Earnings Call Transcript
Hilton Worldwide Holdings Inc. (HLT)
Earnings Call Transcript - HLT Q4 2022
Operator, Operator
Good morning, and welcome to the Hilton Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. 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.
Jill Slattery Chapman, Senior Vice President, Investor Relations and Corporate Development
Thank you, Chad. Welcome to Hilton’s fourth quarter and full year 2022 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K and first quarter 2022 10-Q. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today’s call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the Company’s outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our fourth quarter and full year results and discuss our expectations for the year. Following their results, we’ll be happy to take your questions. With that, I’m pleased to turn the call over to Chris.
Chris Nassetta, President and Chief Executive Officer
Thank you, Jill. Good morning, everyone, and thanks for joining us today. We’re happy to report a strong end to 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. During the year, we continued investing in new innovations and partnerships that meet guests’ evolving needs and further strengthen our value proposition 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 destinations for any stay occasion they may have. Our strategy drove strong performance for the year with system-wide RevPAR up 42.5% versus 2021 and approximately 1% shy of 2019 levels. 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 returned more than $1.7 billion 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 third 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 third quarter and just 3 points shy of prior peak levels. 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 third quarter performance. Strong leisure transient demand continued to drive rates up in the high teens compared to 2019. Business transient 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. 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 third 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. 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. 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. In the fourth quarter, we celebrated the opening of our 60,000th Home2 Suites room, our 150,000th DoubleTree room, our 200th hotel in CALA, and our 600th hotel in Asia Pacific, including our first Hilton Garden Inn in Japan. We also saw continued strength in 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% versus 2021. We now have more rooms under construction than all major competitors. With a record pipeline of more than 416,000 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. Our disciplined development strategy continues to enhance 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 service at an accessible price. Spark provides a simple, consistent, and comfortable stay with practical amenities and unexpected touches, filling an open space in the industry by creating a new premium economy lodging option to meet the needs of even more guests and owners. Premium economy represents a large and growing segment of travelers, totaling nearly 70 million annually in the U.S. alone, for which we have not had a tailored brand to serve. This cost-effective all-conversion brand 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 third parties. Additionally, we’ve identified more than 100 U.S. markets with no Hilton-branded products, providing a great opportunity for the brand and the Company to expand its presence. As a testament to the strength of our system and our continued success of our customer-focused strategy, Hilton Honors surpassed 150 million members during the fourth quarter 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 million 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 sixth 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 seventh consecutive year, we were ranked among the World’s Best Places to Work by Fortune and Great Place to Work. As 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. And we’re more confident than ever that our team is poised to deliver in 2023 and 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.
Kevin Jacobs, Chief Financial Officer and President, Global Development
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 million in the fourth quarter, up 45% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth, particularly in the Americas, Europe, and the Middle East, as well as roughly $30 million in COVID-related government subsidies, 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 fourth quarter, diluted earnings per share adjusted for special items was $1.59, increasing 121% year-over-year and exceeding the high end of our guidance range. Turning to our regional performance. Fourth 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 2019, 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. In the Americas outside of the U.S., fourth 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 and recovery in international inbound travel, particularly from the U.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, fourth 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. 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 in Japan 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 fourth quarter openings. 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.S. and international markets. For full year 2023, we expect net unit growth of between 5% and 5.5%. 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 billion and extend the maturity to 2028. As we look ahead, we continue to remain confident in the strength of our liquidity position and financial flexibility. Moving to guidance. For the first quarter, we expect system-wide RevPAR growth to be between 23% and 27% year-over-year. We expect adjusted EBITDA of between $590 million and $610 million, and diluted EPS adjusted for special items to be between $1.08 and $1.14. For full year 2023, we expect RevPAR growth between 4% and 8%. We forecast adjusted EBITDA of between $2.8 billion and $2.9 billion. We forecast diluted EPS adjusted for special items of between $5.42 and $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 fourth quarter for a total of $123 million in dividends for the year. For full year 2022, we returned more than $1.7 billion to shareholders in the form of buybacks and dividends. In the first quarter, our Board authorized a quarterly cash dividend of $0.15 per share. For the full year, we expect to return between $1.7 billion and $2.1 billion to shareholders in the form of buybacks and dividends. Further details on our fourth quarter 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. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chad, can we have our first question, please?
Operator, Operator
Our first question is from Carlo Santarelli with Deutsche Bank. Please go ahead.
Carlo Santarelli, Analyst
Thank you for the information provided. Kevin or Chris, whoever would like to respond, considering the strong performance in the first quarter and recognizing the seasonal factors that come into play, it appears that for the latter half of the year, you are anticipating some stabilization. Could you explain how you are viewing the second half from a broader economic perspective and what assumptions are included in your guidance regarding the economy?
Chris Nassetta, President and Chief Executive Officer
Yes, thank you for the question. That is certainly a significant concern for everyone. In the fourth quarter, we experienced strong performance across all segments. Although we are early in the year, we are observing that strength continue in the first quarter compared to 2019. Of course, when compared to 2022, the numbers are significantly higher due to the impact of Omicron. From an industry fundamentals perspective, we remain optimistic. The balance of supply and demand ultimately drives results, and currently, the supply side is quite low. In the U.S., our largest market, we are at historically low levels of supply, while demand remains robust. We haven’t noticed any signs of weakening in our major segments, and I believe this is supported by both cyclical and secular trends. Consumers are adjusting how they allocate their spending, directing it more towards experiences. International markets are reopening, leading to increased travel globally, not just to the U.S. Asia Pacific is opening up fully, and we've already seen a resurgence of travel in Japan. China is moving quickly through its own recovery phase, and we anticipate significant travel growth there, especially in the second half of the year. There remains a lot of pent-up demand across all segments. Although some leisure activities have already been popular, we don’t see a slowdown in that area. Demand for business travel continues to be strong, and there remains significant pent-up demand for events, particularly since people are now comfortable planning gatherings again. In the latter half of last year, we saw increased group demand as organizations began to plan events. This trend will continue, as I've noticed during my recent involvement in large events. The economics of supply and demand are favorable. To address your question specifically about our guidance range of 4% to 8%, we’ve taken into account that we are comparing against a period when the world was partly shut down last year. We are being conservative in our assumptions regarding macroeconomic conditions and expect some slowdown in the second half of the year, which we anticipate will create a plateau in our performance amid a moderate recessionary environment. This expectation is reflected in the numbers we've shared today.
Carlo Santarelli, Analyst
Great, Chris. Thanks. That’s super helpful. And then just one follow-up. As you guys think about ‘23 and obviously, some projects that likely were slated for the fourth quarter, as you mentioned, kind of slipping into ‘23. As it pertains to conversion activity as a percentage of the unit growth this year, would you think that that 24% is better, or would you think it’s higher or lower than that 24% that you experienced in ‘22?
Kevin Jacobs, Chief Financial Officer and President, Global Development
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 tougher, although those conditions are loosening. It has been tougher for new construction, as you know. So conversions become even more important. And then, Spark, as we’ve talked about in our prepared remarks, is a 100% 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 drive 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.
Operator, Operator
Thank you. And the next question will be from Joe Greff from JPMorgan. Please go ahead.
Joe Greff, Analyst
So, I just wanted to see, Chris, if you could talk about what’s embedded in the second half of this year’s guidance with respect to U.S. occupancy and pricing changes on a year-over-year basis?
Chris Nassetta, President and Chief Executive Officer
Yes. I won’t go into specifics since we provided a range, and it would be challenging to narrow it down further. However, you can think of occupancy as leveling off. We do not expect, based on our current projections, that occupancy will return to 2019 levels. We believe RevPAR will remain elevated throughout the year due to strong rate integrity. As I mentioned earlier, we maintain confidence in our pricing power this year because there are no significant capacity additions anticipated in the market. Regarding the U.S. market, we are experiencing both cyclical and secular tailwinds that are increasing demand, which we believe will help us sustain pricing power. In the second half of the year, while we expect pricing power to remain stable or possibly decline slightly to align with the ranges we've indicated, we acknowledge that if the market improves unexpectedly, there could be opportunities. Overall, we expect a smooth, though possibly uneven, landing in the U.S., along with a moderate recession in the latter half of the year.
Joe Greff, Analyst
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 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?
Kevin Jacobs, Chief Financial Officer and President, Global Development
Yes. Joe, I think that in recent years, it has been less volatile. If RevPAR increased by around 45% this year, the fees also increased, but not as dramatically, although they were still quite strong. HGV is public, so their growth can be reviewed in their reports. In a more stable RevPAR environment of 4% to 8%, we expect those fees to grow slightly faster than the overall business. This largely depends on spending, and our credit card program reached record spending levels in the fourth quarter and for the entire year, about 50% higher than in 2019. This program is performing well, and while we anticipate it will grow at a better pace than RevPAR over time, it will likely be less volatile due to current global circumstances.
Operator, Operator
The next question is from Shaun Kelley from Bank of America. Please go ahead.
Shaun Kelley, Analyst
Could Chris or Kevin discuss the development side? The shifts occurring in China, along with the overall outlook on construction starts, seem strong. However, we are receiving a lot of investor concerns regarding developers' ability to finance new projects. How has this situation evolved with the interest rate environment and the economy? What were your discussions like throughout the quarter? Additionally, could you provide more insight into Spark? There have been some concerns in the past about going further down the chain scales, and I would appreciate if you could elaborate on that. Why is now the right time to consider moving into the premium economy space?
Kevin Jacobs, Chief Financial Officer and President, Global Development
Yes, I’ll begin with the broader construction trends and then hand it over to Chris to discuss Spark. There are many factors at play. The interest rate environment and the availability of capital have changed significantly, with rates currently much higher than before. While access to capital is somewhat constrained, there is still ample funding for the right projects. Local and regional banks are experiencing different capital constraints compared to larger money center banks. There are some challenges as construction costs, which remain 20% to 30% higher than in 2019, are finally starting to decrease from their peaks. Meanwhile, the fundamental environment is fostering confidence among developers that hotels, when opened, will perform better than anticipated, leading to improved pro forma projections. This overall situation contributed to an increase in construction starts in the U.S. last year compared to the previous year, though it varies by location. For instance, it was particularly challenging to open new hotels in China at the end of the year due to office closures affecting certificate of occupancy issuances. This situation has also hampered starts in China, but we expect continued growth in starts. Developers are optimistic about the current conditions and believe they can manage higher construction loan costs, anticipating better performance upon hotel openings and a more normalized rate environment when transitioning from construction loans to permanent financing. These are some of the various factors influencing the current landscape.
Chris Nassetta, President and Chief Executive Officer
Yes, to support that, I want to discuss Spark. When we talk to our owners, I would say the majority of our system is currently making more money. Each individual hotel is generating more profit than it did at the peak of 2019, which is fostering optimism. This profitability is due to increased efficiencies, higher margins, and strong rate integrity and pricing power. The bulk of the portfolio is producing more free cash flow than ever, which is the essence of their business. Many are adept at identifying revenue opportunities in local and regional markets thanks to their long-standing relationships. As Kevin mentioned, in the second half of the year, we experienced a turning point with construction starts increasing both in the U.S. and globally, and we feel this positive trend will continue without signs of reversal. Regarding Spark, we have been considering entering this space for a long time, almost since my time with the Company began. We have significantly expanded our brand portfolio during this period. Three years ago, we started focusing on this area, recognizing the vast customer base as a great opportunity to better serve our existing patrons while also attracting new ones. A significant portion of this customer base consists of individuals who are just beginning their travel experiences—they are going to evolve and seek more travel options. The sooner we bring them into our system and foster their loyalty, the better. When we develop brands, our approach focuses on customer acquisition and enhancing the network effect for our existing customers. We were confident in our potential in this space, and we faced the complex task of developing a product that fits this price point effectively. Our goal was to ensure that our customer interactions would be excellent—friendly, reliable, consistent—and that we could replicate our commercial success in this sector to outperform our competitors. The reason we invested three years into this project is due to its complexity, but we believe we've found a solution. I believe this could be our most disruptive endeavor as it is a sector ready for change. Hotels in this price range exhibit significant variability in their physical attributes, making it tough to rectify with an extensive existing system in place. While this initiative focuses on conversion, we have spent recent years collaborating with our supply management, design, and brand teams to engineer a product where every hotel entering the system is fully refreshed in all customer-facing areas. We've constructed model hotels, designed the lobbies, and consulted with customers to ensure our offerings meet their expectations. What differentiates this initiative is its potential, and although it may not seem exciting compared to luxury lifestyle brands, it represents a huge opportunity for substantial contributions to the company’s and shareholders' value. We aim to deliver a high-quality, consistent experience in this market segment that currently lacks such offerings due to our innovative approach to updating these properties. While it will take time, we expect growth to occur rapidly, as this segment is the largest in both the U.S. and Europe. Over time, it should become our largest brand in terms of units. As always, our focus is on providing the best service to our current customers while attracting new ones. We're committed to ensuring that our owners achieve superior returns. We believe we have found a working model, and while we will need to demonstrate this, we anticipate seeing movement soon. As Kevin stated, we will open Sparks this year, which may not significantly impact this year's results, but we expect it to make a notable contribution moving into next year and beyond. Ultimately, we view this as an opportunity for our consumer-branded company to launch a new product at scale globally, offering prospects worth billions to our shareholders. We are genuinely excited, have conducted thorough groundwork, and feel confident in our ability to succeed given our track record of building brands effectively.
Operator, Operator
The next question is from Smedes Rose from Citi. Please go ahead.
Smedes Rose, Analyst
I just wanted to ask you a little bit on the owned and leased portfolio. I think you mentioned $30 million of COVID-related subsidies, I think, during the quarter. And I was 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 this point, or how are you thinking about that?
Kevin Jacobs, Chief Financial Officer and President, Global Development
Yes, I believe we've seen the impact of the programs approved so far in Europe. There may be a bit more to come from items we haven't received yet, but it’s negligible. We're not anticipating anything significant beyond that. When looking at it on a normalized basis, especially considering the subsidies we had in 2021, removing those shows a substantial growth. We still expect that portfolio to grow at a faster pace than the overall business this year.
Smedes Rose, Analyst
Great. Thank you. Chris, I’m curious if you could discuss how Hilton is approaching the use of key money to maintain or grow market share, or possibly support developers, given the current situation in the U.S. pipeline.
Chris Nassetta, President and Chief Executive Officer
No, we haven't changed our view on the pipeline, which remains strong with more than 90% having no key money or financial support. When you look at our CapEx and exclude key money, the average for last year and this year suggests a lower figure than we've indicated in recent quarters. We see a strong opportunity for growth without relying on our balance sheet. Investors are looking for returns and our brands are performing exceptionally well in their segments. Overall, there's continued interest in investing with us. To summarize, we don’t see any concerning trends; in fact, the trend for key money is decreasing. In the last couple of years, we experienced some elevated key money due to strategic acquisitions during COVID when opportunities arose. However, those instances will likely decrease moving forward, and I believe that, in terms of overall dollar amounts, the trend will continue to decline in the coming years.
Operator, Operator
The next question comes from David Katz from Jefferies. Please go ahead.
David Katz, Analyst
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?
Kevin Jacobs, Chief Financial Officer and President, Global Development
Yes, David, I can confirm that it’s a definite number. We wouldn’t have provided it otherwise. At this point, it’s a solid figure. We have a range for a reason, as there’s still a lot of the year ahead and many factors could influence it. I did see your note this morning and I believe I understand your perspective. Currently, we're slightly below our historical leverage range. This range assumes minimal borrowing for the year because we’re not fond of the current borrowing environment; it’s quite unstable and interest rates are higher than we’ve previously experienced. This suggests that our leverage will remain roughly stable or decrease a bit throughout the year. This guidance also reflects the capital return from EBITDA, especially as we are a business that generates substantial free cash flow. Beyond a little key money and some capital expenditure, we primarily allocate funds to a small dividend and share buybacks. So that’s our current range.
Chris Nassetta, President and Chief Executive Officer
Yes. I completely agree with everything mentioned. I want to add that our long-term views on the balance sheet and capital returns remain unchanged. We have consistently aimed for a leverage ratio of 3 to 3.5 times. Currently, we are at the low end of that range, or slightly below, due to the volatile debt markets. We expect these conditions to improve. In the medium to long term, we do not plan to maintain leverage at these lower levels and aim to be at the higher end of the range in a normalized environment, or even exceed that if the opportunity arises. We are simply waiting for more stability in the debt markets. As mentioned, we do not have an immediate need for additional debt. As I previously noted regarding our key money, which is the main component of our capital expenditures, we do not foresee a need for significant additional funding. Therefore, any borrowing or increased leverage will provide us with more opportunities to return capital. We provided our current outlook, and we will monitor how the debt markets and the overall economy evolve moving forward.
David Katz, Analyst
I appreciate that. Everything is well received since I misspoke my question. I mean what I say. Can we discuss the new brand briefly? Am I detracting from the idea that you are positioning yourself in a space where there aren’t necessarily direct competitors, or are there competitors, and you believe you’ve developed a better value proposition that will allow you to compete?
Chris Nassetta, President and Chief Executive Officer
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’ve made up a segment. We called it premium economy. 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.
Operator, Operator
The next question is from Robin Farley from UBS. Please go ahead.
Robin Farley, Analyst
My question and follow-up are both really sort of clarifications on earlier comment. 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 pricing power like the rate of increase modestly lower or actually some rate actually lower? Just to clarify.
Chris Nassetta, President and Chief Executive Officer
Not rates actually lowered. Just basically, plateauing relative to ‘19 in the second half of the year.
Robin Farley, Analyst
Thank you for your insights. Regarding occupancy, I understand that your guidance indicates that we won’t return to 2019 occupancy levels. I take it that achieving those levels is just a matter of time and that you anticipate reaching them by 2024, or do you have a different perspective?
Chris Nassetta, President and Chief Executive Officer
Yes. Honestly, I think it may be a bit of conservatism on our part. We could get back there tomorrow if we wanted. We could raise rates to occupy ourselves more, but we choose not to do that. As you can see from the rate growth, we are managing effectively in this cycle, especially considering the current environment, inflation, and other factors, to drive the best bottom line results for our owners. Our occupancy levels are influenced by our pricing strategies. I believe there is still room for recovery and pent-up demand, particularly in business travel and the group segment. I truly believe that there has never been a cycle in recorded history where we haven’t exceeded prior occupancy levels, so I think we will. It may happen this year. If we maintain our pricing power, I actually hope it doesn't happen this year and that it occurs next year instead, allowing us to drive rates, higher margins, and greater profitability for our ownership community.
Robin Farley, Analyst
Great. And then just my other clarification on your net unit guidance. From the comment in the release, I guess, I kind of understood the sort of the coming in just under 5% of 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. 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 if starts are also behind?
Kevin Jacobs, Chief Financial Officer and President, Global Development
I think it's both. The environment has impacted openings and starts in the fourth quarter. Before, it was lockdowns, and now with the reopening, people are getting sick, leading to reduced business activity. So, both signing starts and openings were affected. We don't see this as a long-term trend in China; it seems to be a timing issue. If there's a situation where a completed hotel can't open due to low occupancy, we won't provide quarterly guidance, so we won't specify when those hotels will open. However, you can expect that they will open later than planned.
Operator, Operator
The next question is from Richard Clarke from Bernstein. Please go ahead.
Richard Clarke, Analyst
I guess, if I stare 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 at high-end hotels you’re seeing, or is that mix? And maybe more broadly on pricing, I guess what I observed 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? And does that give you maybe a few more buttons to compress on pricing further through the recovery?
Chris Nassetta, President and Chief Executive Officer
Yes. First of all on Waldorf, there’s no significant issue that's driven by individual hotels. The Waldorf brand, unlike our other brands, has fewer hotels, so dynamics in one or two specific markets won’t have a large impact. We’re not seeing a general slowdown in luxury. On the contrary, we’re still experiencing great strength. I will now hand over the second part of that to K.J.
Kevin Jacobs, Chief Financial Officer and President, Global Development
Yes, Rich, I apologize for not fully grasping the second part of your question. I'm a bit unclear about your direction. My apologies.
Richard Clarke, Analyst
Sure. 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?
Kevin Jacobs, Chief Financial Officer and President, Global Development
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…
Chris Nassetta, President and Chief Executive Officer
Last year, we finished with the highest market share in our history, gaining share in both rates and occupancy. However, those figures across the system do not support that theory.
Kevin Jacobs, Chief Financial Officer and President, Global Development
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&L.
Operator, Operator
The next question is from Chad Beynon from Macquarie. Please go ahead.
Chad Beynon, Analyst
I wanted to ask about the tight labor market that we keep hearing about based on the Fed’s reporting. The experiential category in travel and lodging remains very strong. Do you believe this has peaked when you speak with your partners and builders? What are they saying regarding the labor market? Additionally, how does that influence your thinking about IMFs and profits for the latter half of the year, if at all? Thanks.
Chris Nassetta, President and Chief Executive Officer
The labor market situation has improved significantly. We employ a large number of people and operate many hotels, so I hear directly from our team and our franchise partners. Overall, while we haven't fully returned to pre-pandemic levels in terms of labor availability, we are getting very close. If a year ago the situation was at a 10 in terms of difficulty, I would say it's now around a 4 or 5. It was a frequent topic in all our discussions, but it's not as prominent now, which is a positive sign. The labor situation is definitely easing. Across various sectors, despite the Federal Reserve's comments, there have been many layoffs, particularly in technology, banking, and retail, where businesses had overstaffed in anticipation of sustained COVID-related demand, which ultimately did not hold. This has led to many individuals re-entering the job market, allowing us to recruit the necessary staff. Additionally, while wages increased significantly during the pandemic, they have begun to stabilize since 2019, with substantial wage hikes becoming less frequent. Overall, we're optimistic about the International Market Fund (IMF). We anticipate that it will notably contribute to our growth rate this year and we expect to surpass our previous peak from 2019.
Chad Beynon, Analyst
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 ‘22?
Kevin Jacobs, Chief Financial Officer and President, Global Development
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 millions of dollars headwind in this year’s numbers.
Operator, Operator
The next question is from Bill Crow from Raymond James. Please go ahead.
Bill Crow, Analyst
You mentioned the strong performance of leisure in the fourth quarter and throughout last year. How do you foresee leisure demand impacting your projected RevPAR growth of 4% to 8% this year? Are you expecting leisure to fall within that range, or are there concerns that it might significantly lag behind?
Chris Nassetta, President and Chief Executive Officer
Yes, we believe it will be within that range. We continue to see strong performance. Like all segments, we expect some leveling off due to a slower macro environment in the latter half of the year, but we remain optimistic. Current demand trends are solid. Despite the noise in the market, consumers still have about $1.5 trillion in incremental savings compared to pre-COVID levels. This amount peaked at around $2.7 trillion and has decreased to $1.5 trillion, indicating that consumers are spending. Although they may be feeling anxious due to news coverage, we aren’t seeing this reflected in spending behavior. One reason may be the shift in their spending patterns. They still have some savings and generally feel positive, but they are focusing more on spending in bars, restaurants, and travel relative to their overall expenditures. We anticipate a small headwind in the second half of the year across all segments, but we expect leisure to maintain its position within those ranges.
Bill Crow, Analyst
If I could address my follow-up question on Spark, which is really an intriguing product. Does it address two significant challenges in the industry? One is the considerable amount of deferred capital expenditures from the past several years, and the other is the age of select service hotels like Hampton, which were established around '84 or '85. We're looking at hotels approaching 40 years old. Is that part of the consideration, that many hotels could eventually align with that brand?
Chris Nassetta, President and Chief Executive Officer
It is an additional benefit on the margin. If we have older Hamptons like other third-party products that we believe aren’t suitable for Hampton, we have been disciplined in maintaining the Hampton brand as the strongest brand in lodging by removing properties that are past their prime and don’t fit into the system. Over the next 10 years, we will certainly consider keeping a small percentage of those in the system. However, I believe in the end, it will be a very small percentage of the overall system. Currently, 98% of the deals we're processing are third-party brands. There are a few Hamptons included, but no other Hilton brands. Overall, it remains an additional benefit on the margin, and many of those hotels will eventually exit the system as we have been doing for a long time.
Operator, Operator
The next question is from Patrick Scholes from Truist Securities. Please go ahead.
Unidentified Analyst, Analyst
Currently, 98% of the deals we are processing are from third-party brands. There are a few Hamptons included, but no other Hilton brands. I would consider this an ancillary benefit on the margin. Many of those hotels are expected to exit the system over time, as has been the case for a long while.
Chris Nassetta, President and Chief Executive Officer
Hey Greg, can you hear us? We can't make out what you're saying. Your connection is very unclear.
Operator, Operator
I apologize. So, we’ll have to move on to our next question. And the next question is from Brandt Montour with Barclays. Thank you.
Brandt Montour, Analyst
Actually, just one from me, Chris and Kevin. So, in terms of development and more medium to longer term sort of net unit growth, and 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 three months ago, right, in terms of the speed at which China is reopening now, the excitement over Spark and then U.S. starts continuing to get a little bit better. So I guess, the question is, do you feel a little bit better about getting back to the 6 to 7 NUG than you did three months ago? And are we potentially even playing for maybe hitting that run rate in late ‘24?
Kevin Jacobs, Chief Financial Officer and President, Global Development
I think we expressed our views for a reason, Brandt. There’s a lot that can change in the world. We still feel confident about returning to 6% to 7%. I don’t think my perspective has changed since three months ago. I believe circumstances are improving for us a bit, but we know that situations can shift. Trends will evolve, and we always hope for positive developments. So, I don’t expect to feel significantly different three months from now.
Chris Nassetta, President and Chief Executive Officer
I tend to be more optimistic than Kevin, which is just how we are. We felt good about getting back to it a quarter ago, and I agree that our feelings haven't changed. When we were asked on the last call what it looks like, we mentioned having a clearer view of the U.S. economy either heading into a recession or where people have a bit more certainty. That sentiment still stands. We also talked about needing China to reopen, and while it's not fully open yet, progress is being made, which makes us feel somewhat more positive about that situation. We had Spark in mind but hadn't mentioned it before, and now that we have it, I think it adds a little momentum to our efforts. We felt good about it a quarter ago, and I believe we still feel good about it now.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any additional or closing remarks.
Chris Nassetta, President and Chief Executive Officer
Thank you, Chad, and thank you all for joining us. As you can imagine, we’re pleased with the state of the recovery; fourth quarter numbers are great. While we are aware of the macro trends, we feel very good about what we’re currently experiencing in the business and advanced bookings. We anticipate another strong year ahead. We appreciate your support and time, and look forward to reconnecting after the first quarter to share more insights into what we’re observing. Thank you, and have a great day.
Operator, Operator
And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.