Q2 2023 Hilton Worldwide Holdings Inc Earnings Call

Good morning, and welcome to the Hilton's second quarter 2023 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's prepared remarks, there will be a question and answer session to ask a question you May Press Star then one to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Jill Chapman Senior Vice President Investor Relations and corporate development you may.

Begin.

Thank you Jay welcome to Hilton's second quarter 2023 earnings call before we begin I'd 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. 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 <unk>.

I R Dot Hilton Dot com.

This morning Christmas that 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 of Global Development will then review our second quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions with that in place.

I'll turn the call over to Chris.

Thank you Jill and good morning, everybody. We appreciate you joining us today, we're excited to report strong second quarter results with Revpar, adjusted EBITDA and EPS exceeding our expectations adjusted EBITDA for the quarter to quarter hit a record 811 million the highest single quarter in our company's history.

Performance continued to be driven by solid fundamentals along with continued share gains.

Our industry, leading brands strong commercial engines and powerful partnerships continued to strengthen our system and differentiate us from the competition, while our culture of innovation continued to fuel additional growth opportunities.

Despite macro challenges over the near term, we're confident in our ability to continue driving solid topline and bottomline growth and in turn growing free cash flow given the strength of our results, thus far and our expectations for the rest of the year, we're increasing our guidance for return of capital for the full year to beta.

Two four and $2.6 billion turning to results in the quarter system wide Revpar increased 12, 1% year over year.

Strong demand drove continued.

Pricing power across all segments system wide occupancy improved more than four points during the quarter to reach 77% in June our highest level post pandemic.

Business transient Revpar remained strong growing 11% year over year as trends continued to normalize leisure revpar increased 7% versus last year, driven by solid rate growth and despite more difficult year over year comparisons group recovery remained robust in the quarter with Revpar growing.

19% year over year compared to 2019 system wide revpar grew more than 9% in the quarter with all segments performing well versus prior peaks and accelerating sequentially versus the first quarter stable demand and rising rates drove leisure revpar.

Growth of 26% versus 2019 and business transient growth of 6% group Revpar was roughly flat versus prior peak levels and improved versus the first quarter.

As we look to the back half of the year. We expect continued strength driven by recovery in international markets business transient and group demand on the group side, we continue to see very positive trends our bookings in the quarter for 'twenty 'twenty four arrivals grew 30%.

With group position now at 13% up driven by the corporate segment and our sales team saw the largest revenue bookings in our history for all future arrival periods based on all of that we now expect full year revpar growth of between 10 and 12%.

Turning to development, we signed more than 36000 rooms in the second quarter, representing the largest quarterly signings in our history conversions accounted for nearly a third of signings in the U S signings in international markets doubled versus last year accounting for roughly half of <unk>.

System wide signings in the quarter, driven by strong momentum across Europe , and Asia Pacific and Europe , We signed agreements across 14 countries, including our first tapestry hotel on the French Riviera and our first curio in Croatia in China, a Hilton Garden Inn continued to show tremendous growth since launch.

<unk>, our new franchised business model in the quarter.

We signed approximately 3700 hei rooms in China more than three times.

Last year and accounting for more than a third of our signings in China.

Signings in America were up 20, and the Americas were up 25% year over year with strong interest in the U S. Despite tighter credit conditions, we've signed more than 50 true hotels year to date, representing the strongest pace since 2017 as the operating success of existing <unk>.

<unk> properties is leading to a surge in new signings results were further helped by spark with approximately 60 hotels sign and another 400 and negotiation just six months since its launch.

Nearly all deals are conversions from third party brands and half represent new owners to Hilton with our first Sparks scheduled to open in September and roughly 20 by year end spark is well positioned to disrupt the premium economy segment, while expanding our customer and owner base, especially in <unk>.

Markets, where there is no Hilton brand presence today.

In addition to the strong start for spark, we recently launched an inventive new extended stay brand in the U S. Under the working title project age three the apartment style accommodations are designed for guest booking 20 or more nights built with the staying power of Hilton's Award winning hospitality, we have received tremendous.

This interest from owners and developers due to the strong market opportunity cost efficient build and high margin model that we currently have more than 300 deals and negotiation.

Our system wide pipeline now stands at a record 3000 properties totaling approximately 441000 rooms, increasing 7% year over year and 3% from last quarter.

Following another strong quarter of starts up more than 73% year over year, roughly and over 40% year to date roughly half of our pipeline is currently under construction, we have more rooms under construction than any other hotel company, ensuring guests will have even more options to stay with.

In the years to come.

Specifically in the U S. Our under construction pipeline has continued to increase up 15% year over year, which will contribute to increase openings. Later this year and next in fact in the coming weeks. We're gonna open nearly 2000 additional hotel rooms in New York Times square with the debut of our first ever.

Tempo by Hilton that a new Tri brand property featuring home two suites Hampton Inn and motto.

In the quarter, we celebrated several milestones, including the openings of our 2900 Hampton Inn.

And our 600, Tom two suites property, which remains one of the fastest growing brands in the industry. Additionally, we surpassed the 150000 rooms in Asia Pacific, including the openings of the Hilton Okinawa Bianco Island resort in Japan, and the Conrad said, then our first luxury hotel in China's thriving technology hub.

We expect openings to accelerate as the year progresses, given strong international and conversion trends and expect conversions to account for around 30% of openings for the full year, we expect net unit growth of approximately 5%.

With forecasts for our highest level of signings the largest pipeline in our history and approaching the largest under construction pipeline in our history, we expect net new unit growth to accelerate to 5% to 6% next year and a return to 6% to 7% over the next couple of years.

As part of our commitment to deliver exceptional experiences for gas we remain focused on initiatives to drive increased loyalty and satisfaction. We know for instance that food and beverage experiences are an integral part of travel and want to ensure our hotels themselves are great dining destinations we.

Our recently formed a first of its kind partnership with the James Beard Foundation, serving as the Premier sponsor of the 'twenty to 'twenty three restaurant and Chef awards and continue expanding our partnerships with world class talents, such as Michael Mina Jose Andres, Nancy Silverton and Paul Mcgee.

Hilton honors remains the fastest growing hotel loyalty program with more than 165 million members up 20% year over year, driven by strong growth across all major regions honors members accounted for 64% of occupancy in the quarter up two points year over year.

Air <unk>.

Hilton team members and our award winning culture continue to differentiate our brands from the competition.

Just yesterday, our Waldorf Astoria home to end through brands were named best in category by J D power for their respective segments in North America last week was a Hilton was again named as a top employer for millennials for the sixth consecutive year since 2016, we've been recognized.

Dies by Great place to work is the world's best hospitality company in over 60 countries.

We're thankful for the great work our team members do to serve our guests around the world.

We have incredible opportunities ahead to further position ourselves as the leader in hospitality and we're very excited for the future of travel with that I'll turn the call over to Kevin to give you a few more details on the quarter and expectations for the full year.

Thanks, Chris and good morning, everyone. During the quarter system wide Revpar grew 12% versus the prior year on a comparable and currency neutral basis growth was driven by strong demand growth in APAC as well as continued strength in leisure and steady recovery in business transient and group travel.

Adjusted EBITDA was $811 million in the second quarter up 19% year over year and exceeding the high end of our guidance range performance was driven by better than expected fee growth largely due to better than expected revpar performance as well as strong performance in Europe , and Japan benefiting our ownership portfolio.

Management and franchise fees grew 16% year over year, driven by continued Revpar improvement.

For the quarter diluted earnings per share adjusted for special items was $1 63.

Increasing 26% year over year and exceeding the high end of our guidance range.

Turning to our regional performance second quarter comparable U S. Revpar grew 6% year over year with performance led by continued recovery in both business transient and group segments.

Leisure demand in the U S remains strong but grew more modestly year over year due to tougher comparisons.

In the Americas outside the U S second quarter, Revpar increased 22% year over year performance was driven by strong group demand, particularly at our resort properties in Europe , Revpar grew 26% year over year 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 30% year over year led by rate growth and strong demand from our latest travel.

In the Asia Pacific Region second quarter, Revpar was up 79% year over year led by the continued demand recovery in China Revpar in China was up 103% year over year in the quarter and 18 point sequential improvement from the prior quarter and 3% higher than 2019.

The rest of the Asia Pacific Region also saw significant growth with Revpar, excluding China up 52% year over year.

Moving to guidance for the third quarter, we expect system wide revpar growth to be between 4% and 6% year over year, we expect adjusted EBITDA of between $790 million and $810 million and diluted EPS adjusted for special items to be between $1 60 and.

And a $1 65.

For full year 2023, we expect revpar growth to be between 10% and 12% we forecast adjusted EBITDA of between $2 97, 5 billion and $3.0 billion to $5 billion.

We forecast diluted EPS adjusted for special items of between $5 93 and.

And $6.06. Please.

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

Moving on to capital return, we paid a cash dividend of 15% 15 <unk> per share during the second quarter for a total of $40 million. Our board also authorized a quarterly dividend of <unk> 15 per share in the third quarter.

Year to date, we have returned more than $1 billion to shareholders in the form of buybacks and dividends and as Chris mentioned earlier, we now expect to return between two four and $2 6 billion for the full year.

Further details on our second quarter 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.

M. J can we have our first question. Please.

That's great.

As a reminder to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing.

To withdraw from the queue you May Press Star then two at this time, we will pause momentarily to assemble our roster.

Okay.

Today's first question comes from Joe Greff with J P. Morgan. Please go ahead.

Good morning, everybody morning, Joe.

Not surprisingly maybe the first question relates to your net unit growth target for this year approximately 5%.

Versus the five to five 5% previously can you talk about what's driving that I mean, how specific.

To the U S is that can you talk about the rate of China development recovery and then obviously, we all heard what your expectations are for next year in terms of net rooms growth. What gives you the confidence for that Reacceleration and specifically, whether it's brands or geographies is driving that acceleration. Thank you yeah.

Great Great question and no I'm not surprised that that would be the first question.

You know for the record I think on the last call probably three different times I said around 5% so.

The truth is since our last call.

I don't think our view has really changed much about them.

Where are Doug would be this year.

And so you know it is what it is it was always a bit back end loaded in the and the simple reason for that Joe.

As in the numbers. If you look at starts what's been happening with starts we had a big surge in starts in the second half of last year starts were up second half of 'twenty, 240% and if you look at.

What they are in the first half of this year as I stated in my in my introductory comments are up 40%. So that means that a bunch of stuff is just translating into the second half of this year and into next year and so.

It really is entirely sort of the timing of the in.

In the sequencing of how that happened. So we thought it would be around five we still think it will be around five.

Our confidence in you know going back.

Back on the way back up I do feel like if we look at the data you know, it's not just pure optimism, although everybody knows I'm, an optimistic sort I mean, if you look at the data as I already said starts.

Starts were way up in the second half last year, they've been way up in the in the in the first half of this year. We continue to see good momentum there same with signings I mean, we expected as I said in my comments had a record year in signings relative to our prior peak.

And you know that that all of those things are translating into both our optimism about the second half of this year being much stronger than it than the first half and 2024 being much much better it's a bunch of different things that are contributing to.

That.

It's really all regions, even though arguably the U S credit conditions are you to make it more challenging.

I already said were still up you know year to date over the last over the trailing 12 months, 15% and starts.

And we have some other nice things that are you know that are going to add to our growth here in the United States with spark you know, we're only going to open 20. This year you should assume we're going to open a lot more than that next year and home three will start contributing HII will start contributing next year probably not.

<unk>, but you know that you know that that is a much more financeable product, even even in today's environment, because it's probably more apartment than it is than it is the hotel.

We are broadly having.

Really good success on conversions and Europe , which had been slow has really started to pick up in Asia Pacific really led by China has woken up and the engines of not just restarted, but theyre really starting to fire on many more cylinders I wouldn't say, it's all the way there yet, but you know and the SEC.

Quarter, and our expectations for third and fourth as you know, we're going to we're going to start to get.

Very good momentum and so you know that's why we feel pretty darn good that you know.

On the Doug for next year, obviously for giving you a range I would sort of direct you to the middle of it.

If some things go our way in the world stays relatively stable I think I think we can you know we can be mid mid range of that or above, but it's a little bit early in the year to you know to go quite that far will obviously next quarter in the following quarter, we'll update you, but I think you know what.

I would say to people is again, it's it's objectively based on things that you know success, we're having in conversions.

The success, we're having in demand for spark.

Conversions all over the world Spark here by the way, we will take sparked a Europe relatively quickly.

What we have in the pipeline I mean, almost half of our pipeline is under construction you know more than anybody in the industry and once they start they they almost always always finish so that.

That pickup starting in Q3 last year as you know is starting to pay dividends and thankfully the pickup in starts has has continued.

Everywhere.

In the World and as I said the World is a big place. So there's a little bit more pressure in the U S. Even though that our numbers are still good but a lot less pressure in some other parts of the world that had been feeling it which as you know the benefit of a big diversified global business.

Great. Thank you.

The next question comes from Shaun Kelly with Bank of America. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question.

Yes.

We've covered the net unit growth side.

Chris I'll ask a little bit of the same around sort of the revpar outlook I'd like to Gary Q sort of incremental kind of changes or upside for the second half just kind of what's the biggest difference to kind of your prior outlook that gave you some confidence there and then just any pressures are concerned youre seeing on.

The leisure normalization point, it's a question we take a lot and just kind of maybe update us on the latest you're seeing as we move through some really tough comps in the summer how is behavior out there and what's going better or a little worse than anticipated at this point, yeah happy to so yeah, we moved our numbers up for the second half of the year and thus impacted the full year.

That was done on the basis that we're just seeing better results. We you know as we say very regularly we were not economists. So we try and take that you know consensus view of what's going on in the macro the consensus view last quarter was that the second half of the year would see you know a little bit more means.

<unk> full slowdown I think the consensus view right now I mean, you can pick somebody better broadly is that it's going to slow down, but it's more of a soft landing and later in the year and more into next year and so when we factor for that and we look at them about them. Obviously, we've already booked a half a year and we look at what we have read.

<unk> sidelines now into the third quarter, which we feel.

Very good about and as we look at the fourth quarter well you know, we would probably say the macro view is that things will slow and so we've assumed that.

But probably the macro view is that they saw a little bit less than maybe last quarter and so when you flush all that through.

It results in an increase in our guidance now.

There's possible upside if if the fourth quarter keeps going like we saw in the second and what it looks like we're going to see in the third there may be there may be potential, but it certainly warranted.

We are increasing our guidance base based on where what we've already booked for the year, what we see at the macro view in the late part of the year I mean, the interesting thing is like everybody wants the will the business backwards, but we don't really see it I gave you the stats.

On leisure business transient and group you know I gave you some sense of where we have really good forward looking information, which is really in the group segment remaining really really strong I mean, obviously leisure is growing at a somewhat slower pace because of the comps, but I mean, it's still way.

Over.

The prior high watermarks in business transient keeps grinding up and getting better and the same with group. So as I'm sitting here today honestly, while we will take a macro view of later in the year because we're not economists we're not seeing any signs of weakness as you know I know, there's a lot of questions on the leisure business.

What I would say to you is like we're not see we're having at a wildly strong summer in leisure I mean, the only places where leisure has backed off a bit as where you would expect it where it's normalizing from like crazy highs.

Still in those markets, which I'll talk about way over 19 levels, but I mean, it's just sort of coming back not even the earth, but you know sort of in our universe I guess and those are markets like South, Florida, Hawaii parts of Southern California, where it was just like it was it was insane, but broadly we have a very diversified leisure business.

Broadly, we're not really again other than comps being harder we continue to see good growth and we expect to and you know at least what sight lines. We are into business transient talking to a bunch of customers, which I've done very recently and certainly our sales team talks to them all the time and we got everybody together as we always do last.

We can talk about it you know theyre feeling quite good, particularly the Smbs, which is at this point, 85% plus of our business.

We are traveling more they're feeling reasonably good about soft landing in their business and then you know group.

And there is pent up demand there and group there's still huge.

Huge amounts of pent up demand that Havent been released I said, you know, where we had the best booking quarter in our history.

Or you know in the second quarter and our position is great for next year and you're still not where you would you know where you're going to be with all the Big Association because that was really driven by corporate group. So a bunch of the Big Association groups I mean, they are booking but you know that's multiyear booking cycles. That's that's.

That's still to come and so.

We don't see weakness obviously.

Were sanctioned and we know what the fed is trying to do well here. This afternoon. You know what the next steps are I expect they are going to raise rates, but I do think we're probably getting to the end ish of that tightening cycle inflation is coming down some of the lag.

Indicators that will eventually come into the inflation numbers housing in particular is definitely real time coming down and it will eventually show up and so you know I do think we will see again I'm not an economist, but I do think consensus view is starting to center around a softer landing maybe late this year some time next.

Year and that feels rational based on everything going on and as I said our business, we're not we're not seeing any.

Real cracks anywhere and of course that the places in the world that had been lagging are now starting to like produce so you know the most significant lag everywhere was doing really well, but China and now China is eclipsing prior high high watermarks and getting going on development as I already said, but also operationally that cliff.

Thing 2019 numbers, so not to be a pollyanna it all it all feels pretty good and if we can orchestrate a.

A slowdown, but a reasonably soft landing.

I think the rest of this year is going to be very solid and in line or better than what we said and I think next year will be a darn good year, because I still think.

There'll be straw strengthen.

In leisure, but particularly there'll be if if you get a reasonably decent you know slowdown soft landing youre going to have continued growth in business transient, particularly with.

Smbs, which is the vast majority of the business and group is going to be pretty sticky because people just have to do some of this stuff and particularly in a soft landing environment I don't you know I.

I don't think Youre going to see you know a big a big Big change there anytime soon so it's early and I'm not going to like obviously I'm not going to give guidance yet for next year, we're not it's sort of crazy to do that we got a lot of year to see how things play out, but I sit here today I feel I feel I feel quite good about the rest of this year actually.

Feel quite good about you know as we later this summer going into budget season, and how we how we feel about next year and that's reflected as you not surprisingly in the guidance, we're giving the increase in our return of capital I mean, I think that should be read for what it is.

Thank you very much.

The next question comes from Stephen Grambling with Morgan Stanley . Please go ahead.

Hey, good morning.

Steven.

I know you don't want to give 2020 for guidance, but if we go all the way back to the split off you had outlined this algorithm of 1% to 3% revpar growth translating to <unk>, 14% to 23% EPS EPS algorithm with kind of 6%. Doug you were talking about the Reacceleration, Doug basically in that range, but what other changes in the business.

Should investors be thinking through as we compare contrast that algorithm to today, whether it's thinking about royalty rates or pipeline or other fees I think the the algorithms stands I mean in.

And in fact, even by the way while.

Doug has been a little bit lower Revpar has been higher I mean, you know, it's a pretty pretty perfect hedge meaning.

Been running a little lower on one a little higher on the other and my guess is it's going to flip around over the next couple of years and as I said, we're going to get back to six to seven and same store growth is going to normalize, but we think the algorithm is alive and well and will deliver.

At those in those ranges that we've talked about as a result of increased.

Growth rates from where we are increased license fee rates overall revpar growth.

You know the deals that we've done on the licensing side, which generally drag us up because they are at or above algorithm growth rates. We feel we feel very good about that algorithm that we laid out in 2016 and that it's alive and well and producing and as a result, we're producing today.

For free cash flow than we ever had in history, which is what allows us to return so much capital and that will keep both of those things will keep going up as well.

That's my one thank you.

Okay.

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

Hi, good morning, everyone. Thanks for taking my questions.

I wanted to talk about just the strategic philosophies around brands who've been highly productive at launching brands.

Just observing that a lot of the growth has been sort of in the middle in Midscale and limited service et cetera.

How do you think about launching stuff potentially at the higher end or do not want or need those are.

Just help us understand how you decided where to launch.

Sure David Thanks, So really good question, so yeah I got here.

With that Kevin and others about 16 years ago, and this company had nine brands that were pretty good but not performing that well today. We have 22 brands. So we have I think really built a very powerful sort of engine.

Innovation to figure out what customers want what segments were missing in and to give them.

More of what they want and do it with very high quality brands and then deliver commercial performance, that's winning performance and market leading performance. So that we attract lots of capital I don't think we have a brand and we have some that are early but I don't think we have a brand.

I know, we don't that isn't performing at.

Either equal to or above everybody in the space and so.

And I say that sort of patting us on the back because I'm very proud of that everybody. Every company is different strategies. We think this strategy is a winning strategy because it delivers better products for our customers over time that meet the market.

Modern context, and it's better from a return point of view, because we're doing it with blood sweat and tears and not investing capital and so you know, it's an infinite return and better for the customers is sort of how do you not like it many of those brands not all and I'll talk about that have been in the mid market why because that's the biggest opera.

<unk> and so we're trying to serve any customer for any need they have anywhere they want in the world, but obviously, we have focused a lot on where the big markets are where the big addressable.

Cam's, our total addressable markets and there is no way you could debate that every segment is important but the mid market is where the people are I mean, the big the big demographic trend in the World I don't have to tell anybody on this call is growing middle classes, all over the world right and that so that's where the money is and those people can afford bid.

Mid market hotels, and so when you wake up in 10 or 20 years, the bulk of the rooms growth in the world. That's the bulk of the money that's going to be made is in the mid market. So that's why we have focused there but we.

We have not focused exclusively there we've done a bunch of things in the lifestyle space, you know with urban micro like motto with tempo.

With canopy at the you know at the upper upper upscale lifestyle segment, and obviously you know.

In the luxury space, we have made huge strides I mean waldorf existed, but it wasn't really a brand and Conrad was not much to speak about and Alex are didn't exist and so we've gone from essentially a few hotels to 100 world class luxury hotels with another nearly 60 in the <unk>.

Pipeline and by the way I said it but.

This morning, if you look at Bloomberg or whatever whatever story was ranked the number one luxury brand eclipsed Ritz Carlton.

And customer satisfaction in North America, So, we're making really good strides there and I think there are more opportunities I would say.

Listen we've talked about this for a long time and the only reason we haven't done it is because we've had other market opportunities that we thought would drive would serve more customers drive higher growth and create more value for shareholders, but luxury lifestyle is definitely I mean were in and around the lifestyle segment. Alex are to a degree is sort of.

Luxury lifestyle, but we don't have a pure hard brand in the luxury lifestyle space we will.

I'd say you know we're doing developmental work there we want to give our babies spark and age three while a three we need to give a name which were close to end and then we need to make sure they become little toddlers centers are successful.

But we're doing developmental work in luxury lifestyle I would expect in the next year, we will launch something in that space to sort of add.

Two the three brands we have.

Already in the luxury space to give us another shot on goal for luxury opportunities around around the world, but the band so luxury and lifestyle are hugely important to us because customers like it and we give them lots and lots of opportunities, but again, the big you know the big mass market.

Opportunity every in every major market in the world.

Is the mid market as you know and so we are not ashamed of saying you know we are we have every intention to have the best brands in every market to serve mid market. Because we think that's where the most money will be made over the next 10 or 20 or 30 years.

Understood and if I can just follow up on on one detail.

You know.

Over beating a horse right apologies with respect to the nugget for the remainder of this year.

I just want to be as clear as possible about whether there was some.

One tough comps.

Pull forward or any projects that have slid into next year, better elevating really not really I mean.

Not really as I said in the last call I said around 5% and if you go listen to it maybe three times I mean, a little bit although its not meaningful I mean listen we were hoping from from the standpoint of.

The momentum that we have in spark we were hoping to have 50 hotels opened this year I think by the last quarter, we realized that that wasn't going to happen, but you know we're going to have as I said, we're going to probably have 20 Theres no problem. I mean, we have 400 deals in negotiation with hundreds more coming over the threshold. It's just in the supply.

Jane stuff now set up and moving and so there was a lot of moving parts as we get set up and so you know that.

That you know that probably had a.

Teeny bit of impact I mean, 20 to 50 is a few thousand is a few thousand rooms, but otherwise not not really not really not I mean again I said around five still and we still think it's around five yeah got it. Thank you so much.

I think I'd done not to not to go too far out I think I'd just add that there is a reason why we signaled five last quarter or another quarter has gone by so yeah. So the second quarter sort of in terms of openings played out the way we were thinking it would which is why we were signaling we weren't yet ready to adjust the official guidance. All we've done now is crystallize.

With a half a year in the books and a half a year left that what we thought was going to happen in the second quarter happened and then if you think about the momentum I mean, Chris I talked about this but the momentum and approvals and starts I'd say it was a better experience in the second quarter than we were expecting a quarter ago.

Yes, thanks very much appreciate it.

The next question comes from Smedes Rose with Citi. Please go ahead.

Alright, thank you.

I just wanted to ask you a little bit about occupancy levels. When we look at the U S data and I think this is true for Hilton versus 2019 for reasonable gaps to prior peak occupancy levels of pre pandemic occupancy levels, but it sounds like from what Youre, saying you think maybe the continued improvement in group trends.

So kind of close that gap or maybe something else youre seeing or do you think it is just structurally lower going forward just kind of curious how you think that evolves over the next through.

Through the balance of the year and maybe going forward.

Yes for us, it's been better than the industry, where three or four percentage points off of depending on when you look at it off of peak Occupancies I think there you sort of noted some of the issues I think.

Part of it is you know is happening because of the group. It's still group is getting there, but it's it's still building.

Part of it and Thats impacting a bunch of the cities right that that have recovered a lot. Most of them. There are couple of exceptions are one big exception, but most of the cities that recovered but from an occupancy point of view there is still a lot because they don't have the big city Wides back. So I do I do think it is partly the group.

And then the other thing that's going on is I sort of kid not to be smart about it but part of it's pricing right. So if you said to me could we drive occupancy consistent with the prior peak. The answer is yes, I could probably do it in the next couple of days, but it wouldn't be the right answer meeting.

We're pushing hard on price because we've been obviously at a higher highly inflationary environment and for this from the standpoint of trying to make our hotel owners. The most money that relative trade is the right trade keep pushing price hard even though it might impact occupancy the bottomline is better because the flow through or on rates a heck of a lot.

Better than the flow through on occupancy. So part of this is yeah theres still groups coming back year business transient is still you know, particularly the big corporates are only 92% back part of it and they will come back no matter, what they say by the way over the next few years they'll come back you know you heard it here, but I'm, telling you they will come back.

But but but a bigger part of it is honestly.

Yield management strategies, I mean, we're really trying to push rate and we don't want to give it.

We're not we're not as worried because it's a better outcome for everybody a better outcome for us our owners make more money to drive higher margins.

Okay. Thank you appreciate it.

The next question comes from Brent <unk> with Barclays. Please go ahead.

Hey, good morning, everybody. Thanks for taking my question just a follow up on that Chris <unk>.

Industry ADR growth has been tracking below inflation.

April .

Inflation is probably expected to ease further and I know, you're probably youre pricing based on supply and demand and you're pushing rate and I'm trying just to reconcile those two forces as we look into the back half of this year and maybe you could also just added what your core SME or your core.

Business transient ADR pricing growth is looking like and if that is.

In excess of inflation today.

The answer is yes, I mean, there is tiny.

Tiny disconnect in timing, but I'd say the core pricing of our of our transient products, whether that's leisure or leisure transient business transient is keeping up with inflation at its current levels and obviously, we expect that to continue to come down we we feel good about the pricing power again.

With all the assumptions I already commented on about my view or the macro view that we've adopted for the back half of the year and as we go into next year.

And we think the broader environment is generally supportive for continued rate strength I mean, the one thing you know it's funny, we talked I Kid our team around here, it's like we've been living a little bit in Bizarro world coming through Covid, obviously, and then in the aftermath, where it used to be about fundamentals. That's all we would ever talk.

On these calls and call I've ever talked about with investors the fundamentals of demand, what's going on with demand and what's going on with supply.

In Bizarro World Nobody talks nobody cares about supply, but were normalized I mean, everything is just getting reasonably close to a more normalized environment prices are higher okay, but that's just a broader reset that's happened throughout the entire economy, which I think you know unless you have broad.

<unk>, which it doesn't feel like that's happening anytime soon that's sustained and so you've sort of set a new.

Water level, if you will for pricing and then eventually in the very near term, it's going to get back to basic fundamentals like what's going on with base demand and what's going on in supply and I think the thing that doesn't get it.

Enough attention thankfully as you can see in our starts and signings and nug and our expectations for the future we get a heck of a lot more than our fair share, but what's really going on in supply, particularly in the U S is anemic levels of industry growth that are sub if the if the 30 year average is two 5% it's running at.

Like 0.8, and it will be and it's been running low end given the environment, it's going to stay low and so when you get to a more normalized environment, which is where sort of morphing.

Slowly into over the next year or two.

Youre going to find yourself in an environment, where demand should be reasonably healthy if the economies, okay against a historically low supply side environment in the industry and so I think it's going to feel pretty good and I think it's gonna be another factor for sustaining performance and rate integrity.

Great. Thanks for all that color.

The next question comes from Duane <unk> with Evercore ISI. Please go ahead.

Hey, Thanks, good morning.

Can you talk a little bit about the profile of your owners for new development and how that may be changing with the with the signings activity you talked about in the second half of last year first half of this year any new trends or maybe some surprises you could speak to with respect to <unk>.

The organizations or the individuals that are investing in new development.

Yes, Duane I'd say look no surprises really matters I think Chris mentioned in his prepared remarks, I mean, I think half of the spark owners are new to Hilton right and that's not a surprise to us when youre heading into a different segment youre heading into a different group of owners and we view that as a positive thing right. You are filling the top of the funnel with a lot more demand for the product going forward your diverse.

Find your own base, even further I mean, we've always had a really diversified owner base, but we're diversifying it either even further and we're responding too if you think about Chris said before and when he answered David's question is like.

Evolving the product base to respond to where the demand is while the owner base evolves in that same way to write that capital follows the opportunities and so if we were living in a world not that long ago, where 70% to 80% of our deals every year with existing owners. We're still doing the same absolute amount of volume with our existing owners in fact I have to assume.

One of the stats in front of me I have to assume we're doing more business with our existing owners, but then we're actually adding a whole lot more owners around the world.

I think globally, we're down to like 50 or 60% of our deals are with existing owners annually. So no surprises, but we view it as a huge net positive for the business. The other the other minor seen but I think that's well said is an eight three.

I mentioned in my comments, its a hybrid and it's probably more more apartment that hotel.

We've been really excited about the <unk>.

<unk> interest that we have from larger institutions that either want to develop or work with a partner and fund the development of large numbers of H three just because of the cost to build the you know, it's we think a 60% kind of margin business.

<unk>.

They really like the segment of demand in its existing profile and growth profile. So that's been not surprising because we when we were when we were developing age three that was our hope and expectation, but it's nice to see it come to life I mean, as I said, we're negotiating 300 deals and.

That's not with 300 different people at this point, we've barely opened it up. This is this is with a relatively limited number of very well heeled more institutional type players. We will ultimately open the floodgates on age three once we get it going but it's been very nice to see.

Thank you.

Yeah.

The next question comes from Robin Farley with UBS. Please go ahead.

Great. Thank you I'm, obviously, great news on the Revpar outlook I did have a question circling back to the net unit growth.

You mentioned spark and maybe it sounds like some timing in China that was a little bit pushed out when we think about that.

The strong start numbers that you've talked about can you help us think about timing of interest rates are still moving up a little bit here and obviously some of those big increases in <unk> and.

Starts or do you just sort of comping the pandemics.

Going on.

The comps look different than normal I guess I'm, just trying to think about the timing from here in terms of.

The factors like what has everything do you think bottomed it seems like maybe not yet in terms of with interest rates still moving up and help us think about the timing of like rates moving up it starts being high but and kind of where you see things bottoming in terms of.

Thanks, Yeah.

Yes, just for the record that in the signings numbers and starts.

Signings will be above prior high watermarks pretty materially and starts will be about even even though the comps. The reason there'll be about where we were at our prior high watermark. So it's not just the benefit of of comps.

I'll, let Kevin take the next part of it but I mean sparked the beauty of spark is it's a very it's a relatively low cost entry product and so it doesn't really require a lot of financing, but yes, Bose I mean, I'd say, both spark an H three or more easily financeable products in this environment. So again, that's not why we launched those brands, we launched those brands because theres a ton of customer.

Demand for the product, but if you think about the way it's playing out it's sort of another example of diversification being a great thing we have products that are more financeable I think our lower end products around the world are more Financeable and then I think I had a couple of things I'd guide you to as well I think in when you think about a tighter credit environment, because not just rates it's availability of.

Capital that's not a that's a western world phenomenon is not just U S. But it is it is highly concentrated in the U S. Only 40% of our deliveries. This year are going to be in the U S. Right. So it's a big world out there we've got a lot of diversification and I think that for all the reasons. We've given you. We think momentum can continue and if you think about I mean, Chris talked about <unk>.

<unk> World on fundamentals, it's also bizarre world a little bit on development, because you know it sort of starts with approvals you've got to sign them you got to get them in the ground and then they deliver and that's all usually on a lag and we've had COVID-19 and we've had a bunch of changes, but I think if you think about development being on a lag it has to start somewhere so the outlook for approvals and starts bodes well for the future of that.

Fact that we're rounding out the product base with more easily financeable products bodes well for the future of the fact that we have more limited service and lower end products to deploy in emerging markets bodes well for the future and that's not to say there won't be hiccups, along the way, but we do believe that it's a progression back to normal if you will from here.

Okay, all right great. Thank you.

The next question comes from Michael Bellisario with Baird. Please go ahead.

Thanks, Good morning, everyone.

Morning.

Just wanted to go back to the new credit card deal that Amex announced on.

Today, you guys Didnt mentioned, so maybe hoping you could provide any commentary or incremental fees or economics that you expect to receive and then maybe what's new or different in this deal versus what your last side in 2017.

Yes, I think look there's a there's a fair amount of that is competitively sensitive and we're not going to get into a lot of details, but I can sort of give you a sense for whats new and different I think look the economics are a little bit better.

But which is as a result of the program just being better I think our if you look at total spend in the program for this year, it's gonna be about two thirds higher than it was in 2019 right. So we're growing the program massively it's been a hugely successful partnership with American Express.

We believe that those we've said we don't give you a lot of details to unpack it and we apologize for that but again, it's pretty it's pretty sensitive competitively. It's been growing ahead of algorithm. We think it'll continue to grow at or ahead of algorithm over time. It's a 10 year deal I think a lot of people would have predicted the last time, we did it.

Credit card deal that that credit cards, we're gonna go somehow go away and be replaced by other forms of payments I think I think it's quite the contrary I think travel co brand cards have become extremely successful and attractive products. They drive engagement across the system. It's not just about the economics on the card.

Think amex feels the same way so we're super excited about the deal and probably will stop short on two too many.

More.

Details than what we've already said.

Got it and then just one follow up any incremental economics included in our increased full year guidance from the credit card deal.

I mean, we've we've been assuming that we'd been working on this for a while so I think there's nothing nothing new on that front.

Got it thank you.

Sure.

The next question comes from Chad Beynon with Macquarie. Please go ahead.

Good morning, Thanks for taking my question wanted.

I wanted to ask about the own portfolio the performance in the quarter recovered better than MNF fee portfolio, leading to some of the positive variance versus your Q2 <unk>.

Midpoint EBITDA guide.

Kevin You noted I think strength in Europe , and Japan, obviously, where you probably have some of the smaller concentration, but can you kind of help us think if the outlook has changed for this segment as we kind of look into the back half of the year given how much improvement you saw in the second quarter does that give you more confidence that you could see some margin improvement in just overall EBITDA growth.

Year over year in the back half thanks.

No problem, yes, there is a lot there first of all the whole portfolio is concentrated effectively in U K, Ireland, Europe , and Japan, So, particularly central Europe , and Japan had been quite strong.

There's there's no real sort of change in that I mean, there was a.

A little bit of year over year growth.

For subsidies last year, but that's just that's just a little bit of noise I think basically there's operating leverage in the business right. They're owned hotels their leases right. So there's even more operating leverage than a regular owned hotel. So they've been growing at a rate that is quite fair.

In excess of the overall fee business is long spending fundamentals stay growing that will continue to be the case.

And I think we our outlook for this segment is a little bit better now this quarter than it was last quarter, because our outlook for Europe , and Japan is better.

Thanks, I appreciate it sure.

The next question comes from Richard Clarke with Bernstein. Please go ahead.

My question I guess.

The other two brands.

Paul.

Page three.

Okay.

Back up to 5%.

Thanks for the international business.

The recovery factor.

And then maybe just relate itself.

Why do you think asphalt.

If I go back to when the wholesalers.

60 hotels, I think youre right.

Maybe 20%.

Yeah.

Won't come in.

Yeah.

What those brands achieved.

Sure.

Yeah. Good question I think the answer is yes on not to spark and <unk> three in the U S. But home two in the U S. Hamptons going in the U S. I'll come back tempo is just getting started so I think the combination of all of those brands and the benefit of <unk>.

Versions and soft brands will get us back.

I am confident to those levels the difference between like.

Tempo and our motto and spark is night and day honestly I mean, here's what happened the tempo and motto. We learn we launched them about a day before the pandemic and they are all they are all new build it's pretty much with both those brands. There are some adaptive reuse that will go on.

But it is vast majority of those are new builds and so we got into Covid. There was no financing everything slowed down those brands I think we will we'll do incredibly well I think tempo we have I don't even have the pipeline number in my head, but as we open times square, we've got dozens of those underdevelopment.

Around the country, we're getting ready to take the show on the road around the world.

And now that we're in you know, even though the environment has some uncertainty in financing and all that it's a heck of a lot better than it wasn't covered and so youll start to see a great trajectory and tempo theres nothing wrong Tiptoes, Greg owners love. It. It just COVID-19 gotten away basically same same for motto Sparks a totally different thing one it did not were not <unk>.

<unk>.

While there are challenges.

Out there, it's 100% 100% conversion brand.

And it's basically taking you know hotels that are in much weaker brands and converting them into our system, where there's huge opportunities for market share gains and it doesn't cost and in terms of the quantum of money to do it it's a relatively low ticket.

For owners to do it that's why we have so much.

Interest so I think that ramp on that will be much much faster.

And it's a very different very different thing, but I wouldn't I wouldn't diminish the opportunities in motto and and and tempo there, particularly Tampa mottos micra.

Mike Rowe tell in just the biggest urban markets, we'll do a lot more of them, but I mean tempo will be a mega brand. It's just it just got caught up in getting launched a minute before COVID-19.

Yeah, I wouldn't connect it just short shorter way of saying I wouldn't connect to many dots maybe the world is just different than the brands as Chris said, we're different and again the beauty of spark is you don't have to get a building built to do a spark it's all going to be buildings that are already built.

Thanks very much.

Sure.

Ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back to Chris Masada for any additional or closing remarks.

Thank you M. J everybody. We appreciate as we always do you spending a little bit of your morning with US we know it's a busy time and lots of earnings releases, we obviously.

Remained really optimistic obviously Q2 was.

Great quarter for us that's flowing through plus some given our expectations. The second half of the year again, we're optimistic on our unit growth and optimistic for we're not we're not just the end of this year, but into next year, we'll be able to deliver but most importantly, the algorithm that we've described is alive and well and working and we can.

Continue to grow we continue to maintain an incredible cost discipline.

The companies with the highest margins by 800 basis points that its ever run at thus producing the greatest amount of free cash flow in our history, and we intend to be super disciplined about how we allocate that otherwise known as giving giving it back to our shareholders and so in any event, we will look forward.

After Q3, giving you an update on how everything is going I hope everybody has a great rest of the summer.

The conference has now concluded.

You for your participation you may now disconnect your line.

Okay.

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