Hilton Worldwide Holdings Inc. (HLT) Q2 2019 Earnings Report, Transcript and Summary

Good morning, and welcome to the Hilton Worldwide, Second Quarter 2019, Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Jill Slattery, Vice President, Investor Relations. Please go ahead.

Thank you, Chad. Welcome to Hilton’s Second Quarter 2019 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 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.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 Executive Vice President and Chief Financial Officer, will then review our second quarter results and provide an update on our expectations for the year. Following their remarks we will be happy to take your questions.And with that, I’m pleased to turn the call over to Chris.

Thank you, Jill. Good morning everyone and thanks for joining us today. We’re happy to report another quarter of great results. I think that further demonstrates the strength of our business model and the power of our network effect. Solid net unit growth continued to drive strong bottom line performance with adjusted EBITDA and EPS exceeding our expectations.Additionally RevPAR growth outperformed the industry weighted to our chain scales for the sixth consecutive quarter, illustrating that our 17 distinct brands, award winning loyalty program and exceptional customer experience continue to drive robust market share gains.Overall our system-wide RevPAR index increased 230 basis points year-to-date with gains across all regions and all brands. System-wide RevPAR grew 1.4% in the second quarter, largely in line with our expectations as our market share gains offset broader choppiness in the U.S. and Asia Pacific.Transient RevPAR increased 1.6% on steady business trends and good leisure demand, boosted by the Easter holiday shift. As expected, calendar shifts contributed to softer group performance in the quarter.Turning to our outlook, forecast for GDP, non-residential fixed investment and corporate profit growth remain positive, but incrementally a bit lower than previous estimates. Consistent with these trends, we are modestly adjusting our full year RevPAR guidance to 1% to 2%.Overall we expect the second half of the year to be similar to the first half with consistent U.S. RevPAR growth and slightly softer international RevPAR growth. We expect continued healthy group business towards the mid-point to high-end of our system-wide range and steady business and leisure transient towards the mid-point of our range.Even with slightly lower top-line growth forecast, we are increasing our adjusted EBITDA guidance for the year given the significant contribution of net unit growth and strength in other areas of the business.Longer term, we remain confident in our ability to deliver growth ahead of the broader industry as we differentiate ourselves within the lodging space. With an efficient capital-light business model and a disciplined strategy, we continue to fulfill our mission to deliver exceptional experiences at every hotel for every guest, every time.Our innovative technology platforms, unique product offering and award winning culture allow us to execute this strategy delivering incremental value to our guests, our owners and our shareholders.The strength of our brand portfolio continues to drive owner profitability and therefore greater owner interest. Of the more than 450 hotels we opened in 2018, roughly 75% have already reached a RevPAR index of 100 or greater, with those hotels reaching fair market share within just four months of opening on average.For the full year we remain on track for record signings, construction starts and openings. Forecasted signings of more than 110,000 rooms in 2019 would mark our ninth consecutive year of record signings. This supports continued growth in our development pipeline, which we expect to increase in the low to mid-single digits for the full year. Our current pipeline totals approximately 373,000 rooms or over 40% of our existing base.Given the strength of our system, we continue to deliver solid growth with deminimus use of our capital. More than 90% of our deals do not require any capital from us, which drives higher net fees. Year-to-date we’ve added more than 200 hotels, totaling 29,000 rooms to our system and continue to expect to deliver 6.5% net unit growth for the full year.Overall we believe the greatest development opportunity lies in the mid-market, given the strong secular trends globally driven by an emerging middle-class. We think we are very well positioned to continue delivering impressive growth in the focus service segment given our industry leading RevPAR index premiums.During 2019 we expect to celebrate the opening of our 100th Tru hotel, our 500th Homewood Suites, our 850th Hilton Garden Inn, and our 2500th Hampton, demonstrating continued strength across both new and legacy brands.Additionally, our New Hilton Garden Inn prototype designed to better meet the needs of our Chinese guests and owners is gaining great momentum and further feeling growth in Asia Pacific.We also continue to see impressive momentum in luxury as we execute on an exciting development strategy for the segment. With forecasts to grow our luxury portfolio by over 15% this year, we’re on track to deliver more luxury properties in 2019 than any previous year in our 100 year history.Year-to-date we’ve opened four properties, including the highly anticipated Waldorf Astoria Maldives earlier this month. Additionally the Waldorf Astoria Dubai Financial Center opened its stores just a few weeks ago, joining three other Waldorf properties opened in the Middle East with an additional three in the pipeline.In the quarter we made several exciting announcements that will continue to further development growth, including the signing of our first Tapestry in the Caribbean, our first Canopy in Africa and the Waldorf Astoria Los Cabos Pedregal in Mexico, which we expect to open later this year.We were also thrilled to reopen the historic Caribe Hilton in Puerto Rico, following extensive renovations after damage from hurricane Maria. The breadth of our development strategy spanning all regions and brand segments should position us to drive net unit growth for many years to come.With rooms under construction accounting for more than half of our total pipeline, we have solid visibility into our growth over the next few years, and with favorable secular trends continued strength in signing and conversions, and no significant brand repositioning, we feel very good about our net unit growth over the long term.Our industry leading portfolio is anchored by our award winning Hilton Honors program. An integral part of the overall value proposition to guests, Honors occupancy increased nearly 500 basis points in the quarter to 63%. We now have more than 94 million members, up more than 20% year-over-year with meaningful increases in engagement.Active members account for more than half of our global members. We are also gaining greater share of wallet from our most loyal guests with a number of elite members up 25% year-over-year in the second quarter and those members reaching 100 nights, up nearly 60% versus the same period last year.We’re always looking for ways to better connect with our Honors members and provide increased flexibility and earning and redeeming points. With that in mind, we were thrilled to announce a first of its kind travel and hospitality partnership with rideshare leader Lyft. Members can now earn Honors points when they ride with Lyft and they will have the ability to redeem points in the coming months.Whether it’s our partnerships with leaders such as Lyft, Amazon and Live Nation or on property initiatives like Connected Room, we are continually evolving to enable our members to get the most out of the Honors program.We recently celebrated our 100th Anniversary, which is a milestone few companies achieve, let alone with the momentum that we have. Throughout our history we’ve introduced numerous innovations, pioneered new travel markets and provided a wide range of career opportunities for our team members.We are very proud of all we’ve accomplished over this last century and look forward to continuing to positively influence the world around us in the next century. Overall, with the resilient business model, positive industry growth, a good strategy and a disciplined approach to capital allocation, we think we’re very well positioned for the future.With that, I’m going to turn the call over to Kevin to give us some more details on our results and our outlook.

Thanks Chris and good morning everyone. In the quarter system-wide RevPAR grew 1.4% versus the prior year on a currency neutral basis, largely in-line with our expectations. As Chris mentioned, results benefited from market share gains, slightly offset by softer group business and slowing Chinese leisure demand. We estimate calendar shifts tempered system-wide RevPAR growth by roughly 500 basis points.Adjusted EBITDA of $618 million exceeded the high end of our guidance range, increasing 11% year-over-year. Our performance was largely driven by better than expected license fees and greater cost control. We estimate roughly $10 million of the beat was due to timing items that will reverse in the back half of the year.In the quarter management and franchise fees increased 8% to $591 million, helped by strong net unit growth and other non RevPAR driven fees. Diluted earnings per share adjusted for special items grew 23% to $1.06 ahead of expectations.Turning to our regional performance and outlook, second quarter comparable U.S. RevPAR grew 1%, driven by increasing market share and solid leisure transient growth, while the Easter shift weighed on group business. For full year 2019 we forecast U.S. RevPAR growth in line with our system-wide guidance range, based on positive, but modestly decelerating macro growth.In the Americas outside the U.S. second quarter RevPAR grew 3.3% versus the prior year, largely due to strength across South America, which benefited from particularly robust transient demand in Brazil, despite challenging market conditions. For full year 2019 we expect RevPAR growth in the region to be 3% to 4%.RevPAR in Europe grew 5% in the quarter, boosted by strong trends across Continental Europe, and increase leisure demand in London, which benefited from the Cricket World Cup and rising international inbound travel due to favorable exchange rates.We expect full year 2019 RevPAR growth in Europe to be above the high-end of our system-wide guidance range, given favorable trends across continental Europe, modestly offset by continued uncertainty surrounding Brexit.In the Middle East and Africa region RevPAR was slightly positive in the quarter helped by strong group performance during Ramadan. However supply challenges across the UAE continue to mute leisure transient gains in Egypt, a trend we expect to continue in the back half of the year. For full year 2019 we expect RevPAR growth in the region to be down in the low single digits.In the Asia Pacific region RevPAR increased 2% in the quarter, with a slight RevPAR decline in China, largely due to softening Chinese leisure travel demand, further pressured by the ongoing protests in Hong Kong. For full year 2019 we expect RevPAR growth for the region to be in-line with system-wide guidance, with RevPAR in China relatively flat, reflecting softer performance in the quarter and a potential continuation of trends.Turning to the balance sheet, during the quarter we issued $1 billion of senior notes and used $500 million of the proceeds to partially repay our term loans as part of extending that facility for three additional years to 2026. We also amended our revolving credit facility, up sizing that facility to $1.75 billion and reducing our borrowing rate. These financings lengthened our weighted average maturity by nearly two years at a negligible increase to our weighted average cost of debt.Moving the guidance, for full year 2019 we expect RevPAR growth of 1% to 2% and adjusted EBITDA of $2.28 billion to $2.31 billion, representing a year-over-year increase of more than 9% at the mid-point. We forecast diluted EPS adjusted for special items of $3.78 to $3.85.For the third quarter we expect system-wide RevPAR growth of 1% to 2%. We expect adjusted EBITDA of $590 million to $610 million and diluted EPS adjusted for special items of $0.98 to $1.03. 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 $43 million in dividends. Our Board also authorized a quarterly cash dividend of $0.15 per share for the third quarter.Year-to-date we have returned $766 million to shareholders in the form of buybacks and dividends. For 2019 we expect to return between $1.5 billion and $1.8 billion to shareholders in the form of buybacks and dividends. Further details on our second quarter results and our latest guidance ranges could 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 all of you this morning, so we ask that you limit yourself to one question.Chad, can we have our first question please.

Sure. [Operator Instructions] First question today comes from Stephen Grambling with Goldman Sachs. Please go ahead.

Thanks and good morning. Chris you talk about the ongoing market share gains across segments and it looks like you had particularly strong RevPAR in the high-end brands as well as in some of the new brands. How are you anticipating the gains to translate to the pipeline from here and are there any limitations on the absolute number of sign-ups as you expand? And I guess as a quick follow up, are you seeing any shift in the development interest between existing owners versus new?

Yeah, good question and we’re really pleased with the market share gains that we had. I guess you know it would be you know sort of skipping to the end and then I’ll fill it in. It would be hard to be perfectly scientific about translating market share gains into you know impact on pipeline. But rest assured, as you talk to the owner community, what they are trying to do is drive profitability.So the higher that our market share in an absolute sense is, the more that we can drive pipeline growth. And I think you know – so the nuance to that is growth in index is really important, and I think what’s notable about it is that again you know both, in the first quarter, second quarter and year-to-date, the growth in index is across all brands and all regions and importantly as I mentioned a couple quarters ago, we would expect that our international regions will equal or exceed the index in an absolute sense that we have in the U.S., which is a wonderful harbinger of good things to come in terms of incremental growth around the world.So that growth in index you know sort of being across the board regionally and by brand is important, but what's equally important is just the absolute market share and I want to you know sort of pause on that for a moment, because what owners are looking for, obviously they want growth, but what they are looking for when they talk to us or any other brand is what is the market share of the brand, and so they are looking at it in an absolute sense.You know to use the simple example, if you have a great market share growth off of a very low base, that doesn't necessarily translate into higher pipeline. What translates into the best pipeline growth is highest absolute market share with growth off of that, and so what I think we're most proud of and it’s not by happenstance, it's by strategy is that we have 17 brands, those that have been out and are reasonably mature, are either at the top of the heap or a category killer. There is dog in the bunch.So any time we're talking to an owner anywhere in the world about any of our brands, all of the brands are performing at the highest level or above, which is the – you know which is a very good set of facts for our development teams to be talking to owners as we are working to increase the pipeline.So again, I can't say – I don't have an algorithm that says if we grow share 230 bips it will translate into this much incremental pipeline growth, but rest assured it is a – there is a very direct connection and I think the market share trends of growth, but equally are more important, the absolute high level of market share across our brand portfolio is going to allow us we think to continue to build the pipeline, build our rooms under construction and ultimately have industry leading that unit growth, because it will continue to attract more capital, because they will be able to make more profit by investing in better performing brands.

Fair enough and then you had mentioned in your remarks some of the partnerships you've made with the loyalty program. As folks are redeeming or earning points and burning points through some of those, you know should we generally be thinking of those redemptions as being, you know accretive to the system fund and therefore allowing you to reinvest more and kind of drives that Flywheel from a loyalty standpoint, and where are the biggest opportunities I guess from a reinvestment that you see.

Well, I think – I mean there are a couple of things. I think the answer is yes, on the margin most of those partnerships involve not all, but most of them involve the partner like in the case of Lyft buying points you know in order to provide points when people who are riding in Lyft, which means it is creating incremental opportunity for Flywheel and reinvestment.I think the other way and this is really important when you think about our engagement numbers, which are twice what they were off a much larger base. If you go back six or seven years ago, I think consistent with a lot of others in the industry, our engagement numbers of our loyalty members was probably half of what it is, 25%, 30%. We are now over 50%. Why is that?Well there's a whole bunch elements to it, but part of that is getting more engagement out of your high level customers, but let's be honest, you mostly have those people engaged. If they're staying with you 100 or 200 nights a year they are sort of – they are active and they are engaged.What it’s been about is more getting lower level members of Honors engagement while they may not stay as much. They may stay two, three, five night a year and not a 100, that's business right and that's important business and the more that that can be a direct source of business rather than indirect, obviously it adds to our RevPAR premiums and it does so in an incrementally efficient way in terms of distribution costs.So one of the things we’ve been very focused on in addition to hitting the highest level of loyalty, which you heard about some, what I think are pretty astounding statistics of you know incremental engagement at the high level is getting lower level engagement and so when you think about, you know our points and money slider, when you think about our you know, we are the only ones that have done, you know shop with Amazon point, you know opportunities for points pulling Lyft, the things that we are doing, I don't want to get ahead of us with Live Nation in terms of ability to use point in a broader context in terms of music opportunity.Those are not just about Flywheel and selling points and getting more money in the system, those are about getting lower level members you don't accumulate potentially enough points to go to the Maldives for a week to get engaged with us, because here's the thing we know; the more engagement, the more share of wallet we get. The more that people are using their points and doing things with it that get them active in our system, that get them in our app and get them thinking about us, the more they spend with us. Every guest – this can be proven scientifically and so the engagement numbers, you know in part are as good as they are because of a bunch of these partnerships.You will continue to see more of this from us, both for higher level members and lower level members and it will as I said provide a bit of the Flywheel that you're describing, but I think really what it's focused on is getting greater engagement from our customer base and having more direct relationships.

Super helpful color. Thanks so much.

The next question comes from Harry Curtis with Instinet. Please go ahead.

Hey, good morning everybody. Chris, I wanted to focus on some of the factors affecting 2020. This is kind of like putting your projection hat on. As you talk to fellow CEOs, you know in the last couple of quarters we've talked about their level of spend kind of being put on hold at least temporarily because of trade and to what degree is your guidance at least for the back half of this year and in terms of your expectations for next year affected by that, and not only that, but also the political uncertainty? Do you think that there's any at any of that impacting CEOs willingness to spend today?

Well, answering the second part first, I think the obvious answer is yes. I mean not just you know sort of looking at it scientifically, but you know sort of subjectively you know talking to other CEOs, just talking to friends, anybody you talk to, you know what's going on in the political world which is connected to the trade world which is connected to you know a whole bunch of other things is definitely I think having some impact.I think you know I've said this before, I think it means that more people put a caution flag out. It doesn’t mean that they are not doing things, they are spending, they're not hiring, they're not traveling, it just mean they're a little bit more – they are incrementally more cautious because of what's going on in the broader environment and I think that’s you know absolutely going on.Having said that, again it's a caution flag. I would say what I have not seen is like the red flag, which is like all stop. I think people are still you know quietly sort of reasonably optimistic. I think they are carrying ahead and our expectation for the second half of the year and I'll try and answer your 2020 question, although it's way early and it's super subjective at this point.But you know for the second half of the year I think our view and as we looked at our forecast was more the same. Like there doesn't seem like, I mean maybe the work in China this week will be will be fruitful I suspect sometime this year. My own personal opinion is there will be a trade deal with China that will settle some of those things down, time will tell. Certainly will I think help with our you know business in China, but time will tell. You know but there are other swirling activities with the political, you know theater ramping up with the 2020 election coming.So what we anticipated for the second half of the year honestly is more the same trends. The reason we brought the high end of our guidance down was when we were talking to you a quarter or two quarters ago, honestly comps a bit easier in parts of the world. We thought all things being equal, there was a really good opportunity to see things get a little bit better and when we look at the world right now and sort of trying to do our best to forecast the rest of the year, we look at it and say, no, I think it would be - I think it would be aggressive to say things are going to get better. We think that you know what we try to do in the second half of the year is sort of take the most recent trends and project those out.You know that was a big lead up to your answers to your primary question with is 2020. I sort of think about you know we're way early, what do I know, but I think about 2020 and we have to because we're getting ready to go into budget season and all that fun stuff and start to give guidance to our teams around the world. I would say you know my best intel in talking to lots of CEOs and amongst a lot of folks around the world and our teams is that you know I would project out the current trends in to next year. Now is that going to be what happened? Who knows, right.I mean, I think they could incrementally get a little better, they could incrementally get where – I don’t know. I think it’s way early to judge, but if you, what you are doing, ask me the question today, how would I think about 2020 sitting here today? I would think about 2020 a lot like I think about the second half of this year, because I don't have enough intel to think otherwise.

Alright, I’ll leave it at that. Thanks everyone.

Alright.

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

Hi, good morning everyone. Chris, maybe I just want to ask sort of a similar question, but direct it more at unit growth. So obviously we saw you know some – a very modest amount of sequential growth in the pipeline this quarter, but I think your overall you know view for the full year remains you know pretty steady for pipeline growth. Just what's the commentary out there from developers you know and have you seen any of this corporate softness specifically impact what you are able to do on the signings, your conversion rate or how quickly people are willing to sign deals, and just what’s the activity level out there and what you're able to do from a unit growth perspective?

Yeah, great, great question and I’ll follow on maybe to you know answer a little bit more of Harry's question as well.I mean the short answer is no, we have not seen anywhere in the world at this point sort of a deceleration in the trends and new units in terms of signing, excuse me in fact in terms of starts. We expect both in the U.S. and globally for starts to be up. So our development community, even though if you look at it scientifically, it says the debt markets are tightening a little bit. What our experience would tell us in real time is our developers are getting – financing more easily, they are getting more work done. So none of that caution flags that I described are in the operating environment we see yet in the development environment.Now, depending on what goes on with the economy would stand to reason if, you know if you have a you know protracted period of time where there's a lot of uncertainty, it eventually would seep through. I mean it sort of would be disingenuous to sale right, but we're not seeing it in reality as I said, as our starts are going to be up this year and going to set new records in addition to signings and new unit growth.So give that we’ve got a huge pipeline representing 40% of the base, given that we have a very good track record in delivering conversion and more brands to do that, given that you know the more than half of the pipeline is already under construction, I think you know as I said briefly in my prepared comments, I think we have very good visibility into the next few years and I feel very good about our ability to continue to deliver NUG.Now sort of a follow on to Harry’s comment, which I'd be remiss in not saying and I knew I'd be given the opportunity to do it, so thank you Shaun. You know reality is, even in an environment where you have reasonably low, some might say anemic same store growth 1% to 2%, you know we are growing our EBITDA 9% or 10% right, and why is that? Because the bulk of the growth in the business for us is really new unit growth and other things like license fees and cobrand and those are performing well and we expect those will continue to perform well.So even in a world, you know where we are increasing our guidance, at the same time we took the top and down because the core things that are really driving our growth are performing very well. As I think about next year, its way early to get into it, but you know even in a lower growth same store environment we will do the same thing. I think we will deliver net unit growth comparable to what we are doing this year and we will deliver a comparable kind of result, because the business model is in a post-spin world really is as resilient as we have been saying it is and hopefully quarter-by-quarter as we deliver these results in an environment that has been more choppy and where same store growth has been weaker, but yet we deliver very strong bottom line results that people start to recognize that and understand that that is – that the business is resilient and we run the business well, which we intend to and continue to do that.

Thank you very much.

The next question comes from Thomas Allen of Morgan Stanley. Please go ahead.

Hey, good morning. So on Tru I remember when you announced the brand, at the beginning of 2016 and it's impressive that you are now going to open up your 100th hotel this year. As you do more and more work around new brands, do you think there are any other opportunities that could come to a similar size?

Well, there are definitely other opportunities. We've launched three brands in pretty much the last year. You know we have a couple of things I’ll talk about sort of in the skunk works, one much more advanced than the other.Tru is a mega brand in the sense of – and I've said this many times on this call and when we announced it. I think it'll be our largest brand in the world when it's all said and done. Hampton is today at 2,500 hotels. Reality is Tru is serving a much bigger segment of demand, both here in the U.S. and around the world and while it will take you know decades to get it there and that's the beauty of it. It’s like no investment from us, decades of growth, sort of built in growth, Tru ultimately has the opportunity to be even much bigger than Hampton.So that given its serving largest segment of demand, there are brands, one in particular I'll talk about that I think are mega brands, meaning they are hundreds potentially you know over a long period of time, thousands of hotels, but probably none equivalent to Tru to be perfectly honest, just because it's serving 35%, 40% of all demand and is the biggest segment.There are a couple of things that we are working on, both in the lifestyle space. One which I think you know is a very large scale opportunity on a global basis, which I would say is sort of upscale lifestyle, you know like a – I would describe it as sort of a click above Hilton Garden Inn for you know a more urban or mixed use sort of a you know higher end development opportunity.I do think you know that that brand has a huge amount of potential in terms of hundreds and hundreds and hundreds of hotels around the world. We have already soft lunched it with our development community, the reception which we would typically do before a public launch. The reception has been spectacular. We will probably hard launch that sometime in the next six months just as we refine the product and service delivery and bring a number of development deal to the table.The other one that we are working on that you know I would say more in the skunk works, less imminent is luxury lifestyle. We’ve talked about it you know for a better part of a decade. We will eventually want and be in that space, but we've been trying to focus on some of these other opportunity that we think as we talked to our customers will drive more engagement, more loyalty and sort of help feed the network effect at a larger scale, but we will eventually get to that.So we are not going to be launching three brands every year to be clear. You know I think in the next year we'll probably do one luxury lifestyle at some point in the next couple of years and I'd be remiss in not making this statement. Given that we are in our early days, propagating the breadth and depth of our brands around the world, you know with the list that we have and the two I said, that would be 19 brands. That is plenty of bandwidth for us to keep growing indefinitely, particularly given that we are just getting started with some of these brands in many destinations around the world.

Helpful, thank you. And then just to challenge you a little bit on the U.S. Rev par comment, so if we look at corporate confidence...

Which comment?

Just on the consistent, on the outlook of consistent U.S. Rev par growth. I mean corporate confidence keeps on deteriorating. That’s the idea to show that June was the weakest month of Rev par growth we've seen all year. So it feels like Rev par growth in the U.S. is deteriorating when you guys are expecting to be consistent. Can we just reconcile those two things? Like are you seeing stronger group bookings or production or just talk to that a bit. Thanks.

I would say two things going on really simply and we'll see whether we are right, but I think they are logical. One, particularly third quarter has a very strong group base. So we were sort of leveraging off of that.The second thing is the comps are easier, right. So part of the reason that we thought it would be better was that the comps were easier in the U.S. for a whole bunch of reasons in the second half of the year, so we sort of wiped that out. So between comps being easier and a very strong Q3 group base with most of it already on the books, we feel like the outcome will be very similar. It may be a tick-off. I mean I'm rounding. It may be at tenth or two-tenths off of what we've delivered year-to-date, but we think it'll be you know in that time zone.

And Thomas, to June we also swapped the Sunday for a Friday in June this year, which I think has been sort of talked about and people are evaluating the SPR numbers. So if you look at June – you can look at June and see we made a little bit of an out way. [ Cross Talk]

Yeah, and May was really – April was not that great than June, but May was really strong. So yeah, I wouldn't read too much into June. I mean on the other hand we are definitely saying by bringing our guidance down at the top end overall from a same store point of view that we think the world has – and I said it in my comment, the world is incrementally a little bit weaker.So I'm not – we're not debating that with you. We just – as we look at you know forecast in a granular way by property, given the factors that I just described, we think it's going to be similar to what we saw in the U.S. in the first half of the year.It's definitely going to be lower in the international if for no other reason – I mean all – we had a very strong Europe first half of the year, Continental Europe which we still think will be outperforming the rest of the world, but won't be outperforming as much, and then China in particular which is driving APac, Japan also will be, but China is clearly going to be worse in the second half of the year than the first and so international will be on average less in the second half than the first half, we're pretty confident.

Really helpful color. Thank you.

Okay.

The next question comes from Joe Greff of JPMorgan. Please go ahead.

Good morning everybody. One question related to the hotel development, the pipeline. Chris or Kevin, can you give us a sense of maybe what hotel developers are underwriting to in terms of an IRR now say versus a year or two ago. Maybe you can look at it U.S. versus China. And then with respect to signings, to what extent are you getting the increased requests for helping capital to be involved? Thank you.

Yes, so I don't think people are underwriting you know dramatically different IRRs than they were a year or two ago. I think where people sort of look to change their underwriting is you know what are risk adjusted returns relative to a risk free rate, and the risk free rate has you know moved around a little bit, but hasn't been all that different. So I personally don't think people are under writing to different returns.I think they are adjusting their expectations of what their underwriting is going to be going forward and so you see that a little bit you know in terms of the transaction market for existing assets that affects pricing, but in terms of what people are looking forward to take development risks, that's been really consistent.And then sorry, the second question, key money. Yeah look, I mean I think you've seen the contract acquisition costs line go up a little bit, which is completely normal for late cycle behavior. When you get later in the cycle, deals get a little bit harder to come together, one. Two, there are more luxury deals that pencil later in the cycle than earlier in the cycle, those at the higher end tend to be the deals that require key money, but that's on the margin and you know I think overall the number of deals in our pipeline that have any contribution from us has remained largely consistent.So over the last two years, you know that number is about 10% of the deals than the pipeline has had any contribution from us and that number, that percentage has been pretty consistent for a while.

Thank you.

Sure.

The next question will be from Carlo Santarelli with Deutsche Bank. Please go ahead.

Hey guys, just one quick one and then a quick follow-up. Just in terms of as you guys are thinking about the second half of this year Chris, how much is the U.S. economic activity driving kind of your outlook versus the forward pace that you are kind of looking at right now? And then just more broadly, obviously guys raise your capital return guidance for 2019 in the period. As you think about buyback activity right now, have you altered you know your strategy or stance on capital returns looking ahead at all.

I’ll let Kevin take the second, I'll take the first. The short answer is, is we look at our forecasting as implied in my prior comments, it's done on a very granular basis. So yes, I mean we have a view of what's going on in the economy, we have a view of you know whether it's going to go up, down or sideways.I sort of gave you our view for the moment as sideways, but the bulk of our forecasting with some you know sort of overlay is really based on property by property analysis and looking at the pace of the business and the bookings, and looking at where we – what we need to fill that would not already be on the books and making an assessment of what we think the probability of being able to do that is. So it is – I would say it is a much heavier degree of looking at our forward pace and position than it is just a broad overview of here’s what we think the economy is.

Yeah.

Great, thank you.

And then Carlo on capital return, the short answer is no, we’ve not changed our outlook on capital return. I think what you are seeing in the range is, we are little bit deeper in the year. Our EBITDA outlook is a little bit higher and so solving for the mid-point of our sort of stated leverage range gets you to a little higher mid-point and we are halfway through the year, so we're tightening the range. And I think the way to think about it is – the way we've always thought about it, which is we like the stock you know almost at any price.We like the outlook for the business model and the returns that we can drive by buying back the stock and so the combination of a modest dividend and then buybacks that are going to be, you know think about recurring free cash flow, plus re-leveraging is coming back no matter what, and we are kind of giving you a range you know of outcomes that could vary depending on how we think of the outlook is for the business, and the price will vary a little bit within the range, but largely we think about capital returning in a really consistent way.

Great, thank you both.

The next question comes from Anthony Powell with Barclays. Please go ahead.

Hello, good morning. I want to focus a bit more in China. You mentioned slower leisure demand that there a few times. Is the demand different in the Tier 1 cities in high end resorts compared to some more moderate Tiers or is it slowed down pretty broad based and maybe some more detail on corporate government and leisure will be great?

Yes, so look, I think Anthony it’s been pretty consistent across the board in China. You know I mean over half the business is leisure driven in China and 90% of it is driven in countries. So when you see their economy slowing the way it is and them sort of you know pulling back the reins a little bit on spending, you are going to see that flow through to our business and so, but we really haven't seen. You know you are not seeing sort of the business you know dramatically constructing and the food and beverage being limited the way it had been a couple years ago. I think it's really broadly driven by leisure.

Business has held up and the group which is a much smaller part of the business there than it is here has actually held up much better than leisure. And you know the other thing not to be – probably you know because as I said we assumed the current trend to continue in China, that’s what’s built in the forecast. Recognizing we've been through this in China before, to the extent that the trade deal is met, you know the Chinese leisure consumer more than anywhere in the world I've seen can flip around pretty quickly.Now if we just you know at this point, this thing has been going on long enough where we said, you know – we can't forecast that. But reality is, if a trade deal is done, I mean it will take some time to you know sort of flip it around and get back, you know get them back traveling, but I think there's an opportunity for that to happen and for that to be you know a better potential upside at least later in the year.But again who knows, you know teams are going next week and it is impossible to know what the result of that will be at this point, so we just assume that that doesn't happen.

Alright, thank you.

The next question will be from Robin Farley of UBS. Please go ahead.

Great. I think a lot of my questions have been addressed already, but I did notice that your franchise RevPAR grew better than managed RevPAR in the quarter. Just a little bit different than the overall U.S. trends and wondering if there is anything to call out there?

No, I don't think there's anything there Robin. I think that I'm actually not sure what number you're looking at, but I mean at the higher end RevPAR actually performed stronger than you know at the lower end in terms of brands, so nothing to call out there.

I was looking at your franchise of 1.6 and managed hotels at 1.3 and that the limited service tend to be more franchise and managed would tend to be more full service, and that's a little bit different than that what we see with.

Not necessarily – that’s not necessarily the case in the U.S., so I think that's probably what you're seeing there, is we actually do have a higher level of managed franchise of full service hotels in the U.S. so there is nothing to extrapolate there.

Okay, great. Thank you.

Our next question is from Bill Crow of Raymond James. Please go ahead.

Hey, good morning. Chris I've got a two-parter on capital, capital commitments. And the first one really goes back to your press release over the past week about growing your luxury brands and the footprint in it. It seems to me with 94 million Honors members and the engagement statistics, all the positive momentum you have there, it's a dramatic mismatch with the really limited number of luxury options they have to use their points and I'm just wondering why it took so long to kind of reinvigorate the growth in luxury and whether you thought about putting more of your own capital in to get a quicker growth in that segment.

I appreciate the question. I read you’re not on Sunday Bill. I don't agree with it entirely, but here's what I would say. The Press Release was obviously about sort of pounding our chest about a bunch of cool new hotels that are opening up. Since the day I walked in the door of this company, 12 years ago, we have been focused on luxury. This isn't something that we finally, as you describe, not me, you know we finally decided to focus on luxury. We’ve been – it takes a long time to make any of these deals happen, and so we've been very focused on it for two fundamental reasons.The first is some of our customers want it, right. I mean a lot of our – you know at different times. The second is for loyalty to have it in the system from an aspirational point of view, we think it's important, so we spent a lot of time on it.What I would say objectively is we've made incredible progress. We went from basically nothing 10 or 12 years ago to having open or in the pipeline 110 incredible luxury hotels. I'd say at this point, while we have a lot more we want to do, we have captured most of the most important urban and resort markets. We do have some gaps. We're working very hard at filling those gaps, but we are making tremendous progress, and yes on occasion we are using our balance sheet.If you look at the amount of sort of outstanding key money commitments we have, it would weigh disproportionately to luxury for that very reason. But I would say, and you said it, Bill it implied in your question, it’s obviously what we're doing is working, right, because I'd say we have the market leading statistics in loyalty, not to be defensive. I mean the growth rate in our loyalty program, engagement rate, level of Honors occupancy is working, right and so there's a whole bunch of reasons for that.One the luxury strategy is I think working; two, what you have to remember is while people aspire to go to the Maldives and do all these things, that’s not actually what they do with their behavior, right. What they do more than not, is use it for the mundane things in life like going to you know New York City for the weekend with their husband or wife or going to a Reading, Pennsylvania for a soccer tournament with their kids and using the point they earned traveling on business to satisfy their needs and their personal likes. That is what they – you know if you look at the behavior.And so when you think about it, think about it this way, like we are not a start-up. We have 6,000 hotels that people can redeem at in 115 countries around the globe, right. That can satisfy a lot of needs. We have a 110 open or pipeline luxury, we have almost 200 great resorts around the world. If you look at the upper end of upper upscale with all respect to some most of our competitors who would call that luxury and we don't. So take the upper-end of the Hilton brand, that's probably another 150 or 200 hotels.So in reality, out of the 6,000 hotels we have 400 or 500 of them sort of by a broader categorization of sort of luxury in resort would meet those needs, in addition to the other 5,500 that meet most of their everyday needs. And so we're focused on luxury, we're making great progress. If you went and saw any of the newer luxury Waldorfs or Conrads that have opened, I’d encourage it. I think you would be really impressed, but it is a broad sort of network effect that we are creating to allow loyalty members to get a great value proposition.Luxury is part of it, but it is not all of it. It is – and I would argue honestly as reflected in our numbers, I would argue while it's important, it's a relatively small part of it in terms of the other parts of the ecosystem that help drive loyalty.

That's a thorough and satisfying answer. So I appreciate it. I’ll leave it there. Thanks Chris.

Alright, we’ll debate it offline.

Yeah, you got it.

Alright.

Our next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.

I guess, maybe two follow-ups if I could. One, this one is guess for Kevin. Looking to 2020, how realistic is it to expect much growth in the $1.5 billion to $1.8 billion capital return. There is certainly incremental cash flow, but pipeline and RevPAR growth slowing a bit. I'm wondering how that shapes, how you think about the structure of repurchase activity or capital return next year?

Well, hey look Jeff it's early, so I should probably do the responsible thing and say it's a little bit early to be giving you know sort of capital return guidance. But if you think about it, I mean Chris said earlier in the call, our model is a lot less dependent on same store sales growth today and much more pipeline dependent. Our pipeline growth for the record is not slowing and we do not think our net unit growth is slowing.So thus, those hotels will enter the system, they'll pay fees. Our free cash flow – you ought to assume that our free cash flow will grow slightly and will continue to re-leverage the business, and so our capital available to return to shareholders ought to look you know very similar or slightly higher than it does this year.

Yep, I agree. Keeping in perspective one technical thing and then a broader view, every point in same store RevPAR assumption has the impact of being where it’s about $10 million to $12 million of free cash flow. So in the end it does not move the needle on that and the way to – I think on a broad base we’ve sort of covered this, but it's probably worth covering again to make sure we are abundantly clear.On return of capital, I would say and share buyback, we put it in three buckets. One, free cash flow. You should assume that we are every year always on deploying our free cash flow to do our minor dividend which we don't intend to increase and then you just all the rest of that to buy back stock.You should also assume as we continue to grow EBITDA with this resilient model that in the normal everyday sort of approach will be to re-lever, to sort of you know circle the mid-point of our 3 to 3.5 range. If you look at the financing transactions we just did, where does it take us for the year, 3.25, shocking and that gets it for the 1.5 the 1.8.There is also an opportunity which I’ve talked about, the potentially for short periods of time to lever the company up even more highly beyond that you know for a period of time and then de-lever and accelerate repurchases and what I would say is that sort of the more opportunistic side of it, we did it a little bit with H&A, but that would be an environment where we saw a major dislocation occur and we wanted to take advantage of that major dislocation.So I think every day in and day out you ought to think about our buyback, like what we are doing this year, use all our free cash flow and re-lever to a relatively conservative level and buyback stock.Going beyond that, if there's a big dislocation, I think you know we would certainly consider. You know it’s something we’ve talked about around our board table, and won’t have to decide the time the lever-up incrementally for a period of time, because the free cash flow obviously would allow you to lever down, and to take advantage of dislocations in the market. But it's sort of in those three buckets, two of which you are experiencing this year, the third of which obviously doesn't look likely.

And Chris, now I don’t want to beat a dead horse, but what's the path to getting to the top end of year 1% to 2% annual guidance and RevPAR, because if you are facing tough comps internationally in the back half of the year, and like you said, let’s assume steady U.S. growth, it just feels like the acceleration you would need in the second half of the year, because this is just unlikely to kind of pull your first half of the year up that much if you will?

Yeah, I mean I think as I always do, that we’ll end up somewhere in the middle, right. I mean we narrowed the range. We are usually at two point range, we narrowed it to one, because I think you know who knows, you can't – we don't have a crystal ball. Reality is, you should assume as you always should that the middle of the range is what we think will really happen.Could it get the two? I mean we looked at scenarios where it could. Do I think it's likely? No. I mean what would have to happen? The U.S. would have to you know pick up a little bit. You’d have to have the choppiness, particularly in business transient sort of stabilize. The group is going to perform because it mostly on the book. You’d have to sort of have the caution flags pulled back in in the U.S.Is that possible? Sure. You can get a trade deal done with China, people could feel a little bit better, you know people could start spending a little bit more, traveling, and so it's not impossible. I mean it is possible to get to the two. In our view it was not really possible to get to the three, which is why we took it off the table. I think it is possible.The other things that would contribute to it would be you know China. China, while it's not a huge part of our overall system, you know it was growing at a much, much higher level. So it’s going too flat or modestly down does have some impact. So if you said the U.S. you know stiffened up a little bit and people took a few caution flags in. China flipped around with a trade deal, could you be in to? Yeah.Do I think we will? No I think we will be around 1.5, that's why we gave a range and you know trying to tighten a range more than point when we are halfway through the year, just you know to be honest just didn’t feel prudent.

Great, thanks guys.

Yep.

The next question will be from Smedes Rose of Citi Group. Please go ahead.

Hi, thank you. You’ve gotten to most of them, but I just wanted to ask you. You noted your strength and focus on the mid-market segment and you know we continued to see Tru put up the outsized RevPAR gains relative to other – your other brands in that segment. I’m just wondering, do you think any of the growth there is coming at the expense of Hampton Inn or do you think it's more just the expansion of footprint and the brand containing to gain traction.

No, I don’t. I mean you can't say that they don't compete in some markets at all, but it is really a different segment, that's how we designed it. We spent a lot of time on that and how we think about the go-to-market commercial strategy is to keep it in its swim lane. I think why Tru is gaining, and if you look at it Hampton is gaining share too. So Hampton is not, like you're not seeing, Tur go up and Hampton go down, Hampton’s gaining share, and Hampton is the highest average market share brand that we have. So it is both an absolute sense and a growth sense performing at an incredibly high level.Why Tru I think is doing well, is honestly to think about that segment, no offense to everybody else out there. You know the reason we launched Tru is because we didn't think anybody in that segment was doing it well. We didn't think that there was at scale a brand that delivered a good product, consistent, clean with simple service delivery that resonated with customers and I think what we're finding is we were right. Right the customers are flocking to Tru because it's just a better, newer, cleaner product and what it’s taking share from is folks in that competitive set.

Okay, thanks. And then Chris when you just look back at prior cycles, you know let's say the U.S. economy does take a little bit more of a down shift. I mean when developers are looking to access capital, do banks or lenders, are they more likely to require the development fee within a major brands system like your own? I mean do you see relative gains within maybe the smaller overall development pipeline?

There is no question that that’s the case. Frankly to me I think we've been a huge beneficiary of that even in the last two or three years as lending standards have tightened. I think we are – I mean I know it's me pounding, you know pat myself and Hilton on the back, we are more financeable. I mean just go talk to a dozen lending institutions and ask them their view. Why? Because we drive system wide better market share. We drive better profitability, easier to underwrite, less risky, we've been doing this 100 years and so yes, we are already taking an unfair share amount of development. In an environment that’s gets worse I think our sheer numbers go up, you know they are they always have and I think they will, as long as we continue to drive the market share premiums that we are.

Great. Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over the Chris Nassetta for any closing remarks.

Thanks everybody. As always we appreciate you taking the time. We'll look forward to talking with you after the third quarter and hope everybody enjoys the rest of your summer. Get some time to relax and be with friends and family. Take care.

Thank you, sir. The conference has now completed. Thank you for attending today's presentation. You may now disconnect.