Hilton Worldwide Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 23, 2024

There are 15 speakers on the call.

Operator

Good morning, and welcome to the Hilton Third Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Operator

You may begin.

Speaker 1

Thank you, Chad. Welcome to Hilton's Q3 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.

Speaker 1

For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10 ks. In addition, we will refer to certain non GAAP financial measures on this call. You can find reconciliations of non GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our Q3 results and discuss our expectations for the year.

Speaker 1

Following their remarks, we will be happy to take your questions. And with that, I am pleased to turn the call over to Chris.

Speaker 2

Thank you, Jill. Good morning, everyone and thanks for joining us today. Our 3rd quarter results continue to demonstrate the strength of our business model as strong net unit growth helped drive solid bottom line performance. Adjusted EBITDA and adjusted EPS both exceeded the high end of our guidance despite softer than expected RevPAR performance. We opened more hotel rooms than any other quarter in the history of our company and surpassed 8,000 hotels in our system.

Speaker 2

We also reached a milestone 200,000,000 Hilton Honors members in the quarter as our award winning program, industry leading brands and exceptional service continued to increase guest loyalty. Turning to results, 3rd quarter system wide RevPAR increased 1.4% year over year, below our guidance range due to slower ramp in September following Labor Day, weather impacts, unfavorable calendar shifts and ongoing labor disputes in the U. S. Business transient RevPAR increased 2% with growth across both large corporates and small and medium sized businesses. Leisure trends continue to normalize with RevPAR declining modestly from post pandemic peaks.

Speaker 2

Group RevPAR rose more than 5% year over year, led by strong demand for both corporate and social meetings and events. For the full year, group position is up 10% with group position in 2025 and 20 26 up low double digits to mid teens. Adjusting for holiday and calendar shifts, we estimate system wide RevPAR grew at 2.3% in the quarter, just slightly softer than the 2nd quarter and with all segments increasing. On an adjusted basis, leisure transient RevPAR increased nearly 2%, driven largely by solid trends across Continental Europe. In the Q4, we expect RevPAR growth largely in line with 3rd quarter driven by strong group bookings, continued business transient recovery and favorable calendar shifts, partially offset by the election and ongoing labor disputes in the U.

Speaker 2

S. Weekday pace for October is tracking up more than 300 basis points versus September's weekday pace, driven by solid business transient performance and group strength. Company meetings and convention business continue to grow as a percentage of mix, driving longer booking windows. Given year to date performance and 4th quarter expectations, we expect forecast full year RevPAR growth of 2% to 2.5% and full year adjusted EBITDA growth of approximately 10%, demonstrating the continued resiliency of our business model. Turning to development in the quarter, we opened a record 531 hotels totaling more than 36,000 rooms and achieved the highest net unit growth in our history at 7.8%.

Speaker 2

We marked several milestones in the quarter, including the opening of our 8,000th hotel worldwide, our 9 100th hotel in Asia Pacific and our 9 100th hotel in EMEA. Home2 Suites, which has more than doubled in supply in the last 5 years, opened its 7 100th hotel and continues to have the largest new development pipeline in the industry. We continue to expand our lifestyle portfolio, opening a number of new hotels in the quarter, including the Graduate Auburn and Graduate Princeton, the first two openings under our newly acquired Graduate brand. We also introduced several brands in new markets around the world, including Spark in Canada, Embassy Suites in the UAE, Canopy in Japan and Hampton in Switzerland, demonstrating the strong value of our industry leading brands in delivering for owners. We welcome nearly 400 luxury properties through our exclusive agreement with Small Luxury Hotels of the World.

Speaker 2

These properties spanning 70 different countries provide Honors members even more opportunities to book unique luxury experiences in sought after destinations across the globe. Including SLH and our existing luxury properties, we now have one of the largest luxury hotel portfolios in the industry. Conversions accounted for 60% of openings in the quarter, driven by the addition of SLH Properties and continued momentum from Spark. We opened more than 20 Spark Hotels in the quarter and now have over 6,000 Spark rooms in supply just a year after the brand opened its first property. Spark now has opened hotels in the U.

Speaker 2

S. And the U. K. And Canada and we recently announced plans hotels in Germany and Austria before the end of the year. The brand's pipeline is 3 times larger than its existing supply and we expect continued launches in international markets to further boost Spark's trajectory, positioning us well for future growth in the premium economy space.

Speaker 2

In the quarter, we signed 28,000 rooms, expanding our pipeline to more than 492,000 rooms, which is up 8% year over year. Excluding partnerships, our pipeline also increased from the Q2. We signed 3 luxury deals in Greece, Japan and the UAE and 35 lifestyle properties, including a record 15 curios. Conversions accounted for more than 30% of signings in the quarter, driven by the strength of Spark and the continued momentum across Curio, Tapestry and DoubleTree. Construction starts remain strong, up 21%, excluding acquisitions and partnerships.

Speaker 2

We remain on track to exceed prior levels of starts by year end with meaningful growth across both the U. S. And international markets. 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 4 times our existing share of supply. As a result of our strong pipeline and under construction activity, we continue to expect net unit growth of 7% to 7.5% for the full year and 6% to 7% for 2025.

Speaker 2

We continue to be recognized for our culture and award winning brands. During the quarter, we were named the top hospitality workplace in Latin America and Asia by Great Place to Work adding to the more than 560 Great Place to Work awards and nearly 60 number 1 wins around the world since 2016. We're also proud to be named the number 2 workplace on the 2024 People Magazine companies that care list and recently recognized as Time's Best Hotel Brand of 2024. Overall, we're very pleased with our performance in the quarter and the milestones we've achieved. Our powerful network of brands continue to be an engine of opportunity for our guests, our owners and our team members and we're excited about our growth into the future.

Speaker 2

Now I am going to turn the call over to Kevin for a few more details on our results for the quarter and our expectations for the full year.

Speaker 3

Thanks, Chris and good morning everyone. During the quarter system wide RevPAR grew 1.4% versus the prior year on a comparable and currency neutral basis. Growth was largely driven by strong international performance and continued recovery in group. Adjusted EBITDA was $904,000,000 in the 3rd quarter, up eight percent year over year and exceeding the high end of our guidance range. Outperformance was driven by better than expected non RevPAR fee growth, lower corporate expense and some timing items.

Speaker 3

Management and franchise fees grew 8% year over year. For the quarter, diluted earnings per share adjusted for special items was $1.92 Turning to our regional performance, 3rd quarter comparable U. S. RevPAR was up 1% driven by strong group performance. In the Americas outside of the U.

Speaker 3

S, 3rd quarter RevPAR increased 4% year over year driven by strong results in urban markets, particularly in Mexico. In Europe RevPAR grew 7% year over year driven by key summer events including the Olympics in France and the European Soccer Championships in Germany. In the Middle East and Africa region, RevPAR increased 3% year over year led by occupancy gains in Qatar and Riyadh. In the Asia Pacific region, 3rd quarter RevPAR was down 3% year over year. RevPAR in APACX China increased 4% led by strong performance in India.

Speaker 3

However, China RevPAR declined 9% in the quarter with difficult year over year domestic travel comparisons, disruptions due to typhoons and limited international inbound travel negatively affecting results. Turning to development, we ended the quarter with approximately 492,000 rooms in our pipeline, up 8% year over year with approximately 60% of those rooms located outside of the U. S. And nearly half under construction. For the full year, we expect net unit growth of 7% to 7.5%.

Speaker 3

Moving to guidance for the Q4, we expect system wide RevPAR growth of 1% to 2% year over year. We expect adjusted EBITDA of between $804,000,000 $834,000,000 and diluted EPS adjusted for special items to be between $1.57 $1.67 For full year 2024, we expect RevPAR growth of 2% to 2.5%. We forecast adjusted EBITDA of between 3 point $375,000,000,000 $3,405,000,000 We forecast diluted EPS adjusted for special items of between $6.93 $7.03 Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the Q3 for a total of $37,000,000 Our Board also authorized a quarterly dividend of $0.15 per share in the Q4. Year to date, we have returned more than $2,400,000,000 to shareholders in the form of buybacks and dividends and for the full year, we expect to return approximately $3,000,000,000 Further details on our Q3 results can be found in the earnings release we issued earlier this morning.

Speaker 3

This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chad, can we have our first question, please?

Operator

Thank you. We will now begin our question and answer session. And the first question will be from Joe Greff with JPMorgan. Please go ahead.

Speaker 4

Good morning, Chris, Kevin, Joe. Back in March at your Investor Day, which felt like a long time ago for a lot of different reasons, you gave a 2025 EBITDA target of $3,690,000,000 When you look at that number and the drivers getting there, what's different about 2025 as you sit here today versus this past March? I guess, in other words, if you and the industry are in this 1% to 2% RevPAR growth range for next year, do you still look at that level of EBITDA as achievable or do you need RevPAR to be somewhat higher than 1% to 2% to get there?

Speaker 2

Yes, that's a good question. Obviously, it's a tad early to be getting into 2025 guidance. As you know, we would do typically do that at the end

Speaker 5

of when we report year end at the beginning of

Speaker 2

next year. But I will give you a high next year. But I will give you a high level sense of it. I mean, we are in the sort of early ish stages of budget season, so lots of work to do. But I would say, I have a reasonably like most things, I have a reasonably strong view of where I think things will end up.

Speaker 2

And so, I'd start with sort of like how do we feel broadly about 2025 and I would say we feel pretty good about it. I've been doing this for longer than I might admit, maybe close to 40 years. I've rarely seen sort of a stronger consensus view on the macro, particularly here in the U. S. But I think broadly, and that macro view is the sort of I think the word resiliency, I use to describe our business.

Speaker 2

I think that word is getting used a lot to describe the economy. And I think there is a very broad consensus view that the economy will continue to be it obviously has been slowing, because that's what the Fed has been trying to do here in the U. S. And to a degree in other parts of the world, but focused on the U. S.

Speaker 2

But it remains strong, resilient and showing positive growth. And I think our consensus view is that next year will be more of that, that we'll have positive economic growth. The odds of a recession at this point, I think are quite low. If you look again at consensus view, I'm not an economist, but that's the view and I talk to a lot of people and I would generally agree with the view. So, I think as we think about as a backdrop, thinking about 2025, what's going to be the macro, which can drive a bunch of our business, obviously.

Speaker 2

We feel pretty good about it. I think when you think about how that's going to add up and I'll sort of give you the punch line and then I'll break it down a little bit by regions and segments. I mean, I think the punch line is my best sense, again, early in our budget season is that next year is going to look a lot like this year from a same store growth point of view. Now I think we'll get there a little bit differently, but I would say at this point, I think next year we'll end up when we're sitting here a year from now, we'll be saying it felt a lot like 2024. If you break that down regionally, I think it again, at a high level, where I think it ends up is the U.

Speaker 2

S. Ends up pretty similar to what we're experiencing this year. I think if you look at Asia Pacific, I think it'll be better, in part, because comps in China are going to get easier and there's a lot of stimulus occurring there. So I do think China will have a better year. And China I mean, APAC ex China remains quite strong as Kevin suggested in his comments and we don't see a lot, that's going to disrupt that.

Speaker 2

And we have some comp benefits particularly in the Q3 in weather and typhoons in Japan and China that will be a benefit. So I think APAC will be better. I think EMEA will be a little bit less good than it's been. I think it's still going to be very good to be clear. My guess is it will probably still lead the pack in RevPAR growth in terms of our mega reasons around the world.

Speaker 2

So it's not that I see a problem there, but I do think it will be somewhat less growth than we saw this year. And when you blend it all together, U. S. About the same, APAC a little bit better, EMEA maybe a little bit worse. I think you end up kind of about where you are.

Speaker 2

If you break it down by segments, again, I'm homogenizing a lot of stuff together. But I think it's again a similar story, maybe with a little bit of nuance. I think on the group side, you're going to continue to see really good strength. I said, we're up in the lowtomidteens in terms of our position going into next year. So we feel really good.

Speaker 2

We'll cross over with more than half the business on the books and booking windows are extending because there's just not enough supply relative to the demand. So I think you're going to see both demand growth and pricing growth in the group segment. I think in business transient, which will be I think in 2nd place terms of the pecking order of growth, again, broadly, I think you're going to continue to see business transient grind up. I do think next year we will likely surpass prior peaks of 2019 in terms of demand levels. So you will see increases in demand.

Speaker 2

All the anecdotal and hard evidence that we're getting from most of our big accounts and our SMB business suggests that and you will continue to have good pricing power there. And then leisure, I think, again, a little bit like this year, you're going to continue to see normalization. What does that mean? That means, I think, demand is sort of flat to maybe even down a little bit. But again, because like in all segments of life, particularly here in the U.

Speaker 2

S, inflation is down, but still stubbornly a bit high, I do believe that we'll continue to have very solid pricing power. So when you blend it all out, I think again it'll look a lot like this year. I think it will depending on segment be balanced as I just described, but if you blend the whole world together, it will be a nice blend of both demand and pricing, the way all that sort of amalgam all of what I just said amalgamates together. And, listen, we spent a lot of time on this. We did our as we always do, every quarter our quarterly business review with the whole world and everybody is in budget season and has got their head down.

Speaker 2

But I think the overarching sort of atmospherics with our teams around the world is consistent with what I just said, feeling pretty good. I mean, listen, we'd rather have higher RevPAR growth always, but we feel that that's pretty solid. And the last thing I'd say to finish my filibuster, thank you for the question, Joe, because I'm answering a bunch. We obviously feel really good about unit growth. We've given some we have given some guidance there.

Speaker 2

We've got a lot of momentum in that area. I'm sure we'll have more questions, but we feel very good about that. And so, the way I would think about it is we're always trying to deliver algorithm growth. Back to your initial question, which is I always I say here, X plus Y needs equal Z. So, same store and unit growth need to add up.

Speaker 2

And I am very confident that algorithm will be alive and well for 2025.

Operator

Thank you. And the next question will be from Shaun Kelley from Bank of America Merrill Lynch. Please go ahead.

Speaker 6

Hi, good morning everyone. Chris, just maybe to hit on the development side, given you just talked a lot about kind of what's going on, on the kind of RevPAR and macro side. Can you just walk us through, obviously, we now have the initial expectation of 6% to 7% for next year, A little bit more about what your kind of underlying assumption is there and sort of how it might factor in possibilities of like what could maybe just walk us through what could be a little bit better if the development environment were to improve? Obviously your starts remain really compelling. And what could be a little bit worse?

Speaker 6

Just what would be the kind of range or bound of outcomes there? Thank you.

Speaker 2

And I'll offer some comments and Kevin runs development, so I should cede to him too. I mean, I do think we feel obviously really good about 6% to 7%. We have more visibility into that than obviously the macro. We have a view on macro that's based as I described on consensus, but we have good visibility. We got a lot of stuff under construction.

Speaker 2

We have a lot of momentum on conversions. So the way I would say is just a couple of points of clarification. 1, the 6% to 7% is organic. That's not sort of incorporating partnerships which is why this year's number is coming in hotter than that at 7% to 7.5%. I would say implied in it is about a third of it would be conversions.

Speaker 2

That's about where we'll end up this year. By the way, if you take out the partnerships, we'll end up at about a third. If you add the partnerships in, we're about 50%. So we don't again expect to repeat that. And that's how we get to it.

Speaker 2

Again, it's a super granular analysis. Other than in the year, for the year conversions, everything is identified, meaning it's in the pipeline, it's happening. And so it's really delivering on that one. And if it's going to deliver next year, it's pretty much got to be under construction right now or in the next there may be a brand or 2 in a place or 2 around the world, including the U. S.

Speaker 2

Where you could still start something maybe with a LiveSmart right now or in the next 30 days and sneak it in next year, but it gets awfully hard. So in terms of the new build stuff, we have a good sense of that. Again, conversions, we have a good sense of a lot of those because like Spark and other, they're in the pipeline. So and then there's a segment of those conversions that are unidentified. We have a really good track record on delivering that.

Speaker 2

Obviously, those numbers at a third have been moving up. We've done more than that historically, but they've moved up from the low 20s to about a third. And we're taking a very disproportionate share of conversion opportunities around the world. And that's because our brands are performing really, really well and we don't see any risk of that. So, what could make it like at the higher or lower end of the range?

Speaker 2

I think sort of intellectually the right way to say it is maybe it has to be ultimately in the conversion space because of what I just said. I mean maybe there's a few more that sneak under construction the end of this year. But I don't think that's going to move the needle a whole heck of a lot. I think it's that we're more than a third in the conversions. I think that's possible.

Speaker 2

I'm not saying I think that'll happen, but I think that's possible. We give a range of 6% to 7% for a reason that there's still a heck of a lot of work that Kevin and our development teams around the world have to do. I hope we make it look a little bit easy. It's not, but we feel really good about that range. And so again, object intellectually to do better or worse

Operator

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

Speaker 5

Thanks. I guess maybe a follow-up on the NUB commentary. I guess how does the pipeline of what's in construction just from a fee per room mix compared to the existing base? And have you seen any change in the development as rates have started to come down here and letting us loosen?

Speaker 3

Yes. Thanks, Steve. I'll take the second part first because it's a little bit easier. I think you are starting to see things free up a little bit in terms of the development environment as rates haven't come dramatically down, but they've come down a little bit and I think people could see a path to a better day on the capital front. And we are actually starting to there's a lot more conversations around change of ownerships, which I think supports what Chris was just saying about conversions because you've had as is normal for this part of the cycle, you've had pretty widespread between bid and ask

Speaker 5

on transactions and transactions drive as you know a

Speaker 3

lot of conversions. And so we're starting to on transactions and transactions drive as you know a lot of conversions. And so we're starting to I think see a little bit of a thawing in bid ask spreads which has led to more applications in the last 30 days or so on change of ownerships and things like that. We're starting to see a lot more activity there which bodes well. And then you first buy the fees per room we're really not seeing any change.

Speaker 3

I mean if you think about the complexion of what we're under construction and what we are delivering, it is still largely on an overall basis the same mix. So we are not seeing dramatic changes in the mix. You are obviously seeing RevPAR growth over time. You are seeing mark to market on fees as contracts roll over. We continue to take fee price in terms of license fees a little bit and the vast majority of our development actually is in the brands where we get the highest fees.

Speaker 3

And so when you put all that in the model, we're really not seeing a change in fees per room and in fact it will grow over time.

Speaker 5

Awesome. Thank you.

Speaker 3

Sure.

Operator

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

Speaker 7

Hey, Chris. Just building on your point that you think kind of 'twenty five looks a lot like 'twenty four. I would assume kind of RevPAR being the primary driver of that. Given the group pace that you guys currently have, and I believe you said low double digits to low teens for 'twenty five in 2016 sorry, 25 in 2026. How do we interpret kind of the way you're thinking about leisure and business transient as we move into 2025 based on kind of what we know today?

Speaker 2

Yes. I would say and I tried to cover it, but I'll click a little harder on it. In group, I think you're going to see a very balanced you're going to see the highest growth rate. I mean, I don't have the number I mean, we don't have a budget yet, but you're going to see comparable growth. I mean, you heard the numbers we're talking about for like Q3 up 5% or 6%.

Speaker 2

I think you're going to be looking at that kind of level of growth in the group segment if you look at the whole world. And I think that'll be pretty balanced as I said between price and occupancy, between rate and occupancy. I think in leisure, again, if you're solving for something in the 2s and that's at 5, I think business transient ends up being sort of more in that range, again with a balance. But if group is in the mid single digits, I think business transient is in the low single digits, but higher than 1%. I mean similar to this year, we're sort of trending it to low 2s, something like that.

Speaker 2

And then I think leisure, which again is I think I said this, maybe I didn't, is still treading way over historical levels. We don't think we'll go backwards. We don't think we're going backwards this year, but we think it's sort of flat. And so I would say my expectation and I already said this would be demand is flat, maybe even a little bit down as you continue to normalize the work environment and the like. But because you have pretty good pricing power and you still have inflationary pressures particularly here, but in a lot of parts of the world, we feel like we'll be able to push rate a little bit.

Speaker 2

And so I would say, we think leisure, again, it's early, right? I don't have a budget in front of me, but we've talked a lot about it. I think leisure is positive, but not much positive. So I mean, so I would say it's like very, very modestly positive. And when you put those three things together, that's really not that far off of sort of where we're ending up this year.

Speaker 2

I mean, I think that's why I'd say, I think when you finish 25%, at least sitting here today, it feels an awful lot like 24%.

Speaker 7

I appreciate that, Chris. Thank you.

Speaker 2

Yes.

Operator

And the next question is from David Katz from Jefferies. Please go ahead.

Speaker 7

Hi. Good morning, everybody. Thanks for taking my question. Yes.

Speaker 2

Good morning.

Speaker 7

Chris, you mentioned earlier that you're getting an outsized and it's obvious amount of conversions. Can you provide just a little bit of insight on how you're doing that? Is that just good old fashioned shoe leather, any competition or whatever other euphemism? Or are there some specific drivers because we are obviously observing key money more carefully across the industry than usual at Shire.

Speaker 2

Yes. I mean, listen, Kevin may want to come over the top on this because he and his team are doing the shoe leather. I do think it's partly shoe leather. I mean, listen, I think we're I say to our teams all the time, like our philosophy and how we run the company is we're pretty scrappy, we're pretty gritty. We don't take anything for granted.

Speaker 2

So, we get out and hustle. So, our teams hustle. I don't know what everybody else is doing, but we're hustling. We've built really good relationships. So a lot of this business, not all of it, particularly in Spark, because they're bringing a bunch of new folks into the system, which are going to be hugely beneficial over time as we saw with Hampton decades ago.

Speaker 2

But we have really solid relationships where we've done a really good job with people and doing what they ultimately are looking for, which leads to what I think is really driving it, which is performance. I mean, you're signing up for these deals and not to be pedantic, but these are at the short end generally, very short end, 10, but more likely these are 20 plus year relationships that you're entering into with no real way out. And so these people are investing 1,000,000,000 of dollars when you aggregate all of this development, even all the conversions and they want to have confidence that when they're signing up, they're going to make money, but they're signing up for a long time that they've got the right system that they're signing up for. And so the truth is our track record is really good. Our brands are performing really well.

Speaker 2

Our market share is the highest it's ever been. It's significantly higher than any of our competitors. And so that doesn't mean we don't have to compete. I say to the team all the time, well, for this cool, like why don't we win every deal? Why should we why are we only winning half the deals even though we're whatever 6% of the global market?

Speaker 2

I'll let Kevin explain himself on that. But getting half the business is pretty darn good. And I think it ultimately comes down to our ability over a long period of time to be able to deliver performance for owners because we can be witty, charming, scrappy, gritty, entrepreneur. We can be all the things we think we are or hope to be. But in the end, it's about performance.

Speaker 2

They're investing money in these assets or in this relationship with us to drive returns.

Operator

Thank you.

Speaker 5

Thank you.

Operator

The next question will be from Robin Farley from UBS. Please go ahead.

Speaker 8

Great. Thanks. Chris, I wonder if you could talk a little bit about how your visibility on business transient and leisure transient kind of compares to what it would have been in 2019? In other words, you feel like you have more visibility or less visibility today? And then if I could squeeze one in for Kevin, just on the comments about what drove better EBITDA than guide, would love to hear about that non RevPAR fees and then also I think there was some timing benefit there as well.

Speaker 8

Thanks.

Speaker 2

Thanks, Robin. I would say the answer is we don't have a tremendous amount of incremental visibility. The place we obviously have the most visibility is in group, which is why we give you those statistics. That business is pretty darn sticky. We have found recently and over long spans of time people have needs, but they still have pent up needs.

Speaker 2

So, we feel really good about that. But leisure and transient I mean leisure transient, business transient, our visibility is limited, certainly limited to 60 or 90 days out. But then anecdotally, particularly with business transient, just talking to all of our customers, which we do all the time, our sales teams, I do, others in senior management do, we survey them. We do have data that tells us what they're thinking and that gives us a rationale for what I'm saying to you. I think it will happen next year, but they haven't booked the business yet.

Speaker 2

Unlike groups where they booked it, they haven't booked it. And then leisure is where we have the least where we have the least visibility into the future. Now, the reason I started my whole answer in my filibuster with consensus view was obviously not lost on you or anybody else, particularly in Leisure and Business Transient, as it relates to how we think about next year, a lot of it, so goes the economy to a degree, so goes those segments. So that's why it always has to start with a view consensus view of like what the heck do we think is going to happen in the economy. It's not that the group business is immune to it.

Speaker 2

It's just stickier. It is not as immune to short term swings over time as the other segments. So that's it's about what I mean, if we gotten better, are we do we have better listening posts with our customers than we might have had 5 years ago? Yes, I think so. I think we're better at understanding what's going on.

Speaker 2

But the reality in terms of booking visibility is about the same.

Speaker 3

Yes. And then on the, Robert, on the non RevPAR driven fees, we were clearly we were pleased with the performance if RevPAR came in for all the reasons we talked about under our expectations, the non RevPAR driven fees. If you think about performance in the credit card business, in our purchasing business, things like that was all sort of above algorithm, if you will, above the overall rate of the business. And then on timing, it was about half the beat from the Q3 were timing items if you get behind it. And so that's about all I would say that.

Speaker 8

Thank you.

Operator

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

Speaker 9

Hi. Thank you. Good morning, Smedes Rose. I just wanted to ask hey, good morning. You talked a lot about just group going into next year and it has been and continues to be, it looks like kind of a silver lining in the space.

Speaker 9

And I was just wondering when you look at what you're seeing now for 25 group, I guess particularly in the U. S, is there is it driven more by incremental citywide conventions? Is it more smaller groups that I think have been doing well for a while? Is there anything just kind of in particular that you could call out that's helping to drive that continued strength there?

Speaker 2

I'd say it's a little bit of everything if you think about what's going on. Certainly, the big citywides are picking up and not surprisingly, they just take that and we've been saying this on every call, it just takes longer in gestation to get those that business going because they book multiple years in advance, they spend 1,000,000 of dollars planning these events and they went for 2 or 3 years unwilling and or unable to do that. And so we're certainly seeing wind in our sails from that. But we're also seeing really good social group business. I mean people still want to get out and see people.

Speaker 2

I mean, that is still a thing. And then I'd say corporate meetings are we're seeing really terrific demand. I mean, even though the workplace is sort of normalizing somewhat, it is not going back to what it was and the reality is a lot of people have needs and that they're making sort of making up for a time when they were more remote and they need to do meetings for innovation and culture building and the like. And a lot of people have sort of changed pretty permanently, us included by the way, our work environment in a way where we take less space because people are more mobile and it requires them needing space outside of their own office footprint more than historically they have. And so that's a nice little wind in our sail as well.

Speaker 2

So that's a long way of saying it's broad based. I mean there's it's not one thing driving it.

Speaker 9

Great. Thank you.

Operator

And our next question is from Lizzie Dove from Goldman Sachs. Please go ahead.

Speaker 10

Hi there. Thanks so much for taking the question. I wanted to go back to the unit growth piece, which is obviously very strong. I believe the majority of the pipeline is coming from international just about. So a little bit of a refresh of just where you see the key opportunities, the key markets driving that international expansion, maybe a refresh on the China piece as well with the stimulus.

Speaker 10

And just is there any way that you kind of have to adapt your portfolio as you take those brands to different markets?

Speaker 3

Yes. So I mean, I guess the end, Lizzie, thanks for the question is the easy part is, yes, you do have to adapt your brands and your prototypes and your room sizes and things like that to markets around the world. They still maintain their essence and their positioning within the brand ladder and their swim lanes and things like that, but you're obviously adapting them around the world. I think that sort of if you think about the complexity of the pipeline, it's about it's a little over half, call it, 55 or so percent outside the U. S.

Speaker 3

The stuff that's under construction, just given the dynamics of some of the things that are going on around the world, our limited service business in China, things like that, it's about 80% of what's under construction is outside the U. S. Deliveries this year are going to be sort of more like the pipeline, sort of think about it as mid-40s percent in the U. S. And 55% or so outside the U.

Speaker 3

S. I think the China business is doing great. We think both approval starts, I'm jumping around a little bit, but sorry, it's a broad question. Our approval starts and opens, we think will all be up in China this year. We're even though there is a macro slowdown in China and you read a lot of headlines about real estate bubbles and the like in China, what's going on a lot in China is they are trying to find different uses for some of these buildings and some of the real estate that's been developed in our business, particularly the limited service part of our business, both in our master limited partnerships and in our Hilton Garden Inn business is able to take advantage of a lot of the adaptor reuse of those businesses of those pieces of real estate.

Speaker 3

So and I think when you take a step back from it though, I know you are relatively new to the coverage, but you have gone through the materials and we outlined in our Investor Day is kind of over the time period that we gave you for that. We think, call it, half of the nug, 3 to 3.5 points will be in the Americas, a point or so will be in EMEA and 2 points will be in APAC. And that will move around a little bit year to year. But generally speaking, those will be the trends. And then you'll see in the Western world more conversions.

Speaker 3

In the developed world more new builds. In Asia, we're shifting our business to APAC outside of China. So a lot of growth opportunities there, a lot of growth opportunities in India, a lot of growth opportunities in the Middle East. So we're really seeing the benefit of a diversified set of products that we can deploy and when certain parts of the world are strong, we can deploy in those parts of the world when certain parts slow down diversification is a beautiful thing and we're continuing to grow through it.

Speaker 10

Thank you.

Operator

And the next question is from Brandt Montour from Barclays. Please go ahead.

Speaker 11

Good morning, everybody. Most of my questions have been asked and answered. I'm curious on SLH. I know it's relatively new, but that's a big chunk of luxury hotels in your system on the website. People can earn and burn their points there.

Speaker 11

Curious how the early traction has been, if you've done anything sort of out of the norm in terms of marketing those hotels to loyalty members and how you're feeling about the start there?

Speaker 2

Yes. I mean you're right, Brandon, it is super early, but in the sense that they just went in and sort of the middle end of the summer and a lot of those properties are resorts in very unique locations that book way ahead of time. So, there's only so much data we have just given the time of year it came in. But the data that we do have is super good, meaning that our customers are engaging with it. They're looking at the availability of these properties.

Speaker 2

Now many of them this summer weren't available because they had already been booked given when they came in the system. They are where they did utilize it, they utilized it in a very healthy way for redemptions, which is exactly sort of the behavior set that we're looking for. And so I'd say, obviously a long way to go, but we feel very good about it. The ownership community and SLH feels very good about the start of the relationship. But I think as we get into the get a little bit of time, a quarter or 2 and then certainly get into the spring summer of next year, I think you'll see some real uptick.

Speaker 2

But you go in like if you go on our app, I happen to do it. I was in Italy and Tuscany to meet some friends where we have a few hotels go in the app and like hotels nearby me and we went from having like 3 hotels to like 40 hotels. So and many of them are really small and very unique, but that's exactly what for a leisure high end leisure customer they're looking for. And so it gives us significant enhancement in terms of shots on goal for people to book and importantly for people to be able to dream that are road warriors and have a place to realize those dreams.

Speaker 11

Very good. Thank you.

Operator

And the next question is from Michael Bellisario from Baird. Please go ahead.

Speaker 12

Thanks. Good morning.

Speaker 2

Good morning, Mike.

Speaker 12

Chris, you sort of alluded to it, but just wanted to dig into RevPAR index and pipeline share a little bit more. And is it fair to assume that in a slower RevPAR backdrop that's maybe actually better for your business, at least on a relative basis? And then any similarities or differences that you see today compared to 2018 2019 when RevPAR was last and kind of stuck in 1st year? Thanks.

Speaker 2

Yes. I mean, it's interesting. I said earlier, so I don't want to contradict myself that we obviously always like to see RevPAR higher. And so I will state again, I'd always like to see it higher. But having said that, there are and you alluded to it in the approach to the question, there are benefits of the environment we're in.

Speaker 2

And we saw those benefits going back to that time where typically we are able to deliver, if we do our jobs, better share in terms of performance on our existing assets and we take a in more difficult environments, environments where financing is less available, we end up disproportionately getting more conversions and more of what is available for new construction because our brands are just more financeable. And so that is certainly what we've been experiencing. If you look at the numbers across the board on development, whether you break it apart on new construction or conversions, you look at market share numbers which continue, I mean they're very high. So getting them they continue to grow. We've grown market share every single year in the almost going on 18 years I've been here.

Speaker 2

So the higher you go, the harder it gets, but we're super focused on that. So I'm not giving you a specific answer because there isn't one, but this environment is not has not is not terrible for us in that way. And the really nice thing as I think we demonstrated in the Q3 and we'll demonstrate for the full year and I think we'll demonstrate again next year and the year after is the model is really resilient that even I mean think about it even in the environment we're in where we're going to be in the 2s on same store growth, we're going to deliver a circa 10% EBITDA growth and higher than that in EPS and free cash flow. That doesn't I mean that doesn't feel so bad. Imagine what can be done in even better environment from a same store point of view.

Speaker 2

So that's not as I said, I know I'm not answering it specifically, but these conditions are we feel like whatever I guess I'd finalize it by saying we can't determine the macro. What we can do always is outperform competition. And so we feel good about in this environment our ability to do that. We feel good about that and our job is in every environment to do that. But we yes, and we will.

Speaker 2

But we feel we're not this is not a terrible environment in terms of our ability to deliver.

Operator

Thank you. And the next question will be from Meredith Jensen from HSBC. Please go ahead.

Speaker 13

Yes. Hello. I was wondering if you could speak a little bit about the occupancy and rate sort of offset. I know in the past you've spoken quite a bit about pushing rate and I'm wondering how that conversation with franchisees and hotels have gone shifted over the past few months? Thank you.

Speaker 2

It hasn't really shifted. I mean obviously inflation is down broadly use the U. S. Because it's our biggest market and we're here sitting here in the U. S.

Speaker 2

And inflation is not running 8% to 10%, but it's still running 4% plus against the target of 2%, which I think personally will be a long time coming just because of the underlying strength in the broader economy. And one thing we didn't talk about yet is the basic fiscal spending between chips and inflation reduction and infrastructure. You put all that stuff together, forget the private sector, there is a huge amount of public sector spending going on. And I think all of that sort underpins growth in nonresidential fixed investment, which drives a lot of demand in our business, which I think continues to give us a decent amount of rate integrity. And so our expectation is while that isn't is moderating from the hypercharge levels that you saw generally of inflation across a lot of sectors and we expect the same thing in ours.

Speaker 2

We still expect, that there's a decent amount of pricing pressure. And so as we think about by we have very sophisticated revenue management models that it's not that Chris Nassetta with his hand on the button deciding the rate of every room every night, thankfully. But we have very sophisticated systems, but those systems and all of our science data scientists here at Hilton still believe that given those conditions in most segments at most times there is good pricing integrity. With the one area that I talked about where there's probably less by nature, if you think demand might be flat or going down a little bit as leisure normalizes, particularly on weekends, there may be a little bit less pressure there. But broadly, as I said, I think when we finish this year and next, I think leisure rates will be up, not a lot, but I think leisure rates will be up just because of the underlying macro conditions.

Speaker 2

I don't know if that answered it, but the short answer is not nothing material that we see that's different in the last few months certainly.

Speaker 13

That's super helpful. Thanks a lot.

Operator

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

Speaker 14

Good morning. Thanks for taking my question. Just a quick one continuing on development, the guide for key money or contract acquisition costs at the beginning of the year $250,000,000 to $300,000,000 and that came down this quarter. Obviously, we only have 2 months left in the year. So you have a good sense of where things are from a key money standpoint.

Speaker 14

Kevin, I know this is something you guys highlighted at the Investor Day, but is this more of just a delay to 25% or is this just more progress in your goal to reduce key money as a percentage of NUG? Thanks.

Speaker 3

Yes, sure. I mean, look, I think key money in terms of percentage of NUG and the more strategic bid, no change in our approach. I mean, we still use key money on less 10% of our deals. We use them when we have to when it gets competitive, but 90 plus percent of the deals don't have anything associated with them. It's just a little bit of timing, right?

Speaker 3

We're getting closer to the end of the year. We have more visibility into what we think is going to happen. A little bit of a couple of projects that we have in the works that we think are more likely to happen next year. And if you think about last year was a bit heavier year because of some strategic projects. This year will be a little bit lighter.

Speaker 3

I think going forward, if you think about next year, probably somewhere in between last year and this year, but really no change in strategy.

Speaker 14

Thank you very much.

Speaker 3

Sure.

Operator

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

Speaker 7

Kevin, a question for you. What are your ROI targets for brands specifically developing them internally versus buying a brand? And then related to that, on these recent, I'd call them tuck in brand acquisitions, are these initially accretive to earnings? Or if not, how long does it take for them to be accretive? Thank you.

Speaker 3

No, I think, look, there's a lot there, Patrick. We've talked about this a lot. I think when you think about, we haven't done a lot of acquisitions. So if you think about broadly, you alluded to sort of buy versus build. Obviously, the ROI is near infinite when we build these brands and build them over time organically into multibillion dollar businesses.

Speaker 3

It's sort of you do a buy versus build analysis, but it almost always suggests build from a pure ROI perspective. And the last couple of deals we've done, they've been basically accretive out of the box, right? I think we disclosed that on Graduate, if you'll recall from the press release that it's accretive out of the box. So on both of these things, they were very specific to things we wanted to tuck in strategically. We're able to take advantage of a little bit of distress in the environment to buy them really well and they were accretive right away as I said.

Operator

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

Speaker 2

Yes. Chad, thanks. And to everybody that joined, thank you for the time. Obviously, a lot going on in the world, but we're really happy with how the Q3 worked out. We feel good about the 4th and the full year.

Speaker 2

And as we've talked about quite a bit today, feel good about the setup for 2025. We'll look forward to catching up with you after the year is out and be a little bit more specific on 2025 at that point. And I hope everybody has a good end of the year and great holiday season when you get to it. It's funny to hear myself say that, but it's that time of year. Anyway, thanks again for the time today.

Operator

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

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Earnings Conference Call
Hilton Worldwide Q3 2024
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