希爾頓酒店 (HLT) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Hilton Third Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to Jill Slattery, Vice President and Head of Investor Relations.

Please go ahead, ma'am.

Thank you, Denise.

Welcome to Hilton's Third Quarter 2018 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 publicly update or revise these statements.

For a discussion of some of the risk factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K.

In addition, we will refer to certain non-GAAP financial measures on this call.

You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook.

Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then review our third quarter results and provide an update on our expectations for the year.

Following their remarks, we'll be happy to take your questions.

With that, I'm pleased to turn the call over to Chris.

Thank you, Jill.

Good morning, everyone, and thanks for joining us today.

We're pleased to report another strong quarter driven by our resilient business model.

Adjusted EBITDA was at the high end of our guidance range and EPS exceeded expectations.

We continue to increase our industry-leading market share premiums and to deliver strong net unit growth, all leading to increasing free cash flow.

This setup, coupled with a disciplined capital allocation strategy, enables us to continue delivering long-term value for shareholders.

Year-to-date, we have returned more than 8% of our market cap to shareholders or approximately $1.7 billion in the form of share buybacks and dividends.

Turning to third quarter results.

System-wide RevPAR grew 2% driven entirely by rate gains.

Broader industry fundamentals remain favorable with solid corporate transient RevPAR up 3% and continued strength in group business.

Leisure transient was softer than forecasted given weather-related disruptions and a meaningful impact from calendar shifts.

Accounting for holidays and weather event impacts, we estimate second and third quarter RevPAR trends were essentially steady.

For the fourth quarter, we expect fundamentals to remain favorable but comparability issues due to weather impacts to continue to affect RevPAR results.

Our updated full year RevPAR guidance range is 3% to 3.5%.

Looking ahead to 2019, positive macro indicators suggest continued strength in lodging demand.

This, together with decelerating supply growth in the U.S., should lead to fundamentals remaining positive with regional GDP growth forecast indicating continued strength in international markets.

Additionally, areas of the business where we have better visibility further support healthy dynamics going forward.

Group position for next year remains up in the mid- to high single digits with nearly 70% of group business on the books and early corporate rate negotiations show healthy year-over-year increases.

As a result, we feel good about things heading into 2019 and expect RevPAR trends similar to this year with growth of 2% to 4%.

Our optimism also extends to our development outlook where we continue to gain share of global activity.

We ended the third quarter with more than 2,400 hotels totaling roughly 371,000 rooms in our pipeline, up 11% year-over-year, driven by increases across both our U.S. and international pipelines.

We remain on track to sign a record 110,000 rooms this year and deliver net unit growth of approximately 6.5% in 2018 and again in 2019.

Highlighting our commitment to disciplined capital-light expansion across segments and geographies, we announced several notable transactions in the quarter.

We expect to nearly double our all-inclusive portfolio over the next several years through our strategic alliance with Playa Hotels & Resorts, including adding 2 additional all-inclusive resorts by year-end.

We also announced the signing of the Waldorf Astoria, Miami, which will feature private residences, retail and top restaurants.

With Waldorf Astoria now having 30 properties globally with recently added hotels in Las Vegas and Bangkok, we continue to gain traction among guests and owners alike.

Additionally, we converted 3 properties in Dubai to luxury and full service brands across our portfolio.

This conversion significantly increases our presence in a unique and growing market while further strengthening our partnership with the Al Habtoor Group.

We continuously look for opportunities to broaden our demographic appeal and increase stay occasions among existing guests.

With that in mind, yesterday, we launched our newest brand, Motto by Hilton.

Motto is an affordable brand that combines the best elements of micro hotels and urban lifestyle products.

Properties will feature efficiently designed adaptable rooms, innovative guest solutions and unique F&B offerings local to each hotel's respective neighborhood.

Deals in various stages of development span prime global locations, including New York City, London, Washington, D.C. and Tokyo.

At full scale, we estimate Motto could total several hundred hotels across all major geographies.

Our culture of innovation extends across brands and business areas, resulting in more loyalty members and growing market share premiums.

In the third quarter, we added 3.7 million new Hilton Honors members, up more than 16% year-over-year.

Our roughly 82 million Honors members now account for nearly 60% of system-wide occupancy.

System-wide RevPAR index premiums rose approximately 100 basis points in the quarter with all major regions and brand segments contributing to growth.

Our Web Direct platforms remain our fastest-growing booking channels, a trend we expect to further accelerate with the rollout of "Expect Better.

Expect Hilton", our largest portfolio marketing campaign to-date, launched at the end of the third quarter.

I'm very pleased we continue to be recognized for our ongoing commitment to our guests, team members, owners and communities.

Most recently, Great Place to Work named Hilton #2 on their list of the world's best workplaces.

This is the third consecutive year we've been included on this prestigious list of global companies.

Additionally, for the second year in a row, we were named to the Dow Jones Sustainability North America Index.

We're thrilled to be recognized as an industry leader for our Travel with Purpose commitments.

Overall, the macro environment continues to drive favorable fundamentals.

And as we look ahead into the balance of this year and into next year, we remain confident in our ability to continue to drive strong top line and bottom line growth and to expand our global presence.

As a result, we expect to continue to generate significant free cash flow to drive shareholder returns.

Thank you, and now, with that, I'll turn the call over to Kevin to give a bit more detail on our results and the outlook going forward.

Thanks, Chris, and good morning, everyone.

In the quarter, system-wide RevPAR grew 2% versus the prior year on a currency-neutral basis.

International RevPAR growth modestly exceeded expectations and continued to outpace U.S. growth.

As Chris mentioned, weather and greater-than-expected disruption from calendar shifts led to modestly lower top line growth than we anticipated.

Adjusted EBITDA of $557 million was near the high end of our guidance range, increasing 9% year-over-year.

Our performance was largely driven by better-than-expected license fees and greater cost discipline.

In the quarter, management and franchise fees increased 10% to $544 million, at the high end of our expected 8% to 10% range.

Diluted earnings per share adjusted for special items was $0.77, exceeding the high end of our guidance.

Turning to our regional performance and outlook.

Third quarter comparable U.S. RevPAR grew 1%.

Corporate transient and group business remained solid.

Performance was somewhat tempered by softer leisure transient occupancy given weather and calendar-related disruption.

For full year 2018, we forecast U.S. RevPAR growth of between 2% and 2.5% given good fundamentals, partially offset by continued difficult comps from the storms last year.

In the Americas outside of the U.S., third quarter RevPAR grew 5% versus the prior year, given a mix of strong leisure and corporate transient trends across Canada and broader market strength across the Caribbean.

For full year 2018, we expect RevPAR in the region in the mid-single-digit range.

RevPAR in Europe grew 6.9% in the quarter, roughly 250 basis points ahead of our expectations.

Strength in Turkey, coupled with increased demand in Russia related to the World Cup, largely drove our results.

For the full year, we continue to expect RevPAR in Europe to grow in the mid-single-digit range with strong trends across Continental Europe and an improved outlook for the U.K. and Ireland.

In the Middle East and Africa region, RevPAR grew 1.3% in the quarter, led by increased group volume and strong ADR across resort properties in Egypt.

Performance was modestly offset by softer leisure business in the UAE and Dubai given supply and demand imbalances.

For full year 2018, we expect RevPAR growth in the region to grow in the low single-digit range.

In the Asia Pacific region, RevPAR increased 5% in the quarter as typhoons and weather conditions slowed leisure growth.

Trends in China remain robust with RevPAR up 8%, driven by strong industry dynamics and market share gains.

For full year 2018, we continue to expect RevPAR growth for the Asia Pacific region in the high single-digit range with RevPAR growth in China of around 11%, which accounts for weather-related impacts.

Moving to guidance.

For full year 2018, we expect RevPAR growth of between 3% and 3.5% and adjusted EBITDA of $2,075,000,000 to $2,095,000,000, representing a year-over-year increase of 9% at the midpoint.

Guidance is in line with prior expectations factoring for the third quarter beat with some offset primarily from FX.

We forecast diluted EPS adjusted for special items of $2.67 to $2.72.

For the fourth quarter, we expect system-wide RevPAR growth of between 2% and 3%.

We expect adjusted EBITDA of $518 million to $538 million and diluted EPS adjusted for special items of $0.66 to $0.71.

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

Moving on to capital return.

We paid a cash dividend of $0.15 per share during the third quarter, bringing year-to-date dividends to $137 million.

Our board also authorized a quarterly cash dividend of $0.15 per share for the fourth quarter.

For 2018, we expect to return between $1.8 billion and $1.9 billion to shareholders in the form of buybacks and dividends.

Further details on our third quarter results and our latest guidance ranges 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.

(Operator Instructions) Denise, can we have our first question, please?

(Operator Instructions) The first question will be from Joe Greff of JP Morgan.

Chris, not so surprisingly, my first question or my question relates to your 2019 RevPAR growth commentary.

I know it's early, but can you talk about how much of that is incorporated from some of ground up, either property level or regional input?

And then just broadly, can you talk about how you're seeing next year in terms of U.S., non-U.

S. and then between corporate transient group and leisure?

And then I had a quick follow-up for Kevin after that question.

Wow, this could take the rest of the call.

Happy to do that.

So as you would imagine, this time of year, every year, we go through a process of looking -- going top-down and bottom-up.

I think we start our budget process by sort of having a view of what's going on around the world broadly from a macro trend point of view, but also very -- from a micro point of view in the various regions.

We have lots of discussions with our teams in the regions and leadership and commercial teams and then we go about a very granular bottoms-up budget process.

While we're not complete with that process, I would say we are 90% complete with that process, which does give us a very much a hotel-by-hotel and region-by-region look at what we think we're going to produce next year.

And so what we would typically do is aggregate that up and then give you, given that we're in October of 2018 and we're looking forward to '19, give a fairly broad range.

That's the point up and point down around the midpoint in this case of 3% just based on the fact that it's early as you pointed out.

Important to note, so the range and outcome that we're giving, focusing on the midpoint, is very much the result of that process and very much the result of a buildup of a property-by-property and region-by-region analysis that takes a lot of time and effort by our teams.

I think when you think about it, it is informed from a macro point of view by a few things.

One, the current expectations are, both for the U.S. and global GDP growth, that they will be relatively consistent with this year.

When you look at nonresidential fixed investment numbers broadly, particularly in the U.S., they have been very strong this year and reasonably strong last year, expected -- forecasted to be strong again next year.

That has the highest correlation to demand in hotel rooms historically.

In the U.S., looking at supply numbers, we think the supply numbers are going to tick down against that backdrop next year.

Obviously, in the same way that we are experiencing difficult comps in the second half of this year related to both holidays and weather impacts, those comps then for the second half of next year will become much easier, which will be helpful.

And then getting to the segments, we -- our view, and I said it in my comments, is that we're seeing very healthy growth across all the major segments.

If you sort of neutralize for all the weather and holiday impacts and then -- and what's happening right now, which we think best we can see is going to continue into next year, you saw post-tax reform, business transient pick up from anemic growth of like 0% to 1% to sort of in the 2% to 3% range.

You've seen leisure transient remain relatively steady and strong sort of in the 3%, 3-plus percent range.

And then you've seen group ticking up into the 3% to 4% range.

That's what you've been seeing this year.

Our -- again, when we neutralize for all the things that are going on with weather and everything else, we don't think that, that changed in the third quarter.

We don't think that's changing in the fourth quarter.

We think those trends are broadly going to remain consistent and I think are supported by where we do have visibility, and I talked about it a little bit, are supported by the fact that we are -- we have a very strong group position.

Pace has been great.

Position going into next year is, frankly, as strong as I've seen it.

And that supports it when we think about our special corporate negotiations and the dialogue with our big corporate accounts around both volume and our ability to drive some incremental rate.

Those conversations have been quite positive and stronger than where we were at this time last year.

So when we put all of that together, again, those macro conditions that I just walked through, and then we look at it property-by-property and aggregate it up, this -- that's where we come out.

And I've said this, I think, a bunch of times on the last call and otherwise publicly, next year, at the moment, I feel, but to us, a lot like this year feels, both from the standpoint of our NUG growth but also our same-store growth.

And I do realize there's a negative sentiment out there.

I read the papers, I watch the news and so I appreciate that.

The reality is when we look at the business and what it's producing today and we look at the forward trends that we have, it does not reflect.

What it reflects is what we've suggested is that next year, it looks like, all things being equal, we should be delivering results very similar to this year.

And so that's what -- we're trying to give you the best perspective we have in looking at the business in as scientific a way as we can.

In terms of -- I think the only question, Joe, I didn't get there was U.S. versus international.

I think it's, again, a common theme.

I think next year is going to look a lot like this year.

I believe the international will lead the U.S. It will be stronger than U.S. My guess is, particularly with the strong group base and a tick down in supply, the U.S. will probably, in our numbers, in our roll up, will be modestly better, not materially, modestly better and the international will be modestly lower.

And it'll be modestly lower because hard to replicate the year we're having in APAC and, for that matter, in Europe so our expectation is while it will outpace U.S. growth, it won't outpace it at quite the same rate.

So a little bit more U.S., a little bit less international, but I would say, I think when the year is out next year, it looks a lot like this year and it's not going to be materially off of that.

Did I miss any of your points?

No.

You hit them all, Chris.

And then, Kevin, just quickly, you referenced FX as an offset or as a drag a couple of times in your prepared comments.

What was the FX EBITDA impact in the 3Q?

And what's incorporated to the 4Q relative to a quarter ago?

Yes.

In the fourth quarter -- so in the third quarter, it was sort of mid-single-digit millions.

In the fourth quarter, it's about the same.

So if you take -- we beat by $7 million.

It's the majority of that $7 million coming down -- bringing the full year down to the midpoint is FX.

The next question will be from Harry Curtis of Nomura Instinet.

Just wanted to drill down a little bit more maybe into a regional question, first of all.

If we were to see any evidence of global economic slowing, it would probably be in Asia.

What are you seeing there as far as pacing and price for the next, say, 6 to 12 months?

We haven't seen, Harry, a whole lot of difference.

You can look at our third quarter numbers and I think rightfully say, well, it looks like it's cooled off a little bit, but I think they're -- not to make excuses, I think scientifically, they're just -- there were things going on in Asia that drove that.

You had a bunch of typhoons that have had some effect in China, a meaningful effect in Japan, other sort of onetime events that affected Southeast Asia.

So those are the things, when we look at what happened in the third quarter, were driving it.

The basic underlying trends, like much of the world, we think are relatively stable.

Having said that, it does appear that China's economy is slowing down sort of -- as I said, we read the papers.

We -- I was just in China.

We're around the world a lot.

And so when I said our expectation is maybe a tick higher in the U.S., a bit lower driven by Asia and Europe maybe not being able to keep up the -- quite the pace of growth, some of that -- we have certainly built some of that into our thinking.

In other words, we would expect China to finish this year sort of in the 11% range as an example.

We are assuming something lower than that next year, honestly.

I think it's 8% or 9% from a budgeting point of view.

Just to put it in context to be reflective of the fact that even though we haven't seen any meaningful trend other than sort of the impacts I told you in third quarter, we haven't seen an underlying weakness.

The reality is if the economy is going too slow in China, there should be some knock-on effects.

So we've tried to reflect that in the numbers for Asia Pacific, largely driven by what I talked about in China, and same in Europe.

Europe's having a really good year and the expectation is it's just, to a degree, we're early, but it's -- and we have a great -- a group position, et cetera, but group is not nearly as much of the business over there.

I think just to be a bit conservative, if you will, we've assumed that we won't have quite the growth rate.

So we've tried to reflect that in, but in terms of like have we seen real signs of like sort of global slowdown in the core parts of the business, we have not seen that.

We are trying to be thoughtful and reasonably conservative about looking into next year to incorporate some of those views, but we have not real-time seen it.

Very good.

And let's come back to the U.S. My question is as you've been having conversations with meeting planners and heads of corporate travel, what are they telling you about next year's demand needs?

And is there any evidence of push back?

What I'm trying to get a sense of is you've been dealing with them for a long time.

How reliable -- how often are they right?

How -- is it a reliable forward...

I think that they're right until they're wrong.

I know that's not the answer you want.

I mean here's the thing.

When we're talking to our -- the meeting planners, and on the group side, you heard we have a lot of optimism because the numbers suggest we should talk -- I said on the corporate side, special corporates -- by the way, that's only 10% of the business, so keep it in perspective, but it's a good sightline into the psychology of some of the biggest companies we deal with.

All those are positive.

I mean, my -- not everybody is created equal, but broadly, people say they're going to travel more for business and for meetings and they know they're going to pay more and they're willing to pay more.

And they're willing to pay more at an increasing rate as compared to what they would have said a year ago.

So again, I don't want to be a Pollyanna, but I think all that's positive and I think all of those judgments are based on the fact that people think that the global economy, the U.S. economy in the case of U.S.-centric companies, are just going to hang in there and keep chugging along, which is obviously what is built into the assumptions of our guidance.

But the conversations have been quite positive.

I mean, not racing to the stars, but incrementally more positive than when I was sitting here a year ago.

It would be hard to say it any other way.

The next question will be from Carlo Santarelli of Deutsche Bank.

You guys talked a little bit about what you're seeing in terms of the demand side in China, et cetera, but on the pipeline side, has anything changed with respect to the cadence of your discussions and/or the kind of ongoing development that would give you guys any pause?

Not really.

I mean, I think -- I talked about one of the supporting factors in the macro side on the fundamentals was supply is going down in the U.S., okay?

So it stands to reason that it's getting -- if that's happening, it's getting harder for everybody to get deals done in the U.S. Thankfully, we fight it twice.

We're 11 and change of the market in the U.S. and we have 25% of the rooms under construction or something like that.

So we fight way over our weight, but I would say the trend line continues in the sense that it's getting -- we're getting more than our fair share, but it's getting harder to get deals done.

So we will -- even though we will hit a record in signings in the world this year, another one off the record of last year, signings in the U.S. will go down a little bit, starts will go down a little bit, NUG will go down a little bit because it's getting harder to get deals done.

So it's not getting -- I mean, incrementally, it's not getting -- since the last quarter, I don't think it's dramatically or materially different, but it's definitely harder.

Why?

Inflation's picking up.

Cost of labor's going up.

Cost to build projects is going up.

We think, by the end of the year, it will be sort of a 10% increase in the cost to build.

While you're not seeing incredible turn of the wheel and tightening of credit, it's just a little bit tighter, a little bit harder to get things done.

Interest rates are a little -- are moving a little bit in the wrong direction.

So all of that adds up to -- it makes it harder in the U.S. and that's why you see supply going down and I think you'll keep seeing supply go down because it takes a long time for that sector to reverse.

I would be remiss in not making the following statement.

The great news is the reason we're signing record deals and we're going to have a record delivery of NUG this year and it's going to go up again next year is because the world's a big place and we've anticipated the ebbs and flows and allocated our resources appropriately around the world.

And so while one market's slowing, in this case the U.S., other markets are picking up.

So Asia Pacific keeps -- continues to pick up.

All -- well, frankly, all of our international markets continue to pick up and we continue to get better and better at what we do at sort of building relationships and deploying our brands in intelligent ways to keep our growth going.

So that's how we can add more net rooms next year and hit another record than we did this year, notwithstanding the fact that the U.S. market is slowing.

And I think we'll continue to be in a slowing pattern until you have -- until the whole sort of system resets itself.

Great.

And if I could, Chris, you've always been kind of very firm in your views on M&A and your ability to kind of develop and grow from within.

In the current environment, has anything changed in your perception of where and when possible you would consider acquisitions?

No, no.

The short answer's no.

The filters have always been -- for the 11 years I've been here, the filters have literally remained the same.

Does something really work well strategically in terms of brands and our brand portfolio versus what we could do on our own and does it -- would it -- can we do it in a way that's really accretive to value.

And as we filtered, I say it all the time, we look at almost everything.

Everything to-date that we have filtered through that -- those lenses, really has not made sense versus what we're doing like watching -- launching Motto by Hilton just yesterday where we think we can do it better than anything out there and we can do it exactly the way the customer wants it and create more organic growth without having to buy growth.

So we keep making that decision because I think it's been the right decision.

I always end this M&A discussion with never say never.

I'm not saying that something wouldn't pass through that filtration system.

It hasn't to-date and our philosophy remains exactly what it has been.

The next question will be from Stephen Grambling of Goldman Sachs.

Just, I guess, a couple of quick follow-ups to Carlo's questions.

I guess, first, are you seeing any changes in the competitive dynamic as it relates to getting deals done, whether that's terms and/or the need for key money to incite deals?

And would you anticipate that to change if the environment remains tight?

And then second, given the current weakness in the stock and market more broadly, I guess, how is your approach to capital allocation evolving, if you could just remind us of your leverage thresholds?

I'll take the first and give Kevin the second.

The competitive environment, I would say, did not change in any material way.

I mean, in the U.S., when there's less getting done, deals get a little bit harder to do.

The reality is, as I said, we fight way over our weight because we have the highest market share brands and the highest average market share.

That doesn't mean we don't compete.

On occasion -- sometimes we don't, but on occasion we do.

So I would say, in a minor way, I'd say the deal terms in the U.S. have gotten incrementally tougher, but not in any material way.

Around the rest of the world, really no change, things sort of click along as usual.

So I'd say, not much to talk about there.

But Kevin, on capital allocation?

Yes.

And then, Stephen, on capital allocation, nothing's really changed.

I mean, our stated leverage range is 3% to 3.5%.

You saw us get kind of the top-ish, maybe even a little bit higher on a trailing basis to that range when we did the HNA transaction earlier this year.

So we're still thinking about the same -- things the same way.

We'll continue to distribute the lion's share of our free cash flow.

You noticed from our prepared remarks that we're keeping the dividend the same, which means that as the EBITDA of the company grows, the amount available for share buybacks will increase accordingly, but nothing's really changed yet strategically.

Yes.

We like the stock at 88.

Obviously, we like it even better at this spread.

The next question will be from Shaun Kelley of Bank of America Merrill Lynch.

Just wanted to ask -- I think in the press release this morning, you guys actually put in a comment on the unit growth side around conversion activity and how important that is or maybe becoming.

So could you just give us a little bit more color there?

So first off, is conversion activity accelerating at this point in the cycle?

And then, what are you seeing or hearing from your development organization on that front?

And how much of that is sort of factored into your net unit growth outlook for 2019?

Yes.

I think -- good question.

I expect that conversion activity will accelerate more.

I would say what we've seen technically so far is a minor acceleration, not much of an uptick.

I think when we finish the year, we'll probably do in '18 about 20% of our NUG will be conversions.

I think, ultimately, depending on what goes on, this is sort of countercyclical.

The tougher -- when things get tough, conversion activity picks up.

We've seen a little bit of an uptick this year.

We're not expecting, given our outlook for next year, to see a whole heck of a lot of uptick because we think next year is going to be another pretty good year.

Eventually, when a business cycle turns, I think you would see those numbers go up.

But what's built into our expectations for our 6% to 7% is a comparable percentage of conversions, which is about 20%.

We have almost never delivered less than that and we have more tools and more weapons in the arsenal in the sense that, in the old days, we had really one conversion brand in DoubleTree.

Now, we have Tapestry and Curio, soon a soft luxury brand that is coming in addition to DoubleTree and other brands, but those will be the brands where you'd find the bulk of it.

So what's built -- we will eventually see the numbers tick up, I don't think real soon, built into next year is a comparable level to this year.

So a lot of next year -- when you boil it down, with that gap having to obviously be filled, a lot of next year is in the bank in the sense that 80% of it is under construction.

I mean, we -- it may move a month or 2 here or there, but it's in process.

Can you just give us a sense, Chris, like at a high level, where that number was or the conversion activity was kind of 2, 3 years ago just as a guidepost for -- the 20 -- that 20% number?

Was it lower 2 or 3 years ago kind of directionally?

It's been running like 19% to 25%.

I mean, we've got in the -- at the -- coming out of the Great Recession on a much smaller base.

And the Great Recession obviously was a very big countercyclical opportunity where there was a lot of fear in the market.

I mean, we maxed out in the high 30%s.

I think -- I wouldn't expect that we would get to that level again, but we've been sort of running around this level.

So I don't feel like this is a -- certainly, it does -- it doesn't feel like it's a big pull to us.

My development team, of course, they've got to do a lot of work.

So I don't want -- if they're listening, I don't want them to think otherwise.

But this is something we have typically been able to deliver with a fair amount of ease.

The next question will be from Bill Crow of Raymond James.

Chris, I wanted to -- wanted to see if you can put a little finer point on corporate rate negotiations.

I know it's only 10% of the business, but the owners are saying it's critical for ADR growth for next year.

At one point, you said you're seeing healthy rate increases, but then you kind of broke it down and you said something like occupancy or the demand side and then you said you hope to see some incremental rate increases.

So I'm just curious, are we looking at kind of 0% to 1% on the rates?

Are we looking at 2% to 3%?

What do you...

I think we're looking at -- last year, we were looking at like 1%-ish.

You could argue 1% to 2%, but I think it really ended up in the low 1%s.

We thought 1% to 2% and ended up closer to 1% than 2%.

Right now, it looks like 2% to 3%, right?

I mean, I talked to the teams yesterday to get the latest and greatest update.

It feels to them like 2% to 3%.

Now, it's just 10% of the business, so -- but obviously a good indicator.

Okay.

And then maybe for Kevin, on the capital return, obviously you had the opportunity this year to buy back maybe more than you would have.

But given, Chris, your commentary on the sameness of next year versus this year in different metrics, should we assume $1.5 billion to $2 billion of capital return?

Yes.

I think, Bill, the way to think about it is next -- we did bring forward some leverage into this year around the HNA opportunity.

So the trade-off obviously is free cash flow.

We've got to be careful we're not giving bottom line guidance.

But free cash flow, if you just take what we're saying about RevPAR and net unit growth, ought to be a little bit higher next year than this year and then you will have the opportunity as EBITDA grows to releverage a little bit, but we brought leverage forward this year around the HNA deal.

So if we were to hit the midpoint of our leverage guidance for next year, it's logical to assume that the amount would be somewhat lower next year than it was this year.

The next question will be from Anthony Powell of Barclays.

Could you provide some more detail on your group position being up mid- to high single digits?

What markets are driving that?

Is it more volume or rate?

So it's broad-based.

There's not like one industry group driving it or, frankly, one region.

Although the bulk of our group business ultimately is in the U.S., it is broad-based.

It's up, I would say, in the close to 8% range.

Now, we, being perfectly objective and as scientific as we can be, we believe some of that has to do with commission policies that we think -- we do believe that as we look into next year -- now, the businesses are going to show up so it's going to be good for the business, but we do believe as a result of the change in the commission policies that we advanced some amount of bookings.

And we think that probably means that the real position, the real position is 8% to 9%.

We think when you sort of back out the commission effect, it's still, very easily, 5% to 6% up, which we feel good about.

And it's basically split pretty evenly between -- I was just looking at this yesterday, as well, it's basically split pretty equally between volume and rate.

Got it.

And on the other end of the scale, some of the limited service brands underperformed in the quarter and this year.

Is that just due to higher supply growth?

Or is that a bit of a demand component that is impacting relative RevPAR growth?

I think that's what you're seeing kind of broadly across the industry, and I think it's a combination of things.

Yes, more the supply growth -- even though the supply growth is low and it's getting -- and it's going down, you certainly have seen more of the supply growth in those segments, which I think is probably the largest contributor.

We have some other specific things going on if you look at it, but I mean, in terms of renovation work going on like in the Hampton brand, I think 25% of the brand is under renovation at the moment, and that has some impact, but even with that, the Hampton brand has grown market share.

So it is still outperforming.

I think, broadly, in terms of why that segment in the market is underperforming is to do with the incremental supply in that area, which will be diminishing.

The next question will be from Robin Farley of UBS.

One shorter-term question and one longer-term question.

You were talking about some of the factors that led Q3 to come in a little bit lower in the U.S. than you had thought.

When we look at just the weekly data so far, first half of October is also not off to a great start.

So just wondering if you see sort of a clear -- what you see in your sort of next 30 days in the U.S. looking different maybe than kind of -- it looks like some of those same trends have continued in early October.

So I hate to be so short-term about it, but I know that there's concern out there about kind of what happened in the short-term versus previous guidance and all of that.

And then my other question is on group.

I think you said 3% to 4% is what the increase was in 2018.

I don't know if you put numbers around -- I know you said 70% of next year's group is on the books, but where you're seeing rate and volume for group business for 2019 so far?

Yes.

Robin, I think for the last few weeks, you're still seeing kind of residual -- you're seeing continuation of the tougher comps from last year where the storms and the other weather-related events, particularly in the United States, just generated a lot of business last year that we're still comping over.

So our outlook for the year incorporates a little bit better fourth quarter than third quarter.

So I think you're still seeing some of that show up in the weeklies.

And then on the group side, I think it's about the same.

The picture is about the same.

It's about half and half between -- split pretty evenly between volume and rate in that 3% to 4%.

Yes, but I was asking about your 2019 group, what you have on the books in rate and volume.

What levels increases or not increases for 2019 versus what you saw a year ago for '18?

It's about the same.

Yes, it's about the same.

So in other words, were the 3% to 4% where group is ending up for 2018 is exactly what you thought it would be a year ago?

Yes.

That's comparable, yes.

That's pretty comparable.

I think about a year ago, we were saying mid-single digits and it's coming in sort of 3% to 4%.

Yes.

It was...

It's pretty close as we expected, yes.

Sorry, I didn't understand the question, Robin.

Right.

In other words, just thinking about where group came in versus your expectations for '18 and then how that means for '19...

They've been consistent with our expectation.

The next question will be from Patrick Scholes of SunTrust.

My first question relates to your management business.

What are you seeing or forecasting for labor costs growing next year?

Yes.

I think next year, Patrick, probably about the same as this year on the labor side, probably 3% to 4% all-in wages and benefits, which is about -- I think about the same as this year.

Okay.

And secondly, on the group number that you gave for 8% to 9% next year, and correct me if I'm wrong, that's not a same-store number.

Do you have a same-store number that you can give?

No, that is a system-wide same-store.

What I was trying to do is make sure that we're being honest about trying to filter out the impact of anything we thought that was a result of bookings being advanced because of our change in commission policy.

Now, admittedly, Pat, that's -- I mean, we're trying to apply science to it.

It's not going to be perfect science.

We look at what we're doing through intermediaries versus what we're doing in direct bookings to sort of arrive at an equation to tell us where we think we'd be.

Mid-single digits, 5% or 6%, is where we feel confident without any changes in commission policy.

We would have been -- which is not too terribly, as Kevin pointed out, not too terribly different than where we were at this time last year.

That's why we think delivering 3% to 4% next year when we finish the year in group growth is reasonable.

The next question will be from Rich Hightower of Evercore ISI.

To quickly follow-up on Pat's question there, just in the context of ongoing union negotiations around the country, I think it's been a little more impactful recently to Marriott than you guys.

But within that 3% to 4% labor cost assumption for next year, how much variability would you say is included within that range, just, again, given the ongoing nature of those sorts of discussions?

I don't think a lot of variability.

Obviously, we're not going to comment on negotiations going on with the unions, which are ongoing.

We have a good relationship with the unions and have been sorting through market-by-market deals.

I think that we will end up in those ranges regardless of where those deals turn out.

Remember also that, in our case, it's a little less than 1/3 of our workforce is in an organized format, so 2/3 of it is outside of that.

When you blend it together, we had -- and Kevin's number is in that range, he's...

It's all of it, yes.

It's the whole system and he's factoring for that.

Okay.

That's helpful.

And another quick follow-up to the capital return forecast, whether speaking of this year or next year.

Just in general, how much -- how quickly can you pivot if need be, given a short-term dislocation in stock prices as we may or may not be seeing kind of in the current environment against those longer-term capital return forecasts and also the leverage limits that you guys referred to?

Yes.

I mean, I think if we want to, we have a significant amount of flexibility and we can pivot quite quickly.

Okay.

Any more specifics around that or just as a general comment?

No.

The next question will be from Smedes Rose of Citi Research.

I wanted to ask you about this new brand rollout of Motto.

When you did Tru, I think...

Motto.

Come on, Smedes.

Get it right.

Motto, sorry.

You have a Motto.

It's not MotoPhoto.

When you did Tru, Chris, I think that it was initially offered to owners of Hampton Inns and then, obviously, you went on to a very successful rollout.

I'm wondering, is there anything that you're doing to kind of jump-start this brand with your current owners, maybe sort of any feedback on initial sign-ups that you're receiving from developers that you can share with us?

Yes.

I'll be happy -- I'm glad we got a question on our new brand.

It seems like people ask about our new brands every call and now we launch one and nobody wants to talk about it, but happy to talk about it.

We're very excited about Motto by Hilton.

And we are, of course, as we would do with all our brands -- and you're right to point out that we went to our most important Hampton owners and largely gave them the opportunity on Tru.

Doing a very similar -- we have a very similar approach with Motto always because our existing owner base has been very loyal to us and we want to be loyal to them.

So not only are we going to them as the first shot out of the blocks to say, hey, do you want to work with us on this, but there has been a cadre of them that have been very involved in the development of the brand.

So we're not always -- we're always -- let me put it in the pot, we're always talking to customers and doing focus groups as we design these brands and figure out how to make them tick the right way so that they'll appeal to customers, but we're also working very closely with owners to make sure that we're engineering the cost to build and the cost to operate in a way that they'll deliver returns that work for owners.

Otherwise, we'll have a great thing for our customer, but we'll have no hotels for the customer to stay in.

So it's very much sort of a dual process.

And so we brought a great cadre of owners that we've worked with around the world and to be part of that process and they are very excited about it.

And so not surprisingly, the first deal or many of the first deals we are doing are with existing owners.

Not all, but many of those deals are.

We have, essentially, I think we have 6 deals.

I mean, these are more complicated than Tru's given that they're urban and by the very nature of what it is, it's a bit longer gestation period and higher degree of complexity.

We have about a half a dozen deals done.

I would say based just on the conversations I've been having, including yesterday when we had a huge group of owners in for the launch here at our innovation gallery, we probably have another 20 deals sort of cooking.

And ultimately, Tru will be thousands of hotels, okay?

Tru will be the biggest brand we have just because of the price point it's at.

Motto will be very big, but as I said in my prepared comments, it's hundreds of hotels.

So I think we're off to a great start.

It's a wonderful way for us to better serve our existing customer base.

Even more importantly, it's a great customer acquisition tool.

It's a great product that we can attract customers that have heretofore not been able to stay with us that want to be in an urban environment and adventurous and they need a product at a price point they can afford, whether they're young, in middle age or old, that this is where they want to be and this is a product now that we're putting out there that we think will make it much more affordable for them to stay with us.

And when they stay with us, we have a pretty good track record of getting them to try other things with us.

So we're very excited about it.

Again, it will -- these are more complicated urban deals.

They take longer to sort of pull together, but I think you'll see that we'll very quickly get the pipeline into the dozens of hotels and I think we'll start bringing it to life and reality.

Hopefully, next year, we'll be able to take you on a tour of the first Motto.

Great.

And then, I just wanted to ask you, you mentioned you guys hit about 80 million Honors members at this point.

Can you -- have you seen any change in the percent of bookings going to direct versus OTAs?

Or is that ratio still pretty constant?

No, the ratio is good.

We -- what we saw in the third quarter, it generally tracks year-to-date, but third quarter number is -- we were growing our direct channel share and the OTAs were flat.

So that's -- and that's before we essentially started the latest big push on our campaign of direct book that started rolling out at the end of the quarter.

So the trends are what we want to see, which, again, is not -- it's not that we're not going to or don't want to work with the OTAs.

We do.

We just want to work with them in the right times and the right ways at the right price and we want more and more to have a direct relationship as much as we can, and that's what we're seeing happen in our channel mix.

More growth in direct, our direct channels, particularly our Web Direct channels.

And third quarter, flat on OTAs.

The next question will be from Chad Beynon of Macquarie.

Just one for me just on the ownership assets.

They performed pretty well in the third quarter from a RevPAR standpoint and year-to-date.

I believe most of these are flagship Hiltons in Europe.

Is this strong performance really just kind of a product of, Chris, what you were talking about a strong group traveler in Europe?

Or is there anything else?

And if your outlook, as you mentioned for Europe, is positive in 4Q and going forward, is there any reason why these assets should kind of come down below the M&F RevPAR?

Yes, Chad, I'll take this one.

I mean, it's interesting.

There are a bunch of flagship Hiltons in Europe that are part of that portfolio.

There also are a bunch of hotels in Asia that are part of that portfolio.

And even though Japan had a little bit of disruption from a typhoon, the RevPAR growth was still quite strong in Japan and a couple of other places in Asia.

So you're seeing some of that sort of filter through that portfolio.

But Central Europe, of course, was quite strong in the quarter, which helped.

And the trends ought to be really consistent in the fourth quarter.

It's a very similar outlook.

The next question will be from David Beckel of Bernstein Research.

I think it's been a little bit of time since you've updated us on the Hampton Inn rollout in China.

Can you just give us an update on signings and openings for the year?

Yes.

It's -- our Plateno deal is going really, really well.

I think, at this point, Jill and Kevin can fact check me, I think we've done 250 deals-ish.

I think we have opened 50.

I think we expect to open like 20 more by the end of the year.

I think we're hoping that we have about 70 open and I think we expect to open 100 next year.

So it's moving at a great pace.

It's having the impact that we want, which is building our network effect in China in secondary and tertiary cities with what is a great product with a great partner.

Importantly, because if we don't pull over results, people, as I say, stop building us hotels.

The performance of the hotels is really, really strong in terms of the returns that our partners are getting on these deals.

So we feel very good about it and think it's going to keep cranking.

If you think about what's going on in China, I've said this many times, not dissimilar from other parts of the world, the mid-market is where you're going to see the bulk of the growth just because the phenomenon is a middle-class growth at a very high rate.

Middle-class can afford mid-market type brands.

And that's why we were so interested to get in with Hampton with a partner to try and build that network as fast as we could and it's working.

And just a quick follow-up.

Given some of the M&A that Jin Jiang's been involved with, has that affected your relationship with them or the development agreement in any way?

No, it hasn't.

We've maintained a great relationship.

We are in constant dialogue with them about a whole bunch of different things, including the Hampton relationship.

I think it's one that they are very positive about and, if anything, interested in speeding it up as are we, not in any way changing it or slowing it down.

The next question will be from David Katz of Jefferies.

Congrats.

It all seems quite clear that we're two minutes away from the hour, but I wanted to just touch on one topic, which is your high-end strategy.

The portfolio of brands is obviously very complete or nearly complete from top to bottom.

How are you thinking about the highest end?

I know you're adding Waldorfs and Conrads, et cetera, in different places, but just go back to the make or buy discussion as it relates to that end of the business and the degree to which you can bolster through soft branding, let's say, but I'd love a little color just about that.

Yes.

It's a good and important question in the sense that we, if you -- if I think about how I allocate my time relative to the size of the business, I allocate a disproportionate amount of time to luxury for a couple reasons.

One, it's hard.

The deals are complicated and difficult, not many of them get done around the world.

And it's important.

It's important because even though in the end, I don't think luxury is going to be a whopping component of our bottom line EBITDA and free cash flow, it's important as a halo effect for our loyalty system and for our most loyal customers who want to be able to travel the road and be the road warrior and, ultimately, aspire to hit the Conrad in the Maldives or the Waldorf in the Maldives or Waldorf in Bangkok resorts and luxury hotels.

Whether they use it or not, they want to dream about using it and so it becomes -- it is important that we spend a lot of time on it.

We started standing still 11 years ago.

We pretty much had nothing really going on in luxury, a handful of assets you would call luxury.

I think we have -- if you fast-forward to today, we've worked very diligently with great discipline over time grinding it out organically.

And today, with Conrad and Waldorf alone, and I'll talk about other things we're going to do, we have over 100 hotels open or in the pipeline and that's with having taken some properties out that really don't fit the bill.

There's probably a few more of those that, over time, have to happen, but the net of that will be more adding than -- the net unit growth in luxury will be positive because we have so many good things going on.

And if you think about where we've been adding, Beverly Hills and Shanghai and Beijing and Amsterdam, our deal in London, just announced deal in Miami, another important one coming in the United States and I could go on and on, I think we're making a tremendous amount of progress.

We've got 64 open.

We've got 38 in the pipeline for both brands.

And these are really world-class luxury assets that are resonating unbelievably well with our customers.

That's why we're having such great growth.

Part of the reason we're having great growth in Honors, more Honors occupancy, all of this is connected together.

We have a couple other pistons that will start firing.

One soon, the other probably in the next year or 2. The one soon is soft luxury.

Again, it's not going to be hundreds of hotels.

I guess, it could be over time, but it will certainly add to the luxury side of the business.

And then we will eventually do luxury lifestyle.

We have chosen not to do it because of other opportunities and we can only do so much at one time, but ultimately, we will have a luxury lifestyle brand as well.

And those 2 incremental brands, I think, will take what is already a very good story with Waldorf and Conrad and growth and quality of the properties and size of the system and add to it.

If you could -- in a -- if you said to me like in a perfect world, you can just go out tomorrow and fix it, if I could have done that 11 years ago, it would've been a lot easier, but it's not -- the practical reality is it's not really possible because, back to my comments on M&A, the things that you could make available don't really funnel through our filtration system.

They either have their own problems as a brand or the economics of it would be such that you would destroy a lot of value and so, while we've looked at lots of things, honestly, none of them had made sense.

And we are quite confident.

I underline confident, particularly today, after 11 years of hard work, that we have really good trajectory on luxury that we're going to a good place that we have enough scale and presence that it is not only not holding us back, but look at the overall network effect we've created.

We've got the highest average market share across all of our brands of anybody in the industry.

So here's the thing, it's working.

We've got to keep it working, which is what we get paid to do and we will, but it's working.

And so we will keep grinding it out in 5 and 10 -- not even.

Over the next 3 or 4 years, you'll continue to see some really important hotels and advances in the upper end of the business for us.

And if I can just follow-up on one other segment.

Obviously, you think it's important enough to look at the all-inclusive segment as it is today based on what you've done, but is that a segment that you could envision broadening across different price levels over time?

How big an opportunity do you think that particular segment is?

Or is this just a good to have because it was available to you?

I think it's a pretty important segment.

I think it's big, but it's not gargantuan in the sense that it's only really applicable at the moment in certain micro markets around the world.

And so I think it's important when we talk to our -- the reason we did the deal with Playa is because they're very good at it and we've had a long relationship there and I've had a long relationship with Bruce.

We did a lot of work with our customer base and they said this is something that we want.

Again, it wasn't overwhelming like every customer, but there was enough of our customer base that said they wanted it and you can do it in enough places at -- with high quality product that we thought it was important to do.

Whether you do it across a bunch of different price points, I think that's unclear.

I mean, I think it is all resorts and sort of in the upper upscale.

Could you go upscale?

Possibly.

At the moment, we're really focused more on the upper upscale.

We do think there are a bunch of other markets that we're not in that we could do it.

And I do think it's a decent-sized opportunity, but not, as I said, not a gargantuan opportunity.

And we will look -- currently, we're doing it with sort of as an extension of our core brand at the moment, Hilton.

We will look at whether -- as we get into it, if we think there's enough opportunity to sort of create effectively its own presence, create a independent or an extension of the Hilton with a real brand name to it as opposed to just being part of the Hilton system, but it's premature for us to judge that.

We're very pleased with where we are.

We think it makes -- it adds to our growth, it adds to our profitability and it's one more weapon in our arsenal to please a certain segment of our customers who want to stay there and earn points.

And importantly, they want to redeem at certain types of resorts.

And the all-inclusive environment is an environment that enough of our customer base says they want and we thought it was important that we were present.

And ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Chris Nassetta for his closing comments.

Thank you, everybody.

We went a little over time.

Appreciate everybody sticking with us.

We'll look forward to catching up with you to discuss the end of the year and give a little bit more detail on what we think is going to happen next year on the bottom line on our next call.

Hope everybody has a great day.

Thanks.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.