Good morning, and welcome to the Hilton's First 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 First 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. 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 first quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions. And with that, I'm pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. Before we begin, I'd like to take a minute to express our sadness at the tragic events continuing to unfold in Ukraine. Our hotels have always been a part of the fabric of the communities we serve, and we take our promise to make those communities better places to live and work very seriously. Along with the steps we've taken to protect our team members and guests, we've also partnered with American Express and our ownership community to donate up to 1 million room nights across Europe to support Ukrainian refugees and humanitarian relief efforts. Additionally, the Hilton Global Foundation has contributed to World Central Kitchen and Project Hope to further assist with the humanitarian aid. We are keeping our Hilton family and everyone impacted by these horrific events in our thoughts and hope for a peaceful resolution to this crisis. Our Hilton values and purpose-led culture have led us through uncertainty as well as recovery. Our team members around the world have worked hard to effectively navigate the challenges over the last 2 years, and as a result, have positioned Hilton even stronger for the future. As we look to the year ahead, we are optimistic that our industry-leading RevPAR premiums and fee-based capital-light business model, coupled with further demand recovery, will continue to drive strong performance and meaningful free cash flow, which will enable us to return significant capital to shareholders in a disciplined way. With recent performance exceeding our expectation, we were pleased to have resumed our Capital Return Program earlier than anticipated, beginning share repurchases in March. Through April, we had completed approximately $265 million of buybacks. Additionally, we have declared a $0.15 per share quarterly dividend, further highlighting the confidence in continued recovery…

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 80.5% versus the prior year on a comparable and currency-neutral basis. System-wide RevPAR was down 17% compared to 2019, impacted by the Omicron variant. Following a seasonally slow start to the year, demand picked up across all segments and regions in March, driven by continued strength in leisure demand and loosening corporate travel restrictions. Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $448 million in the first quarter. Results reflect the continued recovery in travel demand. Management and franchise fees grew 79%, driven by meaningful RevPAR improvement and strong Honors license fees. Continued cost control further benefited results. Our ownership portfolio posted a loss for the quarter due to the more challenging operating environment, particularly at the start of the year in Europe and Japan, where the portfolio is concentrated. Fixed rent payments at some of our leased properties also pressured results. However, performance improved throughout the quarter, driven by strengthening demand across Europe in March. Rebounding fundamentals, coupled with cost discipline should continue to drive significant growth in operating performance going forward. For the quarter, diluted earnings per share adjusted for special items was $0.71. Turning to our regional performance. First quarter comparable U.S. RevPAR grew 77% year-over-year and was down 13% versus 2019. While the Omicron variant weighed on demand at the beginning of the year, RevPAR improved 17 percentage points over the course of the quarter, which marks down less than 6% versus 2019. Leisure travel continued to lead the recovery with segment RevPAR exceeding 2019 levels for the quarter. Upticks in business transient and group travel, particularly in March, also contributed to solid performance in the quarter. In the Americas outside of the U.S., first quarter RevPAR increased 137% year-over-year…

. And the first question will be from Joe Greff from JPMorgan.

Chris, how much of your second quarter and full year RevPAR guidance is occupancy-driven versus rate driven? How does moderating growth in leisure volumes, just given the tough comparisons and relatively higher growth in business transient group volumes, impact the blend of ADR and ADR growth in the second half?

Yes. I mean, we gave a lot of commentary on rate growth in the sense of giving you as much visibility as we had to represent the strength that we're seeing. I mean, we're wonderful, as I said in my prepared comments, inflation hedge because we can reprice every minute of every day. And as demand has picked up, we have certainly been able to do that, and we expect that we will continue to be able to do that. I think as the year goes on, we expect the largest part of RevPAR growth to come from rate growth. We obviously expect to see occupancy growth as well. But I think net-net, it will be majority driven by rate. In terms of the segments, leisure, broadly remains quite strong. I mean, right now, I think the number is consumers still have $2.5 trillion of excess savings that they accumulated during the pandemic in their pockets. While people have been out traveling a lot more than they had maybe a year ago, there's still a lot of people that haven't and a lot of people that really want to get out and have experiences. And so people that we have pretty full employment. People have a lot of money in their bank accounts. And I think now feel quite safe broadly, certainly here in the U.S., not everywhere in the world. Obviously, the world is a big place, but in the Western world feel safe going out. And so we expect to see very strong leisure continue. I mean we think we'll probably have the biggest leisure summer we've ever had, only to surpass last summer, which was the biggest leisure summer we had ever seen, prior to what I think we'll see this summer. And then as we get…

And the next question will be from Carlo Santarelli from Deutsche Bank.

Chris, you talked a little bit about kind of business transient back at 45% versus, I believe, that was probably closer to 55% prepandemic. And obviously, Group is probably a couple of hundred below its normal mix. As that stuff comes back and you think about maybe a full year 2023 and occupancy in general, what kind of pricing power do you think you have at occupancy levels that are kind of commensurate with 2019 levels, which I believe were kind of $143, $143-ish?

Yes. Well, let me -- first, in terms of the mix, it's probably worth stating because I commented a teeny bit in my prepared comments. You're right, business transit sort of the mix pre-COVID was plus or minus 55 business transient, 25 leisure transient and 20 group. If you look at, sort of what I would sort of call, the bottom of the recession driven by the pandemic, it went to 35 business transient, 55 leisure and 10 group. Now it's 45 business transient, 39 leisure and 16 group. And I've been saying this so pretty much for 2 years. In the beginning, people maybe thought it was crazy, but that when we wake up and this sort of flushes through the system and we get fully on the other side of it, that business mix is going to look an awful lot like it did pre-COVID. And I think we're on our way to that. And so I think when we look -- maybe not , I think leisure transient will probably remain elevated for a while. But I think it will -- it is regressing to the mean, and it will look more like it did than like it has looked, in '23 and certainly in '24. In terms of broader pricing pressures, as all that comes back, not to be pedantic about it, but it's sort of the laws of supply and demand, economics, which is, if we have a product that's in high demand and increasing demand, and there's not a lot more -- there's not enough supply and not a lot is being added, which is sort of the case in terms of what's going on with all of our segments increasingly so in midweek and that's only going to increase and then you compound that with getting a decent group base starting in the second half of the year and the next year, I think we'll have meaningful pricing power next year, just because the laws of supply and demand suggest we should. And I think they're alive and well.

The next question comes from Shaun Kelley from Bank of America.

Not to probably overly dig into this, but Chris, I think in the prepared comments, you mentioned that April was running down only about 5%. That's obviously already kind of at the top end of the guidance you provided for the second quarter. So I think we all get that the background sounds pretty optimistic. But could you just help us kind of reconcile that? And maybe just some of the puts and takes around what it would take for things to be better than -- a little bit better than maybe what you've laid out in the guidance and/or what factors might have led you to be a little bit more conservative?

Yes. Well, I mean, the guidance we gave is the guidance we gave. First of all -- I mean I think, Shaun, there are -- it's a good question. I think there are some comp issues in certain months. But honestly, if you listen -- if you replay what I just said in response to Carlo's question, we believe that we're going to continue to see a very strong leisure demand base and an increasingly strong leisure -- business transient and group base as we march through the next few quarters of this year and into next year. So we're not trying to signal in our guidance that we think there's something going on from a weakening point of view. We think things are strengthening.

Sorry to split hairs there. And maybe just as a quick follow-up, probably for Kevin. But could you just talk a little bit about -- obviously, the capital return guidance is super encouraging. Does that have you holding a specific leverage target? Or you've mentioned a couple of times in the past about possibly revisiting what that target would be, but what sort of implied in the $1.4 billion to $1.8 billion that we're getting here, and does that leave you a little bit of room to go even higher still, should you reevaluate it?

Yes, Shaun. I mentioned this in my prepared remarks that may have been a little garbled, but it implies that high end of the range, it implies 3.5x. So embedded in that, yes, we've said and I said it in my prepared remarks that we continue to think about potentially increasing leverage modestly over time. We think the balance sheet is shown that it can handle a higher level of leverage and the business can handle a higher level of leverage given what we just went through. And -- but there's still a lot of uncertainty in the world. And so we're starting with effectively 0.25x increase at the midpoint by saying we're at the high end of the range, and we'll take it from there.

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

Just a couple of follow-up questions on growth. What's your level of confidence in the 5% guide this year? Any updated thoughts on timing or gain back to 6% to 7%? And just how are developments in China going?

Yes, sure. No problem. Look, we -- we're giving you the guidance. So we're highly confident that we can achieve it. Obviously, a lot of the stuff that's going on and that's going to deliver this year is construction in progress, and we have a pretty good handle on that. I mean getting back to where we were before. I mean Chris said it in his prepared remarks, over the next few years, getting back to 6% to 7% is going to mean that starts need to start getting back to where they were. Now starts this year, we think, will be about flat maybe slightly down. That will be down in the U.S., up in international, which is consistent with what we've been saying. We're still going to start 66,000 rooms for construction this year, which we think is still a pretty good rate of conversions. And then we think that on a run rate basis, and some of that's going to be filled in by conversions. I mean, we mentioned some of that in our prepared remarks. Conversions, we think, are going to be up, were up 35% in the first quarter -- year-over-year. We think they're going to be up around 25% -- to about 25% or higher of our deliveries this year, so that will help fill in. And then we think we'll get back to that run rate on a run rate basis sometime in 2024. We think we'll be back to the 6% to 7%.

And then, sorry, just China?

Oh yes, sorry, China, sorry. Yes. Look, China, what's going on now is that's very much in that part of the world, a face-to-face culture, right? So the fact that they're locked down in Shanghai, a little bit in Beijing, and other places is stopping signings temporarily, but we still think we're going to be up slightly in terms of construction starts. And we think we're going to open about 20% more rooms in China this year than we did last year. And so we think that once you get past kind of what's going on there on the ground, that there's plenty of pent-up demand for the product, and once people can start moving around, we'll be back to sort of business as usual in China.

The next question is from Stephen Grambling from Goldman Sachs.

On the contract acquisition cost side, it looks like in your guidance, picked up a bit versus pre-pandemic levels. How should we think about this level versus a normalized run rate over the next few years? And is that investment coming in the form of loans and mezzanine equity? Or is it just straight investment in the deals about a future interest?

Yes, sure. I think, look, it is -- this year's guidance implies a little bit lower than last year -- for a start. It is up over 2019. It's largely a good news story, as we've talked about on prior calls, right? I mean -- and it's almost entirely key money. It's not to say that, we never do a little bit of credit support or a little bit of a handful of mezz loans here and there, but it's almost entirely key money that has that elevated from pre-pandemic levels. There's some great deals. Last year like Monarch Beach and -- are all inclusive into Loom and deals like that -- Resorts World Las Vegas was 1 of the big ones. And so those are great deals to win. Some of them are -- sometimes their conversions as in Monarch Beach, and so they're in the year for the year deals, and they get a little bit of expensive at the high end, as we've talked about. This year's guidance implies a little bit lower than last year, and we'd like to think it will be around there for the next couple of years, because we'd like to think we continue to win more than our fair share of these great deals. And I think what I'd say overall in closing is, I think it's still only 10% of our deals, 90% of our deals require no capital support from us whatsoever. And I think that our contract acquisition cost still holds up pretty well versus our competitors.

The next question is from David Katz from Jefferies.

I just wanted to go back to the notion of NUG and construction starts, et cetera, because we do continue to hear bits and pieces around supply chain and availability and cost of materials. Can you just elaborate maybe a bit more on what you're baking into your guide and your thoughts from that perspective?

Yes, happy to, David. I think that, look, the factors are well known, right? Input costs are up. You've got tightness in the labor markets. You've got input prices in terms of commodities. You've got financing. All of which has been the case for a while. And believe it or not, despite what you read, it's actually easing a little bit at the moment, but it's still elevated. And that's all baked into the guidance, right? That's why construction starts will be flat to slightly down this year. Otherwise, they would probably be up materially. They're down 25% roughly to where they were in 2019. Demand for the product -- based on the optimism and the outlook, demand for the product is actually up. I mean we think our signings will be up in the mid- to high single digits this year. And there's that same level of optimism in terms of people wanting to get the project started, it's just being held back by the factors that you're talking about. So those factors are there. They'll probably be there for some period of time. And we think like all things that are cyclical, they will ease over time. And then the fact that our signings are up is what gives us the confidence to believe that our starts will go back to where they were roughly in 2019 and that our NUG will go back to 6% to 7%.

I think that's right. The only thing I'd sort of add to that, and Kevin said earlier in his comments is, inflation is our friend and it's our owner's friend. So if you look at what we've done in the system during COVID as a result of sort of going through every granular, standard for every single brand, we've been able to drive a lot of efficiency at the hotel level. At the same time, obviously, labor costs have been going up. But when you put all of it into the gonkulator, so to speak, with the savings we've created with the inflationary pressures, which are driving their rate up, and obviously, expenses aren't 100% of revenues. So they've got a positive -- they've got positive leverage there. Even in the face of increased labor costs, we are very confident that across all of our brands on a sort of comparable basis, margins are higher. So the enthusiasm in our owner community and why, as Kevin rightly pointed out, we think signings are going to be up is, that our brands are doing great. They're driving great cheer and people are optimistic with recovery, but they're also looking at an equation where they're going to be able to drive higher margins on the other side. Now we have to have the financing market sort of continue to input cost, all that, which will take a little bit of time. And in the meantime, we're having great success in the conversion world. We're going to probably, as Kevin said, increased conversions this year relative to last by 600 basis points of total NUG delivery. So we feel pretty good about where we are.

Okay. If I may just follow up quickly and use your gonkulator 1 more time. The owned and leased aspect of the model looks like it really has 2 sides to it. One, which is kind of a friend in this recovery and the other that strikes me as a bit more challenging. Are there potential ways in the future that you can deal with the more challenging aspects of it and turn them into a positive in some way?

Well, sure. I mean, look, first of all, I'll start out with -- I implied this or I said this in my remarks that portfolio -- the performance in that portfolio is improving, that is starting to turn around. It's been concentrated in parts of the world that have been a little bit behind from a COVID recovery perspective, Central Europe and Japan, in particular. As that portfolio recovers, it will contribute meaningfully to our growth rate, meaning the EBITDA in that portfolio is going to grow at a much higher rate over the next couple of years than the overall fee business is. And so it's going to contribute positively to our growth. So finding a positive there to your question, and we think that from an EBITDA perspective over the course of this year, it's going to turn positive, and then we actually think it will be positive -- slightly positive as an EBITDA contributor this year. And then I think what we can do is what we've been doing, right? I mean we have quite a large portfolio of leased assets when we inherited the company. We've chipped away at it such that it used to be 9% or 10% of the EBITDA of the business on a stabilized basis, it is going to be sub 5% of the -- even when it recovers over the next few years at a higher rate than the overall business, the fee business continues to grow. We shrink the lease portfolio over time. It's going to be less than 5% of the business over time. We got out of 7 leases last year. We allowed 4 of them to expire and then -- because we couldn't come to terms with the landlord on renewing them or we didn't want to be there, and we converted 3 of them to management or franchise agreements, so they stayed in the system and they moved from the capital heavy part of the business to the capital-light part of the business. So we'll continue to take those opportunities over time. And that will end up being a positive as we shrink that business and grow the rest of the business over time.

The next question is from Smedes Rose from Citi.

I wanted to just ask you, when you think about your guidance for the year, and it's great that you have the visibility to provide that. Kind of how are you thinking specifically about which is actually in China and Europe over the balance of the year. You touched on that a little bit with Europe, I guess, with your O&L comments, but maybe just a little -- some more color on how you think that could shape up?

Yes. I think at a high level, Smedes, the way I think about Europe is, Europe is recovering quite nicely, not Eastern Europe, but the bulk of our business in Europe is driven by Western Europe. And Europe is not quite as far along as the United States, but has been motoring along. Kevin gave you a few of the stats that I think support that. So we expect, like the U.S., Europe -- Western Europe to continue to recover. Our expectation is Eastern Europe for the foreseeable future is going to be quite challenged. But again, a very, very small insignificant part of the portfolio being impacted by that. And China, obviously, a more complex situation. We have a view. We have forecast, which is why we can build it in and give guidance. I think our expectation is in the second half of the year, as China goes through a process of locking down some of the major cities and then reopening them, that China is going to reopen for China at a minimum. Not necessarily China opening for international arrivals. But as we saw in the early stages of the pandemic when China got way ahead of the rest of the world, when China opens for China in China business, our business does quite well and can recover very, very rapidly. So our expectation is second half of the year, you will see China start to reopen really with more benefit in the fourth quarter and into next year than in the third quarter.

The next question is from Robin Farley from UBS.

Just some quick ones. Can you talk a little bit about the booking window? I feel like last fall, it was down to sort of less than a week, and maybe pre-pandemic had been more like 30 days. Just kind of where are we now with that visibility?

Booking windows are extending as you might guess. I think within 7 days, it's now -- it had gotten to be a vast majority at the worst of COVID was booked within 7 days. I think we're approaching in April 50-50, plus or minus, like 50% of the business within 7 days, 50% longer. So huge, huge improvement from where we were.

Great. And then on the OTA business, the distribution mix. You mentioned it was down, which makes sense as business transient comes back. Was that -- you mentioned 85% direct, which I assume includes I guess...

75% direct. We didn't give an OTA percentage, we typically wouldn't. But we're in sort of the pre-pandemic, we were in the very low teens, which is what we sort of believe the efficient frontier is for the business to be able to drive the best results for our ownership community. And I would say in the quarter, we're basically there, plus or minus.

Okay. Great. And then I guess the last thing on group. And you kind of -- you've addressed a lot of it in your opening remarks. I think you said you expected that by the end of the year to be at 90% of '19 levels. Fair to say that you expect '23 to be kind of back at 2019 levels? And then also, I don't know if you gave a pacing for like what percent of '23 room nights are booked compared to like what was booked at this time, pre-pandemic. Just to think about it.

We didn't. I think the answer to the first question is, yes. I do think '23 will be back at -- for group, will be back at '19 levels. We did not give a stat. I think the stat from the best of my memory is about 15% down versus '19 at the moment for '23. But as I articulated in the prepared comments, our sales folks can hardly keep up with all the leads that are coming in for the second half of this year and particularly into next year. And so I think just given the trajectory of how this recovery has occurred and what we've seen sort of in the year for the year business. I wouldn't read a whole lot into being 15 down for next year. We have plenty of time to book that. And importantly, the rates are basically low double digits at the moment. The book business is low double digit higher than '19. And so part of what we're obviously trying to do is maximize the outcome, rate flows really nicely for our ownership community. So we're not -- we really don't want to rush too much in this kind of inflationary environment, because we know the business is going to be there, and we want to put it on the books at the highest rates possible. And so we're sort of taking our time and metering it out. I suspect, as I said, next year, we will be at volumes similar to 2019 when we're done with 2023 and at rates much higher than 2019.

The next question is from Patrick Scholes from Truist Securities.

For your net unit growth guidance of approximately 5%, how do those -- how do those percentages break down by global region? Or basically, what are those percentages by growth rates by different regions?

Yes. It should be -- Patrick, it should be pretty similar to -- the rooms under construction are about 80% international. I don't have the sub-breakdown in front of me right now for where it breaks out. But it ought to deliver a plus or minus what the rooms under construction are 20% in the U.S., about 80% outside the U.S.

Okay. Do you happen to have any of the -- what the expectation is for the China growth rate?

Yes. Well, for openings, I think I said in 1 of my earlier answers, we think that openings -- rooms opened in China this year are going to be 20% up year-over-year.

And the next question is from Bill Crow from Raymond James.

Chris, I continue to be -- I continue to be really fascinated by this interplay between the brands and the owners at a time when occupancy and rates are ramping up, but labor continues to be kind of short. And I'm just wondering what you're seeing with guest satisfaction scores and if you have any concerns about that as we head into the busy summer months?

We -- yes, I mean I'd say first on the labor front, there are still significant issues that we're seeing, both in what we manage and as we talk to our franchise community, what they're seeing. Over the last 6 months, we've seen a very significant increase in labor coming back into the labor force and our ability to get folks in the hotels, which obviously are needed, given the demand profile and the increases in demand across all segments, as I already described. So we're not all the way anywhere near where we want to be, but the issues are not -- they're not as extreme as they had been at other points in the pandemic, including recently. In terms of customer satisfaction, I think, listen, I think all service industries have suffered, and we're right there along with the rest of them. We've been intensely monitoring and we have all sorts of ways to do that, both through social, but our own tracking systems that we call self satisfaction and loyalty tracking. And what I've seen is those numbers that had sort of bottomed out in the middle of the pandemic have started to come back and go the other way, as we've been able to get labor and bring some of the services back. Our social scores, I think the last I saw lead the industry and have been moving up in a positive way. So we have -- we're not satisfied with what we're doing right now. I think the team sitting at this table would say, I've been pounding the table a lot. We like what we're doing. We're on a good trajectory. We need to get more labor back in. We need to restore more services, get food and beverage back on track and…

The next question is from Chad Beynon from Macquarie.

We've heard a lot about airline price increases recently in, I guess, upcoming in the next couple of months. Seems like the operators are pushing through the fuel increases to the consumer. And I know, in your prepared remarks, you noted that March and spring break were strong for the leisure customer, so it doesn't sound like there's been any pushback at this point. But can you talk about, I guess, what you've seen during different cycles as gas prices have remained elevated and if you think that could impact kind of the mindset of the leisure customer for the rest of '22?

Yes. I've been doing this a long time, and we've been studying this a long time, and in fact, got our team to update, R Squared on this, just so we could be technically accurate, I like numbers. And the reality is if you go back over long periods of history, there is not a very high R square. There is not a very high correlation. In fact, there's a very low correlation between what's going on with fuel prices and demand in our business. You can go back to like the '08, '09, when oil hit 150-plus a barrel, and we went, looked at all those periods. And there's not a very high correlation. I think it has a lot to do with the consumer psychology, which at the moment, there are certainly lots of fears and uncertainty about where the world goes. But at the moment, as I said, the consumer has an abundant amount of savings as do businesses and a burning desire to sort of get out there and do business and/or experience the world having been locked up a lot more than they would have liked to. So we're not really seeing any of it. Now there's also a phenomenon that is we'll shift around, but if you looked at our business prepandemic, sort of roughly 2/3 of the business, 60% to 2/3 were fly to and the rest were drive to. That's flipped around during the pandemic. And it's still disproportionately, the majority right now even with where we are in recovery, are people driving. So part of this is there's -- now gas prices are going up, too, but maybe not proportionately as much as the airline ticket is. So there is a little bit of a substitution effect that I suspect is going on with people deciding they'll drive a little further, right? They kind of got used to COVID like, hey, it might have been a 2- or 3-hour sort of limit, before and now it's a 5-, 6-, 7-hour limit for what they're willing to endure to drive. And so it's a long-winded way of saying, we have not seen resistance and we do not, in looking at very detailed analysis of R Squares, we do not historically see a lot of high correlation.

The next question comes from Richard Clarke from Bernstein.

Just one thing I noticed is the number of managed rooms has actually come down quarter-on-quarter by over 2,000, which is the biggest drop I can find. And some quite big drops by brand, DoubleTree, Waldorf, Astoria. Is this a strategy? Are you moving away from franchise towards managed towards more franchise? And if that's the case, maybe why are you leaning away from the incentive fees in the recovery? Or is this more an owner-led shift?

Yes. Look, Richard, it's a good question. I don't have quarter-over-quarter shift in front of me. You're probably right, if you're looking at it, that it's a relatively big shift. Some of that is things converting to franchise, right? They're staying in the system. They're not necessarily coming out. And it's not strategic. We still -- our rooms under construction, like I said earlier, 80% outside the U.S., that's 50-50 managed versus franchise outside the U.S. So the reality is we go where the demand is in the developed world, a little bit more demand at the lower end right now for new construction, right, and new deliveries. And so we fish where the fish are, right? And so the market takes us there. There's more customer demand and more owner demand a little bit, and again, in the developed world, towards franchising. And in the developing world, it's about 50-50.

And just you just mentioned there that you've seen some shift from managed to franchise. Why does that process take place?

Where does it take place?

No, why does it take place?

Owner demand -- I mean customer demand for the product at the lower end and owner demand for franchising. So it's...

And if you look at the regions of the world, I mean, the U.S. has always been a predominantly sort of franchise-oriented environment. If you look at our makeup here, it's a majority -- vast majority of its franchise. 10 years ago, there was no franchising going on in Europe. Today, they is. So we have a much more sort of blended approach. It's like 50-50. If you went to Asia Pacific, five years ago, 7 years ago, it was 0 franchise. Now franchising is, particularly in China, is growing, and it's an opportunity for us, particularly with mid-market brands, to be able to create a network effect much, much faster. And we feel super confident in our ability to manage a franchise system. I don't think there's anybody better in terms of delivering great product and great service to customers. So it's driven a lot by sort of the owner desires and sort of the evolution of the business around the world as different parts of the world mature.

The next question is from Vince Ciepiel with Cleveland Research.

I had a question on cross-border. Could you remind us like how much international arrivals is as a percentage of your U.S. room nights? I think it's pretty small, but kind of how that business is performing today versus pre-COVID if you've seen recent progress there? And then kind of the other way around, when you look at, say, your European business and North American guests heading there for this summer, can you describe kind of what you've seen with booking behavior in the last few months?

Yes.

Go ahead.

Yes, sure, on a normalized basis and you pre-Covid the U.S. is about 95:5, right? About 95% of the customers comes from inside the U.S. 5% outside. Now in big cities like New York, San Francisco, L.A., that could be up to 20% for cross-border. That obviously plummeted during COVID, right, to near 0 and now is actually approaching pretty close to normalized mix, both in the U.S. and Europe. Europe is more about 2/3, 1/3 within the region and outside of the region. And again, that's actually back to approaching levels where it was pre-COVID as the world is opening up.

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

Thank you, Chad, and thank you all for joining us today. I think you could probably hear the enthusiasm in our voice. It's been quite a couple of years, but I do believe that the decisions we made, the actions we took during the pandemic have put Hilton in the best position it's ever been in from the standpoint of driving performance, margins, driving free cash flow and returning capital to shareholders in the years to come. We're super excited about what we think is going to play out for the rest of the year, and we'll look forward after the second quarter to updating you on that progress. Thanks again for the time today.

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