Hilton Worldwide Holdings Inc (HLT) — Q2 2015 Earnings Call Transcript

Thank you, Leann. Welcome to the Hilton Worldwide second quarter 2015 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 are effective only as of today. We undertake no obligation to publicly 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 www.hiltonworldwide.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of our second quarter results and will describe the current operating environment as well as the company's outlook for the remainder of 2015. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then provide greater detail on our results and outlook. Following their remarks, we will be available to respond to your questions. With that, I am pleased to turn the call over to Chris.

Thanks, Christian. Good morning, everyone, and thanks for joining us today. We're pleased to report another strong quarter with adjusted EBITDA and earnings per share above the high end of our guidance. We continue to feel great about the fundamentals, which should continue to support strong performance going forward. As a result, we've raised our full year adjusted EBITDA and EPS guidance. Given our confidence in the outlook and the significant deleveraging we've achieved, we are also pleased to commence returning capital to shareholders with the declaration this morning of our first quarterly cash dividend. Kevin will cover this in more detail later in his remarks, but we intend to grow our dividend over time as earnings grow, and we believe we should be able to initiate these share buyback programs next year. Turning to our performance in the quarter, system-wide comparable RevPAR grew 5.2% on a currency-neutral basis. May was somewhat softer than expected, largely due to weaker transient business caused by weather in the Southern and Central U.S. and demand declines across oil and gas markets, impacting quarterly RevPAR growth by approximately 100 basis points. However, trading growth for the quarter was still relatively strong, up a little over 5% system-wide and strengthened significantly in June, continuing into July. Group business was strong in the quarter as system-wide group revenue increased over 6% at our comparable owned Americas owned and operated hotels, largely during company meetings that were up over 10% in the quarter, with particular strength in the Chicago, New Orleans, and Hawaii markets. Favorable mix shifts also combined to support ancillary spend with food and beverage as owned and operating hotels growing 7% in the quarter. Group position continues to track up in the mid-single digits for both the balance of this year and into 2016. We expect to see a strong second half of the year in group, with the fourth quarter outpacing the third quarter largely due to holiday shifts. Turning to development, our system growth continues to lead the industry and gain momentum. According to Star, we increased our industry-leading position in both pipeline and rooms under development in the quarter. We are on track to have a record number of signings this year, roughly 90,000 rooms, continuing to grow the largest pipeline in our company's history, all with de minimis amounts of our capital and no acquisitions. In the quarter, we opened 82 hotels totaling more than 11,000 rooms, bringing our total supply to 4,440 properties and more than 730,000 rooms, with the opening of the Hilton Aruba Caribbean Resort and Hilton Garden Inn, Guatemala City earlier this month. We are now present in 97 countries and territories. Including all approved deals, our pipeline stands at nearly 265,000 rooms. As of today, we have 1 million rooms open or under development and expect to be in 100 countries and territories by the end of the year. Net unit growth adds to our ability to serve customers anywhere in the world for any travel they have, driving significant loyalty to our system, that continues to enhance our industry-leading RevPAR index premiums. To serve even more customers, we continue to globally deploy our existing brands and launch new brands like Home2, Curio, and Canopy, and soon a new midscale brand. We now have nearly 60 Home2 hotels open with over 225 more in the pipeline. Year-to-date, we have signed or approved nearly 80 new Home2 hotels and continue to build significant momentum with developers. Curio has celebrated its first anniversary with nearly 50 properties and 13,000 rooms open or in various stages of development, with its first international hotels opening this month in the Caribbean, Europe, and Latin America. We also continue to see tremendous interest from owners in Canopy, with over 20 hotels and 3,500 rooms either in the pipeline or within signed letters of intent. We expect the first Canopy to open in Reykjavik, Iceland, early next year. We intend to launch our new midscale brand in the first quarter of 2016, largely targeting new customers for our system at a price point below the Hampton brand. We believe the target market is about 40% of U.S. room night demand, demand that our current system largely does not serve. We have already received tremendous interest from our owners on this brand and our goal is to have a system size larger than Hampton over time, with next to no capital investment required. Our portfolio of brands, from Waldorf to Hampton, and soon to include our midscale brand, are linked together by our Hilton HHonors program, and our enhanced HHonors app is at the center of making our system more rewarding and attractive to guests. Fully integrated into our backend systems, the HHonors app allows guests to check in and select their room at over 4,100 hotels globally today, with straight-to-room capabilities via a digital key, now rolling out at scale, with hundreds of hotels expected to offer the service by year-end. Our award-winning HHonors app has been downloaded nearly 5 million times, and nearly one in four HHonors arrivals are using digital check-in and room selection today. Totally nearly 5 million digital check-ins a day and approaching 1 million mobile check-ins per month. Guest feedback has been really positive, with the HHonors app receiving the highest average Apple Store customer rating amongst all hotel apps since its relaunch. Now let me update you on the outlook for the remainder of the year. Overall, the fundamentals of the cycle remain very solid, and we continue to expect 5% to 7% system-wide RevPAR growth in 2015. In the U.S., we expect 5% to 7% RevPAR growth for the full year, supported by favorable supply and demand dynamics and growing group business, particularly in the fourth quarter, although we expect continued pressure from softening European and Japanese inbound travel. Decreases should be mitigated by continued upticks in inbound travel from other markets, particularly from China, and strong domestic leisure business. For the Americas region outside the U.S., we anticipate mid-single-digit RevPAR growth for the full year, supported by solid trends in Mexico, Peru, and Colombia, which should more than offset challenges in Brazil, where economic softness continues. We maintain our mid-single-digit RevPAR growth expectations for Europe, although prolonged challenges in France and Eastern Europe continue to temper our regional performance. Leisure trends remain very strong, particularly throughout Spain and Italy, as robust international inbound travel and greater local demand drive strong transient business. For the Middle East and Africa region, we forecast low single-digit RevPAR growth for the year, as decreasing inbound demand from Russia, Germany, and Turkey continues to weigh on results in Saudi Arabia and the UAE. This inbound weakness should be largely offset by strengthening fundamentals and easy comparisons in Egypt. In the Asia-Pacific region, we continue to expect high-single-digit RevPAR growth supported by strong fundamentals in Japan, positive momentum in Thailand, and solid performance in China. We continue to forecast 6% to 8% RevPAR growth in China for the full year, despite decelerating economic growth, due mostly to our favorable market mix and rising market share. In summary, we're very pleased with our second quarter performance as well as the setup for the remainder of this year and in the next. We also remain very focused, first and foremost, on creating long-term value for shareholders, including exploring possible structural options for the company. I know many of you are curious about the potential for timeshare or real estate spin opportunities, and I can tell you that we continue to explore all options and still plan to give you a full update before the year's out. With that, I'm going to turn the call over to Kevin for further details on the quarterly results and the outlook for the rest of the year. Kevin.

Thanks, Chris. Good morning, everyone. During the quarter, our RevPAR growth of 5.2% was driven by a 3.4% increase in average rate and a 1.3 percentage point increase in occupancy. In actual dollar system-wide, RevPAR increased 2.9%. RevPAR growth was 5.8% for the first half of the year, roughly two-thirds driven by rate. Diluted earnings per share adjusted for special items was $0.25, an increase of 19% versus the prior year period and above the high end of our guidance. Adjusted EBITDA was $777 million, an increase of 15% year-over-year, beating the high end of our guidance by approximately $17 million. SP growth significantly outperformed expectations and FX headwinds were lower than expected. We attribute $5 million to $10 million of the beat to timing items that should normalize during the back half of the year. For the quarter, enterprise-wide adjusted EBITDA margins were up 320 basis points year-over-year to 41.8%. Management franchise fees were $434 million in the quarter, up 17% over the second quarter of 2014, driven by strong franchise sales, new unit growth, and accelerated timing of certain items, including change of ownership and termination fees. We continue to grow fees by increasing effective franchise rates. Through the second quarter, we have approved the relicensing of over 275 hotels this year, more than double the pace of last year, resulting in a net increase of franchise rates from 4.6% to 5.5% in those hotels or an estimated fee increase of more than $10 million annually. For the fee business overall, we expect growth in the back half of the year, particularly the fourth quarter, to de-accelerate relative to the first half. Again, this is mostly owing to accelerated timing of fees booked earlier in the year than we initially anticipated, tougher comparisons to last year, and some high one-time items that benefited prior-year results. The ownership segment posted adjusted EBITDA for the quarter of $318 million, up approximately 9% versus the prior year. Results were driven by robust fundamentals and were boosted by performance in Chicago, Japan, New Orleans, and the recently acquired 1031 exchange assets in Florida and San Francisco outperforming their underwriting. Cost savings, including lower energy prices, further fuel the segment's outperformance and supported margin expansion of 200 basis points. Timeshare adjusted EBITDA was $86 million in the quarter, up 21% versus the prior year period. Performance is in line with our expectations, and we continue to expect timeshare adjusted EBITDA of $335 million to $350 million for the full year 2015. We continue to grow our timeshare supply with fee-for-service deals that require no capital on our part, including two recent capital-light deals: a condo-to-hotel conversion in Orlando and a new build tower in Myrtle Beach. Our current timeshare supply totals nearly 136,000 inventories or about six years of sales at our current pace, with over 83% of those developed by third parties. Finally, our corporate and other segment was $61 million for the quarter, slightly better than expectations. Moving on to regional results. In the U.S., RevPAR grew 5% year-over-year at comparable system-wide hotels. As Chris mentioned, results were pressured by severe weather and flooding in key areas of the country, and demand declines across key oil markets, most notably Houston, where RevPAR dropped 5.7% in the quarter, as well as by tough year-over-year comparisons. More broadly, we continue to see solid fundamentals supported by increasing rates and strong leisure transient revenue, which was up over 8% in the quarter. Trends in New York improved sequentially, aided by both transient and group performance. Inbound travel to the U.S. from Continental Europe declined by 1% through June, which has impacted gateway cities. However, some markets like San Francisco and Hawaii have seen increased demand from other countries, including China and Australia, mitigate weaker European travel. In the Americas outside the U.S., RevPAR grew 6.8%, driven primarily by strength in Mexico, Peru, and Chile, which was somewhat offset by Brazil, where performance was hit particularly hard given prolonged economic softness from lower commodity prices. RevPAR in Europe increased 4.6% as solid leisure trends supported by rising inbound travel offset softer group volumes in Germany, Spain, and the UK. Inbound travel from the U.S. to Continental Europe grew 6.5% year-to-date through June, and strong vacation bookings continue into the third quarter. The Middle East and Africa region posted modest RevPAR growth of 2.5%, despite the sustained recovery in Egypt, declining inbound demand continued to weigh on fundamentals in the Arabian Peninsula. In the Asia-Pacific region, RevPAR gains of 9.4% were driven by nearly 19% growth in Japan, which benefited from strong transient rates, as well as continued improvement in Thailand and strong trends in China. Corporate and leisure demand, coupled with market share gains, supported over 10% RevPAR growth in Mainland China, despite some softness in the country's broader economy. Turning to capital allocation, we reduced long-term debt by $175 million in the quarter and prepaid an additional $350 million on our term loan this month, using the net proceeds from the Hilton Sydney sale. This brings total debt reduction year-to-date to $750 million. As Chris mentioned, we will begin returning capital to shareholders through a quarterly dividend of $0.07 per share, payable on September 25, to shareholders of record on August 14. We intend to grow the dividend over time, maintaining a target payout ratio of 30% to 40% of recurring cash flow, which we define as adjusted EBITDA, less debt service, CapEx, taxes, and working capital. Our goal remains to achieve an investment-grade credit rating, which we believe will maximize equity value over the long-term. Going forward, we anticipate returning recurring cash flow in excess of a market dividend to shareholders through programmatic share buybacks. Based on our anticipated credit profile, we believe this could occur in the second quarter or third quarter next year. We ended the quarter with a net debt-to-adjusted EBITDA ratio of 3.7 times and expect to end the year below 3.5 times after factoring for dividend payments. In terms of our outlook for the full year, we are maintaining system-wide RevPAR growth guidance of between 5% and 7% on a comparable currency-neutral basis. Adjusting for the sale of the Hilton Sydney, which closed early this month, we are raising our full-year adjusted EBITDA guidance range by $20 million at the mid-point to $2.82 billion to $2.87 billion. Our full-year guidance continues to assume approximately $16 million related to FX impacts for the year. For the third quarter of 2015, we expect system-wide RevPAR to increase between 4.5% and 6.5% on a comparable currency-neutral basis, adjusted EBITDA of between $730 million and $750 million, and diluted EPS adjusted for special items of $0.21 to $0.23. Further detail on our second quarter results and updated guidance can be found in the earnings release we distributed earlier this morning. This completes our prepared remarks. We'd now like to open the line for any questions you may have. In order to speak to as many of you as possible, we ask that you limit yourself to one question and one follow-up. Leann, can we have our first question, please?

Good morning, everyone.

Good morning.

Just wanted to ask you a bigger picture question. Investors' single biggest concern is that lodging demand and pricing are decelerating, that the cycle is over. So I wonder if you could give maybe a bit more detail that gives you confidence that Hilton can enjoy pricing power in the 5% to 7% range for an extended period, that the cycle really has ample room to run?

Harry, I'm happy to address that. I know that is prime on everybody's mind, particularly given what I've seen in volatility in the markets and as others have reported. I think my philosophy on this is quite simple and frankly quite consistent, which is I think we're in a very, very nice part of the cycle. I don't feel any different in that regard than I felt over the last several quarters. I think that is supported—not to oversimplify it—but I think it is supported by the basic laws of economics. If I look at the U.S. market, which still represents nearly 80% of our EBITDA, we have an economy that is certainly not roaring, but is showing reasonably stable growth with the potential to have a slight uptick in growth. The demand for hotel rooms follows very closely, but it closely correlates to that. We are seeing decent demand growth matched by historically low supply levels. We're now clicking a little bit over 1% in 2015. Recognizing the 30-year average is 2.5%, and by the way, in my history of many cycles, it is not at the average that you typically run into supply problems, and I think we're a long way from that average. I think if the U.S. economy maintains a moderate growth rate based on what we can see from the standpoint of where that pipeline is and what supply growth is going to be, I think you've got several years of running. Remember, you can feel very good about it. Every quarter can be a little bit different, depending on transient things that go on, like what we experienced in May or how groups cycle through, but it should clearly, in my opinion, support growth. That is what I have been saying consistently over the last couple of years, and I think for the next couple of years, it should clearly support growth in the 5% to 7% range, which is what we have been delivering. If you look at the breakdown by segments, that should give you confidence; it makes me feel good. You look at what is going on in transient: you had a little hiccup in May, but related to very specific things. However, June has been very strong in the highest rated segments of transient. Leisure transient is quite strong, and then you go to the group side and we gave you some of the stats; the group pace has been good, the position is good both for the rest of this year and looking into 2016; it is quite strong, particularly in company meetings, which is honestly where you'd like to see strength. Not only do the basic laws of economics and sort of the macro conditions make me feel good, but when I look at the micro conditions of the various important segments of our business and where they are going, their performance makes me feel confident. Last point, I know this is on everybody's mind, so we're taking some time on it. I sense that people are getting less enthusiastic about the cycle over the last six to eight weeks. However, over the last six to eight weeks, I can tell you that my team hasn’t been getting slightly more negative or neutral; they have been slightly more positive in their views of what’s going on in our three big mega regions. That may be anecdotal, but the atmospherics of what we see in hard data and our interactions with our teams feel quite positive as well. So, I declare from my point of view that we think the cycle is alive and well, we're very confident in being able to deliver what we suggest we're going to deliver this year, and we think the good times continue.

That takes care of it for me. Thanks.

Good morning, everybody, and thank you.

Good morning, Joe.

Thanks for the prospectus, Chris. Kevin, when you're looking at the third quarter guidance of 4.5% to 6.5%, which I think is probably reassuring relative to what others have talked about, how do you see that on a currency-adjusted basis? And then what's the assumption for the U.S. properties in that guidance?

The 4.5% to 6.5% I assume means that it is FX neutral, so what it would be at actual rates. I think it would be a 0.2% lower than that at actual rates. And then, the U.S. is consistent with that outlook.

Got it. In the last couple of quarters, we've seen relatively stronger growth...

...and Joe we covered it sort of indirectly; that the reason is they had that pick down is really a reflection of the holiday calendar in the third quarter. The effect of the calendar has shifted some business to the fourth quarter, particularly on the group side more than the third quarter. The full second half of the year looks a bit more weighted in the fourth quarter versus the third quarter, and so that half a point is reflective of that.

So would you expect the second half U.S. to be consistent with the growth that you saw in the first half?

Generally, yes.

Great. That's it from me. Thanks very much, guys.

Hi, thanks. I guess just along the same lines, here, in order to achieve the higher end of your RevPAR growth for the year, we're going to need to see RevPAR kind of pick up at a pretty healthy pace through the second half. I know you have your range there, but if you had to lean one way or the other, would you be kind of towards the higher side or kind of mid-part of that range?

Well, I'd say a couple of things. I think you're doing the math right, so yes, it does imply a pickup. I do think that you will see sequentially the third-quarter RevPAR numbers be higher than the second quarter. I think the fourth quarter, at least as we look at our forecast, particularly given that really stronger base will be higher than the third quarter. I would say for the full year, I would probably direct it to the middle part of the range.

And then just, Kevin, to clarify in the management and fee income for the quarter, you said there were $5 million to $10 million of sort of, for lack of a better word, one-time items in there... Is that all in that line?

Yes.

Even if you adjust for those, it seems like growth in the second quarter was a little above the high end of your range, and I'm just wondering throughout the back half of the year, you're trying to be conservative there or is there something that would kind of slow down that pace of growth?

No, I think there are a couple of things we planned with me. One is the timing, as you mentioned. There was something that materialized earlier in the year than we thought, and then in the fourth quarter last year we had some one-time items that created a little bit tougher comps on a growth rate basis.

Okay. Can you quantify what the amount loss in that fourth quarter last year or?

No. We could take you through some of the modeling offline, but I wouldn't want to come out.

All right, thank you.

Hi, thank you. Just switching gears for a moment to your pipeline. Chris, just your new unit openings and your development pipelines seem to be efficiently weighted; now in the U.S., about 54% international versus 60% when you guys had the IPO. I am just wondering what you think is causing the shift in the international market and what do you think gets the new construction development reinvigorated?

You've got those numbers exactly right. The IPO was 64% domestic to 54%, 46% international. I think that I would say obviously the different parts of the world move in a different cadence. The U.S. development side, particularly in the limited-service base has been picking up steam. You can see it in our numbers and some others' numbers. Other parts of the world, including Europe, slowed down and are now picking up steam. Asia-Pac, compared to where it was, has slowed down somewhat. I'd say the Middle East is generally consistent. What I'd love is—we did talk a lot about the IPO—that at our scale and with the breadth of chain-scale diversification we have, we have the ability to ebb and flow with market conditions everywhere. The idea is there are going to be times when we saw it for five years leading up to last year that China and Asia-Pacific were roaring, but there are going to be times when the U.S. and Europe were very slow. Now, Asia-Pacific is slowing somewhat modestly, and Europe is finally stabilizing and improving a bit. The development side in the U.S. is starting to pick up some steam. This is one of the great things about diversification: as that is going on, we are making sure that we're really thoughtful about our development strategies. We're making sure we have the right resources in the right place that we're layering our brands in the right way to satisfy both consumer demand and where the capital is flowing in these various parts of the world. If we're intelligent and strategic about how we do that, we're going to keep growing and grow at an accelerated pace, no matter what's going on in the world, because the world is a big place. It's a diversified world, and we're going to be able to continue to gain momentum by being intelligent. What we've seen is just what I said: the U.S. and Europe are now picking up a little bit, providing more of the overall growth up until 2010 through 2013 when we went public. The U.S. had little or nothing going on, Europe was in stasis, and Asia-Pacific was a big part of the story. That's why I like our story relative to others; we can do this. We have 12 of the best brands with the highest market share and create development teams around the world and strategically push and pull to continue to grow our base of hotels to meet customer needs anywhere they want to be.

Thanks. And if I could just bring it back to the quarter's results for a second, you gave us some very helpful color on the weaker transient business in May. Can you just help us understand what percentage of your system-wide room count ended up being affected by the weather and the weaker energy demand just to drive the 100 basis points decline in RevPAR?

Yeah, I wouldn't want to guess. I don't have the exact number, so hopefully we'll get back to you, but it's not insignificant. I would say probably because it was a large swath of the limited-service system impacted—I would guess about 20%. But I'll ask Christian and Joe to take care of that, but we did do the math; I just don't have the number of hotels.

Okay. That's not insignificant.

Thanks and thanks for taking my question. There is a potential-driven question: Chris, you eluded a little bit about this in your prepared remarks. Last quarter, the only thing we could talk about was M&A, and this quarter, I made it five questions and didn't ask about it. How does M&A fit into the strategic alternatives? You alluded to real estate and timeshare but didn't mention that. So, how are you thinking about that today, and has that changed at all?

I think it hasn't changed. We think about it very consistently with what I've articulated and Kevin and others have articulated before, and that is we feel really good about the attributes of the company as they stand, and our ability to expand those attributes organically—meaning launching new brands—and as a result be able to lead the industry in growth and do it in a very capital-light way. I've been clear in saying you'd never say never; we look at everything that's out there, generally. If we found anything that sort of went through our filter being highly strategic for us and economically compelling in terms of value-enhancing, it would be something we would consider. I will say I don't really see anything that's out there right now that gets through that filter, and that's because of a good problem we have; we have pretty much in our view what we need to be successful. That doesn't mean we're not going to launch new brands; we're focused on scaling, we've just launched two new brands last year and Home2 not too long before that. Given the base size of the company, our scale, our geographic distribution, our existing chain-scale distribution, we think the higher return answer for all investors, including ourselves, is to really focus on organic growth. So, in a simple way, I would say we are not particularly acquisitive. But we are always trying to be intelligent and thoughtful.

That's very helpful. And then my follow-up would just be when we think about the other two alternatives in terms of more organic things you can do. The real estate, the regroup, you know just better than anyone that the valuations have come off fairly significantly in the last few weeks, and the quality things are volatile. But the question is does the recent change in valuation have a material impact on where you guys are viewing that longer-term set of alternatives for the real estate side?

No, I don't think so. We're really trying to take a long-term view. When you think about the company in its best, do we think we can create the most value for shareholders over the long-term in our current setup or another setup? It is a very long-term view. We've done a considerable amount of work looking at all the options as you can imagine; it's quite complex structurally. We want to be thoughtful about the value levers because we're not in the business of doing things for practice; we're in the business of doing things that we think will create long-term value. So, we've done a lot of work. We'll continue to do a lot of work, and as I said, certainly before the end of the year, I think we can lay out the rationale for how we want to move forward. But these recent ups and downs don't have any material impact on our thinking as far as I can see.

Thanks very much.

Good morning, Chris. I guess maybe to put a finer point on it is, in your products, how are you thinking then about your 2016 RevPAR growth either domestically or globally, just as compared to the pace in 2015. Do you think it's going to hold or accelerate?

I'll go back to what I said earlier; I think we will be in that 5% to 7% range. We have not started to go into our budgeting process yet, which in a couple of weeks will kick off. We're in regular dialogue around the company and with all of our regional heads about their view of this year and next, obviously looking at the pace of bookings. I think the cycle is alive and well; I stand by what I said, which is I think we'll be able to deliver RevPAR growth in that time zone for the next couple of years.

And I apologize, I got on a little late; can you talk about your perspective on trends and pricing in China in the next 12 months versus the past 12 months, just given some of the headlines we've been seeing in the market falling, and low consumption, or whatnot?

China, obviously, the economic growth story there is one of a bit of deceleration. They are going to great lengths to stabilize their markets to keep consumer confidence high. They're transitioning that economy to be consumption-led, not unlike ours and many of the other mature economies. I suspect there will be some bumps and bruises along the way, but the underlying fundamentals of 1.3 billion people gaining in wealth is going to allow them, over an extended period of time, to accomplish their objective. I think they've been reasonably smart in doing this. We are seeing reasonably healthy results in the market. I think the hotel space there is in its nascent stages of development and growth. If you look at representation per room, there are thousands of people per room—rooms per thousand people—in China. It’s still much lower than in other developed economies. I think any stage you look at the next 10 years, 20 years, 30 years, China will have ups and downs but will rise. In the end, you’re going to continue to see a massive amount of development because there’s a huge amount of demand coming from their consumers. When you look at the current trends, I gave you the number: we had a great second quarter, and we still think we’ll be at 6% to 8% for the full year, some of that is getting a network effect and gaining market share. I think the story is becoming much more of a mid-market story. We’re very aggressively trying to do that because that’s what’s going to build our infrastructure and network. We feel very good about China; in fact, we signed the same number of deals in China this year as last year.

Great. Thank you.

Hi. Good morning. So, a bigger picture on the midscale brand launch you're planning for early 2016. If you look at supply growth in the U.S., the one chain scale that's actually seeing a decline in supply growth is the midscale segment, while most future construction is in the upper mid to upscale range. What gives you the confidence that you can change that dynamic?

Everything you just said gives us the confidence we're going to do that. I think what you're seeing is there, with all due respect, there aren't good mid-scale products; that's why we are doing it. If you think about the history of it, and I’ve said this in one-on-one meetings and perhaps on one of these calls, Hampton was initially targeted to be in that segment. It has just been so successful that it's grown out of it; it’s now in upscale. Its average rate will be close to $115 in the system this year, and as a result, there is a huge swath of the demand base in the U.S. that our current system doesn’t serve. We think there is a significant customer base out there that wants our product, but the reason there hasn’t been a lot of development is that the products just haven’t resonated with consumers. This is why we are taking time to get it right and create a product that serves a customer base we're not currently serving while, importantly, still generating good returns. We've been working with our ownership groups; we're way down the path, and we believe we’ve cracked that code. So, we’re going to create something; the reason I think this will be thousands of hotels is the demand is there. We've found that nobody's building because the returns aren't there, so they’re building Hampton and Garden Inn and Fairfield. We think we're giving them an alternative, something the customer base likes, and that can help achieve the types of returns we’ve seen in the past.

Thanks. As my follow-up, I think the first question you guys were asked was from Harry; he highlighted that investors' top concern is around the cycle. I think the second-highest concern is just around the threat from the sharing economy. People can often get too flippant around that threat. Can you address that?

Yeah. Yeah, you can imagine we've talked about this management team and with our board of directors. I don't view it as a direct competitor we play in; it's kind of a different customer looking for a different type of experience. I think it's a real business—it's a growing business—where it fulfills a leisure value adventure sort of need that it satisfies. I mean, that’s not what we deliver. We’re not trying to be the cheapest; we're trying to have the highest quality product and service, so the people will pay a premium. I think the proposition when customers come to us looking for something different than what they're looking for with Airbnb. I'm not going to say there is zero overlap, that none of our customers ever use them; they may use them for different needs. Statistically, across many markets, I think it's beneficial in that it’s growing the pie more than anything else. It's stimulating more travel, which in the end is fantastic.

Thank you.

Hey, guys. Thanks for taking my question. Just wondering, I know within the context of your group pace for 2016. Kevin, I believe you said mid-single digits. Could you talk a little bit about the tenor of maybe some of your group discussions over the several months and relative to - we had this conversation at the end of April? Could you provide a little color on the in-the-quarter, for-the-quarter trends?

I would say the group tenor is the same; I don’t think there’s a material difference. We’re looking for what will be another very good year. We don’t have as much capacity available for people, so that gives us a bit more leverage. I wouldn’t say it has moved a lot either way; I think our leverage levels for groups have gotten a little stronger. If I look back, even in the quarter, bookings were strong and up in the high single digits from our pace point of view. So that is quite good.

Great. Thanks, Chris.

Good morning.

Good morning, David.

I want to come back to China for a minute. I wanted to ask about your agreement with Plateno. There have been some press accounts that Plateno and Jin Jiang are getting together. Will that have any impact on your deal with them?

No. We've been in a pretty constant dialogue with them as those discussions have been evolving. I think our view of a combination of Jin Jiang and Plateno is that, together, they are even stronger and an even better partner for us than what we're trying to do. In discussions with them, I don't think it changes their commitment to what we're trying to do at all.

Great. Thanks. You've covered all the other important stuff already, so thank you.

Hey, good morning, everyone. Are you seeing any headwinds on the cost side with developers in the U.S., particularly in the select service?

Well, I mean, the answer is yes, but not in a way that is slowing down our ability to add to our pipeline. There is no question that there is more construction going on—not just in hotels, but there is more infrastructure spending going on. You're beginning to see construction in other areas of real estate; home building is picking up. So, there’s no question costs of build are increasing higher than the average inflationary increases. But given the strength of the business in terms of the growth in RevPAR, I think it has been generally enough that the deals that make sense can still get done. That is a reason, by the way, and I have articulated this before that I have such confidence in the supply side, which is that not all deals make sense. There is a reason that there are basically two companies that make up more than half of what’s getting built in the U.S., and those are the two companies—including us—that have very high market shares that allow the economics to work. While the other stuff being built is because the costs to build have been going up. If you don't own high market shares, the economics do not work. It’s a good news story for us because we've got that market share; we can continue to build our pipeline when others cannot.

Now, switching over to China, how are developers funding the projects over there? Can you give us a brief overview of the profile of the developers?

Well, the profile is changing. I'd say in the big full service and luxury stuff, that is still a component of what is in our pipeline and getting done, and those are very large companies that are in a lot of different businesses and in many cases are partially government-owned. There’s a spattering of publicly listed Hong Kong-based real estate companies in there, but a lot of those deals have been done by big Chinese conglomerates that own lots of different businesses and have some government ownership. What is shifting in that is, as we're going more to a limited service mix, that’s where the demand is as I have already described. It is now changing to much smaller players—entrepreneurial players—and much less of the big conglomerates; much more diversified smaller entrepreneurial individuals, small companies, and families that are making those kinds of investments. I think that is a really good thing, that is a natural thing. That’s exactly what is going on in the U.S., where you have a massively diversified system and most of our owners are small families and small businesses. This is increasingly what can happen in China.

Okay. Thanks a lot for taking the questions.

Great. Thanks. I think most of my questions have been answered, but maybe just to circle back to one topic for a little more clarification, which is the potential for spinning out a REIT. I think just maintaining the RevPAR guidance is kind of a victory given the lower RevPAR guidance from a number of other major players. It sounds like you're saying that the lower valuations out there wouldn't deter your interest in a REIT spin. But maybe it's fair to say it would change the timing of it?

Not necessarily; the lens we will look through is how we create the best long-term value for everybody. I think you'll be very careful to look at any sort of snapshot in time of what it was, three months ago, yesterday, or what it might be a month from now. When you look at the different pieces of our businesses, you get multiple factors. One of these factors is relative valuations, tax efficiencies, the various businesses, and the incremental costs more so than one enterprise as compared to what we are today. Those are the factors we are filtering through as we go through this process. And obviously, we'll see what's going on in the market, but we’re trying to take a long view on where relative valuations are, and we will do the same in the future.

Great. Thank you.

Hi, good morning.

Good morning.

Two questions. First, just a better sense for cash use. You generally have been paying down around $200 million in debt every quarter; now you'll be paying around $70 million with the dividend. What will happen to the rest of the $130 million or so? You mentioned buybacks, but is there some kind of pacing that you're thinking about, or how do you think about that?

I think on the dividend versus use of cash, I think our other uses of cash are going to stay very similar; we're not going to change our overall outlook on our capital allocation. I do still; as I said in my prepared remarks, want to achieve investment grade. As we've said long, we thought that target range for our balance sheet was between three times and four times leverage; I think we'll find ourselves a little above that range as we're targeting a range of 3 times to 3.5 times. We think we're going to finish the year at 3.4 times with the dividend. That gives us some room to get into the middle of that range, so you'd see other uses would include continued debt paydown in the back half of the year.

That as a line could go back to $20 million or so per quarter?

Yes.

Okay. Thank you.

Hey, good morning.

Good morning, Bill.

Just to clarify, Kevin, you had suggested earlier that $800 million of debt reduction for the year was now increasing that. I'm just trying to build that same bridge between the $1.1 billion and $1.3 billion of capital available to reduce debt and return to shareholders against $800 million of debt reduction and $130 million to $140 million dividends?

Yeah. I think the difference, Bill, is the Sydney paydown worth about $800 million; it was our prior guidance number. Then, that moved up to $1.1 billion to $1.3 billion when we sold Sydney and have that Sydney paydown added in there. Now, all you would do is take the dividend amount, and that would be part of the $1.1 billion to $1.3 billion.

Okay. Very good, Chris, couple of quick topics. Myriad signed a marketing and distribution agreement with TripAdvisor; I wanted to get your thoughts on that, and will it reduce commissions paid out?

Yeah, I'm not going to get into where we may or may not be with a particular party. We've had some discussions with them, and those discussions are ongoing. We think that the terms of what we can negotiate with them are consistent with basically three pillars we have in dealing with any of our distribution partners. That is one: we want control of our inventory; two, we want to have the ability to price differentially to our most loyal customers. Otherwise, known as our HHonors members; three, we want to have very efficient margin structures or commission structures with them. I’d say not a pillar, but the overarching philosophy must always be that we want to have the most direct relationship we can with our customer. Everything we are doing that we talked about in the prepared comments about our HHonors app is all around trying to shift as many people into our direct channels as possible because, number one, we want that direct relationship; it’s the most cost-efficient way for us to distribute our product. We will have distribution partners; I don't see a world where we're going to get everybody coming to our direct channels. The more the better, and we'd like to work with our distribution channel partners, and if we can reach our three pillars' standards, we may do something at Trip.

And then, the other topic, Chris, is as you think about this potential to split up the company and knowing that you’re kind of allergic to G&A; would it not make sense to look for an existing REIT platform that might already have that G&A. commitment that could make the economics work better?

Yeah. There's a theoretical rationale, if you decide to spin off that you would want to leverage off existing G&A platforms for efficiencies that will weigh the cost and benefits of doing that. But, we will consider that option as well, as I’ve said before.

Hi. Thanks for taking my question. I have a question on margins; they have been impressive in the quarter and year-to-date. When you look at RevPAR growth, your business has been driven by occupancy and rate, so is there anything going on with costs there, and how should we think about margins progressing into the second half?

Yeah, Vince. This is Kevin. We certainly had some things go our way in terms of cost in the quarter, energy being one of the predominant costs that’s been down due to what's going on in the oil markets. We continue to work our labor management systems to run the properties as efficiently as we can. If we achieve RevPAR growth that exceeds inflation, particularly as you point out, it comes more from rate than occupancy; we should be able to continue to drive margin growth.

Great. Thanks. A different topic: the last couple of years, Hampton, Doubletree and Garden Inn have led your guidance as RevPAR growth. I noticed they are more in line with the system average this quarter. So I guess first, how much of that is related to the weather's impact? And then second, you provided a positive longer-term outlook. Just part of that, are those brands leading system RevPAR growth?

I think it is partially a result of those brands being more impacted by the items that impacted Q2 for sure. But as we've said in a couple of calls ago, we do believe that RevPAR growth levels are going to converge between the lower segments and the upper segments, and when we look at the balance of the year and look at next year, and frankly year-to-date, extracting out the weather impact, we believe that's happening.

Great. Thank you.

Yeah, good morning, guys. I can't believe we've made it to 67 minutes without mentioning timeshare. But timeshare obviously has continued momentum for you. Can you just give us a little color on what you're seeing out there in this business, whether it relates to tour flow, package size, financing, etc., and whether you're seeing some additional opportunities to continue feeding into this business?

The timeshare business is incredible; our tour flow numbers are way up in the quarter, up 9%. VPG is up 7.5%. We expect those kinds of numbers for the full year. Our team is doing an amazing job, and we've transformed this from traditional timeshare. We’ve built the majority of our inventory today in a very capital-light way. The challenge has always been the recurring inventory numbers. I think we’ve proven that we are able to find the right counter-parties for these projects, which allows us to keep offering new inventory while the economy strengthens.

As it relates to the consumer, the consumer confidence is up, and that’s at the end of the day is driven by how the consumer feels about their own balance sheet. And so you’re seeing high levels of sales growth, and more people willing to go on tours. We haven’t really changed the financing profile of the business that much, but the consumer is willing to borrow a little bit more to stretch with that product because they feel good about their balance sheet. As for the opportunities we continue to find, we just did another capital-light deal in the quarter. So there are good prospects for future growth in the business.

That's very helpful. One quick follow-up if I may here: Chris, you call out some interesting mobile check-ins, and I certainly recognize this isn't all about cost savings, but it sounds like you've had a high adoption rate; clearly, the consumer wants to control their experience. Do you see any real meaningful efficiencies and how should we think about that in the future?

Not yet because it’s too early in the process. We're not trying to drive costs, but ultimately there will be cost efficiencies in our model. The adoption rates for the HHonors app are huge; your customer satisfaction rates are off the charts. Think about it: customers want choice and control; they want to interact with us like they do with other businesses in their daily lives. The hotel business has been, to be frank, behind the curve, and we’re trying to get ahead of it. Cost efficiencies will come along, but now it’s about enhancing the experience.

Thank you.

Thanks very much. Good morning.

Good morning.

I agree with your sentiments about Airbnb, but just wanted to follow up with this question: Is the risk that the rapid growth of alternative accommodation is holding back pricing power or has the potential to do so, given that these types of accommodation can come into their own when there is compression? How do you think about the risks that pricing power may be weaker than in previous cycles?

Not to be Pollyannaish, but any type of supply could have the effect of taking away our pricing power, and there may be markets where there is some impact. However, broadly, we are not seeing that it is enough that we can measure. I think it is just a different kind of customer. The largest part of our customer base is really business travelers. I think the alternative accommodation growth is good for the overall travel industry. In the end, they’re stimulating more travel, and that is good for us.

Thank you.