Hilton Worldwide Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 14 speakers on the call.

Operator

Good morning and welcome to the Hilton Second Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's prepared remarks, There will be a question and answer session. 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.

Operator

You may begin.

Speaker 1

Thank you, MJ. Welcome to Hilton's Q2 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 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 ks.

Speaker 1

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 Nassotta, 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 Q2 results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions.

Speaker 1

With that, I'm pleased to turn the call over to Chris.

Speaker 2

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 hit a record $811,000,000 the highest single quarter in our company's history. Performance continued to be driven by solid fundamentals along with continued share gains.

Speaker 2

Our industry leading brands, strong commercial engines and powerful partnerships continue 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 $2,400,000,000 $2,600,000,000 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 4 points during the quarter To reach 77% in June, our highest level post pandemic. Business transient RevPAR remains Strong, growing 11% year over year as trends continue 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 all segments performing well versus prior peaks and accelerating sequentially versus the Q1.

Speaker 2

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 Q1. 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 20 24 arrivals 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.

Speaker 2

Based on all of that, we now expect Full year RevPAR growth of between 10% 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.

Speaker 2

In Europe, we signed agreements across 14 countries, including our first Tapestry Hotel in 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 HCI rooms in China, more than 3 times Last year and accounting for more than a third of our signings in China. Signings in We've signed more than 50 True Hotels year to date, representing the strongest pace since 2017 as the operating Excessive existing true 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 6 months since its launch.

Speaker 2

Nearly all deals are conversions from 3rd 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 There's no Hilton brand presence today. In addition to the strong start for Spark, we recently launched an inventive new extended Hey, Brian 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.

Speaker 2

Our system wide pipeline now stands at a record 3,000 properties, totaling 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, 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 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.

Speaker 2

In fact, in the In the quarter, we celebrated several milestones including the openings of our 2,900th Hampton Inn and our 600th Suites property, which remains one of the fastest growing brands in the industry. Additionally, we surpassed 150,000 rooms in Asia including the openings of the Hilton Okinawa and Miyako Island Resort in Japan and the Conrad Shenzhen, our 1st luxury hotel in China's thriving technology hub. We expect openings to accelerate as the year progresses given strong international and on 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% to 6% next year and to return to 6% to 7% over the next couple of years.

Speaker 2

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 And continue expanding our partnerships with world class talents such as Michael Mina, Jose Andres, Nancy Silverton and Paul Magee. Guild and Honors remains the fastest growing hotel loyalty program with more than 165,000,000 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.

Speaker 2

Just yesterday, our Waldorf Astoria Home2 and True brands were named best in category by J. D. Power for their respective segments in North America. Last week was Hilton was again named as a top employer for millennials for the 6th consecutive year. Since 2016, we've been recognized by Great Place to Work as the world's best hospitality company in over 60 countries.

Speaker 2

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

Speaker 3

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 $811,000,000 in the 2nd 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 Management franchise fees grew 16% year over year driven by continued RevPAR improvement.

Speaker 3

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, 2nd 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.

Speaker 3

S. Remained strong, but grew more modestly year over year due to tougher comparisons. In the Americas outside the U. S, 2nd quarter RevPAR increased 22% year over year. Performance was driven by strong group demand, particularly at our resort properties.

Speaker 3

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, 2nd quarter RevPAR was up 79% year over year led by the continued demand recovery in China.

Speaker 3

RevPAR in China was up 103% year over year in the quarter, an 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 Q3, we expect system wide RevPAR growth to be between 4% 6% year over year. We expect adjusted EBITDA of between $790,000,000 $810,000,000 and diluted EPS adjusted for special items to be between $1.60 1 $0.65 For full year 2023, we expect RevPAR growth to be between 10% and 12%. We forecast adjusted EBITDA of between $2,975,000,000 $3,025,000,000 We forecast diluted EPS adjusted for special items of between $5.93 $6.06 Please note that our guidance ranges do not incorporate future share repurchases.

Speaker 3

Moving on to capital return, we paid a cash Dividend of $0.15 per share during the Q2 for a total of $40,000,000 Our Board also authorized a quarterly dividend of $0.15 per share in the Q3. Year to date, we have returned more than $1,000,000,000 to shareholders in the form of buybacks and dividends. And as Chris mentioned earlier, we now expect to return $2,400,000,000 $2,600,000,000 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.

Speaker 3

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,

Operator

Today's first question comes from Joe Greff with JPMorgan. Please go ahead.

Speaker 4

Good morning, everybody.

Speaker 2

Good morning, Joe.

Speaker 4

Not surprisingly, maybe the first question relates to your net unit growth target for this year, approximately 5% Versus the 5% to 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? And then obviously, we all heard what your expectations for next year in terms of net rooms growth, what gives you the confidence for that reacceleration and what specifically whether it's brand or geographies is driving that acceleration?

Speaker 4

Thank you.

Speaker 2

Yes. Great question. And no, I'm not surprised that that would be the first question. For the record, I think on the last call probably 3 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, where our NUG would be this year.

Speaker 2

And so it is what it is. It was always a bit back end loaded and the simple reason for that Joe It's 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 twenty two, 40%. And if you look at What they are in the first half of this year, as I stated in my introductory comments, they 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.

Speaker 2

And so it really is entirely sort of the timing In the sequencing of how that happens. So we thought it would be around 5. We still think it will be around 5. Our confidence in going back on the way back up, I do feel like if we look at the data, 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 were way up in the Half last year, they've been way up in the first half of this year.

Speaker 2

We continue to see good momentum there. Same with signings, I mean, we expect As I said, my comments have a record year in signings relative to our prior peak and 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.

Speaker 2

Credit conditions are to make it more challenging. As I already Said, we're still up year to date over the last over the trailing 12 months, 15% in starts. And we have some other nice things that are going to add to our growth here in the United States with Spark. 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 3 will start Contributing H3 will start contributing next year, probably not a ton, but that is a much more financeable product Even in today's environment because it's probably more apartments than it is hotel, we are broadly having Really good success on conversions and Europe, which had been slow, has really started to pick up and Asia Pacific really led by As 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, In the Q2 and our expectation for 3rd and 4th is we're going to start to get a very good momentum.

Speaker 2

And so that's Why we feel pretty darn good on the nug for next year, obviously, if we're giving you a range, I would sort of direct you I think we can be mid range of that or above, but it's a little bit early in the year To go quite that far, we'll obviously next quarter and the following quarter, we'll update you. But I think what I would say to people is again, It's objectively based on things that 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 Spark to Europe relatively quickly. And just what we have in the pipeline, I mean almost half of our pipelines under construction more than anybody In the industry and once they start, they almost always finish. So, that pickup starting in Q3 last year We're starting to pay dividends and thankfully the pickup in starts has continued everywhere In the world and as I said, the world is a big place. So there is a little bit more pressure in the U.

Speaker 2

S. Even though our numbers are still good, But a lot less pressure in some other parts of the world that had been feeling it, which is the benefit of a big diversified global business.

Speaker 4

Great. Thank you.

Operator

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

Speaker 5

Hi, good morning everyone. Thanks for taking my question. 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 kind of changes or upside for the second half, just kind of what's the biggest difference to kind of your prior outlook that And just kind of 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

Speaker 2

Yes, happy to. So, yes, 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. As we say very regularly, we're not economists, so we try and take that 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 a little bit more meaningful slowdown. I think the consensus view right now, I mean you can pick somebody, but 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.

Speaker 2

And so when we factor for that and we look at some of that, obviously we've already booked a half a year. We look at what we have reasonable sight lines now into the Q3, which We feel very good about and as we look at the Q4, 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 the 4th Order keeps going like we saw in the second and what it looks like we're going to see in the third, there may be potential. But it certainly warranted Our guidance based on where what we've already booked for the year, what we see at a macro view in the late Part of the year.

Speaker 2

I mean, 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, I gave you some sense of where we have really good forward looking information, Just 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 watermarks and 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 weaknesses. I know There's a lot of questions on the leisure business.

Speaker 2

I mean what I would say to you is like we're not seeing 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 Where it's normalizing from like crazy highs, it's still in those markets, which I'll talk about way over 'nineteen levels, but I mean it's just sort of Coming back not even to earth, but 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 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 at least what sidelines 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 got everybody together as we always do last week to talk about it. They're feeling quite good, particularly the SMBs, which At this point, 85% plus of our business, they're traveling more, they're feeling reasonably good about soft landing in their business.

Speaker 2

And then Group and there's pent up demand there. In group, there's still huge amounts of pent up demand that haven't been released. I said, we're We had the best booking quarter in our history ever in the Q2 and our position is great for next year and you're Still not where you would where you're going to be with all the big associations because that was really driven by corporate group. So, a bunch of the big association groups, I mean they are booking, but that's multi year booking cycles. That's still to come.

Speaker 2

And so, We don't see weakness. Obviously, we're sentient and we know what the Fed is trying to do. We'll hear this afternoon 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.

Speaker 2

Housing in particular is definitely real time coming down and will eventually show up. And 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 sometime next year and that feels rational based on everything going on. And as I said, our business, We're not seeing any real cracks anywhere. And of course, the places In the world that had been lagging are now starting to like produce.

Speaker 2

So the most significant lag everywhere was doing really well but China. Now China is eclipsing prior high watermarks and getting going on development as I already said, but also operationally eclipsing 2019 numbers. So Not to be a polyhed, it all feels pretty good and if we can orchestrate 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 I still think there'll be strong strength in leisure, but particularly there'll be if you get a reasonably decent Slow down, soft landing, you're going

Speaker 3

to have

Speaker 2

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 think you're going to see a big change there any So it's early. 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 quite good about the rest of this year.

Speaker 2

I actually feel quite good about As we later this summer get into budget season, 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.

Operator

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

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Steven.

Speaker 6

I know you don't want to give 2024 guidance, but if we go all the way back So the split off you had outlined this algorithm of 1% to 3% RevPAR growth kind of translating to 14% to 23% EPS algorithm with kind of 6% NUG, you're talking about the reacceleration of NUG basically in that range, but what other Changes in the business should investors be thinking through as we compare and contrast that algorithm to today, whether it's thinking about royalty rates or pipeline or other fees?

Speaker 2

I think that the algorithm stands. I mean, and in fact, even by the way, while, NUG has been a little bit lower, RevPAR has been higher. I mean, It's a pretty perfect hedge, meaning we've been running a little lower on 1, a little higher on the other. 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 6% to 7% and same store growth is going to normalize. But we think the algorithm is alive and well and we'll deliver 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, The deals that we've done on the licensing side, which 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 it's alive and well and producing.

Speaker 2

And 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. Again, that will keep Both of those things will keep going up as well.

Speaker 6

Easy enough. That's my one. Thank you.

Operator

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

Speaker 7

Hi, good 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 a lot of the growth has been sort of in the middle and mid scale and limited service, etcetera.

Speaker 7

How do you think about launching stuff potentially at the higher end or do you not sort of want or need those or And just help us understand how you decide where to launch?

Speaker 2

Sure, David. Thanks. Really good question. So yes, I got here with Kevin and others about 16 years ago and this company had 9 Brands that were pretty good, but not performing that well. Today, we have 22 brands.

Speaker 2

So, 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 either equal to or above everybody in the space. And Listen, I say that sort of patting us on the back because I'm very proud of that.

Speaker 2

Every company has different strategies. We think this strategy is a winning strategy because It delivers better products for our customers over time that meet the market in a modern context and it's better from a return point Because we're doing it with blood, sweat and tears and not investing capital. And so it's an infinite return and better for the customers is sort 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?

Speaker 2

Because that's the biggest opportunity. And We're trying to serve any customer for any need they have anywhere they want in the world. But obviously, we have Just a lot on where the big markets are, where the big addressable 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? And that's where the money is And those people can afford mid market hotels.

Speaker 2

And so 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. So that's why we have focused there. But We have not focused exclusively there. We've done a bunch of things in the lifestyle space with Urban Micro like Motto, with Tempo with Canopy at the upper upscale lifestyle segment and obviously In the luxury space, we have made huge strides. I mean, Waldorf existed, but wasn't really a brand and Conrad Well, it's not much to speak about and LXR didn't exist.

Speaker 2

And so we've gone from essentially a few hotels 100 world class luxury hotels with another nearly 60 in the pipeline. And by the way, I said it, But this morning if you look at Bloomberg or whatever, Walter Vistoria is ranked the number one luxury brand, Eclipse Ritz Carlton 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 That is 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, we're in and around the lifestyle segment.

Speaker 2

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. I would say, 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 make sure they become little toddlers and are successful. But we're doing developmental work in luxury lifestyle.

Speaker 2

I would expect in the next year we'll launch something in that space to sort of add To the 3 brands we have already in the luxury space to give us another shot on goal for luxury And 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 mass market opportunity in every major Shamed of saying 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.

Speaker 7

Understood. If I can just follow-up on one detail and if I'm over beating a horse, apologies. With respect to the NUG for the remainder of this year, I just want to be as clear as possible about whether there was some 1, tough comps, pull forward or any projects that have slid into next year That are elevating

Speaker 2

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 3 times. I mean a little bit, although it's not meaningful. I mean, listen, we were hoping From the standpoint of the momentum that we have in Spark, we were hoping to have 50 hotels open this year.

Speaker 2

I think by the last quarter we realized that that wasn't going to happen. But we're going to have, as I said, we're going to probably have 20. There's no problem. I mean, we have 400 deals in negotiation with 100 With 100 more coming over the threshold, it's just we and the supply chain stuff now set up and moving. It was a lot of moving parts as we get set up.

Speaker 2

And so that probably has a teeny bit of impact. I mean 20 50 is a few thousand rooms, but otherwise not really, not really. I mean, again, I said around 5. I'm still We still think it's around 5.

Speaker 3

Yes. David, I think not to go too far on. I think I'd just add that there's a reason why we signaled 5 last Quarter another quarter has gone by. So the 2nd quarter sort of in terms of openings played out the way we were thinking it would, which 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 Q2 happened.

Speaker 3

And then if you think about the momentum, I mean Chris already talked about this, but the momentum in approvals and starts, I'd say it was a better experience in the Q2 than we were expecting a quarter ago.

Speaker 8

Yes. Thank

Speaker 7

you very much. Appreciate it.

Operator

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

Speaker 8

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 for Hilton versus 2019, there's a reasonable So gap to prior peak occupancy levels or pre pandemic occupancy levels.

Speaker 8

But 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 in the next Through the balance of the year and maybe just going forward?

Speaker 2

Yes. For us it's been better than the industry. We're 3 or 4 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 happening because the group, it's still group is getting there, but it's still building.

Speaker 2

Part of it and that's impacting a bunch of the cities, right, that have recovered a lot, most of them. There are Full of exceptions or one big exception, but most of the cities have recovered, but from an occupancy point of view, they're still off because they don't have the big city whites back. So 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 a Smart ass about it, but part of it's pricing, right? So if you said to me, could we drive occupancy consistent with the prior peak?

Speaker 2

The answer is, Yes, I could probably do it in the next couple of days, but it wouldn't be the right answer. Meaning, we are pushing hard on price because we've been obviously in a higher highly inflationary environment. And for 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 bottom line is better because the flow through on rates are heck of a lot better than the flow through on occupancy. So Part of this is, yes, there's still groups coming back.

Speaker 2

Yes, business transient is still particularly the big corporates are only 92 And they'll come back no matter what they say by the way over the next few years, they'll come back. You heard it here. I'm telling you they'll Come back. 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 as worried because it's a better outcome for everybody, better outcome for us.

Speaker 2

Our owners make more money drive higher margins.

Speaker 8

Okay. Thank you. Appreciate it.

Operator

The next question comes from Brandt Montour with Barclays. Please go ahead.

Speaker 6

Hey, good morning, everybody. Thanks for taking my question. Just a follow-up on that, Chris. Industry ADR growth has Been tracking below inflation since April. Inflation is probably expected to ease further.

Speaker 6

And I know your pricing is Based on supply and demand and you're pushing rate. And I'm trying to reconcile those two forces as we look into the back half of this year. And maybe you could also just add in what your core SME or your core business transient ADR pricing growth is looking like and if that is in excess of inflation today?

Speaker 2

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 transient or business transient is keeping up with inflation at its Current levels and 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 it's funny we talked I Kit, our team around here, it's like we've been living a little bit in bizarro world coming through COVID obviously and then The aftermath where it used to all be about fundamentals.

Speaker 2

That's all we would ever talk about on these calls. That's all I'd ever talk about with investors, 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 we're normalized. I mean everything is It's getting reasonably close to a more normalized environment.

Speaker 2

Prices are higher, okay, but that's just a broader reset that's happened throughout the Tire economy, which I think unless you have broad disinflation, which it doesn't feel like that's happening anytime soon, that's 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 enough attention, thankfully, as you 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.

Speaker 2

It's 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. And so When you get to a more normalized environment, which is we're sort of morphing slowly into over the next year or 2, You're going to find yourself in an environment where demand should be reasonably healthy if the economy is okay against Historically low supply side environment in the industry. And so I think it's going to feel pretty good and I think it's going to be another factor

Operator

The next question comes from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Speaker 9

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 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 the organizations or the individuals that are investing in new development?

Speaker 3

Yes, Duane, I'd Hey, 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? And that's not a surprise 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 own 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 is like Evolving the product base to respond to where the demand is, well, the owner base evolves in that same way too, right?

Speaker 3

The 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 were with existing owners, we're still doing the same absolute amount of volume with our existing owners. In fact, 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. So I think globally we're down to like 50% or 60% of our deals are with existing owners annually.

Speaker 3

So no surprises, but we view it as a huge net positive for the business.

Speaker 2

Yes. The other minor theme, I think that's well said is on H3. I mentioned in my comments, It's a hybrid and it's probably more apartment than hotel. We've been really excited about the 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 it's we think a 60% kind of margin business and they really like the segment The demand in its existing profile and growth profile. So that's been not surprising because And when we were developing H3 that was our hope and expectation, but it's nice to see it come to life.

Speaker 2

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

Operator

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

Speaker 10

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.

Speaker 10

When we think about 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 starts are due to sort of comping The pandemic, so there's that going on 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, but help us think about the timing Like rates moving up, starts being high, but kind of where you see things bottoming in terms of that? Thanks.

Speaker 2

Yes. Just for the record in the signings numbers and starts, signings will be above Prior high watermarks pretty materially and starts will be about the even though the comps are easier, it will be about Where we were at our prior high watermark, so it's not just the benefit of comps. I'll let Kevin take The next part of it, but I mean Spark, the beauty of Spark is it's a relatively low cost entry product and so it doesn't Really require a lot of financing.

Speaker 3

Yes, both I mean I'd say both Spark and H3 are more easily financeable products in this environment. So again, that's not why we launched those brands. We launched those because there's a ton of customer and owner 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.

Speaker 3

I think our lower end products around the world are more financeable. And then I think I'd 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. It's not just U.

Speaker 3

S, but it is highly 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 All of the reasons we have given you, we think momentum can continue.

Speaker 3

And if you think about, I mean, Chris talked about Bizarro World on fundamentals, it's also Bizzaro world a little bit on development because it sort of starts with approvals. You got to sign them. You got to get them in the ground and then they deliver and that's all usually And 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. So the outlook for approvals and starts Bodes well for the future. The fact that we're rounding out the product base with more easily financial products bodes well for the future.

Speaker 3

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.

Speaker 10

Okay. All right. Great. Thank you.

Operator

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

Speaker 11

Thanks. Good morning, everyone.

Speaker 12

Good morning.

Speaker 11

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?

Speaker 3

Yes, I think look there's a 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 What's new and different, I think, look, the economics are a little bit better, 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 going to be about 2 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.

Speaker 3

But again, It's pretty sensitive competitively. It's been growing ahead of algorithm. We think it will 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 going to go somehow go away and be replaced By other forms of payments, I think it's quite the contrary.

Speaker 3

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. So we're super excited about the deal and Probably will stop short on too many more details than what we've already said.

Speaker 11

Got it. And then just one follow-up, any incremental economics included in the increased full year guidance from the credit card deal?

Speaker 3

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

Speaker 6

Got it. Thank you.

Operator

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

Speaker 13

Good morning. Thanks for taking my question. Wanted to ask about the owned portfolio. The performance in the quarter recovered better than M and 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.

Speaker 13

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 Q2, does that give you more confidence that you could

Speaker 3

In U. K, Ireland, Europe and Japan, so particularly Central Europe and Japan have been quite strong. There's no real Sort of change in I mean, there was a little bit of year over year growth for subsidies last year, but that's just a little I think basically there's operating leverage in the business, right, their 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 in excess of the overall fee business. As long as fundamentals stay growing that will continue to be the case.

Speaker 3

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

Speaker 13

Thanks. Appreciate it. Sure.

Operator

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

Speaker 12

Good morning. Yes, just on the 2 new brands, Spark and H3, Are those going to be enough to get U. S. NUC back up to 5% expect that the international business And maybe just related to that, obviously, you're giving us some nice big numbers on where you think Spark can do in the If I go back to when Motto was launched, about 60 hotels, I think you're 8 and 10 when you launched Tempo, you talked about maybe 20 to 30. I think you Haven't got a 10 foot yet, but more coming soon.

Speaker 12

Just maybe what's different here versus maybe where what those brands achieved in the shorter term?

Speaker 2

Yes. Good question. I think the answer is yes on not just Spark and H3 3 in the U. S, but Home 2 in the U. S, Hampton is growing in the U.

Speaker 2

S, I'll come back. Tempo is just getting started. So I think the combination of all of those brands, the benefit of conversions in soft brands We'll get us back, I am confident to those levels. The difference between like a tempo And a Motto and Spark is night and day honestly. I mean here's what happened to Tempo and Motto.

Speaker 2

We launched them about a day For the pandemic and 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 will do incredibly well.

Speaker 2

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 and now that we're in even though the environment has some uncertainty in financing and all that is a heck of a lot better than In COVID, so you'll start to see a great trajectory and Tempo, there's nothing wrong. Tempo is great. Owners love it. It's just COVID got in the way.

Speaker 2

Basically same from Motto. Spark is a totally different thing. 1, it's not we're not COVID. While there are challenges out there, it's 100% conversion brand, and it's basically taking 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, it's a relatively low ticket Yes, for owners to do it. That's why we have so much interest.

Speaker 2

So I think the ramp on that will be much, much faster And it's a very different thing. But I wouldn't diminish the opportunities in Motto and And Tempo, they're going to particularly Tempo Motto's a micro hotel and just the biggest urban markets will do a lot more of them. But I mean Tempo will be a mega brand. It just got caught up in getting launched a minute before COVID.

Speaker 3

Yes, I wouldn't connect. This is A shorter way of saying I wouldn't connect too many dots. I mean the world is just different and the brands as Chris said are 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.

Speaker 12

Thanks very much. Sure.

Operator

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.

Speaker 2

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.

Speaker 2

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 Not just the end of this year, but in the 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 continue to grow. We continue to maintain incredible cost discipline. The company is at the highest margins by 800 basis This point that it's 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 it back to our shareholders.

Speaker 2

And so, 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.

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Earnings Conference Call
Hilton Worldwide Q2 2023
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