Operator:

Good morning and welcome to the Hilton Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Head of Development Operations and Investor Relations. You may begin.

Christopher Nassetta:

Thank you. Jill good morning everyone and thanks for joining us today. We are pleased to report strong second quarter results with RevPAR growth driving adjusted EBITDA and adjusted EPS above the high end of our guidance. We continued to execute on our successful development strategy and in July our system surpassed 8000 hotels globally. Our newly acquired brands and recent strategic partnerships will help us build even more loyalty with guests, further enhancing our network effect and increasing our industry leading RevPar premiums. Coupled with our asset light fee based business model, we are well positioned to continue producing significant free cash flow and driving meaningful shareholder returns in the quarter. In the quarter, system-wide, RevPAR increased 3.5% year-over-year above the midpoint of guidance due to robust group performance, continued recovery in business transient and easier holiday comparisons. Transient RevPAR grew 2% year-over-year with increases in both business and leisure demand. RevPAR across large corporates rose 5% in the quarter, driven by strong trends across most industries, including notable recover in technology. Leisure transient RevPAR continued to exceed prior peaks, supported by solid summer travel demand, particularly in international markets. Group RevPAR rose more than 10% year-over-year, led by strong demand for corporate and social meetings and events and booking windows continued to lengthen. For the full year group position is up 10% over last year, with position up mid-teens over the next several years. We expect full year system-wide RevPAR to increase 2% to 3% driven by positive growth across all major segments and regions. We tempered the high end of our expectations versus prior guidance due to softer trends in certain international markets and normalizing leisure growth more broadly. With continued strength in group and steady recovery in business transient, we expect higher end chain scales to continue to outperform. Turning to development in the quarter, we opened 165 hotels totaling more than 22,000 rooms and achieved net unit growth of 6.2%. We marked several milestones in the quarter, including the opening of our 6000th hotel in North America, and we surpassed 75,000 home two suites rooms globally. We also opened seven new resort properties in Europe, including the debut of Curio in Croatia and DoubleTree in Malta. We welcome graduate hotels and NoMad into our family of brands during the quarter, providing further opportunities to deliver exceptional guest experiences and accelerate our expansion in the fast growing lifestyle segment. Demand for lifestyle products continues to increase as guests seek unique experiences and sought after destinations around the world. In the last year, we have expanded our lifestyle offerings by more than 30%, fueled largely by growth in Curio, Tapestry and the recent acquisition of Graduate. With roughly 400 lifestyle properties today and hundreds more in the pipeline, we are well positioned for substantial growth over the next several years. Conversions accounted for roughly half of openings in the quarter, driven by the addition of Graduate and the continued strength from DoubleTree and Spark. In the quarter, Spark opened 27 hotels, more than doubling its existing supply. The brand also celebrated its debut in Europe with the opening of Spark by Hilton London Romford, just nine months after the first property opened in the U.S. The opening marks the start of an exciting journey for Spark to redefine the premium economy segment in Europe, with further launches of the brand across Continental Europe expected in the coming months. In the quarter, we signed 63,000 rooms, increasing our pipeline to approximately 508,000 rooms, which is up 8% from last quarter and 15% year-over-year, with notable strength across the EMEA and APAC regions. In particular, Hilton Garden Inn continued to gain tremendous traction with year-to-date signings, up nearly 90% across 20 different countries. Overall, conversions accounted for over half of the signings in the quarter, driven by additions from our acquisitions and partnerships. Excluding acquisitions and partnerships, conversions accounted for 25% of signings in the quarter, largely driven by continued momentum with Curio, Tapestry and DoubleTree. System-wide construction starts in the quarter were up 160% versus last year and up 37% excluding acquisitions and partnerships. With meaningful growth across both the U.S. and international markets, we remain on track to exceed prior peak levels of starts by year-end. Approximately half of our pipeline is under construction and we continue to have more rooms under construction than any other hotel company, accounting for more than 20% of industry share and nearly four times our existing share of supply. We've seen tremendous interest from owners through our exclusive agreement with small luxury hotels of the world. With the pace of initial property signups far exceeding our expectations under our strategic partnership, we added nearly 300 boutique luxury properties to our system in July, with an additional 100 properties expected to join later this year. Adding these unique properties to our network is highly complementary to our existing luxury portfolio and significantly increases our luxury offerings for guests around the world without any capital commitment. During the quarter, the first AutoCamp properties were added to our platforms. Each AutoCamp location provides a unique opportunity for guests to immerse themselves in nature without sacrificing the comforts of high end accommodations. These exclusive agreements with SLH and AutoCamp provides Honors members with new and exciting ways to earn and redeem points while broadening and enhancing our network effect. As a result of our strong pipeline recent tuck-in acquisitions and strategic partnerships, we now expect net unit growth of 7% to 7.5% for the full year. We are also proud to continue to be recognized for our industry leading brands and culture. Brand finance recently ranked Hilton as the most valuable hotel brand for the 9th consecutive year, claiming nine of the top 50 hotel brand spots. Additionally, Hilton was recently named the top workplace in the U.S. for millennials by Great Place to Work and Fortune for the 7th consecutive year. Since 2016, we've received over 540 recognitions as a Great Place to Work across more than 60 countries and we remain the number one great place to Work in the World and the United States. We're very happy with our second quarter results, development milestones and brand and commercial enhancements which we think demonstrate the continued strength of our business model. Now I'm going to turn the call over to Kevin for a few more details on the results in the quarter and our expectations for the year.

Operator:

Thank you. [Operator Instructions] And the first question will be from Joe Greff with JPMorgan. Please go ahead.

Christopher Nassetta:

Yes, I'd be happy to. I think the way to think about it is what's being added essentially is, is Graduate. I mean, if you look at our prior guidance, we had incorporated a guesstimate on what we would do for SLH. We are doing better than that. And so I think in the end that's going to probably be about a point and a half of NUG Graduate, which we said would be separate and apart is about a half a point. And so I think if you sort of unwind all that and compare it against prior guidance, the organic is slightly less, but has 100% to do with some things that are just moving from the fourth quarter into the, into the first quarter of next year. But as we were, as I said in my comments, in terms of feeling good about what's going on the development side, I mean, for the full year, we're going to hit historically high levels on signings. We're going to hit historically high levels on starts. And that is both of those, excluding any sort of partnerships or acquisitions. And obviously that's been translating into very good results. We feel very good about the momentum into next year. Most everybody was at our investor day in the spring where we articulated a sort of algorithm story of 6% to 7% organically. And we feel very, very good about being able to deliver on that. Obviously, this year is going to be above the higher end of that because of some of the inorganic things. But if we fast forward to next year, our expectation certainly is organically. We will be, we will be solidly in that range just given the signings, the starts and looking at how that's going to play out in the next couple of years.

Operator:

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

Christopher Nassetta:

Yes. Well, last year was elevated because of a few very specific deals, which we've noted over the last couple of calls. This year will moderate and be lower than last year. And I think on a go-forward basis, I'd look at the next year as it sort of being comparable to where we'll end up this year. We're not really seeing any material difference. Notwithstanding a lot of noise in the market, I think in the quarter. Kevin helped me. We, our key money percentage of deals in second quarter was like 7% or 8%. Overall key money is still less than 10%. So 90 plus percent, fully free of any form of incentive. And we haven't really seen those stats really move around a whole lot. Again, we had an elevated year or two coming out of COVID because we got some really cool opportunities on some very big super high end luxury and sort of resort convention type assets. And we took advantage of that. But we're getting back to more normalized levels, which again will be lower than last year, this year. And I think we'll continue at that kind of level over the next two or three years.

Christopher Nassetta:

I don’t have the exact number in my head, but I would guess at this point, for 2025, it's probably 40% to 50%. And for 2026, it's probably a quarter, something like that. By the end of the year, we'll be for 2025, we'll probably cross over at 60% to 70%. Those would be sort of the typical numbers. And group is sort of getting back to pre-COVID typical levels. Like, even if you look in the second quarter group mix, it was pretty much at where we were pre-COVID. I mean, of overall mix in Q2 was 20%, which is exactly what it was, pre-COVID. So it's sort of, Group it's taken a while because of the long lead nature of it and planning and all that goes into it, particularly with the larger groups and the citywides. But that, that's sort of, now hitting on all cylinders and normalizing. So, yes, I would think it'd be in those percentages. So I think it's a, they're a very good indicator if we sit around this very table, with all of our senior team, including head of sales and his team, and they feel very good. They're not. There's no sense of sort of slowing on demand and pricing, and the group demand, pricing and overall attitude in that segment remains quite good, quite strong. And as I mentioned in the comments, the booking window is extending. I mean, our overall booking window extended in the quarter. And at this point, pretty much the booking window is back to, obviously got super short during COVID but it's pretty much now back to normalized level extended in the second quarter and pretty much got us back to pre-COVID levels. The Group booking window continues to extend just because people have to go further out. There's just not enough space available for their needs.

Operator:

And the next question is from Shaun Kelley with Bank of America, Merrill Lynch. Please go ahead.

Christopher Nassetta:

Good morning, Shaun.

Christopher Nassetta:

Yes, a great question. And obviously we spent a lot of time talking to people and looking at a lot of data in our business. Let me do it maybe through the lens of walking around the world a little bit to talk about what's going on. So starting with maybe I'll finish at home, start with Asia Pacific. Asia Pacific, as you heard in Kevin's commentary, is sort of a tale of two cities, China and then APAC ex-China. So in China, I think Kevin covered it nicely. In China, there is actually a very significant amount of travel going on. We do expect to end the year sort of down probably circa 5%. But what's going on in China is obviously they have economic issues, so their economy is slow, but really the travel business is still quite robust. But what's happening is they've opened up a lot of corridors for inter Asia travel that is visa free. And Chinese travelers love to travel and they're getting out of China and they're going around and there's just not enough inbound travel yet into China. There's not enough flights from Europe and the U.S. and other parts of the world to compensate for that, and that's going to take time. I mean, I was there during the quarter at a U.S. China travel summit that the State Department sponsored with their equivalent, and we were talking about, how we're going to get, stimulate more travel, more flights. And by the way, the flights have tripled or quadrupled, even since then. So, I mean, there is progress, but it's still going to take some time. So I think, China is a complex story, but that's what's going on. People, travel in aggregate similar to where it was sort of not better or worse, but more people leaving, not enough coming in. I suspect over the next year or two, we will get to a different place. Hopefully their economy start to pick up, but you'll have a lot more inbound travel. The rest of Asia Pacific quite strong, particularly led by Korea and Japan. And we haven't seen any real signs of weakening in those markets. And I should say India, for that matter. No real signs of weakening. And those are the real APAC ex-China markets that are driving performance. And then coming to EMEA, again, sort of a bit of a tale to cities. The Middle East remains quite strong pretty much across the board. Europe, I would say, is still very, very strong in an absolute sense, but a touch weaker than what we had seen a quarter ago, led by what you're talking, implied in your question, which is some of the leisure business. Again, you're still at the high end of high single digit sort of year-over-year growth. So it's not like it's a it's not a bad story. It's just a little it's come off just a little bit. And then coming, coming, I could keep lots of other places in the world, but these are the big markets. It’s coming home to the U.S. is exactly what's implied and sort of what you would guess from what I've already said. If you break apart the segments, Group is still raging, business transient is still grinding up, not at a rapid pace, but still grinding up. Both of those segments maintaining great pricing power. And then leisure transient has been normalizing, because we're just getting back to a more normal life. And it was at very elevated levels, particularly on weekends, but broadly and so we continue to see sort of normalization there. And the consumer, if you break it apart, and sort of segments in the lower sort of half of consumers, maybe even the lower three quarters. I mean, you can read the data is all out there. They had bank accounts, and checking accounts full of money coming out of COVID. They've spent all that money. They're now borrowing more. And so, they have less available, less disposable income and capacity to do anything, including travel. You go up to the upper echelons and people still have pretty fat bank accounts and checking accounts and wherewithal. And so, what the impact of that is, some continued normalization on leisure transient. And the reason I use normalization is not to be cute. I mean, for the full year, if you look at it, we think we will globally see growth in all segments. I said that quickly in my prepared comments. It'll be very, very low in leisure transient, but positive a little bit, higher on business transient and then, very, very strong for the reasons I've described on meetings and events. So it is not, at least in our world and what we have seen year-to-date and what we expect for the rest of the year, it's not cratering in any way. It's just soft. It's but definitely softening for the reasons I described.

Operator:

And the next question will be from Stephen Grambling from Morgan Stanley. Please go ahead.

Kevin Jacobs:

Yes. Sure, Stephen. I think, look, obviously, those -- the non-RevPAR-driven fees outperformed. We still had very strong core fee growth in the quarter based on our algorithm but non-RevPAR-driven fees outperformed in the first half of the year. Some of that is a little bit of timing as it relates to the over the trajectory of the quarters of this year. And, but I'd say longer term, all of those parts of the business, right, we've talked about license fees. We've talked about other income. We've talked about ancillary lines of business at our Investor Day, all of those parts of the business should continue to grow at algorithm or above over time. So you're seeing a little bit of timing issues this year, but then over time, it should be additive to the algorithm overall.

Kevin Jacobs:

Not on partnerships or deals just a little bit of comparability year-over-year and just a little bit of strength in the early part of the year in some of those parts of the business.

Kevin Jacobs:

And -- I should say, a handful of onetime items in there, but nothing related to the partnerships.

David Katz:

Hi, good morning, everyone. Thanks for taking my question. And it's perfectly suited because I wanted to follow on to the prior one, which is related to non-RevPAR fees. Can you talk a bit about your ability to affect or influence that growth meaning is there just more resource toward identifying and executing on those opportunities? Or is the world just evolving in a way that's sort of driving that growth on your behalf which benefits from your scale?

David Katz:

Super helpful. Lots more in this. Thanks very much.

Robin Farley:

Great. Hi, thanks. Just circling back to the unit growth guide for next year. You have -- I think it's something like 30% more rooms under construction than you did in 2019 if my math is right. So you don't really necessarily need an acceleration in conversions, but some others are talking about that. I wonder if you could just sort of characterize what you think is going on in the conversion environment in terms of are there things that would drive that to accelerate in 2025 or -- for [indiscernible]

Robin Farley:

Great. It's very helpful. And then if I could, just one clarification. Kevin's comments on kind of the timing of fee growth and that the first half outperformed and the idea that it will -- over time, it will -- that sort of algorithm is sustained. Just does that mean like sort of for the full year, the algorithm will be the same? Or was that more that like I'm just thinking about it in second half would be slightly below algorithm, but the full year still comes in, in line or with the comment that...

Robin Farley:

Great. Perfect, thank you.

Smedes Rose:

Hi, thanks. Just I guess to follow up on the growth outlook a little bit. Just looking at sort of the implied RevPAR ranges at kind of one and change to three and change through the back half of the year. I mean, is the higher end just a reflection of maybe what happens with the U.S. economic growth? Or is there something else in particular that you think could drive you towards the higher end of that implied outlook?

Smedes Rose:

Thank you. Appreciate it.

Brandt Montour:

Good morning everybody. Thanks for taking my questions.

Brandt Montour:

Good morning. So Chris and Kevin, so implied in the fact that EBITDA, the guidance for the full year didn't really come down but you did cut RevPAR, we're left to assume that there's some incremental fees potentially from that extra NUG from SLH. Correct me if I'm wrong there. But the follow-on question is, if you could just remind us the economics of the SLH hotels and what you're implying to sort of accruing fees from them as we go through the rest of the year?

Brandt Montour:

Okay. That's super helpful. And then the follow-on question is just a clarification on some of your comments, Kevin, on the back half RevPAR I know U.S. is the big one, but U.S. and China may be taken separately, what are you implying for the back half on those two buckets versus the July run rate? Are you implying any reacceleration or sort of straight lining or what's qualitatively what you guys are thinking there?

Christopher Nassetta:

And I think that acceleration, Kevin said this, Brant would be fourth quarter oriented. I think third quarter, you will likely see -- you're in a transition where leisure is softer and you don't have all the business travel and the meetings and events. So third quarter, if you look at it, third versus fourth. I think third quarter will be weaker, fourth quarter a lot stronger for the reasons Kevin described. One, we end -- we fully expect a more normalized business transient travel, particularly as you get a week or so past Labor Day. And in October, November, it will get cooking, and we have a very strong group base in the fourth quarter that supports a stronger fourth quarter than third.

Operator:

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

Christopher Nassetta:

Good morning.

Kevin Jacobs:

No, not yet. I think, look, it's sort of early days on sort of those changes. But I mean, really, in the end, that's about more transparency, and we do not see any impact to AV. We have not seen any impact nor do we expect any from that change.

Kevin Jacobs:

Yes, thanks for the question, Patrick. We appreciate that because we think it's been a very good story. We talked about this a little bit at the Investor Day, but for those who weren't there or need a reminder, we think there's 50 to 100 basis points a year of embedded margin growth increases in the business as we shift, obviously, the growth in the business is all through the fee segment. So those fees come in at 100% margin and improve the margins of the business. And so that, combined with really good cost control, which I think we have like Chris said earlier, I think we'll pat ourselves on the back a little bit on that. I think we're really good about being disciplined about cost control. And so what that's done is you can see our margins are 1,000 basis points higher than they were pre-COVID, and we think that, that will continue to grow. Again, there will be different there'll be puts and takes depending on what's going on in the economy and how we do and where we are relative to our annual algorithm projections. But for the most part, you should think about it as 50 to 100 basis points -- embedded growth.

Patrick Scholes:

Okay, thank you for the clarity.

Chad Beynon:

Good morning. Thanks for taking my question. I wanted to focus on conversions, which for you guys and a lot of your peers are just becoming a bigger component of net unit growth? And maybe said differently, more predictable piece. So as you think about the net unit growth beyond in 2025 and 2026 and some of the new brands that you've rolled out, which are helping on conversions, should this lift just in terms of percentage of NUG. And how does the cycle play into that with rates coming down? Thanks.

Chad Beynon:

Thank you very much.

Duane Pfennigwerth:

Hey good morning. Thank you. Just on Spark, you mentioned 27 hotels. Any themes in terms of the brands or types of properties that are converting from and what the average investment by owners is? And then my follow-up on the 400 SLH, generally, where are they located? And any more detail you can offer about the profile of these properties coming in as well? Thank you.

Duane Pfennigwerth:

Thank you.

Dan Politzer:

Hey good morning everyone. Thanks for taking my question. Just a quick one on China. I believe you said that China was 30% of overall fees. I assume that over indexes in terms of the incentive management fees. But how should we think about that relative to that line item? And maybe any guide guardrails for incentive management fees as we think about the rest of the year and as it relates to China.

Dan Politzer:

Thank you. Helpful.

Richard Clarke:

Hi, good morning. Thanks for taking my questions. Just looking at some of the other regions like Middle East and Africa, Asia, ex-China, the ones that are really delivering the double-digit growth at the moment. Just your outlook for that for the second half. Can they keep that pace of momentum? Or are we going to sort of see a convergence of global RevPAR around your guidance number?

Richard Clarke:

And then maybe just a clarification. Maybe this is related to your previous comment, Kevin. But I noticed that think about 1,000 Waldorf Astoria rooms have left the system and about 300 Conrad. I guess that's probably Edinburgh and the New York one. But just any color around those hotels leaving the system and what it means for those brands.

Christopher Nassetta:

And that was at our urging, with what we're strategically trying to do with Waldorf, if you think about all the existing Waldorf, the new [Indiscernible] that are coming. Waldorf is really hitting on all cylinders. The product is extraordinary. The new products are off the charts. And so there are like any brand that's been around for a while, there are some that really don't quite fit the bill. But the good news is with 24 brands, we have a home for -- not for everything, but we have a home for those things. And those properties that that left Walter are terrific properties that just weren't sort of meeting the mark on Waldorf, but they met the mark in other brands.

Operator:

And the next question is from Kevin Kopelman with TD Cowen. Please go ahead.

Kevin Jacobs:

Yes. So the first one, the answer is no. I mean, technically, our forecast was set before Friday, but I don't think the Friday's move is going to have a material effect on the full year for FX. It's just it did -- as we mentioned. It did get a little bit worse over the -- become a little bit more of a headwind over the course of the quarter, which affected our guidance range for the full year. And then sorry, the second part of your question?

Christopher Nassetta:

We gave it -- it's in the press.

Christopher Nassetta:

4,000 and change.

Kevin Kopelman:

Thank you very much.

Conor Cunningham:

Hi, everyone. Thank you. Just on the conversations with developers, I'm just curious on how that's changed over the past six months. I assume that there's a lot more comfortability around financing and credit availability. And then another one, just Airbnb called out booking presentation on just longer-term rentals. I mean, I realize your extended stay business is not exactly the same. But are you seeing any hesitancy on the longer but curve stuff in general? Thank you.

Conor Cunningham:

Just on the evolution of your discussions with developers. It seems like -- yes.

Conor Cunningham:

Appreciate, thank you.

Christopher Nassetta:

Thank you, Chad, and thank you, as always, for spending an hour of your day with us. Obviously, we're super pleased with being able to deliver on second quarter, and we feel very good about our outlook for the full year, as I described, while the macro environment is a little bit weaker. Our development story is incrementally stronger and the net result is pretty much our ability to deliver an algorithm, which we're excited about. We will look forward to catching up with you after the third quarter to give you the latest and greatest. And hope everybody enjoys what you can on the rest of summer. Take care, and thanks.

Operator:

Good morning, and welcome to the Hilton First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

Jill Chapman:

Thank you, MJ. Welcome to Hilton's First Quarter 2024 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.

Christopher Nassetta:

Thanks, Jill. Good morning, everyone, and thanks for joining us today. We are pleased to report strong first quarter results, which continue to demonstrate the power of our business model and the strength of our development story, both adjusted EBITDA and adjusted EPS meaningfully exceeded the high end of our guidance even with RevPAR growth at the low end of our expected range. We also announced several new partnerships and additions to our brand portfolio, which will enable us to build even more loyalty with customers and help accelerate growth.

Kevin Jacobs:

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 2% versus the prior year on a comparable and currency-neutral basis. Growth was largely driven by strong international performance and continued recovery in group.

Operator:

Of course, the first question today comes from Stephen Grambling with Morgan Stanley.

Christopher Nassetta:

Sure. Happy to cover that. That's a broad array of topic so really -- really artful questions, Stephen. I would say when you flush it all out, obviously, and Kevin covered it in his prepared comments, the first quarter from a RevPAR point of view is a little bit lighter than we thought, but sort of easily explained on the basis of what Kevin already talked about. We had a lot more under construction than we had anticipated, which is a good thing, but not enough rooms out of inventory in a lot of those assets, particularly in our limited service brands to take it out of the comp set. So that weighed on is weather, definitely, we didn't anticipate what was going on -- what happened in the Northeast at the beginning of the year.

Joseph Greff:

Chris, just kind of going back to your comments on how you're viewing the balance of this year. You mentioned all 3 major segments you would expect to be degrees of up year-over-year from a RevPAR growth perspective. If you were to bifurcate it between the full-service chain scale segments and the select service chain scale segments, would you expect the lower-end chain scale segments to be positive year-over-year?

Operator:

The next question comes from Robin Farley with UBS.

Christopher Nassetta:

Yes. Taking one at a time. In terms of Group and BT versus '19, they are both eclipsing from a revenue point of view, but from a demand occupancy point of view, they're both below business transient modestly, pretty minor. Group a little bit more so, I think, like 500 basis points or something like that is from memory. They can, in fact, check me. And that has -- so let me cover in reverse order business transient is, I mean Group is just a function of gestation period for this to ramp up. I think by the time you get to the second half of the year, and certainly, by the end of the year, Group demand will be finally back to where -- just based on the underlying strength in that space.

Operator:

The next question is from Shaun Kelley with Bank of America.

Christopher Nassetta:

Yes. Thanks. I'm going to ask Kevin to take that.

Carlo Santarelli:

Kevin, I know you touched on it in your prepared remarks a little bit, but specifically on the base and other fees, I think they were up about 32% year-over-year, a dramatic acceleration. In terms of the things you mentioned, I would assume some of that is international, but any way you could provide a little bit more color on the drivers there?

Operator:

The next question comes from David Katz with Jefferies.

Christopher Nassetta:

Yes. I mean we did say last time that we were going to incorporate SLH into it, and that is incorporated into our 6% to 6.5%. We ultimately will add in Graduate, but just we think the better convention is to add both the EBITDA and earnings impact and the net NUG impact once closed so that is not in that. I think the way to think about it going forward is the SLH is going to be probably coming into our system over the next couple of years. It's early days, but so far, we really like what we're seeing. We're getting a very, very high percentage of existing SLH members in the markets that we have been out and with SLH marketing to sign up and want to come into the system. And we have no reason to believe that won't continue, getting the technology and all that done, which is people are working on both sides very, very diligently on. We'll start to get us to the other side and incorporating assets and the ability for our customers to book through our channels and honors, earn and burn and all of that, sometime probably middle or late summer so I mean, it's a little bit of a moving feast.

Bennett Rose:

I just noticed that the percent of the pipeline under construction just ticked up a little bit from fourth quarter and first quarter. I was just wondering, is that concentrated in the U.S. and could you just maybe talk a little bit about what developers are seeing in terms of getting properties out of the ground on the financing front or getting the supplies of the workers they need. Just any color along there?

Brandt Montour:

And maybe for Kevin. Kevin, you mentioned timing items. If you could just elaborate on that and sort of what and where and when we should expect any of that to reverse, please?

Operator:

The next question comes from Chad Beynon with Macquarie.

Christopher Nassetta:

Yes. I don't have the data point in my head, but I do know this. Yes, it's building for '25, '26. I believe both years are sort of high single, low double-digit increases relative to where we've been in the past. So yes, I mean, they're putting the data in front of me. So my memory is right, 13% and 15% up in '25 and '26.

Charles Scholes:

On the NoMad news, that's a pretty small change at the moment. What are your plans for that? Where do you see that brand going in the next 5 years?

Christopher Nassetta:

And what we really love about it is we did as I've talked about, it seems like time and eternity, luxury lifestyle. We did a huge amount of work because one of the options was to do this on our own, which you know we are pretty good at and like to do historically. And as we did the work over the last bunch of years, sort of like because this is always benefit in the skunk works, and I'm not exaggerating, this is sort of the ethos of what Andrew Zobler and his team have created a sort of bull's-eye for what we think is modern luxury lifestyle today and going forward in terms of what customers are looking for.

Operator:

The next question is from Duane Pfennigwerth with Evercore ISI.

Kevin Jacobs:

Sorry, Duane, I didn't quite catch the first part of your question.

Kevin Jacobs:

Yes, I think it's a bit of both without getting into too much detail. There was a touch of the timing was in fees, but a lot of it is strength. And like I said earlier in one of my answers, in the parts of the world where our managed business is bigger and the segments in the U.S. with urban hotels where our managed business is bigger, we think incentive management fees will continue to be a strong contributor over the course of the year, and that's sort of all baked into our guidance. So no anomalies in there.

Michael Bellisario:

Two parts for you on loyalty. Just first, what was Honors occupancy in the quarter? And then bigger picture. Just aside from offering customers more options, how are you driving how are you thinking about incremental engagement? I know you're still having to educate travelers about loyalty and the benefit of loyalty, especially compared to all the book direct and marketing campaigns you had to do pre-pandemic?

Operator:

The next question is from Bill Crow with Raymond James.

Christopher Nassetta:

Yes. I mean we do think the Olympics will be a nice positive for Europe broadly and obviously, for Paris and France. I mean our -- it's not going to dramatically impact our numbers just because Europe is a pretty big part of our portfolio. But if you look at France, while we're present in a lot of markets in France. We're not -- it's not a large portion of our portfolio. So it will be great, and it will help, but it's not going to help as much as if it was in New York City or summer where we had a huge density hotels.

Richard Clarke:

In the quarter versus 2019, it looks like U.S. occupancy is still 450 basis points where you were pre-COVID. Obviously, there's some seasonality in there but that doesn't seem to get you anywhere near that. Is it just now a matter of time to get that occupancy back or can we now think that maybe there has been some structural shift in travel that means kind of...

Operator:

The next question is from Conor Cunningham with Melius Research.

Kevin Jacobs:

Yes, Conor. It sort of depends on -- it's sort of a little bit deal dependent, right? Sometimes it often depends on which flags are available in that particular market. It depends on where you are at the upper end in luxury, there's a lot more competition because there's just more brands. And then when you get into the sort of the middle tiers and below, there's us and a couple of others that -- not to be competitive that sort of maybe fight for second place when we're not available. So yes, we do really well. I think for the full year last year, in the U.S., we did 40% of all conversion deals that were done in the U.S.

Operator:

The next question is from Dan Politzer with Wells Fargo.

Kevin Jacobs:

Yes. I think it's really across the board. They're seeing the same dynamics. The Group demand is strong, business, Leisure, particularly with the strength of the dollar that sort of buys more for leisure travelers going over there, it's really been across the board.

Benjamin Chaiken:

Great flow-through on revenue to EBITDA in 1Q. That's in the context of what sounds like some calendar headwinds. Anything you would call out as a tailwind or a comp dynamic or just good blocking and tackling. If I heard correctly, I believe you mentioned there was a $10 million good guy in 1Q that I believe reverses in 2Q? Just anything you could call out as we progress through the year?

Kevin Jacobs:

Yes. And again, I think I said this before, but when it comes from fees, right, I mean, that's obviously our highest margin business. And so an incremental dollar of fees and IMF drops straight to the bottom line. So when the strength comes from the fee segment, which probably will continue to because that's our largest segment and our fastest-growing segment, you're going to continue to see better flow-through and margin growth.

Christopher Nassetta:

Thanks, everybody. As always, we appreciate you dedicating this much time as we've described. We feel good about the business, good about momentum, good about where broadly economies are to deliver the results that we've talked about and super good about the momentum we have on the development side. And we will look forward to talking to you this summer after we complete Q2. Thanks again and talk soon.

Operator:

Good morning. And welcome to the Hilton Fourth Quarter 2023 Earnings Conference call. All participants will be in a listen-only mode [Operator Instructions]. After today's prepared remarks, there will be a question-and-answer session [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Chris Nassetta:

Thank you, Jill. Good morning, everyone, and thanks for joining us today. We are happy to report a great end to what was another really strong year for Hilton. For the year, system-wide RevPAR grew 12.6% versus 2022 with solid growth across every major region and chain scale compared to 2019, RevPAR increased 10.7%. Strong top line performance drove record adjusted EBITDA of nearly $3.1 billion, up roughly 20% year-over-year to the highest level in our company's history. During the year, we launched two new brands, introduced new innovations, expanded our partnerships and opened a near record number of rooms, all of which further strengthened our network and enabled us to welcome more guests than ever before. Our strong top and bottom line performance drove significant free cash flow, enabling us to return $2.5 billion to shareholders. Turning to results for the quarter. System wide RevPAR increased 5.7% year-over-year, exceeding our expectations, driven by strong international and group trends. Group RevPAR rose 6% year-over-year due to an uptick in small company meetings and convention demand. Business transient recovery continued in the quarter with RevPAR up more than 4% [visited] by gains in both rate and occupancy. As expected, leisure transient RevPAR increased 3%, decelerating modestly versus the third quarter, largely due to seasonality. Compared to 2019, system wide RevPAR grew 13.5% in the quarter, up more than 200 basis points sequentially compared to the third quarter. Demand continued to improve with December system wide occupancy reaching 2019 peak levels. Group RevPAR outperformed expectations, increasing 8% versus 2019 and up more than 700 basis points sequentially versus the third quarter. Business transient continued to recover growing 5% versus 2019. As expected, leisure RevPAR remained strong growing 25% versus 2019 and decelerating sequentially due to calendar shifts. As we look to the year ahead, we expect system wide top line growth of 2% to 4% versus 2023. We expect performance to be driven by continued growth across all major regions with international markets modestly outpacing the US. We also expect positive RevPAR growth across all segments, driven by continued recovery in business transient and group coupled with steady leisure demand. We expect continued recovery in small company meetings and large association and convention business to drive strong group performance. For 2024, group positions is up 16% year-over-year with small companies meetings increasing as a percentage of mix, further demonstrating the value of small and medium sized businesses given higher rates and greater resiliency. Turning to development. We continue to see positive momentum throughout the year opening 24,000 rooms in the fourth quarter, marking the largest quarter of openings in our history. We achieved several milestones in the quarter, including the openings of our 250th Tru Hotel and our 1000th Hilton Garden Inn. We also reached 70,000 rooms globally for Home2. Additionally, we celebrated the opening of Signia by Hilton Atlanta, the city's largest ground up development in over 40 years. The property strategically located next to the Georgia World Congress Center and Mercedes-Benz Stadium features nearly a thousand rooms and over a hundred thousand square feet of meeting space, including the largest hotel ballroom in Georgia. For the full year, we opened 395 hotels, totaling approximately 63,000 rooms and achieved net unit growth of 4.9%. Conversion activity remains strong, accounting for 30% of openings and demonstrating the strong value proposition our system continues to deliver for owners. Full service and collection brands represented the large majority of conversions and continue to gain traction with owners. Both Curio and Tapestry open more hotels in 2023 than in any other year. Even with robust openings, our pipeline reached the highest level in our history, driven by record signings of 130,000 rooms, up 45% year-over-year and up 12% compared to pre-pandemic levels. At year end, our pipeline totaled over 462,000 rooms with roughly half under construction following a strong year in construction starts. For the full year, starts increased 15%, driven by the US. We continue to have more rooms under construction than any other hotel company with approximately one in every five hotel rooms under construction globally slated to join our system. As we look to the year ahead, we expect continued positive momentum in signing starts and conversions to drive even stronger openings, boosted by our two newest brands, Spark and LivSmart Studios. For the full year, we continue to expect net unit growth to accelerate to the higher end of our 5.5% to 6% guidance range with the opportunity for further upside of 25 to 50 basis points from our exclusive partnership with Small Luxury Hotels of the World that we announced this morning. This partnership will meaningfully expand our luxury distribution as we expect to add the majority of their over 500 hotels to our system. Adding this extraordinary portfolio with a heavy orientation to resort locations to our already strong and growing luxury portfolio will further enhance a powerful network effect and give our guests even more opportunities to dream, book, earn and burn points, and we're doing so in a capital light way. The royalty rate will be in line with our existing brands, but fees will be paid only on the business driven through our channels. We expect over time to drive a meaningful portion of system revenues for SLH, and we'll start to integrate hotels into our system later this spring. Last quarter, we announced Hilton for Business, our multifaceted program designed to transform the travel experience for small and medium sized businesses by providing a new booking Web site along with targeted benefits designed specifically for SMBs. The program launched in January with thousands of companies registering in just the first few weeks. SMBs account for approximately 85% of our business transient mix and comprising meaningful and growing percentage of our group mix. Given its greater resiliency and higher rates, we think this important customer base provides significant opportunities to drive further growth. Overall, we remain focused on creating unique experiences in our hotels, including through innovative food and beverage offerings. We recently announced the launch of StiR Creative Collective, an in-house consulting and development arm that gives us the ability to work with our owners, operators and hotel teams to elevate food and beverage offerings to meet the evolving needs of our guests. Several noteworthy StiR projects have already launched at the Conrad Orlando, the Canopy by Hilton in Toronto and the new Signia in Atlanta. In a business of people serving people, our team members are at the heart of absolutely everything we do. We recently celebrated the remarkable achievement of being named the number one world's best workplace by Fortune and Great Place to Work. This recognition follows eight consecutive appearances on the world's best list and marks the first time a hospitality company has achieved the top honor in this best in class program. Additionally, for the seventh consecutive year, we were honored to be included on both the world and North America Dow Jones sustainability indices, the most prestigious ranking for corporate sustainability performance. Overall, we're extremely pleased with our performance with our world class brands and powerful commercial engines driving a record pipeline and accelerating net unit growth. We're confident in our ability to continue delivering value for all of our stakeholders in 2024 and beyond. Now, I'm going to turn the call over to Kevin to give a bit more detail on the quarter and our expectations for the year ahead.

Operator:

The first question today comes from Joe Greff with JP Morgan.

Chris Nassetta:

I'm happy to do that, Joe. I figured with all the rumor and all, I'd get asked this question. Obviously, first and foremost, you're right, I'm not going to comment on market rumors and speculation on anything specific. I would say my attitude, our attitude on M&A is really the same as it's always been. If nothing, we've been consistent and I've been consistent in what I've said. And that is we -- the fact is, as you point out, we haven't done any, but every time I've ever been asked for the last 10 years of being public, I've said never say never, but we have a very tough filtration system. And that filtration system at a high level is, number one, does something really -- is something additive from the standpoint of the portfolio of brands that we have. And from the standpoint of offering our customers, a product and experience that would be really additive to the family of brands that we have, number one. And number two, and importantly, can it be done in a way that's accretive to the value of the company. For the last 16 years, going on 17 years that I've been here, we've looked at pretty much everything. I've said that to everybody and nothing is passed through that filter. So that's the reason we haven't done anything. The environment we're in is a little bit different. There is, for a lot of reasons, interest rates and otherwise, more stress in the system than normal, that probably, I think, presents more opportunity to do things like this, but things that are quite modest in my view and that are what I view as sort of tuck-in acquisitions. Now I still think the filtration system is really rigorous. And obviously, we're not sitting here announcing any acquisitions. We announced a strategic exclusive partnership with SLH that we're very excited about, and I'm sure we'll talk about from other questions on the call. So that we don't have anything to report. And to the extent that we do, obviously, you guys will be the first to know. And so summary is we have no different attitude. We continue to look at everything but the stress in the environment maybe provides a little bit more opportunity than we've seen in quite a long time.

Carlo Santarelli:

Chris, you obviously -- you talked about the strength in business transient and group that you kind of foresee for 2024. Given those mixes respectively are down couple of hundred basis points from pre-pandemic levels, I was kind of wondering where you think they settle for 2024? And what impact that mix shift has obviously presumably taking away from leisure demand to some degree on ADRs for the year?

Carlo Santarelli:

And then if I could, just a follow-up on Joe's question from earlier. The guidance for 2024, I'm going to assume that SLH and any kind of tuck-in M&A that you guys do in 2024 would be on top of the guidance that you provided this morning…

Operator:

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

Chris Nassetta:

Well, first of all, on SLH, as you hopefully could tell from my prepared comments, we're really excited about it. We've had a relationship there for a while. We've been working with them to figure this out and we're really excited to be able to get it done. I mean if you think about it, it's sort of like the moons and the stars aligned super well for us. We're going to be able to bring the majority of 500 hotels that are super unique, small, obviously, Small Luxury -- it's Small Luxury but very heavy resort orientation and very heavily oriented to very niche markets that are super hard to get into. And so when you look at it vis-a-vis the overlap of our existing -- we have 100 open luxury hotels, we have about another 60, 70 in the pipeline. So a terrific portfolio and growing super rapidly. When you look at the overlap, there is really none just because this is a really unique collection of hotels. We did a bunch of focus groups and customer research around this over the last year and really feel like this offering from the standpoint of our customers, particularly our higher end customers is going to be super well received in terms of their ability to bucket through our channels, but earn points, burn their points, go on their vacations in these places and the like. And so we think it is literally the perfect combination. And an unbelievable way for us to take what is currently 100 -- with pipeline 150, 160 hotel luxury portfolio and turn it into 600 or 700 scattered in all the best and most unique and hard to duplicate places around the world. So we think this is great. Customers, we think, based on all the work we did, are going to really love it, and we're excited to start ramping up including them in all our channels. In terms of the economics, we feel really good about it. As I said, we want to be really straightforward. I mean the license fees that we're getting are very similar sort of in the zone of what we would typically get in all of our -- with our direct brands. One difference in this case, as I said in my comments, we'll get paid on the business we generate, which we think will be significant. I mean it will take time to ramp that up, it will be significant. And that there's real economics in this for us as well. So we think sort of like, as I said, moons and stars, fabulous for the network effect, fabulous for our customers, and we think really good for shareholders in the sense that we'll be generating meaningful fees, and we are investing nothing, it's fully capital light.

Chris Nassetta:

I think there are always -- I mean we're looking at lots of different things all the time. I mean since the IPO road show, we have talked a lot about network effect. I mean, very consistently trying to build that out to create an ecosystem that brings customers in and builds loyalty. And so we're always looking at other opportunities. And so I think there are possibilities in that regard. But nothing -- I would say, right now, we're focused on this. This is a lot of effort and work to get these built into the system. And we'll see, we'll see, anything that we think we can do to keep building -- bringing new customers in and giving them and our existing customers more products that resonate with them, that builds more loyalty and that we can commercialize in the sense of being paid for the effort we're interested in. But nothing more to report at this point beyond SLH.

David Katz:

Just to follow on the same theme. Is there a case or a strategy or thought around whether SLH could either naturally or strategically transition into a business use as well? I admit I've not stayed one. Is there any particular barrier to that as business people tend to choose smaller and smaller hotels, more unique properties over time?

David Katz:

If I can just ask about the locations geographically, what kinds of cities are in it now and where would they like to be, please?

Operator:

The next question comes from Smedes Rose with Citi.

Chris Nassetta:

We ultimately think the majority of SLH hotels are going to join our system and feel confident in that. The question is just going to be with all the technology and -- I mean all of which is being worked on because we've been -- we signed it recently, we've been working with them for quite some time. So the range of 25 to 50, which we feel comfortable, just has to do with how quickly we can get all -- execute against all of the technology requirements and the like. So again, as I said, we feel good about the high end of 5.5% to 6% without any of those. The quarter [indiscernible] will depend on just the speed of execution. And so next call, we'll try and give you -- we just signed the deal, teams are working hot and heavy on it. On the next call, we can probably try and refine it a bit, we'll have a better set.

Kevin Jacobs:

I actually don't have the actual share count in front of me right now, Smedes. We'll follow up with you.

Brandt Montour:

Just one more on SLH.

Brandt Montour:

I mean, I guess the question is, when you think about those hotels coming in the system, and it sounds like they're all -- you think that they might all come at some point. But do they have to opt in? And sort of what is -- those individual hotel owners, what does the mechanism look like? I guess I would have thought of them all…

Brandt Montour:

And so just to quickly follow-up on that. So these are hotels that went to SLH originally, because they wanted to keep their sort of whole specific brand, their own name and be very independent and you're basically allowing them to do that same thing by going [Multiple Speakers]…

Operator:

The next question comes from Robin Farley with UBS.

Kevin Jacobs:

We think we did 30%, as Chris mentioned in his prepared remarks this year. We think it will be a little bit higher than that, sort of in the mid-30s for the year this year.

Kevin Jacobs:

I mean over time, it will depend on market cycles, of course, but I think as we -- particularly with Spark, which is 100% conversion brand, I think it will drift upwards over time and become an important part of -- it's always been an important part, but it will be a little bit higher over time. And then again, it will vary with market cycles over a longer period of time.

Chad Beynon:

With respect to the 2% to 4% RevPAR guide, Chris, I know you walked through this from a segment standpoint, and it's obviously early in the year. In 2023, you guys exceeded [Star] results in each quarter. And for '24, I think [Star] has a slightly more positive outlook than you guys. So could you kind of maybe kind of square that circle in terms of your process versus maybe how [Star] would do it? And then, I guess, more importantly, should we expect the international RevPAR, I know it's FX neutral, to be more positive for you guys than domestically?

Chad Beynon:

Looking forward to more of that at the Investor Day.

Operator:

The next question comes from Patrick Scholes with Truist Securities.

Kevin Jacobs:

Look, Spark is going great. I mean, we've got nearly 150 of them in the pipeline already, and we just launched it last year. We've got another 250 working deals, something like that, so 400 working deals. We had eight or 10 of them open now that are performing really well. So we're picking up a lot of momentum. So we feel really good about the future of Spark and its value proposition. And I think I'm probably not going to comment on what our competitors might or might not be doing together. We believe strongly in the value proposition for Spark that's why we launched it, and we don't think that anything that goes on in the environment around us will change that trajectory or our ability to be successful in that segment.

Duane Pfennigwerth:

I wonder if you could offer some thoughts on the trajectory you see from here on mid scale and below chain scales, still up meaningfully versus pre-pandemic, but a bit softer year-over-year. How do you interpret that? And is there anything you see on the horizon that could drive some acceleration this year on the lower end?

Operator:

The next question comes from Michael Bellisario with Baird.

Kevin Jacobs:

So at the beginning, I'd say, look, for the first part of it, Michael, the success has been pretty broad based. I mean 45% up in signings which was up 31% in the US and then obviously a little bit better than that outside of the US and we expect another record year in 2024. And that's just because our brands are performing, industry fundamentals remain good. So despite what people think about economic growth, you're going to be in a supply constrained environment here for a while. And in those environments, we take more share, right? We mentioned we've got one in five rooms under construction more than any other hotel companies. So we have a lot of momentum and owners want to affiliate with us. And then when you get into an environment where capital -- where lending is more constrained, right? Lenders want to see -- they want to lend to projects that are affiliated with our brands. And that's not just a US phenomenon that's around the world because lenders feel like they're more likely to get paid back. And so a lot of it's momentum, it's across all the brands and chain scales and across all the regions. And then the second part of your question, I think -- look, it is early days, it's only a handful of hotels. But I think so far, what we're seeing from the performance of the Sparks is in line market share premiums reasonable to strong loyalty contribution. We do think we're going to sign up a lot more new members with these hotels, because we'll bring new customers into the system. So it's not just a matter of were they a member before they booked but sometimes they book and they become a member while they're there. So I think it is early days but pretty consistent performance across the board there.

Richard Clarke:

Just going back to SLH. Firstly, is this the luxury lifestyle launch you've teased recently or is that still to come? And then related, I guess, when other companies have done these kind of partnerships, they've seen some criticism that hotels are joining the loyalty program but a lower percentage of their revenues being handed over to Hilton. So how are you going to stop hotels from choosing the SLH route into Hilton Honors rather than maybe joining LXR or Canopy, or one of the other brands where they would pay across all of their revenues, the fee percentage?

Richard Clarke:

Maybe if I can just ask one very quick follow-up. Just the gap between the 15% RevPAR growth in owned and lease and the 8% revenue decline, what's leading to that gap in that segment?

Operator:

The next question is from Bill Crow with Raymond James.

Chris Nassetta:

I think we're going to see a very strong -- a much stronger inbound year, that doesn't mean outbound is going to be bad. But I think with what happened with the value of the dollar last year and you had the strength there, drove a lot of international travel, particularly to Europe, I don't think -- and people hadn't been in a while, so you put those things together and it created a real groundswell for outbound business. I think there'll be plenty of outbound. But I think the trend this year will be sort of recovering not maybe fully but getting much closer to full recovery by the end of the year on inbound international. The Chinese inbound is the big variable, which is still a small fraction of what it was. I still think that takes a more protracted period of time, just given everything going on in China, but other countries around the world are compensating for that. So we might not get all the way back this year. I think TBD, but I do think for the story, part of the strength this year is going to be about inbound international. And I think part of that will obviously index very heavily towards the big urban markets. And that combined with what I already talked about on the group side, with the resurgence of all the big citywides and association as well as SMB group business that's everywhere, but that's nice for the big cities as well. So I think you're going to see -- I think that will -- when we finish the year, we're going to feel a lot better about inbound and not bad about outbound, but I think inbound will be the story.

Chris Nassetta:

I think you will. I mean, first of all, I mean, our numbers are really good and not to pat us on the back, but we take an unfair share of what is getting signed and an even less fair share of what's getting financed. So our numbers are not indicative of what's going on in the broader market. I think if you look in the broader market, the supply numbers are sort of circa 1%. And in my own view, you're right. Eventually, that will go back up. I mean the 30 year average is 2.5%. So it suggests if you look at long-term trends, it will go up, particularly as strong as the business has been and we think will continue to be into this year. But there are natural limitations in place, which is why you see it at 1%. I mean the 1% is sort of an output of very high cost to build and higher cost of labor, and higher interest rates, no financing availability that occurred over the last couple of years. And so you see that sort of hitting the numbers now. But the reality is while some of those things have stabilized, and that's why our starts were up double digit in the US last year, it's still very hard while financing. Interest rates have come down a little bit. Cost to build has not, but it's stabilized. Obviously, rates have gone up. I mean the economic setup works pretty well, but it really works, it’s obviously really well for us because we drive very high market share and very high rates and higher than almost all of our competitors, so it works better for us. And the financing market, while it's better, okay, that's why we're able to get -- we got a lot more done last year, and I think we'll get a lot more done this year. It's not robust. And so there's a natural sort of gate that exist. And while it's getting better, I think will exist for a while. And it takes time to build these things, right? So the reality is, I think, this year, we'll still be not as constrained but more constrained financing environment that will weigh heavily to our benefit. And then I think it will continue to ease. But I think before you're going to see a lot of this stuff convert for and mass from a pipeline to under construction, particularly here in the US, I think it takes a couple of years, and then it takes a year or two to build the stuff. So I feel pretty darn good about like '24, '25 and probably most of '26 for being pretty meaningfully below the 30 year averages on supply, and that's why I made the comments that I made. I think it's just math. At some point, they got to start to finish.

Kevin Kopelman:

Could you give us an update on how you're thinking about fee growth for the year? If you still expect it to exceed [indiscernible] plus RevPAR, and any kind of puts and takes there?

Kevin Kopelman:

And then one other quick one. Could you talk about any plans or your plans to get back into the kind of 3 to 3.5 times leverage range that you talked about?

Operator:

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 closing remarks.

Operator:

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.

Operator:

Hello, and welcome to the Hilton's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Chris Nassetta:

Thanks, Jill, and good morning, everyone, and thanks for joining us today. I wanted to start today by saying that our thoughts are with all of those impacted by the tragic events that are unfolding in the Middle East. Our priority remains the safety and security of our team members and guests as well as helping in any way we can to support the relief efforts for the humanitarian crisis in the region through a number of organizations, including the International Committee for the Red Cross. Turning to results. We're pleased to report another strong quarter with system-wide RevPAR, adjusted EBITDA and adjusted EPS all above the high-end of our guidance ranges. The strength of our brands, power of our commercial engines and resilient business model continue to drive strong top and bottom line performance. This supports meaningful free cash flow generation and greater shareholder returns. Year-to-date, we've returned more than $1.9 billion to shareholders, and we remain on track to return $2.4 billion to $2.6 billion for the full year. In the quarter, system-wide RevPAR increased 6.8% year-over-year, boosted by strong international performance and continued recovery in business transient and group. Demand improved across all segments and regions with system-wide occupancy for the quarter reaching our highest level post-pandemic and only two percentage points off prior peak levels with September just one point shy of 2019. Group RevPAR rose 8% year-over-year, outperforming leisure and business transient RevPAR growth of 5% each. Compared to 2019, system-wide RevPAR grew 11.4% in the quarter with all segments accelerating sequentially versus the second quarter. Overall performance was driven by both rate and occupancy. Steady rate growth and rising demand drove leisure RevPAR up 29% versus 2019, improving roughly 300 basis points versus the second quarter. Business transient RevPAR grew 7% with both large and small accounts improving. Adjusting for holiday and calendar shifts, mid-week RevPAR increased nearly 500 basis points versus the second quarter. On the group side, RevPAR exceeded 2019 peak levels for the first full quarter since the pandemic and we continue to see positive group booking trends in the quarter for all future periods. Group position for 2024 is now up 18% year-over-year, and lead demand in the quarter for all future arrivals increased more than 15%. As we look to the fourth quarter, we expect continued strength in international markets, along with continued improvement in business transient and group demand to drive further acceleration in RevPAR compared to 2019. Better-than-expected third quarter performance and increased expectations for the fourth quarter, partially driven by better group bookings. As a result, we now expect full year RevPAR growth of 12% to 12.5%. Turning to development. We saw another quarter of robust signings with a near-record 35,500 rooms signed increasing 80% year-over-year. Our pipeline now stands at the highest in our history, totaling 457,000 rooms, up 4% versus the second quarter and 10% year-over-year. Signings in the quarter spanned our portfolio, demonstrating the benefits of a diversified industry-leading family of brands. Conversions accounted for 35% of signings increasing sequentially versus the second quarter. Overall, we remain on track to deliver the highest annual signings in our company's history, surpassing 2019 record levels by double-digit percentage points. We also delivered another strong quarter of construction starts with every major region exceeding our expectations, and the US in particular, delivering its strongest quarter of start since Q1 2020, up 18% year-over-year. Roughly half of our pipeline is currently under construction, and we continue to have more rooms under construction than any other hotel company accounting for more than 20% of industry share. In the quarter, we opened 107 hotels totaling nearly 16,000 rooms, up 22% year-over-year and 12% versus the second quarter. We achieved several milestones in the quarter, including the opening of our 700th hotel in the Asia-Pacific region, and we celebrated our 60th anniversary in Japan. We also opened our 300th lifestyle hotel in our 50,000th lifestyle room, including the global debut of Tempo by Hilton designed with well-being in mind, the brand's first property is now open in the middle of Times Square, New York as part of the TSX development. Additionally, Canopy launched in the south of France with the opening of the Canopy by Hilton Con making Hilton's entry into the city and the latest addition to a growing portfolio of Canopy properties across Europe. Curio celebrated its debut in Savannah, Georgia. Tapestry increased its portfolio with the opening of the Bankers Alley Hotel in Nashville, and Motto expanded its signature flexible design and local vibe with its second hotel in New York City. During the quarter, we also celebrated the debut of our newest cost-effective conversion brand Spark by Hilton, the grand opening of the Spark by Hilton Mystic Groton in Connecticut solidified our foray into the premium economy segment. I just visited the property last week and was blown away. I would encourage any of you that are in the area to go see it. Opening just eight months after launch, Spark is the fastest announcement to market brand in Hilton's history, with more than 400 deals in negotiation; we think this is the start of a journey to reshape the premium economy segment while expanding our customer and our owner base. Announced just five months ago, Project H3 also continues to see tremendous demand with 350 deals in negotiation. In fact, later today, we're breaking ground on the first ever property in Kokomo, Indiana, which we expect to open in late summer 2024. Positive momentum in openings has continued into the fourth quarter with several notable openings in October, including the 540 room Hilton Cancun, Mar Caribe and all-inclusive resorts. Tomorrow, we'll announce and open a 1,000-room conversion property in the Northeast part of the United States. We forecast conversions will account for approximately 30% of full year openings. For the full year, we continue to expect net unit growth of approximately 5%. We believe we have hit an inflection point and expect a meaningful uptick in openings in the fourth quarter with continued positive momentum into next year with forecast for our highest level of signings in the air, the largest pipeline in our history, nearing the largest under-construction pipeline in our history with identified 2024 openings and positive momentum in conversions, we are confident in our ability to accelerate net unit growth to 5.5% to 6% next year and to return to our prior 6% to 7% growth rate. In terms of fee contribution, our algorithm is alive and well, and we expect fee growth above RevPAR plus net unit growth going forward. Our under-construction portfolio mix of roughly 60% focused service hotels and 40% full service remains in line with our existing supply. This balanced and diversified pipeline, along with rising RevPAR and royalty rates gives us confidence in our ability to continue delivering high quality growth with increasing fees per room. We also continue strengthening our value proposition for Hilton Honors members. In the quarter, Honors membership grew 19% year-over-year to more than 173 million members and remains the fastest growing hotel loyalty program. Members accounted for 64% of occupancy, up more than 200 basis points year-over-year. Demonstrating our commitment to meeting the evolving preferences of our guests, we recently announced several new innovations. As part of our long-term commitment to digitally transform the business travel experience for millions of small and medium-sized enterprises, we will launch Hilton for Business early next year. The multifaceted program will feature a new booking website along with targeted benefits designs, especially for SMEs, which account for approximately 85% of our business mix. Additionally, we will expand our events booking capabilities, enabling customers to book meetings and event spaces with or without guestroom blocks directly on our website. For travelers who prioritize sustainability, we recently announced an expanded agreement with Tesla to install up to 20,000 universal wall connectors at 2,000 hotels making our planned EV charging network, the largest in the industry. We also continue to be recognized for our culture. During the quarter, we were named the top hospitality employer in Europe and in Asia by Great Place to Work. And just yesterday, we were named the number one Best Workplace for Women in the United States for the fifth year in a row. The strong results we're reporting today would not be possible without our more than 460,000 team members who spread the light and warmth the hospitality each and every day. Overall, we're very pleased with the performance in the quarter, and we remain very optimistic about the tremendous opportunities that lie ahead with continued strong demand, coupled with our record pipeline and accelerating net unit growth forecast. We're confident in our ability to further differentiate ourselves from the industry in the years ahead. Now I'll turn the call over to Kevin for a few more details on the results for the quarter and our expectations for the full year.

Operator:

Yes. Of course. [Operator Instructions] Our first question today comes from Shaun Kelley with Bank of America. Please go ahead.

Chris Nassetta:

Good morning, Shaun.

Chris Nassetta:

Yes. Yes, last quarter, we gave a broad range of five to six, which we felt good about, but a broader range for obvious reasons, we were middle of the year, and there was a lot of year left and thus a lot of time to see what was going to happen in signings and starts and success with conversions and the like. And so -- as you saw from what we just reported on in Kevin's and my comments, we continue to have great success in the third quarter and that's continued in the fourth quarter. As I said in my prepared comments, we're going to have a record year by double-digit percentage on signings. While starts aren't quite back to where they were, they're getting close to being back to where they were. We obviously have an elevated level of conversions from what we've seen in recent years at 30%, which we think is going to continue with across a broad range of brands and of course, including the addition of Spark. And so the confidence we have is at this point in the year, we have a very granular model. This is -- we always have a model, but in the middle of the year, by definition, we just don't have as much information. Now, as I said in my comments quite briefly, we have identified -- a lot of what we're going to deliver next year is identified. Obviously, we have a bunch of conversions that we'll do in the year for the year, but we have a lot -- we've had a lot of success there. And so the confidence is ground up region-by-region, hotel-by-hotel with some, we think, reasonably conservative assumptions for what we'll be able to execute on given the momentum we have in conversions, this is where we end up is 5.5 to 6. And so we wouldn't say it if we didn't believe it and it is a plan that is based on the underlying momentum and things that are largely in production. As I looked at it, I know we get questions all the time about when are you going to get back to six to seven, and we obviously -- and I said in my prepared comments, I have every confidence we will. I think it's possible next year if a few things go our way. I think we could be at the bottom end of that range. But we're still in October 2023. So we're going to take it one step at a time. We refined it. We feel really good about 5.5 to 6, next time we talk, we'll ever find it even more. And as I said, a few things go our way. Honestly, when I look at all of the data in a granular way, I think there's probably more upside potential than downside risk at this point.

Operator:

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

Chris Nassetta:

No, I would say every region is a little different. I don't have a hard stat in my head. I'll give you sort of a directional answer. I mean with limited service in the pipeline generally in the pipeline a couple of years, full service, I would say, on the order of three or four years, but it could vary greatly depending on what region of the world you're in. But I think directionally, those are -- if I average it all together, those are pretty good. And I would say what happened during COVID is that extended out a great deal because everything stopped and slowed down and then you have the supply chain issues even after things got moving again, we reopened. You have the supply chain things that slowed things down. That has now come back down to being closer to where we were, but still a little bit more extended than where we were. And I think that has a lot to do with just in a lot of parts of the world, what Kevin just said. It's just a little harder to get things done. And so it's taking a little bit longer. People are getting financed, but if they had five projects they wanted to start, they're maybe getting two or three of those finance and it's taking a little bit longer. So I think there is a little bit longer gestation period. Now when 30% of the deliveries are conversions, obviously, that's a super short gestation period from pipeline into NUG. And so that's helping -- if you take it on average, I would say, with an increase of conversions relative to being in the low 20s right before we were in COVID. I would say the gestation period, the time and pipeline is about the same. Again, I'm doing sort of quick and dirty math in my head. But if you just look at pure new construction, it's a little bit -- it's still a touch longer than it had been. And again, we sort of like not to repeat myself, we factored all of that in, meaning we know we have a team that is on the ground everywhere in the world, working with all of our owners on every project that's under construction and what we think we're going to deliver next year other than the end of the year for the year, which are largely obviously conversions at this point. Those are projects. They're on the ground, they're being -- they're under construction, and we have rational time lines for when we think that those will deliver.

Carlo Santarelli:

Hey guys. Thank you for taking my question. Chris, you said earlier in the call that the kind of fee growth -- you expect fee growth to outpace kind of the NUG plus RevPAR dynamic. I was wondering if you could kind of break down a little bit how to think about the NUG plus RevPAR dynamic for the operating business relative to kind of the fees and whatnot and how we should think about that fee component of that relationship?

Operator:

The next question comes from Stephen Grambling with Morgan Stanley. Please go ahead.

Kevin Jacobs:

Yes. So, Stephen, first of all, I'd say our overall approach to key money has been very consistent the entire time we've been here. We still have less than 10% of our deals that have any key money associated with them. I think you have to recognize that in a more competitive environment for conversions, those tend to be get a little bit more competitive and a little bit more expensive. But this year, what I would say is it's just we happen to have one -- we upped our guidance for overall CapEx, I should point out that, that's not key money guidance. That's overall CapEx guidance. We upped our guidance. We've been fortunate to win a few relatively large deals at the higher end of the business where they get a little bit more expensive in the fourth quarter. And we had one big deal, as we've told you about that carried over. It really was a last year deal, but didn't end up closing until this year, which caused last year to be lighter this year to be a little bit heavier. If you look at a three-year average we're sort of south of $250 million of total CapEx, the way we guide it. And I think that's the right way to think about it going forward. We think next year will normalize and be back into that sort of low 2s -- low to mid-2s range on a total CapEx basis.

David Katz:

Hi. Good morning, everyone. Thanks for taking my question.

David Katz:

You covered a lot of details and in particular, the NUG acceleration into next year. If you could help us unpack a little bit. Is there some expectation for improvement in the landscape? And I know Kevin mentioned taking share of the opportunities that are out there. How? Is that a function of key money? I'd love to just get a sense for how you're pitching it and why you win?

Operator:

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

Chris Nassetta:

Yes. Thanks, Smedes for the question. I think you may be conflating two different comments. Group is way up 18%, group business on the books for next year. The 85%, I was talking about SMEs was business transient. It does turn out by coincidence that 85% of our group business is small and medium groups, but that's a total coincidence. And 15% of it is sort of large, I'd say, 300-room plus groups. As we look at next -- as you look at sort of implied, I think, in some of the comments I've already made or in the prepared comments, what's going to happen next year is that it will start. I still think group business has always been dominated by just like business travel, business transient by small and medium groups. But you will see the return of the mega groups that started in the second half of this year. It takes a long time to plan these things and think about it last year. Nobody wanted to commit them much because they didn't know we were still in the open close, open close. They got to spend millions of dollars planning these events, they can't get out of them, there's penalties and everything else. So, people waited a long time, and then it takes -- then they got to get a space and it's getting much, much harder to get space for these city-wides and the big groups. So that just takes time. I think it will shift next year not radically, but I think you will see a decent shift to an orientation to the large groups because they have a huge amount of pent-up demand that needs to be satiated. And so that's going to start happening next year. My guess is you'll see a big surge in it, it will shift the stats around. Over time, I think it's probably like -- I don't have a hard data point, but sort of directionally having done this a long time. I think it's like 80-20, something like that more normally. And so I think next year, you're going to get -- you're going to get more of that instead of 85%, 15%, you're going to see the bigger groups take a leap up in the short to intermediate term to get to a more normal environment. But we're seeing sort of underneath the question, I assume, is what are we seeing in strength from small, medium, big, whatever. We're seeing -- if we sat in this very room with our sales team as we do every quarter and went through it all. We're seeing strength in everything. Group is just off the hook, strong tons of demand, peak groups or lead times are lengthening because the obvious, right? Now everything -- there's not been a lot of group hotels that have been built in this country for essentially 20 years. And so you have all this demand, you have fewer places to go. So, groups have to start planning further in advance and booking much, much further out. And so -- the demand is very good. We've not seen -- notwithstanding a lot of noise in the environment about like where is the economy going and the like for next year. It's not -- we've not seen any real impact in terms of group demand at this point to the contrary. Our teams are saying they're doing everything they can to keep up with demand.

Brandt Montour:

Hey, good morning, everybody. Thanks for taking my question. Maybe for Kevin, the fourth quarter RevPAR guidance looks strong, not out of the arena of your third quarter RevPAR growth. And you don't see that sort of translate into EBITDA year-over-year growth in the fourth quarter versus sort of the third quarter. Just wondering if there's timing you want to highlight between the two quarters or anything else and why that would be a little bit diverging?

Operator:

The next question comes from Robin Farley with UBS. Please go ahead.

Chris Nassetta:

It's a great question, I wish I had a great answer. Every year sort of widely different I would say less than half, it's not nothing, but a lot of the work gets done in the year. But I would say, if I had to guess that it half, maybe a bit less would be 40% to 50% would be on the books one way or another or maybe not in -- it wouldn't be in the pipeline, but it would be in some form of negotiation. I would say 40% to 50% would be in some form of negotiation.

Patrick Scholes:

Hi. Good morning, everyone. The question about how you're thinking about upcoming corporate rate negotiations for 2024? Thank you.

Operator:

The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Chris Nassetta:

I think it will be -- I mean, I think it will be reasonably balanced between the US and Rest of World, maybe a smidge lower in the US than Rest of World, but not too terribly different, at least based on what we're seeing now. And then for Rest of World, I think we see positive growth everywhere, by the way. We don't see a region where we will not have growth. We're in the middle of budget season, so it's slightly premature to judge exactly where it will be. But if you said to me, where do we think it would be recognizing we're early in the process. I would say low to mid-single-digit global RevPAR growth. And we'll, obviously, on the next call, we'll give you a refined view when we have finished the whole process. But again, I would think that would be Rest of World a little bit higher, US, not too terribly different, and the one that would lead the pack again would be Asia-Pacific for a bunch of reasons, most notably China, which, if you recall, just in terms of comps, China did open up and is now doing really well, but the first part of this year was not. So, you will have a very strong start given everything that's happening in China in the business, which there's a lot of noise about China in their economy. But from a travel tourism point of view, in China, it's very, very strong now. We think that will carry into the beginning of the year, and then you'll have some easy comps. So, we think from a pure what will RevPAR year-over-year growth point of view, where would the regions be, I would say, China and thus, APAC will lead the charge. But they're going to - I would say, given we think it will probably be in the low to mid-single-digits, they're going to converge a little bit more. And now the world because China is open, is all -- you're getting out of sort of these COVID comp issues and you're getting almost to sort of a normalized world where you have comps where everybody was open from COVID other than, as I say, the first part of the year in China, the first part of 2024 comparability issue.

Chad Beynon:

Good morning. Thanks for taking my question. Just in terms of occupancy versus rate discussion, I guess, more focused on occupancy. Chris, can you talk about how we should think about occupancy exiting 2023 as a percentage or decline versus 2019? And then more importantly, is there still a day of the week that just hasn't come back? Should occupancy permanently be a couple of hundred basis points off? Just trying to think about this in the medium term? Thanks.

Operator:

The next question comes from Michael Bellisario with Baird. Please go ahead.

Kevin Jacobs:

Yes, I think that the white space for us is luxury lifestyle. We've talked about it a bunch. We are doing a bunch of work in the space right now. I think next year, we will come out -- we will have a product in the market next year. So we've done a lot of work over many years, but we sort of cranked up that engine once we got Spark launched in H3 out there. That's sort of next. I think our customers, listen, I think our customers love what we have. I mean, as reflected in the fact that loyalty is amongst the largest and is certainly the fastest growing. And I think we -- I know we still represent the highest level of engagement in the sense of Honors occupancy being higher than anybody in the industry. So, I think our customers are saying to us the ecosystem that you've created, both how you do loyalty, the products you have, the geography, what we talk about frequently, the network effect that we've built combined with Honors and experiences related to Honors and how they engage with Honors is really working well. So, I don't think there is anything that if I'm being really blunt that our customers are screaming out, I just sat in 12 hours of focus groups with customers because we're going through a strategic planning process for over two nights with every segment of customers, people are loyal to us, not loyal to us, et cetera, et cetera. There was -- I mean there's a lot to unpack there. I'm not going to do it on this call, but there was nothing that our customers were saying like, gosh, you need this and you need that. Look, what we do know is that having more on the high end creates even more of a halo effect. We believe we have a significant amount already in the luxury space, in the resort space. And given our scale and breadth and depth geographically, we think it's very pleasing to our Honors members. But on the margin, having more of it, we think, is beneficial, which is why we spend the time doing it. It's why we want to do luxury lifestyle. The other reason really not only do we want our customers to have more opportunities at the high end, but we're just giving away, if I'm being honest, we're just giving away development opportunities. I'm looking at Kevin, who runs development, too. It's like I travel all over the world. We have owners that are super loyal to us, and many of them want to build a luxury lifestyle hotel, and we don't really have a product for them. And so literally, they're doing it with other people just because we don't have a product, and that makes me crazy, so that I think that it will obviously enhance our growth rate. Now, luxury lifestyle is not like H3 or Spark or Tempo or Home2 -- it's not -- not -- it's a very bespoke thing. You're not going to have thousands of these. You're not even going to have hundreds of these. I mean, look at people who have been at it for a long, long time. You'll be fortunate to have dozens of them. But every room counts and having more really high-quality products in the right locations, we think continues to build our network effect. And so I've said this many times to many investors, I sort of love where we are which is we have a -- we have a network effect that works. We have 173 by end of the year, beginning of next year, we'll have 200 million Honors members that are very loyal to us. They love Honors. They love the network that we've created. They love the brand diversification, the geographic diversification. And so there is really doing luxury lifestyle is fabulous, doing more luxury deals with Waldorf, Conrad and LXR, we'll keep doing that. Those will add to growth, but there is -- the ecosystem works. I think point in case is the success that Honors is having vis-à-vis the competition. So, I look at these as all like incremental halo incrementally. Obviously, we can always make it better. And we can always add -- want to add products that add to our growth rate. And we think luxury lifestyle will.

Chris Nassetta:

Hey Bill, are you there?

Chris Nassetta:

Good morning.

Chris Nassetta:

A lot in that question.

Chris Nassetta:

Let me -- I'll maybe tackle both Kevin can jump in. On Country Garden, it is not a huge component of our overall pipeline yet in China. And so I don't feel like there's any risk. And certainly, the guidance we're giving you on NUG anticipates what we think conservatively will happen there. Having said, Country Garden obviously has a lot of issues, but this venture is a totally separate entity apart from their residential business. They remain very committed to it. They have very rigorous milestones that they have to meet in order to keep the exclusivity with Home2. And if they don't, we have all sorts of options that we could move forward on doing it ourselves, et cetera, et cetera. So, Home2 is very well received by the Chinese customer and very well received by the owner community recognizing Country Garden is not building any of these. This is a MOA, where we're going out with them, and these are franchisees that are doing it, and it's not their money. It's individual property owners, developers in all these little regions of China. And so it's not a capital drain for them. They like it. It's profitable, and I think they'll stick with it. If they don't, ultimately, we have all sorts of mechanisms. If they don't meet the milestones, it's not like we have to wait very long. I suspect they will -- what they're saying to me and to us is they remain very committed to it. So I think we -- I think it's fine. I think come to the key ingredient to it is super popular, super profitable on the ones that we've opened up in the development community just like I love Home2 in the US, the development community in China loves it. So that means that we're going to get a bunch of Home2s done. Hopefully, it's with them. If it's not, we'll do it ourselves. On the deal we talked about without naming it, we're not going to name it, we would have named it if we could. So we're not going to comment on specific deals and individual key money. The way to think about it broadly is on big, complicated city center, full service or luxury, those are the deals that end up drawing -- I mean being most of the key money we spend. As Kevin said, less than 10% of our deals and our pipeline by number have any form of balance sheet support. And disproportionately, it's those kinds of deals, they're more competitive, they're more strategic in certain locations where we may have lesser density of distribution where it's really important to us. And in every single case, we are making money. I mean, we are never giving key money, and I'm not going to comment on individual deals. We're never giving key money that doesn't have us make -- creating value in a contract that is significantly higher than the key money contribution. Obviously, that's -- we're a for-profit business. We just don't approach it that way. So every deal is profitable and 90%-plus of them are infinitely profitable because we put nothing into.

Chris Nassetta:

Thanks, everybody, for the time today. Obviously, very pleased with Q3, but more importantly, pleased with the momentum we have going into the fourth quarter, I feel pretty good about next year. We'll get back to you on exactly what we think as we get through our budget process. But given the macro view of what next year is going to be like and the pent-up demand, particularly in group, but also in business travel, we feel very good about it. And obviously, we talked a lot about NUG today. We tried to give you a much more granular view of that. We feel good that we've hit a point of inflection and we're on the road to getting back to our 6% to 7% growth rate. So we got a busy end of the year to make all that happen and get set up for next year. We'll get back to it, and we'll look forward to getting back with you after the year is over.

Operator:

Good morning, and welcome to the Hilton Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Chris Nassetta:

Thank you, Jill, and good morning, everybody. We appreciate you joining us today. We're excited to report strong second quarter results with RevPAR, adjusted EBITDA and EPS exceeding our expectations. Adjusted EBITDA for the quarter had a record $811 million, the highest single quarter in our company's history. Performance continued to be driven by solid fundamentals, along with continued share gains. Our industry-leading brands, strong commercial engines and powerful partnerships continue to strengthen our system and differentiate us from the competition while a culture of innovation continued to fuel additional growth opportunities. Despite macro challenges over the near term, we're confident in our ability to continue driving solid top line and bottom line growth and, in turn, growing free cash flow. Given the strength of our results thus far and our expectations for the rest of the year, we're increasing our guidance for return of capital for the full year to between $2.4 billion and $2.6 billion. Turning to results in the quarter. System-wide RevPAR increased 12.1% year-over-year as strong demand drove continued pricing power across all segments. System-wide occupancy improved four points during the quarter to reach 77% in June, our highest level post pandemic. Business transient RevPAR remained strong, growing 11% year-over-year as trends continue to normalize. Leisure RevPAR increased 7% versus last year, driven by solid rate growth and despite more difficult year-over-year comparisons. Group recovery remained robust in the quarter with RevPAR growing 19% year-over-year. Compared to 2019, system-wide RevPAR grew more than 9% in the quarter with all segments performing well versus prior peaks and accelerating sequentially versus the first quarter. Stable demand and rising rates drove leisure RevPAR growth of 26% versus 2019 and business transient growth of 6% and group RevPAR was roughly flat versus prior peak levels and improved versus the first quarter. As we look to the back half of the year, we expect continued strength driven by recovery in international markets, business transient and group demand. On the group side, we continue to see very positive trends. Our bookings in the quarter for 2024 arrivals grew 30%, with group position now at 13%, up driven by the corporate segment. And our sales team saw the largest revenue bookings in our history for all future arrival periods. Based on all of that, we now expect full year RevPAR growth of between 10% and 12%. Turning to development. We signed more than 36,000 rooms in the second quarter, representing the largest quarterly signs in our history. Conversions accounted for nearly 1/3 of signings in the U.S. Signings in international markets doubled versus last year, accounting for roughly half of system-wide signings in the quarter, driven by strong momentum across Europe and Asia Pacific. In Europe, we signed agreements across 14 countries, including our first Tapestry Hotel in the French Riviera and our first Curio in Croatia. In China, Hilton Garden Inn continued to show tremendous growth since launching our new franchise business model. In the quarter, we signed approximately 3,700 HCI rooms in China more than 3x last year and accounting for more than 1/3 of our signings in China. Signings in America were up 20 in the Americas were up 25 year-over-year with strong interest in the U.S. despite tighter credit conditions. We've signed more than 50 true hotels year-to-date, representing the strongest pace since 2017 as the operating success of existing true properties is linked to a surge in new signings. Results were further helped by Spark with approximately 60 hotels signed and another 400 in negotiation just six months since its launch. Nearly all deals are conversions from third-party brands and half represent new owners to Hilton, with our first park scheduled to open in September and roughly 20 by year-end, Spark is well positioned to disrupt the premium economy segment while expanding our customer and owner base, especially in markets where there is no Hilton brand presence today. In addition to the strong start for Spark, we recently launched an inventive new extended stay brand in the U.S. Under the working title Project H3, the apartment-style accommodations are designed for guests booking 20 or more nights built with the staying power of Hilton's award-winning hospitality. We have received tremendous interest from owners and developers due to the strong market opportunity, cost-efficient build and high-margin model, and we currently have more than 300 deals in negotiation. Our system-wide pipeline now stands at a record 3,000 properties totaling approximately 441,000 rooms, increasing 7% year-over-year and 3% from last quarter. Following another strong quarter of starts, up more than 73% year-over-year roughly and over 40% year-to-date, roughly half of our pipeline is currently under construction. We have more rooms under construction than any other hotel company ensuring guests will have even more options to stay with us in the years to come. Specifically in the U.S., our under construction pipeline has continued to increase, up 15% year-over-year which will contribute to increased openings later this year and next. In fact, in the coming weeks, we're going to open nearly 2,000 additional hotel rooms in New York Times Square with the debut of our first-ever tempo by Hilton than a new tri-brand property featuring Home2 Suites, Hampton Inn and Motto. In the quarter, we celebrated several milestones, including the openings of our 2,900 Hampton Inn and our 600 Home2 Suites property, which remains one of the fastest-growing brands in the industry. Additionally, we surpassed 150,000 rooms in Asia Pacific, including the openings of the Hilton Okinawa, Miyako Island Resort in Japan and the Conrad Shenzhen, our first luxury hotel in China's thriving technology hub. We expect openings to accelerate as the year progresses given strong international and conversion trends and expect conversions to account for around 30% of openings. For the full year, we expect net unit growth of approximately 5%. With forecasts for our highest level of signings, the largest pipeline in our history and approaching the largest under-construction pipeline in our history, we expect net unit growth to accelerate to 5% to 6% next year and to return to 6% to 7% over the next couple of years. As part of our commitment to deliver exceptional experiences for guests, we remain focused on initiatives to drive increased loyalty and satisfaction. We know, for instance, that food and beverage experiences are an integral part of travel and want to ensure our hotels themselves are great dining destinations. We recently formed a first-of-its-kind partnership with the James Beard Foundation serving as the premier sponsor of the 2023 restaurant and Chef awards and continue expanding our partnerships with world-class talents such as Michael Mina, Jose Andres, Nancy Silverton and Paul McGee. Hilton Honors remains the fastest-growing hotel loyalty program with more than 165 million members, up 20% year-over-year, driven by strong growth across all major regions. Honors members accounted for 64% of occupancy in the quarter, up 2 points year-over-year. Hilton team members and our award-winning culture continue to differentiate our brands from the competition, just yesterday, our Waldorf Astoria Home2 and Tru brands were named best in category by J.D. Power for their respective segments in North America. Last week, Hilton was again named as a top employer for millennials for the sixth consecutive year. Since 2016, we've been recognized by Great Place to Work as the world's best hospitality company in over 60 countries. We're thankful for the great work our team members do to serve our guests around the world. We have incredible opportunities ahead to further position ourselves as the leader in hospitality, and we're very excited for the future of travel. With that, I'll turn the call over to Kevin to give you a few more details on the quarter and expectations for the full year.

Operator:

[Operator Instructions] Today's first question comes from Joe Greff with JPMorgan. Please go ahead.

Chris Nassetta:

Yes, great question. And no, I'm not surprised that, that would be the first question. For the record, I think, on the last call, probably three different times I said around 5%. So the truth is, since our last call, I don't think our view has really changed much about where our NUG would be this year. And so it is what it is, it was always a bit back-end loaded. And the simple reason for that, Joe, is in the numbers. If you look at starts, what's been happening with starts, we had a big surge in starts in the second half of last year. Starts were up second half of '22, 40%. And if you look at what they are in the first half of this year, as I stated in my introductory comments, they're up 40%. So that means that a bunch of stuff is just translating into the second half of this year and into next year. And so it really is entirely sort of the timing of -- in the sequencing of how that happens. So, we thought it would be around 5%. We still think it will be around 5%. Our confidence in going back on the way back up, I do feel like -- if we look at the data, it's not just pure optimism, although everybody knows I'm an optimistic sort. I mean if you look at the data, as I already said, starts were way up in the second half of last year. They've been way up in the first half of this year we continue to see good momentum there. Same with signings, I mean, we expect, as I said in my comments, have a record year in signings relative to our prior peak and that -- all of those things are translating into both our optimism about the second half of this year being much stronger than the first half and 2024 being much, much better. It's a bunch of different things that are contributing to that. It's really all regions, even though arguably the U.S. credit conditions are -- make it more challenging. As I already said, we're still up year-to-date over the last -- over the trailing 12 months, 15% in starts. And we have some other nice things that are going to add to our growth here in the United States with Spark. We're only going to open 20 this year. You should assume we're going to open a lot more than that next year and Home3 will start contributing H3 will start contributing next year, probably not a ton, but that is a much more financeable product, even in today's environment because it's probably more apartment than it is a hotel. We are broadly having really good success on conversions and Europe, which had been slow, has really started to pick up. And Asia Pacific really led by China has woken up and the engines have not just restarted, but they're really starting to fire on many more cylinders, I wouldn't say it's all the way there yet, but in the second quarter and our expectation for third and fourth is we're going to start to get a very good momentum. And so that's why we feel pretty darn good on the NUG for next year. Obviously, for giving you a range, I would sort of direct you to the middle of it. If some things go our way and the world stays relatively stable, I think we can be mid-range of that or above, but it's a little bit early in the year to go quite that far. We'll, obviously, next quarter and the following quarter, we'll update you. But I think -- what I would say to people is, again, it's objectively based on things that success we're having in conversions, the success we're having in demand for Spark, conversions all over the world, Spark here. By the way, we will take Spark to Europe relatively quickly. And just what we have in the pipeline, I mean, almost half of our pipelines under construction more than anybody in the industry. And once they start, they almost always finish. So that pickup starting in Q3 last year is starting to pay dividends. And thankfully, the pickup in starts has continued everywhere in the world. And as I said, the world is a big place. So there's a little bit more pressure in the U.S. even though the numbers are still good but a lot less pressure in some other parts of the world that had been feeling it, which is the benefit of a big diversified global business.

Shaun Kelley:

I guess if we've covered the net unit growth side. Chris, I'll ask a little bit of the same around sort of the RevPAR outlook. I'd like to gear it to sort of incremental kind of changes or upside for the second half? Just kind of what's the biggest difference to kind of your prior outlook that gave you some confidence there? And then just any pressures or concerns you're seeing on the leisure normalization point. It's a question we take a lot and just kind of maybe update us on the latest you're seeing as we move through some of these really tough comps in the summer. How is behavior out there? And what's going better or a little worse than anticipated at this point?

Operator:

The next question comes from Stephen Grambling with Morgan Stanley. Please go ahead.

Chris Nassetta:

I think that the algorithm stands. I mean -- and in fact, even -- by the way, while NUG has been a little bit lower, RevPAR has been higher. I mean it's a pretty perfect hedge, meaning -- we've been running a little lower on one a little higher on the other. My guess is it's going to flip around over the next couple of years. And as I said, we're going to get back to 6% to 7% and same-store growth is going to normalize. But we think the algorithm is alive and well and will deliver at those -- in those ranges that we've talked about as a result of increased growth rates from where we are, increased license fee rates, overall RevPAR growth, the deals that we've done on the licensing side, which generally drag us up because they're at or above algorithm growth rates. We feel very good about that algorithm that we laid out in 2016 that it's alive and well in producing. And as a result, we're producing today more free cash flow than we ever had in history, which is what allows us to return so much capital. Again, that will keep -- both of those things will keep going up as well.

David Katz:

I wanted to talk about just the strategic philosophies around brands. You've been highly productive at launching brands and just observing that a lot of the growth has been sort of in the middle and mid-scale and limited service, et cetera. How do you think about launching stuff potentially at the higher end? Or do you not sort of want or need those? Or -- and just help us understand how you decide where to launch.

David Katz:

Understood, and if I can just follow up on one detail and if I'm over beating the horse, apologies. With respect to the NUG for the remainder of this year, I just want to be as clear as possible about whether there was some on tough comps pull forward or any projects that have slid into next year that are elevating.

Kevin Jacobs:

Yes, David, I think not to go too far on. I think I'd just add that there's a reason why we signaled last quarter, another quarter has gone by. So, the second quarter is sort of in terms of openings played out the way we were thinking it would, which is why we were signaling we weren't yet ready to adjust the official guidance. All we've done now is crystallized with a happy year in the books and have a year left that what we thought was going to happen in the second quarter happened. And then if you think about the momentum, I mean, Chris already talked about this, but the momentum in approvals and starts, I'd say, it was a better experience in the second quarter than we were expecting a quarter ago.

Smedes Rose:

I just wanted to ask you a little bit about occupancy levels. When we look at the U.S. data, and I think is true for Hilton versus 2019 is a reasonable sort of gap to prior peak occupancy levels or pre-pandemic occupancy levels. But it sounds like from what you're saying, you think maybe the continued improvement in group trends will kind of close that gap? Or is certainly be something else you're seeing? Or do you think it's just structurally lower going forward? Just kind of curious how you think that evolves over the next -- through the balance of the year and maybe just going forward?

Operator:

The next question comes from Brandt Montour with Barclays. Please go ahead.

Chris Nassetta:

The answer is yes. I mean there is a tiny disconnect in timing. But I'd say the core pricing of our transient products, whether that's leisure or leisure transient or business transient is keeping up with inflation at its current levels. And obviously, we expect that to continue to come down. We feel good about the pricing power, again, with all the assumptions I already commented on about my view or the macro view that we've adopted for the back half of the year. And as we go into next year, and we think the broader environment is generally supportive for continued rate strength. I mean the one thing -- it's funny we talked -- I kid our team around here, it's like we've been living a little bit in bizarro world coming through COVID, obviously, and then in the aftermath, where you all be about fundamentals. That's all we would ever talk about on these calls. It all has ever talked about with investors, the fundamentals of demand, what's going on with demand and what's going on with supply. In the bizarro world, nobody talks -- nobody cares about supply. But we're now in a lie. I mean, everything is just getting reasonably close to a more normalized environment. prices are higher, okay, but that's just a broader reset that's happened throughout the entire economy, which I think unless you have broad disinflation, which it doesn't feel like that's happening anytime soon, that's sustained. And so you've sort of set a new water level, if you will, for pricing. And then eventually, in the very near term, it's going to get back to basic fundamentals, like what's going on with base demand and what's going on in supply. And I think the thing that doesn't get enough attention, like thankfully, as you can see in our starts and signings and NUG and our expectations for the future, we get a heck of a lot more than our fair share. But what's really going on in supply, particularly in the U.S. is anemic levels of industry growth that are sub if the 30-year average is 2.5%, it's running like 0.8% and it will be, and it's been running low. And given the environment, it's going to stay low. And so when you get to a more normalized environment, which is we're sort of morphing slowly into over the next year or two, you're going to find yourself in an environment where demand should be reasonably healthy if the economy is okay against a historically low supply side environment in the industry. And so, I think it's going to feel pretty good. And I think it's going to be another factor for sustaining performance and rate integrity.

Duane Pfennigwerth:

Can you talk a little bit about the profile of your owners for new development and how that may be changing? With the signings activity you talked about in the second half of last year, first half of this year, any new trends or maybe some surprises you could speak to with respect to the organizations or the individuals that are investing in new development?

Chris Nassetta:

Yes. The other minor segment, I think that's well said, is on H3. I mentioned in my comments, it's a hybrid, and it's probably more apartment than hotel. We've been really excited about the institutional interest that we have from larger institutions that either want to develop or work with a partner and fund the development of large numbers of H3 just because of the cost to build the -- it's we think a 60% kind of margin business, and they really like the segment of demand and its existing profile and growth profile. So that's been not surprising because we -- when we were developing H3, that was our hope and expectation, but it's nice to see it come to life. I mean, as I said, we're negotiating 300 deals and that's not with 300 different people at this point. We barely opened it up. This is with a relatively limited number of very well-heeled more institutional type players. We will ultimately open the floodgates on H3 once we get it going. But it's been very nice to see.

Robin Farley:

Obviously, great news on the RevPAR outlook, I did have a question circling back to the net unit growth. You mentioned Spark, and maybe it sounds like some timing in China that was a little bit pushed out. But when we think about the strong start numbers that you've talked about, can you help us think about timing of interest rates are still moving up a little bit here? And obviously, some of those big increases in starts are due to sort of comping the pandemics, so there's that going on, making the comps look different than normal. I guess just trying to think about the timing from here in terms of the factors like what has everything do you think bottomed. It seems like maybe not yet in terms of -- with interest rates still moving up, but help us think about the timing of like rates moving up, starts being high, but -- and kind of where you see things bottoming in terms of that.

Kevin Jacobs:

Yes. Both Spark on H3 are more easily financeable products in this environment. So again, that's not why we launched those brands. We launched those brands because there's a ton of customer and owner and for the product. But if you think about the way it's playing out, it's sort of another example of diversification being a great thing. We have products that are more financeable. I think our lower-end products around the world are more financeable. And then I think I'd couple of things I'd guide you to as well. I think when you think about a tighter credit environment because not just rates, it's availability of capital, that's not a -- that's a Western world phenomenon. It's not just U.S., but it is highly concentrated in the U.S. Only 40% of our deliveries this year are going to be in the U.S., right? So it's a big world out there. We've got a lot of diversification. And I think that for all of the reasons we've given you, we think momentum can continue. And if you think about mean Chris talked about bizarro world on fundamentals. It's also bizarro world a little bit on development because it sort of starts with approvals you got to sign them, you got to get them in the ground and then they deliver, and that's all usually on a lag. And we've had COVID, and we've had a bunch of changes. But I think if you think about development being on a lag, it has to start somewhere. So, the outlook for approvals and starts bodes well for the future. The fact that we're rounding out the product base with more easily financeable products bodes well for the future, the fact that we have more limited service and lower-end products to deploy in emerging markets bodes well for the future. And it's not to say there won't be hiccups along the way, but we do believe that it's a progression back to normal, if you will, from here.

Michael Bellisario:

Wanted to go back to the new credit card deal that Amex announced on Friday, you guys didn't mention it. So maybe hoping you could provide any commentary or incremental fees or economics that you expect to receive? And then maybe what's new or different in this deal versus what you last signed in 2017?

Michael Bellisario:

Got it. And then just one follow-up, any incremental economics included in the increased full year guidance from the credit card deal?

Operator:

The next question comes from Chad Benyon with Macquarie. Please go ahead.

Kevin Jacobs:

Yes, no problem. Yes, there's a lot there. First of all, the whole portfolio is concentrated effectively in U.K., Ireland, Europe and Japan, so particularly Central Europe and Japan have been quite strong. There's no real sort of change in -- I mean, a little bit of year-over-year growth for subsidies last year. That's just a little bit of noise. I think basically, there's operating leverage in the business, right? Their own hotels, their leases, right? So there's even more operating leverage than a regular owned hotel. So they've been growing at a rate that is quite in excess of the overall fee business. As long as fundamentals stay growing, that will continue to be the case. And I think we -- our outlook for the segment is a little bit better now this quarter than it was last quarter because our outlook for Europe and Japan is better.

Richard Clarke:

Just on the two new brands, [Arch] and H3. Are those going to be enough to get U.S. now back up to 5% that the international business will [indiscernible] recovery factor 6 to 7. And then maybe just related to that, by giving us some big numbers on where you think Spark can do in the near term. If I go back to when Motto was launched now 60 hotels, I think you're 8 to 10, when you launched Tempo, you talked about maybe 20 to 30 having got a Tempo yet, but one coming through, just maybe what's different here versus maybe where -- what those brands achieved in the shorter term?

Kevin Jacobs:

Yes. I wouldn't connect -- is a shorter way of saying, I wouldn't connect too many dots. I mean the world is just different, and the brands, as Chris said, are different. And again, the beauty of Spark is you don't have to get a building built to do a Spark. It's all going to be buildings that are already built.

Chris Nassetta:

Thank you, MJ. Everybody, we appreciate as we always do, you spending a little bit of your morning with us. We know it's a busy time and lots of earnings releases. We obviously remain really optimistic. Obviously, Q2 was a great quarter for us. That's flowing through plus some given our expectations for the second half of the year. Again, we're optimistic on our unit growth and optimistic for not just the end of this year, but in the next year, we'll be able to deliver. But most importantly, the algorithm that we've described is alive and well and working and we continue to grow. We continue to maintain incredible cost discipline. The Company is at the highest margins by 800 basis points ever run at, thus producing the greatest amount of free cash flow in our history, and we intend to be super disciplined about how we allocate that otherwise known as giving it back to our shareholders. And so in any event, we'll look forward after Q3, giving you an update on how everything is going. I hope everybody has a great rest of the summer.

Operator:

Good morning, and welcome to the Hilton's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brian Kucaj, Senior Director, Investor Relations. You may begin.

Christopher Nassetta:

Thanks, Brian. Good morning, everyone, and thanks for joining us today. We're pleased to report that demand for travel remains strong, maintaining the trend that we saw in the back half of last year, which led to both our top and bottom line results finishing the quarter above the high end of our guidance. As we move forward, fundamentals remain strong, and we expect secular tailwinds to continue to support growth. Despite continued macroeconomic uncertainty, we're optimistic that the power of our network effect, our industry-leading RevPAR premiums and our fee-based capital-light business model will continue to drive strong operating performance, unit growth and meaningful cash flow, enabling us to return an increasing amount of capital to shareholders. In the first quarter, system-wide RevPAR grew 30% year-over-year and 8% compared to 2019. Rate continued to drive growth, up 11% compared to 2019, and system-wide occupancy reached 68%, up from the prior quarter and just 2 points shy of peak levels. Globally, all segments outperformed expectations, and the lifting of COVID restrictions in China drove significant recovery in demand across Asia Pacific throughout the quarter. As a result, RevPAR in the month of March exceeded 2019 levels across all regions and segments for the first time since the pandemic began. Given our strong results and positive momentum, we're raising both top and bottom line guidance for the full year, which Kevin will cover in more detail in just a few minutes. Turning to the segment details. Leisure trends remained strong throughout the quarter with RevPAR surpassing 2019 by approximately 15%, ahead of prior quarter performance. Strong leisure transient demand continue to drive rates up in the mid-teens above 2019 and occupancy fully recovered back to 2019 levels, driven by the surge in travel in Asia Pacific. Business transient also continued to improve with RevPAR up 4% from 2019, reflecting the resiliency of business travel, particularly for small and medium-sized businesses, which remained roughly 85% of our segment mix. Recovery in group remains robust with RevPAR finishing roughly in line with 2019 with steady improvement each month in the quarter and March exceeding 2019 by 5%. Demand for future bookings also remained strong with full year group position up 28% year-over-year and 3% versus 2019. Additionally, new group leads ended in the quarter 13% higher than 2019, an increase of 6 points compared to prior quarter. Looking at the full year, based on the better-than-expected Q1 results, the accelerated demand across Asia and continued positive momentum in group, we now expect full year system-wide top line growth between 8% and 11% versus 2022, assuming some slowdown in the back half of the year due to macroeconomic uncertainty, particularly in the U.S. Turning to development. In the first quarter, we opened 64 properties totaling over 9,000 rooms, celebrating several milestones, including the opening of our 500th hotel in China, our 100th addition to the Tapestry Collection and the opening of the Canopy Toronto Yorkville, the Lifestyle brand's debut in Canada. We also opened 2 new Embassy Suite resort properties in Virginia Beach and Aruba with the Aruba addition marking the brand's 10th international property. And after recently being ranked the #1 Hotel Franchise in Entrepreneur Magazine's Franchise 500 for a record-breaking 14th year in a row, Hampton by Hilton expanded its global presence to 37 countries with the brand's first property in Ecuador. While we expect to see some impact from the current financing environment, we are encouraged by the progress on the signings and starts front. We signed approximately 25,000 rooms during the quarter, growing our pipeline to a record 428,000 rooms, more than half of which are currently under construction. Signings in the quarter outpaced prior year across all regions. And conversion signings in the quarter were 24% higher than prior year, benefiting in part from the rollout of our newly-launched brand, Spark by Hilton. The initial interest in Spark has been tremendous. We currently have more than 300 deals in various stages of negotiation, and our teams are working hard to deliver this exciting new premium economy conversion brand with hotels opening later this year. Hilton Garden Inn also continues to be an engine of global growth with 14 new signings across 6 countries in the quarter and over 60 working deals in 22 countries. Additionally, in April, we announced the signing of the Waldorf Astoria Jaipur, marking the debut of the brand in India and further demonstrating our commitment to expanding our world-class luxury brands across the globe. Construction starts for the quarter totaled over 19,000 rooms, up nearly 20% from prior year, and starts in the U.S. were up more than 50% year-over-year. Our global under construction pipeline is up 8% compared to March 2022. And per STR, we continue to lead the industry in total rooms under construction. Taking all this into account, we still expect to deliver net unit growth within our guidance range this year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years. On the loyalty front, Hilton Honors grew to more than 158 million members, a 19% increase year-over-year and remains the fastest-growing hotel loyalty program. In the quarter, Hilton Honors members accounted for 62% of occupancy, an increase of 200 basis points year-over-year. Additionally, in an effort to further provide our loyal guests with an elevated wellness experience, in April, we announced the international expansion of our partnership with Peloton, bringing Peloton bikes to properties across the UK, Germany, Canada and Puerto Rico, building on our existing partnership to make Peloton bikes available in all U.S. hotels. As one of the world's largest hospitality companies, we recognize Hilton has the responsibility to protect the planet and to support the communities we serve to ensure our hotel destinations remain vibrant and resilient for generations of travelers to come. In early April, we published our 2022 Travel with Purpose Report, outlining our latest progress towards our 2030 environmental, social and governance goals, including our efforts to reduce our environmental impact while creating engines of opportunity within our communities and preserving the beautiful destinations where we live, work and travel. We remain committed to driving responsible travel and tourism globally while furthering positive environmental and social impact and sound governance across our operations and our communities. All of our success would not be possible without the dedicated efforts of our talented team, and we continue to be recognized for our remarkable workplace culture. Recently, Great Place to Work and Fortune ranked Hilton the #2 workplace in the U.S., our eighth consecutive year on the list, and once again, the top-ranked hospitality company, an accomplishment I'm truly proud of. Overall, despite macroeconomic uncertainty, we believe that our world-class brands, dedicated team members and resilient business model have us incredibly well positioned for the future. Now I'll turn the call over to Kevin for a few more details on the quarter and our expectations for the full year.

Operator:

[Operator Instructions] And the first question is from Carlo Santarelli from Deutsche Bank.

Christopher Nassetta :

Yes, a really good question. Obviously, I think I used the macroeconomic uncertainty two or three times for a reason because there is an uncertain environment. I mean, what we're seeing today is, as you heard in what you saw in our numbers and in the prepared comments is very good strength across all our segments. Leisure continues to be super strong. Business transient in the quarter, both demand and pricing, has returned to prior peak levels and group is motoring on its way. It's just longer in gestation to get there. But based on the trends, it's going to get there in the second half of the year, I think, with a great deal of certainty. So we are not -- you didn't really ask it this way, but I think part of it is we're not seeing any cracks in terms of demand patterns. There is a lot of momentum. I sit at this very table every Monday morning with my entire executive committee, representing every region of the world. And the first question I ask, are you seeing any cracks? Any issues with demand broadly? Any issues regionally? Any issues from a segment point of view? And the truth is we're just not seeing it. Having said that, we know here in the U.S. and in many other places around the world, there's an inflation issue. Now it's being -- it is being managed. It's becoming -- it is in the process of normalizing, particularly here in the U.S., but it's not there. And the Fed has said it's going to deal with it. I believe that -- I take them at their word. And I think ultimately, that means you're going to continue to have a slowing of the broader economic environment that, at some point, has to have some impact on us. It hasn't yet for a bunch of reasons, I suggested

Christopher Nassetta :

Correct. Yes. I mean, the way to think about those is those are normalizing in growth rates, above algorithm growth, above typical growth you would assume sort of on a same-store basis. But we're still particularly because of Omicron, on the fee side, we have a supercharged fee growth rate in the first quarter. But I think the way to think about, over the intermediate, even longer term, is we think all of those ancillary license fees and otherwise, they're going to grow better than our typical algorithm growth. You're just -- yes, you have some year-over-year normalization going on in Omicron impact.

Operator:

And the next question is from Joe Greff from JPMorgan.

Christopher Nassetta :

Yes. I mean, it's early. So we've obviously been talking to a lot of our ownership community as the banking issues have sort of taken hold. And I would say there's a broad range that anecdotally go from, we haven't seen much impact. We're still getting finance. As you can see in our numbers in starts in the U.S. being so far up. Now part of that was before the banking, the regional local banking set of issues, but part of it was after. They're still getting the best owners with the best relationships are getting their deals done, and our market share in a tougher environment goes up. So proportionately relative to others in the industry, we typically do even better. But we also have folks that are saying very hard to find the money and some in the middle that are saying like they're talking to their banks and their banks are saying, "Hey, we're going to be there for you. Just give me like 90 days. Let me see how this all plays out." And so I think it's early to know. I think being objective about it, which I always am trying to be, I think the Fed seems to be managing through this reasonably well. There's some ongoing things today or this week going on, but I think the Fed, I think, is pretty committed to making sure there isn't sort of a run on regional banks broadly. So I think we're in reasonably good shape that way. But I think that the net result is for a period of time, there'll be less credit available, okay? I still think we'll get more than our fair share of it because our brands are better performing, and we'll see our share go up as we historically do when times get tougher for financing, et cetera. But it's hard to believe that in the short to intermediate term, there's not going to be some impact. It hasn't shown up. It didn't show up in the first quarter. We haven't seen it yet, but I think in terms of pipeline, people, I think our expectation at this point for the year is the pipeline is going to keep growing. The bigger question is going to be the conversion under construction. In the first quarter, it was very, very good, as you heard, in the data. I think that will get more challenging. I think it just stands to reason that will get more challenging. And so listen, the good news for us is we tend to get -- our share goes up. It's a big world. While China has been a little bit slower to sort of pick up steam on the development side, it is picking up steam, I think, particularly as we think about next year, I think it's going to be a big net contributor. And conversions are -- have been and continue to be a big focus of ours. We think we'll do meaningfully more as a percentage of overall delivery this year as conversion somewhat aided by this year a little bit, but a lot, I think, next year by Spark, which is 100% conversion, very low cost of entry in a relative very, very lightly, if dependent at all, on the banking community. So that's not why we did Spark. We did Spark for all the right reasons, to better serve, create a bigger and better network effect, but just in time management, the timing of it actually is quite good. As we said, it's not going to do a lot for this year, but I think over -- starting next year and beyond, it will add significantly. But the net of all that, Joe, is, again, answering -- I'm trying to give a little bit of color across the board. We do expect that what's going on in the banking system, particularly for limited service, which is disproportionately financed by the regional and local banks, that they're going to pull in their horns. They're going to survive. Most of them are going to get through this, but there's going to be less credit available, and that's going to slow things down a bit.

Christopher Nassetta :

Should be, yes. It should be mathematically, yes. The algorithm is, as you know, so the same-store plus unit growth. And we've been delivering on average even through COVID, 5-ish, maybe a tick over, even in an environment that is being impacted by some of the things I just described. We believe we'll continue to do that as we manage our way over the next couple of years back up to the 6% to 7%. And so even in a no growth same-store environment, which is not certainly what we're experiencing now for the record, as you can see, but even in that environment, fees would continue to grow with unit growth.

Shaun Kelley :

Chris, I kind of wanted to stick with the development activity, but maybe let's just go out a little bit longer term. And if you could help us pull from a little bit of your experience of how this played out during the global financial crisis a little bit. Just help us think about, if we think about some of the -- there's kind of three drivers, I think, about domestic unit growth, obviously, decently reliant on the financial system; the conversion activity, where you've got a pretty interesting pipeline of brands that might even be stronger than back then; and then the international side. Can you help us think about sort of buckets 2 and 3? And as we get on to '24 and '25, how much could those help carry the weight? And how protected do you think, let's call it, a broad mid-single-digit net unit growth target should be in a variety of different scenarios as people are just trying to think about broader fallout here from financing and again, a more difficult macro broadly?

Operator:

And the next question is from Smedes Rose from Citi.

Christopher Nassetta :

We were already seeing it pre-COVID, where there was just a demand for workforce housing and people -- more mobility in their lives and they wanted to be places and work from different places. And they didn't -- they were going to be there long enough to commit. They're like, get an apartment and pay a one year's deposit and all that fun stuff. And so we are already seeing demand that was outstripping supply. And then COVID hit. And while a lot of things have normalized, and I've talked about this on prior calls a bunch of times, the one thing that happened is it accelerated the idea of mobility. While the office environment is normalizing, a lot of people are going back. It's not exactly what it was. More people are going to be remote as a percentage of the workforce permanently. More are going to have flexibility and sort of different times of year, times of the week, Mondays and Fridays. And all of that is continuing to just -- as those patterns shift, it's building more and more demand against a limited amount of supply. And so the fundamentals we think are just great. The way I think about the product that we're developing, and I'm getting ahead of myself, but it's coming really soon. I mean, down we have -- we've built it. We've done 99% of the work. It's almost a hybrid. It's like an apartment efficiency meets hotel. And I'd say it's almost like 60-40. It's more apartment efficiency. There's so many workforce housing needs that are just unmet with this kind of product for somebody who needs to be somewhere 30, 60, 90, 120 days. So you're talking about average length of stay of probably 20 to 30 days on average versus most of the core extended-stay brands are like 5 to 10 maybe, somewhere in that range, if you look at the industry. So it's a different demand base, different types of locations, which is why we love it because we're not serving it, meaning it's not competitive with what we're doing with Home2 and certainly not competitive with Homewood because it's serving a totally different need, mostly in totally different markets. And as I said, we -- I didn't intend to go this far, sorry. But this is hundreds and hundreds and hundreds of hotels over time. This is not like we're going to do 50 or 100 of these. I mean, you'll wake up over time in 10 years, and will -- it will be like Home2. We'll have 4, 5, 6. We'll have a lot of these because we think the need is there now and growing. And we -- while a lot of people are doing things in this arena, I think we've proven by launching brands that we do uniquely have done it pretty well to launch brands and get to scale and build network effect, not just broadly for the company but within brands. And we've done that, I think, as well or better than anybody. And I think we have an opportunity to do it here. And our system delivers. The system delivers the highest market share in the business. So if you're an owner thinking about I'm going to build a similar product somewhere else, I mean, you're going to look at the system strength. And ultimately, I think, historically, people vote with their feet. They vote with a product that they think will work better from a customer point of view, ultimately, higher margins and drive higher share. And so we got to do it again, but we've got a pretty good track record of doing this stuff. We've spent a lot of time on this. And hopefully, by the next time we talk, it will be out of the shoot and we'll be talking about how many deals we got lined up.

Kevin Jacobs :

Are you talking about the difference between -- if you do Q1 in the guidance, Smedes?

Kevin Jacobs :

No, there's -- no. Removals is right in line with normal. We'll end up about 1%, 1% and change for the year. Just the gross rooms from a timing perspective -- I mean, I think I don't want to repeat what Chris said earlier on the call. But I think from a timing perspective, for the full year, gross room additions were lower in the first quarter and deletions were about the same. So that's the difference.

Stephen Grambling :

Maybe following up on some of your comments about the new brand launches, Spark and then it sounds like another one in the extended-stay. When you think about going into some of these lower-end chain scales, I think many of the peers often see higher attrition rates or deletion rates. What can you do to ensure that the attrition rates from your brands are more resilient long term? And have you seen any evidence of that from your current lower of chain scale brands such as Tru?

Stephen Grambling :

That's helpful context, and that's my one question.

David Katz :

I wanted to just go back to Spark because obviously, a lot of enthusiasm and success and it's unlike things that you've done before. If we look at the makeup of the deals that you've put together, I'd love some color on what's in there. Are those independents that are looking for a brand? Are those switching from other brands for one reason or another? Are any of the hotels switching within your system into it that may have otherwise departed for one reason or another?

David Katz :

Fair enough and understood. My follow-up is when we look at the revenue intensity of adding in this category, how does that measure up with your other brands? Obviously, the upper upscale, a unit is generating more, right? But how does the fee structure and the revenue intensity of this measure up and add to your system?

David Katz :

Sounds like no meaningful key money there either?

Kevin Jacobs :

Yes, I think David, just to add just a little bit, and Chris covered it, yes. I mean, the capital intensity of our -- in our business is much higher at the upper end, right? So the higher you go in the chain scale, the more the deals are competitive and you're contributing capital. And the other thing I'd say is why I think sort of working with you for a while, I think where you were headed with that. I think from a revenue intensity perspective, Chris described it. As you layer in these lower fee per room hotels, mathematically, of course, your fee per room does go down. But when we model it out over a long period of time, you'd be surprised the fees per room do not...

Kevin Jacobs :

They keep going up over time, and we continue to grow at what we often talk about as algorithm. So if you take same-store sales plus NUG, the fees per room and the fee growth continues at that pace. And part of that is because of the non-RevPAR-driven fees that Chris mentioned earlier in the call, which we think will continue to grow at a higher rate than algorithm. So you put that all in your model and it's -- it's surprisingly steady/continues to grow.

Operator:

The next question is from Robin Farley from UBS.

Christopher Nassetta :

Yes. On a global basis, business transient, actually fourth quarter to first quarter ticked up. So on a -- it was about -- in the fourth quarter, about 1.03 and it went to 1.04. But importantly, on an aggregate occupancy basis in the first quarter, for the first time, it actually got back or slightly above where it was at the prior peak. Now that's not a U.S., that's a global number. So why is that happening in the face of everything you're reading? And it's really simple, which is why I said it in the comments, it's SME. It's like what we're all filtering through is big corporate America. Big corporate America is worried about the world, all the uncertainty and maybe curbing some of their appetite for travel. Having said that, I've met with -- we had a big customer event, and I didn't get that impression even at a big corporate America. I think incrementally year-over-year, they're all traveling more but maybe not as much as they would have thought. But the SMEs continue, which are 85% of our business, continue to perform really, really well. And the big corporates weren't really back in any event. And so since they had not come back to prior levels, while they may recover more slowly, they're not, my impression from talking to a bunch of them, they're not really cutting because they already had cut so much and they hadn't built it back. They're just -- maybe it's flattening for them. But I said it many times over the last few years. We have, by choice, we were always quite dependent 80% of our business was SMEs. It's 85% now by choice, meaning we have shifted our mix because it's higher rated business, it's more resilient in the sense that it's more fragmented by the very nature of what it is. So business transient is alive and well. And I'd say in the first quarter, both the price was above and volume was at or slightly above, and that trend continues into Q2 although we're early in Q2.

Christopher Nassetta :

It's normalizing. It's slightly elevated relative to pre-COVID but not much and has come down a bunch. And we expect probably by the end of the year, certainly into next, it will be normalized with where it was, which is where we want it to be.

Brandt Montour :

I was wondering if you could just dig in a little bit to the drivers of the conversion activity, taking Spark out of it. Chris, you mentioned potentially lower hotel transaction activity from financing headwinds putting pressure as well as financing being a headwind in and of itself for doing non-Spark hire and conversions. I guess could you stack that up against some of the maybe positive tailwinds, perhaps enforcement of brand standards across the industry, foresee more trade down or even more independents getting more nervous looking for brands? How do you look at all those factors on a net basis later into the year?

Operator:

The next question is from Bill Crow from Raymond James.

Kevin Jacobs :

Yes. I think, Bill, what you're seeing is it's kind of -- it's across the board. It's positive change to all regions. Largely, I think Chris covered this earlier in the call, largely concentrated with the demand strength continuing into the second quarter and us taking the second quarter up a little bit, a little bit in the third quarter and then the -- and if you think about pushing out the anticipated slowdown in the back half of the year, but there is improvement in the outlook in all regions, including the U.S.

Christopher Nassetta :

I mean, I don't think so. Well, the #1 prima facie evidence it has. So I mean, Bill, but I just finished on a couple of questions ago, in the data in the first quarter, business travel has already recovered. I think what it means for us is in the intermediate term, as you get more certainty in the environment, there's upside in business travel, meaning we've done a good job of shifting to SMEs. With that shift, we're sort of, on a volume basis, back to where we were. Rate base is higher. The big corporates still have to travel. By the way, the big corporates are also not one size fits all. It's really where you see the impact is technology, banking consulting. If you look at a lot of the other big corporate sectors, they're still growing, but those sectors weighed it down. As those sectors stabilize and start to think about the future and being competitive and getting their sales forces back out and get out of cost-cutting mode, which they will, they always do, I look at it as upside. So I think when you wake up in a year or two and we're in a little -- we're in -- whenever we get to a more certain environment, hopefully it's sooner than later, I think the opportunity will be that business travel, both volume and price, will be higher than the prior peak. I think the same thing for the group business. I think this has done -- what's happened in the last three years has done nothing but reinforced -- I mean, we're definitely benefiting from a lot of pent-up demand, but it's done nothing but reinforce, as I talk to all of our group customers and the like, that the need for people to be congregating to do the things that they do in culture and collaboration and innovation and all of those fun things. So I kind of famously said when we get through this in like April, May of 2020, I think it will look a lot more like it did than it does. And I think that's -- I still think that. And I think the data largely supports it. If you look at the business mix, like this quarter versus pre COVID and the big segments of business transient, leisure transient and group, we're within a point. I mean, right now, the only difference is leisure is a point higher then group's a point lower. Otherwise, it's about where it was, right? And that's because group takes time to sort of -- to come back. And in the meantime, leisure has been strong. But ultimately, as we get strong high-rated groups back, we will continue to mix more of that in. So I do not personally believe there is credence to that argument. I think the data supports that argument at this moment.

Christopher Nassetta :

Yes. Same.

Christopher Nassetta :

Thank you, Chad. Thanks, everybody, for the time today. Interesting times with all -- the word of the day is uncertainty. But as you can see, we feel very good about what we delivered in the first quarter. We feel great about the second quarter. Frankly, we feel pretty good about the full year. We're making sure that we're keeping our eyes wide open about what's going on in the world. But we continue to do well and deliver, and most importantly, return more and more capital, which we'll continue to do. So thank you for the time, and we look forward to catching up with you after the quarter.

Operator:

Good morning, and welcome to the Hilton Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Chris Nassetta:

Thank you, Jill. Good morning, everyone, and thanks for joining us today. We’re happy to report a strong end of another year of continued growth. Together with our team members, owners and communities, we’ve navigated through the most challenging times our industry has experienced and are deep into recovery throughout the world. During the year, we continued investing in new innovations and partnerships that meet guests’ evolving needs and further strengthen our value proposition for Hilton Honors members and owners. We remain committed to delivering reliable and friendly experiences to our guests and we continue to enhance our network through our strategic and disciplined approach to development, enabling us to serve even more guests across more destinations for any stay occasion they may have. Our strategy drove strong performance for the year with system-wide RevPAR up 42.5% versus 2021 and approximately 1% shy of 2019 levels. Both adjusted EBITDA and EPS surpassed our expectations and prior peaks with margins of roughly 69%, up more than 300 basis points year-over-year and more than 800 basis points over 2019 levels. Strong results and higher margins enabled us to generate the highest levels of free cash flow in our history and returned more than $1.7 billion to shareholders for the full year. Turning to results for the quarter. System-wide RevPAR grew 24.8% year-over-year and increased 7.5% compared to 2019 with performance improving sequentially versus the third quarter. We saw continued progression across all segments with leisure, business transient and group RevPAR all exceeding 2019 levels. System-wide occupancy reached 67%, up from the third quarter and just 3 points shy of prior peak levels. Overall rates remained robust, increasing 13% versus 2019 with all segments exceeding expectations. As expected, leisure trends remained strong throughout the quarter, with RevPAR surpassing 2019 levels by approximately 12%, modestly ahead of third quarter performance. Strong leisure transient demand continued to drive rates up in the high-teens compared to 2019. Business transient RevPAR also continued to improve, with business travel up 3% versus 2019, nearly all industries saw continued recovery compared to the prior quarter. Small and medium-sized businesses remained an important and growing part of our business travel segment, accounting for roughly 85% of our segment mix and enhancing our overall resiliency. Group saw the biggest quarter-over-quarter improvement with RevPAR fully recovering to 2019 levels, driven by both occupancy and ADR gains. Company meetings boosted performance improving more than 7 points versus the third quarter. As we look to the year ahead, acknowledging macroeconomic uncertainty we expect system-wide top line growth of 4% to 8% versus 2022. We expect performance to be driven by continued growth in all segments and aided by easy first quarter comps due to Omicron, meaningful recovery across Asia and solid growth in U.S. urban markets as group business continues to recover. Comprising roughly 20% of our normalized mix, group is a segment with the greatest visibility. For 2023, group position is up 25% year-over-year and nearly back to 2019 levels. Even with robust forward bookings, the pipeline still remains strong with tentative bookings up more than 20% versus last year, helped by rising demand for company meetings as organizations bring their teams back together. Additionally, pricing for new bookings is up in the low double digits and lead volumes in January were at all-time highs. Turning to the development side. We continue to deliver on our commitment to capital-light growth. For the full year, we added nearly a hotel a day, totaling more than 58,000 rooms and celebrated the opening of our 7,000th hotel. Since our go-private transaction 15 years ago, we’ve more than doubled the size of our system. Our rooms in the U.S. are up nearly 100%, and our international portfolio is now 3.5 times larger. Additionally, we’ve added 10 new brands to our system, more than doubling our portfolio of brands. We achieved all of this without any acquisitions and more than 90% of the deals in our current pipeline did not have any key money or other financial support. In the fourth quarter, we celebrated the opening of our 60,000th Home2 Suites room, our 150,000th DoubleTree room, our 200th hotel in CALA and 600th hotel in Asia Pacific, including our first Hilton Garden Inn in Japan. We also saw continued strength in construction starts throughout the year, leading to starts of more than 70,000 rooms for the full year. In the U.S., starts increased more than 9% versus 2021. We now have more rooms under construction than all major competitors. With a record pipeline of more than 416,000 rooms, half of which are under construction, we expect net unit growth of 5% to 5.5% for the year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years. Our disciplined development strategy continues to enhance our network effect and enables us to serve more guests across more destinations for any stay occasion. Building on this commitment, last month, we launched our newest brand, Spark by Hilton, a value-driven product that delivers our signature reliable and friendly service at an accessible price. Spark provides a simple, consistent and comfortable stay with practical amenities and unexpected touches, filling an open space in the industry by creating a new premium economy lodging option to meet the needs of even more guests and owners. Premium economy represents a large and growing segment of travelers, totaling nearly 70 million annually in the U.S. alone, for which, we have not had a tailored brand to serve. This cost-effective all conversion brand offers a streamlined reinvestment plan, focused on core guest elements and enables owners to leverage our industry-leading commercial engines and powerful network effect. To date, we have more than 200 deals in various stages of negotiation, almost all of which are conversions from third parties. Additionally, we’ve identified more than 100 U.S. markets with no Hilton-branded products, providing a great opportunity for the brand and the Company to expand its presence. As a testament to the strength of our system and our continued success of our customer-focused strategy, Hilton Honors surpassed 150 million members during the fourth quarter and remains the fastest-growing hotel loyalty program. Honors members accounted for approximately 64% of occupancy in the quarter, up more than 300 basis points year-over-year and roughly in line with 2019. Additionally, we welcomed approximately 200 million guests to our properties during the year, exceeding pre-pandemic peak levels. We remain focused on ensuring Hilton has a positive impact on the communities we serve. For the sixth consecutive year, we were included on both the World and North America Dow Jones Sustainability Indices, the most prestigious ranking for corporate sustainability performance. And for the seventh consecutive year, we were ranked among the World’s Best Places to Work by Fortune and Great Place to Work. As our performance demonstrates, our team members have proven that we can handle whatever comes our way. And because of our hard work and discipline, we are incredibly well positioned for the future. We’re at a pivotal moment with great opportunities ahead and a new golden age of travel. And we’re more confident than ever that our team is poised to deliver in 2023 and beyond. Now, I’ll turn the call over to Kevin to give a little bit more detail on the quarter and the expectations for the full year.

Operator:

[Operator Instructions] Our first question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Chris Nassetta:

Yes. I mean, listen, you can see in the fourth quarter -- first of all, thanks for the question. I think that is the $64,000 question on everybody’s mind. I mean, you could see in the fourth quarter, we had really good strength across all the segments. We’re early in the year. But in the first quarter, we continue to see that that strength continue in substance relative to 2019, obviously, versus 2022, it’s way up because of the Omicron impact. But we continue, from a fundamentals of the industry point of view, to feel very good about things. I mean, if the fundamentals are supply and demand, that’s what ultimately drives the result. The supply side is quite muted. We’re currently experiencing -- using the U.S. market, which is our biggest market, as an example, equal to the lowest levels of supply that we’ve seen. Thankfully, we get more than our fair share. But overall in the market, very low levels of supply. And that continues to be met with very strong demand. And we have not seen, for the record, any weakening. We have not -- we haven’t like seen any telltale signs. There are no threats of like any of our major segments sort of backing up. What I think is driving that is some of those cyclical and secular sort of tailwinds. First, you continue to see consumers shifting how they’re spending their money. So, maybe they’re spending a little bit less, but how they’re spending it, it continues to be shifted more towards experiences where sort of exhibit A on the experience side. The international markets are opening up. People -- you’re starting to see not just inbound to the U.S. but across the world, people traveling. Asia Pacific is opening up pretty fully. It will take a little bit more time. We saw that happen in Japan in the fourth quarter, which raged. We had strong results. So, we get the full benefit of that. China is obviously going through sort of what we went through 12 to 18 months ago with herd immunity and the like. But our view is that’s happening quite rapidly. On the ground, you’re already starting to see significant travel within China in terms of uptick. And we expect, particularly in the second half of the year, you’re going to have a big tailwind from that. And there continues to be broader pent-up demand across all segments. I mean, you could argue in the leisure side, some of that has -- the people have been doing a lot of it, but we don’t see them slowing down. So, we continue to think people partly because of the shift in -- as I mentioned, towards experiences, we continue to see strength there. On the business transient side, still good demand, very strong demand and growing demand, lots of pent-up demand. And as I mentioned in my prepared remarks, we finished the second half of last year on the group side as people really got comfortable, we were through COVID and they could start planning events. They’ve been planning them like crazy. Even the biggest groups, all the association stuff, that really starts to hit the second half of this year because of all of the planning. Some of that’s happening. I’ve been in a lot of big events, speaking at them lately. But the group demand, which I think is pretty resilient, just because people have gone years without doing things that they need to do for survival, is pretty resilient. So, those are -- the economics of supply and demand are really good. To be specific, Carlo, and a very fair question, when we’ve given you a range of 4% to 8%, what did we sort of build into it? I mean, part of the reason that you’re suggesting a flattening or decel because, let’s be honest, it’s math. I mean, we’re going to be way up. You saw our guidance for the first quarter. The world was partly shut down in the first quarter last year. So, that’s just a comparability issue. But we have anticipated, right or wrong, we’ve tried to be conservative that the second half of the year, you’ll see macro economic conditions slow. So, if you were to categorize it, I would describe it as we have assumed in the second half of the year sort of a plateauing related to what we think will be a moderate recessionary environment in the second half of this year. And that’s what we have sort of built into what we’ve suggested to you in the numbers today.

Kevin Jacobs:

Yes. Carl, we think it’s going to be higher. I mean a couple of different reasons. One, conversions continue to be more important as the world gets a little bit tougher, although those conditionings are loosening. It has been tougher for new construction, as you know. So conversions become even more important. And then, Spark, as we’ve talked about in our prepared remarks, is a 100% conversion brand. So, we don’t think there’s going to be a ton of those introduced this year. But by the end of the year, we’ll start delivering those. And so that will drive a little bit higher level of conversion. So, the way we think about it, we don’t guide specifically, but higher than that 24%, say, probably 30% or higher for the year.

Joe Greff:

So, I just wanted to see, Chris, if you could talk about what’s embedded in the second half of this year’s guidance with respect to U.S. occupancy and pricing changes on a year-over-year basis?

Joe Greff:

Great. And just as my follow-up, Chris or Kevin, when you think about the fees not related to RevPAR growth in the franchise and the licensing line, specifically the credit fees as well as royalty fees coming from timeshare, do you think that grows in line with RevPAR, or how are you thinking about how that changes over the course of this year versus last year?

Operator:

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

Kevin Jacobs:

Yes. Sure, Shaun. Thanks. I’ll start with sort of maybe the construction trends more broadly and then maybe hand it off to Chris to cover Spark a little bit. I think what you’ve seen -- look, there’s a lot of puts and takes, right? So, you’re talking about the interest rate environment and availability of capital. And obviously, rates are a lot higher than they had been. And availability of capital is a little bit more constrained, but there’s still plenty of money available for the right projects in the world. If you think about what’s going on at the local and regional bank level is different than what’s going on at the money center banks in terms of capital constraints and things like that. You have some headwinds as we would say in terms of construction costs coming down. They’re still higher than they were in 2019 by about 20% to 30%, but that’s off of peaks and moving in the right direction. And then, as we’ve been talking about the fundamental environment gives people more confidence that when the hotel -- when they develop the hotel and it opens, it will perform at a higher level than maybe it otherwise would have. So, their pro forma goes up. So, you sort of put all that into gonculator, and that’s why starts started to build in the U.S. and ended up higher in the U.S. last year than they were the year before. It depends on where you are in the world. Obviously, it was really difficult -- not only was it difficult to get hotels open/impossible in China at the end of the year because, literally, the offices that gave you your certificate of occupancy were closed. And so, that’s why you saw a little bit of softness in our NUG. That same environment is going on in starts. So, if you’re in China, starts have been behind. But we think starts are going to continue to build from here. The fundamental setup does give developers optimism. And the way they’re thinking about it, they can absorb, not in all cases but in a lot of cases, they can absorb a higher cost of their construction loan and thinking that the world will be in a better place when they open the hotel, it will perform better and that when they roll their construction loan into a permanent loan, then hopefully, the rate environment will be a little bit more normalized. So, those are sort of some of the puts and takes of what’s going on in the world.

Operator:

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

Kevin Jacobs:

Yes. I think it’s played through based on the programs that have been approved thus far in Europe. I mean, if -- there’s maybe a little bit more to come through based on things we’ve for that haven’t quite come yet, through a very small amount. And who knows, if anything more will come, but we’re not expecting any. And the thing I would say is if you look at it on a normalized basis, because remember, we had subsidies in 2021 as well, if you sort of pull all that out, the growth has been quite dramatic. And we continue to think that that portfolio will grow at a higher rate than the overall business this year.

Chris Nassetta:

No, no. As I commented on in my prepared remarks, and if you look at the whole pipeline, more than 90% of it has no key money, no financial support. We have not changed our view on that. If you look at the aggregate dollars in CapEx, and you peeled out what we’re spending in key money, actually, if you average last year and this year together because we had some things we thought would happen last year that are happening this year, it’s actually lower than what we’ve been suggesting to everybody over the last couple of quarters. So no, I don’t -- we still view the opportunity to grow as very strong and without the use of our balance sheet and that ultimately is driven by what you would guess it is. Everybody investing in our portfolio of brands is doing it to get a return, and our brands are the highest performing brands in individual segments. But overall, when you aggregate them together, and people are continuing to want to invest with us in that way. So, a long-winded way of saying, no, we don’t see anything. In fact, I think the trend line for us overall in key money, I’m looking at Kevin, he runs development, too, so make sure he agrees with this. But the trend line is down, meaning over the last couple of years, we’ve had a little bit of elevated key money in aggregate dollars because during COVID, a bunch of things we’ve been working on a long time came together or some other people’s deals blew up, and we were able to sweep in on some very strategic things at a moment in time. And those were lumpy, but we always have opportunities we’re working on. But I think those lumpy -- there are going to be fewer of those lumpy things. So, I think -- honestly, I think in an aggregate dollar sense over the next few years, the trend line is down, not up.

David Katz:

Just following on some of the earlier discussions about the thoughtful conservatism baked into the guidance. Could we talk about the capital returns a bit and just how you thought about pulling that together? And is that necessarily a kind of firm number in view of how the guidance is set up? And what could push that up or down going forward?

Chris Nassetta:

Yes. The only thing I would add -- all of that I agree wholeheartedly. The only thing I would add to that is that’s not -- our longer-range views on the balance sheet and return of capital haven’t changed. We have been very consistent since the beginning of time. It feels like saying we want to be 3 to 3.5 times. We’re at the low end or below -- a little bit below the low end of the range for the reasons Kevin just described. We think debt markets are choppy. They’ll get better. Over the intermediate and longer term, we don’t intend to run leverage at those levels. We would intend to be in the ranges, frankly, and that’s -- we’ve said it on these calls, probably towards the high end of the range, in a more normalized environment or even beyond that is something that we would certainly -- we’ve been asked and said many times publicly, we would consider. We just need -- we’re just looking for a little bit more stability in the debt markets. And obviously, as Kevin said, we don’t have the need. And as I commented in my answer to the earlier question on key money, which is the primary use in terms of CapEx, we don’t think we need a whole lot more. So, any borrowing, any re-leveraging or leveraging up, obviously, this affords us the opportunity to return even more capital. So, I think there will -- those opportunities will exist. We gave you what we think right now, and we’ll see how the debt markets and broadly how the macro sort of shifts going forward.

Chris Nassetta:

I would say we don’t think there are any real competitors. I mean, meaning that, if we do our job, we’re going to sort of come in plus or minus 20% below true, which would still probably be above, if you look on average, it will be above where most of the folks in the existing segment are. That’s why, like we like to do, we’re a branding company. We’ve made up a segment. We called it premium economy. So, our view would be it is above the traditional economy space. It will price above, both because of the strength of our system, our commercial engines, loyalty system and all those things, but importantly, because it will be a better, higher quality, more consistent product.

Robin Farley:

My question and follow-up are both really sort of clarifications on earlier comment. Chris, you said in your guidance, you were assuming that pricing power would flatten or even be modestly lower later in the year. I just wanted to clarify, were you saying pricing power like the rate of increase modestly lower or actually some rate actually lower? Just to clarify.

Robin Farley:

Okay. Perfect. Thank you. And then on occupancy, you mentioned that your guidance, you’re really not even getting back to occupancy in 2019. I’m assuming that’s just sort of a matter of time and that you would expect to be there by 2024, or are you -- do you have a view about…

Robin Farley:

Great. And then just my other clarification on your net unit guidance. From the comment in the release, I guess, I kind of understood the sort of the coming in just under 5% of the COVID delays in China that it was maybe some openings that were sort of pushed past December 31 in China that would maybe make then Q1 opening sort of ahead of the full year number. But then in your comments, you made a comment about starts in China being behind. So I guess, I just wanted to get some clarification on whether it was just openings delayed by a few weeks or sort of a broader issue with the unit growth in China if starts are also behind?

Operator:

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

Chris Nassetta:

Yes. First of all on Waldorf, there’s no -- that’s driven by individual hotels. Just the Waldorf brand, unlike our other brands, there’s not so many hotels that one dynamic in one particular market or two markets will drive it. So, there’s no -- we’re not broadly seeing slowdown in luxury. To the contrary, we’re continuing to see -- we’re continuing to see great strength. I’ll dish the second part of that to K.J.

Richard Clarke:

Sure. I guess, when I look at your pricing relative to the market, relative to some of your closest peers, it seems you’ve increased prices a little bit less than some peers and your occupancies recovered quicker than some peers. Is that in line with your sort of strategy?

Chris Nassetta:

The simplest way to look -- system-wide last year, we finished in share at the highest levels in our history, and we gained share both in rate and occupancy. So -- but those numbers across the system would not support that theory.

Kevin Jacobs:

No. There’s always timing issues in terms of those line items. In the end, we have revenue and all of our various funds and programs are going to run breakeven over time, and then you’re just seeing timing issues on the P&L.

Chad Beynon:

I wanted to ask about the tight labor market that we continue to hear about in terms of the -- from the Fed’s reporting. Obviously, very strong in the experiential category on travel and lodging. So, do you believe this has peaked when you talk to your partners, kind of your builders? What are they saying just in terms of the labor market? And then secondarily, how does that factor into how you’re thinking about IMFs and kind of profits in the back half of the year if it hasn’t? Thanks.

Chad Beynon:

Great. And then secondly, just in terms of FX, the dollar has weakened a little bit against kind of the basket of the non-U.S. currencies. How are you thinking about an operational impact from that? And then also, as that kind of feeds into guidance, is there a translational impact with just a slightly weaker dollar versus what you saw in ‘22?

Operator:

The next question is from Bill Crow from Raymond James. Please go ahead.

Chris Nassetta:

Yes. I think we do think it would be within that range. We continue to see strength. We do expect like all the segments that you will see some plateauing as a result of a slower macro environment in the second half of the year. But we still feel very good about it. The demand trends here and now are really strong. And while there’s a lot of noise out there, if you go back -- just went back and looked at the number, consumers still have incremental savings in the U.S. relative to the month before COVID of $1.5 trillion. Now -- so that peaked at like $2.7 trillion. It’s down to $1.5 trillion. So, they are spending it, and they’re probably reading the papers and watching the news and getting more nervous. And so, that would be a behavior set that would say that maybe they pull back a little bit. But the reality is we’re not seeing it. And I think part of the reason we’re not seeing it, okay, and time will tell, is because of the phenomena that I described earlier in the call, which is they’re shifting their spending. So not only do they still have incremental savings in their pockets and feel reasonably good, but they’re spending a lot more of it at bars and restaurants and travel as a percentage of their overall spend. And so, we have anticipated, like all segments, there’ll be a little bit of a headwind in the second half of the year, but we do expect leisure to be in those ranges.

Chris Nassetta:

Listen, it is an ancillary benefit on the margin, meaning if we do have older Hamptons like other third-party products that we think aren’t fitting for Hampton, as you know, we’ve been quite disciplined in keeping the Hampton brand, the strongest brand in lodging, in my opinion, by pushing properties out that are past their prime and don’t make sense in the system. There -- I think over the next 10 years, there is some percentage of those that we will certainly look at keeping in the system. I think in the end, Bill, it will be a very small percentage of the overall system. And if I look at the deals that we have in-house right now, 98% of the deals we are processing right now are third-party brands. So, there are a few Hamptons in there. But there’s no other Hilton brands in there, but there are a few Hamptons. But I would say it’s an ancillary benefit on the margin. A lot of those hotels, frankly, over time, are going to exit the system as we’ve been doing for time and eternity.

UnidentifiedAnalyst:

[Technical Difficulty]

Operator:

I apologize. So, we’ll have to move on to our next question. And the next question is from Brandt Montour with Barclays. Thank you.

Kevin Jacobs:

Look, I think we said what we said for a reason, Brandt, not to be sort of cagey about it, but there’s a lot can go one way or the other in the world. We still feel great about getting back to 6% to 7%. I don’t -- Chris may have a different view. I don’t feel differently today than I did three months ago about that. I think the world is coming our way a little bit. But we don’t expect -- none of these things stay constant, right? I mean, these trends will change, and we always think the world is going to come our way. So, I don’t feel that much better in three months from now.

Operator:

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.

Operator:

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

Operator:

Good morning and welcome to the Hilton Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations & Corporate Development. You may begin.

Chris Nassetta:

Thank you, Jill. Good morning, everyone, and thanks for joining us today. The third quarter marked a very important milestone in our continued recovery. For the first time since the pandemic began, system-wide RevPAR surpassed 2019 levels. Additionally, adjusted EBITDA and adjusted EPS exceeded the high end of our guidance and 2019 levels. We achieved several notable development milestones in the quarter, including reaching 100,000 rooms open across Europe, and announced various strategic partnerships, further enhancing the guest experience and the strength of our global system. The quarter's strong performance, coupled with our capital-light business model, enabled us to continue returning meaningful capital to shareholders. Year-to-date, we've returned more than $1.3 billion. And for the full year, we're on track to return between $1.5 billion and $1.9 billion to shareholders. Turning to the specifics results in the quarter, occupancy reached more than 73%, only four points shy of 2019 levels. As expected, strong travel demand continued through the summer months, primarily driven by robust leisure trends. Post Labor Day, demand remained strong as business transient and group demand improved significantly and leisure demand remained robust. Overall demand for the quarter peaked in September, nearly reaching 2019 levels with business transient demand only two points off 2019 levels. ADR also continued to strengthen and proving quarter-over-quarter and up 11% versus 2019. Rates across all segments surpass 2019 levels, with leisure transient rates up in the high-teens and both business transient and grew up in the mid-single digits. All of this translated into third quarter system-wide RevPAR growth of approximately 30% year-over-year, and 5% compared to 2019 levels, with each month surpassing prior peaks. Leisure transient RevPAR continued to lead the recovery, exceeding 2019 levels by more than 11% for the quarter. Business transient RevPAR reached 2019 levels, with notable acceleration in large corporate business. Our top 20 business accounts are now just 3% shy of 2019 levels, with forward bookings trending above 2019. Small and medium-sized businesses remain ahead of 2019 levels. Group RevPAR reached roughly 93% of prior peak levels for the quarter, with company meetings improving significantly as a percentage of mix. We expect trends to remain strong for the balance of the year with system-wide RevPAR once again surpassing 2019 levels in the fourth quarter. Leisure transient RevPAR is expected to remain meaningfully above prior peaks, driven by solid consumer confidence and continued eagerness and ability to travel. We expect business transient RevPAR to continue to see gradual recovery, primarily driven by rising demand as companies encourage their people to get back on the road. System-wide group position for the fourth quarter is approximately 5% above 2019 levels, accelerating over the last several months, largely due to a robust demand pipeline. Additionally, rates on new bookings are up in the mid to high-teens versus 2019, with group mix continuing to normalize. Company meetings and convention business make up a larger percentage of forward bookings versus the same period in 2019. As we look ahead, we remain very optimistic about the future of travel. Despite near-term macro headwinds, we're not seeing any signs that fundamentals are weakening. Rising demand, coupled with historically low industry supply growth, should continue to drive strong pricing power. Consumers are shifting back to spending on experiences, international borders are reopening and pent-up demand is being released across all segments. Consumers still have an estimated $2.4 trillion of excess savings accumulated during the pandemic, or approximately 55% more in their checking and savings accounts than they did in 2019. Additionally, according to a recent global Hilton study, 85% of business travelers hope to travel as much or more next year, and group position for 2023 is less than 10% shy of 2019 peak levels, with a tentative pipeline up significantly. While the macro environment is more challenging, we are in the midst of a strong rebound with secular tailwinds that should support continued growth. Turning to development, we opened 80 properties, totaling nearly 13,000 rooms in the quarter and achieved several important milestones, including reaching 100,000 rooms in Europe, 25,000 Curio rooms globally and 600 Hilton Hotels & Resorts. All of our brands continue growing at a healthy pace given their distinct identities and compelling value propositions for both owners and guests. According to STR, our year-to-date net additions remain higher than all major branded competitors, demonstrating the power of our disciplined development strategy and the strength of our industry-leading RevPAR index premiums. During the quarter, we signed approximately 20,000 rooms, bringing our pipeline to a record 416,000 rooms, half of which are under construction. Signings were boosted by strong RevPAR performance in the US, which drove greater owner optimism around the recovery. While macro factors tempered international signings, we were thrilled to announce nine landmark agreements to expand our luxury presence across seven countries in the Asia Pacific region, including the Conrad, Singapore Orchard. We also signed agreements to grow our flagship Hilton brand in Malaysia, Waldorf and Morocco in what will become our first system-wide tempo property in Times Square. Construction starts outperformed expectations in the quarter, largely due to better activity in the US as the cost of materials stabilized and demand for residential construction declined. According to STR, Hilton is the only major hotel company to deliver year-to-date growth in its under construction pipeline. For the full year, we continue to expect net unit growth of approximately 5%, and we expect mid-single-digit growth for the next couple of years before returning to our historical growth rate of 6% to 7%. With even more exciting destinations to enjoy, we continue strengthening our value proposition for Hilton Honors members. In the quarter, Honors membership grew 19% year-over-year to $146 million, and members accounted for more than 61% of occupancy, up 200 basis points year-over-year and roughly in line with 2019. We also continue to invest in new innovations focused on ensuring we deliver reliable friendly stays that meet guests' evolving needs. An overwhelming 98% of guests in a recent survey said they are prioritizing wellness activities while on the road. During the quarter, we announced an industry-first partnership with Peloton to add Peloton bikes in every fitness center across all of our 5,400 US properties by year-end. Our extremely talented team works tirelessly to execute on a great strategy, and we continue to be recognized for our award winning culture. Hilton was recently named the number one Best Workplace for Women in the US and the number two on the World's Best Workplaces by Fortune and Great Place to Work, our seventh consecutive year on the list and the only hospitality company on the list. As we begin a new golden age of travel, I think we're better positioned than ever. Our brands are performing at their highest levels, we're running our highest margins in our company's history and we're on track to generate our highest levels of free cash flow yet. Now, I'll turn the call over to Kevin to give you a bit more details on the quarter and our expectations for the full year.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Joe Greff with JPMorgan. Please go ahead.

Chris Nassetta:

Good morning, Joe.

Chris Nassetta:

I'll take it in the order you gave it. Just by way of background, you asked where was it in 2019. It was about 10% of our overall business in 2019. At the moment, it's about 7% of our overall business. And that is largely at this point given the big accounts are coming back by choice because we have chosen to pivot our mix as we've been talking about for the last several quarters a little bit more heavily towards SMB, small and medium-sized enterprises, simply because they are higher rated and more resilient through ups and downs. Having said that, our big corporate customers have been customers of ours a long time, and they're important, but we have weighted that down. I think as they I mentioned that we were most recently only really about 3% off with our top 20, my guess is that 7% will go up a bit, but our objective is to keep it a bit lower than 2019. We're early in that negotiation season, and what I can say at this point in talking to our teams is the vast majority of those accounts are going to dynamic pricing. That's something that we've been doing over a very long period of time, even pre-COVID. We did have the majority of the accounts dynamic, but we had a decent chunk, I want to say, 25% or 30% pre-COVID. And through the last few years, we've moved very aggressively to get more people dynamic. So at this point, the majority of them are dynamic. And I think that all customers understand because of what they're dealing with in every aspect of their life, that is that, at least at the moment, inflation is a real thing and that their expectation is that they're going to have to pay more. And the best – it's early days. The best we think at this point is high single-digit, very low double digit sort of in 9% to 10% range is best we can figure at this moment.

Operator:

And the next question is from Shaun Kelley from Bank of America. Please go ahead.

Chris Nassetta:

Yeah. I think you're right. There's a lot of macro uncertainty. And as a result, it's a little bit early for us to prognosticate on what we think for next year. Not only that, but we're just at the early stages of our budget process, which we'll be going through over the next 60 days or so, to complete by year-end. And so it is premature. Having said that, directionally, I'm happy to comment on, sort of how we and I think about it at the moment on a forward-looking basis. What we're obviously looking at, as I said in my prepared comments, is fundamentals that are currently pretty strong. And while, again, we're not naive to what's going on with the Fed here in central banks in other parts of the world in the sense of trying to tame inflation by slowing economies, we do think we have a reasonably unique setup that is maybe different than some other industries for a period of time that is going to benefit us not just in the fourth quarter, but into next year. What are those things? Not to be too redundant because I covered them briefly, the laws of economics are alive and well, supply and demand. Supply is at historically low-levels, and it's going to stay there for a while, right, just given everything that's going on from COVID and now into the macro concerns. Demand, is picking up. As I covered relative to the third quarter, our expectation is that it's going to continue to pick up into the fourth quarter. Why is it picking up? It's picking up because the segments remain strong. I mean, leisure, I covered it. People still have desire and a lot of disposable income and savings to spend and more flexibility and time. Business transient that you have a huge amount of pent-up demand that's accrued, as well as in the meetings and events segment, you have the international markets opening up. And you have a broader trend of just the secular shift or maybe cyclical shift back to the more normalized spending patterns of everybody is spending less on things and spending more on experiences. And so, that's what we're benefiting from. We obviously got hammered during COVID, unlike other industries. But now we're in this recovery. And those -- I sort of describe it here with our team and with our Board is like, you have headwinds and tailwinds. The headwinds are the macro. The world is slowing down, right? And it has to and they're going to accomplish their goal. But we have tailwinds, okay? We have these tailwinds of like spending more on experiences, international travel, pent-up demand and then just incremental demand associated with people having to run their businesses, gather and meetings and events of all sorts, whether it's social or business. And at the moment, those tailwinds are stronger than the headwinds. And I would say meaningfully stronger, which is why we would continue to recover, we continue to have pricing power. My own belief is we have enough wind in our sails to go for a while. Now, I don't – it depends on the macro and like what happens in the economy and how long does it slow for? How much does it slow? I mean, those are things I don't know. I'm not an economist, and everybody can judge for themselves. But my view is, for the next few quarters at least, those are pretty powerful tailwinds. And we're talking to customers, we're seeing daily data, we're putting our finger on as many pulses as we can to understand it. So that's a long-winded way of saying, I don't know what the answer is for next year. But my view is RevPAR is definitely going to be up, in my opinion. Year-over-year, it will definitely be over 2019 levels. And what we're going to figure out from now to the end of the year as part of the budget process and watching the macro and watching those tailwinds and headwinds fight each other, how much we think it's going to be up. But our view is that, it is definitely going to be up. We did give you some sense quickly on that, being in the mid-single digits, so similar to this year and an expectation for next year. So if you listen super carefully, that was in my prepared comments. So we are trying to give a little bit more visibility there, because we have obviously more visibility ourselves into sort of those things tracking through pipeline and under construction and delivery schedules.

Chris Nassetta:

Sure.

Carlo Santarelli:

Hi, everybody. Good morning. Chris, obviously, you guys have gotten back to returning capital much in the way you did prior to the pandemic with buybacks. But since kind of coming public again, this is the first time where you've operated in an environment where interest rates were something greater than where they've been. So I'm just wondering, as you think about your capital return strategy, you think about your cost of funding, obviously you're debt, there isn't a ton that's really rate sensitive and you have some time before you have any bonds do. How does the new interest rate environment kind of factor into your capital plans?

Carlo Santarelli:

Thanks, Chris.

Smedes Rose:

I wanted to ask you a little bit more about what you're seeing in China and maybe kind of what the development pipeline looks like there. And with rooms, I guess, opening just into a very depressed demand, would you expect developers to pull back there or kind of how are you thinking that plays out over the next year or so?

Smedes Rose:

Thank you.

David Katz:

Hi, morning everyone. Thanks for taking my question. You've given a ton of fundamental information. I get the puts and takes with all of it. I wonder if you could talk about the non-RevPAR fees to some degree as they become just an important part and how we might expect those to behave in the puts and takes around those, as well as the opportunities to grow them into other areas, et cetera, longer term. Thanks.

David Katz:

Understood. And I don't want to break the rules, but there was just one. SG&A came down a little bit, and I hope this is helpful to everyone. I was just curious what the driver of the SG& A guide coming in a little bit was and if it's sustainable in 2023, and then I'll stop. Thank you.

David Katz:

Thanks very much.

Robin Farley:

Great. Circling back to you having more rooms under construction than you did a quarter ago. I know you talked a bit about China and that starts are up there. Can you talk about what's going on with US rooms under construction? And it's just what we hear from others is that it's been so much more challenging to get developers to put shovels in the ground, right, outside of the signings, actually putting a shovel in the ground. And so is what you saw here in Q3 an anomaly in terms of having more refund construction sequentially, or is that something that you think you'll continue to see. Thanks.

Robin Farley:

Great. Thank you for the color. And just for my follow-up question, if I could ask about group. You mentioned your position for 2023 is 5% ahead of 2019. And I think that's a total revenue position. And just given how much disruption there's been that groups that were not necessarily booking as far out because of the disruption from the pandemic, it seems like, I'm just thinking about the impact on your RevPAR for next year, that the benefit to you is that if they're booking closer in, you're going to be able to get these, sort of, current rates as opposed to like historically group, you're stuck with whatever rates you agreed to two years ago. Can you give us a sense of maybe how much the volume is down? Like thinking about like the incremental price that you may get on. I don't know how significant that volume delta between now and what you have in 2019 one.

Robin Farley:

Great. Super helpful. Thank you.

Chad Beynon:

Good morning. Thanks for taking my question. Kevin, you mentioned that one of the areas of the Q3 came from the better European ownership segment, which is probably benefiting from a stronger US dollar and just overall recovery. Can you talk about how you're thinking about this segment, the margins around that maybe in the fourth quarter and beyond? I know at the beginning of the year, there was probably a little bit more pessimism. And I'd say in the last two quarters, this has probably come in ahead of expectations and push numbers higher? Just trying to level set on that. Thanks.

Chad Beynon:

Great. Thank you very much. Appreciate it.

Operator:

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

Chris Nassetta:

Morning.

Chris Nassetta:

Best I remember, they both moved about 500 basis points in the quarter.

A – Chris Nassetta:

Up. Better. Better.

A – Chris Nassetta:

Yeah, I mean, that's not -- the business that gets booked that far out is typically the mega size groups. The association groups and other trade groups, and not so much -- I mean, corporations don't -- they don't book their small meetings or their social events. That's a relatively short cycle. But when you look at the big -- I think I mentioned -- I know I mentioned in my prepared comments, what we're seeing in terms of the mix on a forward-looking basis in bookings on the group side is looking a lot like the mix from pre-COVID, which by definition means we're getting a much bigger mix of the very large meetings and events that are getting booked. It's not surprising. It took some time to get there. And to get the revenue consumed, we'll take more time because these are huge multi-thousand person events, many of them citywide. They just take a long time to plan and implement. But that is definitely starting to happen as you talk to convention, visitor, CVBs around the country that is starting to happen. And it makes sense. Notwithstanding the macro concerns out there, a lot of these groups have to meet to survive. I mean, these are events that it's not just networking, these are revenue raising events that allow these trade groups and associations to be alive. And so they can only go so long in not doing these. And the reason they weren't doing them before was -- and by the way, they're generally very resilient in economic ups and downs, the big mega groups that book multiyears out, because there's too much planning and money involved. The reason that they uniquely during COVID were impacted was health. Like nobody -- if you're having an event that nobody shows up, well then we'll pay the registration fee and then you have a big expense of putting on the event, you not only don't make money, you can lose a lot of money. But now that we're sort of like -- I don't want to be the guy that declares that COVID is sort of over in the sense that it's not gone and there's variance, people aren't making decisions in terms of their behavior, both personally and professionally. And in meetings and events that are factoring for that, I think all of these groups now view it as it's a safe time from a health point of view to do it and they need to do it. And so they're very deep into the booking and planning processes. And so it sort of makes sense. The unique thing was the health issue this time, which we had to sort of get through. But I think at this point, notwithstanding things going on in COVID, I mean, just go into the airport, go into any one of our big hotels or anywhere else, and you can see that when these events are happening, they're very normal. It looks just like it did before.

A – Chris Nassetta:

Yeah.

Q – Duane Pfennigwerth:

Hey, thanks very much. Maybe switch gears a little bit. I wanted to ask you about revenue management systems. One of the things we've heard from operators recently is a preference for Hilton RM systems and the concept of pricing floors in those systems moving up. Can you speak to the investment you've made around RM? What do you think your special sauce is there and how you might be viewing pricing floors and institutionalizing those pricing floors differently than you have in the past?

Kevin Jacobs:

Yes, I was going to say that. But, yes, we probably won't get into the way the algorithms work or any -- I don't even know, I can't even bring myself to say that out loud. But, look, I'd say, we have a long history of being really good at revenue management. And it is part of our special sauce. We say all the time, you can't really unpack all of the different things that we do commercially and say it's that -- that one thing is x basis points of RevPAR index premium, right? It all goes into the premiums that we drive. But, I would say, we, in our history, we have a vendor that we work with. We co-created the algorithm with them. We work -- they've been an amazing partner. We work really hard with them. And we think we're really good at it. We've created the concept of the consolidated center. We drive more of our owners that sign up to be in these consolidated centers where we help them. We don't set pricing for the vast majority of our system, right, because 75% of it's franchise, and it's ultimately up to the franchisees to set the pricing. But we can advise them on how we do it, and we're really good at it and it's part of our special sauce, and I’d probably just leave it at that. I don't know got anything to add.

Duane Pfennigwerth:

Appreciate the thoughts.

Operator:

Next question is from Stephen Grambling from Morgan Stanley. Please, go ahead.

Chris Nassetta:

Thanks, Stephen, good to have you on the call. I mean, not to be pedantic about it, but maybe I'll sound that way. It's just the loss of economics. I mean, I don't know how many times I got asked in the lead up to the pandemic. Why can't you get rate pressure? I'm not going to accuse you of it, but probably got asked a thousand times by you and everybody else. And my comment there is just, there was no compression. You were in an environment where, while supply wasn't high, it was over 30-year averages, and more importantly, demand was low, because you were in this very low work growth environment where GDP was vacillating between like 0% and 2%. And you put those -- you were an equilibrium. I mean, supply and demand, or maybe even a little bit at an equilibrium in the wrong way, and that doesn't give you pricing power.

Chris Nassetta:

And no inflation. Now, you have all the things that allow you to have pricing power. You have very limited capacity for what will be an extended period of time, robust demand growth that we're talking about and broader inflationary pressures. And those things are different to the laws of economics. As they say around here, they're alive and well, and that's what's happening. They were driving the results prepandemic and they're driving this result just a different set of conditions.

Chris Nassetta:

Sounds good.

Brandt Montour:

Hey, good morning, everybody. Thanks for taking my question. Chris or Kevin, I'm curious if you have thoughts about the conversion activity into a potential macro slowdown. And the basis for the question is that, that activity historically has acted sort of countercyclical for obvious reasons, but you guys just had a cycle where conversion activity was really high. So I guess, was there a pull forward of the conversion activity into 2020 and 2021 and 2022, that we would have maybe normally seen in a macro type of slowdown which we could eventually see?

Brandt Montour:

Makes sense. Thanks for all the thoughts.

Chris Nassetta:

Thanks, everybody, for the time. As always, we appreciate the great questions and opportunity to give you a little bit of color on everything going on. Obviously, the macro environment is a little bit uncertain. And like you, we're watching it very carefully. But as you heard today, we remain really optimistic, certainly, about the long term of the business given the position that we're in from a brand strength and margin and overall enterprise-wide point of view. But we also remain optimistic in the short to medium term, just given that these tailwinds that we've talked about several times today are pretty strong. And we continue to see very good trends and very good recovery across all the segments. So we'll look forward after the end of the year to giving you a sense of the fourth quarter, and obviously, a little bit more visibility into how we think about 2023. Thanks again. Have a great day.

Operator:

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.

Chris Nassetta:

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.

Operator:

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

Chris Nassetta:

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.

Chris Nassetta:

Revenue, revenue, revenue…

Chris Nassetta:

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.

Chris Nassetta:

Yes. Thank you.

Sean Kelly:

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?

Sean Kelly:

Thank you very much.

Joe Greff:

Good morning, everybody.

Joe Greff:

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?

Joe Greff:

Great, thank you.

David Katz:

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?

David Katz:

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?

David Katz:

Excellent. Thanks.

Operator:

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

Chris Nassetta:

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.

Chris Nassetta:

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.

Operator:

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

Chris Nassetta:

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.

Chris Nassetta:

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.

Chris Nassetta:

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.

Chris Nassetta:

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.

Operator:

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

Chris Nassetta:

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…

Kevin Jacobs:

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.

Operator:

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

Chris Nassetta:

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.

Chris Nassetta:

Yes.

Vince Ciepiel:

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?

Vince Ciepiel:

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?

Operator:

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

Chris Nassetta:

Good morning.

Chris Nassetta:

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.

Chris Nassetta:

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.

Operator:

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

Chris Nassetta:

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.

Operator:

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.