Hilton Worldwide - Q2 2023
July 26, 2023
Transcript
Operator (participant)
Good morning, welcome to the Hilton Second Quarter 2023 Earnings Conference Call. All participants will be in the 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 1. 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.
Jill Chapman (SVP of Investor Relations and Corporate Development)
Thank you, MJ. Welcome to Hilton's Second Quarter 2023 Earnings Call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com.
This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our second quarter results and discuss 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. 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 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 a 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 top line and bottom line 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 between $2.4 billion and $2.6 billion. Turning to results in the quarter, system-wide RevPAR increased 12.1% year-over-year, as 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 2024 arrivals grew 30%, with group position now at 13% up, driven by the corporate segment. Our sales team saw the largest revenue bookings in our history for all future arrival periods.
Based on all that, we now expect full-year RevPAR growth of between 10% and 12%. Turning to development, we signed more than 36,000 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 system-wide signings in the quarter, driven by strong momentum across Europe and Asia Pacific. In Europe, we signed agreements across 14 countries, including our first Tapestry hotel on the French Riviera and our first Curio in Croatia. In China, Hilton Garden Inn continued to show tremendous growth since launching our new franchise business model. In the quarter, we signed approximately 3,700 HGI rooms in China, more than three times last year, and accounting for more than a third of our signings in China.
Signings in 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 Tru hotels year to date, representing the strongest pace since 2017, as the operating success of existing Tru properties is leading to a surge in new signings. Results were further helped by Spark, with approximately 60 hotels signed and another 400 in 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 Spark 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 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 H3, the apartment-style accommodations are designed for guests booking 20 or more nights, built with the staying power of Hilton's award-winning hospitality. We have received tremendous interest from owners and developers due to the strong market opportunity, cost-efficient build, and high-margin model. We currently have more than 300 deals in negotiation. Our system-wide pipeline now stands at a record 3,000 properties, totaling approximately 441,000 rooms, increasing 7% year-over-year and 3% from last quarter. Following another strong quarter of starts, up more than 73% year-over-year, 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 us 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 increased openings later this year and next. In fact, in the coming weeks, we're going to open nearly 2,000 additional hotel rooms in New York Times Square, with the debut of our first ever Tempo by Hilton and a new tri-brand property featuring Home2 Suites, Hampton Inn, and Motto. In the quarter, we celebrated several milestones, including the openings of our 2,900th Hampton Inn and our 600th Home2 Suites property, which remains one of the fastest-growing brands in the industry.
Additionally, we surpassed 150,000 rooms in Asia Pacific, including the openings of the Hilton Okinawa Miyako Island Resort in Japan and the Conrad Shenzhen, 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 unit growth to accelerate to 5%-6% next year, and to return to 6%-7% over the next couple of years.
As part of our commitment to deliver exceptional experiences for guests, 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 recently formed a first-of-its-kind partnership with the James Beard Foundation, serving as the premier sponsor of the 2023 Restaurant and Chef Awards, and continue expanding our partnerships with world-class talents such as Michael Mina, José Andrés, 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.
Hilton team members and our award-winning culture continue to differentiate our brands from the competition. Just yesterday, our Waldorf Astoria Home2 and Tru brands were named best in category by J.D. Power for their respective segments in North America. Last week Hilton was again named as a top employer for millennials for the sixth consecutive year. Since 2016, we've been recognized by Great Place to Work as 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 a 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.
Kevin Jacobs (CFO and President of Global Development)
Thanks, Chris. 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 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. remained 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 religious 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, 18 points 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 $1.65. For full year 2023, we expect RevPAR growth to be between 10% and 12%. We forecast adjusted EBITDA of between $2.975 billion and $3.025 billion.
We forecast diluted EPS, adjusted for special items, of between $5.93 and $6.06. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the second quarter for a total of $40 million. Our board also authorized a quarterly dividend of $0.15 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 Nassetta mentioned earlier, we now expect to return between $2.4 billion 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. MJ, can we have our first question, please?
Operator (participant)
Of course. As a reminder, to ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the queue, you may press star, then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Joe Greff with J.P. Morgan. Please go ahead.
Joe Greff (Managing Director of Equity Research)
Good morning, everybody.
Kevin Jacobs (CFO and President of Global Development)
Morning, Joe.
Joe Greff (Managing Director of Equity Research)
Not surprisingly, maybe, the first question relates to your net unit growth target for this year, approximately 5%, versus the 5%-5.5% 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? 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? What specifically, whether it's brand or geographies, is driving that acceleration? Thank you.
Chris Nassetta (President and CEO)
Yeah, great question. 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%. I the truth is, since our last call, I don't think our view has really changed much about where our NUG would be this year. You know, it is what it is. It was always a bit back-end loaded, and the simple reason for that, Joe Greff, is 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 2022, 40%. If you look at what they are in the first half of this year, as I stated in my introductory comments, they're up 40%. That means that a bunch of stuff is just translating into the second half of this year and into next year. It really is entirely sort of the timing of and the sequencing of how that happens. We thought it would be around five. We still think it will be around five. Our confidence in, you know, going, you know, back on the way back up, I do feel like if we look at the data, you know, it's not just, you know, pure optimism, although everybody knows I'm an optimistic sort.
I mean, if you look at the data, as I already said, you know, starts were way up in the second half of last year. They've been way up in the first half of this year. We continue to see good momentum there. Same with signings. I mean, we expect to, as I said in my comments, have a record year in signings relative to our prior peak. You know, that all of those things are translating into both our optimism about the second half of this year being much stronger 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 know, make it more challenging. You know, as I already said, we're still up, you know, over the trailing 12 months, 15% in starts. We have some other nice things that are, you know, that are gonna add to our growth here in the United States. With Spark, you know, we're only gonna open 20 this year. You should assume we're gonna open a lot more than that next year. H3 will start, you know, contributing next year. Probably not a ton, but you know, that is a much more financeable product, even in today's environment, 'cause it's probably more apartment than it is hotel.
We are broadly having really good success on conversions. Europe, which had been slow, has really started to pick up. Asia Pacific, really led by China, has, you know, woken up and the engines have not just restarted, but they're really starting to fire on many more cylinders. I wouldn't say it's all the way there yet, but you know, in the second quarter and our expectation for third and fourth is, you know, we're gonna start to get a very good momentum. You know, that's why we, you know, feel pretty darn good that, you know, on the NUG for next year. Obviously, if we're giving you a range, I would sort of direct you to the middle of it.
If, you know, if some things go our way and the world stays relatively stable, you know, I think we can, you know, we can be mid-range of that or above. It's a little bit early in the year to, you know, to go quite that far. We'll obviously, next quarter and the following quarter, we'll update you. I think, you know, what I would say to people is, again, it's objectively based on things that. You know, success we're having in conversions, you know, the, you know, success we're having in demand for Spark, conversions all over the world, Spark here. By the way, we will take Spark to Europe relatively quickly. Just what we have, you know, in the pipeline. I mean, almost half of our pipelines are under construction, you know, more than anybody in the industry.
Once they start, they almost always finish. That pickup starting in Q3 last year is, you know, starting to pay dividends. Thankfully, the pickup in starts has continued everywhere in the world. As I said, the world's a big place, so there's a little bit more pressure in the U.S., even though our numbers are still good, but you know, a lot less pressure in some other parts of the world that had been feeling it, which is, you know, the benefit of a big, diversified global business.
Joe Greff (Managing Director of Equity Research)
Great. Thank you.
Operator (participant)
The next question comes from Shaun Kelley with Bank of America. Please go ahead.
Shaun Kelley (Senior Research Analyst)
Hi, good morning, everyone. Thanks for taking my question.
Chris Nassetta (President and CEO)
Good morning.
Shaun Kelley (Senior Research Analyst)
I guess if 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 gear it to sort of incremental, you know, kind of changes or upside for the second half. What's the biggest difference to, you know, kind of your prior outlook that gave you some confidence there? Just any pressures or concerns you're seeing on, you know, the leisure normalization point. It's a question we take a lot and just kinda maybe update us on the latest you're seeing as we move through some of these really tough comps in the summer. How's behavior out there and what's going better or a little worse than anticipated at this point?
Chris Nassetta (President and CEO)
Yeah, happy to. 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're not economists, so we try and take the, 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 meaningful slowdown. I mean, you can pick somebody, but it broadly is that it's gonna slow down, but it's more of a soft landing and later in the year and more into next year. When we factor for that and we look at the momentum, obviously we've already booked a half a year.
We look at what we have reasonable sight lines now into the third quarter, which we feel very good about. As we look at the fourth quarter, you know, we would probably say the macro view is that things will slow, and so we've assumed that. Probably the macro view is that they slow a little bit less than maybe last quarter. When you flush all that through, it results in an increase in our guidance. Now, you know, there's possible upside if the fourth quarter keeps going like we saw in the second and what it looks like we're gonna see in the third, there may be potential.
It certainly warranted our increasing our guidance based on what we've already booked for the year, what we see in the macro view in the late part of the year. The interesting thing is like everybody wants to 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, you know, really good forward-looking information, which is really on 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 water marks, and business transient keeps grinding up and getting better, and the same with group.
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 weaknesses. You know, I know there's a lot of questions on the leisure business. I mean, what I would say to you is, like, we're having a wildly strong summer in leisure. I mean, the only places where leisure has backed off a bit is where you would expect it, where it's normalizing from, like, crazy highs. It's still in those markets, which I'll talk about, way over 19 levels. I mean, it's just sort of coming back, not even to Earth, but, you know, sort of in our universe, I guess. Those are markets like South Florida, Hawaii, parts of Southern California, where it was just like, you know, it was insane.
Broadly, we have a very diversified leisure business. Broadly, Again, other than comps being harder, you know, we continue to see good growth and we expect to. You know, at least what sight lines we have in the 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, you know, got everybody together, as we always do, last week to talk about it. You know, they're feeling, you know, quite good, particularly the SMBs, which is, at this point, 85% plus of our business. You know, they're traveling more. They're feeling reasonably good about soft landing and their business. You know, there's pent-up demand there. In group, there's still huge amounts of pent-up demand that haven't been released.
I said, you know, we had the best booking quarter in our history, ever, you know, in the second quarter. Our position is great for next year. You're still not where you know, where you're going to be with all the big associations, because that was really driven by corporate group. A bunch of the big association groups, I mean, they are booking, but, you know, that's multiyear booking cycles. That's still to come. So, you know, we don't see weakness. Obviously, you know, we're sentient. We know what the Fed is trying to do. We'll hear this afternoon, you know, what the next steps are. I expect they are gonna raise rates. 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 will eventually show up. You know, I do think we'll 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 or sometime next year. That feels rational based on everything going on. As I said, our business, we're not seeing any real cracks, you know, anywhere. Of course, the, you know, the places in the world that had been lagging are now starting to, like, produce. You know, the most significant lag everywhere was doing really well, but China.
Now China is eclipsing prior high water marks and getting going on development, as I already said, but also operationally eclipsing 2019 numbers. Not to be a Pollyanna, it all feels pretty good, and if we can orchestrate a, you know, a slowdown but a reasonably soft landing, you know, I think the rest of this year is gonna be very solid and in line or better than what we said. I think next year will be a darn good year because I still think, you know, there'll be strength in leisure, but particularly, there'll be if you get a reasonably decent, you know, slowdown, soft landing, you're gonna have continued growth in business transient, particularly with SMBs, which is the vast majority of the business.
Group is gonna 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 don't think you're gonna see, you know, a big change there anytime soon. It's early. I'm not gonna, you know, like, obviously, I'm not gonna give guidance yet for next year. It's sort of crazy to do that. We got a lot of year to see how things play out. I sit here today, I feel quite good about the rest of this year. I actually feel quite good about, you know, as we, later this summer, get into budget season, how we feel about next year. That's reflected, as you not surprisingly, in the guidance we're giving, the increase in our return on capital.
I mean, I think that should be read for what it is. Thank you very much.
Operator (participant)
The next question comes from Stephen Grambling with Morgan Stanley. Please go ahead.
Stephen Grambling (Managing Director of Equity Research)
Hey, good morning.
Chris Nassetta (President and CEO)
Morning, Stephen.
Stephen Grambling (Managing Director of Equity Research)
If we go all the way back to the split off, you had outlined this algorithm of 1%-3% RevPAR growth, kind of translating to 14%-23% EPS algorithm with kind of 6% NUG. You're talking about the reacceleration of NUG, basically in that range. What other changes in the business should investors be thinking through as we compare and contrast that algorithm to today, whether it's.
Chris Nassetta (President and CEO)
I think-
Stephen Grambling (Managing Director of Equity Research)
Thinking about royalty rates or pipeline or other fees?
Chris Nassetta (President and CEO)
Yeah. I think that the algorithm stands. I mean, in fact, even by the way, while NUG has been a little bit lower, RevPAR has been higher. I mean, you know, it's a pretty perfect hedge, meaning, you know, we've been running a little lower on one, a little higher on the other. My guess is, it's gonna flip around over the next couple of years. As I said, we're gonna get back to 6%-7%, and same store growth is gonna normalize.
We think the algorithm is alive and well, and will deliver, you know, at those in those ranges that we've talked about as a result of, you know, 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, you know, generally drag us up because they're at or above algorithm growth rates. We feel very good about that algorithm that we laid out in 2016, and that, you know, it's alive and well and producing. As a result, we're producing today more free cash flow than we ever had in history, which is what allows us to return so much capital. That will keep both of those things going up as well.
Shaun Kelley (Senior Research Analyst)
That's my one. Thank you.
Operator (participant)
The next question comes from David Katz with Jefferies. Please go ahead.
David Katz (Managing Director of Equity Research)
Hi, morning, everyone. Thanks for taking my questions. I wanted to talk about just the strategic philosophies around brands. You've been highly productive at launching brands, and just observing that, you know, a lot of the growth has been sort of in the middle and mid-scale and limited service, et cetera. You know, how do you think about, you know, launching stuff potentially at the higher end? Or, you know, do you not sort of want or need those? Or, and just help us understand how you decide where to launch.
Chris Nassetta (President and CEO)
Sure, David. Thanks. Really good question. Yeah, I got here with 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. I, you know, we have, I think, really built up a very powerful sort of engine of innovation to figure out what customers want, what segments we're missing, 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, you know, at the, at either equal to or above everybody in the space. Listen, you know, I say that, you know, sort of patting us on the back because I'm very proud of that. Every company has different strategies. We think this strategy is a winning strategy because it delivers better products for our customers over time, that meets the market, you know, in a modern context. It's better from a return point of view because we're doing it with blood, sweat, and tears and not investing capital. 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 opportunity. You know, we're trying to serve any customer for any need they have anywhere they want in the world. Obviously, you know, we have focused a lot on where the big markets are, where the big addressable, you know, TAMs are, Total Addressable Markets, and there's no way you could debate that every segment is important, but the mid-market is where the people are. I mean, 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? That's, so that's where the money is, and those people can afford mid-market hotels.
When you wake up in 10 or 20 years, the bulk of the rooms growth in the world, thus, the bulk of the money that's going to be made, is in the mid-market. That's why we have focused there. 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 up, upper upscale lifestyle segment. Obviously, you know, in the luxury space, we have made huge strides. I mean Waldorf existed, but wasn't really a brand, and Conrad was not much to speak about, and LXR didn't exist. We've gone from essentially a few hotels to 100 world-class luxury hotels with another nearly 60 in the pipeline.
By the way, I said it, but this morning, if you look at Bloomberg or whatever, Waldorf Astoria is ranked the number one luxury brand, eclipsed Ritz-Carlton, in customer satisfaction in North America. We're making really good strides there, and I think there are more opportunities. I would say, you know, 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 serve more customers, drive higher growth, and create more value for shareholders. Luxury lifestyle is definitely. I mean, we're in and around the lifestyle segment. LXR, to a degree, is sort of luxury lifestyle, but we don't have a pure hard brand in the luxury lifestyle space.
We will, you know, I would say, you know, we're doing developmental work there. We want to give our babies Spark and H3. Well, H3, we need to give a name, which we're close to, and then we need to, you know, make sure they become little toddlers and are successful. We're doing developmental work in luxury lifestyle. I would expect in the next year, we'll launch something in that space to sort of add, you know, to the three brands we have already in the luxury space to give us another shot on goal for luxury opportunities around the world. Luxury and lifestyle are hugely important to us because customers like it, and we give them lots and lots of opportunities.
Again, the big, you know, the big mass market opportunity, in every major market in the world, is the mid-market, is, you know. So, you know, we are not ashamed of saying, you know, we have every intention to have the best brands in every market to serve mid-markets, because we think that's where the most money will be made over the next 10 or 20 or 30 years.
David Katz (Managing Director of Equity Research)
Understood. If I can just follow up on one detail, and if I'm, you know, over beating a horse, you know, apologies. With respect to the NUG for the remainder of this year, I just wanna be, you know, as clear as possible about whether, you know, there was some, you know, one, tough comps, you know, pull forward or, you know, any projects that have slid into next year that are, you know, elevating.
Chris Nassetta (President and CEO)
Not really. Not really. I mean, you know, 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 it's not meaningful. I mean, listen, we were hoping from the standpoint of, you know, the momentum that we have in Spark, we were hoping to have 50 hotels open this year. I think by the last quarter, we realized that that wasn't gonna happen. you know, we're gonna have, as I said, we're gonna probably have 20. There's no problem. I mean, we have 400 deals in negotiation, with hundreds more coming over the threshold. It's just, you know, and the supply chain stuff now set up and moving.
It's just was a lot of moving parts as we get set up, you know, that probably has a teeny bit of impact. I mean, you know, 20-50 is a few thousand rooms. Otherwise, not really. I mean, again, I said around five. We still think it's around five.
Kevin Jacobs (CFO and President of Global Development)
Yeah, David.
David Katz (Managing Director of Equity Research)
Thank you so much.
Kevin Jacobs (CFO and President of Global Development)
I think I not to go too far on it. I think I'd just add that there's a reason why we signaled five last quarter. Another quarter has gone by, 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 gonna happen in the second quarter happened. If you think about, you know, the momentum, I mean, Chris already talked about this, but the momentum in approvals and starts, I'd say, was a better experience in the second quarter than we were expecting a quarter ago.
Chris Nassetta (President and CEO)
Yeah.
David Katz (Managing Director of Equity Research)
Thank you very much. Appreciate it.
Operator (participant)
The next question comes from Smedes Rose with Citi. Please go ahead.
Smedes Rose (Director of Equity Research)
Hi, 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, you know, for Hilton versus 2019, there's a reasonable sort of gap to prior peak occupancy levels or pre-pandemic occupancy levels. It sounds like from what you're saying, you think maybe the continued improvement in group trends will kind of close that gap, or is there maybe something else you're seeing, or do you think it's just structurally lower going forward? Just kind of curious how you think that evolves through the balance of the year and maybe just going forward.
Chris Nassetta (President and CEO)
For us, it's been better than the industry. We're three or four percentage points off of, depending on when you look at it, off of peak occupancies. I think that you sort of noted some of the issues. I think, part of it is, you know, is happening because the group, it's still, you know, group is getting there, but it's, you know, it's still, you know, building. You know, part of it, and that's impacting a bunch of the cities, right? That have recovered a lot, most of them. There are two exceptions or one big exception, but most of the cities have recovered. From an occupancy point of view, they're still off because they don't have the big city wides back. I do think it is partly the group.
The other thing that's going on is, I sort of kid, not to be a smart ass about it, part of it's pricing, right. If you said to me, "Could we drive occupancy consistent with the prior peak?" The answer is, yeah, I could probably do it in the next couple of days, but it wouldn't be the right answer. Meaning, you know, we're pushing hard on price because we've been obviously in a highly inflationary environment. For the standpoint of trying to make our hotel owners the most money, you know, that relative trade is the right trade. Keep pushing price hard, even though it might impact occupancy. The bottom line is better because the flow-through on rate's a heck of a lot better than the flow-through on occupancy. Part of this is, yeah, there's still groups coming back.
Yeah, business transient is still, you know, particularly the big corporates are only, you know, 92% back. They'll 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, I'm telling you, they'll come back. A bigger part of it is honestly, yield management strategies. I mean, we're really trying to push rate, we, you know, we're not as worried because it's a better outcome for everybody. Better outcome for us, our owners make more money, drive higher margins.
Smedes Rose (Director of Equity Research)
Okay. Thank you. Appreciate it.
Operator (participant)
The next question comes from Brandt Montour with Barclays. Please go ahead.
Brandt Montour (Director of Equity Research)
Hey, good morning, everybody. Thanks for taking my question. Just to follow up on that, Chris. You know, industry ADR growth has been tracking below inflation since April. You know, inflation is probably expected to ease further. I know you're, you know, your pricing is based on supply and demand, and you're pushing rate. But I'm trying just to reconcile those two forces as we look into the back half of this year. Maybe you could also just add in, you know, what your core SME or your core business transient ADR pricing growth is looking like, and if that is, you know, is in excess of inflation today.
Chris Nassetta (President and CEO)
The answer is yes. I mean, there is a tiny disconnect in timing, but I'd say the core pricing of our transient products, whether that's leisure or leisure transient or business transient, is keeping up with inflation at its current levels. Obviously, we expect that to continue to come down. 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, you know, through COVID, obviously, and then in the aftermath, where it used to all be about fundamentals. That's all we would ever talk about on these calls. That's all I'd ever talk 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. We're 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 disinflation, which it doesn't feel like that's happening anytime soon, that's sustained.
You've sort of set a new, you know, 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. I think the thing that doesn't get enough attention, like, 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. What's really going on in supply, particularly in the U.S., is anemic levels of industry growth that are sub. If the 30-year average is 2.5%, it's running at, like, 0.8, and it will be, and it's been running low, and given the environment, it's going to stay low.
When you get to a, you know, more normalized environment, which is we're sort of morphing slowly into over the next year or two, you're going to find yourself in an environment where demand should be reasonably healthy if the economy's okay, against a historically low supply side environment in the industry. I think it's going to feel pretty good, and I think it's going to be another factor for sustaining performance and rate integrity.
Brandt Montour (Director of Equity Research)
Great. Thanks for all that color.
Operator (participant)
The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.
Duane Pfennigwerth (Senior Managing Director of Equity Research)
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, you know, the organizations or the individuals that are investing in new development?
Kevin Jacobs (CFO and President of Global Development)
Yeah, Duane, I'd say, look, no surprises, really. I mean, I think Chris mentioned in his prepared remarks, I mean, I think half of the Spark owners are new to Hilton, right? That's not a surprise to us. When you're heading into a different segment, you're heading into a different group of owners, and we view that as a positive thing, right? You're filling the top of the funnel with a lot more demand for the product going forward. You're diversifying your owner base even further. I mean, we've always had a really diversified owner base, but we're diversifying it even further, and we're responding to, if you think about Chris said before, and when he answered David's question, it was like evolving the product base to respond to where the demand is. Well, the owner base evolves in that same way, too, right?
The capital follows the opportunities. If we were living in a world, you know, not that long ago, where 70%-80% of our deals every year were with the existing owners, we're still doing the same absolute amount of volume with our existing owners. In fact, I have to assume, I don't have 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, you know. I think globally, we're down to, like, 50% or 60% of our deals are with existing owners annually. No surprises, but we view it as a huge net positive for the business.
Chris Nassetta (President and CEO)
Yeah, the other minor theme that I think that's well said is on H3. I mentioned in my comments, it's a hybrid, and it's probably more, more apartment than hotel. We've been really excited about the institutional 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 H3 just because of the cost to build, the, you know, it's we think, a 60% kind of margin business, and, you know, they really like the segment of demand and its existing profile and growth profile. That's been not surprising because when we were developing H3, 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 with a relatively limited number of very well-heeled, more institutional-type players. We will ultimately open the floodgates on H3 once we get it going, but it's been very nice to see.
Duane Pfennigwerth (Senior Managing Director of Equity Research)
Thank you.
Operator (participant)
The next question comes from Robin Farley with UBS. Please go ahead.
Robin Farley (Managing Director of Equity Research)
Great, thank you. 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, you know, the strong start numbers that you talked about, can you help us think about timing of, you know, interest rates are still moving up a little bit here, and obviously, some of those big increases in starts are due to sort of comping the pandemic. There's that going on, you know, making the comps look different than normal. I guess, 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. Help us think about the timing of, like, rates moving up, starts being high, and kind of where you see things bottoming in terms of that. Thanks.
Chris Nassetta (President and CEO)
Yeah, just for the record, in the signings numbers and starts, signings will be above prior high water marks pretty materially, and starts will be about even though the comps are easy, it'll be about where we were at our prior high water mark. It's not just the benefit of comps. I'll let Kevin take the next part of it, I mean, Spark, the beauty of Spark is it's a relatively low-cost entry product, it doesn't really require a lot of financing, but.
Kevin Jacobs (CFO and President of Global Development)
Yeah, both. I mean, I'd say both Spark and H3 are more easily financiable products in this environment. Again, that's not why we launched those brands. We launched those brands because there's a ton of customer and owner demand for the product. 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 financiable. I think our lower-end products around the world are more financiable. Couple things I'd guide you to as well. I think when you think about a tighter credit environment, because it's not just rates, it's availability of capital, that's not a Western world phenomenon. It's not just U.S., but it is highly concentrated in the U.S.
Only 40% of our deliveries this year are gonna be in the U.S., right? It's a big world out there. We've got a lot of diversification, and I think that for all of the reasons we've given you, we think momentum can continue. If you think about, I mean, Chris talked about bizarre world on fundamentals. It's also bizarre world a little bit on development, 'cause, you know, it sort of starts with approvals. You know, you gotta sign them, you gotta get them in the ground, and then they deliver, and that's all usually on a lag. We've had COVID, 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. The outlook for approvals and starts bodes well for the future.
The fact that we're rounding out the product base with more easily financiable products bodes well for the future. The fact that we have more limited service and lower-end products to deploy in emerging markets bodes well for the future. 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.
Robin Farley (Managing Director of Equity Research)
Okay. All right, great. Thank you.
Operator (participant)
The next question comes from Michael Bellisario with Baird. Please go ahead.
Michael Bellisario (Senior Research Analyst)
Thanks. Good morning, everyone.
Kevin Jacobs (CFO and President of Global Development)
Good morning.
Michael Bellisario (Senior Research Analyst)
Just wanted to go back to the new credit card deal, that Amex announced on Friday. You guys didn't mention it, 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 you last signed in 2017?
Kevin Jacobs (CFO and President of Global Development)
I think, look, there's a, there's a, you know, a fair amount of that is competitively sensitive, and we're not gonna get into a lot of details, but I can sort of give you a sense for, you know, what's new and different. I think, look, the economics are a little bit better, you know, but which is as a result of the program just being better. I think our, you know, 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? We're, we're growing the program massively. It's been a hugely successful partnership with American Express. We believe that we've said we don't give you a lot of details to unpack it, and we apologize for that. 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 a credit card deal, that credit cards were gonna go, somehow go away and be replaced by other forms of payments. 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, and I think Amex feels the same way. We're super excited about the deal and probably will stop short on, you know, too many more details than what we've already said.
Michael Bellisario (Senior Research Analyst)
Got it. Then just one follow-up. Any incremental economics included in the increased full year guidance from the credit card deal?
Kevin Jacobs (CFO and President of Global Development)
I mean, we've been working on this for a while. I think there's nothing new on that front.
Michael Bellisario (Senior Research Analyst)
Got it. Thank you.
Kevin Jacobs (CFO and President of Global Development)
Sure.
Operator (participant)
The next question comes from Chad Beynon with Macquarie. Please go ahead.
Chad Beynon (Managing Director of Equity Research)
Morning. Thanks for taking my question. Wanted to ask about the own portfolio, the performance in the quarter recovered better than M&F fee portfolio, leading to some of the positive variance versus your Q2 midpoint EBITDA guide. Kevin, you noted, I think, strength in Europe and Japan, obviously, where you probably have some of the smaller concentration. 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 and just overall EBITDA growth year-over-year on the back half? Thanks.
Kevin Jacobs (CFO and President of Global Development)
No problem. There's a lot there. First of all, the whole portfolio is concentrated effectively in U.K., Ireland, Europe, and Japan. Particularly Central Europe and Japan have been quite strong. There's no real sort of change in the... I mean, a little bit of, you know, year-over-year growth for subsidies last year, that's just a little bit of noise. I think basically, there's operating leverage in the business, right? Their own hotels, their leases, right? There's even more operating leverage than a regular owned hotel. They've been growing at a rate that is quite in excess of the overall fee business. As long as fundamentals stay growing, that will continue to be the case. 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.
Chad Beynon (Managing Director of Equity Research)
Thanks, appreciate it.
Kevin Jacobs (CFO and President of Global Development)
Sure.
Operator (participant)
The next question comes from Richard Clarke with Bernstein. Please go ahead.
Richard Clarke (Managing Director of Equity Research)
Good morning. Yes, are those going to be enough to get U.S. NUG back up to 5%, so the international business will continue over of the recovery back to six to seven? Maybe just related to that, you're giving us some nice big numbers on where you think Spark can do in the near term. If I go back to when Motto was launched, about, you know, 60 hotels, I think you're at eight and 10. When you launched Tempo, you talked about maybe 20-30, and you haven't got a Tempo yet, but one coming soon. Just maybe what's different here versus maybe where, what those brands achieved in the shorter term?
Chris Nassetta (President and CEO)
Yeah, a good question. I think the answer is yes on not just Spark and H3 in the U.S., but Home2 in the U.S., Hampton's growing in the U.S. I'll come back, Tempo is just getting started. I think the combination of all of those brands, you know, the benefit of conversions and soft brands will get us back, I am confident, to those levels. The difference between like Tempo and Motto and Spark is night and day, honestly. I mean, here's what happened to Tempo and Motto. We launched them about a day before the pandemic. They are all new build. I mean, 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.
We got into COVID, there was no financing, everything slowed down. Those brands, I think, will 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 under development around the country. We're getting ready to take the show on the road around the world. Now that we're in a, you know, even though the environment, you know, has some uncertainty in financing and all that, it's a heck of a lot better than it was in COVID. You'll start to see a great trajectory. That, and Tempo, there's nothing wrong. Tempo is great. Owners love it. It's just, you know, COVID got in the way. Basically, same for Motto. Spark's a totally different thing. One, it's not, we're not in COVID.
While there are challenges, you know, out there, it's a 100% conversion brand. 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 in terms of the quantum of money to do it's a relatively low ticket for owners to do it, and that's why we have so much interest. I think the ramp on that will be much faster, and it's a very different thing. I wouldn't, you know, I wouldn't diminish the opportunities in Motto and Tempo. They're gonna, you know, particularly Tempo. Motto's, you know, a micro hotel in just the biggest urban markets. We'll do a lot more of them.
I mean, Tempo will be a mega brand. It just got caught up in getting launched a minute before COVID.
Kevin Jacobs (CFO and President of Global Development)
Yeah, the short, shorter way of saying, I wouldn't connect too many dots. I mean, the world is just different, the brands, as Chris said, are different. 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.
Richard Clarke (Managing Director of Equity Research)
Thanks. Thanks very much.
Kevin Jacobs (CFO and President of Global Development)
Sure.
Operator (participant)
Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back to Chris Nassetta for any additional or closing remarks.
Chris Nassetta (President and CEO)
Thank you, MJ. 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 remain really optimistic. Obviously, Q2 was a great quarter for us. That's flowing through, plus some, given our expectations, the second half of the year. Again, we're optimistic, you know, on our unit growth and optimistic for when not just the end of this year, but in the next year, we'll be able to deliver. Most importantly, the algorithm that we've described is alive and well and working, and we continue to grow, we continue to maintain incredible cost discipline.
The company's at the highest margins by 800 basis points that it's ever run at, thus producing, you know, the greatest amount of free cash flow in our history. We intend to be super disciplined about how we allocate that, otherwise known as giving it back to our shareholders. In any event, we'll look forward after Q3 to giving you an update on how everything is going. I hope everybody has a great rest of the summer.
Operator (participant)
The conference has now concluded. Thank you for your participation. You may now disconnect your line.
