Earnings Call Transcript - HLT Q2 2023

Operator, Operator

Good morning, and welcome to the Hilton Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. 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, Senior Vice President, 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, 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 had 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 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 the 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 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 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 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%, and 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. And our sales team saw the largest revenue bookings in our history for all future arrival periods. Based on all of that, we now expect full year RevPAR growth of between 10% and 12%. Turning to development, we signed more than 36,000 rooms in the second quarter, representing the largest quarterly signs in our history. Conversions accounted for nearly one-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 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 one-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 true hotels year-to-date, representing the strongest pace since 2017 as the operating success of existing true properties is linked 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 park 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, and 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 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. 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, 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% to 6% next year and return to 6% to 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, Jose Andres, Nancy Silverton, and Paul McGee. Hilton Honors remains the fastest-growing hotel loyalty program with more than 165 million members, up 20% year-over-year, driven by strong growth across all major regions. Honors members accounted for 64% of occupancy in the quarter, up 2 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 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 the leader in hospitality, and we're very excited for the future of travel. With that, I'll turn the call over to Kevin to give you a few more details on the quarter and expectations for the full year.

Kevin Jacobs, CFO and President, Global Development

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 12% versus the prior year on a comparable and currency-neutral basis. Growth was driven by strong demand growth in APAC as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $811 million in the second quarter, up 19% year-over-year and exceeding the high end of our guidance range. Performance was driven by better-than-expected fee growth, largely due to better-than-expected RevPAR performance as well as strong performance in Europe and Japan, benefiting our ownership portfolio. Management 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 our logistics 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, 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 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 the 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 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, Operator

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

Joe Greff, Analyst

Can you discuss your net unit growth target for this year, which is around 5%, compared to the previous 5% to 5.5%? What factors are influencing this change? Specifically, how does this relate to the U.S. market and what is the status of the recovery in China? Additionally, we have noted your expectations for net room growth next year. What gives you confidence in that acceleration, and what specific brands or regions are contributing to this growth?

Chris Nassetta, President and CEO

Yes, that's an excellent question, and I anticipated it would be the first one asked. Just to clarify, I mentioned around 5% during our last call on three different occasions. Our perspective on net unit growth this year hasn't changed significantly since then. It’s a bit back-end loaded, primarily due to the numbers. In the second half of last year, we experienced a significant surge in starts, which were up 40%, and the first half of this year has followed suit with another 40% increase. This indicates that much of that activity is spilling over into the second half of this year and into next year. We initially projected it would be around 5%, and we maintain that belief. Our confidence in our growth trajectory is based on data rather than mere optimism. As I mentioned, we had strong starts in the latter half of last year and continuing momentum in the first half of this year. We also anticipate a record year in signings compared to our previous peak. All these factors contribute to our optimism for a stronger second half this year and significant improvements in 2024. This growth is seen across all regions, even if U.S. credit conditions present some challenges. However, we are still up 15% in starts over the past 12 months. Additionally, we expect positive developments in the U.S. with our Spark initiative, where we plan to open more locations next year. Home3 will start adding value next year as well. We're also seeing success with conversions; in Europe, there has been a notable increase in activity, and Asia Pacific, particularly China, has been revitalized. While it's not fully recovered yet, we expect strong momentum in the coming quarters. In terms of net unit growth projections, I would suggest looking at the middle of the previously mentioned range. If conditions remain favorable, we might hover around or exceed that mid-range, but it's still early in the year for definitive statements. We will keep you updated in the upcoming quarters. The growth is backed by our success in conversions and the demand for Spark, and we plan to expand into Europe soon. Nearly half of our pipeline is already under construction, outpacing competitors, and once projects start, they typically reach completion. The increase in starts we’ve seen recently will yield dividends, and though the U.S. market has some pressures, overall, the diversified global nature of our business is beneficial.

Operator, Operator

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

Shaun Kelley, 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 kind of changes or upside for the second half? Just kind of what's the biggest difference to kind of your prior outlook that gave you some confidence there? And then just any pressures or concerns you're seeing on the leisure normalization point. It's a question we take a lot and just kind of maybe update us on the latest you're seeing as we move through some of these really tough comps in the summer. How is behavior out there? And what's going better or a little worse than anticipated at this point?

Chris Nassetta, President and CEO

We have adjusted our expectations for the second half of the year, which has influenced our full-year outlook. This change is based on the improved results we are observing. We are not economists, but we considered the general consensus that the second half might experience a more significant slowdown. Currently, the broad consensus seems to suggest a soft landing, likely at the end of this year or into next year. Given this and the momentum we are seeing, particularly with our bookings for the first half of the year, we feel optimistic about the third quarter. For the fourth quarter, we anticipate some slowdown in line with the macroeconomic views, though perhaps not as steep as suggested last quarter. This overall outlook justifies an increase in our guidance. There is potential for upside if the fourth quarter follows the positive trends we're seeing from the second and the expected continuation into the third. While we remain aware of the macroeconomic conditions, we aren't currently identifying any signs of weakness. Specifically within the leisure segment, we are experiencing a strong summer, and any moderation is occurring in expected markets where growth is returning to more typical levels, particularly in regions like South Florida, Hawaii, and parts of Southern California. Overall, our leisure business remains diverse and resilient. In the business transient sector, our discussions with customers, especially among small and medium-sized businesses, reflect a positive outlook as they increase their travel. There is also considerable pent-up demand in the group segment, and we recorded our best booking quarter ever in the second quarter, placing us in a strong position for next year. Although large associations are still in lengthy booking cycles, we are seeing movement there as well. While we remain aware of the Federal Reserve's actions, including expected rate hikes, we believe we may be nearing the end of the tightening cycle. Inflation is showing signs of decline, particularly in real-time indicators like housing, and we expect these trends to be reflected in the inflation numbers eventually. Our business remains solid, without any significant weaknesses evident, and regions that were previously lagging are now performing well, particularly China, which is surpassing previous peaks. If we can manage a gentle slowdown, we anticipate a strong remainder of the year and a robust next year, with continued strength in leisure and business transient segments, especially among SMBs. While I won't provide specific guidance for next year at this point, I feel confident about the rest of this year and how we will approach the next budget season, which is reflected in our adjusted guidance and increased capital returns.

Operator, Operator

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

Stephen Grambling, Analyst

I know you don't want to get 2024 guidance, but if we go all the way back to 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?

Chris Nassetta, President and CEO

I believe the algorithm remains intact. Although NUG has been slightly lower, RevPAR has increased. This situation acts as a perfect hedge, with one declining and the other rising. I anticipate this will shift over the next few years. As mentioned, we aim to return to 6% to 7% growth, and same-store growth is expected to normalize. We trust the algorithm is still in effect and will perform within the ranges we've discussed, supported by higher growth rates from our current position, increased license fees, overall RevPAR growth, and the advantageous licensing deals we've secured, which typically perform at or above the algorithm's growth rates. We are confident in the framework established in 2016, which continues to deliver results. Consequently, we are generating more free cash flow than ever, enabling us to return substantial capital. Both of these factors are expected to continue to rise.

Operator, Operator

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

David Katz, Analyst

I wanted to discuss the strategic approaches regarding brands. You've been very successful at launching new brands and it seems that much of the growth has come from the mid-scale and limited service segments. How do you approach the possibility of launching brands in the higher-end market? Is that something you're interested in pursuing or do you feel you don't need to focus on that area? Please help us understand your decision-making process for launching new brands.

Chris Nassetta, President and CEO

Thank you for the question, David. I arrived here with Kevin and others approximately 16 years ago, and at that time, this company had several good brands that weren’t performing well. Currently, we have 22 brands, and I believe we have developed a robust engine of innovation to understand customer needs, identify gaps in the market, and provide high-quality brands that ensure strong commercial performance. I’m proud to say that we don't have a brand that performs below average in our industry. Every company has its own strategy, and we believe our approach is effective because it leads to better products that align with market demands, particularly as we're doing this with efficiency rather than heavy capital investment, resulting in infinite returns that benefit customers. Many of our brands target the mid-market segment, which represents a significant opportunity. We aim to cater to all customers and needs globally, but we concentrate on major markets with large total addressable markets. It's evident that every segment holds value, yet the mid-market is particularly important due to the growth of middle-class populations worldwide, who are able to afford mid-market hotels. Looking ahead 10 to 20 years, much of the growth and revenue in the hotel sector will likely come from the mid-market. However, our focus isn't solely on the mid-market. We are also active in the lifestyle sector with brands like Motto and Tempo, and we’ve made notable advancements in the luxury space as well. For instance, Waldorf was underdeveloped, and Conrad was not particularly strong; now we've expanded to around 100 world-class luxury hotels with nearly 60 more in development. Recently, Waldorf Astoria was recognized as the top luxury brand in customer satisfaction in North America, surpassing Ritz-Carlton, highlighting our progress. While we've previously prioritized other market opportunities, we acknowledge the importance of luxury lifestyle. We currently operate in that segment with LXR and are in the development stages of creating a distinct luxury lifestyle brand. We aim to launch something new in that space within the next year to complement our existing luxury brands. Luxury and lifestyle are critical to us because they resonate with customers and provide various opportunities. Ultimately, however, the vast mass market opportunity lies in the mid-market, and we firmly believe in our commitment to develop leading brands across all markets to capitalize on the financial potential over the next several decades.

David Katz, Analyst

Understood, and if I can just follow up on one detail and if I'm over-beating the 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 on tough comps pull forward or any projects that have slid into next year that are elevating.

Chris Nassetta, President and CEO

I'm not really sure. As I mentioned in the last call, I mentioned around 5%. If you listen to it, I said it a few times. We were hoping for the momentum we have in Spark to result in 50 hotels opening this year, but by the last quarter, we realized that wouldn't happen. Instead, we will probably have 20 open. There’s no issue there; we have 400 deals in negotiation with many more on the way. The supply chain is now set up and moving. There were many moving parts as we got everything organized, which may have had a slight impact. From 20 to 50 is a few thousand rooms, but overall, it hasn't changed much. Again, I mentioned around 5%, and I still believe that's the case.

Kevin Jacobs, CFO and President, Global Development

Yes, David, I think not to go too far on. I think I'd just add that there's a reason why we signaled last quarter, another quarter has gone by. So, the second quarter is 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 crystallized with a happy year in the books and have a year left that what we thought was going to happen in the second quarter happened. And then if you think about the momentum, I mean, Chris 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.

Operator, Operator

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

Smedes Rose, Analyst

I wanted to ask about occupancy levels. When we examine the U.S. data, it appears that Hilton's current performance compared to 2019 shows a noticeable gap from pre-pandemic occupancy levels. Based on what you're saying, do you believe that ongoing improvements in group trends might help to reduce that gap? Or is there something else you are observing? Alternatively, do you think occupancy levels may remain structurally lower in the future? I'm interested in your perspective on how this will evolve over the remainder of the year and beyond.

Chris Nassetta, President and CEO

Yes. We have performed better than the industry. We are about 3 or 4 percentage points below peak occupancy levels, depending on when you look at it. You noted some of the issues, and part of it is related to the group segment. Our group business is improving but is still in progress, which affects many cities that have largely recovered. However, there are some exceptions. While most cities have bounced back, their occupancy remains below expectations because they lack significant citywide events. I believe the group segment plays a role here. Additionally, I might joke about it, but we are also cautious. If asked whether we could drive occupancy back to prior peak levels, I would say yes, I could probably achieve that in a couple of days, but it wouldn't be the right approach. We are focusing on raising prices because we are in a high inflation environment. For the benefit of our hotel owners, it makes more sense to keep pushing prices up, even if it affects occupancy. Ultimately, the financial outcome is stronger because the revenue from rates is much better than what we gain from increased occupancy.

Operator, Operator

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

Brandt Montour, Analyst

Just a follow-up on that, Chris. Industry ADR growth has been tracking below inflation since April. Inflation is probably expected to ease further. And I know your pricing is based on supply and demand and you're pushing rate. And I'm trying to just 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.

Chris Nassetta, President and CEO

The answer is yes. There is a slight timing disconnect, but I would say that the primary pricing for our transient products, whether leisure or business, is keeping pace with current inflation levels. We expect that to continue to decrease. We are confident in our pricing power, considering the assumptions I've previously shared about my outlook and the broader macroeconomic view for the latter part of the year, as we move into next year. The overall environment seems supportive of ongoing rate strength. It’s interesting to note that we've felt a bit like we've been in a strange situation since COVID and its aftermath, primarily focusing on the fundamentals of demand and supply during our discussions. In the current scenario, the supply aspect hasn't received much attention. However, things are now heading towards a more normalized environment. Prices may be higher, but this is a broader reset across the economy. Unless we experience widespread disinflation, which seems unlikely in the near term, this pricing level appears to be the new norm. Eventually, we'll revert to basic fundamentals regarding demand and supply. It's important to highlight that, as evidenced by our starts, signings, and expectations, we are capturing a significant share of the market. However, the reality in U.S. supply is that industry growth has been weak, significantly below the 30-year average of 2.5%, currently around 0.8%, and it is likely to remain low. As we gradually shift to a more typical market over the next year or two, we should see healthy demand if the economy remains stable, against a historically low supply situation in the industry. This will likely contribute positively to sustaining performance and maintaining rate integrity.

Operator, Operator

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

Duane Pfennigwerth, Analyst

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, the 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?

Kevin Jacobs, CFO and President, Global Development

Yes, Duane, I would say there are no real surprises. As Chris mentioned earlier, about half of the Spark owners are new to Hilton, which isn’t unexpected when entering a different segment with a new group of owners. We see this as a positive development since it increases demand for our product. We're diversifying our ownership base even more, which has always been quite varied, but now it's even broader. As Chris noted previously, as we evolve our product offerings to meet demand, our owner base is also evolving accordingly. The capital tends to follow opportunities. Not long ago, 70% to 80% of our deals were with existing owners, and while we’re maintaining the same volume with those existing owners, we are also bringing in many more owners globally. Currently, about 50% to 60% of our deals each year are with existing owners. So, while there are no surprises, we see this as a significant net positive for our business.

Chris Nassetta, President and CEO

Yes. The other minor segment I mentioned is on H3, which I described as a hybrid that leans more towards being an apartment than a hotel. We are very encouraged by the institutional interest we have received from larger organizations that either want to develop or collaborate on the funding of numerous H3 properties, primarily due to the construction costs. We believe this segment has about a 60% margin, and institutions are drawn to the demand and growth potential it presents. This interest has aligned with our expectations when we set out to develop H3, so it’s gratifying to see it materialize. Currently, we are negotiating 300 deals, not with 300 different parties, but mainly with a select few affluent institutional players. We plan to expand opportunities for H3 once we establish a solid foundation, and it's encouraging to witness this development.

Operator, Operator

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

Robin Farley, Analyst

Great news on the RevPAR outlook. I have a question regarding net unit growth. You mentioned Spark, and it seems there have been some delays in China. Considering the strong start numbers you've discussed, can you provide insights on the timing of interest rates, which are still rising? The significant increase in starts is likely influenced by comparisons to pandemic levels, which makes the numbers appear different than usual. I am trying to understand the timeline regarding factors such as when you think we might reach a bottom, especially since interest rates are still climbing. Can you help clarify the relationship between rising rates and high starts, and where you believe we might see stabilization?

Chris Nassetta, President and CEO

Yes. Just to clarify, the signing numbers will show significant increases in starts, which will exceed previous highs, and starts will align with our earlier peak despite comparing with residential figures. It’s not solely a result of favorable comparisons. I'll hand it over to Kevin for the next part. However, the advantage of Spark is that it serves as a relatively low-cost entry product, thus requiring minimal financing.

Kevin Jacobs, CFO and President, Global Development

Yes. Both Spark on H3 are more easily financed products in the current environment. We launched those brands due to strong customer and owner demand. This illustrates how diversification is beneficial. We have products that are easier to finance, and our lower-end products globally are also more financeable. It's important to consider that the tighter credit environment is not just about interest rates; it relates to the availability of capital, which is primarily a phenomenon in the Western world, particularly in the U.S. Only 40% of our deliveries this year will occur in the U.S., so we have significant global diversification. We believe our momentum can continue for various reasons. Additionally, while development can be delayed due to factors like COVID, the outlook for approvals and starts looks promising. The addition of more easily financeable products is positive for the future, and our offerings of limited service and lower-end products for emerging markets also bode well. While we anticipate some challenges along the way, we believe we are moving toward a return to normal.

Operator, Operator

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

Michael Bellisario, Analyst

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, Global Development

Yes, there's a good amount of information that is sensitive from a competitive standpoint, so we won't go into extensive details, but I can share some updates. The economics of the program have improved, largely due to enhancements made to it. This year, total spending in the program will be about two-thirds higher than it was in 2019, indicating significant growth. Our partnership with American Express has been extremely successful. We've mentioned that we don't provide many specifics about the program, and we apologize for that; however, it's competitive information. The program has been growing beyond expectations, and we believe it will continue to grow at or above projected rates in the future. This is a 10-year agreement, and many might have thought that credit cards would diminish in favor of alternative payment methods. On the contrary, travel co-brand cards have become highly successful and appealing, fostering engagement throughout the system. It's not solely about the financial aspects of the card, and we believe Amex shares this perspective. We're very excited about this agreement and will limit further details beyond what we've already disclosed.

Michael Bellisario, Analyst

Got it. And 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, Global Development

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.

Operator, Operator

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

Chad Benyon, Analyst

I wanted to ask about the owned 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. But can you kind of help us think if the outlook has changed for this segment as we kind of look into the back half of the year, given how much improvement you saw in the second quarter, does that give you more confidence that you could see some margin improvement and just overall EBITDA growth year-over-year in the back half?

Kevin Jacobs, CFO and President, Global Development

Yes, there’s a lot to discuss. Firstly, our portfolio is heavily focused in the U.K., Ireland, Europe, and Japan, with Central Europe and Japan showing particularly strong performance. There hasn't been much change, just a slight year-over-year growth for subsidies from last year, which is mostly noise. Essentially, there's operating leverage in the business, especially with their own hotels and leases, providing even more leverage than typical owned hotels. They have been growing at a pace that significantly surpasses the overall fee business. As long as the fundamentals continue to improve, this trend will persist. Our outlook for the segment is more optimistic this quarter compared to last quarter, largely because our expectations for Europe and Japan have improved.

Operator, Operator

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

Richard Clarke, Analyst

Regarding the two new brands, Arch and H3, will they be sufficient to increase the U.S. market share back to 5% and enable the international business to recover by 6 to 7 times? Additionally, could you share your projections for Spark in the near term? When Motto was launched, it had 60 hotels, and you mentioned 8 to 10 for H3. With Tempo, you anticipated having 20 to 30, although it still hasn't launched yet. What sets these new brands apart in terms of achieving results in the short term compared to the previous ones?

Chris Nassetta, President and CEO

Yes, I believe the answer is affirmative not only for Spark and H3 in the U.S., but also for Home2 and Hampton which are growing in the U.S. I'm optimistic about Tempo as well, which is just beginning its journey. The combination of these brands and the advantages of conversions in soft brands will help us return to our previous levels, and I am confident of that. The contrast between Tempo, Motto, and Spark is significant. Both Tempo and Motto were launched right before the pandemic, and they are primarily new builds, with only a few adaptive reuse projects. When COVID hit, financing became scarce and everything slowed down. However, I believe these brands will excel moving forward. While I don't have specific pipeline numbers for Tempo, we are set to open in Times Square and have many projects under development across the country. Although the financial environment still has some uncertainties, it is much improved compared to the pandemic. You will begin to see an upward trend in Tempo, which is performing well and is well-received by owners, but the pandemic hindered its launch. The same goes for Motto. Spark is fundamentally different; it operates entirely as a conversion brand and focuses on transforming weaker hotels into our system, which presents significant opportunities for market share growth without requiring a large investment from owners, explaining the high interest. Therefore, the ramp-up for Spark will be much quicker. However, I do not want to downplay the potential for Motto and Tempo. Particularly for Tempo, while Motto focuses on micro hotels in major urban markets, we will see more of them. Tempo has the potential to become a major brand, but it was impacted by its release right before COVID.

Kevin Jacobs, CFO and President, Global Development

Yes. I wouldn't suggest making too many connections. The world is simply different, and as Chris mentioned, the brands are also different. The advantage of Spark is that you don't need to construct new buildings; it will utilize existing ones.

Operator, 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.

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 for 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 points 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. And so in any event, we'll look forward after Q3, giving you an update on how everything is going. I hope everybody has a great rest of the summer.

Operator, Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.