Hilton Worldwide Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Hilton 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. 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.

Speaker 1

Thank you, MJ. Welcome to Hilton's 4th quarter and full year 2023 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 Q4 and full year results and discuss expectations for the year.

Speaker 1

Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Speaker 2

Thank you, Jill. Good morning, everyone, and thanks for joining us Today, we are happy to report a great end of 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 year over year to the highest level in our company's history. During the year, we launched 2 new brands, introduced new innovations, expanded our partnerships and opened a near record number of rooms, all of which further strengthened our network and flow enabling us to return $2,500,000,000 to shareholders.

Speaker 2

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% boosted by gains in both rate and occupancy. As expected, leisure transient RevPAR increased 3%, decelerating modestly versus the Q3, largely due to seasonality.

Speaker 2

Compared to 2019, system wide RevPAR grew 13.5% in the quarter, up more than 200 basis points sequentially compared to the Q3. 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 Q3. Business transient continued to recover growing 5% versus 2019. As expected, leisure RevPAR remains strong, growing 25% versus 2019 and decelerating sequentially due to calendar shifts.

Speaker 2

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 U. S. 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.

Speaker 2

For 2024, group position is up 16% year over year with small company 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, 24,000 rooms in the 4th quarter, marking the largest quarter of openings in our history. We achieved several milestones in the quarter, including the openings of our 250th True Hotel and our 1 thousandth Hilton Garden Inn. We also reached 70,000 rooms globally for Home2.

Speaker 2

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 1000 rooms and over 100,000 square feet of meeting space, including the largest hotel ballroom in Georgia. For the full year, we opened 3 95 hotels totaling approximately 60 3,000 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 opened more hotels in 2023 than in any other year.

Speaker 2

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 U. S. We continue to have more rooms under construction than any other hotel company with approximately 1 in every 5 hotel rooms under globally slated to join our system.

Speaker 2

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 2 newest brands, Spark and Live Smart 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 are 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.

Speaker 2

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 de booking website along with targeted benefits designed specifically for SMBs. The program launched in January With thousands of companies registering in just the 1st few weeks, SMBs account for approximately 85 percent 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.

Speaker 2

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 STIRR 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 8 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.

Speaker 2

Additionally, for the 7th 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 pipeline and accelerating net unit growth, we are 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.

Speaker 3

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 5.7% versus the prior year on a comparable and currency neutral basis. Growth was driven by a strong international performance and continued recovery in group and business transient. Adjusted EBITDA was $803,000,000 in 4th quarter up 9% year over year and exceeding the high end of our guidance range. Outperformance was driven by better than expected fee growth, largely due to better than expected Rev performance and license fee growth.

Speaker 3

Management and franchise fees grew 12% year over year. For the quarter, diluted earnings per share adjusted for items was $1.68 Turning to our regional performance, 4th quarter comparable U. S. RevPAR grew 2% year over year with performance led by both business transient and group. Leisure transient in the U.

Speaker 3

S. Was flat with difficult year over year comparisons. Relative to 2019 peak levels, U. S. RevPAR increased 11% in the 4th quarter, improving 100 basis points versus the 3rd quarter.

Speaker 3

In the Americas outside the U. S, 4th quarter RevPAR increased 7% year over year with urban markets delivering RevPAR growth of 17% boosted by strong group business. In Europe, RevPAR grew 10% year over year with solid performance across all segments. Large events, including the Rugby World Cup in Paris, drove strong group performance across several key cities. In the Middle East and Africa region, RevPAR increased 12% year over year led by strong rate growth.

Speaker 3

The COP28 Climate Change Conference in Dubai, along with solid trends in Egypt, continued contributed to strong performance in the region. In the Asia Pacific region, 4th quarter RevPAR was up 42% year over year led by continued demand recovery across China and Japan and notable strength across all segments. RevPAR in China was up 73% year over year in the quarter with RevPAR in the Asia Pacific region, excluding China, up 18% year over year. Turning to development. As Chris mentioned, for the full year, we grew net units 4 point 9% and ended the year with over 462,000 rooms in our pipeline, which was up 11% year over year with approximately 60% located outside the U.

Speaker 3

S. And nearly half under construction. Looking to the year ahead, we are about our strong development story and the robust demand for Hilton branded products in both the U. S. And international markets.

Speaker 3

Moving to guidance. For the Q1, we expect system wide RevPAR growth of 2% to 4% year over year. We expect adjusted EBITDA to be between $690,000,000 $710,000,000 and diluted EPS adjusted for special items to be between $1.36 and $1.44 For full year 'twenty four, we expect RevPAR growth of 2% to 4%. We forecast adjusted EBITDA of between $3,330,000,000 $3,380,000,000 We forecast diluted EPS adjusted for special items of between $6.80 $6.94 Please note that our guidance ranges do not incorporate future share repurchases. Moving to capital return, we paid a cash dividend of $0.15 per share during the Q4 for a total of $158,000,000 in dividends for the year.

Speaker 3

For full year 2023, we returned $2,500,000,000 to shareholders in the form of buybacks and dividends. In the Q1, our Board authorized a quarterly cash dividend of $0.15 per share. For the full year, we expect to return approximately $3,000,000,000 to shareholders in the form of buybacks and dividends. Further details on our Q4 and full year results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks.

Speaker 3

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

Operator

Certainly. Thank you. The first question today comes from Joe Greff with JPMorgan. Please go ahead.

Speaker 4

Good morning, guys. Thanks for taking my question. Chris, I was hoping you can talk about M and A of brands. Obviously, there was an article earlier this week suggesting you might be close with the Graduate withheld brand. If you want to comment specifically on this, but I would just love to get your overall view on opportunities for you to acquire brands and then since it's something that you've been sort of not doing at all, maybe you can revisit some of the criteria for brand M and A?

Speaker 2

Yes, I'm happy to do that, Joe. I figured with all the rumor mill, I'd get asked this question. Obviously, 1st 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 and A is really the same as it's always been.

Speaker 2

If nothing, we've been consistent and I've been consistent in what I've said. And that is, 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. We have a very tough filtration system and that filtration system at a high level is number 1, does something really is something Additive from the standpoint of the portfolio 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 1. And number 2, and importantly, 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.

Speaker 2

I've said that to everybody and nothing has 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 than normal that probably I think presents more opportunity to do things like 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 to know.

Speaker 2

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.

Speaker 4

Thank you.

Operator

Thank you. The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Speaker 5

Hey, guys. Great. Thanks for taking my question. Chris, you obviously you talked about the strength in business transit and group that you kind of foresee For 2024, given those mixes respectively are down a couple of 100 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?

Speaker 2

Yes. I think broadly, if you look at the segments and I said it at a very high level in the prepared comments, feel really good about all the segments. Business transient continues to recover. I mean the big corporates finished the year still a bit off, probably 5% off of where they were, but still but growing. Every segment in that world is a little bit different.

Speaker 2

I mean most segments were relatively strong and neither back to or beyond prior to pandemic levels with the exception of probably banking technology and consulting, which were less, but blended together, they weren't that far off. The SMB segment is at or above. Most of those segments are at or above. And when you blend all that together for the Q4 full year from a RevPAR point of view, business was ahead, but from an occupancy point of view, it was still a bit behind. We do think that by the time we finish This year assuming sort of the broader consensus view of a reasonably soft landing that by the time we get to the end of the year, we think you'll be at more normalized levels of demand.

Speaker 2

And we believe given very low supply numbers that are continuing and continued decent economic growth that we're going to continue to have pricing power there and everywhere else. On the group side, I gave you a snippet of like group position being up 16%. That's the best leading indicator. Anecdotally, sitting around this very table last week with all our teams from around the world and all of our commercial and sales leads, I've said it, the demand is off the hook. I mean, the demand is really strong.

Speaker 2

Every quarter is the next new high watermark in terms of bookings for all future periods. So we are seeing very good strength. We believe the group demand is quite sticky in the sense that a lot of it still is pent up demand that are things people haven't done for a long time that They need to do in addition to incremental new demand. You're obviously seeing in the group space the big association citywide business start come back that super sticky business because of the timeframes associated with the planning and the cost. So we Group will definitely lead the system and as a result you asked about rate which I'll cover on both.

Speaker 2

We think rate will be very strong. Just there is so much demand and there is just a limited amount of space if you think about it. Not only is supply low broadly, but supply of hotels over the last 10 years that have been built that have a lot of meeting space It's been anemic and so you have a lot of demand. I mean, I was sitting around this table yesterday and we're planning our own Conferences for like sales conferences and general managers can go all these things that we have to start going out 3 4 years because we can't get space in our own hotels. So demand is good as a result with very limited supply, pricing should be good.

Speaker 2

And then On leisure, we do think it will grow. We do think probably more in rate in volume because the consumer, particularly our consumer, which is our median income levels reasonably good. It's in the $140,000 to $150,000 $150,000 range. They still have plenty of money, plenty of desire to travel. And again, there's just not a lot of new supply.

Speaker 2

So the fundamental economic setup is good. Obviously, it got Supercharged coming out of COVID, so it will probably, we think it will grow more rate than volume, But it will grow, but it will be 3rd in line after continued recovery starting with group, then business transient, then leisure transient. So, We feel really good about again, based on a broad consensus view that we have a rational sort of reasonably soft landing and continue to see decent slowing broadly, but decent economic growth in 2024.

Speaker 5

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

Speaker 4

Correct. Okay.

Speaker 2

That was it. 5.5 to 6 With a strong indication to the high end of that is pure organic. I said in my prepared comments, we think SLH depends on how rapidly hotels come in that which is why there's a range 25 basis points to 50 basis points on top of that. And if we were to do anything else, it's all on top of that. But that is the 5.5 to 6 or leading towards the high end of it is pure organic.

Speaker 5

Great. Thank you, Chris.

Operator

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

Speaker 4

Hi, good morning everyone.

Speaker 6

Good morning.

Speaker 4

Chris, Wondering maybe you could build off of the last part there about SLH. This is a little bit of new territory, obviously, something that's Pretty selective, but just A, can you give us a little bit more about the deal itself? And I think it sounds economically Quite similar to what we see in the normal kind of in the normal course on the fee side, but any color you can provide there? And then I think more importantly is just Big picture, do you think there are other collections and places out there that you could utilize your distribution capability and help other systems that may exist out there, but not overlap directly with owners, which I know is going to be a sensitivity point for you?

Speaker 2

Yes. Well, first of all, on SLH, as you hopefully can 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 align super well for us.

Speaker 2

We're going to be able to bring the majority of 500 hotels that are super unique, Small, obviously, small luxury, it's a small luxury, but very heavy resort orientation and very heavily oriented to very niche markets that are super hard to get into. To very niche markets that are super hard to get into. And so when you look at it visavis the overlap of our We have 100 open luxury hotels. We have about another 60, 70 in the pipeline. So, terrific portfolio and growing super rapidly.

Speaker 2

When you look at the overlap, it's 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 book it 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 and all the best we think based on all the work we did are going to really love it and we're excited to start ramping up and 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.

Speaker 2

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 is in this case, we as I said in my comments, we'll get paid on the business we generate, which we think will be significant. I mean it'll take time to ramp that up, it'll be significant. And 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.

Operator

Thank you.

Speaker 4

Sorry, just as a follow-up there, Chris. Any thoughts on, again, sort of future opportunities that could let look like this to sort of leverage the platform? Yes. It's just

Speaker 2

a 3 or Part question.

Speaker 4

Sorry about that.

Speaker 2

That's all right. We got time. I think they're always I mean, we're looking at lots of different things all the time. I mean, Since the IPO roadshow, 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.

Speaker 2

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 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.

Speaker 7

Thank you

Speaker 4

very much.

Operator

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

Speaker 7

Hi, good morning everyone. Thanks for taking my question. Good morning. Just to follow on the same theme, is there a Case or strategy or thought around whether SLH could either naturally or strategically transition into a business Use as well, I admit I've not stayed in 1. Is there any particular barrier to that as business people tend to choose smaller and smaller hotels, more unique properties over time.

Speaker 2

Listen, absolutely no barrier. I mean, I emphasize the resort because you look at it as a percentage of their rooms and number of hotels, a lot of them are in resort locations. By the way, there's over 500 hotels and growing by the way. It's not like it's static. It's growing and we think we're going to help them grow at a much faster pace by being in our system.

Speaker 2

So we think this will continue to be 5, 6, 7 and continue to grow. There are plenty that are in urban locations around the world that are small luxury boutique hotels, just percentage wise it's more resorts, but there are there's a very good representation, in urban environments around the world and some really interesting urban environments that we don't have luxury exposure to. And so we absolutely believe that this is also crosses over into business transient. It will also drive some group business, but prototypically these hotels have very limited meeting space just by the very nature of what they are. I mean they have some boardrooms and small meeting spaces.

Speaker 2

So we'll be it'll drive Some meetings and events business, but I think it will be a lot of leisure and then 1st and foremost and then business transient. But I think business transient will be a meaningful component of it, particularly in those hotels and in the right locations.

Speaker 7

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.

Speaker 2

I think if you looked at the map, I mean, you can go on rather than me describing, you can go on their website. I mean, Right now it's sort of like 60% of it is in Europe, 20% in the U. S, 20% in APAC. The major cities in those markets they have pretty much all of them have some representation. What you'll find if you went and then double clicked on that is that locations within those cities are pretty unique just because of what they are and where they are.

Speaker 2

So they're in niche, Super hard to duplicate locations within most of those major cities.

Speaker 7

Okay. Thank you very much. Appreciate it.

Operator

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

Speaker 6

Hi, thanks. I just had a quick question on the again on SLH, to reach the higher above the 6% unit growth that you said you're comfortable with, what sort of penetration would you need to reach Within the SLH portfolio, I guess, in year 1 to get to the 6.25% or 6.5% growth that you mentioned with this potential with this partnership?

Speaker 2

Yes. 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 you'll get all of execute against all of the technology requirements and the like.

Speaker 2

So again, as I said, we feel good about the high end 5.5% to 6% without any of those, the quarter to a half 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. In the next call, we can probably try and refine it a bit. We'll have a better sense.

Speaker 6

And I just Kevin, could you just share with us what the year end share count was?

Speaker 3

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

Speaker 6

Okay. Thank you.

Operator

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

Speaker 8

Great. Thanks for taking my question. Just sorry, one more on SLH.

Speaker 2

That's okay. Listen, we're excited about it too. So we're happy to

Speaker 6

answer it.

Speaker 8

Exactly. No, 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 They

Speaker 2

have to opt in and we and the team at SLH have already started a process of communicating with them in that process, but they have the option to opt in. Now we think, as does SLH, as at least The owners that we've discussed with that it's a compelling value proposition for them to be opting in, which is why we have confidence that the majority of the system ultimately will come in. But they have the option to opt in or not.

Speaker 8

Okay, great. And so just

Speaker 3

to quickly follow-up on that.

Speaker 8

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 to your distribution system.

Speaker 2

All of that. They're branding with us. The SLH brand is maintained. So that's the same branding they've had. We're just giving them access to 100 of millions of customers, a loyalty program, all of our sort of commercial booking channels and the like, which obviously booking channels and the like, which obviously has proven to be, given the market share we drive in our system, quite a compelling value proposition.

Speaker 2

So we feel good about it for the same reasons. We feel good about all of our development progress.

Speaker 8

Congratulations.

Speaker 2

Thanks.

Operator

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

Speaker 9

Great. Thanks. So looking at your pipeline, your rooms under construction looks like it's back almost to Pre pandemic levels pretty much. So I guess I'm just wondering what percent of your, 2024 unit growth are you expecting to come from conversions? Thanks.

Speaker 3

Yes, 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.

Speaker 9

And I know you're not guiding to anything next year yet, but is that something that you expect to accelerate as a percent of your growth over time or do you think that we're seeing if that sort of mid-thirty percent range this year will be kind the most and then it will return to more normal additional supply under construction?

Speaker 3

I mean over time it will depend on market cycles of course, I think as we particularly with Spark, as we 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.

Speaker 9

Okay, great. Thank you. Most of my other questions have already been asked. So thanks.

Operator

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

Speaker 10

Good morning. Thanks for taking my question.

Speaker 2

Good morning.

Speaker 11

With respect to the 2% to

Speaker 10

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 4, 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?

Speaker 10

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. Thanks.

Speaker 2

Yes. I mean, As you would guess, we look at what all the pundits have to say, including some travel. And That's interesting, but we do a ground up process. I mean, this is done by every individual hotel in the world, all 7,500 plus of that then aggregates into us having a budget and then we create a range around it. So that's the process we go through.

Speaker 2

Obviously, there's lots of uncertainty still on as we've talked about, we sort of tend always to take the consensus view, which right Now it's a soft landing. So there are a lot of different paths that the broader economy can take, but it feels Certainly with what we're seeing in our business that that is the most likely outcome. And so this is how we aggregated it together on a property by property basis. I would like to believe and certainly every year I believe that I've been here in 16 years. We have grown market share, including last year, where we grew market share pretty nicely and are currently at the highest levels of market share we've ever had in our history.

Speaker 2

If we do our job again this year, we will grow market share again, which should mean that we would outperform whatever the market gives us that is what we are trying to do. In terms of internationally, I think I said in my comments, International is going to be a bit above the U. S. In part because you still have parts of Asia. Well, one, EMEA is really strong, just basically strong, it's recovered and strong.

Speaker 2

And then you have parts of Asia Pacific that are still sort of recovering, Notably, the China market in comparability benefits, and that's really causing a slight over performance in international versus U. S.

Speaker 10

Thanks. Looking forward to more of that at the Investor Day.

Speaker 2

Yes.

Operator

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

Speaker 5

Good morning, everyone.

Speaker 3

Good morning.

Speaker 5

Hopefully, this question is for Kevin. Just give us an update on how is progressing and then related to that, given the uncertainty surrounding what's happening with Choice and Wyndham, Do you think that is helping with your conversion activity?

Speaker 12

Thank you.

Speaker 3

Yes. 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 8 or 10 of them open now.

Speaker 3

They're performing really well. So we're picking up a lot of momentum. So we feel really good about the future of Spark and value proposition and I think probably not going to comment on what our competitors might or might not be doing together. We believe strongly in the value position for Spark. That's why we launched it and we're not 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

Speaker 6

Okay. Fair enough. Thank you. Sure.

Operator

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

Speaker 2

Hey, thanks. Appreciate it. Good morning. 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?

Speaker 2

And is there anything you see on the horizon that could drive some acceleration this year on the lower end?

Speaker 3

Yes. Look, I think some of it is comps, right? Those segments recovered really well and a lot more quickly from COVID. So some of it's year over year comps. So I think that you'll always have those as cycles play out, you'll have those effects and we really believe in the demand mid scale.

Speaker 3

So you could have differences in year over year RevPAR growth relative to other chain scales. But in terms of serving Tons of customers, we think there's 70,000,000 customers out there in that chain scale or below. And then if you think about so for Spark for mid scale transient, if you think about Live Smart for more extended sort of 30, 60, 90 day extended stay business, We feel really good about the demand profile over the long term and the ability to serve, as Chris said earlier in one of his serve more customers, bring new customers into the system, more importantly, deliver great returns for owners and earn more fees. It's we don't do this. We don't do these things because of how year over year RevPAR growth will perform.

Speaker 3

Now we like in these chain scales, we expect to generate premium market share and outperform the competition, but you're going to have you're going to continue to have freeze year over year in RevPAR growth and that's not why we do these things.

Speaker 2

Appreciate the thoughts.

Speaker 6

Sure.

Operator

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

Speaker 10

Thanks. Good morning, everyone.

Speaker 7

Good morning.

Speaker 10

Sort of a 2 parter, just first on Development and Signings, maybe Where are you seeing the wins by brand, by region, and kind of outside of the Spark momentum that you just mentioned? And then I guess just specifically On Spark for the 8 or 10 hotels, I know it's still early days there, but what are you seeing in terms of loyalty contribution and earn and burn patterns from Honors members so far? Thanks.

Speaker 3

Yes. 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 and which was up 30% 31% in the U. S. And then obviously a little bit better than that outside of the U. S.

Speaker 3

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 1 in 5 rooms under construction more than any other hotel company. So we have a lot of momentum and owners want to affiliate with us.

Speaker 3

And when you get into an environment where capital where lending is more constrained, right, lenders want to see they want to lend projects that are affiliated with our brands and that's not just a U. S. Phenomenon, that's around the world because lenders feel like they're more likely to get paid back. And so a lot of its 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.

Speaker 3

It's only a handful of hotels. But I So far what we're seeing from the performance of the Sparks is in line, market share premiums reasonable to strong loyalty contribution. Do think we are going to sign up a lot more new members with these hotels because we will bring new customers into the system. So it's not just a matter of where they a member before they book, 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.

Speaker 10

Thank you.

Operator

The next question comes from Richard Clarke with Bernstein. Please go ahead.

Speaker 12

Morning. Thanks for taking my question. Just going back to SLH. 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, there's been some Criticism that hotels are joining the loyalty program, but at a lower percentage of their revenues being handed over to Hilton.

Speaker 12

So how are you 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?

Speaker 2

Yes. Good questions. The first, Luxury Lifestyle, no, this is not in lieu of that. We are Still hard at work. I've made I think pretty clear for a long time, but much clearer lately that we intend this year to enter that space one way or another and we're hard at work and I think you should expect sometime this year, hopefully sooner than later to see us enter that space and we think that something that is totally different than what we're trying to do with SLH.

Speaker 2

In terms of the value proposition of existing brands versus SLH as I said in my earlier comments, I mean, SLH is something very different than LXR, very different than Canopy, different than Waldorf, different than Conner, different than everything we have in the These are really very small luxury hotels in very niche markets in a lot of cases, But even within non niche markets, very niche locations, and as a result, we do not believe that they are in conflict with or cannibalize anything else we're doing just because I mean I suggest anybody just go on the website, They got 500 plus, you can sort of get a feel for it. And I think we did huge amounts of work in terms of overlap analysis to make sure we understood that. I think you could very quickly understand that like this isn't consistent with anything else we're doing. It will be very what we do in luxury lifestyle will be very different. What we're already doing with LXR, our luxury soft brand is very different.

Speaker 2

Those hotels tend to be bigger, hotels, more meeting space and all of those things. So that's why I said we're excited. It's very as big as We are at 7,500 hotels across all of these chain scales. It's really hard to find something that you would view as This complementary, but we worked really hard to find that and we think SLH is that. So, we do not believe that we believe it will bring in lots of new customers, serve our existing customers, as I said, really well, make them happier as they earn and particularly They burn points and will not be in conflict either with our existing owners, but more importantly not be in conflict with our existing growth in the brands that we already have on the brand part.

Speaker 12

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

Speaker 3

You're talking about the clock yes, it's almost entirely the impact of government subsidies last year in the Q4. I assume if you're looking at year over year RevPAR relative to RevPAR growth, which is same store and the subsidies come in below the revenue line.

Operator

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

Speaker 11

Thanks. Good morning all.

Speaker 2

Good morning, Bill.

Speaker 11

Chris, I'm curious, there's quite a debate out there about inbound versus outbound, Especially on the leisure side, you said you expect leisure to be up this year. I'm wondering if what you're seeing in your system tells you that outbound travel is going to be as strong as last year or if we're going to see more balanced playing field here in the United States?

Speaker 2

I think we're going to see a very strong, a much stronger inbound here. That doesn't mean outbound is going to be bad, but I think with the what happened with the value of the dollar last year, 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 the inbound international. The Chinese inbound is the big variable, which is still a small fraction of what it was.

Speaker 2

I still 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 to TBD, but I do think part of 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 We're going to feel a lot better about inbound and not bad about outbound, but I think inbound will be the story.

Speaker 11

Thank you. I do have a follow-up question or make it quick here, but you a couple of times have kind of emphasized this low supply growth environment. The development pipeline continues to build. It's actually, I think, at all time high levels. Your pipeline is a great example.

Speaker 11

I'm wondering if you're seeing any change in the pace of new construction starts or any indication that the period between signed deals and groundbreaking starting to shorten it. It feels like we got kind of a coiled snake out there. At some point we're going to see some supply growth take off.

Speaker 2

I think you will. I mean, first of all, I mean, our numbers are really good and not to pat us on the back. We take an unfair share of what is getting signed and an even less fair share of what's getting financed. 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%.

Speaker 2

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 we'll 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% sort of out An output of no 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.

Speaker 2

And so you see that sort of hitting the numbers now. But the reality is while some of those things have stabilized, that's why our starts were up Double digit in the U. S. 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.

Speaker 2

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 exists 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 will still be a not as constrained, but more constrained financing environment that will weight heavily to our benefit.

Speaker 2

And then I think it'll continue to ease, but I think before you're going to see a lot of this stuff convert for on and mass from a pipeline to under construction, Particularly here in the U. S, I think it takes a couple of years and then it takes a year or 2 to build the stuff. So I think 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, but at some point they got to start to finish.

Speaker 11

Great. Thank you.

Speaker 2

Yes.

Operator

Thank you. The next question comes from Kevin Kopelman with TD Cowen. Please go ahead.

Speaker 6

Great. Thanks a lot. Could you give us an update on how you're thinking about fee growth for the year? If you still expect it to exceed NUG plus RevPAR and any kind of puts and takes there?

Speaker 3

Thanks. Yes. We still think we think fee growth will be a little bit above the algorithm as it normally is. A couple of headwinds, a little bit of headwind from FX, but even with that, we think we'll be above algorithm for fee growth this year.

Speaker 6

Okay, great. 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 the leverage range that you talked about?

Speaker 3

Yes. Our guidance this year implies we will be approaching the bottom end of that range. We still think it's the appropriate range for us. Obviously, the borrowing environment has been a little bit challenged. We haven't liked where rates have been.

Speaker 3

We're still obviously, Our capital return is still moving up and we've given guidance for this year. But the guidance for this year implies that we'll be approaching the bottom end of that range by the end of the year.

Speaker 6

Great. Thanks so much. Sure.

Operator

Thank you. 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.

Speaker 2

Thank you everybody for taking the time. Obviously, a really good year for us last year, some exciting things going on with SLH, but Even the organic growth and increases in unit growth that we see, given the momentum we're taking from last year into this year, We feel really good about the progress of the company. We feel really good about where things are and outlook for the full year and we'll look forward to Catching up with you after the Q1 to give you an update. Thanks again and have a great day.

Operator

The conference has now concluded.

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Earnings Conference Call
Hilton Worldwide Q4 2023
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