Hilton Worldwide Holdings Inc

NYSE:HLT

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Hilton Fourth Quarter and Full Year 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.

[Jill Slattery, VP and Head of IR]

Thank you, Denise. Welcome to Hilton's fourth 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 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 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 fourth quarter and full year 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.

[Chris Nassetta, President and CEO]

Thank you, Jill, and good morning, everyone. We appreciate you joining us today.

We're happy to report a good finish to what was a great year for Hilton. In the fourth quarter adjusted EBITDA and EPS once again exceeded our expectations. We continue to prove the resiliency of our business model as net unit growth exceeded our expectations and drove the majority of our bottom line and free cash flow growth.

We also continue to demonstrate the power of our network effect by increasing our industry leading market share premiums 100 basis points for the full year with all regions gaining share. Exceptional experiences for our guest drive better profits for our owners, generating higher returns for our shareholders. Speaking of returns for the full year, we returned $1.9 billion to shareholders in the form of buybacks and dividends representing approximately 9% of our market cap.

Turning to results, our system-wide RevPAR grew 3% for the year. Group business performed well throughout the year with RevPAR growth of 4%, slightly exceeding our expectations given particular strength in convention business across a number of key markets. Corporate transient trends were healthy with RevPAR up 2.6% for the year with some softness experienced in the fourth quarter. Leisure transient continue to grow, also up 2.6% for the year that fell shy of our expectations given greater than expected impact from events and calendar shifts and a bit of softer demand in the later part of the year.

Looking to the year ahead we expect similar to modestly slower trends versus what we saw in full year 2018. Macro indicators continue to support generally favorable fundamentals and a good backdrop for continued pricing increases despite modest deceleration in GDP expectations versus prior estimates. Group trends are solid with 2019 bookings up in the mid-single digits and corporate negotiated rates are up just over 2% slightly ahead of last year's growth.

Given the modestly lower macro forecasts coupled with uncertainties in some international markets, we're adjusting our full year RevPAR guidance range to 1% to 3%. An area of the business where we continue to have greater visibility is net unit growth. Our strategic approach to development has allowed us to establish one of the largest and most diversified systems and pipelines in the industry.

In 2018, we opened more than one hotel per day and had the best year of openings in our history, adding over 450 hotels and achieving net unit growth of nearly 57,000 rooms or approximately 7% growth year-over-year. We ended the year with roughly 5,700 properties and 913,000 rooms across 113 countries and territories. It was also a record year for construction starts and signings.

During 2018, we started construction on more than 83,000 rooms, the best year in our history. We signed 108,000 rooms marking our fourth consecutive year of signings over 100,000 rooms and are on track for another year of record signings with increases expected across both U.S. and international markets.

We remain focused on building a presence everywhere in the world our guests want to travel. With more than half of our pipeline located outside the United States and 35 new countries represented, we have tremendous opportunities to grow our global footprint for the foreseeable future. Roughly 30% of our pipeline is located in Asia Pacific, a region that continues to benefit from powerful long-term secular trends supported by a growing middle class in China.

In the fourth quarter we celebrated the opening of our 50th Hampton by Hilton in China with an additional 200 in the pipeline. We also debuted our accessible lifestyle brand in the region with the opening of the Canopy by Hilton Chengdu City Center. With more than 75% of our pipeline in Asia Pacific under construction, we expect to open approximately 20,000 rooms in the region in 2019 and achieve roughly 20% net unit growth.

The Europe, Middle East, and Africa region accounts for nearly 20% of our pipeline and has an increasing number of Hilton Honors members driving demand for our products. In particular we continue to gain great traction with our newer brands and expect positive momentum to continue with the recent launches of Motto, our urban lifestyle micro hotel brand; and LXR, our luxury collection brand.

We celebrated several milestone openings in the region last quarter including the Hilton Beirut downtown, the Lincoln Plaza London, Curio; and we look forward to celebrating the opening of our first LXR property in Europe, the Biltmore, Mayfair in London in the coming weeks, as well as adding several other unique properties to the collection in the coming year.

In the United States we continue to focus on serving guests for every stay occasion across a variety of price points. In the fourth quarter we celebrated the opening of our 50th Tru hotel, continuing its momentum as the fastest hotel launch in industry history. This year we expect to open another 75 of the 500 hotels in the pipeline and under development.

We're also thrilled to welcome the Waldorf Astoria Atlanta Buckhead to our system during the quarter. This exciting addition enhances the brand's presence on the East Coast and brings our total luxury and lifestyle portfolio to 73 properties open globally with another 73 in the pipeline.

For the full year we gained over 14 million new Honors members, bringing total membership to 85 million at year end, up approximately 20% year-over-year. Growth is coming from every major region of the world with roughly 40% of members coming from outside the United States. Our Honors members now account for approximately 60% of system-wide occupancy, which is up 200 basis points for the full year.

We expect continuous enhancements to our Honors program coupled with innovations like Digital Key and Connected Room, to continue to drive more direct relationships with our guests. Since its launch in 2015, we have scaled Digital Key to more than 4,100 properties globally and guests have opened more than 40 million doors to date, using the app based feature.

We also rolled out over 1,800 Connected Rooms with plans to bring the technology to approximately 300 hotels by the end of 2019 enabling guests to create more personalized travel experiences through our partnerships with Netflix and Showtime and other customization features.

Last November in preparation for celebrating our 100th anniversary this year, we announced the release of research that showed the positive impact Hilton has had on the people and communities we serve. Thanks to the Hilton effect, during the first 100 years we welcomed 3 billion guests, employed 10 million team members and contributed $1 trillion in total economic impact to the world.

As we prepare to celebrate our centennial, we are optimistic about what the future holds for Hilton and believe we are well positioned to continue driving growth ahead of industry trends. For 2019, we expect RevPAR growth together with strong net unit growth to drive significant free cash flow generation, enabling us to execute on our disciplined capital allocation strategy and to continue delivering returns for shareholders.

With that, I'm going to turn the call over to Kevin, to get into more details in the quarter and our outlook for the year ahead.

[Kevin Jacobs, EVP and CFO]

Thanks Chris, and good morning everyone.

In the quarter, system-wide RevPAR grew 2% versus the prior year on a currency neutral basis, at the lower end of our guidance range. Lower than anticipated growth in transient largely due to softer leisure demand across the U.S. and Asia Pacific regions weighed on results. Group RevPAR exceeded our expectations increasing nearly 4%. We estimate the calendar shifts and weather events tempered system-wide RevPAR growth by roughly 40 basis points.

Adjusted EBITDA of $544 million exceeded the high-end of our guidance range, increasing 12% year-over-year. Our performance was largely driven by better than expected licensees and upside across our ownership portfolio given RevPAR gains in London and continental Europe.

In the quarter, Management franchise fees increased 14% to $532 million, ahead of our expected 9% to 11% range as results continue to benefit from strong net unit growth and better performance from our co-brand and credit card program. Diluted earnings per share adjusted for special items of $0.79 also beat expectations.

Turning to our regional performance and outlook; fourth quarter comparable U.S. Re PAR grew 1.1% entirely driven by ADR growth. Solid group trend supported results but growth was somewhat tempered by softer transient given the weather and calendar related disruption. Our full year 2018 U.S. RevPAR grew 2.2%, given expected upticks in performance in group and business transient and consistent levels of performance in leisure transient.

For full year 2019, we forecast U.S. RevPAR growth consistent with our system-wide guidance range based on expected steady fundamentals and continued pricing increases. In the Americas outside the U.S., fourth quarter RevPAR grew 6.9% versus the prior year, given an uptick in trends across Mexico coupled with strong ADR growth in Canada, similar to trends throughout the year.

For full year 2018 RevPAR grew 6.1% in the region and we expect full year 2019 RevPAR growth to be in a range consistent with our system-wide guidance. RevPAR in Europe grew 7.2% in the quarter driven by stronger than anticipated transient trends particularly in London as increased U.S. travel to the U.K. boosted results.

For the full year RevPAR in Europe outperformed expectations increasing 6.9% as a result of strong transient gains most notably in Vienna and London. We expect full year 2019 RevPAR growth in Europe to be consistent with our system-wide range given continued strength in transient trends in markets like Turkey partially offset by tough comps in Russia following last year's World Cup and uncertainty surrounding Brexit.

In the Middle East and Africa region RevPAR was slightly positive in the quarter. Similar to trends we saw on prior quarters leisure transient gains in Egypt were largely offset by declines in the Arabian Peninsula due to supply demand imbalances. For full year 2018 RevPAR was up 1.8% in the region. For full year 2019 we expect RevPAR growth in the region to be roughly flat given weaker than expected inbound travel to Egypt and continued softness in the Arabian Peninsula.

In the Asia Pacific region RevPAR increased 3.4% in the quarter following a broader slowdown in leisure transient demand stemming in part from decelerating inbound travel coupled with impacts from weather conditions and natural disasters. Softening domestic leisure demand in China also weighed on growth in the quarter with RevPAR up just over 5%. For full year 2018 RevPAR in the Asia Pacific region grew 6.5% largely driven by strength in China particularly in the first half of the year.

In China RevPAR increased approximately 10% for the full year. For full year 2019 we expect RevPAR growth for the Asia Pacific region in the mid single-digit range with mid to high single-digit RevPAR growth in China accounting for continued deceleration in economic growth.

Moving to guidance for full year 2019, we expect RevPAR growth of 1% to 3% and adjusted EBITDA of 2.24 billion to $2.29 billion representing a year over increase of approximately 8% at the midpoint. We forecast diluted EPS adjusted for special items and under are updated definition of $3.66 to $3.78.

For the first quarter, we expect system-wide RevPAR growth of 1% to 3%. We expect adjusted EBITDA of $470 million to $490 million and diluted EPS adjusted for special items of $0.73 to $0.78. Please note that our guidance ranges do not incorporate future share repurchase.

Moving on the capital return, we paid a cash dividend of $0.15 a share during the fourth quarter for a total of $181 million in dividends for the year. For the full year 2018, we were returned $1.9 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 2019, we expect to return between $1.3 billion and $1.8 billion to shareholders in the form of buybacks and dividends. Further details of our fourth quarter and full year results in 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. We would like to speak with all of you this morning so we ask that you limit yourself to one question and one follow up related to your question. Denise can we have our first question please.

[Operator]

[Operator Instructions] And your first question this morning will be from Joe Greff of JPMorgan. Please go ahead.

[Joe Greff, JPMorgan]

I’ll just start off with a question on pipeline and room's growth and certainly RevPAR growth. Obviously the room’s growth in the fourth quarter was much stronger than what we had modeled and if you look at the pipeline at the end of the year was down a little bit sequentially. How much of that pipeline - that sequential pipeline decrease is a function of just more rooms opening up and to what extent is it just calling of some of the stuff that's under construction. We can understand the pipeline change a little bit better?

[Chris Nassetta, President and CEO]

Yes it's a combination of things Joe but a good question and one that we've been getting a lot so I'm glad you asked it and happy to answer it. First, I would look at the full year because quarter to quarter there's always noise going on if you look at the full year pipeline was up 6%. We would fully expect as we think about this year and we go through this year that we will again and the year with pipeline up it may vary quarter-to-quarter but we think directionally it will go up.

I think in the fourth quarter two things happened both of which you noted. We came in much harder on deliveries which was great which was why net unit growth instead of being in the mid 6s ended up basically at 7. But you know the downside of that is it comes out of the pipeline when it is delivered of course when it delivered they're paying us fee. So we'd much rather get into that state and in the pipeline.

And then we always - throughout the year in this case at the end of the year sort of look at everything its under construction and things that we don't think are going to really happen over reasonable period of time we clean those up. And so it's a combination of those two things.

And the second part of that's an important not nuance in a sense because when we clean those up and get them out of the pipeline it allows us an opportunity to replace those deals. If you leave deals in the pipeline that aren’t going to happen you sort - you’ve taken a location at a place.

So we try and be really diligent we're great with our owners if they need a little bit more time obviously we try and work with them. But at a point where we think it's not really, not going to happen we want to get it out. So it's a combination of those things again 6% up year-over-year I would think when we end the year certainly based on what we're seeing you will see sequential improvement year-over-year through 2019.

[Joe Greff, JPMorgan]

And then my follow up both you Chris and Kevin referenced that later in the fourth quarter later in the year you saw some leisure transient softness and you reference it in the U.S. and China. Can you talk about that and how much of it may be driven by one-time things that were disruptive to travel versus something that's more macro in nature. Can you help us understand maybe what some of the drivers there were…

[Chris Nassetta, President and CEO]

The bigger decline that you saw if you look across the world in leisure transient were in China for the reasons that I think are pretty obvious in terms of both trade war issues, as well as the slower economy as well as some weather related things that were going on. We did see some of it in other regions as well Middle East, Africa we saw some weakness in leisure transient. And in the U.S., I would say was reasonably modest and in the U.S. And I would say not to avoid the questions.

Looking at the end of the year even looking into January it’s very difficult particularly at the end of the year with all the noise related to the overlapping weather issues, the change in day of week year-over-year as well the holiday shifts. As much as I'd love to say I can give you really scientific hard stats on exactly what happened with leisure transient at the end of the year and in January it's just hard to do.

I would say we didn't see a dramatic difference. If you look at the full year it's interesting we went into the year I think on this call last year we said here is what we think is going to happen we think group is going to pick up because it's getting stronger and we have a great position. You'll remember in 2017 we had quite a dynamic year as industry in corporate transient we said we think we're going to see nice pickup coming out of tax reform. And we think leisure transient is generally going to hang in there.

Basically that's exactly what happened for the full year. At the end of the year when you got into the third quarter to a degree and definitely in fourth quarter with all the noise on holidays and weather impacts, it just the data got very garbled and it got very choppy.

So I think time will tell. I think our view is that the guidance of one to three is that you know group is hanging in there really well. I think if there's an expectation that you're going to have broader economic growth that is still good in the U.S. and good around the world. But a little bit less than what people thought a quarter ago that that will ultimately mean that both leisure and business transient will be a little bit less then what we might have experienced last year. And that sort of baked into the 1 to 3 guidance that we gave.

[Operator]

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

[Carlo Santarelli, Deutsche Bank]

I just have one and I appreciate the comments on the call thus far. With respect to the capital return, the range that you guys have provided is a little bit wider and acknowledging that there were one primary but really two exogenous events that kind of beefed up your buyback in 2018. As you think about the range for 2019 with respect to the buyback and excluding the dividends, what do you - other than kind of the leverage profile that that you're looking to target, how are you guys kind of thinking about within that range what are the key drivers of being towards the high end as opposed to the lower end?

[Chris Nassetta, President and CEO]

It's a good question. I'll start with the range. Yes, the range is you know obviously we gave it, so you can see it's $500 million. Actually it's only a touch larger - only a touch wider than the range we started out with last year. And at the end of the day it's a quarter of a total leverage on our EBITDA base, not even not even a quarter of a turn leverage.

And so the way we thought about giving guidance was we set the mid-point at 3.25x leverage. So, if the EBITDA forecast - based on the EBITDA forecast we have and the capital return at the mid-point that would leave us at 3.25x at the end of the year which as you know is at the mid-point of our stated range of 3x to 3.5x.

And so - and then what we try to do is bracket it at a quarter of return 250 on each side from there. And you're right, we did have a couple of events - opportunities last year to buyback an outsized amount of stock and bring a little bit of stock buybacks forward into the earlier part of the year and that combined with a little bit of extra cash we had at the time enabled us to lean in on particularly on the HNA transaction.

And so as the year plays out, this year we're given a little bit of a wider range and it'll be the same type of analysis. If we see opportunities to buy little more, we might do a little more, if we don't like the way the world is headed or how we feel about the outlook for the economy, we might do a little bit less.

[Operator]

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

[Harry Curtis, Nomura Instinet]

A quick follow-up on Joe's question. Wanted to get a little bit more detail on the pipeline in China; does it stand to reason that as their economy slows that the pipeline resale should slow as well?

[Chris Nassetta, President and CEO]

And the reason, yes. That is not what our experience has been to date. Our pipeline - we believe in China is in good shape and we believe is continuing to grow, talk with the team's multiple times a week and we still have a lot of activity. The nature of the activity as has been discussed on a number of prior calls has definitely been shifting more towards mid-market opportunities than higher end opportunities. We're still certainly doing a bunch of Hilton's and Waldorfs and Conrads and DoubleTree's and even Embassy now.

But more of the bulk is shifting to mid-market, and China for us right now that really is Hampton by Hilton and Hilton Garden Inn. That stands the reason because what's going on is growth in the middle class, they want to travel and that's what they can afford.

So I think we continue to see now the bulk of the pipeline growth coming from that. And so far so good, the relationship with Plateno is working out well, they continue to actually ramp up their activities. So, yes, I mean if the China economy slows down - continues to slow and stays growing at a slower pace, I do think at some point it will have - it has to have a ripple effect. But I want to be clear that we really haven't seen it. We delivered in China last year about 11,000 rooms and that was up close to 50% from the prior year and based on what's in the cooker right now that I'm pretty darn confident will happen, we'll be up another 30%, 33% this year.

And some of those are short - relatively short gestation because the Hampton Inn opportunities move fast. I mean they're moving through the pipeline in 12 or 18 months sort of time frame. So, so far so good but China will have ups and downs just to be clear just like every other market in the world. The long-term trend is up and if you draw a line through it over the next 20 or 30 years is definitely going up but they'll have the ups and downs just like the U.S. pipeline and deliveries to.

But right now we're in pretty good shape I think for the next probably two years given what we have in the pipeline and what sort of - and already under construction in addition to now having conversion opportunities which is kind of a new thing in China. I think we'll do more conversions this year in China than we've ever done. I think we're feeling very good about the next couple of years in China.

[Harry Curtis, Nomura Instinet]

And then the follow-up question is, you're making some nice progress on development of the luxury portfolio. Can you walk us through what that pipeline looks like and where you are today and thinking ahead maybe two to four years where you're likely to go with the luxury portfolio?

[Chris Nassetta, President and CEO]

Yeah, we are. Thank you for saying it. We're very proud of what we've been doing in luxury. We've been added for a long time. I've been here 11 going on 12 years and one of the first things that we started working on when I got here is making sure that we had the aspirational product in the portfolio for all of our customers and importantly our most loyal customers in Honors. That's the kind of product they want.

As we've been doing it the old fashioned way. We have not been out buying things. I suspect that is not something that will be in our future because there's nothing that really we think is really possible. And so we've been grinding it out and doing it the right way and in focusing on both the existing brands of Conrad and Waldorf but also with adding brands to the portfolio importantly LXR which we talked about earlier, Canopy in the lifestyle space and the possibility of other things that are in the skunkworks right now that would add to our luxury lifestyle brand portfolio.

And I would say – my believe that I've been at it now as long as I've been here as I said is that we've really hit stride in the sense of. We have become the fastest growing luxury brands or the major players and we are starting now to really be able to find ourselves with both Conrad and Waldorf and Canopy in the right locations in the right cities both from an urban and resort point of view to where we're creating a real distribution network that matters. I think these are brands that are really starting to resonate based on the research that we do with our customer base and more broadly.

And I think the next as much as I think we've hit stride. I think over the next three to five years you're going to see some pretty amazing things happening within both these brands. We're getting ready to open up a spectacular new Conrad in Washington DC, Downtown DC in the next 30 days. I was just in Waldorf, New York last Monday doing the model room review that is if you look in that building there is a lot going on that's happening. We're hopeful that that's going to deliver in 2021 and it will absolutely be a spectacular product.

Couple a weeks ago I was touring the under construction Waldorf in London. In the Admiralty Arch building facing Buckingham Palace which will be an absolute jewel box and a whole bunch of others that are coming that really add to what is a growing, but very special portfolio. So I feel really good about where we are. I mean technically in Waldorf today we have 31 hotels. We've got another 19 in the pipeline. I mentioned a couple of those similar statistics for Conrad, 33 opened and 19 in the pipeline and great things happening. San Francisco, I mean I won't go through the whole list.

But suffice to say, we've looked at the world and figured out like where our customer, where our luxury customer wants to be and we are hard at work if we're not already there in making sure that we get there in a relatively short period of time. So I think it's working, I think if we look at the share numbers in those brands they've been growing at a really nice pace. What our customers are telling us is very positive and I think we're really starting to hit stride.

[Operator]

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

[Shaun Kelley, Bank of America Merrill Lynch]

Chris, I just wanted to go back to China for a quick moment and one thing we've seen in the data is that Hilton continues to pretty meaningfully outperform some of the broader industry data in China as it relates to what we've see in RevPAR in that market. I'm sure this has to do with probably a variety of different mix factors, but when you guys kind of look at your own experience I mean could you just help us maybe pass the part a little bit. Do you think you're benefiting from city mix, market share gains, brand mix, ramp up of new properties, what's helping drive some of the strength that we're seeing there? Just on overall absolute basis, I do understand that it obviously slowed sequentially?

[Chris Nassetta, President and CEO]

As I would say but a lot thing, it's a combination of things. It's not any one thing but I think the properties that we're opening are spectacular properties in really good locations. We've been incredibly disciplined about what we're doing, who we're doing it with, what markets, what brands to get it right, and that is helping us. If you look at market share numbers, our market share numbers are growing at a very rapid pace. I don't have the exact China number but in APAC we grew market share numbers which would be driven largely by China almost 300 basis points.

APAC overall we are now driving system-wide market share of 115, and China would be comparable to that. By the way that eclipse is our U.S. market share which also grew in the year. So we are driving great properties, great commercial delivery, driving great performance that is taking share from the competition. There is also in fact even though that you're looking at comp numbers, many of the you know in China particularly at the upper end less so at the lower, but if you look at like DoubleTree and above, the ramp periods in China are longer than you would find in the United States as an example.

And so we do get the benefit even though year-over-year these are comp and they've been in the system they're still ramping in a way that is more significant than you would find in other parts of the world. So we are clearly getting a benefit in that regard to. But the largest part of it honestly is we're driving huge amounts of share growth.

[Shaun Kelley, Bank of America Merrill Lynch]

And I mean it's interesting on the share growth, so then just a follow-up with that. I mean you mentioned location being a critical factor there. Is there also a piece of this that's critical mass of brand awareness I mean I think if we were to rewind a decade ago it almost probably a little in a different places it would relate to sort of maybe brand awareness in China but obviously been super aggressive there. So is that a piece of it or, and kind of how would you measure that or look at that?

[Chris Nassetta, President and CEO]

Definitely, I mean our brand awareness has always been pretty good honestly but it is much, much better. So it's partly that. It's also commercial infrastructure. We made the decision years ago like you know five, seven years ago to probably more than that probably seven to nine years ago relatively early in my tenure even though we didn't have many hotels that we were going to invest in the commercial infrastructure to make sure that we build the neural network to deliver commercially for our owners. Because if you want to grow there and we're using third-party money and you open a bunch of hotels and they don’t do well and they tell their friends you know it doesn't really work out so well.

So we sort of invested ahead of the growth curve remembering 11 years ago like when we had five hotels in China. So we had a very small business. Fast forward today you know opening in the pipeline we've got you know 450, 500 hotels. So we knew what was coming and we said even in back in our private days we need to invest ahead of that right. Now we've grown into it obviously with the scaling of the business but we built critical commercial infrastructure there to allow us to deliver. In addition to having the right properties with the right owners, and the right locations and having brands that resonate. There's a whole bunch of investment that's gone on over time in the commercial delivery.

[Operator]

The next question will be from Thomas Allen of Morgan Stanley. Please go ahead.

[Thomas Allen, Morgan Stanley]

Just in terms of distribution you highlighted that you had seen a good increase in loyalty member distribution. But could you just talk about the mix between OTA's, property direct, call centers et cetera and how that's shifting? Thank you.

[Chris Nassetta, President and CEO]

I mean I think the short answer on that is, as you can see with our latest campaigns with Anna Kendrick and a whole bunch of other things we're very focused on driving direct relationships and direct business. And if you look at our web-direct channels, they remain the fastest growing channels that we have and growing at a much faster rate than OTA channels.

Now we still believe there is a lot more that we can do. As we have said our book-direct efforts which are more than marketing. There's a marketing element to it but making sure that the value proposition is the most compelling value proposition from the standpoint of how we price our products. From the standpoint of the technology and the other things that enable a better experience for folks that are part of our Honor system and have a direct relationship. We are going to – we are in a mode of we're going to constantly be reinvesting and focusing on that.

So that will be an always on effort, but it's working and if you look at the numbers for the year our web-direct channels of all types grew three times the rate of other channels.

[Thomas Allen, Morgan Stanley]

And then you highlighted the strength and the credit card business in the fourth quarter. Is there way to quantify it and talk qualitatively or quantifiably how that should benefit or how that should go forward in 2019? Thanks.

[Chris Nassetta, President and CEO]

Thomas in the fourth quarter we had a great quarter in that program and the card products have been very well received by consumers. And it's still a relatively new program so it's starting to get its legs and ramp up. Our card signings in the quarter were up almost 25% we spend in the quarter up kind of mid single-digits.

And so the way to think about that going forward is as those signings mature and we get more spend and the program gets more popular we expect that to continue increase with increases in spend next year expected to be well in excess of that mid single-digits this year. So we're very positive about the outlook for that program.

[Operator]

The next question will be from Wes Golladay of RBC Capital Markets. Please go ahead.

[Wes Golladay, RBC Capital Markets]

Want to go back to maybe some market share data. Do you have your overall RevPAR index and how that’s trending for the portfolio your direct bookings percentage and then are your share of global hotel supply?

[Chris Nassetta, President and CEO]

Sure in terms of index here is what I gave you I shared a teeny bit of it well today pack my other comments, but I can give you across the board. So U.S. market share ended last year a little over 114% which was up 80 basis points system-wide U.S. EMEA as we have sort of three mega regions so EMEA finished the year at 116 again I think I noted on the last call given that we are a capital like business and depending on third parties to build hotels for us to continue to grow. There's no more important statistic that we look at then our market share because that's what people why people are making that investment.

And for the first time ever these numbers I'm giving you are reflective of the EMEA and APAC not only having great share growth but I’ll finish giving you the numbers but eclipsing our U.S. market share. So reflective of the fact that we are now creating this network effect and have made you know have brands and enough distribution, enough commercial capabilities as I described in APAC that the whole ecosystem is working really well. So EMEA ended the year 116 up almost 200 basis points APAC ended the year at 115 up almost 300 basis points.

So, if you, blend all that together a bit over 114 just given the heavy weighting of the U.S. In terms of our direct business, our direct channels represent about 75% percent of our overall business. If you look at all our web channels those represent about half of that roughly and 40% or 50% of that is sort of on our app which is a growing at a pretty astronomical rate. Obviously we like that that's where we want to continue to push as many of our loyal customers as we can that’s absolute most efficient channel. So we're really pleased with the progress there.

Again lots of incremental strategies in play, which won’t get into in detail on this call to continue to give our customers even more reasons to want to go through those channels, because it's a better price, a better deal. And the experience will be better because of all of the other things they get with technology and otherwise as a result of being a member and buying that way. What was the last question…

[Wes Golladay, RBC Capital Markets]

The global hotel supply?

[Chris Nassetta, President and CEO]

Share of global supply like 5% I think something like that. So we're almost four times that in terms of share of rooms under construction in the world, last number I saw was about 5%.

[Operator]

And the next question will be from Stephen Grambling of Goldman Sachs. Please go ahead.

[Stephen Grambling, Goldman Sachs]

I guess as a follow up to your comments on conversions being a new thing in China and also the comments on brand awareness improving there. You mentioned in the past that conversions tend to ramp during tough backdrop and can buttress softer or new construction. But how do you think about the economics to run an independent versus a Hilton brand. And how they have evolved over the past kind of nine years of expansion and as we think about how that may dictate conversions if the environment stays challenged?

[Chris Nassetta, President and CEO]

Yes, conversions did ramp up last year. I mean we went basically from 20% low 20 and change to 25. I've said on other calls I mean we peaked through the Great Recession in the low 40s that was an unusual time. I suspect we will not get back to those kind of numbers, but I think yeah clearly as condition got a little more challenging throughout last year, financing got a little bit more difficult over the last couple of years. We've seen more conversions than I suspect we will again both because I think in the U.S. you'll see some ramp up in the opportunity. But also I suggested in APAC and certainly EMEA where we have already had those opportunities you'll see an uptick.

And of course we've been adding brands to make that more possible. In the last go around and the Great Recession we basically had one core conversion brand and that was DoubleTree and it was a gift that has given us a lot. I mean it really has performed well in every regard, we still have DoubleTree but it has broader distribution.

Now we have Curio, Tapestry, LXR in addition to DoubleTree. And of course we have Hilton another other opportunities as well. So we feel very good about sort of positioning ourselves to take advantage of it. I do suspect that you are in a trend you will see a trend line that is inching up from the low 20s to the mid 20s and I think I suspect it'll keep going.

The value proposition at a high level is pretty straightforward. The reason to come in to the Hilton system we just talked about market is really twofold. We think in almost every case we can drive better revenues. Our system will drive better revenues, our average market share around the world is over 114% that suggests that versus the average we're driving 14% higher revenues that's a lot of revenue okay. And yes they got to pay us, but that's a lot of extra revenue to pay with. The other thing that we afford them through both our deals with all of our distribution partners as well as opportunities with our supply management function.

We afford them cost energy opportunities so we believe we can significantly in most cases lower distribution costs and significantly lower the cost of they're buying certain products and services if they attach themselves to HS and Hilton supply management. And so it's a powerful combination when you put it together driving a big premium on revenue and reducing expenses means more profit and there's plenty enough we think in almost every case to pay us. Our fair share and for them to make a lot more money which is why a lot of people choose to do it.

[Stephen Grambling, Goldman Sachs]

I guess as a very quick follow up just to make sure I heard you correctly I guess on China. Is there any reason why that trend would be different as we think about the potential for conversions…

[Chris Nassetta, President and CEO]

I think that the reason is - first of all China is weakening a little bit right. So they've been in a prolong expansionary phase and while they're still, by the way let's keep in perspective. They're still growing at 2 to 3, 2.5 times the rate of the United States and the West maybe if you put Europe in there more than that they're still growing at a good pace, but at a lower pace than they've been growing for a long time. So that one situation the other thing that's going on as you had a big boom over the last 20 years, but really over the last 10 to 15 of deals getting done and a lot of those deals are coming due.

So you have relatively new hotels that have been built in the cycle where there at the end of their term of the contract. You put together a little bit weaker environment in a world where people have optionality and we're driving industry leading market share we think that bodes well for our opportunity.

[Operator]

The next question will be from Anthony Powell of Barclays. Please go ahead.

[Anthony Powell, Barclays]

You mentioned the 14 million new Hilton Honors members there were lot of changes and also loyalty programs based last year. You think you may gain some mind share among loyalty focused customer at the expense of some others given some of the changes that your competitors?

[Chris Nassetta, President and CEO]

I don't - I mean it's really hard for us to know clearly we're experiencing very high growth rates we don't think by the way those growth rates are going to abate this year. Our goal is to have over 100 million members when we finish this year, and I'm highly confident that we will be able to do that. So we think that the pace will continue. We have done a bunch of stuff which you can see and that has been publicized throughout the system both the lower tiers, but particularly at the higher tiers to make the program more appealing and it's resonating.

Obviously we're getting members from somewhere people that are already frequent travelers. So to some degree I suspect that we are benefiting by getting members of other programs that are shifting their loyalty. What we're focused on is really just creating as I said a hyper compelling reason why people want to be a member of our club. Like that Honors isn't just about points, Honors is about getting the best value by points by price and it's about getting unique experiences both with the technology and other ways, like our relationship with Live Nation and Formula 1 and a whole bunch of other relationships that are just things that are hard to replicate and that people experientially like and choose to sort of migrate their way towards us.

So I can't give you hard data on like who is come exactly from where and to a degree as long they're great customers that we can get engaged with us, we don't care. We want them in the system. The thing that we didn't say that I'm actually most proud of, it's really important to have a big - we all focus on like we got $85 million we're going to have a $100 million and that's great, it's a big number, right. And it's growing and it's going to keep growing at a great pace.

What's most important is engagement, it's like how many of those members are actually actively engaged with us that are coming, staying with us and I’m going to say I know what the number is now. I think five or six years ago I think we would have said we probably had 15% to 20% of that number that we're really engaged. Today, 50% percent; so half the 42 million so a teeny bit less than half we would view as are engaged with us. That they are actually they have recent stay activity and purchase activity, that's a big deal, right.

Big numbers are great. How many people are actually buying? I mean we could auto enroll the whole world if we wanted. We could have a 1 billion people if we wanted, but that's a lot – my team doesn't like that idea. But it's really how do we get people in the program that we can get engage with us and staying with us and buying our products. And that statistic I think is really, really important one.

[Anthony Powell, Barclays]

Got it. And I think you mentioned earlier in the call that you expect rate growth to play a bigger role in RevPAR growth of U.S. this year. That's interesting given price power has been soft recently. What gives you confidence in your ability to push rate a bit more?

[Chris Nassetta, President and CEO]

Well, I mean if you look at fourth quarter a 100% of our growth was rate. If you look at the whole year in the U.S., 80% of our RevPAR growth was rate growth. I think it will be similar this year. So that's what gives me the confidence. Now you would I think argue well but it's not a high number, and I would say you're right and – but there are other reasons for that. I think the other reasons for that which I've talked about a lot and I think it's come up on prior calls, have more to do with the fact that you're in a sort of a low compression environment. The overall economic growth is fairly tepid inflation. Throughout this period it has been fairly tepid. You've had a lot of volatility particularly in the U.S. around politics and things that create caution.

And so I think as compared to prior cycles where you had much more robust broader economic growth, that sort of flowed through. So I think it's sort of stands to reason and what has been a relatively low growth environment that that's what you get. The other thing that's going on that I don't think many have focused on is what's going on is really good in the sense that – but it affects the rate growth numbers over the last several years and that is mix of business.

So, if you look at the overall occupant system-wide occupancy for Hilton, we are over 300 basis points higher occupancy than we've ever been in our 100 year history. Why? The bulk of it is weekends and off peak times we've just gotten much smarter about filling up. Oh, is that good? Sure it's good because we make money. Our job is to drive returns to our owners and they are getting a rate that they make money on and their bottom line profitability on an absolute dollar basis is higher.

The consequence of it though is when you look at rates it creates a scenario where that business by definition on weekends is at a lower rate. And so when you blend in that mix at a lower rate it sort of - it dilutes the story on rate growth, which I think is an illusion. Obviously, our owners and we are much better off with that incremental business even though when you blended in because its lower rated business, it sort of dilutes the rate growth story.

And so I think – again, this isn't super positive for our owners that we're able to do this and we're not, we have not been of the mind that there is a big rate issue that's sort f out there. It's short of what I just said, short of mix and really a low compression environment.

[Operator]

The next question will be from Robin Farley of UBS. Please go ahead.

[Robin Farley, UBS]

I wanted to ask about group business because I know it's probably difficult to get visibility and then there are trade wars and government shutdowns and things that you don't know when you're giving guidance. But just kind of looking at last year, it look like initially you thought group would be up mid single-digit and then there was a pointer in the year you got more conservative. You thought would be up 3 to 4 and it came in at 4. So I guess just thinking about your expectation for 2019, you talked about being up mid single-digit. Can you tell us maybe what group bookings came in Q4 versus the same time last year just so we could think about sort of a incremental like how the outlook is changing in the most recent months?

[Chris Nassetta, President and CEO]

Yeah, Robin it's a good question. I think what you're referencing is earlier in the year we were talking about the business on the books being up mid single-digits which is what it was. And for fourth quarter it ended up realizing it for. So pretty close to where the book was. Our book for 2019 is also up mid single digits. That doesn't mean that that's exactly where it's going to realize because it depends on how many members of the block show up and what they decide to pay and who decides to cancel them.

As you know there's a lot that goes into it, but I don't know why built into our expectations as we said is that group business will remain solid and so we'll see what the experience ends up looking like in 2019. But the business on the books is still up in the mid single-digit.

[Robin Farley, UBS]

And then just want to follow-up on the leisure commentary. I know you talked about some of the issues in China where the bigger declines were. But just looking at the U.S. rates, there was some modest leisure decline. If that was sort of related to weather or calendar things, can you talk about how leisure looks to the degree do you have some visibility so far for Q1 in 2019? In other words, are there – is that sort of softening, I don't want to use the word softening if it's not the word you'd use; but are you seeing about a little bit here and early 2019 as well?

[Chris Nassetta, President and CEO]

I would say it's noisy and it was noisy at the end of last year for the reasons that you highlighted. All the movements of pieces around day of week, around holiday, around the overlapping weather. And it's been noisy. It was noisy in January largely to do with the government shutdown. So again, I'm not trying to be evasive. It's hard to judge it right now. I mean to be perfectly fair we think our expectation for the year is leisure is going to be fine. That leisure is going to grow, we think it will probably grow less than last year. We think business transient will probably grow less because we have an expectation that's based on consensus view of the world that broader economic growth is going to be a little lighter.

When we look at the trends that we see in January, they're noisy but we look - we can get a decent sense of February/March. We think that they are supportive of the range and outcome that I just described and that we've given you today, which would be a little bit lower than last year.

[Operator]

The next question will be from Patrick Scholes of SunTrust. Please go ahead.

[Patrick Scholes, SunTrust]

Hi I'm curious on what you're seeing out of Europe as it relates to Ford demand specially on the leisure side out of the U.K. Certainly we're getting some signals from the cruise lines or the floating hotels that some of the European based cruise brands are really seeing some difficulty as it relates to travel around Brexit I wonder what you are seeing for the hotel side?

[Chris Nassetta, President and CEO]

Yeah Patrick, I mean similar to sort of, we’re seeing a little bit on what Chris just said, it's a little bit hard to have this ability. They have their fair share noise over there with Brexit, sort of the way we've have a little bit of noise here and as you know the lead time on unlike cruise's lead time on some of our business is pretty short in that area.

So we've kind of given you guidance that we think you know the region is going to be within the range, we'd expect leisure to be within that and there's a number of ways it could go. Obviously the fourth quarter was quite strong in continental Europe and London. Driven by leisure and U.S. inbound to the U.K. and to continental Europe in particular. And so there's a - those trends could continue but right now we're saying kind of within the range.

[Operator]

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

[Bill Crow, Raymond James]

Chris, if you look at the front end of growth, really talking about application volumes and construction starts, any changes in those especially as you think about your three mega regions?

[Chris Nassetta, President and CEO]

No, I mean overall it's been trending as you heard in the numbers in our prepared comments. Overall it's been trending reasonably consistently in terms of the deals that we've been signing. We've obviously been converting those to construction and delivery at a higher rate of productivity. The make-up of it has shifted a bit, the U.S. not surprisingly has been a little bit slower and the rest of the world has been a little bit faster.

But the net result has been the same and that's sort of the beauty of a big global business that is diversified the way we are and we like to think that we're pretty quick on our feet and that we're good at anticipating sort of the mega trends in terms of what's going on with demand growth, what's going on with flows of capital, so that we pivot in the right ways and the right time.

So I'm pretty confident we will be able to continue to do that, which is why we're saying we think we'll have another record year in signings. I actually - well last year maybe was a little bit lighter in the U.S. and little bit heavier in the rest of the world. I think particularly given some momentum we have lived through and now with the addition of Moxy - Motto, that the U.S. will probably be flat a bit up this year but the net result would be I think for the next year to sort of we're comfortable that we can assign a similar amount to what we've been doing over the last few years.

[Bill Crow, Raymond James]

I take it you're not merging with Marriott to get the Moxy brand?

[Chris Nassetta, President and CEO]

No.

[Bill Crow, Raymond James]

Kevin, one from me for you, I would have thought maybe that share repurchases in the fourth quarter would have been a little bit more robust given the stock market sell-off. Were there black out period issues or what was your hesitation I guess at that point?

[Kevin Jacobs, EVP and CFO]

Bill, that's good question. There wasn't really hesitation. We ended up coming in at the top end of the range and so we did - we think we were down to a range of 1.8 to 1.9 at the - as of last earnings and we ended up at 1.9. So we kept it going and then yes, the very end of the year and leading into the beginning of this year you are on a 10b5-1 plan because your blackout period will remain, but we remain buying of course but you're on a plan where you don't get to control it. So nothing more complicated than that.

[Operator]

The next question will be from Smedes Rose of Citi. Please go ahead.

[Smedes Rose, Citi]

I wanted to ask you on the reduction in third-party commission group rates that you put in place I think some time ago but we've heard that maybe you've put in some additional flexibility on the part of the owners or bookings and maybe you could just provide an update on that front?

[Chris Nassetta, President and CEO]

No. I mean we're not going to get any details on individual deal that we cut. We cut our commissions broadly across the Board from 10 to 7 with third-party group intermediaries which I assume what you're talking about. As we have always had that we have certain of our most important relationships where we have incentives systems built in. By the way that was the case back when we were at 10, that's the case the one we're at 7.

So those continue on to make sure that we're driving share in the right way and incenting behavior to get disproportionate share. I have certain players where we think it's really incremental business that our sales team maybe has less access to.

So I would say that that sort of business as usual as we've done it. I'm obviously not going to get into individual deals here whatever.

[Smedes Rose, Citi]

But you're not rolling back that initial…?

[Chris Nassetta, President and CEO]

No. Let me make perfectly clear, we are not rolling that back. We are 100% committed to the change we made.

[Smedes Rose, Citi]

I just wanted to ask you, so I mean it looks like the U.S., there's increasing evidence of the U.S. development cycle, it potentially peaks and starts to edge down. We talked about this before but it's always interesting to hear your thoughts on anything you're hearing from developers on terms of lending or access to capital or just lowered return expectations as overall cost - the cost environment continues to move up?

[Chris Nassetta, President and CEO]

Yes, there's nothing really new on that front. I mean I think that over the course of the past year or frankly in the financing cycle over the course of the past year so you've seen lenders on the margin get a little bit capital, get a little bit tighter and a little bit more expensive. Now that said you know for us the good news for us is we've got, we fight way above our weight in terms of the number of deals that we do. Good deals can - still plenty of capital in the world, good deals can still get financed and so we continue to fight above our fair share so that that hasn't been an issue.

And of course construction costs have been going up particularly in the developed world a double-digit rates for a couple of years now and so you've seen broadly an overall slowdown in construction starts in the U.S. which is why you see the prognosticators predicting that supply growth is going to peak but for us we continue to you for high quality projects it's still - they're still readily financeable.

[Operator]

And ladies and gentlemen that will conclude our question-and-answer session for today. I would like to hand the conference back to Chris Nassetta for his closing remarks.

[Chris Nassetta, President and CEO]

Thanks everybody for joining us today. Good discussion. We'll look forward to talking after the first quarter. Obviously early in the year we'll have a lot more visibility on what's going on out there when we talk next. I appreciate the time today, and we'll catch up soon. Take care.

[Operator]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.