Q3 2019 Earnings Call

Good morning, and welcome to the Hilton third quarter 2019 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist I 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 your question. Please press Star then too.

Please note this event is being recorded.

I would now like to turn the conference over to Jill Slattery, Vice President Investor Relations. Please go ahead.

Thank you Chad welcome to help them third quarter 2019 earnings call before we begin we would like to remind you that our discussion. 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 expectation as of today.

We undertake no obligation to publicly update or revise these statements.

For a discussion of some of the 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'll refer to certain non-GAAP financial measures on this call you can find reconciliations of non gap to GAAP financial measures discussed on today's call in our earnings press release and on our website at <unk> Dot Hilton Dot com.

This morning Christmas <unk>, our President and Chief Executive Officer will provide an overview of the current operating environment and the company's outlook, Kevin Jacobs, Our executive Vice President and Chief Financial Officer will then review our third quarter results and provide an update on our expectations for the year. Following their remarks, we'll be happy to take your questions with that.

We used to turn the call over to Chris.

Thank you Joe Good morning, everyone and thanks for joining US today, our third quarter results continued to prove the strength of our business model as strong net unit growth through solid bottom line performance.

Adjusted EBITDA was towards the higher end of our guidance range well adjusted EPS exceeded our expectations. All in spite of softer than expected industry Revpar performance. Additionally, our strong portfolio brand supported by our powerful <unk> commercial engines continued to drive strong market share gain.

And.

Year to date, we've increased our system wide Revpar index premium nearly 200 basis points growing across all brands and all regions.

Our performance continues to drive meaningful free cash flow generation year to date, we have returned approximately $1.2 billion to shareholders in the form of buybacks and dividends.

And we're on track to return 1.6 to 1.8 billion or nearly 8% of our market cap for the full year in the quarter. We grew system wide Revpar 40 basis points, which was below our expectations due to softness in U.S. Transit and Asia Pacific.

System wide group Revpar increased more than 3% in the quarter boosted by strength in company meetings. However, transient revpar was relatively flat across business and leisure falling short of expectations due to weakening macro trends for the fourth quarter, we expect condition.

Thanks to remain consistent with these trends as a result, we now expect pull your revpar of around 1%.

As we look to next year uncertainties in the macro environment make it difficult to forecast most indicators suggest continued economic growth for all major global regions, but at a slower pace as a result at this point, we would expect full year 2020, revpar growth to be around flat.

A 1% that said, we expect to continue to deliver net unit growth in the 6% to 7% range, which should continue to support solid bottom line performance next year, we will give you more specific guidance on our next call. Our robust development story remains a key driver of arc.

Continued success and delivering value beyond the broader fundamentals year to date, we've opened nearly 330 hotels totaling roughly 47000 rooms and remain on track to deliver approximately 6.5% net unit growth for the full year.

This will mark our fifth consecutive year of net unit growth above 6%.

At the end of the third quarter, our pipeline totaled nearly 379000 rooms with continued growth across both U.S. and international regions.

Developer appetite for our brands remain strong and we expect to deliver another year of record signings of over 115000 rooms and record construction starts of more than 87000 rooms, which supports our net unit growth growth outlook for the next several years in the U.S. both.

Signings and starts are tracking modestly ahead of our prior expectations was starts now forecast to grow nearly 20% in the U.S. for the full year.

Turning to openings, we welcomed our hundreds through on our 2500 Hampton.

Demonstrating continued growth.

In both new and existing brands since launching less than four years ago true as established itself as the Premier Midscale brand with a Revpar index of 130, the highest brand premium in the industry at the other end of the spectrum Hampton is one of our oldest brands, but remains a dominant player.

They are in excess and its segment. After 35 years Hampton still boasts an industry, leading revpar index of nearly a 120 and a pipeline of more than 700 hotels.

Earlier this year, we announced that we're on track to open more luxury properties in 2019 than any year in our history and the third quarter. These additions included the Waldorf Astoria, Los Cabos Petr goal in Mexico, The Conrad Shang Yang and the Conrad tinge in China, the built more mayfaire our first Alex.

Our property in Europe , and the Grand reopening of the Conrad New York Midtown following an extensive renovation and conversion from the London.

Overall, we think our discipline and diversified development strategy positions us to capitalize on demand trends around the world throughout all parts of the cycle, while maximizing our net fees and driving significant shareholder returns.

With over half of our pipeline under construction, we feel good about our ability to continue delivering over 6% net unit growth for the next few years.

Our goal to deliver brand for every traveler for any travel need they may have anywhere in the world is resonating with our most loyal guests in the quarter Hilton honors members accounted for more than 62% of occupancy.

Increasing 430 basis points year over year.

Additionally, unique honors features like connected room and digital key along with our new expect better expect Hilton marketing campaign, starring Anna Kendrick continue to attract new members.

Honors enrollments increased 25% year over year in the quarter totaled nearly 99 million members and we may remain on track to hit our hundred million member milestone this week.

Our commitment to providing exceptional guest experiences and customer service would not be possible without our nearly 420000 team members and the strong culture, we have built together.

Im extremely proud that Hilton has maintained our number two ranking as the world's best place best workplace and it was also named the number one best workplace for women in the U.S. with the support and dedication of our team members, where we are able to grow our global footprint and have a positive impact on the communities where we live.

Live and work.

To sum it up with another quarter of solid bottom line performance, we remain confident in our fee based business model and diverse diversified capital light growth strategy.

This combined with our discipline disciplined approach to capital allocation. We think we are puts us in a great position to continue driving value for our guests our owners and our shareholders with that I'm going to turn the call over to Kevin for more details on the results and our outlook for the future.

Thanks, Chris and good morning, everyone in the quarter system wide Revpar grew 0.4% versus the prior year on a currency neutral basis as weaker transient demand in the U.S. and slower than expected Chinese leisure travel weighed on results. Despite softer macro trends, we continued to gain market share.

Adjusted EBITDA of $605 million increased 9% year over year.

Outperformance to the midpoint of guidance was primarily driven by greater cost control and the quarter management franchise fees increased 6% to $577 million with strong net unit growth and license fees offsetting softer topline performance.

Diluted earnings per share adjusted for special items grew 13% to one dollar and five cents exceeding the high end of our guidance.

Turning to our regional performance and outlook third quarter comparable U.S. Revpar grew 0.4% as solid market share gains and good group business were offset by soft transient trends.

For full year 2019, we forecast U.S. revpar growth inline with our system wide guidance based on modestly softer macro trends.

In the Americas outside the U.S. third quarter Revpar declined modestly versus the prior year, largely due to hurricane related weakness across the Caribbean.

For full year 2019, we expect revpar growth in the region to be in the low single digits.

Revpar in Europe grew 2.4% in the quarter driven by increased demand across London, which benefited from a good citywide calendar and strong international inbound trends.

Results were further boosted by solid convention and trade show business across Turkey in Spain, we.

We expect full year 2019, revpar growth in Europe could be in the low single digits, given favorable trends across continental Europe modestly offset by continued Brexit uncertainty.

In the Middle Eastern Africa region, Revpar was slightly negative in the quarter similar to trends we've seen throughout the year supply growth in the EU a continued to pressure rate growth.

For full year 2019, we expect revpar growth in the region to be down in the low single digits.

In the Asia Pacific region, Revpar fell 2.7% in the quarter as trade tensions intensified and protests in Hong Kong further weighed on leisure travel.

As a result, revpar in China fell 5.6% in the quarter.

For full year 2019, we expect revpar growth for the region to be flat to slightly down.

With Revpar in China declining in the low single digits, reflecting a continuation of current trends.

Moving to our guidance for full year 2018, we expect revpar growth of around 1% and adjusted EBITDA of 2.285 billion to $2.305 billion, representing a year over year over year increase of roughly 9% at the midpoint.

We forecast diluted EPS adjusted for special items of $3.81 to $3.86.

For the fourth quarter, we expect system wide revpar growth to be roughly flat, we expect adjusted EBITDA of $563 million to $583 million and diluted EPS adjusted for special items of 91 cents to 96 cents.

Please note that our guidance ranges do not incorporate future share repurchases.

Moving on the capital return, we paid a cash dividend to 15 cents per share during the third quarter for a total of $43 million in dividends year to date, our board or sorry $43 million in dividends in the quarter. Our board also authorized the quarterly cash dividend of 15 cents per share in the fourth quarter year to date, we've returned 1.2 billion to share.

Holders in the form of buybacks and dividends.

For 2019, we expect to return between 1.6 and $1.8 billion to shareholders in the form of buybacks and dividends.

Further details of our third quarter results and our latest guidance ranges can be found in the earnings release, we issued earlier this morning.

This completes our repaired our prepared remarks, we would now like to open the line for any questions you may have.

I'd like to speak with all of you. This morning. So we ask that you limit yourself to one question.

Chad can we please have our first question.

Sure to get into the question queue. At this time you May Press Star then one on your telephone keypad, if you're using his speakerphone. Please pick up your handset before doing so if at any time a question has been addressed and you'd like to withdraw. Your question. Please press Star then too.

The first question comes from Harry Curtis with Instinet. Please go ahead.

Hi, good morning, everybody.

Pardon Harry.

Yes. Good good morning. Good question a quick question on your pipeline, which again was up sequentially as well as year over year.

Despite what looks to be relatively flat corporate travel budgets.

But developers still have a strong appetite to invest even in this decelerating economy, what do you think.

The disconnect is.

And maybe you can you can speak to two that maybe the uniqueness.

Brands.

Okay.

But at the end of the day.

The expected to continue.

Yeah, I think that's a good good question and I think this short answer is we do expect it to continue.

At least for the for the time being I think with what's going on with developers meet every region in the world is a little bit different story.

But I think broadly most of the folks that were working with particularly in the U.S.

This is their business.

They are if you look at it largely a very diversified group of owner operators, a large part of it again, particularly in U.S. is franchise base.

And they are as we are and everybody that's running a business trying to grow ultimately grow their business both on the ownership and on the operating side and what they're doing is looking for unique opportunities in particular markets and in particular locations within those markets with the right brands, where they still believe.

Even with higher construction costs, however, higher labor costs et cetera that they can drive they can both finance and then drive ultimately returns on their equity that makes sense and so.

What we are seeing I mean, a testament to that is the number I gave you that we expect starts in the us to go up 20%. This year, what we what we are seeing is for the right projects in the right markets in the right locations. We have good developers they are getting things done and we are talking about our brands.

We are disproportionately a beneficiary of that because.

Our individual brands, either our category killers in terms of market share or where they sort of lead lead cold co lead the pack on average.

We have the highest market share in the business and there is not one brand in the bunch that is not performing at a very high level from a market share point of view in so that is can you know the basic desire of developers to continue to grow their businesses in a selective way.

Combined with our having the best highest performing brands in the business, which is just I think objective really in factually true is allowing us to continue to take a disproportionate share of development opportunity out there. If you look at the inputs and it and it is.

That's surprising frankly, I would say based on my expectations coming into the year, which are always we're always pushing our teams that that's our job and now we are outperforming.

But even my expectations I think when when we finished the year we think.

In terms of new deal signings I mentioned in my comments over 115000 rooms, we think we will probably do a bit a bit better than that it will be the highest level of approvals deal signings that we'll we'll have had in our history, that's about up close to 10% year over year, So while yes the.

Moment.

It is more challenging.

We are performing really well in that regard construction starts, which obviously is the next step if you want to deliver you got to you got to build them. We think when the years out will be up circa 5% 20, 20% in the U.S., but overall throughout the world.

Five plus percent so those I think are all.

Very good leading indicators frankly as I said in my prepared comments of what's the next few years will bring.

You heard that.

We are cautious as I think everybody is about the same store growth environment, because macro conditions have weakened there's just no no debating that and that's why we're we're sort of giving I would say.

Reasonably cautious guidance on a same store basis, but the beautiful thing about this model, which is really being driven by what we're talking about pipeline rooms under construction and ultimately net unit growth is that.

Even in this environment, we will be able to deliver greater great Bottomline results, even in a a modest the almost flattish revpar environment in the third quarter. You saw we drove EBITDA growth of 9% with sort of one ish for the year, we're going to grow for the full year EBITDA at 9% S that 13.

You know 13 plus percent, while we didnt give guidance for next year.

With whats being signed whats going under construction in what we think we will deliver in the six 7% range, we will deliver even in the face of.

Reasonably weak macro conditions, we will deliver another great year, which I think you know is again, a testament to in a post spin world.

The the strength of the business model and if we do our jobs.

We will keep those inputs the that that we're talking about.

Citing more deals the rooms under construction moving moving the right direction.

Okay. If I can ask just a quick.

Follow up Thats related are you seeing any change in the requirement.

By lenders for more equity.

I would say, we study that pretty scientific I would say.

After a what has been a.

Tightening trend, meaning less money.

A little a little bit tougher terms are all around in the lending environment.

We have seen that flattened out so I would say quarter over quarter over the last couple quarters, I mean, it got harder over the last year or year or two but it.

At this point it is relatively stable.

Okay very good and this is very much in caused by the way. This year do after growing at high single digit load the double digit rates are our best sense and what we're seeing is that that has been tempered as well that construction costs are going to be growing in the low to saying theres still growing.

In the low to mid single digits versus high single digit low double digit which is helpful to a degree.

Very good thank you.

Our next question will come from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey, guys.

Good morning.

Guys as we think about kind of the unit growth and the Revpar growth for next year clearly the under construction pipeline is roughly where it was last year, a little bit above where it was last year at this time, so that should bode well for kind of next year's NOG number obviously, the revpar guidance, a little bit more tempered.

When we think about though the level of performance from some of the other fees and whatnot, but that go into kind of 2020 relative to what you got this year from things like the credit card et cetera, do we think 2020 looks like more of a year, where it's it's no plus revpar trying to gets us to your expectation.

Ones for fees or is there still some slack in there that would allow you to continue to outperform like you have year to date, thus far I get more Carlo I think it's more of the former than the latter I mean, we Oh, we do believe you know we had a big ramp up in growth rate as we had the new deal with Amex sorted come come into play.

That is now ramping down I do believe it will grow in the next several years at at somewhat above algorithm growth. If you will but not materially. So so that it really is going to create as you called it sort of incremental slack I think the way to think about I think the way to think about next year is some simple.

Algorithm kind of growth.

Great. Thank you and then just one quick follow up on obviously, where you are right now from a leverage perspective, a little bit below where you've been obviously the capital returns or implied to be up a little bit more a little bit from from where you'd previously guided the range to be for this year.

How are you thinking about the current leverage and as you look out to 2020 with respect to the balance sheet and capital returns.

Carlo I, it's Kevin I think we think about all of that in the same way that we've been thinking about it. So I think the way you should think about it is you've heard you've heard us say this before but sort of high level you should think about the entirety of our recurring free cash flow plus whatever proceeds we get from lever, we leveraging the business should drive the capital return.

We're still comfortable with our 3% to 3.5% sorry, three to three and a half times range and would be targeting the midpoint I think what you're seeing you know this quarter is we did finish it ticked lower than the midpoint.

And that's really related to the recent OTA wireless sale in that cash still being on the balance sheet and a little bit a timing if we if we achieve the midpoint of our midpoint or slightly better of our capital return guidance for the year, we'll be right about in the middle of the range. So nothing nothing new there.

Great. Thank you guys sharp.

Our next question comes from Joe Greff of JP Morgan. Please go ahead.

Good morning, guys.

Okay.

Can you break out a threeq performance between business transient.

And leisure transient I know you kind of kind of bucket them together when you are going through Threeq you highlight yes, they were pretty comparable.

Yeah. They were both flat I don't have it in my head, but both basically flat one was a plus I think business transient was up but tick and leisure transient was down a tick recognizing part of the leisure transient thing a small part of it was weaker I'm not trying to candy code that.

There was also at leisure transient comp that was more difficult this year over last year.

On the business trends in it was the anemic I mean, it was positive but anemic and you know that was just you know I'd love to have a more sophisticated answer I think it just had to do with broader weakness we did see.

Just a little bit of color like if we if you look at business transient you break it down by segment small business medium and big Big businesses.

We saw more impact in larger businesses, which.

I mean, we have a theory on that I mean, there sort of more tied in most of them are public they're more tied into what's going on real time in the marketplace.

And maybe reacting to the uncertainty that is out there a little bit more rapidly than than smaller medium sized businesses that that's the theory, but we.

We'll be parsed it we did see.

More more impact and large accounts, but it was basically the way to look at both of them as they sort around the flat ones up a little ones that a little.

Great. Thank you and as a quick follow up to that can you talk about your exposure to.

Top 25 us markets, what percentage of your fees or.

These markets what percentage of maybe thinking about it. This way your anticipated 2020 openings are in these markets and I feel that youre data of late.

That's we've seen a bit level of detail.

Thank you yeah happy to do that we yeah, we have about.

In the U.S. about 30, 538% of our existing supplies in the top 25 markets little bit less than that in from a pipeline point of view.

And those markets, while while our top 25 has that been outperforming the star data they have been modestly underperforming and on the non top 25.

So we would see some impact from that I think if you look you know across the industry.

We are we do not stand out on the heavy side of that let's say.

Thank you very much.

The next question comes from Sean Kelly Bank of America Merrill Lynch. Please go ahead.

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

Yeah, Chris maybe to follow up on just the the broader environment on.

People start to kind of think about the zero to one outlook in just the overall kind of.

Puts and takes about 2020 can can you just help us think about you know when you're talking to other either large corporations on the customer cider or other kind of follow CEO .

What are some of the things that might differentiate between high and low in your range and more importantly by just any.

Green shoots or things you could see that might be a little bit more on on not optimistic side as you're kind of thinking about 2020, just trying to kind of frame.

Yeah frame up what how much of this is an extrapolation of current trend versus what could be different having this conversation here from today, yes. So good question and deserves a good answer I'm not sure. If I have one I mean, but but I'll give you I'll give you one I mean, I kidding, aside I talked to a lot of customers and im doing.

That all the time and I would say none of this will surprise you I mean, what you know what I think the sentiment is broadly is probably the sentiment of everybody on this call certainly the settlement of everybody in this room, which is there a lot of uncertainties in the world and markets don't like uncertainties businesses don't like uncertainties when there when they are trying.

And to make decisions on hiring more people investing in plant equipment technology, making bigger decisions that drive you know that drive investment that drive demand for hotel rooms.

You know in this kind of environment I sort of describe that maybe on the last call that they're caution flags out I think everybody's reading the papers watching what's going on with Brexit watching what's going on with the trade wars.

Not only us in China, but Korea and Japan.

Now looking at.

Water economic issues at.

An election year coming up in the U.S. and impeachment.

Process going on and when you add I think when you add all of that up again, I'm I'm being a master of the obvious here when you add all of that up it's creating a level of uncertainty that I think has got people rattled and I think what that's what you're seeing and the results is the caution flags are out people are you know our.

Doing fewer thing I think you'll see it ultimately in hiring numbers, you'll see it certainly investment numbers and it is showing up and were decent the sort of lead indicator on some of the shorter term transient trends that you know there just it's still there's still traveling there still doing things, but maybe.

Maybe not it's not as robust as it would otherwise be so it's sort of you know the the in the.

What would lead to.

Things feeling a little bit better to your question of like how do you get to the island, it's settling some of those things out and I mean, you're you're going to have an election that we'll have but that's all going to add until late in the year, but trade deals getting done.

Brexit getting resolved just one one way or another nada impeachment, rather resolution I mean any of these things I think.

Or or a number of them together getting resolved certainly in my opinion and that that is all that is could give you a boost it could sort of released.

Well.

A different level of decision, making and people being willing to invest more higher more and thus have to and want to travel more but I think you need to see you know you need to see some of you know some or a number of these things sort of settled down and and and people to to pull the caution.

Well again, a little bit.

Thank you very much.

Next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.

Hi, Thanks to follow up please first how should we think about the opportunity and timing to start pushing some of the new brands overseas and then second how our existing owners.

Financials or leverage levels.

Similar or different to to prior cycles.

Maybe take the second one first I think broadly.

People's leverage levels are lower I mean, I, you know as compared to going into the great recession.

I would say well debt is fairly available abundantly available. It is not as crazy available as it was then so my sense certainly within our system as people are much more sensibly levered.

As we look at the possibility of a slower.

Growth period of time in terms of.

Distributing our brands around the world that is something that's always ongoing there's a long answer the sure when I'll try and give you the sherwin which is.

We are constantly looking at the up market opportunities based on demand patterns around the world. We are constantly looking at whether we should be creating demand and introducing various brand concepts around the world. It may not even exist in certain markets like extended stay in China. As an example, and so you should assume yet.

Yes that part of our program is not only continuing to grow the brands that we have adding incrementally to that brand portfolio over time, but how we distribute those strategically.

Is front and center in our mind and something we spent a lot of time thinking about and you will continue to see incremental brand introductions into parts of world Tapestry in Europe . For example, you will see you will likely see extended stay.

Now entering China in the next 12 months and a whole bunch of other examples are around the world of us doing that and then when you look at it.

People think about like no again, the future of growth we are really in our infancy in our international growth.

Both in terms of just why were big and we've been doing it along time, if you really look at our footprint in the world, There's theres gargantuan opportunity, but also.

In most regions of the world, even where we're fully distributed.

Or more fully distributed we've been there longtime we may have seven to nine brands of our 17 brand. So not only do we opportunity to grow those brands, but we have the opportunity to sort of double down and and add overtime and in a sensible way a number of incremental brands in every every region of the world. So its a.

Very strategic thoughtful process of how we go about planting these new flags out there to make sure that.

We always are doing it the way that that we can support it commercially because we got to drive returns for owners, which is what makes them come back to want to build a to build more hotels for us, but yes, you should assume we will continue to propagate do brands in all regions of the world in a very systematic sort of strategic way.

Helpful I'll jump back in the queue. Thanks, so much.

Our next question is from Thomas Allen of Morgan Stanley . Please go ahead.

Go ahead, Tom is perhaps your line is muted on your end.

All right well move to our next question, which will be Robin Farley with you BS. Please go ahead.

Great. Thanks, two questions. One is I wanted to circle back to your comments on transient leisure because I think it's the first time that you've talked about that being softer not being up and.

I know that Q3 had that tougher comp.

In last year's Q3, but can you give us any insight into sort of how Q4 is looking with two thirds visibility on the quarter just trying to think about how much of it was the tough comp versus actually a underlying trend and I know you talked a lot about a bunch of the macro uncertainties out there I don't know if those comments were more about the business transient issue or do you think that's.

Are those the same issues for for leisure transient Im just trying to think about whether this is a trend or a tough comp. Thanks, I think if I'm being honest I think it's somewhat of a tough comp of more of a trend I think our expectation is the fourth quarter, we will will will be tough as well now the comps aren't as much initially.

But just the broader trends are weaker if you look at the you know the retail numbers that we're coming out before September they sort of suggested strength, but September retail numbers.

Were quite weak and I think reflective of what we're seeing in some of the some of the leisure trends again, I think to the extent, we get some of the uncertainties at of the Air I think you have plenty of opportunity for consumer confidence, which is still reasonably it not as high as it's been.

And still reasonably high to drive.

Some reasonable growth in in leisure transient, but our expectation are sort of running assumption right now as you know under current conditions, both leisure and business transient will will be weaker we think though we think there'll be positive generally but they will be.

We will be reasonably weak.

Okay. That's helpful. Thanks, and then if I could just follow a question about.

Licensing fees, which I think Kevin highlighted was why you're you were still able to make your guided range for fee growth, even though revpar was a little bit below the range. How should we think about that going forward licensing fees. It seems like that can be one off shore or you're not necessarily as as predictable I guess.

If there's any color you can give us to how to think about licensing fees going forward, yes, sure about I mean, I'm happy to try I think that I mean overall I think the message is very similar to before it actually factually we are lapping over much stronger comps last year as the program was ramping up and so that's clearly a trend that's going to continue license fees actually.

We Didnt you know were inline with our expectations this quarter and we're not one of the reasons why we made our fee growth. This quarter. We did have some other non revpar driven fees that that did a little bit better but license fees was not an outsized sort of impact.

On the quarter, and so and that'll that'll continue into the fourth quarter, which is why you're seeing some of the they've got the fee growth guidance for the fourth quarter be a little bit lower because we're lapping over I think 14% fee growth in the fourth quarter of last year. So overall the programs doing fine by the way you know acquisitions I'll sort of more focus on the full year because it can be lumpy.

Quarter over quarter, but we think card acquisitions going to be up about 25% for the year spend in the in the mid to high teens for the year. So the program's going just fine and you're just seeing that we're lapping over really tough comps from last year and I would say the only thing I'd add to that is it actually is quite stable I mean, the only thing it's going on as you're you're sort of.

The lapping these big ramp up years of of a new programs. So the growth rate is coming down just because of the arithmetic, but the the programs as as it stabilizes is actually.

Quite stable in terms of our expectations of contribution to growth in the next bunch years.

Okay, great. Thank you very much.

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

Good morning, Hey, Chris you brought up the.

Election in the political uncertainty and I think it's not beyond the realm of possibility that next year, we could be dealing with.

Our tax environment and potentially.

Backlash against share repurchases I'm, just trying to think about how your capital allocation decisions may change in that sort of environment, whether you might be more open to.

External growth in a low interest rate.

Our share repurchase environment.

Interesting and good question Bill, it's hard to know what's going to happen next year.

Having said that we feel strongly about our capital allocation strategy and buybacks have been around for time at eternity, and while I know theres been things written about it in the political with all the political swirl I personally would bet a whole lot of money against them, creating legislation.

That would restrict buybacks you know I don't believe it makes any sense everything I've read about the arguments for it makes no sense and so I'm not I don't really have an answer if that were to change. Obviously, we had at the thing about it I don't think it ultimately don't think it well and I think our strategy on how we.

I want to return free cash flow that we don't need to grow the business to shareholders in the form of a modest dividend.

But a lot of buybacks over time.

Is the right strategy, we're going to stick with it if the law prohibits it obviously wouldn't but again I would doubt that that would happen and I think over the next 510 15 20 years.

If you run the models you know the result, the best result, we can we can deliver is going to be as as a result of that capital allocation strategy.

Great I'll leave it there thank you.

Thanks question is from Smedes Rose with Citi. Please go ahead.

Oh, Thanks, a lot.

Just wanted to follow up on the capital return question and the past you sort of indicated that you think you could.

Continue to repurchase and.

Pay dividends, along and it's sort of same range of what you've done this year anything about today's.

Guidance your Revpar outlook change that for you at this point.

No it doesn't I mean, what Kevin said, it but I'll say it again, because it bears repeating did it perfectly fine job doing it but I know this is front and center everybody's vitamin E. the way you're thinking about our you know and an over simplified way, how we think about our capital allocation program is that every year, we're going to produces.

Certain amount of free cash flow, Okay, and we got to do something we also have the opportunity to lever and we can lever within the ranges that we've talked about we could lever beyond that okay. So the way I would think about it isn't sort of three increments.

The first is what are we going to do with our free cash flow. What we have said and I will say again is we're going to pay a modest dividend. We don't have any intention to increase it from its current levels and use all the rest of it to do buybacks. We've also been pretty consistent in saying.

And I would say again that within the leverage levels of three to three and a half so assume mid 0.3 and a quarter on a regular basis will be relever because of the business can handle that leverage easily you know we want to we want to be in the market. We want to be returning capital. We think you know sort of in that range makes sense.

If.

The business could in circumstances.

Certainly a handle more leverage and we would consider more leverage than the three to three and a half but that would be really as part of.

A market dislocation and that market dislocation is nobody likes or it will know when we see it would be looking at you know valuation metrics that are sorta you know.

Below long term averages would be a sort of a leading indicator that there may be an opportunity.

So at the moment, Okay. We have we haven't we will continue to implement both stage, one and stage to all our free cash flow and a re levering to sort of roughly mid point of our targeted leverage levels stage. Three we are more than willing to consider at the rate moment, we just don't view.

To that moment has now.

Thank you I ask you to you you mentioned, China was down 5.6% in the quarter.

Sure anyway, you can break out how much how much that was just kind of Hong Kong, driven with what's going on and that market persons.

Overall kind of weakness in leisure that you've talked about on prior calls.

Yes, I can calling card, obviously had a at a tough quarter, Hong Kong was down 40% for us.

And that means if you did the math mainland China was down a little less than three if you look at the full year, what we think we will deliver.

And Hong Kong is obviously still sort of in play we think.

Greater China will be down as Kevin I think said sort of you know low single digits. So call. It 3% mainland China, we think will be flat to down a point something like that in Hong Kong down 20, 325% something like that.

Okay. Thank you very much huh.

The next question comes from Anthony Powell with Barclays. Please go ahead.

Hi, good morning, how you're talking about about transient and the third quarter, how to group bookings for Ford periods look in the quarter and how does the group pace for next year.

Impact your guidance group group pace has been fine not I would say not not robust and week by week in month by month, it's been definitely been choppy. Some of that has to do with the commission change we're lapping over periods where.

We went from 10 to a 7% commission and so it creates it created some you know obtuse behavior last year, which creates comparability issues for this year, but I would say you know pace has been generally.

Okay, not great as we look at position for next year I would say, we feel reasonably good about it not as good as we would have felt at this time last year. So if you look at system wide numbers were up and kind of the low single digits. If you compare that to last year at this time by comparison we were.

Up in the mid single digit so we're up like 2% last year, we were up like 5% now you know we've given guidance for the year of zero to one.

Being up 2% in group position going into the year makes us feel good meaning you know weve sorta.

We had a much higher level of expectation this time last year.

Based in part upon that group position of what we would deliver.

In Revpar, obviously, we have a different view for next year and we think the group position is up and is supportive of of the overall revpar guidance. It so.

Yeah.

I think so maybe just one more and we saw at Walter project in San Francisco delayed due to the owners a liquidity challenges how much of your pipeline isn't a luxury segment and considering those projects would be at risk if a slowdown in the overall environment continues.

Yeah, I'd say, it's a diminimus amount, it's one 1% one one and change so we we've known in San Francisco about San Francisco I know it got pump they became public this week, but we've we've known about that for the better part of a year.

But it's a relatively or a very small part of our overall pipeline and the and the projects that you know that are most important to us in that pipeline in San Francisco is not but San Francisco has been had had challenges for long time projects that that are really important that pipeline are many of them are under construction or we have.

Every expectation there'll be delivered.

Great. Thank you.

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

Hi, good morning, Chris and Kevin.

Given some good morning, you've given some color on a group expectations as well as a softness in the business traveler wonder what what you're seeing right now as far as trends.

In specifically leisure travel and what are your what do you thinking about next year for leisure. Thank you.

Happy, but I think there I think we already covered it I mean leisure trends in the third quarter just to recap were.

Flat to slightly down part of that was you know.

The lapping over tougher comps for leisure transient in 2018 part of that was just a you know just weaker transient business like the retail numbers were down you know starting in September were seeing some of that our expectation is that we'll have more of the same going to the fourth quarter and built into our assumptions for.

Flat to plus one is an expectation of positive, but it reasonably he anemic transient growth in both the business and the leisure side. What I was asked the question earlier, what could change that obviously.

Yeah, any one of the things that are going out in the world that has created that as rattling the markets in rattling business in terms of uncertainty.

You know any any or all of those or any number of those getting resolved.

You know could be helpful but.

You know hope is not a strategy. So what we've tried to do both for the fourth quarter next year is give you a sense of what we think sort of based on current conditions, which which had been weaker.

And again I said it earlier comments, we still expect of not only deliver 9% EBITDA growth and 13% Dps growth this year and what we're not going to give guidance given that unit growth fee growth et cetera, we expect to have another very good year next year, even in the face of what we think will be quite unique.

Same store growth.

Okay. Thank you.

Our next question will be from David Katz of Jefferies. Please go ahead.

Hi, good morning, everyone.

I wanted to just to ask something because it's come up you know a number of times over the past few months and it may sound as though I'm headed in a negative direction, but that's not the case I think the rest of your business model is so crystal clear with that little preamble I wanted to.

Ask about the owned and leased portion of the piano.

Because what we try and do sometimes this is figure out where the leverage to the upside on the downside is within that line item.

Can you just talk about the you expand space or how help us think about how the leverage within that owned up and down actually works.

Yeah, David Yeah, I'd say generally works the way you're used to it working because you've been covering real estate companies for really long time right. So these are these are hotels that are you know sort of behave like owned hotels at the GLP margin level, it's about 30% and then they have rent payments because most of them are leased and so the margins end up being a little bit lower.

With that which add the touch of opera of operating leverage but the reality is the expense base and those hotels is growing about the way. It's growing you know in the broader real estate world where half the late half the expense model is labor and labor costs are going up you know call. It three and a half 4% around the world Inflations growing up going up.

You know kind of one and a half 2% around the world and so our expense base is growing and at these levels of Revpar. It's hard to you know increased the profitability. The hotels that said you know the segments getting smaller over time, it's less than 10% of our of our overall EBITDA. We are transitioning out of a lot of the smaller less strategic.

Leases I think we're going to transition out of four leases. This year plus one owned hotel in auto our that we're selling and so that's part of the business is getting a little bit smaller the rest of the business is growing at a 6% to 7% clip and so over time, where you're going to see is within a reasonable amount of time, you're going to see that segment be 5% of the business overall and the end.

The revenue expense dynamics, they're going to work the same it's just going to affect the overall answer even less.

Got it perfect.

Thank you very much faster.

Our next question is from Jared Shojaian with Wolfe Research. Please go ahead.

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

The DNA guidance came down a little for the year at the high end how much flex do you think you have on the Genie side, if revpar continues to weaken and.

Any color you can share on how you're thinking about 2020 right now.

Yeah, I mean, Jerry we can we can continue do better we tried to be as efficient as we can I mean, some of it's it's coming down you know, we tightened the range and it got a bit lower because as we've seen revpar coming down. We've just done better now now are we going to now we have a certain amount of expenses in the business and can we do enough there that it's sort of going to overcome you know to pursue.

That revpar going along if it goes to zero not really but you should expect that we can continue to do better and we've consistently over a number of years now grown DNA at a rate that's less than inflation overall and I think we continue to do that.

Great. Thank you and one more quick one if I make a Chris I think I heard you say you're feeling good about your ability to deliver over 6% net unit growth over the next several years, what kind of risks are there if the environment softens from here, what I guess, what would cause you to be below 6% beyond next year.

Yeah, I mean, the risk is you go in you know you go into another great recession sort of or or material recessionary environment, but.

I feel good about it because the inputs are largely in place. So you know even if you go into a much slower environment. Then we're experiencing today. These hotels that are under construction, which is over half the pipeline or are almost all going to get completed number one the only other input is can.

Versions, and what I would argue is in a weaker environment that actually stimulates more conversion activity not less so for the few hotels that might fall out that maybe.

Under construction and for some reason don't complete and that is very rare that that happens I would I would bet that we would more than compensated for with incremental conversions. So that's why you know I didnt lightly say I feel good about our ability to continue for the next two years to drive over 6%, 6% net unit growth because then.

I think the inputs are largely in place. So I mean, theres always downside you know our general counsel be staring down a bit into it but I. We feel we said we feel good about it because we do feel I do feel good about.

Great. Thank you very much.

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

Thanks, everybody for the time today, obviously, a lot going on in the environment, We'll watch the fourth quarter carefully.

Continue to do our part to drive bottom line results look forward to summarizing the year in February and for those nap Nats fans out there given that we won last night hopefully good night Tonight.

And we'll have our first world series in Washington in history anyway. Thanks, everybody have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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