Hilton Worldwide Holdings Inc.

Hello and welcome to the Hylton third quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. 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.

Thank you, MJ. Welcome to Hylton's third quarter 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. For discussion of some of the risk factors that could cause actual results to differ, please see the risk factor section of our most recently filed Form 10-K. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our third quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions. With that, I am pleased to turn the call over to Chris.

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

Thanks, Chris, and good morning, everyone. During the quarter, system-wide REF PAR grew 6.8% versus the prior year on a comparable and currency-neutral basis. Growth was driven by strong international performance as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $834 million in the third quarter, up 14% 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 REVPAR performance and license fee growth. Management and franchise fees grew 12% year-over-year. For the quarter, diluted earnings per share adjusted for special items was $1.67, increasing 27% year-over-year and exceeding the high end of our guidance range. Turning to regional performance, third quarter comparable U.S. REVPAR grew 3% year-over-year, with performance led by continued recovery in both business transient and group. Leisure demand in the U.S. remains strong, even with tougher year-over-year comps. Relative to 2019 peak levels, U.S. REF PAR increased 10% in the third quarter, improving 200 basis points versus the second quarter. In the Americas outside the U.S., third quarter REF PAR increased 11% year-over-year. Performance was driven by strong group demand, particularly in urban locations. In Europe, REVPAR grew 11% year-over-year. Performance benefited from continued strength in leisure demand and recovery in business travel. In the Middle East and Africa region, REVPAR increased 19% year-over-year, led by both rate growth and strong demand from the summer travel season. In the Asia Pacific region, third quarter REVPAR was up 39% year-over-year, led by the continued demand recovery in China. REVPAR in China was up 38% year-over-year in the quarter and 12% higher than 2019. The rest of the Asia Pacific region also saw significant growth with REF PAR excluding China up 40% year over year. Moving to our guidance for the fourth quarter, we expect system-wide REF PAR growth to be between 4.5 and 5.5% year over year and 12% to 13% versus 2019 with continued sequential improvement versus the third quarter. We expect adjusted EBITDA of between $739 million and $759 million. and diluted EPS adjusted for special items to be between $1.51 and $1.56. For the full year 2023, we expect REVPAR growth to be between 12% and 12.5%. We forecast adjusted EBITDA of between $3.025 billion and $3.045 billion. We forecast diluted EPS adjusted for special items of between $6.04 and $6.09. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of 15 cents per share during the third quarter for a total of $39 million. Our board also authorized a quarterly dividend of 15 cents per share in the fourth quarter. Year-to-date, we have returned more than $1.9 billion to shareholders in the form of buybacks and dividends, and we expect to return between $2.4 and $2.6 billion for the full year. Further details on our third quarter results can be found in the earnings release we issued earlier this morning. 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. MJ, can we have our first question, please?

Yes, of course. As a reminder, to ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. Our first question today comes from Sean Kelly with Bank of America. Please go ahead.

Hi, good morning, everyone, and thanks for taking my question. Good morning, Chris. So, Chris, I think the big incremental here is obviously, you know, your 2024 improving net unit growth outlook. I think this is, you know, meaningfully better than what people were expecting out there. So you gave some color in terms of what you're seeing on, you know, obviously signings, starts, and details. But just help us kind of dig in here a little bit. What would kind of give you the confidence to kind of bump that up from where we were a quarter ago? Is there something in particular you'd like to call out for us? And specifically, just remind us of exactly the activity levels you're seeing here in the U.S. as we know we're fighting that sort of tougher construction and financing environment for owners broadly. It seems like you're obviously able to buck that trend. Thank you.

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

The next question.

Sorry, MJ. Thanks, Sean. Just to circle back to the U.S., I think, look, the story, I mean, you've heard the story about, you know, things are a little bit more stressed with financing costs, but I think the story around if you are financed and you're entitled and you're ready to go and you want and you want to build a hotel you're better you're better off getting underway than leaving that asset as a non-performing asset and i think that you think about that being fueled also by the fundamental environment where you know people are optimistic about growth capacity additions are going to be constrained we continue to take share and so i think it's a good story in the u.s as well

The next question comes from Joe Graf with JP Morgan. Please go ahead.

Good morning, guys. Thanks for taking my question. Chris, just trying to understand, you know, longer-term, the accelerating net rooms growth, how – on average, how long is the typical full-service or the typical limited-service hotels staying in the pipeline – Is that timeline narrowing? I mean, understanding, you know, next year's accelerating rooms growth is more a function of past periods, gross room signings, as well as, you know, starts that you're seeing pick up here. But are you seeing the timeline rooms staying in the pipeline narrow at all?

I would say every reason is a little different. I don't have a hard stat in my head. I'll give you sort of a directional answer. I mean, with limited service in the pipeline, generally in the pipeline a couple of years, full service I would say on the order of three or four years, but it could vary greatly depending on what region of the world you're in. But I think directionally those are, if I average it all together, those are pretty good. And I would say, you know, what happened during COVID is that that extended out, you know, great deal because everything stopped and slowed down and then you had the supply chain issues that even after things you know got moving again you know we reopened you had the supply chain things that slowed things down that has now come back down to being closer to where we were but still a little bit more extended than where we were and I think that has a lot to do with just in a lot of parts of the world what Kevin just said it's just a little harder to to get things done. And so it's taking a little bit longer. People are getting financed, but, you know, if they had five projects they wanted to start, they're maybe getting two or three of those financed and it's taking a little bit longer. So I think there is a little bit longer gestation period. Now, you know, when 30% of the deliveries are conversions, obviously that's a super short gestation period, uh, you know, from pipeline into, into NUG. And so that's helping, you know, if you take it on average, I would say with an increase of conversions relative to being in the low 20s, you know, right before we were in COVID, I would say that, you know, the gestation period, you know, the time in pipeline is about the same. Again, I'm doing sort of quick and dirty math in my head. But, you know, but if you just look at pure new construction, it's a little bit, it's still a touch longer than it had been. And again, We've sort of, like, not to repeat myself, we factored all of that in, meaning we know we have a team that is on the ground everywhere in the world working with all of our owners on every project that's under construction. And what we think we're going to deliver next year, other than the end of the year, for the year, which are largely, obviously, conversions at this point, those are projects. They're in the ground. They're under construction. And we have rational timelines for when we think that those will deliver.

The next question comes from Carlo Santorelli with Deutsche Bank. Please go ahead.

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

Yeah, we do get a bunch of questions periodically on, like, fees per room and they're going up and going down. I mean, that's the reason we put it in there, and we'll give you a lot more granularity on that on March 19th of next year when we do a full day or a good part of a day talking about it. But we put it in there because we wanted to, you know, we get the question enough. I wanted to, you know, publicly, you know, say how we think about it. You know, we described years ago when we had our last analyst day sort of an algorithm, you know, that had same store growth, new unit growth with leverage associated with, you know, license fee increases and that that would ultimately give us same store growth. fee growth that would be greater than the combination of those two. And that is the condition that exists today. That's what we see in the business today. As we model the business going forward, we believe that will continue as we look at the models. Why? Because of the things that are happening. We're getting safe store. We're adding units. And we continue to see our license fee rates go up as we renew contracts. You know, we have 5% of the system that's sort of on average rolling out every year and getting marked to market. And we're moving our, you know, and a bunch of brands, we're moving our license fees up. So when you factor for all of that, that's how you get it in our core REVPAR base. And then our non-REVPAR base fees, Um, as I think we've said a bunch of times, you know, we're having great success. There's a bunch of different pieces of that. Um, the two biggest pieces of it are our credit card, uh, co-brand business and our, um, HGVC, um, HGV business, both of which we think over time, you know, will grow at higher than algorithm on average. And so when you put all that together, those are our fees and, you know, that's why our fees we believe will be growing. greater than sort of REBPAR plus NUG. And that obviously then translates if you just do simple math. When you look at fees per room and you add REBPAR growth into that equation and you model it out over time, it's sort of hard if you make those assumptions not to see fees per room go up. So people ask us that. We think, you know, I think the math is pretty easy. That's why we put it in there is just to sort of put a marker out there. Again, we'll give We're going to have – the reason we want to have an analyst day is to do a bunch of different things, but that will be one of them to give everybody a little bit more granularity. But in an abundance of sort of transparency, we obviously always have our business modeled, and we think the arithmetic is pretty straightforward and obviously compelling.

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

Hey, thank you. We'd love to touch on key money a little bit, which went up a bit in the guidance for the fourth quarter, even as conversions are also going up. Can you just remind us of your general approach to key money and how the industry dynamics around key money have been evolving as we think about not only in 4Q but beyond?

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

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

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

I would say built in, I said this is a very granular, for next year, it's a very granular analysis. So it's all in production or conversion. So I would say we do think the environment's not great, but not bad. I mean, things are getting financed. Actually, in a really tough environment, as Kevin implied, we end up taking share. So we're getting much more than our fair share of the development opportunities. Why? I mean, I'm obviously partial, but I think if you talk to a broad base of owners, they would say, because our brands perform better, our market share is the highest in the industry. And if they're only going to do a few deals, they want to do them and get the highest returns. And so they go to the brands that are going to deliver the best performance. So, I mean, it's clearly... you know, it's still, you know, challenging financing environment, although open and slow. We haven't made any big assumption to get to these NUG numbers for next year that something changes wildly. We think it's sort of going to, my guess is it will matriculate and get a little bit better, you know, because there's a chance at some point next year rates will come down and things. We haven't really made that assumption, as I said, because what's going to happen next year is largely in production. But we do think as has been happening this year and for a number of years, that we will continue to take share. And we do believe, and built into this, is that on conversions, again, I said I think we'll be 30 this year. I think we'll be about 30 next year, too, that we are going to get more than our fair share of conversions. And we have enough momentum that I have the confidence to feel good about giving you the range and outcomes on that basis. And my guess is, as I said, if a few things go our way, you know, we might be able to outperform, you know, that we've really definitely, you know, hit an inflection point. If you get, if you really think about the inflection point, it was sort of the second half of last year, you started to see the momentum shift and things bottom out in terms of signings and starts. And I kept saying this to people, I know everybody's been nervous about Nug, and for good reason, but we can just see like the rat moving through the snake, so to speak, starting the second half of last year. And now you're starting to see it produce. Third quarter is up a little. You'll see the fourth quarter, we're going to have a very large delivery quarter. And, you know, our belief just given, again, what we know is in production is, you've hit a real point of inflection and you're on the way back up. So that's a lot to unpack. I think the core answer is there is no broad assumption of, like, the world improving from the standpoint of development and financing in any material way from where we are here.

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

Hi, thank you. I just wanted to go back to your comments around group business, which looks like it's pacing very well up for next year. And you mentioned, as you have before, that 85% is coming from smaller business enterprises. And I just wondered if you could talk a little bit about the remaining 15%, which I guess is comprised of larger businesses and maybe just what you're hearing in terms of their sort of appetite to book into next year at this point.

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

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

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

Yeah, sure, happy to, Brent. I think, yeah, obviously we raised our, you know, we raised our guidance, you know, about the amount of the third quarter B. We did increase the top line for the fourth quarter a little bit, not huge, and it is flowing through, say, for a little bit of timing in corporate expense, a little bit of FX, and then a small amount for Israel. That's really it.

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

Great, thanks. I wanted to ask, returning to the topic of Unicross, the conversion percent next year, you said about 30% as well in 2024. Can you give us a sense of sort of typically in October of the prior year, how much of those conversions would be kind of already on your books versus how much would come in sort of in the year for the year that you don't have as much visibility on? Just to kind of understand the visibility there. Thanks.

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

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

Hi. Good morning, everyone. Question about how you're thinking about upcoming corporate rate negotiation for 2024. Thank you.

Yeah, we feel pretty good about it. I mean, we're sort of in the – it's just getting into the thick of it. It's not – we're nowhere near done. You know, keeping in mind it's a relatively small part at this point of the business. This is like 6% of our business, given that we have really pushed hard on the SME side of the business, and that's 85% of the business. So when you sort of whittle it down, it's about 6% of the business. But we think, you know, at this point, when you add it all together, the fixed and the dynamic, most of our pricing is dynamic at this point. You know, it's probably in the upper single digits here.

The next question comes from Dwayne Fenworth with Evercore ISI. Please go ahead.

Hey, thanks. Good morning. Chris, I'll ask you to pull out your crystal ball for a second. Could you share some high-level thoughts on which regions have the most REVPAR growth potential into 2024? Are you thinking maybe next year is more of a domestic growth scenario? driven year or more of the same with international leading? Does the regional leadership change into 2024?

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

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

Morning. Thanks for taking my question. Just in terms of occupancy versus rate discussion, I guess more focused on occupancy, Chris, can you talk about how we should think about occupancy exiting 23 as a percentage or decline versus 19? And then more importantly, is there still a day of the week that just hasn't come back? You know, should occupancy permanently be a couple hundred basis points off? Just trying to think about this in the medium term. Thanks.

Yeah, I mean, I said in the prepared comments that in Q3, we actually were only 200 basis points off, and in September, we were only 100. So I think we're going to exit this year getting closer and closer to, you know, prior levels of occupancy for the industry, but at least for Hilton. I think as we get into next year, particularly as we're able to build the group base, which is if you really look at what's happening, if you're getting midweek business back, you know, leisure is obviously still strong. Weekends are still stronger than they were. What's really happened, particularly in a lot of the big cities in the U.S., is you don't have the group base back. Well, you've seen recovery. You don't have that big group base to leverage that. the rest of the business off of. And as I already commented, we think, you know, you're going to have a really robust group year just given where bookings are right now. That then is, I think, sort of the last leg of the stool allowing you to get back to occupancy levels comparable to 2019. So I suspect next year we will as that, you know, as you go through the year and you get that group base back. I think, you know, the rest of the segments feel like very good. I mean, I know everybody wants to think nobody's going to travel for business, but that's just that, you know, people are traveling like crazy. You look around and, you know, the makeup of there's some industries, you know, technology and financial services that haven't, you know, rebounded as much and have issues of, you know, like overhiring and then reduction of workforce and all that. But again, the bulk of it's driven by SMEs and they're traveling more than they were. And most of the corporates and even those corporates, the people they still do have are traveling more. So, you know, I do believe, you know, we will get back to prior levels of occupancy. I think it'll happen next year. I think we're getting, we're not quite there, but we're getting close. I think next year, as you think about the split between rate and occupancy, it's a little early, but I would say it's probably a pretty balanced you know, pretty balanced equation as between the two next year. I mean, certainly it's early look.

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

Thanks. Good morning, everyone. Just wanted to ask on luxury, maybe just remind us, where's the white space today as you see it? And then maybe more importantly, what are your customers still asking for as you think about investing key money dollars at the higher end price point.

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

The next question comes from Bill Crow with Raymond James. Please go ahead. Mr. Crow, your line is open.

Hey, Bill. Are you there?

I'm sorry, Chris. Good morning, Chris and Kevin and Jill. Quick two-parter on NUG, maybe the last question on NUG for today.

A lot of nut questions.

Well, a couple of specific questions. First of all, the headlines surrounding Country Garden in China aren't getting any better. And I'm just wondering, as it regards the pipeline as opposed to the already constructed and opening units, what do you think the risk is to that pipeline as you stand today? The second part of the question is more specific on the key money. And we understand the hotel you're going to announced that the conversion on tomorrow is in Boston. The reports are circulating that it's a $40 million key money payment. I'm just trying to figure out the economics to Hilton on a payment like that.

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

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

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

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