A Conversation with Chris Nassetta

I think it has been.

It's a little challenging. It's a little challenging.

Yeah, no, for everyone. Almost the entire first day of programming almost canceled because they didn't make it in.

You bet. Doing a little Top Gun with the pilot to get through. We made it. Dodge clouds.

Yeah. Well, technically, we're not in it. We're adjacent to it right now, but you guys will be in it. You'll be in it later. Yeah. It's beautiful.

There's an over/under bet on how many questions I'll get at it.

Right. Three. No, I'm going to give you five. I'm going to... Yeah. Well, let's see. Let's see.

He won't answer them.

Well, you know, by now I'm pretty optimistic in general, but I think in the moment we're in, while it doesn't feel great, I think there are reasons to be optimistic. You're saying we're going to start small and go big, and I'm maybe going to do small and big and everything at the same time because I think it's all sort of interconnected and part of the same story. So, obviously, I'd have to tell we have a huge representation from the ownership community here, which is why I love this conference. Lots of good friends and owners of ours I see. It's bright lights, but I see a bunch of friends in the audience. And I tell you know, listen, I grew up in the ownership side of the business. I spent a lot of my career, you know, as an owner. And so, you know, it's a really tough time if you grew up in that and are experiencing what we're experiencing when you have revenues, you know, sort of anemic same-store growth. And you're still in a reasonably high inflationary growth period for expenses, my you know, it's simple math. The math is working against you. And honestly, every market's a little bit different. Some markets have bucked the trend, but I'd say broadly in the US, at least the last couple years, COVID was obviously bad. Then we had a kickstart where everything got really good. And then we've gone into what I would say is a pretty good malaise where you have stubbornly high cost growth against stubbornly low, you know, same-store revenue growth. And so, that doesn't feel good. So, why you would say, 'Chris, that doesn't really sound like a good setup for being optimistic.' But let me tell you why I am, in part, because I always am, but I do think this is well-founded. And number one, I think there's a bunch of things, and this I'll leave or maybe later, that we can do both as a company and as an industry to drive greater efficiencies to be able, even in that kind of environment, to drive margin growth. I think in our system, we will drive margin growth this year because many of you who are working with us know that we put in a program called Pro Program Rise, which is reducing loyalty rates and reducing program fee rates, you know, and if you add it all up, it's three-quarters of a point or a full percentage point in margin if you're delivering the right in the right ways for customer in terms of quality of product and quality of service, with which the majority of the system coming out of the gates is because we have a fantastic owner community. So, you know, that's one thing in an environment like this that's difficult that we can do. But by the way, my view is that's a down payment, and we'll get to AI and efficiencies and what it means for creating opportunities on the cost side and distribution side, etc., which I think are monumentally big. But I've said to my team that's sort of a down payment. I think there's more that we can do to garner efficiencies in our system given our scale that can translate into even more benefits for owners. Okay? So, in a tough environment, I think I certainly view my job as like leaning in and figuring out, all right, I can't change the macro. I think the macro is changing, and I'm going to come to that. But what I can do and what we can do in the meantime is take advantage of the scale and the things that we know that we or we think we can do better than anybody else to like, even in this environment, try and create some opportunity for margin growth. At the same time, and this is that's sort of the starting small. On the big side, I have been saying for the better part of like the last six or nine months, and in many case on earnings calls and in owner events and owner advisory calls, as so many of you in the room have heard it, that I think that there's a big sea change coming in terms of broader economic growth and the setup over the next several years is going to be very, very different and much, much better in the sense that you're going to start to see this bifurcated economy come together, where you're going to see not just the K economy where the high end does well, but you're going to see the mid-market start to do really well. You're going to start to see meaningful upticks in same-store growth at the same time that you see inflationary pressures lessening. Okay? By the way, that's happening. I know we have the war in Iran, and we can come back and unpack that, but that's all happening, and I've been saying it for six or nine months, again, to some people rolling their eyes, but and I'll come back to it. The reality is we are now seeing it. Like I'm seeing it in every daily data, weekly, monthly, even with the storms, even with the war in Iraq, and I guess Iran, all and I guess Iraq war in the Middle East everywhere, you know, we are seeing that.

You know, what's sort of underneath it? And I think this is the big picture, but I think it's like the most important thing, you know, as I think about it, that we as we think about the next two or three years that we could all think about together is you have a, you know, in the United States, you have a lot of noise in the system. Like there's no two ways about it, you know, the politics are divisive, you know, you can love or hate our current administration, but there's no way you can get around the fact that there's just a million things going on. It's like overwhelming force everywhere all at once, you know, whether that's in the geopolitical sense, the macroeconomic sense. It's just sort of a lot to handle for all of us, including me. Like every day is a new adventure. Having said that, like my whole attitude in life has been like lift up above the noise. Like what's really going on? And if you do lift up above the noise of the day today, here's what's going on. Okay? Forget Iran for a moment, and let's maybe it's a big assumption, but I don't think it's crazy to say that will work itself out over the next 60 days. You know, and I don't think we're going to live in a world where you're going to have elevated oil prices for an extended period of time. There's just politically, it's unpalatable. The world can't stand it. The world has to come together and figure it out. And it might look ugly and painful for a short period of time, but I think it'll get worked out. That's more, you know, there's a more complex description app. So, just sort of set that aside. Fundamentally, what is really going on is inflation is structurally coming down. The largest input to inflation is housing costs. Housing costs are on a two-quarter lag. Talk to anybody in housing, and they're trying to stimulate tons more housing. Housing input is coming down. Inflation is coming down again short of a short-term oil shock, which is a one-time adjustment. What does that mean? That means rates are coming down. The new chairman of the Federal Reserve, if he gets approved, is a very, very close friend of mine. I think it's safe to say he believes that rates need to come down. I mean, I think he's been quite public in that. At the same time, you're in one of the biggest deregulatory environments that we've seen in modern history. You're in a period of time where you have some of the most favorable tax policy that's fixed for the next 3 to 5 years, which is unheard of. That's very business-friendly. You have this thing, and I'll come back to the investment, but this AI thing that is going to create one of the greatest productivity booms. There's all sorts of ins and outs, but the thing that ultimately drives economic growth, if you look at the last 100 years of American history, are these big productivity booms. We're going to get a huge productivity boom. And we have this massive, most importantly for everybody in this room, the single highest correlation, the highest R squared over time and eternity for growth in hotel rooms is non-residential fixed investment. So, what's going on? You have a huge amount of investment that's going on. Everybody's like, 'Where is it?' Like, 'Well, I don't see it.' It's like, because it takes time. Think about the Biden infrastructure bill, $1.6 trillion, the Chips Act, $800 billion. These are huge numbers. Less than 20% of those has even been spent because it takes years to get the money into production and get permitting. But listen, I said this in Washington on stage with a bunch of members of Congress. The one thing Washington does really well when they've legislated money is they spend it. That money's getting spent. It doesn't get clawed back. And then, that's not even taking into account the massive investment that's going on in AI by the big tech companies, AI infrastructure, which is happening in every little town around America in terms of data centers. There are no data centers and there is no AI without energy, massive energy investment. And so, like the reality is those things are hard to deny. They are not going to stop anytime soon. They will stop. By the way, will we overdo AI and build too many data centers, too much energy? I bet we do. But it ain't going to happen in the next 2 or 3 years. It's not the way this thing works. There's just too much momentum. And so, everybody's been sort of like rolling their eyes at me when I've been saying this because it's like they don't see it because it takes time to seep into the system. And while I can't say that I've got months and months and quarters of data, I'm telling you starting in the fourth quarter of last year and into the first quarter of this year, we're seeing it in the mid-market. We're seeing it in business travel midweek in our mid-market brands. We're seeing this bifurcation of just the high end doing well and everything else sort of like flat or down starting to reverse itself. And so, what does that mean? If we do our job at Hilton, you know, we're going to do a better job in reducing your load on fees and other things we can do for reduction in distribution costs and other things we can talk about to you if you want later. But I'm pretty confident in the next 2 or 3 years you're also going to be in an environment where inflation is going to come down and top line's going to go up and you're going to be back making with a business that has margin growth. So, I think that's incredible. Good night, everybody. Thanks for coming. And if I'm wrong, I'm wrong, but I'll be happy to come back next year if I'm wrong.

I got it. I got it. It's like you know, I always say to my team, you got to be careful not to fight yesterday's war tomorrow. Like one thing that always I've been doing this for longer than I should admit. I mean, I've been doing this for 40 years. Like everybody always thinks like, you know, it's different this time. And like there'll be no more business travel. It's only going to be leisure, you know, during COVID. Nobody's going to travel for meetings and events. Look around. Even with the whole East Coast shutdown, there's a thousand people sitting in here at a meeting event. You know, things do change. I'm not the guy that has my head in the sand and like nothing ever changes, but things remain more the same than they change. Over long periods of time, they change. Over short intermediate periods of time, they change less than people think. And so, like yeah, leisure's great and the high end's great, but that, you know, if you tilt to all of that and then when things start to flip around, like my attitude is always that's the whole makeup of our portfolio. Have a very serve any customer for any need they have anywhere they want to be in the world. And sometimes that feels good in one segment and bad in another, but over long periods of time, in a diversified portfolio, it works out.

But we have hard data now that's agreeing with me. So, you still...

For sure.

It'll get easier, I think. It's not going to I mean, listen, to a degree, I know you probably think I would say something different but I that I'm going to say, I think it being a little bit difficult is not a bad thing. Right? I mean, when it was really easy in our industry, again, the benefit of doing this for a long time, I mean, we're below 30-year averages in supply growth in the US. We're I mean, right now we're running like 1%, a little bit below one. The 30-year average is like two to two and a quarter. I mean, you want the industry to be healthy. I can remember in my career where literally supply would get up to six, seven, sort of like, you know, where it gets so easy, the money is flowing, there's no discipline. And typically when that happened, bad things occur, you know, at the tail end of that. So, I think it's not a bad thing that there's, you know, that people are more disciplined, they're more discriminating. That we have lower supply numbers. It makes it healthier for all of us that are in this room. I do think it'll get easier for all the reasons I said. I mean, if rates are coming down and cost growth is coming down at a time when top line same-store revenue growth is going up, by definition, the math has to get a bit easier. And I think it will. What do your numbers show on the development side? It's got to show they're down. They're soft. Because I'll make it up.

Okay? The ones are okay? I think the ones are fine.

As long as we get an unfair share. No, I honestly do but it does have obviously when things are really easy, we grow faster, too. Everybody does. I just think we're better off as an industry with, you know, supply and demand being more in balance in a relative sense makes for a healthier industry. And the healthier industry over the long term makes financing when you want to build everything better, right? Because you know, higher beta industry means that when you think about the lending community over the long term, when they see that kind of beta, it makes them more nervous. So, us sort of I wouldn't say we self-regulate, but being sort of disciplined, some self-regulation, and then the markets, you know, sort of limiting what can be done will ultimately be good for everybody. Good for same-store results. Good healthy outcomes long term for the industry. It will continue to build confidence with the lending community that this is an industry where the fundamentals are good, where supply and demand is stayed for an extended period of time relatively in balance.

Some of that is imposed. Some of it is self-imposed.

We look at it a lot. I mean, obviously population growth is not great and immigration is down for what's going on. I think those, you know, I think the latter of those is sort of a moment in time. Inbound international, I again at this event, DC was sort of beating the country up. I mean, if you I've just finished chairing US Travel Association, but I've been involved in Washington and representing our industry for a long time. And if you go back 30 years ago to now, we've lost half our market share in the world. Half. I mean, that's hundreds of billions of dollars in the economic opportunity, millions of jobs that have been lost, and there are a whole bunch of reasons for that. You know, obviously we're all focused a little bit more recently on the fistfight we're having over trade and tariffs, and particularly with Canada, which has been painful. And Mexico actually has ended up working out all right, and the numbers are up there. I do think all that will sort of resolve. I think the Canadian thing, USMCA, by the end of the summer, I think there'll be some deal. It might ultimately I was talking with folks in the administration last week. It might get done in a Mexico and Canada deal separately, or one first and then the other separately rather than together, but I do think something will get done, and I think we'll normalize relations with Canada. We really need to. I think the bigger issue and I know the ultimate question, so I'll go there in a minute. The bigger issue is just like, why have we lost so much market share, and why are we willing to accept that? And the answer is because there's been and it's not this administration's fault. It's been happening for 30 years. And that is that we have not kept pace in a competitive world. There used to be everybody wanted to come to America, and you didn't have to market America, and it was just like open the floodgates. But the reality is there's now a lot of really good competition, and for people in Asia or in Europe or in the Middle East or even Latin America, there are a lot more places they can go that are competitive, new resort destinations that are cheaper and a heck of a lot closer to home. And where as a result of being closer to home, it's easier, there's less friction in terms of having to cross the border, pay really expensive fees to get a visa, wait a half a year to get a visa, all the friction that we put in the way. So, I think you know, listen, I'm going to sort of as I always have, try and make it my business to keep pounding that and working on that. I think in the end we need Brand USA to be fully funded, and we need to be marketing America, and then we need to work really hard to set goals and take friction out of the process. Even if we could get halfway back, I mean, we were at 10% market share, we're now at five. Seven and a half would be still probably a couple hundred billion dollars in economic activity and over a million jobs, and it'd be good for everybody in this room. So, we need to as an industry, we need through many administrations, because it will take time, we need to work hard on that. But I'm not...

I don't believe that. I again, economic growth, non-residential fixed investment's going to be going on for the reasons we talked about. And we don't have a lot of supply, that's why you want to keep fundamentals of supply and demand relatively in balance. And so, as those things are happening, I think we'll be fine. And I think if we can then get some of these other things figured out like Canada and broader inbound international travel, and trust me, over time the immigration thing will balance out. I mean, the politics shift back and forth wildly. I think we'll be...

I don't think any of those are things that I wake up in the middle of the night that are structural flaws that are going to hold us back as an industry. I think the winds in our sails are too strong.