Hilton Worldwide Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 9, 2023

Key Takeaways

  • Hilton delivered a robust recovery in 2022 with system-wide RevPAR up 24.8% year-over-year in Q4 and 42.5% for the full year, occupancy nearing 2019 levels, record adjusted EBITDA margins of ~69%, and more than $1.7 billion returned to shareholders.
  • For 2023, Hilton forecasts system-wide RevPAR growth of 4–8% versus 2022 and expects Q1 RevPAR to rise 23–27% year-over-year, driven by continued leisure strength and a 25% increase in group bookings back near 2019 volumes.
  • Hilton added nearly one hotel per day in 2022 (58,000 rooms), achieved 4.7% net unit growth and enters 2023 with a 416,000-room pipeline—over 90% with no key money—targeting 5–5.5% net unit growth this year and 6–7% over the next few years.
  • Hilton launched Spark by Hilton, a value-driven premium economy brand addressing a $70 billion U.S. segment, with 200 conversion deals in negotiation and expansion plans in 100+ under-served U.S. markets.
  • The Hilton Honors program surpassed 150 million members—up from 100 million in 2019—accounting for 64% of Q4 occupancy, and remains the fastest-growing hotel loyalty network.
AI Generated. May Contain Errors.
Earnings Conference Call
Hilton Worldwide Q4 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Hilton 4th Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen only mode. After today's prepared remarks, There will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference over to Jill Slattery Chapman, Senior Vice President, Investor Relations and Corporate Development, you may begin.

Speaker 1

Thank you, Chad. Welcome to Hilton's 4th quarter and full year 2022 earnings call. Before we begin, I 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 10 Q. In addition, we will refer to certain non GAAP financial measures on this call.

Speaker 1

You can find reconciliations of non GAAP to GAAP This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our Q4 and full year results and discuss our expectations for the year. Following the results, we'll be happy to take your questions. And with that, I'm pleased to turn the call over to Chris.

Speaker 2

Thank you, Jill. Good morning, everyone, and thanks for joining us today. We're happy to report a strong end of another year of continued growth. Together with our team members, owners and communities, We've navigated through the most challenging times our industry has experienced and are deep into recovery throughout the world. For Hilton Honors members and owners, we remain committed to delivering reliable and friendly experiences to our guests, And we continue to enhance our network through our strategic and disciplined approach to development, enabling us to serve even more guests across more Our strategy drove strong performance for the year LASISTOMIDE RevPAR up 42.5% versus 2021 and approximately 1% shy of 2019 levels.

Speaker 2

Both adjusted EBITDA and EPS surpassed our expectations and prior peaks with margins of roughly 69 up more than 300 basis points year over year and more than 800 basis points over 2019 levels. Strong results and higher margins enabled us to generate the highest levels of free cash flow in our history and return more than $1,700,000,000 to Shareholders for the full year. Turning to results for the quarter, system wide RevPAR grew 24.8% year over year And increased 7.5% compared to 2019 with performance improving sequentially versus the 3rd quarter. We saw continued progression across all segments with leisure, business transient and group RevPAR all exceeding 2019 levels. System wide occupancy reached 67%, up from the 3rd quarter and just 3 points shy of prior peak levels.

Speaker 2

Overall rates remained robust, increasing 13% versus 2019 with all segments exceeding expectations. As expected, leisure trends remained strong throughout the quarter with RevPAR surpassing 2019 levels by approximately 12%, modestly ahead of 3rd quarter performance. Strong leisure transient demand RevPAR also continued to improve with business travel up 3% versus 2019. Nearly All industries saw continued recovery compared to the prior quarter. Small and medium sized businesses remained an important and growing part of our business Travel segment, accounting for roughly 85% of our segment mix and enhancing our overall resiliency.

Speaker 2

Group saw the biggest quarter over quarter improvement with RevPAR fully recovering to 2019 levels driven by both occupancy and ADR Gains, company meetings boosted performance improving more than 7 points versus the 3rd quarter. As we look to the year ahead, acknowledging macroeconomic uncertainty, we expect system wide top line growth of 4% to 8% versus 2022. We expect performance to be driven by continued growth in all segments And aided by easy first quarter comps due to Omicron, meaningful recovery across Asia and solid growth in U. S. Urban markets As group business continues to recover, comprising roughly 20% of our normalized mix, Group is a segment with the greatest visibility.

Speaker 2

For 2023, group position is up 25% year over year and nearly back to 2019 levels, even with robust forward bookings, the pipeline still remains strong with tentative bookings up more than 20% versus last year, helped by rising demand for company meetings as organizations bring their teams back together. Additionally, pricing for new bookings is up in the low double digits and lead volumes in January were at all time highs. Turning to the development side, we continue to deliver on our commitment to capital light growth. For the Full year, we added nearly a hotel a day totaling more than 58,000 rooms and celebrated the opening of our 7,000th hotel. Since our go private Transaction 15 years ago, we've more than doubled the size of our system.

Speaker 2

Our rooms in the U. S. Are up nearly 100% and our international portfolio is now 3.5 times larger. Additionally, we've added 10 new brands to our system, more than doubling our portfolio of brands. We achieved all of this without any acquisitions and more than 90% of the deals in our current pipeline did not have any Key money or other financial support.

Speaker 2

In the Q4, we celebrated the opening of our 60,000th Home2 Suites Room, Our 150,000 Doubletree Room, our 200th Hotel in Kala and our 600th Hotel In Asia Pacific, including our first Hilton Garden Inn in Japan. We also saw continued strength Construction starts throughout the year, leading to starts of more than 70,000 rooms for the full year. In the U. S, starts increased more than 9% 1000 rooms, half of which are under construction. We expect net unit growth of 5% to 5.5% for the year and remain Confident in our ability to return to 6% to 7% net unit growth over the next couple of years.

Speaker 2

Our disciplined development strategy continues to our network effect and enables us to serve more guests across more destinations for any stay occasion. Building on this commitment, last month we launched our newest brand, Spark by Hilton, a value driven product that delivers our signature reliable and friendly The needs of even more guests and owners. Premium Economy represents a large and growing segment of travelers totaling nearly $70,000,000 annually in the U. S. Alone, for which we have not had a tailored brand to serve.

Speaker 2

This cost effective all conversion Fran offers a streamlined reinvestment plan focused on core guest elements and enables owners to leverage our industry leading Commercial engines and powerful network effect. To date, we have more than 200 deals in various stages of negotiation, Almost all of which are conversions from 3rd parties. Additionally, we've identified more than 100 U. S. Markets With no Hilton branded product, providing a great opportunity for the brand and the company to expand its presence.

Speaker 2

As a testament to the strength of our system and our continued success of our customer focused strategy, Hilton Honors surpassed 150,000,000 members during the Q4 and remains the fastest growing hotel loyalty program. Honors members accounted for Approximately 64% of occupancy in the quarter, up more than 300 basis points year over year and roughly in line with 2019. Additionally, we welcomed approximately 200,000,000 guests to our properties during the year, exceeding pre pandemic peak levels. We remain focused on ensuring Hilton has a positive impact on the communities we serve. For the 6th consecutive year, we were included on both The World and North America Dow Jones Sustainability Indices, the most prestigious ranking for corporate Sustainability performance and for the 7th consecutive year, we were ranked among the world's best places to work by Fortune and Great Place to Work.

Speaker 2

So our performance demonstrates our team members have proven that we can handle whatever comes our way and because of our hard work and discipline, We are incredibly well positioned for the future. We're at a pivotal moment with great opportunities ahead and a new golden age of travel We're more confident than ever that our team is poised to deliver in 2023 beyond. Now, I'll turn the call over to Kevin To give a little bit more detail on the quarter and the expectations for the full year.

Speaker 3

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 24.8% versus the prior year on a comparable and currency neutral basis and increased 7.5% compared to 2019. Growth was driven by continued strength in leisure as well as steady recovery in business transient and group travel. Strength over the holiday travel season also benefited results. Adjusted EBITDA was $740,000,000 in the 4th quarter, up 45% year over year and exceeding the high end of our guidance range.

Speaker 3

Outperformance was driven by better than expected fee growth, particularly in the Americas, Europe and the Middle East, as well as roughly $30,000,000 in COVID related government which benefited our ownership portfolio. Recovery in Japan following borders reopening in October also contributed to strong performance in ownership. Management and franchise fees grew 31% year over year driven by continued RevPAR improvement. Good cost discipline further benefited results. For the Q4, diluted earnings per share adjusted for special items was $1.59 increasing 121 percent year over year and The high end of our guidance range.

Speaker 3

Turning to our regional performance, 4th quarter comparable U. S. RevPAR grew 20% year over year and increased 8 versus 2019. All three segments showed quarter over quarter improvement as compared to 'nineteen with performance continuing to be led by strong leisure demand. Both business transient and group RevPAR recovered to above 2019 peak levels for the first time since the pandemic began, driven by continued recovery in occupancy and Strong rate.

Speaker 3

In the Americas outside of the U. S, 4th quarter RevPAR increased 53% year over year and 25% versus 2019. Performance was driven by strong leisure demand over the holiday travel season, particularly at resort properties where RevPAR was up over 60% versus peak levels. In Europe, RevPAR grew 67% year over year and 20% versus 2019. Performance benefited from continued strength in leisure demand recovery in international inbound travel, particularly from the U.

Speaker 3

S. In the Middle East and Africa region, RevPAR increased 26 year over year and 34% versus 2019. The region benefited from international inbound travel during the World Cup in Qatar. In the Asia Pacific region, 4th quarter RevPAR was up 29% year over year and down 19% versus 2019. RevPAR in China was down 37% compared to 2019, taking a step back quarter over quarter as loosening travel restrictions led to a surge of new COVID cases.

Speaker 3

Demand is expected to gradually recover throughout the year, but remains volatile in the near term due to rising infections. The rest of the Asia Pacific region saw significant improvement with RevPAR excluding China up 8% versus 2019. Performance was largely driven by strength and following borders reopening. Turning to development. For the full year, we grew net units 4.7% modestly lower than expected, largely due to the ongoing COVID environment in China, which weighed on 4th quarter openings.

Speaker 3

Conversions accounted for 24% of our gross openings for the year. And additionally, our pipeline grew year over year ending 2022 at more than 416,000 rooms with nearly 60% of those located Outside the U. S. And roughly half under construction. Looking to the year ahead, despite the near term macroeconomic uncertainty, We are encouraged by the robust demand for Hilton branded products in both the U.

Speaker 3

S. And international markets. For full year 2023, we expect net unit growth of between 5 percent and 5.5 percent. Turning to the balance sheet. In January, we completed an amendment to our revolving credit facility to increase the borrowing capacity Under the facility to $2,000,000,000 and extend the maturity to 2028.

Speaker 3

As we look ahead, we continue to remain confident in the strength of our liquidity position and financial Moving to guidance. For the Q1, we expect system wide RevPAR growth to be between 23% 27% year over year. We expect adjusted EBITDA of between $590,000,000 $610,000,000 and diluted EPS adjusted for special items to be between $1.08 1 $1.14 For full year 2023, we expect RevPAR growth between 4% 8%. We forecast adjusted EBITDA of between $2,800,000,000 $2,900,000,000 We forecast diluted EPS adjusted for special items $5.42 $5.68 Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the Q4 for a total of $123,000,000 in dividends For full year 2022, we returned more than $1,700,000,000 to shareholders in the form of buybacks and dividends.

Speaker 3

In the Q1, our Board authorized a quarterly cash dividend of $0.15 per share. For the full year, we expect to return between $1,700,000,000 $2,100,000,000 to shareholders in the form of buybacks and dividends. Further details on our Q4 and full year results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have.

Speaker 3

We would like to speak with as many of you as possible, so we ask that you limit yourself Chad, can we have our first question please?

Operator

Thank you. We will now begin the question and answer session. Our first question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Speaker 4

Hey, guys. Thank you and thanks for all the color you provided. Kevin or Chris, whoever wants to kind of tackle it, obviously, Given the strength in the Q1 and acknowledging their seasonality and it doesn't flow this simply, it does look like at For the back half of the year, you guys are looking at a flattening out. Could you kind of of RevPAR, could you more or less frame kind of how you're thinking about the back half From a macro perspective and what's more or less embedded in your guidance as it relates to the economy?

Speaker 2

Yes. I mean, listen, you can see in the Q4, first of all, thanks for the question. I think that is the $64,000 question on everybody's mind. I mean, you could see in the Q4, We had really good strength across all the segments. We're early in the year, but in the Q1 we continue to see That strength continue in substance relative to 2019 obviously versus 2022, it's way up because of the Omicron impact, but we continue from a fundamentals of the industry point of view To feel very good about things.

Speaker 2

I mean, if the fundamentals are supply and demand, that's what ultimately drives the result. The supply side is quite muted. We're currently experiencing using the U. S. Market, which is our biggest market as an example, Equal to the lowest levels of supply that we've seen.

Speaker 2

Thankfully, we get more than our fair share, but overall in the market, Very low levels of supply and that continues to be met with very strong demand. And we have not Seen for the record, any weakening. We have not, we haven't like seen any telltale signs. There are no threads of like Any of our major segments sort of backing up. What I think is driving that is some both Cyclical and secular sort of tailwinds.

Speaker 2

First, you continue to see consumers Shifting how they're spending their money. So maybe they're spending a little bit less, but how they're spending it, it continues to be shifted more Towards experiences, we're sort of Exhibit A on the experience side. The international markets are opening up. People you're starting to see Not just inbound to the U. S, but across the world, people traveling.

Speaker 2

Asia Pacific is opening up Pretty fully, it will take a little bit more time. We saw that happen in Japan in the Q4, which raged, we had very strong results. So we get the full benefit of that. China is obviously going through sort of what we went through 12 to 18 months ago with Herd immunity and the like, but our view is that's happening quite rapidly on the ground. You're already starting See significant travel within China in terms of uptick and we expect particularly in the second half of the year, you're going to have A big tailwind from that.

Speaker 2

And there continues to be broader pent up demand across all segments. I mean you could argue In the leisure side, some of that has the people have been doing a lot of it, but we don't see them slowing down. So We continue to thank people, partly because of the shift in as I mentioned towards experiences, we continue to see strength there. On the business transient side, still good demand, very strong demand and growing demand, lots of pent up demand. And as I mentioned in my Prepared remarks, we finished the second half of last year on the group side as people really got comfortable we were through COVID and they Start planning events.

Speaker 2

They've been planning them like crazy. Even the biggest groups, all the association stuff that really starts hit the second half of this year because of all of the planning, some of that's happening. I've been in a lot of big events speaking at them lately, but the group demand, Which I think is pretty resilient just because people have gone years without doing things that they need to do for survival is pretty resilient. Those are the economics of supply and demand are really good. To be specific, Carlo, and a very fair question.

Speaker 2

When we've given you a range of 4 to 8, what did we sort of build into it? I mean, part of the reason that you're suggesting a flattening of DSO is because let's be honest, it's math. I mean, we're going to be way up. You saw our guidance for the Q1. The That the second half of the year, you'll see macroeconomic conditions slow.

Speaker 2

So, if you were to categorize it, I would Describe it as we have assumed in the second half of the year, sort of a plateauing related to what we think will be a moderate recessionary environment In the second half of this year. And that's what we have sort of built into what we've suggested to you

Speaker 4

Great, Chris. Thanks. That's super helpful. And then just one follow-up. As you guys think about 'twenty 3 and obviously some projects that likely were slated for the Q4 as you mentioned kind of slipping into 23.

Speaker 4

As it pertains to Conversion activity as a percentage of the unit growth this year, would you think that 24% Is better or would you think it's higher or lower than that 24% that you experienced in 'twenty two?

Speaker 3

Yes, Carl. We think it's going to be higher. I mean, a couple of different reasons. One, conversions continue to be more important as the world gets a little bit Although those conditionings are loosening, it has been tougher for new construction as you know. So conversions become even more important.

Speaker 3

And then Spark, as We've talked about in our prepared remarks is 100 percent conversion brand. So we don't think there's going to be a ton of those introduced this year, but by the end of the year we'll start delivering those and so that will A little bit higher level of conversion. So the way we think about it, we don't guide specifically, but higher than that 24%, say probably 30% or higher for the year.

Speaker 4

Thank

Operator

you. And the next question will be from Joe Greff from JPMorgan. Please go ahead.

Speaker 5

Good morning, guys.

Speaker 2

Good morning, Jeff.

Speaker 5

So I just wanted to see, Chris, if you could talk about what's embedded in the second half of this With respect to U. S. Occupancy and pricing changes on a year over year basis?

Speaker 2

Yes. I mean I'm not going to get highly specific because we gave you a range and that would be hard to do the range that way. But I would say Directionally, the way to think about it is, that occupancy sort of flattens out. We don't believe, at least in the numbers we're giving you, we don't anticipate that occupancy even gets back To 2019 levels, RevPAR levels we think throughout the year will be higher because of rate integrity. For all the reasons I described in my filibuster off of Carlo's Question, we do continue to believe we will have good pricing power at least through this year simply because there is no capacity The addition really coming into the market, and you asked the question about the U.

Speaker 2

S. Market and we do have these both cyclical and secular tailwinds That are giving us increases in demand that we think are going to allow us to continue to have pricing power. We're not assuming in the second half of the year That pricing power is increasing. I would say we assume it's flattening or maybe even modestly lower to get to the So, on the occupancy side, if the world's Better than everybody thinks. There may be some opportunities.

Speaker 2

Again, we've at a very high level, we've assumed Not a crash landing, sort of soft to bumpy landing in the U. S. With a moderate recessionary Environment in the second half, but with some structural things that are going to help the business globally that I talked about and help the business in the U. S. In terms of spending patterns, group demand and pent up demand on certain categories of business travel.

Speaker 5

Great. And just as my follow-up, Chris or Kevin, when you think about The fees not related to RevPAR growth in the franchise and the licensing line, specifically the credit card fees, As well as royalty fees coming from timeshare. Do you think that grows in line with RevPAR or how are you thinking about how that changes Over the course of this year versus last year?

Speaker 3

Yes. Joe, I think look historically or right, not historically, over the last few years it's been less Volatile, right? So if RevPAR was up 45% -ish for the year this year, those fees were up something less than that, although still very robust And HGV is public, so you can look at what they've grown when they report. I think in a more normalized RevPAR environment 4 to 8, they should grow slightly higher they should grow at a rate that's better than the overall business. And so largely dependent on spend, although Our credit card program set a record for spend in the Q4 and for the full year.

Speaker 3

It was spend about 50% higher than it was even in 2019. So that program is Quite well, although it should be it should grow better than RevPAR over time, but it will be a little bit less volatile than it's been just given what's been going on in the world. Thank you, guys. Sure.

Operator

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

Speaker 6

Hi, good morning everyone. Good morning. Chris or Kevin, just maybe we could talk about the development side. I mean, obviously, the kind of Shifts from China side, the overall outlook on the construction starts remains robust and we just continue to get a lot of Investor concern about the ability of developers to finance new projects, how has that changed with the interest rate environment or the economy. So how did your conversations Kind of throughout the quarter.

Speaker 6

And then if you could talk maybe dig as my follow-up, dig a little bit deeper In the Spark, there's been a bit of concern or question in the past about kind of going further down in the chain scales and just Hoping you could unpack that a little bit for us. Why is right now the opportunity set right for moving into the premium economy space?

Speaker 3

Yes, sure, Sean. Thanks. I'll start with sort of maybe the construction trends more broadly and then maybe hand it off to Chris to cover Spark a little bit. I think what you've seen, look, there's a lot of puts and takes, right? So you're talking about the interest rate environment and availability of capital and obviously rates are a lot higher Than they had been and availability of capital is a little bit more constrained, but there's still plenty of money available for the right projects in the world.

Speaker 3

If you think about what's going on At the local and regional bank level is different than what's going on at the money center banks in terms of capital constraints and things like that. You have some headwinds as we would say in terms of construction costs coming down. They're still higher than they were in 2019 by about 20% to 30%, but that's off of peaks and moving in the right direction. And then as we've been talking about the fundamental environment gives people more confidence That when the hotel when they develop the hotel and it opens, it will perform at a higher level than maybe it otherwise would have. So their pro form a goes up.

Speaker 3

So you sort of put all that in the gunkulator and that's why starts started to build in the U. S. And ended up higher in the U. S. Last year than they were the year before.

Speaker 3

Depends on where you are in the world, obviously, it was really difficult. Not only was it difficult to get hotels openimpossible in China at the end of the year because literally the They gave you your certificate of occupancy. We're closed. And so that's why you saw a little bit of softness in our NUG. That same environment is going on in starts.

Speaker 3

So if you're in China, Starts have been behind, but we think starts are going to continue to build from here. The fundamental setup does give developers optimism And the way they're thinking about it, they can absorb not in all cases, but in a lot of cases, they can absorb a higher cost of their construction loan and thinking that the world will be in a better place when they open the hotel, it will perform better and that when they roll their Construction loan into a permanent loan that hopefully the rate environment will be a little bit more normalized. So those are sort of some of the puts and takes of what's going on

Speaker 2

in the world. Yes, and supporting that and I'll talk about Spark, when we talk to our owner, I would say at this point, the majority of our system are making more money. Each individual hotels are making more money than they were at the peak of 2019. So that's driving optimism. And the reason they're making money is more efficiencies, higher margins, Obviously, rate integrity and pricing power has helped that.

Speaker 2

But they've got the bulk of the portfolio is producing More free cash flow than it ever has and this is the business they're in and many of them are quite good at finding the money in a local and regional context They have decades long relationships and as Kevin said that's why you saw in the second half of the year we saw inflection point where it starts Starting to go up, here in the U. S. And generally around the world and we think that trend, we don't see anything that suggest That trend is reversing itself. On Spark, listen, we spent a lot of time. We have the truth is we have been Thinking about something in this space for a long, long time, almost the entire time I've been at the company, We had a lot of obviously we've doubled the size of our brand portfolio, so it's not like we've been sitting around doing nothing.

Speaker 2

We had not entered that zone, but 3 years ago or so, we started to look at it and say like because it's a very big customer base, it's a huge opportunity to better serve our existing customers, But also an important opportunity to acquire new customers. If you look at that customer base, at least half probably, I think arguably more than half of that customer base That are early in their travel lives that are going to grow up and do other things and the sooner you get them into the system and building loyalty with them, the better off You are. So as always, when we look at brands, it starts with a sort of a customer acquisition And a network continuing to build the network effect for our existing customer base. So we were confident when we started Looking at it 3 years ago that there was a lot of reasons to be serious about it. Then comes the hard part of trying to figure out how do we engineer something At this price point that really works, that it works for customers, meaning that the experience they have with us is going to be great, Friendly, reliable, consistent and that we can apply the same magic, if you will, from a commercial point of view to our ownership community that we have our other brands so that we drive superior performance to our competition.

Speaker 2

And so there's a reason we spent 3 years on it because it's not easy, but we think We figured it out. I would say, and time will tell, this will be the most disruptive thing we've done in terms of brand space, because It is very ripe for disruption. If you go look at hotels at this price point in this segment, you will find a very high It's already out there. So you'd say, well, this is all conversion. It is all conversion.

Speaker 2

But what we did over the last few years is figure out with our supply management team, with our design With our brand teams and everybody else in this company, how can we engineer a product where every single hotel, 100% of the time when it comes in System has been refreshed. Everything that is customer facing. We built it. We built the rooms. We put it in real hotels.

Speaker 2

We built the lobbies And we brought customers in to say, is this what you want? Is it different? And so what will be different about this In this space and why I am not worried about it and why frankly, I mean it's not sexy, okay. It's not as sexy as lifestyle and luxury, But in terms of an opportunity to be a value contributor in the 1,000,000,000 of dollars for this company and its shareholders, I'm as excited about this as anything else we've done because from a customer point of view, we are going to give them A high quality consistent experience at this price point that does not exist in the market because of the way we've engineered The retrofit of these properties and this will ultimately take some time, but it can happen quickly. It will be 1,000.

Speaker 2

It's the biggest segment In the U. S, it's the biggest segment in Europe. I mean, it will be 1,000. It should be over time the biggest brand we have in terms of number of units. And as I said, most importantly, it always starts with what is best for better serving our existing customers and acquiring new customers and how do we do it in a way that owners will get a superior return.

Speaker 2

We And how do we do it in a way that owners will get a superior return? We think we have cracked the code. We will have to prove it. It will come to life quite quickly, as Kevin said. We will have As Kevin said, we will have Spark open this year.

Speaker 2

It won't have a too terribly big impact on this year's numbers, But as we get into next year and beyond, we think it will have a meaningful impact. And as I said, ultimately, I look at these as Opportunities as a consumer branded company to think about a new product at our scale being able to be deployed at scale, Deployed globally and have the opportunity to be worth 1,000,000,000 of dollars to our shareholders. And I think this It checks all of those boxes. So we're super excited. We're not nervous.

Speaker 2

We've done all the work. I hope we've proven at this point Given this is the 10th or 11th brand that we've created out of the ashes or out of the dust that we're pretty good at this at this point.

Operator

The next question is from Smedes Rose from Citi. Please go ahead.

Speaker 4

Hey, good morning. I just wanted to ask you a little bit on the owned and leased portfolio. I think you mentioned $30,000,000 of COVID related subsidies, I think during the quarter and I'm just wondering should we just assume that those start to kind of dissipate as we go through 2023 or are they just all gone at How are you thinking about that?

Speaker 3

Yes. I think it's played through based on the programs that have been approved thus far in Europe. I mean, If there's maybe a little bit more to come through based on things we've applied for that haven't quite come through yet a very small amount. And who knows if anything more will come, but we're not expecting any. And then the thing I would say is if you look at it on a normalized basis, because remember we had subsidies in 2021 as well, If you sort of pull all that out, the growth has been quite dramatic and we continue to think that that portfolio will grow at a higher rate than the overall business this year.

Speaker 3

Great.

Speaker 4

Thank you. And then, Rich, I was just wondering if you could just touch on, you mentioned the U. S. Pipeline and we all see what's happening there. Any change in the way that Hilton is thinking about using key money in order to maintain or grow share or potentially lend to developers at this point or?

Speaker 2

No, no. As I commented on in my prepared remarks and if you look at the whole pipeline, More than 90% of it has no key money, no financial support. We have not changed our view on that. If you look at the Aggregate dollars and CapEx, when you peeled out what we're spending in key money, actually if you average last year and this year together, because we had things we thought would happen last year that are happening this year, it's actually lower than what we've been suggesting to everybody over the last Couple of quarters. So no, I don't we still view the opportunity to grow as very strong and without the Our balance sheet and that ultimately is driven by what you would guess it is.

Speaker 2

Everybody investing in our portfolio Brands is doing it to get a return and our brands are the highest performing brands in individual segments, but overall When you aggregate them together and people are continuing to want to invest with us in that way. So A long winded way of saying no, we don't say anything. In fact, I think the trend line for us overall in key money, I'm looking at Kevin who runs development 2, so make sure he agrees with this, but the trend line is down, meaning over the last couple of years, we've had a little bit of elevated Key money in aggregate dollars because during COVID a bunch of things we've been working on a long time Came together or some other people's deals blew up and we were able to sweep in on some very strategic things At a moment in time and those were lumpy, but we always have opportunities to work on, but I think those There are going to be fewer of those lumpy things. So I think honestly, I think in an aggregate dollar sense over the next few years, the trend line is down, not up.

Speaker 4

Thank you very much.

Operator

The next question comes from David Katz from Jefferies. Please go ahead.

Speaker 7

Hi, everyone. Thanks for taking my question. Just following on some of the earlier discussions about The thoughtful conservatism baked into the guidance, could we talk about the capital returns a bit and just how you thought about Pulling that together and is that necessarily a kind of firm number In view of how the guidance is set up and what could push that up or down going forward?

Speaker 3

Yes, David, I have to say that yes, it's a firm number or we wouldn't have given it to you. I assume that goes without saying, but I can't help myself. So yes, as of Al, it's a firm number. That's what we think. It's a range for a reason.

Speaker 3

There's a lot of year left and a lot could happen. I think if I did read your note this morning, so I think I know where you're going with this. It does right now we're a little bit lower than our The historic range of leverage, that range does assume effectively no borrowing for the year because we think that the borrowing and we don't borrowing environment right now, it's very choppy. Rates are higher than we're used to. And so that assumes that leverage Stays roughly flat to slightly down for the year and that's what and yes, that's what the range of guidance and EBITDA will spit out For capital return, again, recognizing that we're very high free cash flow business and we don't do other than what we were just talking about with a little bit of key money and a little bit of capital.

Speaker 3

We don't do much else with the money other than pay a small dividend and use it for buybacks. And so that's the

Speaker 2

Yes. The only thing I would add to all of that, I agree wholeheartedly. The only thing I would add to that is that's not our longer range views on the balance sheet and Return of capital haven't changed. We have been very consistent since the beginning of time. It feels like saying we want to be 3x to 3.5x.

Speaker 2

We're at the low end or below little bit below the low end of the range for the reasons Kevin just described. We think the debt markets are choppy. They'll get better. Over the intermediate and longer term, we don't intend To run leverage at those levels, we would intend to be in the ranges, frankly, and we've said it on these calls, probably towards the high end of the range In a more normalized environment or even beyond that, it's something that we would certainly we've been asked and said many times publicly we would consider. We just need we're just looking for a little bit more stability in the debt markets.

Speaker 2

And obviously, as Kevin said, we don't have the need and as I commented in my answer to the earlier question on key money, which is the primary use in terms of CapEx. We don't think we need a whole lot more. So any borrowing, any re leveraging or leveraging up, obviously, just affords us the opportunity So I think there will those opportunities will exist. We gave you what we think right now and we'll see how the debt markets And broadly how the macro sort of shifts going forward.

Speaker 7

Appreciate that. And the ribbing is well received since I misspoke on that question. I know you mean what you say. Can we talk about the New brand, just a bit. Am I taking away from that, the notion that you are fitting yourself into a space where there Aren't necessarily direct competitors or there are and you believe you've come up with a better value proposition That will just compete better?

Speaker 2

I would say we don't think there are any real competitors. I mean meaning that if we do our job, we're going to sort of Come in plus or minus 20% below true, which would still probably be above If you look on average, it will be above where most of the folks in the existing segment are. That's why Like we like to do, we're a branding company. We made up a segment. We called it premium economy.

Speaker 2

So our view would be It is above the traditional economy space. It will price above both because of the strength of our system, our commercial engines, loyalty system and all those things, but Importantly, because it will be a better, higher quality, more consistent product.

Speaker 7

Got it. Thank you very much.

Operator

The next question is from Robin Farley from UBS. Please go ahead.

Speaker 8

Great. Thanks. My question and follow-up are both Really sort of clarifications on earlier comments. Chris, you said in your guidance, you were assuming that pricing power would Flatten or even be modestly lower later in the year. I just wanted to clarify, were you saying the pricing power like The rate of increase modestly lower or actually some rate actually lower, just to clarify?

Speaker 2

Not rates Just basically plateauing relative to 'nineteen in the second half of the year.

Speaker 8

Okay, perfect. Thank you. And then on occupancy, you mentioned that your guidance, you're really not even getting back to occupancy In 2019, I'm assuming that's just sort of a matter of time and that you would expect to be there by 2024 or are Do you have a view about Kale?

Speaker 2

Yes. I mean, honestly, I think it may be a bit of conservatism on our part. I do think we can get By the way, Robin, we can get back there tomorrow if we wanted. But we could dump rates, because we could occupy ourselves up. But we don't want to do that.

Speaker 2

We actually manage as you can see with the rate growth. We are trying to manage in this cycle, particularly given the environment, inflation and everything else, Really effectively to drive the best bottom line results for owners. In this case, that to a degree, our occupancy levels are driven by Pricing strategies, okay. Some of it is still, I think there is more recovery and more pent up demand, particularly business travel And the group segment, so I absolutely believe there's never been a cycle that I'm aware of that in recorded Saree, we will not go above prior occupancy levels, but I think that we will. It may happen this year.

Speaker 2

Honestly, if we continue to have pricing power, I kind of hope it doesn't and I hope it happens next year because it means we continue to be able to drive rate and thus higher margins a more profitability for our ownership community.

Speaker 8

Great. Thank you. And then just my other clarification on your net unit guidance. From the comment in the release, I guess I'd kind of understood the sort of the coming in just under 5%, the COVID delays in China that it was maybe Some openings that were sort of pushed past December 31 in China that would maybe make then Q1 opening sort of ahead of the full year number. But then in your comments, you made a comment about starts in China being behind.

Speaker 8

So I guess I just wanted to get some clarification on Whether it was just openings delayed by a few weeks or sort of a broader issue with the unit growth in China, Your efforts are also behind.

Speaker 3

I think it's both, Robin. I mean the environment is creating a drag both it created a drag in the Q4 on openings and also has The drag on starts because it's just broadly when they reopen and then everybody before it was locked down, now they Everybody gets sick, but the net result is the business activity comes is a drag on business activity. So signing starts and opens We're all affected by it. We don't think it's a long term trend in China. We think it's timing.

Speaker 3

And yes, by definition, if we As I said earlier in the Q and A, if there was an environment where you literally have a completed hotel that can't open because it can't get a certificate of We don't give you quarterly guidance, so we're not going to get into like when those hotels are going to open, but I think you can assume they're going to open on a

Speaker 8

Okay. All right. Great. Thanks very much.

Speaker 4

Sure.

Operator

The next question is from Richard Clarke from Bernstein. Please go ahead.

Speaker 9

Thanks. Good morning. I guess if I stay long enough at your release, I find one negative number, which is pricing is down year on year for the Waldorf Astoria. Is there any particular pricing pressure or high end hotels you're seeing or is that mix? And maybe more broadly on pricing, I guess what I observe is you seem to have taken a little bit less pricing than some of your peers and your occupancies recovered a little bit quicker, would that match what the strategy has been?

Speaker 9

And does that give you maybe A few more buttons you can press on pricing further through the recovery.

Speaker 2

Yes. First of all, on Waldorf, there's no there, there. That's driven by individual hotels. Just The Walther brand, unlike our other brands, is not so many hotels that one dynamic in one particular market or 2 markets will drive it. So there's no we're not Broadly seeing slowdown in luxury.

Speaker 2

To the contrary, we're continuing to see great Frank, I'll dish the second part of that to KJ.

Speaker 3

Yes, Rich, I'm sorry, I didn't I maybe a little bit of clarification on the second part. I'm not fully understanding where you were going with that. I'm sorry. Sure.

Speaker 9

I guess when I look at your pricing relative to the market, relative to some of your closest peers, It seems you've increased prices a little bit less than some peers and your occupancies recovered quicker than some peers. Is that in line with your sort of strategy?

Speaker 3

No, our market share is up across the board, right? So we're driving better revenue outcomes than our competitors. You may be looking at individual, I don't know what you're looking at in terms of our competitors or individual sort of spot rates for year on year. We'd be happy to look

Speaker 2

at it. Yes, the simplest way to look at it. Last year, we finished and didn't share at the highest levels in our history and we gained share both in rate and occupancy. So, But those numbers across the system would not support that theory.

Speaker 9

Okay. Thanks. And maybe just a quick follow-up. The reasonable size adjustment in the net other expenses from management franchise, The pass through costs that have been negative through the rest of the year, looking like maybe you were clawing back some of the losses through COVID. So just wondering, There's some specific program that's pivoted that the other way in Q4?

Speaker 3

No, there's always timing issues in terms of those line items. In the end, we have revenue and all of our various funds and programs are going to run breakeven over time and then you're just seeing timing issues on the P and L.

Speaker 9

Okay. Very clear. Thank you.

Operator

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

Speaker 10

Good morning. Thanks for taking my question. Wanted to ask about the tight labor market that we continue to hear about in terms of the From the Feds reporting, obviously very strong in the experiential category on travel and lodging. So Do you believe this is peaked when you talk to your partners, kind of your builders? What are they saying just in terms of the labor market?

Speaker 10

Good. And then secondarily, how does that factor into how you're thinking about, IMFs and kind of profits in the back half of the year, if it hasn't? Thanks.

Speaker 2

Yes, I mean the labor market situation has eased a lot. So as we talk to I mean listen, we employ a lot We operate a lot of hotels as I talk to our team, but beyond that talk to our franchise community. I think they would say That broadly we are not fully back to where we were in terms of access to labor, but we're getting awfully close. And so, if it was on a scale of 1 to 10 a year ago, a 10 in terms of Extremis, It's a 4 or 5. I mean, it was something we were talking about every single day, every conversation and it is not quite as topical, which is a good indication.

Speaker 2

So I think the labor situation is easing. You continue to see across a broad universe of other industries, notwithstanding what the Fed is saying, a lot of layoffs, Including, of course, through technology, but through banking, also through retail, where people had really staffed up Thinking that the COVID retail demand was going to be maintained and it hasn't. And so there are a lot of people that are getting pushed back out into the Job market and that's allowing affording us the opportunity to get the labor that we need. You've also seen while wage Rates went up a lot during COVID, net from 2019 to now. You've seen that start to stabilize And those kind of big increases are not continuing.

Speaker 2

They're at a higher absolute level, but the Level the rate of increase has diminished substantially. In terms of how we think about IMF, we feel good about IMF. I think for the year, we expect IMF to add significantly to the growth rate. We think this year, we expect that it will get over Our prior high watermarks.

Speaker 10

Great. And then secondly, just in terms of FX, The dollar has weakened a little bit against kind of the basket of the non U. S. Currencies. How are you thinking about An operational impact from that and then also as that kind of feeds into guidance, is there a translational Impact with just a slightly weaker dollar versus what you saw in 2022?

Speaker 10

Thanks.

Speaker 3

Operationally, obviously, it has effects In each individual market where you're pricing labor in those currencies, it's a very small headwind, Single digit 1,000,000 of dollars headwind in this year's numbers.

Speaker 10

Appreciate it. Thank you. Sure.

Operator

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

Speaker 11

Hey, good morning, guys. Thanks. Hey, Chris, as you think good morning. You talked about the strength of leisure in the Q4 and all of last year. But When you think about leisure demand this year, how would your RevPAR 4% to 8% growth for the year, how would that Would leisure be in that range or there's a lot of concern that it's going to be significantly below that?

Speaker 2

Yes, I think we do think it would be within that range. We continue to see strength. We do expect like all the segments that you will see some plateauing as a result of a slower macro environment in In the second half of the year, we still feel very good about it. The demand trends here and now are really strong. And while there's a lot of noise out there, if you go back, we just went back and looked at the number.

Speaker 2

Consumers still have incremental savings in the U. S. Relative to the month before COVID of $1,500,000,000,000 Now, so that peaked at like $2,700,000,000,000 it's down to $1,500,000,000 So they are spending it and they're probably reading the papers and watching the news And getting more nervous and so that would be a behavior set that would say that maybe they pull back a little bit. But the reality is we're not seeing it. And I think part of the reason Seeing it, okay, and time will tell is because of the phenomena that I described earlier in the call, which is They're shifting their spending.

Speaker 2

So not only do they still have incremental savings in their pockets and feel reasonably good, They're spending a lot more of it at bars and restaurants and travel, as a percentage of their overall spend. And We have anticipated like all segments that there'll be a little bit of a headwind in the second half of the year, but we do expect Leisure to be in those ranges.

Speaker 11

Yes, thanks. If I could address my follow-up question on Spark, which is really an intriguing product. Does it kind of take care of 2 problems that are out there for the industry? And one is, obviously, a lot of deferred CapEx over the last several years. But the other one is The age of select service hotels Hampton Inn, what started in 'eighty four or 'eighty five.

Speaker 11

So we're dealing with Hotels coming up on 40 years old. So is there a is that part of the thought process is that you've got a lot of hotels that could Ultimately fit within that brand?

Speaker 2

Listen, it is an ancillary benefit on the margin, meaning If we do have older Hamptons like other third party products that we think aren't fitting for Hampton, as you know, we've been quite disciplined in keeping the Hampton brand the brand, the strongest brand in lodging in my opinion by pushing properties out that are past their prime and don't make sense in the system. There I think over the next 10 years, there is some percentage of those that we will certainly look at keeping I think in the end, Bill, it will be a very small percentage of the overall system. And if I look at the deals that we have in house right now, 98% of the deals we are processing right now are 3rd party brands. So there are a few Hamptons in there. There's no other Hilton But there are a few Hamptons, but I would say it's an ancillary benefit On the margin, a lot of those hotels, frankly, over time are going to exit the system as we've been doing for time and eternity.

Speaker 11

Great. Thanks for the time.

Operator

Yes. The next question is from Patrick Scholes from Churrus Securities. Please go ahead.

Speaker 4

Congratulations on what appears to be another success play.

Speaker 3

Hey, Greg, can you hear us? We can't understand what Your connection is super garbled.

Operator

I apologize, Sarah. We'll have to move on to our next question. And that next question is from Brandt Montour with Barclays. Thank you.

Speaker 12

Hey, good morning, everybody. Thanks for taking my question. Actually, just one for me, Chris and Kevin. So in terms of development and More medium to longer term sort of net unit growth and I your comments were well taken, Chris, on a couple of years. The world seems to have gotten a bit better for you though, right, since 3 months ago, right, in terms of the speed at which China is reopening now, the excitement over Spark, And then U.

Speaker 12

S. Starts continuing to get a little better. So I guess the question is, do you feel a little bit better about getting back to the 6 to 7 nug Then you did 3 months ago and are we potentially even playing for maybe hitting that run rate in the late 2024?

Speaker 3

Look, I think we said what we said for a reason, Brent, not to be sort of cagey about it, but there's a lot can go one way or We still feel great about getting back to 6% to 7%. I don't Chris may have a different view. I don't feel differently today than I did 3 months ago about that. I think world is coming our way a little bit, but we don't expect none of these things stay constant, right? I mean these trends will change and we always think the world is going to come our way.

Speaker 3

So I don't feel that much

Speaker 2

better for you. I'm probably more optimistic by nature than Kevin. That's our roles. But No, I think we feel this. We felt pretty good about getting back to it a quarter ago.

Speaker 2

So I agree in the sense we don't feel differently. I think we were asked on the last call what does it look like. And we said it looks like you get to terra firma With a view on the U. S. Economy either in recession or where people have a little bit more certainty, I don't think we've accomplished that hasn't really changed.

Speaker 2

Then we said China, okay, that we got to get China back and reopened and while it's Fully reopened, it's happening. So I think on the margin, we feel better about that. And we didn't have we in our heads had Spark, but we didn't tell you about And so we now have a spark there and I think that provides no pun intended a little bit of spark to the you know to our progress So, you know, we felt pretty good about it a quarter ago. I think we feel pretty good about it now.

Speaker 11

Excellent. Thanks so much, guys.

Operator

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

Speaker 2

Thank you, Chad, and thank you all for joining us. As you I hope you would imagine we're pleased with the state of the recovery. 4th quarter numbers are great. While we're Sentient and watching the macro trends, we feel very good about what we're seeing right now in the business and Advanced bookings and all the things that you know sidelines that we have into the business, we think we're going to have another really good year and we appreciate the We appreciate the time. We look forward to catching up with everybody after the Q1 to give you more sight lines into what we're seeing then.

Speaker 2

So thank you and have a great day.

Operator

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

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