Q3 2022 Hilton Worldwide Holdings Inc Earnings Call
Good morning, and welcome to the Hilton third quarter 2022 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's prepared remarks, there will be a question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Please note this event is being recorded.
I would now like to turn the conference over to Jill Slattery, Senior Vice President Investor Relations and corporate development you may begin.
Thank you Chad welcome to Hilton's third quarter 2022 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.
Yes.
For a discussion of some of the factors that could cause actual results to differ please see the risk factors section of our most recently filed Form 10-K, and our first quarter 10-Q.
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 on today's call in our earnings press release and on our website at IR Dot Hilton Dotcom.
This morning Christmas better, 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 of 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 and with that.
I'm pleased to turn the call over to Chris. Thank you Jill good morning, everyone and thanks for joining US today, the third quarter marked a very important milestone in our continued recovery for the first time since the pandemic began system wide revpar surpassed 2019 levels. Additionally, adjusted EBITDA and adjusted <unk>.
EPS exceeded the high end of our guidance and 2019 levels. We achieved several notable development milestones in the quarter, including reaching 100000 rooms open across Europe and announced various strategic partnerships further enhancing the guest experience and the strength of our global system the quarter's strong.
The return between 1.5 and $1.9 billion to shareholders.
Turning to the specifics results in the quarter occupancy reached more than 73% only four points shy of 2019 levels as expected strong travel demand continued through the summer months, primarily driven by robust leisure trends pose labor day demand.
Remained strong as business transient and group demand improved significantly and leisure demand remains robust overall demand for the quarter peaked in September nearly reaching 2019 levels with business transient demand only two points off 2019 levels.
ADR also continued to strengthen and proving quarter over quarter and up 11% versus 2019 rates across all segments surpassed 2019 levels with leisure transient rates up in the high teens and both business transient and group up in the mid single D.
Digits.
All of this translated into third quarter system wide red par growth of approximately 30% year over year, and 5% compared to 2019 levels.
With each month, surpassing prior peaks.
Leisure transient revpar continued to lead the recovery exceeding 2019 levels by more than 11% for the quarter.
Business transient Revpar reached 2019 levels with notable acceleration and large corporate business. Our top 20 business accounts are now just 3% shy of 2019 levels with forward bookings trending above 2019, small and medium sized businesses remain.
Ahead of 2019 levels group Revpar reached roughly 93% of prior peak levels for the quarter with company meetings, improving significantly as a percentage of mix.
We expect trends to remain strong for the balance of the year with system <unk>. Once again, surpassing 2019 levels in the fourth quarter leisure transient revpar is expected to remain meaningfully above prior peaks driven by solid consumer confidence and it continued eagerness and ability to travel.
We expect business transient rep par to continue to see gradual recovery, primarily driven by rising demand as companies encourage their people to get back on the road.
System wide group position for the fourth quarter is approximately 5% above 2019 levels accelerating over the last several months largely due to a robust demand pipeline. Additionally rates on new bookings are up in the mid to high teens versus 2019 with group mix.
<unk> to normalize.
Company meetings and convention business make up a larger percentage of forward bookings versus the same period in 2019 as we look ahead, we remain very optimistic about the future of travel despite near term macro headwinds, we're not seeing any signs that fundamentals are weakening rising.
Demand coupled with historically low industry supply growth should continue to drive strong pricing power <unk>.
Consumers are shifting back to spending on experiences international borders are reopening and pent up demand is being released across all segments.
Consumers still have an estimated 2.4 trillion dollars of excess savings accumulated during the pandemic or approximately 55% more in their checking and savings accounts than they did in 2019. Additionally, according to a recent global Hilton study 85% of busy.
<unk> travelers hoped to travel as much or more next year and group position for 2023 is less than 10% shy of 2019 peak levels with a tentative pipeline up significantly.
While the macro environment is more challenging we are in the midst of a strong rebound was secular tailwinds that should support continued growth.
Getting to development, we opened 80 properties totaling nearly 13000 rooms in the quarter and achieve several important milestones, including reaching 100000 rooms in Europe , 25000, curio rooms globally and.
600, Hilton hotels and resorts all of our brands continue growing at a healthy pace given their distinct identities and compelling value propositions for both owners and guests. According to STR our year to date net additions remain higher than all major branded competitors demonstrates.
The power of our disciplined development strategy in the strength of our industry, leading rep part index premiums.
During the quarter, we signed approximately 20000 rooms bring our pipeline to a record 416000 rooms half of which are under construction signings were boosted by strong revpar performance in the U S, which drove greater owner optimism around the recovery, while macro factors tempered.
International signings, we were thrilled to announce nine landmark agreements to expand our.
Our luxury presence across seven countries in the Asia Pacific region, including the Conrads, Singapore Orchard, We also signed agreements to grow our flagship Hilton brand in Malaysia, Waldorf in Morocco, and what will become our first system My tempo property in times square construction starts outperformed X.
Expectations in the quarter, largely due to better activity in the U S. As the cost of materials stabilized and demand for residential construction declined.
According to STR Hilton is the only only major hotel company to deliver year to date growth and it's under construction pipeline for the full year. We continue to expect net unit growth of approximately 5% and we expect mid single digit growth for the next couple of years before returning to our historical growth rate of <unk>.
Percent to 7%.
With even more exciting destinations to enjoy we continue strengthening our value proposition for Hilton honors members in the quarter honors membership grew 19% year over year to $146 million and members accounted for more than 61% of occupancy up 200 basis points year.
Every year and roughly in line with 2019, we.
We also continue to invest in new innovations focus on ensuring we deliver reliable friendly stays that meet guests evolving needs an overwhelming 98% of guests in a recent survey said they are prioritising wellness activities, while on the road during the quarter, we announced an industry first partnership with <unk>.
Peloton to add peloton bikes in every fitness center across all of our 5400 U S properties by year end.
Are extremely talented team works tirelessly to execute on a great strategy and.
And we continue to be recognized for our award winning culture Hills and was recently named that number one best workplace for women in the U S and the number two on the world's best workplaces by fortunate in great place to work or seventh consecutive year on the list and the only hospitality company on the list as.
As we begin a new Golden age of travel I think we're better position than ever are brands are performing at their highest levels were running our highest margins in our company's history and we're on track to generate our highest levels of free cash flow yet <unk>.
Now I'll turn the call over to Kevin to give you a bit more details on the quarter and our expectations for the full year.
Thanks, Chris and good morning, everyone. During the quarter system wide Revpar grew 29.9% versus the prior year on a comparable in currency neutral basis, and increased 5% compared to 2019 growth was driven by continued strengthened leisure demand as well as steady recovery and business transient and group travel.
Justin EBITDA was $732 million in the quarter exceeding the high end of our guidance range and up 41% year over year.
Outperformance was driven by better than expected fee growth, particularly across the Americas and Europe results also benefited from further recovery and our European ownership portfolio.
Management franchise fees grew 33 per cent driven by continued Revpar improvement and strong honors license fees. Good cost control continued to benefit results.
For the quarter diluted earnings per share adjusted for special items was one dollar and 31 cents exceeding the high end of our guidance range and increasing 68% year over year.
Turning through our regional performance third quarter comparable use revpar grew 22% year over year and was up 6% versus 2019 <unk>.
Performance continued to be led by strong leisure demand over the summer travel season, with continued recovery and business transient and group travel further benefiting results.
Total U S business transient reached 2019 levels for the quarter with.
With U S group Rep far up seven percentage points quarter over quarter to 95% of 2019 peak levels.
And the Americans outside the U S third quarter, Revpar increased 74% year over year and was up 17% versus 2019.
Performance is driven by continued strength and leisure demand, particularly across resort properties, where ADR was up more than 20%.
In Europe Rep par group, 92% year over year. It was up 20% versus 2019 performance benefited from strong leisure demand and international inbound traveled throughout the summer.
In the Middle East and Africa region, Revpar increased 45% year over year and was up 6% versus 2019 <unk>.
The region continued to benefit from strong leisure demand and internationally inbound travel, particularly from Europe .
In the Asia Pacific Region third quarter, Revpar was up 46% year over year and down 16% versus 2019, Revpar in China was down 14% compared to 2019, improving 33 percentage points quarter over quarter is leisure demand picked up over the school holidays, and Covid Lockdowns in Shanghai, and Beijing were lifted and.
July travel.
Travel demand remains volatile in China as a result of strict COVID-19 policies and restrictions do contain new outbreaks.
The rest of the Asia Pacific Region continued improvement with Rev. R. Excluding China up 10 points quarter over quarter with September Revpar down just 8% to 2019.
We remain optimistic about further recovery across the entire Asia Pacific region is travel restrictions continued to ease and borders reopened to international travel for example, our recent booking pace in Japan has already started to increase following the recent government stimulus announcement in border openings.
Turning to development, our pipeline grew year over year in sequentially totally nearly 416000 rooms at the end of the quarter with nearly 60% of pipeline rooms, located outside the U S and roughly half under construction.
For the full year, we still expect net unit growth of approximately 5% and signings of approximately 100000 rooms globally with U S signings exceeding 2019 levels.
Despite the near term macroeconomic challenges, we remain confident in our ability to deliver net unit growth in the mid single digit range for the next couple of years.
Moving the guidance for the fourth quarter, we expect system wide rep progress to be between 19, and 23% year over year or up to to 6% compared to fourth quarter of 2019.
We expect adjusted EBITDA of between $641 million and $671 million and adjusted EPS adjusted for special items, and sorry diluted EPS adjusted for special items to be between one dollar and 15 cents and one dollar and 23 cents.
For full year 2022, we expect revpar growth between 40 and 43% relative.
Relative to 2019, we expect revpar to be down 1% to 3%.
We forecast adjusted EBITDA of between 2.5 billion in $2.53 billion.
Our adjusted EBITDA forecasts represents a year over year increase of more than 50% at the midpoint and exceeds 2019, adjusted EBITDA by nearly 10%.
We forecast diluted EPS adjusted for special items of between $4.46 and $4.54.
Please note that our guidance ranges do not incorporate future share repurchases.
Moving onto capital return, we paid a cash dividend of 15 per share during the third quarter for a total of $41 million a year to date or board also also authorized quarterly dividend of 15 per share in the fourth quarter year to date, we have returned more than $1.3 billion to shareholders in the form of buybacks and dividends.
For the full year, we expect to return between $1.5 billion and $1.9 billion to shareholders in the form of buybacks and dividends.
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.
<unk> and can we have our first question. Please. Thank you. We will now begin the question and answer session to ask a question you May Press Star then one on your touch tone phone, if you're using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question will come from Joe Graf with J P. Morgan. Please go ahead.
Good morning, Chris Kevin Jill Jenson.
Good morning, Jeff.
I wanted to talk about corporate at negotiated rates can you give us some perspective on how important what percentage of your room nights prepaid.
Pre pandemic.
<unk> associated with corporate rate negotiations accounted for as a percentage of the total.
And then as you think about those negotiations that are ongoing now for next year do you get the sense that more companies that were traditionally part of the corporate rate negotiations are opting to go to a more dynamic less contractual right type of model.
I'll take it in the order you gave it.
Just by way of background U S where was it in 2019 it was about 10% of our overall business in 2019 at the moment, it's about 7% of our overall business and that is largely at this point given the big accounts are coming back by choice because we have chosen.
To pivot our mix as we've been talking about for the last several quarters, a little bit more heavily towards SMB small medium size enterprises simply because they are higher rated.
And more resilient.
Through ups and downs, having said that are big corporate customers have been customers.
Bars, a long time and they are important but we have waited that down I think as they.
Mentioned that we were most recently only really about 3% off with our with our top 20. My guess is that 7% will go up a bit but you know our objective is to keep it a bit lower than 2019 were early and that negotiations season, and what I would say.
What I can say at this point and.
Talking to our teams is the vast majority.
Those accounts are going to dynamic pricing, that's something that we've been doing over a very long period of time, even pre COVID-19.
We didn't have the majority of the accounts dynamic, but we had a decent chunk I Wanna say 25 or 30% pre.
Pre COVID-19 and through the last few years, we've moved.
Very aggressively to get more people to dynamics. So at this point the majority of them are dynamic and you know I think that all customers understand because of what they are dealing with in every aspect of their life.
That at least at the moment inflation is a real thing and that their expectation is.
That they're going to have to pay more than you know the best it's early days the best.
The best week, we think at this point is.
High single digit.
Very low double digit sort of an <unk>.
10, 90 10 range is best best we can figure at this moment.
Great. Thanks, Chris.
And the next question is from Sean Kelly from Bank of America. Please go ahead.
Hi, good morning, everyone.
Historically, the third quarters kind of when we get a little bit of a taste of kind of of 2023, Rev par outlook and I think.
All of the macro turmoil that's out there it makes all dissension in the world to not maybe provide something specific but can you just help us walk walk us through your thinking here Big picture, you, obviously see alot speak with a lot of people out there. So based on kind of what you know right now maybe give us a little bit of directional colouring.
Particularly what can accelerate further from the trend lines that we're seeing in the third in early fourth quarter and just how do you see it moving through the year 2023, Yeah, I think you're right. There's a lot of macro uncertainty and as a result, it's a little bit early for us to to prognosticate on what we think for next year.
Not only that but we're just at the early stages of our budget process, which will be going through over the next 60 days or so to complete by year end.
So it is premature having said that directionally I'm happy to comment on sort of how how we and I think about it at the moment on a forward looking basis.
What what we're obviously looking at as I said in my prepared comments as fundamentals that are that are currently pretty strong and while again, we're not naive to what's going on with the fed here in central banks in other parts of the world in the sense of trying to tame inflation by slowing economies.
We do think we have a reasonably unique set up that is may be different than some other industries for a period of time that is going to benefit us not just in the fourth quarter, but into next year, what are those things not to be too redundant because I covered him briefly.
You know the laws of economics are alive, and well supply and demand supply is at historically low levels and is going to stay there for awhile right just given everything that's going on from Covid and now into the macro concerns demand is picking up as I covered relative.
Relative to the third quarter, our expectation that it's going to continue to pick up into the fourth quarter.
Why isn't picking up it's picking up because the segments <unk>.
Remains strong I mean leisure covered it people still have desire and and a lot of disposable income and savings to spend and more flexibility and time.
Business transient that you have a huge amount of pent up demand, that's accrued as well as in the meetings and events.
Segment, you have the international markets opening up and you have a broader trend of just.
E a secular shift or maybe cyclical shift back to the more normalized spending patterns of everybody spending less on things and spending more on experiences and so.
That's what we're benefiting from we obviously got hammered during COVID-19. Unlike other industries, but now we're in this recovery in those.
Those you know I I sort of describe it here you know with our team and with our board is like you have headwinds and Tailwinds.
The headwinds or the macro the world is slowing down right and it has two and they're going to they're going to accomplish that goal, but we have tailwinds. Okay. We have these tailwinds of like spending more on experiences international travel pent up demand and then just incremental demand associated with people having to run their businesses gather.
Meetings and events of all sorts, whether it's social or business and at the moment.
Those tailwinds are stronger than the headwinds and I would say meaningfully stronger which is why we will continue to recover we continued our pricing power my own belief is we have enough wind in our sails to go for awhile now it depends on the macro and like what happens in the economy.
How how long does it slow for how much does it slow I mean, those are things I don't know I'm not an economist and everybody can judge for themselves, but my view is for the next few quarters at least those are pretty powerful tailwinds and we're talking to customers, we're seeing daily data.
We are.
We're putting our finger on as many places pulses as we can to understand it. So that's a long winded way of saying I don't know what the answer is for next year, but my view is <unk> definitely going to be up in my opinion.
Year over year, it will definitely be over 2019 levels and what we're going to figure out from now to the end of the year as part of the budget process and watching the macro.
I've been watching those tailwinds and headwinds fight each other how much we think it's going to be up but our view is that it is definitely going to be up we.
We did give you some sense quickly.
You know being in the mid single digits. So similar to this year.
And an expectation for next year. So if you listen Super carefully that was in my prepared comments that we we are we are trying to give a little bit more visibility there because we have obviously more visibility ourselves into sort of those things tracking through pipeline and under construction and delivery schedules.
Thank you very much.
Sure.
The next question is from Carlo Santa Rally with Deutsche Bank. Please go ahead.
Hey, everybody. Good morning, Chris Obviously, you know you guys have had been it's gotten bad to returning capital much in the way you did prior to the pandemic with buybacks, but.
<unk> can I end up coming public again. This is the first time, where you've operated in an environment where interest rates.
Where something greater than where they've been uhm. So I'm just wondering as you think about your capital return strategy you think about your your cost of funding obviously your your debt there there isn't a ton that's that's really great sensitive and you have some time before you have any bonds do.
How does the new interest rate environment kind of factor into your capital plants.
Yeah, I mean, obviously it factors into it I'd say first of all.
<unk> background, where returning more capital than we ever have historically.
Because we are producing more free cash flow than we ever have historically and we intend to continue to do that we have.
From a balance sheet point of view said, we want to be at three to three and a half times leverage we still want to be in that zone. We have said, we want to be towards the higher end of that.
Which would imply incremental borrowing that might increase or buy back in at some point.
There will be a time I suspect that we want to do that at this moment with where the capital markets are we probably are not in a rush to go out and take on more debt to do that.
But at the right time and right place there we might be in there and there are obviously other ways of are raising capital in the form of shorter.
Credit facilities and other facilities that we have but at the moment.
We are still of the mind three to three and a half times, we're probably.
Honestly, you're going to end the year, a little bit lower than we might have gas because of where the capital markets are but we think those things will stabilize and again if there are opportunities that present themselves to do more than we're doing we will certainly look to take advantage of those opportunities for a balance sheet point of view and maturity we're in.
Fabulous shape Kevin.
If you want but we don't really have any meaningful maturities until 2006, we took great advantage.
Both pre Covid and then during COVID-19 when the fed lead to and so hard to be so helpful to those markets to refinance and push out maturities. So we feel really good about the profile of our maturities, which as we have known for a number of years of any meeting and about what our current rate structure is so you know.
Been doing this a long time these things go up and down the fed is doing what they have to do.
To harness demand ultimately you know my guesses as if history is any indicator of the future.
And they overdo it a little and.
And at some point in the next couple of your ears that will go the other way and as I said you know we.
We have a number of ways to raise.
That the bond markets or one, which we don't honestly like right now for obvious reasons and wouldn't look to enter those markets at the moment, but we have other forms of credit and the forms of our credit facility and other other facilities that are shorter term and as a result lower costs. So hopefully that gives you a sense of it the answer is yes.
But yes, and no I mean, yes, it impacts us, but it doesn't in any way change our trajectory of still returning.
Significant the most capital that we ever have and we're gonna continue.
Fully planning to continue doing that on the basis that we're gonna be producing more free cash flow this year and by the way if I'm right on red par and going up we're gonna just produce more free cash flow next year, but that is the.
It gives us the ability to keep returning very large amounts of capital without having to necessarily borrow and Ah Margaret we don't like.
Thanks, Chris Yep.
The next question is from Smedes Rose from City. Please go ahead.
Hi, Thanks, I wanted to ask you a little bit more about what you're saying in China, and maybe kind of what the development pipeline looks like there and.
Rooms, I guess opening just seem to be very depressed demand would you expect <unk> pull back there are kind of how're you thinking that plays out within the next year or so yeah.
He asked me what I would say is it sort of similar to it's kind of a microcosm of what Chris was was saying on the macro I mean, you've got some headwinds and you've got some sale tailwinds right. I mean, you definitely have macroeconomic disruption there that's.
That's been well publicized. It's also I think we've talked about this in prior quarters. The actual way development gets done on the ground in China is still a very much a face to face environment, a face to face culture. So that's affecting our level of signings at the moment.
Interestingly enough, we've had really strong signings over the last couple of years and so starts her up in China. This year pretty mature for the third quarter prematurely and will be up for the year deliveries will be up for the year and as you know we're pivoting too you know more of a limited service strategy in China, that's ultimately going to be less sensitive to the macro environment.
Over time, and so so that's all sort of a mixed mixed view and what we would say is developer optimism remains really strong.
A lot of demand for our brands, particularly Hampton.
And he'll end Hampton at home too that are just getting started and then we're rolling out Hilton Garden Enfranchising. So that's sort of a long way of saying, we we think the trajectories up over time in a material way, but in the short term you do have some choppiness.
Okay. Thank you.
Sure.
The next question comes from David Cats from Jeffries. Please go ahead.
Hi morning, everyone. Thanks for taking my questions.
You, you've given a ton of fundamental information I got the puts and takes with all of it I Wonder if you could talk about the non revpar fees to some degree as they become just an important part and how we might expect those to behave in the puts and takes around.
Those as well as well as to the opportunities to grow them.
Into other areas of et cetera longer term. Thanks, Yeah sure. It's a good question I think we you've heard David you've heard us say in prior quarters that those fees.
During COVID-19 they were less volatile right. They sort of went down a lot less when the world blew up and then our expectation was that they'd go up you know.
Not quite at the pace of of other fees Revpar driven fees during recovery interestingly enough in the near term those fees are actually growing almost at the rate of our overall fee growth rates that we've had very strong I mean are two primary ways that we generate fees of course or credit card fees, which have been bolstered by one you know change that we made to the program.
I think the programs as strong as it's ever been obviously consumer spending has been pretty strong so that fuels.
Spend in the issuance of points and fuels remuneration HGV is doing quite well there. There are fee growth has been really strong. So far this year. There are public. So you can look at their numbers I don't have to tell you how they're doing but you should assume that we grow kind of in lock step with them as they recover and they grow fees and so over time.
You know I would say that they will continue to be a more meaningful contributor. It's hard to say, you know and and more normalised revpar environment, They probably do grow at or slightly above the level of Revpar. If trends continue and then we'll be looking for ways to continue to grow those over time and so we're not going to get into specifics on things that haven't happened, but you should have.
Assume that you know the co brand new credit card product is one that can be taken outside of the primary countries that we're in now we were getting good growth with our new products in Japan, and we'll be looking to bring that to other other countries.
Countries HGV of just did an acquisition right. So they're doing quite well and then we're always thinking about ways. We've talked to you guys in the past about how to commercialize our customer base further and how to drive more revenue so more to come on that but that's sort of generally the story.
Understood and I I don't want to break the rules, but there was just one SG&A came down a little bit I hope. This is helpful to everyone. I was just curious what the what what the driver of the SG&A Guide.
Being in a little bit was and if it's sustainable and twenty-three and and then I'll stop. Thank you. Yeah. That's okay. We'll let you break the rules a little bit.
It's a it's a fair question I'd say generally it's a really good story right I mean, and we continued to do a good job of containing costs as you know we're very disciplined.
About about spending money there is a little bit of timing stuff in the gap numbers and I know I know, we give you the gap and we think about it more in cash and that's a little bit unfair, there's a little bit of noise in the gap numbers, but it's still a really good story, there still legit savings on the gap side and then we think about it more on the cache site right. What are we actually spending on overhead and all.
Cash G&A this year for the full year is going to be sort of down in the low to mid teens relative to 2019, that's not to say there aren't some headwinds in terms of you know as the business of recovers and people move around a little bit more cost of labor inflation is is a real thing, but we still think that over time.
We'll be able to grow our G&A based sort of around the level of inflation going forward until you'll see sort of permanent that's part of what's driving the margin improvements that Chris was talking about earlier Nicole.
Thanks very much.
The next question is from Robin Farley from UBS. Please go ahead.
Great, Yes, circling back to.
<unk>, having more reasons under construction then you did a quarter go ahead, and they talked a bit about China and it starts are up there can you talk about what's going on with you guys rooms under construction and and it just what we hear from others is that it's been so much more challenging to get developers to put shovels in the ground right outside of signing to actually putting shoveling.
The ground and so is what you saw here in Q3, an anomaly in terms of having more was under construction sequentially or is that something that you think you'll continue to see thanks, yeah, well, we certainly hope we continue to see it I mean, you know it is definitely an inflection point in the third quarter, which we think continues and.
Into the fourth quarter.
Well it certainly relative to normal times, if there is such a thing as.
Is more difficult in terms of cost cost to build.
Financing availability.
Other thing that's happened is that a recovery has been much much steeper than anybody thought and obviously unlike any other recovery period right strength has way outperformed with anybody at the at and when you look at it you can look at the majority of our system, which we do the majority of our system the hotels or or.
Generating greater profitability than they ever have greater than 19, which was the prior high watermark. So what does that what is happening that is then fueling.
And we'll talk about the U S. Because you asked about the U S. It's fueling optimism in people wanting to do more deals. This is we have a very diversified owner base, it's mostly small and medium businesses. This is what they do it.
It is in a part of what they do is 100% for the most part of what they do and they like what they see and they're making gobs of money and most of their hotels and they want to do more of it and they want to lock up the best friends, you know to Pat us on the back we have the highest performing brands in the business the highest market share across on.
Magenta across each of the segments and so.
We I think are disproportionately benefiting from that and how it's showing up.
Is.
There's Kevin I think mentioned and is prepared comments.
We're gonna be over 19 levels on signings this year in the U S and that in a percentage of those are translating into starts and that's why we have seen the the uptick in start starting in the third quarter that we think is going to continue to the fourth quarter now there's a lot of uncertainty I Dunno man you know like how many different ways. We can say it every.
But he is asking the question says it so.
There's a lot of uncertainty out out in the future, but we are C.
But we are seeing an inflection point and we are certainly expect that to continue and are hopeful it continues.
For an extended period of time.
I'll input costs are higher the reality is those things are starting to stabilize it a little bit and you've.
You've seen other forms of construction and drop off which are provided more availability of sub contractors and while the big banks are still it's still challenging it from a lending point of view our ownership community broadly is getting financed and local and regional banks and they've still with the strongest relationships.
It's been been willing to finance now, they're putting more equity up there providing in many cases full recourse.
And and rates are higher but I think their view as rates are higher for a period of time. These are short term financing that ultimately when asset stabilize will be in a different environment and longer they can convert to longer term financing that's more reasonable so.
It is clearly net net harder.
There are a lot of reasons as I say, if you just look at the behavior of our broader under community there signing more deals and we've had an inflection and inflection point and starts.
And we like seeing that and we thank our performance in market share and and all of those things are are meaningful contributors to it and we'll we'll keep it will keep you up to speed as we watch those.
When's it headwinds you know in the macro environment to see if.
If that changes, but we were we've been very pleased with that momentum.
[noise] great. Thank you for the color just for my follow up question. If I could ask about group you mentioned your position for 23 five per cent is 19, and I think I think that's a total revenue position and just given how much disruption there send that reset you know we're not necessarily books.
King as far out because of the disruption from the pandemic.
It seems like I'm, just thinking about the impact on your <unk> for next year that the benefit to you is that if they are booking closer and you're you're gonna be able to get these sort of current rates as opposed to like historically group you're stuck with whatever rates. You agreed to you know two years ago can you give us a sense of maybe how much.
Volume.
Is down like thinking about like the incremental price that you may get an iron how significant that uhm that volume that'll take between now what you had in 19 months. Let me, let me think up on stats cause I think maybe I misheard, you or you Miss stated what I said when I get groups that so we're <unk>.
5% up in the fourth quarter.
By the way if you could go back a couple of quarters ago, we were not we were five or 10% down so again <unk>.
Business has been picking up at a very rapid pace, but is relatively short lead. We are we are nine or 10% off and group position system wide for 2000 2003, not ahead, but our tentative and pipeline are literally off the charts I mean, when I when we sit.
And talk to our sales teams across the World you know the biggest issue is just having enough people to keep up with all the demand there's a massive amount of demand and it is you know it is short lead demand. So when we look into next year just given the experience we've been having it makes us feel it makes us feel very very good about.
Being able to.
Fill in that group base, and ultimately get group back which was it.
93% in the third quarter, we think it will be from a revenue point of view roughly at par in the fourth quarter and we think given this trajectory it will be above 19 high watermarks next year. Thus another contributor like leisure, which we think will stay strong and business transient, which we think is pigging.
Up steam and will stay strong to why we think next year will be a reasonably two very good positive year in terms of rates.
That is a good thing in the sense that we do I think have a reasonably if all these segments stay stable to strong we have we have an ability to maintain pricing power that I think is again just back to the fundamentals of the business that I think is reasonably good and we've been booking new business at much higher rates.
You're right existing business.
Is.
His book that less high rates, although still reasonable rates. Most most of those are are equal to or greater than 2019 rates and at this point.
The majority of our bookings for all of next year I would say are still to be to be blocked we're probably roughly.
Half of our bookings, maybe plus or minus are on the books at this point in the year and everything that's going on between now and the end of the year. We will go into next year higher than that in my opinion, given the demand, but all of those bookings will be at a higher rate structure. So we think there's both you know the opportunity for the demand.
To get back and then exceed based demand levels of 19 and to do it at a higher rate, which for that segment will contribute meaningfully to to <unk>, just the sink back to what it nor.
Normally was you know our our system wide group.
Was about 20% of our business and 19, you know right now it's about 16 17, you know so we think you know next year will normalize.
And be.
Pretty close to if not you know at historical levels of of demand from a segmentation point of view.
Oh, great Super helpful. Thank you.
The next question is from Chad Beynon with Mcquarrie. Please go ahead.
Good morning, Thanks for taking my question.
Kevin you mentioned that one of the areas of the Q3 B came from the better European ownership segment, which is.
Probably benefiting from a stronger U S dollar and just kind of overall recovery can you talk about how you were thinking about this segment the margins around that maybe in the fourth quarter and beyond I know at the beginning of the year, there was probably a little bit more pessimism and I'd say you know in the last two quarters. This is probably come in ahead of expectations and push numbers are.
I'm just trying to level set on that thanks, yeah.
Yeah sure I think is completely fair right away I think that Europe has continued to despite the rhetoric over there and what they are bracing for in the winter and things like that.
We talk about it all the time around here. The operating results have continued disordered defy gravity and you heard you heard the results that I've said in my prepared remarks, which are sort of growth in excess both you know obvious on an absolute basis because of how far it fell but relative to 2019 in excess of the other regions of the world that clearly has translated.
Through to our real estate portfolio or at least the part of it that is concentrated in that part of the world. The UK in Central Europe , I'd say for the fourth quarter similar to what we've said about the macro we don't see any reason to believe that that sort of won't continue and then you'll probably in that part of the world have some headwinds next year right. You mean, you think about.
The inflation that they've got going on that affects labor that in that in flex affects our energy costs and utilities and things like that although you know if the fundamental environment holds up we should do just fine and then Japan, where we have a couple of large leases again they'd just open the country up demand is starting to pour in and that's a that's a part of the <unk>.
Portfolio that could be a headwind and so I'd say you know the sort.
Wrap it all up on a run rate basis, we're about sort of three quarters of the way back to 2019 levels. So we don't see any reason why that portfolio doesn't continue to recover to where it was which should continue to enhance our growth rate broadly overall and I think it's always worth mentioning that that you know keep in mind that the rest of the business the fee businesses grow.
Doing it at a nice clip and that that portfolio continues to get smaller over time because of the work. We've done there. So we exited seven leases last year will exit another two or three of them. This year I think two or three.
Year is probably the right way to think about it and you know that business will be.
You wake up a few years from now there'll be 5% or less of the overall business.
Great. Thank you very much appreciate it.
The next question is from Patrick Shoals from Truest Securities. Please go ahead.
Hi, good morning, everyone morning.
I Wonder if we could talk a little bit more about that group paid if I kept my numbers correct.
You said.
Next year down roughly nine to 10 per cent and then it said for four two up five I Wonder since you reported at the end of July you, how how is that.
The pastebin.
Go in for those two different periods. It certainly sounds like <unk>, but what was the.
The comparable pay for next year.
We need to ask before I remember they both moved about 500 basis points and.
In the cough correct up a better better okay.
Okay, and then do you have any.
It's early but any indications I'm sort of the longer you know how our corporations feeling about.
2020, <unk> 24 25 at this point I guess, it's fair to assume that they're probably a lot more cautious and they would be to book a holiday party at this point.
Something's not the business that gets book that far out is typically the mega size groups that you know these.
So she Asian.
Groups and other trade groups and not somebody I mean corporations don't not only they don't even they don't put their small meetings are there.
So that that's you know relatively short cycle, so, but when you look at the Big I think I mentioned that I know I mentioned in my prepared comments you know what we're seeing in terms of the mix on a forward looking basis and bookings on the group site is looking a lot like the mix from pre COVID-19, which by definition means we're getting a much bigger mix.
Of the of the very large meetings and events that are getting book you know, it's not surprising it took you know.
Some time to get there.
And to get the revenue consume will take more time, because these are huge multi thousand person events. Some many of them citywide. They just take a long time to plan and implement but that is that is definitely starting to happen as you talk to convention.
Visitor cbeebies around the country that is starting to happen and it makes sense notwithstanding the macro.
Concerns out there are a lot of these groups have the meat to survive I mean these are events that it's not just networking. These are revenue raising events that allow these trade groups and associations too.
Be alive and so they can only go so long and not doing they're using the reason they weren't doing them before was in there and by the way. They are generally very resilient and economic ups and downs the big Mega groups that book Multiyears out because there's too much planning and money involved.
The reason that they uniquely during COVID-19 were impacted was health like nobody if you're having an event that nobody shows up with them will pay the registration fee and then you have a big expensive putting on the event.
You not only don't make money you could lose a lot of money, but now that we're sorta like you know I don't Wanna be the guy that declares that the COVID-19 is sort of over in the sense that it's not gone and there's variance people aren't making decisions in terms of their behavior, both personally and professionally and in meetings and events.
You know that are that are factoring for that I think all of these groups now view it as it is to save time.
From a health point of view to do it and they need to do it and so they're they're very deep into the booking in planning processes and so it's sorta make sense that unique thing was the health issue. This time, you know, which was which we had to sort of get through but I think at this point notwithstanding.
Things going on in Covid I mean, just go into the airports go into any one of our big hotels or anywhere else and you can see that when these events are happening there they're very normal it looks just like it just like it did before.
Okay Uhm.
Great I appreciate the caller. Thank you yep.
Yep.
The next question comes from Duane <unk> from Evercore ISI. Please go ahead.
Hey, thanks very much.
Maybe switch gears, a little bit I wanted to ask you about a revenue management systems one of the things we've heard from operators recently as preference for Hilton.
R M systems, and the concept of pricing floors.
In those systems moving up can can you speak to the investment you've made.
Around or you know what you think you're special sauces, there are and how you might be viewing pricing floors, and institutionalizing those pricing floors Ah differently than you have in the past.
I'll, let Kevin answer, but competitively, we're probably not gonna give you quite the detailed answer that yeah, I was going to say that but yeah, we'll probably won't get into the way the algorithms work or any any.
Even though I can't even bring myself to say that F word outlet.
But I can look I'd say, we have a long history of being really good revenue management and it is part of our special sauce.
We say all the time, you can't really unpack all of the different things, we do commercially and say it's that that one thing is X basis points of Rep. Our next premium right. It all it all goes into the premiums that we drive, but I would say we in our history, we have a vendor that we work with we co created the.
The algorithm with them we work they have been an amazing partner, we work really hard with him and we think we think we're really good at it we've created the concept of the consolidated center, we drive more of our owners that sign up to be in these consolidated centers, where we help them. You know we don't set pricing for the vast majority of our system right to 75% of its franchise that it's ultimately up to the free.
I used to set the pricing, but we can advise them on how we do it and we're really good at it and it's part of our special sauce and I'd, probably just leave it at that.
No I would say that's right and we don't stop I mean, it's got a system in the old days. The systems are like you built a new system and then you let it run for a long time, where these algorithms and are being tweaked constantly to add incremental data fields that used to be in in revenue management in our world.
It was really just like you know data related to the hotel now we have datasets because the world is a wash and data.
That are contributing to the decision making in these algorithms and just make make it smarter.
You know during COVID-19 in the aftermath of Covid one of the big things has not been less about.
The floors and more about ceilings and so I think we've been you know.
Very you know very thoughtful about that as well so yeah. It's part of our you know one of the many things that we think we are commercial teams are second to none in the industry not just in revenue management, but every other regard but.
This is one area that we think we do a really good job.
I appreciate the thoughts yep.
The next question is from Stephen Grambling from Morgan Stanley . Please go ahead.
Thanks for taking my question. This is a bit of a follow up on the last topic and on pricing power broadly prior to the pandemic. There were regular questions. It seemed on why rate was so hard to push even as occupancies, where near peak given there seems to be very little pricing pushback now how would you frame what has changed cyclically versus structural as you consider either changes in consumer behavior distribute.
<unk> yield management as you were describing or other factors. Thanks, Hey, Steven good good to have you on the call.
I mean not to be pedantic about it.
But maybe I'll found that way, it's just the laws of economics, I mean, I don't know how many times I got asked you know in the lead up to the pandemic why can't you get it ready pressure.
Not going to accuse you of it but probably got asked a thousand times, but you and everybody else in my comment. There is just there was no compression you were in an environment, where while supply wasn't high it was over 30 year averages and more importantly demand was low because you were in this very loads.
Burke growth environment, where GDP was vacillating between like zero and two per cent and you put those you know you you were an equilibrium and supply and demand or maybe even a little bit add add an equilibrium in the wrong way and that doesn't give you pricing and no inflation and no inflation now you have all the.
Things that allow you to have pricing power you have very limited capacity for what will be an extended period of time.
Robust demand growth that we're talking about you know and and broader inflationary pressures than those things are different so the odds of economics.
As I say around here, they're alive and well that's what's happening.
They were driving the result, prepaying demick and they're driving this results just different set of conditions.
Makes sense. Thanks for getting me on I'll leave you with one.
Sounds good.
The next question is from Brant <unk> from Barclays. Please go ahead.
Hey, good morning, everybody. Thanks for taking my question, Chris or Kevin I'm curious, if you have thoughts about the conversion activity into potential macro slowdown and the basis for the question is that you know that that activity historically has acted sort of counter cyclical or.
For obvious reasons, but you know you guys just had a cycle, where where converge activity was really high. So I guess is there was there a pull forward of the conversion activity into 2020, 2021, and 2022 that we would have maybe normally seen in a in a macro type of slowdown, which we we could eventually see.
Yeah, I don't think it's a good question, Brian I don't think there's been a pull forward I mean, we're still gonna do roughly 25 per cent of our rooms additions. This year is conversions you're right. It does interestingly it does tend to be counter cyclical and I think this is what you're saying, but I'll I'll just state anyway look sort of rising tides conversions actually get tougher in really <unk>.
Strong fundamental environments right rising tides lift all boats and so if you think of you know an.
Hotel that may be considering needing a brand and a really strong demand environment, they need us a little bit lessons. So the pace of convergence goes down.
So that's that's actually a little bit interestingly, a little bit of a headwind at the <unk> at at right now and then the other thing that drives isn't a lot of them happen around transactions and right and at the moment because of people thinking about macro headwinds going forward transaction activity has slowed somewhat because bad <expletive> spreads widened in those markets and so there are.
As many assets trading so that's a little bit of a headwind and I think actually a downturn can sort of be a strong tailwind on both of those fronts right. If you get a little bit of a reset in.
People's outlook, you sort of have a downturn then I'll look gets better capital costs, you know sort of adjust rates come down spreads widening you actually then so you pick up in transaction activity, which helps and then during the downturn you know as demand softens people need us needless more so we think that conversions will continue to be a big part of the story and interestingly enough.
A little bit of a softening in the macro could be could be a nice tailwind there.
Makes sense, thanks for all the sauce.
Sure.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back to Christmas setup for any additional or closing remarks. Thanks.
Thanks, everybody for the time is always we appreciate the great questions an opportunity to give you a little bit of color on everything going on.
Obviously, the macro environment is a little bit uncertain and like you were watching it very carefully but as you heard today, we remain really optimistic certainly about the long term of the business given given the position that we're in from a brand strength in margin and overall enterprise wide point of view.
But we also remain optimistic in the short to medium term just given that these tailwinds that we've talked about several times today.
Are pretty strong and we continue to see very good trends and very very good recovery across all the segments. So we'll look forward. After the end of the year to giving you a sense of the fourth quarter, and obviously, a little bit more visibility and how we think about 2023, thanks again and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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