Q2 2019 Earnings Call
Good morning, and welcome to the Hilton worldwide second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Jill Slattery, Vice President Investor Relations. Please go ahead.
Thank you Chad.
Welcome to hook on second quarter 2019 earnings call before we begin we would like to remind you that our discussion. 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 factor section of our most recently filed Form 10-K . In addition, we'll refer to certain non-GAAP financial measures on this call you can find reconciliations of non-GAAP to GAAP financial measures discussed on today's call in our earnings press release and on our website at IR Dot Hilton Dotcom.
This morning Christmas that 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'll be happy to take your questions and with that I'm pleased to turn the call over to Kris. 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 demonstrate 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 six six consecutive quarter.
Illustrating that our 17 distinct brands award winning loyalty program, an exceptional customer experience continued 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 profit growth remain positive, but incrementally a bit lower than previous estimates consistent with these trends were 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 us 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 midpoint of our range, even with slightly lower topline growth forecasts, we're 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 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 enemy innovative technology platforms unique product offerings 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 a record signings construction starts and openings.
Forecasted signings of more than 110000 rooms in 2019, Woodmark, 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 373000 rooms or over 40% of our existing base.
Given the strength of our system, we continued to deliver solid growth with de Minimis 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 29000 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 strong secular trends globally, driven by an emerging middle class. We think we are very well positioned to continue delivering impressive growth in the focused service segment, given our industry, leading Revpar index premiums. During 2019, we expect to celebrate the openings of our 100th through hotel, our 500th Homewood suites.
Our 850 of Hilton Garden Inn, and our top 20 520, 500th Hampton.
Demonstrating continued strength across both new and legacy brands. Additionally, our new Hilton Garden Inn prototype design to better meet the needs of our Chinese guests and owners is gaining great momentum and further fueling growth in Asia Pacific.
We also can continue to see impressive momentum in luxury as we execute on an exciting development strategy for the segment with forecast 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 Maltese earlier this month.
Additionally, the Waldorf Astoria, Dubai Financial Center opened its stores just a few weeks ago joining three other older 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 Walter Pastoria, Los Cabos Pedra go in Mexico, which we expect to open later this year.
We were also thrilled to reopen the historic rebate 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 a solid visibility into our growth over the next few years and with SEC favorable secular trends continued strength in signings and conversions and no significant brand Repositionings, 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 guess 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're 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 ride share leader lift 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 lift Amazon in live nation or on property initiatives like connected room, we're 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're very proud of all Weve accomplished over this last century and look forward to continuing to positively influence the world around us in the next century overall with a 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.
Outperformance 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 of 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 one dollar in six cents ahead of expectations.
Turning to our regional performance and outlook second quarter comparable us Revpar grew 1% driven by increasing market share and solid leisure transient growth, while the Easter shift a weighed on group business.
For full year 2019, we forecast the 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 increased 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.
And 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 continued 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 inline 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 upsizing 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 to 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 midpoint.
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 98 cents to one dollar in three cents.
Please note that our guidance ranges do not incorporate future share repurchases.
Moving on to capital return, we paid a cash dividend of 15 cents per share during the second quarter for a total of $43 million in dividends. Our board also authorized a quarterly cash dividend of 15 cents 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 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 can be found in the earnings release, we issued earlier this morning.
This completes our prepared remarks, we would now like to open the line for any questions. You may have we would like to speak with all of you. This morning. So we ask that you limit yourself to one question.
Chad can we have our first question. Please.
Sure.
We will now begin the question and answer session to ask the question you May Press Star one on your telephone keypad and if you are using your speakerphone. Please pick pick up your handset before pressing the keys. If any time. Your question has been addressed and Youd like to withdraw your question. Please press Star then too.
The first question today comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Thanks, Good morning, Chris you talked 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 a good question and we're really pleased with the market share gains that we had I guess you know it would be.
Skipping to then and then I'll fill it in and it would be hard to be perfectly scientific about.
Translating market share gains into impact on pipeline, but rest assured as you talk to the owner community with what they are trying to do is drive profitability. So the higher that our market share in an absolute sense is that the more that we can drive pipeline growth and I think it's so so the nuance of that is.
Growth in an index is really important and I think what's what's notable about it is that again both.
In the first quarter second quarter and year to date.
The growth in in index is across all brands and all regions and importantly, as I mentioned, a couple of quarters ago, We would expect that our international regions will equal or exceed the index.
In an absolute sense that we have in the US which is a wonderful harbinger of good things to come in terms of incremental growth around the world. So that growth that index sort of being across the board regionally and by brand is important but what's equally important is just the absolute market share and and I want to sort of pause on that for a moment because what owners are looking for obviously, they want growth, but what they're looking for when they.
Talk to us or any other brand is what is the market share of the brand and so they're looking at it in an absolute sense to use. The simple example, if you have great market share growth off of a very low base that doesn't necessarily translate into higher pipeline, which 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 businesses that are been out and are reasonably mature are either at the top of the heap or a category killer. There is no dog in the bonds. So any time, we're talking to owner anywhere in the world of any of our brands all of the brands are performing at the highest level or above which is a which is a very good set of facts for our development teams to be talking to owners as we were as we're working to increase the pipeline. So again I can't I can't say I don't have an algorithm that says if we.
Gross 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 or more importantly, 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 net 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 are redeeming, our earning points and burning points through some of those.
Should we generally be thinking of those redemptions as being.
Accretive to the system fund and therefore, allowing you to reinvest more and kind of drive that flywheel from from a royalty standpoint, and what 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 lift buying points.
In order to provide points when people are who are riding and lift which means that is creating.
Incremental opportunity for flywheel Unreal reinvestment I think the other way and in and this is really important when you think about our engagement numbers, which are twice what they were off a much larger 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 20, 530%. We're now over 50% or why is that well there is a whole bunch of elements to it but part of that is getting.
More engagement out of your high level customers, but let's be honest you mostly had those people engaged if they're staying with the 100 or 200 nights a year, there's sort of they are active and they are engaged what its been about is more getting lower level members of honors engage and while they may not stay as much. They may stay 235 nights a year not a 100, that's business right and Thats important business in the more that that can be a direct source of business, but rather the indirect obviously it adds to our 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 incremental engagement at the high levels is getting lower level engagement and so when you think about.
Our points in money slider, when you think about our.
And where are the only ones have done shop with Amazon points opportunities for points pooling lift the things that we're doing I don't want to get ahead of us with live nation in terms of ability to use points in it in a broader context in terms of.
Music opportunities those are not just about flywheel and selling points and getting more money in the system. Those are about getting lower lower level members, who 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 him in our app and get them thinking about us the more they spend with us every as it can be proven scientifically and so the engagement numbers.
Impart are 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 lower level numbers 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.
Hi, guys I wanted to.
Focus on some of the factors affecting 2020. This is kind of like putting your projection had on.
As you talk to fellow Ceos.
In the last couple of quarters, we've talked about their level of it spend kind of being put on hold at least temporarily because of trade in and.
And to what degree is your 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.
Not only that but also the political uncertainty is do you think that theres any is 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.
Sort of looking at it.
Scientifically, but sort of subjectively.
You know talking to other Ceos, just talking to friends that anybody you talked to.
What's going on in the political world, which is connected to the trade world, which is connected to 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 have put a caution flag that doesn't mean that they're not doing things are not spending they're not hiring they're not traveling it just means they're a little bit more there incrementally more cautious because of what's going on in the broader environment and I think that that's absolutely going on having said that again, it's a caution flag I would say what I have not seen as like the Red flag, which is like all stop I think people are still.
Quietly sort of reasonably optimistic I think they are carrying ahead and and.
Our expectation for the second half of the year and I'll I'll try and answer your 2020 question, Although it's way early in and it's Super subjective at this point, but for the second half of the year I think our view in as we looked at our forecast was more of the same.
Mike There doesn't seem like I mean, maybe that work in China. This week will be will be fruitful I suspect sometime this year by 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 business in China.
But time will tell but there are other swirling activities with the political.
Theater ramping up with the with the 2020 election coming so what we anticipated for the second half of the year honestly is more of the same trends.
The reason we brought the low at the high end of our guidance down was when we were talking to you a quarter or two quarters ago honestly comps are a bit easier and 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 so to try and do our best to forecast the rest of the year, we look at and say no we don't.
I think it'd be I think it'd be aggressive to say things are going to get better. We think that what we've tried to do in the second half of the year sort of take the more recent trends and and project those out I know that was a big lead up to your answer to your primary question, which is 2020 I sort of think about were 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 fund stuff in and start to give guidance to our teams around the world.
I would say you know my best Intel and talking to lots of Ceos and in and amongst a lot of folks around the world and our teams is that I would project out the current trends in the next year now is that going to be what happens who knows right. I mean, I think they could incrementally get a little better that get incrementally get where I don't know that I think it's way early to judge, but if you which are doing asked me that question today, how would I think about 2020 sitting here today I would think about 2020, a lot like I'd think about the second half of this year, because I don't have enough Intel to think otherwise.
All right I'll leave it at that thanks, everyone.
Right.
The next question comes from Shaun Kelley of Bank of America. Please go ahead.
Hi, good morning, everyone.
Chris maybe just want to ask sort of a similar question, but direct it more at unit growth. So.
Obviously, we saw some very modest amount of sequential growth on the pipeline this quarter, but I think your overall view for the full year remains.
Pretty steady for pipeline growth.
Just what's the commentary out there from developers.
And have you seen any of this corporate softness specifically impact what you're about what you're able to do on the signing here your conversion rate or how quickly people are willing to sign deals and just whats the activity level out there on what you're able to do from that from a unit growth perspective.
Yes, Greg Great question, and then I'll follow on maybe to.
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 on.
New units in terms of signing in excuse me in fact in terms of starts we expect both in the us and globally for starts to be up so our development community, even though if you look at it scientifically it says the the debt markets are tightening a little bit what our experience would tell us real time is our developers are getting financing more easily they are getting more done so none of the caution flags that I described our.
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.
Protracted.
Period of time, where there is a lot of uncertainty. It eventually woods would see through I mean, it's sort of be disingenuous to say otherwise, but we're not we're not we're not seeing it in reality as I said is our starts are going to be up this year and going to set New records. In addition to signings in new unit growth. So given that we've got a huge pipeline representing 40% of the base given that we have a very good track record.
And delivering conversions and more brands to to do that given that you know the more than half of the pipeline is already under construction I think.
They 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 nuc 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 Sean.
Reality is even in an environment, where you have reasonably low some might say in cemig same store growth, 1% to 2%.
We are growing our EBITDA nine 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 co brand and those are performing well and we expect those will continue to perform well so.
Even in a world, where we're increasing our guidance at the same time, we took that the top end down because the core things that are really driving our growth are performing very well as I think about next year, it's way early to get into it but.
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're 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 that has been more choppy and were same store growth has been weaker but yet we deliver very strong bottom line results that people will start to recognize that and and understand that that you know that that is that the business is resilient and we if we run the business well, which we intend to 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 true I remember when you announced the brand at the beginning of 2016 and it's impressive that you now are going to open up your hundredth 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 and pretty much the last year.
We.
We have a couple of things I'll talk about sort of in the Skunk works one much more advanced than the other true is a mega brand in the sense and I've said this many times on this call and when we announced it I think it will be our largest brand in the world. When it's all said and done Hampton is today, it's 2500 hotels.
Reality is true 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 is like no investment from us decades of growth sort of built in growth true ultimately as the opportunity to be even much bigger than Hampton. So there given its serving the largest segment of demand. There. There are brands. One in particular I'll I'll talk about that I think our megabrands, meaning they are hundreds potentially.
Over a long period of time thousand hotels, but probably none equivalent to true to be perfectly honest just because it's serving 30, 540% of all demand.
And is the biggest segment there are a couple of things.
That we're working on both in the lifestyle space, one, which I think you know has is a very large scale opportunity on a global basis, which I would say is sort of upscale lifestyle.
A I would describe is sort of a click above Hilton Garden Inn for.
More urban or mixed use sort of higher end development opportunity I do think that 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 launched it with our development community the reception, which we would typically do before a public launches. 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 deals.
To the table the other one that we are working on that.
I would say more in the Skyworks, let les imminent is luxury lifestyle, we've talked about it.
For 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 opportunities that we think.
As we talk to our customers.
We will drive more engagement more loyalty and sort of help feed the network effect.
Adelaar at a larger scale, but we will eventually we will eventually get to that so.
We are not going to be launching three brands every year to be clear I think I think in the next year, we'll probably do one luxury lifestyle at some point next couple of years and I'd be remiss in not making this statement given that we are in our early days propagating the the breadth and depth of our brands around the world. We would the lift that we have in the two I said they'd be 19 brands that is.
Plenty of bran 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. Revpar comment. So so if we look at corporate confidence which comment.
I just on the consistent and on the outlook of consistent U.S. Revpar growth I mean corporate confidence keeps on deteriorating STR data showed a June was the weakest month, the revpar growth, we've seen all year, so like it feels like.
Revpar growth in the U.S. is deteriorating when you guys are expecting entry consistent Kent can you just reconcile those two things like are you seeing stronger group bookings are production or just start talked a little bit.
I would say two things going on really simply and we'll see whether were right, but I think there there are logical one, particularly third quarter as 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 were easier in the U.S. for a whole bunch of reasons in the second half of the year. So we sort of wipe 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 that the outcome will be very similar it may be a tick off I mean, I'm I'm I'm rounding it may be a 10th or two tenths off of what Weve delivered year to date, but we think it will be in that timeframe and Thomas to June . We also swapped a Sunday for our Friday in June this year, which I think has been sort of talked about in people evaluating the STR numbers. So if you look at you can look at you know a may allow.
A little bit of an idea and May was released April was not that great in June but may was really strong so.
Yes, I would 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 my comments 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.
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 US in the first half year is 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 it will be outperforming the rest of the world, but won't be outperforming as much and then China in particular, which is driving APEC, Japan will still be but China is clearly going to going to be worse in the second half of the year than the first and so international will 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 JP Morgan. Please go ahead.
Hi, good morning, everybody.
One question related to the hotel development pipeline add Chris or Kevin can can you give us a sense of.
Maybe what hotel developers.
Our underwriting too in terms of an IR now say versus a year or two ago. Maybe you can look at it you less versus China, and then with respect to.
Signings to what extent are you getting though increased requests for help and capital to be involved.
Thank you.
Yes, so I don't think people are underwriting differ dramatically different IR ours than they were a year or two ago I think well I think what were people sort of look to change their underwriting is what is what are the risk adjusted returns relative to a risk free rate and the risk free rate has moved around a little bit but hasn't been all that different. So I personally don't think people are underwriting to different returns I think they're adjusting their their expectations of what their underwriting is going to be going forward and so you you see that a little bit in terms of the transaction market for existing assets that affects pricing, but in terms of what people are looking for to take development risk that's been really consistent.
And then sorry, the second the second question key money, Yes look I mean, I think you've seen the contract acquisition cost 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 thats on the margin and I think overall the number of.
Deals in our pipeline that have any contribution from US has remained largely consistent over the last two years.
That that number is about 10% of the deals in the pipeline have had any contribution from us in that number that 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 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're kind of looking at right now and then just more broadly obviously you guys raise your capital return guidance for 2019 in the period.
As you think about buyback activity right now have you altered your strategy or stance on capital returns looking ahead at all.
I'll, let Kevin take the second I will take the first the short answer is as we look at our forecasting as implied my prior comment 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 whether it's going to go up down or sideways I sort of gave you our view for the moment is sideways.
But the bulk of our forecasting with some 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 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.
Yes, great. Thank you.
And then Karl on capital return in the short answer is no. We have not we have not changed our outlook on capital return I think what you're seeing in the ranges, we're a little bit deeper into the year, our EBITDA, our EBITDA outlook is a little bit higher and so solving for the midpoint of our sort of stated leverage range gets you to a little bit higher midpoint and we're halfway through the year. So we are tightening the range and I think the way to think about it is the way we've always thought about which is we like the stock 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 think about freight recurring free cash flow plus re leveraging is coming back no matter, what and were kind of giving you a range of outcomes that could could vary depending on how we think the outlook is for the business and the price will vary a little bit within the range, but largely we think about capital return in a really consistent way.
Great. Thank you both.
The next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning.
One focus a bit more on China, you mentioned slower leisure demand. They are few times is the demand different and the tier one cities in high end resorts compared to more moderate tiers or slow down pretty broad based and maybe some more detail on corporate government and leisure will be great.
Yes, So I think look I think Anthony it's been pretty consistent across the board in China.
Over half the business is leisure driven in China, and 90% of is driven in country. So when you see their economy.
Slowing the way it is and then sort of.
Pulling back the range, a little bit on spending youre going to see that flow through to our business and so but we really haven't seen.
You are not seeing sort of the business dramatically constructing and the food and beverage being limited the way. It had been a couple of years ago. It seems really broadly evident by 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 the other thing not to be a pollyanna because as I said, we do.
We assume the current trends continue in China, that's that's what's built into the forecast.
Recognizing we've been through this in China before to the extent that the trade deal is Matt Chinese leisure consumer more than anywhere in the world I've seen can flip around pretty quickly now we just.
At this point is and has been going on long enough, where we said you know.
We can't forecast that but reality is if a trade deal done I mean, it will take some time to sort of flip it around and get back get them back traveling but I think there's an opportunity for that to happen and for that to be.
A bit of potential upside at least later in the year, but again, who knows teams are going next week and it is it is.
It is impossible to know what was the result of that will be at this point. So we've just assume that that doesn't happen.
All right. Thank you.
The next question will be from Robin Farley of VBS. 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 manage revpar in the quarter in just a little bit different than the overall U.S. trends and wondering if there's 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 youre looking at but I mean at the higher at the higher end Revpar actually performed stronger than.
At the lower end in terms of brand so nothing to call out there I was looking at your your franchise up 1.6, and managed hotels up 1.3 and that the limited service tend to be more franchise and manage would tend to be more full service and that that that's a little bit different than what we see with not necessarily in the that's not necessarily the case in the U.S. So I think thats, probably what you're seeing there is we actually do have a higher higher level of managed.
Franchise of full service hotels in the U.S. So there is nothing theres 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 brand.
Footprint that it seems to me that with 94 million honors members in the engagement statistics and 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 Im just wondering why it took so long to.
Kind of.
Reinvigorate the growth in luxury and whether you've thought about putting more of your own capital into.
Get a quicker quicker growth in that segment.
I appreciate the question I read your note on Sunday, Bill I don't agree with it entirely but here's here's 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've finally as you described not me. We finally decided to focus on luxury we but it takes a long time to make any of these deals happen and and so we've been very focused on it for for two fundamental reasons.
The first is some of our customers want it right I mean, a lot of our different times. The second is.
Or loyalty to have it in the system from an aspiration all point of view. We think is important so we spend a lot of time on it what I would say objective is we've made incredible progress. We went from basically nothing 10 or 12 years ago to having opened are 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 were working very hard at filling those gaps that were making tremendous progress on yes on occasion, we are using our balance sheet. If you look at the the amount of sort of outstanding key money commitments, we have it would wait disproportionately to luxury for that for that.
For that very reason, but I would say and you said it bill implied in your question is obviously, what we're doing is working right because I'd say, we have the market, leading statistics and 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 theres a whole bunch of reasons for that one the luxury strategy is is I think working to what you have to remember is while people aspire to go to the Maldives invoicing, that's not actually what they do in that 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 points they aren't traveling on business to satisfy their needs in their personal life that is what they what if you look at the behavior and so when you think about it think about it this way like we're not a startup we have 6000 hotels that people can redeem at in 100 in 15 countries around the globe right that satisfy can satisfy a lot and needs. We have 110 open or pipeline luxury we.
<unk> of almost 200, great resorts around the World. If you look at 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 6000 hotels, we have four or 500 of them sorta by broader categorization of sort of luxury and resort would meet those needs. In addition.
To the other 5500 that meet 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 Walter So Conrad that that have opened I'd encourage it I think you would be really impressed but it is a broad sort a network effect that we are creating to allow loyal team members to get.
A great value proposition luxuries 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 helped drive loyalty.
Thats a thorough and.
Satisfying answer so I appreciate I'll leave it there thanks.
Well debate in offline, yes, you got it.
Right.
Our next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.
I guess, maybe two follow ups, if I could one just one I guess for Kevin.
Looking to 2020, how realistic is it to expect much growth and the.
$1.5 billion to $1.8 billion capital return and there's certainly international right incremental cash flow.
But but pipeline in revpar growth slowing a bit I'm wondering how that shapes. How you think about the structure of repurchase activity our capital return next year.
Well ahead look Jeff it's early so I should I should probably do the responsible thing and say, it's a little bit early to be giving sort of capital return guidance, but if you think about 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 for the record is not slowing and we do not think our net unit growth is slowing so that those hotels will enter the system they'll pay fees, our free cash flow odd to you ought to assume that our free cash flow will grow up will grow slightly and we will continue to re leverage the business and so our available our capital available to return to shareholders ought to look very similar or slightly higher than it does this year.
Yes, Hi, I agree keeping in perspective, a cup, but one technical thing and then a broader view.
Every point in same store Revpar assumption has had the impact of being worth about 12, 10 $10 million to $12 million of free cash flow. So in the end does not move the needle on that and the way to think that a broad based we've sort of covered this but it's probably worth covering again to make sure were abundantly clear.
On return of capital I would say in share buyback, we've put it in three buckets, one free cash flow you should assume that were every year always on deploying our free cash flow to do are minor dividend, which we don't intend to increase and then use 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 circa the midpoint of our three to three and frankly, if you look at the financing transactions. We just did where does it take us for the year three in a quarter shocking.
And that gets us to the 1.5 to 1.8, there's also an opportunity, which I've talked about potentially for short periods of time to lever the company up even more highly beyond that for a period of time, and then de lever and accelerate repurchases and what I would say is that sort of the the more opportunistic side of it we did it a little bit with agent day, but that 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 Youre you ought to think about our buyback like what we're 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 we would certainly consider something we've talked about around our board table and would have to decide the time to 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 I.
Obviously doesn't doesn't look likely.
And Chris I would not want to beat a dead horse, but what's the path to getting to the top end of year.
One the 2% annual guidance.
And revpar, because if you're facing tough comps internationally in the back half of the year and like you said listen steady U.S. growth. It just feels like the acceleration you would need in the second half of the year is just unlikely to kind of pull your.
First half of the year up that much if you will yeah, I mean, I I think as I always do that we'll end up somewhere in the middle right. I mean, we narrowed the range. We're usually a two point range, we narrowed it to one.
Because I think you know who knows you cant 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 us would have to pick up a little bit you'd have to have the choppiness, particularly in business transient sort of stabilize the group. The group is going to perform because it's mostly on the books you'd have to sort of have that caution flags pulled back in the us is that possible sure you could get it.
The trade deal done with China people, good feel a little bit better you know people could start spending a little bit more traveling so it it's not impossible and it is possible to get to the two it was in our view 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 will contribute to it would be China, China, while it's not a huge part of our overall system. It was growing at a much higher level. So it going to flat or modestly down does does have some impact. So if you said you as you know stiffened up a little bit and people took a few caution flags in China flipped around with the trade deal could you be at two yes, do I think we will know I think will be around one and a half. That's that's why we gave a range and.
Trying to tighten the range more than a point when we're halfway through the year just.
To be honest it didnt feel prudent.
Great. Thanks, guys.
The next question will be from Smedes Rose of Citigroup. Please go ahead.
Hi, Thank you.
You've gotten the most of it but I just wanted to ask you you noted.
Your strength and focus on the mid market segment, and we continue to see true put up the out outsized revpar gains relative to other.
You are the brand from 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 footprint in that brand continuing to green gain traction.
No I don't I mean, you can't say that that they don't compete in some markets at all but it is really a different segment. It's how we designed it we spent a lot of time on that and how we think about the go to market commercial strategies is to keep it and swim Lane I think why true is gaining.
And if you look at it Hampton is gaining share too. So Hampton is not like you're not seeing through go up in Hampton go down and is gaining share and hamptons the highest average market share brand that we have so it is it is both in absolute sense and a growth since performing at an incredibly high level wide through I think is doing well is is honestly to think about that segment no no offense to everybody else out there and the reason we launched true is because we didnt think anybody in that segment was doing it well, we didnt 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 that customers are flocking to true because it's just a better newer cleaner product and it's taking we would it's taking share from his folks in that in that competitive set.
Okay. Thanks, and then Chris when you just look back at prior cycles.
Let's say the US economy does take a little bit more of a downshift I mean, when developers are looking to access capital do do banks are lenders.
Are they more likely to require that the.
Development be within a major brands Winston like like your own I mean, do you see relative gains within maybe a smaller overall development pipeline. There is no question that that's the case frankly to me as 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 Pat myself and held on the back we are more Financeable I mean, just go talk to a dozen lending institutions and ask him 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 a 100 years and so yes, we are already taking it unfair share amount of development in an environment that gets worse I think our sheer numbers go up 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 to Chris and set up for any closing remarks. Thanks, everybody as always we appreciate you taking the time.
We'll look forward to talk to them and 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.