you mentioned U.S. new construction, obviously, would be lower, kind of how that would compare to this year's 4.5% to 5%. And then, also on that topic, the conversions in this quarter, I think we're 20 some percent of openings. Do you see that moving higher? In other words, are you in the early stages of budget conversions that maybe will come out later this year? I know you've talked in the past about how pressures in the business can lead to a greater rate of conversion. So wondering if that's teeing up for later this year? And then, could that offset the lower new construction growth next year? Thanks.

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

The next question is from Bill Crow from Raymond James.

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

Yes, I mean, we've been having a lot of discussion within the industry. And within China, in fact, I participated in a meeting with the Premier Li of China, just a couple of weeks ago and this is one of the topics that we talked about. If you look at our business, using some metrics, in our business, like in the U.S., international, inbound, only about 4% of the business, if you look at our business globally, it's about 10%. And it does weigh, obviously, more heavily inbound business in other parts of the world, particularly in Europe, which depends on it more. So would be higher than 10%, a large feeder market is China, I mean, its other parts of the world as well, but it's China. And so I think as Europe opens up, obviously, they're going to be like the rest of the world, I think they're going to be doing, within region travel, which given all the pent up demand, as actually I think been reasonably good, just like we're seeing in the U.S., even though we don't have much inbound travel going on, we don't have any outbound going on. And so I think, in the end Europe's opportunity for the early stages of recovery are robust for the same reason, while they're not going to have inbound from China, or other markets, they're not going to have any outbound and Europeans like to travel and particularly in the summer, like to go on vacations and when it's open and they can, they will and they'll stay within the confines of either their countries or the region. So I think I think it's going to be fine. Obviously, longer term, as you get some more stabilized world, you want to open up these travel quarters,…

The next question is from Patrick Scholes with Truist.

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

Yes, it's a difficult issue, as I'm sure if you're talking to the ownership community you're hearing and listen, we talk to him every day and we operate a lot of properties. It is singularly at the moment, I wouldn't say the only issue when you're in a global pandemic, there's lots of issues, but it's one of the most important issues because, it is very difficult, particularly here in the U.S. to get labor and it is constraining recovery on a certain times, because you can't get enough people to service the properties. I do think in the short-term, I've already said it, and it's implied in earlier questions, there's going to be wage pressure, wage inflation, I do think it will stabilize and work itself out as we get later into the year, it's a complex issue, That is at the intersection of people being concerned about their health still, particularly in some of the communities that we need to get focused, back in coming back to work and that's going to take some time, both vaccination and marketing to a number of those communities to get vaccinated and getting it done and getting them to a place where they feel safe being in a workplace. So that's part of it. And then, the other part of it is, getting kids back in school, because a lot of people in the workforce are taking care of kids, they don't there's no daycare, school becomes daycare, and the federal government's it for all the right reasons, the way back when did a top up of unemployment insurance and on top of the state unemployment insurance and obviously sent out $14 100 checks and they did all these things to support people that were in arm's way, all of all…

Thank you, Chris for your complex and evolving…

Trust me, we're spending a lot, there's no silver bullet in the short-term. We've spent a lot of time on it. I think this is one of those, you just have to sort of -- you just have to work through it. It will work out because all of those things are going to be changing. And so the conditions are going to change pretty materially, as we get to the fall, but between here and there, it's going to be incremental, because then I think it'll be a sea change in the fall.

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

Chad, thank you and to everybody that joined us today, we appreciate the time, as always, it's hard to say we're really pleased with where things are given what we've been through over this last year and that we're still in the middle or towards hopefully the end of a pandemic. But we are pleased, I've always had confidence in the business model of ours. I've always had confidence in people's desire to travel; for all the reasons they have always wanted to travel. I think the evidence is pretty clear one that -- the decisions that we made as a result of the crisis have made our business stronger. We're driving higher market shares, higher margins, on a lower cost structure and that as we see, the telltale signs of getting past the health crisis. We're starting to see the world come back to life and all the reasons I thought people wanted to travel are, I think playing out, the way in and we had hope for we have a ways to go. So I don't want to be a power Pollyanna about it, but we feel good about where we are and definitely incrementally better than we did over the last couple quarters. So thanks again. And we'll look forward to reporting back after we finish our second quarter.

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