希爾頓酒店 (HLT) 2014 Q2 法說會逐字稿

Good morning and welcome to Hilton Worldwide Holdings' Second-Quarter 2014 earnings conference call and webcast.

(Operator Instructions)

As a reminder, today's call is being recorded. Thank you. I will now turn the call over to Mr. Christian Charnaux, Vice President of Investor Relations.

You may begin, Mr. Charnaux.

Thank you, Sally.

Welcome to the Hilton Worldwide Second-Quarter 2014 Earnings call.

Before we begin, we'd 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.

The factors that could cause actual results to differ are discussed in our SEC filings. You can find a reconciliation of the non-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 2014. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then provide greater detail on our results and outlook. Following the remarks, we will be available to respond to your questions.

With that, I'm 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 quarter of great results highlighted by strong top-line revenue growth, fee growth, and ownership segment performance, which led to results at the top end of our guidance range. We continue to feel very good about the macro setup for the remainder of the year. And as a result, we have raised our full-year adjusted EBITDA and EPS guidance.

In the second quarter, we exceeded the high end of our guidance on system-wide comp RevPAR growth of 6.7% on a currency-neutral basis. Growth was driven by a 4% increase in average rate and a 2-percentage-point increase in occupancy to 78%. Strong growth in transient demand, combined with continued group performance, delivered solid RevPAR growth for the quarter. Transient revenue grew over 7% system-wide.

In the US, we saw particular strength, with Rack RevPAR in the quarter up 14%. Government business also stabilized, up over 3% year over year in the US after five consecutive quarters of declines.

Group revenue in the quarter was in line with expectations, up 5% system-wide in the Americas. And we continue to expect pickup in the back half of the year based on strong group revenue position. At both our Big 8 and the larger set of US-managed hotels, our group revenue position for both the third and fourth quarter is up in the mid-to-high single digits.

In Europe, strong group performance in the UK, Italy and Portugal continue to drive positive momentum. As we look to the first half of 2015, we're seeing a similarly positive story, with group revenue position up 8% across all US full-service and luxury properties.

Ancillary revenue growth continued as expected in the quarter, with FMB at our owned and managed hotels on track to grow at roughly the same rate as RevPAR for the full year. We saw continued growth in group spend, with ancillary revenues per group room up 14% in the quarter for the Big 8 and over 12% across all of our owned hotels in the Americas.

Our adjusted EBITDA for the quarter was $651 million, an increase of over 10% from the second quarter of 2013 and at the upper end of our guidance range. Adjusted EBITDA margins increased 110 basis points versus the second quarter of 2013.

Now turning to development highlights. We maintained our number one ranking in key categories, according to Smith Travel Research, including rooms under construction in every major region of the world, pipeline size and system-wide rooms. We continue to have great success in growing our system off the largest base of rooms in the industry. In the quarter, we opened 56 hotels and over 8,000 rooms and 107 hotels and 17,000 rooms through Q2.

As of quarter end, we had 694,000 rooms operating globally. And with the opening of the Hilton Garden Inn Astana in Kazakhstan, we've increased our global presence to 93 countries and territories. In terms of rooms under construction, we had 542 hotels and 106,000 rooms at quarter end that will soon be added to our system, all of which are in our Capital Life Management and Franchised segment. This gives us an 18% share of all rooms under construction globally, or approximately four times our share of existing supply.

Our industry-leading pipeline continues to grow, increasing by 18% over the 12 months ended June 30. Now with 1,230 hotels and approximately 210,000 rooms in 75 countries and territories. For comparability, including all deals approved but not signed, our pipeline would have been over 230,000 rooms. In the second quarter, we approved 135 hotels with over 21,000 rooms for development.

In what we believe will add significantly to our growth over time, we recently launched our newest brand, Curio -- A Collection by Hilton. We believe that Curio will further enhance our ability to serve existing customers and attract new ones through a collection of unique four-to-five-star hotels.

For owners, affiliation with our commercial engines should drive significant market share premiums and distribution cost efficiencies. For Hilton, we see a market opportunity of over 1,200 hotels globally and expect eventually to have hundreds of Curios in the portfolio. We expect our first Curio to open this fall.

The developer response to Curio has been extraordinary. We've already reached agreements on nine properties, comprising more than 4,100 rooms, including the SLS Las Vegas Hotel & Casino and a project in Doha, Qatar. And we have more than 75 Curios globally in various stages of discussion.

Clearly, Curio, our 11th brand, is off to a strong start. And we're still on track to launch our 12th Brand in a space we call "accessible lifestyle" by the end of the year. Owner interest continues to be very strong with this new brand as well. These new brands will add further momentum to the opening of fee-paying rooms.

We increased our system size in the quarter by over 7,000 net rooms, or over 15,000 net rooms in the first half of the year. All with de minimis amounts of capital investment by us and without any acquisitions.

Brand strength is the key driver to our asset-light strategy. And we continue to believe we have the strongest brand portfolio in the industry. And our portfolio is getting even stronger as we grew our global RevPAR index 100 basis points year over year for the quarter, 70% of which was driven from rate. In fact, every one of our brands grew their global RevPAR index this quarter.

Our leading brand strength is also evident in the annual J.D. Power 2014 North America Hotel Guest Satisfaction Index Study, where Homewood and Hilton Garden Inn brands placed first in their segments, their 11th and 10th wins, respectively. Our brands have earned 34 first-place awards since 1999, significantly more than any multi-brand lodging company.

Additionally, in the 2014 Customer Service Hall of Fame survey sponsored by USA Today, Hilton Worldwide was voted the top-rated hotel company in the United States for customer service. And the number two company in customer service across all industries surveyed.

Technology is, of course, a key enabler of superior guest experiences. And our guest expectations have been evolving very quickly in this area. Earlier this week, we introduced a significant technological milestone for the Company, one that is representative of our depth, talent and agility.

For the first time in the industry, our guests can check in using their Hilton HHonors account on a mobile device, tablet, or computer and choose their exact room from digital floor plans before arriving at their hotel. Guests will also be able to customize their stay by purchasing upgrades, by making special requests for items to be delivered to their room, and even by checking out of the hotel, all using their personal technology devices.

These capabilities will be available at US-based Hilton Worldwide properties across six of our brands by the end of this summer. And by the end of 2014, guests at more than 4,000 properties in 80-plus countries can experience this new technology.

Based on data and feedback from our customers, we know that they want this level of control over their travel experiences. Moving forward, we will give guests even more choice and control with the ability to use their smartphones as a room key. We've spent the last few years testing and developing proprietary technology. And we're pleased to announce that by the end of 2015, all US hotels across four brands will have this capability. With the entire global portfolio of brands following soon thereafter.

We believe this will revolutionize the hotel experience for our guests and will deliver significant return on investment for our owners as we execute this initiative at scale.

Now let me update you on the outlook for the remainder of 2014. As we look at the macroeconomic picture and outlook for lodging performance around the world, we see very favorable conditions in the majority of our markets, with uncertainty in some regions only moderately weighing on overall results. In the US, we continue to expect moderate GDP growth, coupled with historically-low levels of supply, to continue to drive very strong fundamentals. Given such favorable backdrop, we're maintaining our high single-digit RevPAR growth expectations for 2014.

For the Americas region, outside the US, we expect continued growth in Mexico and South America to support high single-digit RevPAR increases for the full year 2014.

Europe continues to benefit from strong group performance and steady transient gains, particularly as rebounding fundamentals in the Southern region and easy year-over-year comparisons in Turkey offset softness in France. While we continue to monitor the ongoing uncertainty in Eastern Europe, our relatively limited exposure to the region should mitigate near-term risk. We remain confident in our mid-single-digit European RevPAR growth expectations for the full year 2014.

Moving onto the Middle East-Africa region, we expect geopolitical tensions to continue to weigh on travel demand. Our outlook largely assumes a steady state. And we anticipate flat RevPAR in the region for 2014, as a positive booking pace and easy comparisons in Egypt somewhat mitigate challenges elsewhere in the region.

Lastly, Asia-Pacific continues to benefit from strength in Japan and China. With second-quarter GDP growth in China of 7.5% coming in modestly above expectations, and stimulus measures supporting Beijing's commitment to growth within this range, we're confident that solid performance will continue to offset challenges, such as weakness in Thailand, leading to mid-single-digit RevPAR growth for the overall region.

Given strength in the Americas and APAC and the continued rebound in Europe, we remain optimistic heading into the back half of the year. We're confident that our award-winning brands and industry-leading Commercial Services platform will enable our global portfolio to deliver RevPAR in the 5.5% to 7% range for the full year.

Furthermore, we continue to forecast net unit growth of 5.5% to 6.5% in the Management Franchise segment equating to 35,000 to 40,000 rooms. In light of our positive outlook, we're raising our adjusted EBITDA to $2.425 billion to $2.475 billion, an increase of $10 million at the midpoint. Our diluted earnings-per-share guidance for the year increases to a range of $0.67 to $0.70, or an increase of $0.03 a share.

In summary, we had an excellent quarter, posting results in the top end of our guidance range and outperforming our primary competitors on the top line, margins, bottom line and capital light net unit growth. We also continue to deploy free cash flow to prepaid debt and build equity value with total prepayments of $600 million year to date. We feel great about the fundamentals of the Business and our positioning for the remainder of this year and for next year.

Now let me turn the call over to Kevin, who will discuss the quarter's financial performance in a bit more detail.

Thanks, Chris.

Good morning, everyone. As Chris mentioned, we are very pleased with our results for the second quarter, which came in at the high end of our expectations.

For the second quarter 2014, diluted earnings per share totaled $0.21, ahead of our guidance of $0.18 to $0.20. Total Management franchise fees were $371 million in the second quarter, an increase of 14% over the second quarter of 2013, driven by both new units and top-line growth. Franchise fees continue to perform strongly, up 15% in the quarter.

Given the strength-to-date in our expectations for the remainder of the year, we're increasing our comparable Management and Franchise fee growth estimates by 100 basis points to 11% to 13%.

In our Ownership segment, adjusted EBITDA for the second quarter of $291 million was 8% higher year over year, adjusted for a non-comp increase in affiliate fees. This performance was driven by US RevPAR growth for the segment of 6.4% and strong operating margin growth at owned hotels globally, which grew nearly 150 basis points excluding non-comp affiliate fees.

Our Timeshare segment continues its transition to a more capital-light business, with third-party developed intervals comprising 57% of sales in the quarter and representing about 82% of our total supply at quarter end.

Second quarter adjusted EBITDA of $69 million was 15% better than prior year. Driven by favorable transient rental and club revenue and margin growth, higher sales and marketing and G&A contribution, and higher owned and fee-for-service sales.

Corporate expense and other was $80 million in the second quarter, compared to $67 million in the prior year. The majority of this increase in net expense relates to incremental public company costs, including stock compensation expense, which as we discussed last quarter are not evenly distributed throughout the year. We continue to expect growth for the segment of 3% to 5% for the full year.

In terms of our regional performance, strong performance in the Americas was slightly muted by weakness in Egypt, Saudi Arabia, Singapore and Thailand. In the US, continued economic strength drove comparable RevPAR growth of 7.3%, with rate accounting for nearly two-thirds of the increase. We saw this strong growth despite the Easter shift, which negatively affected growth by more than a point.

US-focused service brands were particularly strong, with 7.9% RevPAR growth in the quarter, up from 6.7% in Q1. We attribute these solid US results to continued strong fundamentals and robust demand, particularly in California and the Pacific Northwest, where we saw RevPAR increases of over 10%. Additionally, Florida benefited from both strong transient and group demand, which drove RevPAR gains of nearly 12%. And Boston performed well, especially over Marathon Weekend in April.

US-owned hotels grew RevPAR 6.4%, boosted by strong performance in San Francisco and Hawaii. Conversely, our owned hotels in Chicago and New Orleans were adversely affected by softer group volumes given fewer city-wides in those markets.

Our hotels in the Americas outside the US posted a very strong quarter, with comparable year-over-year RevPAR up over 8%. Results were driven by strength in Mexico and Brazil. In Asia-Pacific, RevPAR increased nearly 5%, driven almost equally by occupancy and rate gains.

Similar to Q1, results were boosted by strong performance at our hotels in Japan and Korea, where comp owned and operated RevPAR increased over 16%. Greater China grew RevPAR over 7%, due in part to solid performance in Hong Kong. APAC results were tempered, however, by softness in Thailand and Singapore.

In Europe, RevPAR increased 4.4% primarily due to increased occupancy. With the exception of strong performance at certain group hotels in the UK, northern countries remained challenged throughout the quarter; and France continued to struggle. However, rebounding fundamentals in the southern and Mediterranean's hotels largely offset these challenges. Athens, for instance, was up more than 18%. Portugal increased RevPAR an impressive 57%, as its Corporate Meeting business saw robust growth. Additionally, we improved our RevPAR index by 170 basis points in Europe versus the second quarter of 2013.

Finally, in the Middle East and Africa, RevPAR declined 3.4% for the quarter as political strains, Visa restrictions in Saudi Arabia, and a resurgence of MERS virus fears continued to negatively affect travel demand.

Turning to our balance sheet, we continued to reduce our leverage, working towards our objective to achieve investment-grade status by using substantially all of our free cash flow to prepay debt and in turn build equity value for our shareholders.

In the quarter, we made voluntary prepayments of $250 million on our term loan, with an additional payment of $150 million in July, which brought our total debt prepayment to $600 million year to date.

As a result of continued strong performance, we are increasing our expected debt prepayment range by $100 million to $800 million to $1 billion for the year.

We also priced the second timeshare AVS transaction during the quarter, with the majority of the proceeds being used to repay our Timeshare Warehouse facility. We believe that the market reacted very well to the offering, which was significantly upsized to $350 million and priced at an all-in fixed rate of 1.81%. In fact, the transaction priced at the tightest weighted average pricing spread and the highest advance rate of any timeshare offering done since the financial crisis, which we think is another strong endorsement of the quality of our timeshare customer and platform.

We ended the quarter with cash and cash equivalents of $829 million, including $284 million of restricted cash. And had no borrowings outstanding under our $1 billion revolving credit facility. We also executed a successful secondary equity offering of 103.5 million shares during the quarter, generating a total of more than $2.3 billion of gross proceeds for Blackstone. For Hilton, the offering had the dual benefits benefit of diversifying our shareholder base and increasing our float, which roughly doubled as a result of the offering.

Finally, let's turn to our outlook for 2014. For the full year, as Chris mentioned, we are maintaining our system-wide RevPAR guidance of between 5.5% and 7% on a comparable currency-neutral basis. Ownership segment RevPAR is expected to increase between 4.5% and 6.5% on the same basis.

We are increasing our guidance for full-year adjusted EBITDA and diluted EPS, expecting a range of between $2.425 billion and $2.475 billion, and EPS adjusted for special items of between $0.67 and $0.70 for the full year. As noted, we expect Management and Franchise fees to increase between 11% and 13%.

We are maintaining our full-year Timeshare segment adjusted EBITDA guidance of $315 million to $330 million. And CapEx spending, excluding timeshare inventory, will total approximately $350 million, including about $250 million to $260 million in hotel CapEx, which represents roughly 6% of ownership revenue.

For the third quarter of 2014, we expect system-wide RevPAR to increase between 5.5% and 7% on a comparable currency-neutral basis. We expect third-quarter adjusted EBITDA of between $610 million and $630 million, and diluted EPS of $0.15 to $0.17.

Further detail on our second-quarter results and updated guidance can be found in the Earnings Release we distributed this morning.

This completes our prepared remarks. And we're now interested in answering any questions you may have. So that we may speak to as many of you as possible, we ask that you limit yourself to one question and one follow-up.

Sally, could we have our first question, please?

(Operator Instructions)

Your first question comes from Shaun Kelley, Bank of America.

Chris or Kevin, I just wanted to ask about the outlook for the back half here, so when we look at your 5.5% to 7% that's actually below what we're seeing for some of the peers out there and so I just wanted a little bit of color since you did come in at the high-end of everyone, I think across the global hotel peer set for the C-Corps for the second quarter, what you guys seeing in that? Is that brand mix and group in terms of the outlook or do you think that's just overall conservatism?

No. I think, Sean, good question. If you look at our guidance for the full year, I believe we're at the midpoint, the highest in the industry which we think is reflective of our performance which if you look at the last couple quarters and including second quarter numbers we just gave you, we are beating the competition.

So I think we feel really good about the second half of the year. Transient Business as we discussed in Q2 is great. We see no reason why it's not going to continue.

I discussed I described the group position in both the big Hotels and the broader group managed Hotels in the back half, both the third and fourth quarter being strong. So we feel good about the second half of the year performance and obviously, with our midpoint in the industry, we feel good about that and obviously our objective is trying would be to try and outperform that and try and perform at the higher levels of what we've given you.

Your next question comes from Joe Greff, JPMorgan. Your line is open

Chris, you had mentioned that the pipeline increased 18% year-over-year. We actually saw a nice sequential growth Q2 end versus 1Q end. Can you talk at a high-level view what Brands or geographies you're seeing incremental interest in? And that represents either that year-over-year or sequential change?

And then on the topic of my second question my follow-up is on a topic of net rooms growth which guys outpaced both your larger cap lodging C-Coporation peers on. When you think about next year and you're thinking about the pipeline build and I'm not sure if you want to get into a guidance-related question for 2015, but directionally, it would be intuitive that your net rooms growth or your net room and addition would accelerate and I guess how are you broadly thinking about that at this point as well? Thank you.

Happy to handle those. In terms of pipeline and where we're seeing growth, I think it's generally across the globe.

We continue to have-to see great progress in all the major regions around the world. The US has picked up probably as a percentage manner a little bit more than the rest of the world for us. That's because the US story right now is almost entirely a limited service story.

We think we have the best limited service brands in the business that we're getting far more than our fair share. We're getting 20%-plus of the deals and we're 10% of the market in terms of rooms under construction.

So the US has picked up a little bit more, but we've talked about many times, the strategy is really with this great geographic distribution that we have and this great change scale distribution that we have is to really be strategic about how we deploy Brands around the world, the right Brands at the right time based on conditions in the market and customer demand. And so we are continuing to see broad pickup across the world in all the major regions. As I said, a little bit heavier percentage-wise in the US.

I think you're right in that I don't want to get into giving guidance for 2015 while I'm sitting here in the middle of this year. Having just reported the second quarter. But I think your assumption's right, Joe. And that is to say we're having great success converting a pipeline into rooms under construction.

We have more rooms under construction than anybody in the business and in every region major region of the world, which I mentioned in my comments, those rooms once they are under construction, obviously we'll highly likely to deliver--it's very unusual once under construction--that they would not deliver. So I think we still believe that last year was really the nadir.

We had a big pickup from last year to this year, mid-4%s to 6% or at the midpoint of our range in terms of net unit growth. And while I don't -- I don't have the exact number because this year is still playing out in terms of rooms we'll get under construction, it is certainly our belief that will continue to accelerate.

Your next question comes from the line of Carlo Santarelli with Deutsche Bank. Your line is open.

If I could ask a question on the owned hotel segment, obviously you guys will start to lap some easier occupancy regarding seeing rate contributing north of 60% of the RevPAR growth in that segment. Obviously saw margins pick up a little bit within the segment this quarter but how do you guys foresee the cadence for the back half of the year of margin acceleration within that segment specifically?

Well, I think if you look at the guidance for the full year, which I think is as good as anything out there, we're at 150 basis points. We had a very strong margin growth in the first quarter because we were lapping some easier comps but also we still have some of our ops effectiveness things rolling out.

In this quarter we were sort of on the higher end of the target of the range for the year. So by definition, we're going to see margin growth more in line with the overall expectations for the year through the rest of the year. That's not because any things going wrong. It's just the comps get harder as it relates to certain initiatives that we had going on in the Hotel.

So in the last couple of years, we've had outside margin growth because we had some opportunities to do things quite efficiently that built a much stronger base to leverage off of in terms of our cost structure and now we are getting very healthy margin growth. I think industry-leading margin growth, but we'll temper into that this year into that 100 to 150 basis point range so we feel very good about what's going on in the cost side and the margin side as well as overall performance on the top line for the rest of the year.

The big hotels have -- will have an uptick from the second quarter and the second half of the year driven by the group position which is quite strong as I said and in the big Hotels, group position in the third and fourth quarters in the high single digits, low double digits.

Great. Thanks, Chris. If I could ask one follow-up. As you guys obviously think about your balance sheet positioning of your balance sheet and think about the cash flow obviously that you'll be generating for debt paydown and obviously assuming an EBITDA growth next year on top of this year's guidance, it looks as if you'll be somewhere in the mid-to-low 3 times leverage range. By year-end next year.

So I guess the question more or less, is how do you think about your capital returns strategy at that point in time? I know investment grade is a primary focus but where do you feel you need to be to be comfortable there before you start pursuing other measures of capital?

Great question. I think your math is directionally right. We're going to end this year based on the guidance we've given you in the low 4%s.

If you fast-forward and make some assumptions, we're in the zone of being 3% to 4% which is our target. Our target is to get to get to a range where we can be a low-grade investment grade rating and we do believe it's in that range. Obviously the rating agencies will have a lot to say about that but that's based on a lot of work that we did as part of getting our initial rating.

And once we get to that level of lower grade investment grade, our belief remains that we're not in the business of hoarding capital. We are perfectly comfortable at that level of leverage that-that we have a balance sheet that is bulletproof and can deal with anything that might come at us. And so we would be very much looking at that point to take our free cash flow and give it back to shareholders and the way we would do that, I would say, is first we would probably make sure that we can appeal to yield investors to have some dividend that would likely sync up with where our competitive set is.

And then whatever remaining cash flow was available after that, it would be very simple. We would give it back to shareholders in the way we think they want it back and that would be to be through buybacks or dividends and I think we would make that judgment based on what our view is that at the time that shareholders are looking for.

The owners of the Company, if we have excess cash flow we think are entitled to get that cash back the way that they want it. And as we, I, I think, have proven, we are able to perform at the top end of the industry, both from an operating point of view but also from a unit growth point of view without the need for a lot of capital. So we don't see that changing. We do think that once we get through the deleveraging that we'll have a significant amount of free cash flow to be able to return to investors.

Your next question comes from the line of Harry Curtis with Nomura. Your line is open.

I had a broader question then a more narrow question. The broader one is that Chris, you've seen a number of lodging cycles and as you look into 2015, what, if anything, versus say, 2013 and into the first half of 2014, what, if anything, has changed that you note, that will continue to drive occupancy pricing margins forward? Are you more encouraged by any one or two factors?

I think, Harry, the answer would be exactly what you and most everybody on the phone would expect. I think we're getting I do believe we're right at the mid-cycle. We have very strong realtime indications of the things that you would typically experience at this part of the cycle are occurring.

You're getting back to very high occupancy levels, you have an ability because of the return of group business to really start to get more aggressive on your mix of business and because of the overall strength in the Transient Business. And return to group business, you're able to move rates up in an absolute sense.

So I think 2015's going to be another very, very good year simply because you got a lot more business coming in the funnel to manage. You're going to -- we're going to be able to be much more aggressive on mix. We're going to be able to be more aggressive on moving rates up and all of that's going to be good for topline and all of that should flow through to the bottom line, should create a higher flow-through situation.

So we're sitting here as we look to the rest of the year. Of course as I already described, feeling quite good and it's too early to give guidance so I'm not going to do that, but the setup for next year feels terrific. Really, really strong.

Very good. And then my follow-up question was on the Hilton Brand, which from a topline perspective did lag the other Brands and just thought it'd be useful to have you discuss what the factors may be behind that and is that an opportunity for you?

Having looked at it pretty carefully, I think the simple answer's just geography, specific geography of the Brand. You can take out-if we play around with it, take-sort of adjust for a few geographies, and it's right in line with everybody else.

So we don't believe there's any issue with it. I think you'll see as those geographies stabilize, you'll see the Hilton Brand back where it should be.

Yes Harry, the system wide stacks are revenue-weighted so the bigger hotels and a couple of the markets as I mentioned in my comments that had softer citywide, those drive more because they're bigger revenue hotels.

Chicago, New Orleans in the quarter, those have a huge impact just because they're really big hotels.

And then we have some big hotels with a fair amount of revenue in the Middle East.

Yes. Egypt, Saudi Arabia.

And that's all historically because of the way the Business grew in those parts of the world and more Hilton.

Your next question comes from the line of Steven Kent with Goldman Sachs.

Could you just talk a little bit about your Real Estate Value Maximization Programs or some of the ideas you've talked about in the past, Hilton New York in particular and the Waldorf. I know Hilton New York just made quite a bit of progress, any commentary on Waldorf or any of the others?

Yes. We're making good progress in the things that we've talked with you guys about in the last couple quarters. So we broke ground--or I should say our partner Blackstone--broke ground at the Hilton Hawaiian Village to start our newest timeshare tower. We're in registration. We believe we'll be actually selling units by the end of the year.

So we're off and running and everything is progressing as planned at the Hilton New York, terrific progress on the design work for the retail platform. I think we're in good shape to get that under construction early next year and get that in process and delivering EBITDA in the year, next year. Because it can be done relatively quickly.

On the timeshare at the New York Hilton again, quite good progress. We're in for registration at the moment. And believe we will obtain that registration by year-end.

We haven't talked about it but we are way down the road on the process of getting incremental entitlements that Hilton Waikoloa Village to do incremental timeshare in one or more of the towers. We do believe that long-term maximization of that asset--given it's a very large hotel in a market that does not have enough airlift for a very large hotel--is to convert one or more towers over time to timeshare. We had to go through an entitlement process. We are largely done with that.

The reason we have not talked in much about it is simply because we have other inventory that we're selling in that market so it's not going to occur in terms getting of into the conversion in sale, it will not occur in the short-term because it doesn't make sense at this exact moment but over the intermediate term, over the next couple of years, we will move forward with that and we do believe there is a very significant value arbitrage on that.

And then on the Waldorf of course, the big one, there's nothing new to report. We are making really good progress as we talked about last time. We have very good understanding of what the various uses to maximize the opportunity are.

We have a very good understanding of the tax structuring opportunities to make sure that whatever we're doing is maximizing the after-tax value accretion benefits to shareholders. And we are now out, officially in a process trying to find a counterparty to make this all happen.

It is still our objective that as I said on the last couple of calls, to be able to lay that all out in detail by the end of the year. And we're making good progress against that.

Your next question comes from the line of Felicia Hendrix with Barclays. Your line is open.

Chris, unlike your closest peers, you were able to grow RevPAR sequentially in the quarter. I'm just wondering do you attribute that -- you talked about that in the highlights behind how your quarter, but do you think that that is attributable more to geographic mix or RevPAR index gains?

I think it's more to do with RevPAR index gains. We have gains as I said over 100 basis points for the whole system. Every single brand gain share.

We have a bunch of different initiatives going on in the Revenue Management side. That have been very helpful particularly in the limited service space where we've been deploying a whole new Revenue Management technology base. So I do believe it has almost everything to do-let me put it this way.

If you compare our RevPAR against one of our primary competitors we overlapped pretty much perfectly and our performance was significantly better than theirs. So that in and of itself suggests it has a lot more to do with market share gains and things that we are doing versus a geography.

We're very much of the belief that I haven't been shy about saying it's that we have something reasonably unique which is we have very large scale, very large geographic diversification, very significant change-scale diversification. And if you have great Brand strategies, you connect those dots with great Commercial strategies, we believe that it is a very powerful thing in terms of driving customer loyalty because we can serve all of customers' needs no matter what they are, wherever they want to be in the world, and they are able to stay loyal to us.

Now, obviously you've got to have good Brands you've got to have good strategies on the Revenue side, but the makeup of what we have properly managed I think really does allow us to drive great results. And hopefully our job and we plan to, continue to drive increasing market share premiums.

By the way, those market share premiums then, are the reasons why we can drive these huge pipeline numbers and rooms under construction and net unit growth because in the end, it's all third-party capital. We're not buying rooms. We're not investing any major money.

It's third-party money that's investing with us and their investing with us because they're looking at these market share premiums I'm describing and they are making the judgments that they're going to make more money by working with us than their other options.

That's really helpful. Thank you. And then just to talk about your pipeline for a second, in light of your Curio and then the new accessible lifestyle brand, is there any way to help us think through--when we look at your pipeline growth for 2015--how much of a driver those two new brands could be?

Not yet. We tried to give you a sense of what obviously we've done in Curio to date. And how many deals we have in motion. Curio is going to take off I think at a pretty good clip.

Our lifestyle brand, the gestation period will be a little longer just because it will be a little bit heavier proportion of newbuild and major renovation versus Curio, which is almost immediate conversion opportunity of great independent hotels so that will take a little bit longer. What I would-we're not giving guidance obviously we talked about net unit growth. The way I think it all boils down to, expectations on how many rooms are we going to deliver on a net basis into the system over time?

As I said, we'll give you in the next sometime before the year is out obviously, a little bit more visibility into next year when we have it. But I do believe as I said, that I think to Joe's question that last year, was the nadir and that net unit growth is going to continue to pick up. And part of that pickup is going to be contributions from Curio and our lifestyle brand.

Your next question comes from the line of David Lowe with Baird.

Chris, first, thanks for the very clear explanation of capital allocation strategy. That's helpful. To follow up on Curio and the lifestyle brand, can you talk a little bit about your willingness to commit capital and how much capital you think you might need in order to jumpstart those two brands?

I think the answer is very simple. David, and a good question, limited de minimis amounts of capital.

We don't view those Brands as any different than any of the others. In the sense that we will occasionally, on a strategic deal, make a minor contribution. Most typically almost exclusively in the form of key money.

We would look at those two Brands particularly as they get started in that same way but I think when you look at the aggregate of what that means, it's a de minimis amount of capital. If you look at our entire pipeline, less than 5% by number of deals have had any contribution of key money.

So that means more than 95% of the number of deals that we're doing are what we would call drive deals where there's no investment from us. We think of these two Brands as sort of a similar phenomenon. We believe with the strength that I described of the overall system and our commercial engines that we have a lot to offer to owners and that we should not have to deploy our balance sheet to make these things happen in any material way.

So just to follow-up on that, would you consider lower franchise fees as an incentive for Curio in particular? Have you done some of that already?

Well, I think all of us in the business on strategic deals will look at ramp ups on franchise fees and things. And so yes, we would look at those, particularly as new Brands in that same way but that's pretty typical in the Business. And that's very short-lived generally. It's not long-term discounts. It's basically sort of, as Hotels are coming into the system new or conversion giving them a chance to sort of ramp up.

So we would consider that. In some cases. Again, we view that as an investment just like key money. So if we're going to discount fees, we look at it relative to do we need to do it as a strategic deal? And all of the same things we look at when we invest key money one way or another, that's an investment as well. And so on occasion, we will do that. Just as everybody has and just as we've done with other Brands.

Next question comes from Robin Farley with UBS. Your line is open.

One question, one follow-up. I guess in the cycle, where would you say you started to get interested in monetizing real estate in the form of a potential REIT spinoff if we're halfway through the cycle now or in the second half of the cycle, is this where you start to think about timing for that?

And then my follow-up question was really just clarifying, it sounded like in your opening remarks that maybe there was a slight lowering of guidance in the Asia-Pacific region. I think you said in the single digits.

That sounded like you were saying that for your full-year guidance for Asia-Pacific which is just a tad lower I guess, than sort of saying it would be the fastest growing RevPAR globally for you which would have suggested in the 7% or higher. So just wanted to clarify if that's what the subtlety in guidance is. Thanks.

Sure. Both good questions. On the real estate side, I believe it came up on the last call as well. I think the way that we look at that is less to do with exactly where we are in the cycle and more to do with just wanting to make sure whatever we do with the real estate, that it's a value creation exercise.

As it relates to the bulk of our real estate given the tax attributes, the way that we would want to do any transaction is really to do it in a tax efficient way. And thus it would mean in the structured transactions either for all or large parts of it. And for us to do that, factoring for the cost of doing it, the cost of duplicative G&A and those things, what we really would need to see is some divergence in multiples that would suggest that a bifurcation of the Business in that way would create value.

The reason we have not been rushing to do it is we have not seen those conditions. And so doing it now, we think would be treading water at best. Probably going underwater slightly because there are costs of doing it as I say and costs of duplicative G&A.

So I think what we would be looking for has less to do with exactly where we are in the cycle since we wouldn't really be taking these major assets and selling them outright because the friction and that would be too great. We look at more, at any point in time wherever we are in the cycle, do relative valuations and multiples suggest that a separation of -- the parts separated would be more than pieces together. And the way we look at it today, we just don't see that.

The APAC question is a great question. And I apologize we weren't trying to be subtle. We did probably bring the guidance down just a smidgen and had really to do with some of the things Kevin did reference relative to Thailand and Singapore being a little bit lighter.

The core areas that drive our AsiaPac business which are Japan and China, we still feel good about the year. We're going to have a great year in Japan, very high RevPAR growth and China we still think we're in the 6% to 7% range which is what we thought but just because of some disruption that you've seen in Thailand and Singapore being a little weaker, it has weighted the full-year down a little bit to sort of mid-or a little bit better single digits.

Your next question comes from the line of Jeff Donnelly with Wells Fargo.

Chris, back on Steve's question about the Waldorf. Have you reached a point where you can say it is more or less likely that you'll execute a transaction where you can pull cash out of the Waldorf versus finding a partner to recapitalize the development or redevelopment?

And second, can you maybe discuss what your priorities are there? I know you'd like to end up with a flagship hotel and a smaller footprint but are there other priorities such as cash or a carried equity interest or even a timeshare venue that you put importance on?

I think the priorities-starting maybe with the second and coming back to the first, both good questions. I think the priority for us in the end is to have a fully renovated reposition product on the full city block on Park Avenue that the Waldorf Astoria represents and as part of that, a very high-quality five-star minimum, I would say plus or minus 400 room Waldorf Astoria. That would be the flagship for the Waldorf Astoria Brand.

Now, there are a lot of different ways to look at the uses where that Hotel could be bigger than that. There aren't many I think that it could be smaller. A lot of it has to do with honestly, what various counterparties might want.

From our point of view, if we end up with the Waldorf at its size today, we can obviously-that would be very pleasing. We could have a smaller hotel and be quite satisfied with that.

Getting timeshare use into it is an option. It is not necessarily a priority in terms of something that we have to have done.

We would love to get cash out of the Waldorf. I think the more likely efficient way of maximizing the value of the Waldorf is not going to involve getting a lot of cash out. I think it is going to be trying to get a great value for the Waldorf, get the capital put in by a third-party and be in some way either doing it in a joint venture where we continue to have an ownership--maybe a major ownership stake in the Hotel--or using in some way, the proceeds of that to trade into other real estate on an efficient basis.

We have not gotten to the bottom of all of it because we're out in the world of counterparties trying to figure out how third parties are going to look at it, but the reason that it is not highly likely is there's a huge amount of cash to come out of it and that there's not a huge amount of value, there is. I'm not going to give it to you because I don't know if yet, but it's worth a lot more than what the multiple times EBIT is.

It's that we want to do that on a very tax efficient basis and I think you as the shareholder base should want us to do that as well because there'd be a lot of friction. The Waldorf was acquired in 1949 so you can imagine, it does not have a significant amount of basis.

The good news is it has a huge amount of value and there are some very efficient ways in the world of real estate to be able to capture that value and effectively take advantage of that without ultimately having a lot of friction. Exactly how we're going to do that, I'm not being coy. We don't know.

We know the various options, which productivity would be either a JV structure or a 1031 structure. We just have to finish the process on the counterparty side to be able to judge which direction it's going to go.

Your next question comes from the line of Smedes Rose with Evercore.

I just wanted to go back to your Big 8 Hotels and could you maybe remind us where they were in the last peak in terms of the percentage of group mix and where they are now and I know you don't want to talk about 2015 too much but is it fair to assume that the Group will continue to strengthen there into next year? Is that what you're seeing on pace now or maybe a little more color around that?

In terms of where they are versus the last cycle, they're actually about where they were before but that doesn't mean we don't think that we can layer Groups in more effectively as group demand strengthens to increase it. So I think we've said publicly in the past that the target there is sort of 40% and they're in the high 30%s, so if we are successful as demand strengthens and the top of the funnel fills and layering groups into non-peak periods we ought to be able to continue to drive it a little bit higher.

And I think just it's implied in what Kevin said, just quality of group. It's also taking groups that are lower rated, lower quality groups and lower, importantly, lower spend groups that were sort of filler in a more challenging group environment and replacing them with higher quality, higher paying groups that spend more, that have a lot more ancillary spend. So plenty of upside in the transition of group going forward.

Your next question comes from the line of Thomas Allen with Morgan Stanley.

So there's some hope the incentive Management fees are close to an inflection point here. Your IMFs increased 15% this quarter, 17% last quarter. How should we think about the trajectory going forward? Thanks.

I think the trajectory, what we saw in the quarter is sort of the full-year trajectory. Probably would have been a little bit closer to the first quarter trajectory, but for what's going on in the Middle East we have a handful of incentive Management fee contracts that are pretty lucrative there and Middle East has got a few issues as you can read going on. So it weighted it down a little bit but we feel great about that trajectory.

Notably if you look at our IMF which I think is a little bit different, 80% of our overall IMF is outside the US, only 20% is inside the US and why does that matter? That matters because the structure of incentive Management fees outside the US is different. It's a much lower beta structure. We don't sit behind a press to owners, like the traditional approach inside the US.

So you're going to continue to see a good trajectory, I think this year is going to be fine, in the mid-teens or maybe inching up a little past that. But as we get in the next couple years, both because of improvement in performance but importantly because the majority of the pipeline is international, majority of those have incentive Management fees because they're full-service and they have incentive Management fees that don't sit behind priorities. As those continue to enter the system, you're going to see incentive Management fee growth go into the 20%-plus over the next couple years. So we feel good about this year trajectory feel very good about it.

Thank you. And just as my follow-up, as you gave some good detail on the Waldorf I think I'll just try and push for a little more, do you know the approximate square footage of the room base? Just trying to think if you were to lower the room count from 1413 now to 400 to 500, how much salable square feet would there be for other stuff? Thanks.

Thomas, it's a 1.6 million square foot building. So it really can vary quite a bit depending on how our counterparty would want to break it up between Residential and Hotel. So the overall square footage about 1.6 million.

There are no further questions at this time. Mr. Nassetta, I turn the call back over to you.

Great. Thanks, everybody. We appreciate the time here on a Friday in the middle of summer. We'll try and find a better day but as a new public Company, Fridays seem to be the only days that we could get. We're going to do a little better next year.

Anyway, we're very pleased as I think you could tell with both the second quarter results but more importantly, how we feel about the second half of next year and how we feel about the broader set-up going into next year. We'll look forward to catching up with you after the third quarter and I hope everybody enjoys the rest of your summer.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.