Hilton Worldwide Holdings Inc.

Good morning and welcome to the Hilton Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Head of Development Operations and Investor Relations. You may begin.

Thank you, Chad. Welcome to Hilton's second quarter 2024 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk 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 in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassata, our President and Chief Executive Officer, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our second quarter results and discuss our expectations for the year. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Thank you, Jill. Good morning, everyone, and thanks for joining us today. We are pleased to report strong second quarter results with Redpar growth driving adjusted EBITDA and adjusted EPS above the high end of our guidance. We continue to execute on our successful development strategy, and in July, our system surpassed 8,000 hotels globally. Our newly acquired brands and recent strategic partnerships will help us build even more loyalty with guests, further enhancing our network effect and increasing our industry-leading RevPAR premiums. Coupled with our asset-light, fee-based business model, we are well-positioned to continue producing significant free cash flow and driving meaningful shareholder returns. In the quarter, system-wide REBPAR increased 3.5% year-over-year, above the midpoint of guidance due to robust group performance, continued recovery in business transient, and easier holiday comparisons. Transient REBPAR grew 2% year-over-year with increases in both business and leisure demand. REBPAR across large corporates rose 5% in the quarter, driven by strong trends across most industries. including notable recovery in technology. Leisure transient RevPAR continued to exceed prior peaks, supported by solid summer travel demand, particularly in international markets. Group RevPAR rose more than 10% year-over-year, led by strong demand for corporate and social meetings and events, and booking windows continued to lengthen. For the full year, group position is up 10 percent over last year, with position up mid-teens over the next several years. We expect full-year system-wide red part increase 2 to 3 percent, driven by positive growth across all major segments and regions. We tempered the high end of our expectations versus prior guidance due to softer trends in certain international markets and normalizing leisure growth more broadly. With continued strength in group and steady recovery in business transient, we expect higher-end chain scales to continue to outperform. Turning to development in the quarter, we opened 165 hotels, totaling more than 22,000 rooms, and achieved net unit growth of 6.2%. We marked several milestones in the quarter, including the opening of our 6,000th hotel in North America, and we surpassed 75,000 home-to-suites rooms globally. We also opened seven new resort properties in Europe, including the debut of Curio in Croatia and Doubletree in Malta. We welcomed graduate hotels and Nomad into our family of brands during the quarter, providing further opportunities to deliver exceptional guest experiences and accelerate our expansion in the fast-growing lifestyle segment. Demand for lifestyle products continues to increase as guests seek unique experiences and sought after destinations around the world. In the last year, we have expanded our lifestyle offerings by more than 30%, fueled largely by growth in Curio, Tapestry, and the recent acquisition of Graduate. With roughly 400 lifestyle properties today and hundreds more in the pipeline, we are well positioned for substantial growth over the next several years. Conversions accounted for roughly half of openings in the quarter, driven by the addition of Graduate and the continued strength from Doubletree and Spark. In the quarter, Spark opened 27 hotels, more than doubling its existing supply. The brand also celebrated its debut in Europe with the opening of Spark by Hilton London Romford just nine months after the first property opened in the U.S. The opening marks the start of an exciting journey for Spark to redefine the premium economy segment in Europe with further launches of the brand across continental Europe expected in the coming months. In the quarter, we signed 63,000 rooms, increasing our pipeline to approximately 508,000 rooms, which is up 8% from last quarter and 15% year-over-year. with notable strength across the EMEA and APAC regions. In particular, Hilton Garden Inn continued to gain tremendous traction with year-to-date signings up nearly 90% across 20 different countries. Overall, conversions accounted for over half of the signings in the quarter, driven by additions from our acquisitions and partnerships. Excluding acquisitions and partnerships, conversions accounted for 25% of signings in the quarter, largely driven by continued momentum with Curio, Tapestry, and Doubletree. System-wide construction starts in the quarter were up 160% versus last year, and up 37% excluding acquisitions and partnerships. With meaningful growth across both the U.S. and international markets, we remain on track to exceed prior peak levels of starts by year-end. Approximately half of our pipeline is under construction and we continue to have more rooms under construction than any other hotel company, accounting for more than 20% of industry share and nearly four times our existing share of supply. We've seen tremendous interest from owners through our exclusive agreement with small luxury hotels of the world, with the pace of initial property signups far exceeding our expectations. Under our strategic partnership, we added nearly 300 boutique luxury properties to our system in July, with an additional 100 properties expected to join later this year. Adding these unique properties to our network is highly complementary to our existing luxury portfolio and significantly increases our luxury offerings for guests around the world without any capital commitment. During the quarter, the first AutoCamp properties were added to our platforms. Each AutoCamp location provides a unique opportunity for guests to immerse themselves in nature without sacrificing the comforts of high-end accommodations. These exclusive agreements with SLH and AutoCamp provide honors members with new and exciting ways to earn and redeem points while broadening and enhancing our network effect. As a result of our strong pipeline, recent tuck-in acquisitions, and strategic partnerships, we now expect net unit growth of 7% to 7.5% for the full year. We are also proud to continue to be recognized for our industry-leading brands and culture. Brand Finance recently ranked Tilton as the most valuable hotel brand for the ninth consecutive year, claiming nine of the top 50 hotel brand spots. Additionally, Hilton was recently named the top workplace in the U.S. for millennials by Great Place to Work and Fortune for the seventh consecutive year. Since 2016, we've received over 540 recognitions as a great place to work across more than 60 countries, and we remain the number one great place to work in the world and the United States. We're very happy with our second quarter results, development milestones, and brand and commercial enhancements. which we think demonstrate the continued strength of our business model. Now I'm going to turn the call over to Kevin for a few more details on the results in the quarter and our expectations for the year.

Thanks, Chris, and good morning, everyone. During the quarter, system-wide REF PAR grew 3.5% versus the prior year on a comparable and currency-neutral basis. Growth was largely driven by strong international performance and continued recovery in groups. Adjusted EBITDA was $917 million in the second quarter, up 13% year over year, and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth, largely due to better-than-expected U.S. REVPAR performance and some timing items. Management and franchise fees grew 10% year over year. For the quarter, diluted earnings per share adjusted for special items was $1.91. Turning to our regional performance, second quarter comparable U.S. REVPAR was up 3%, driven by strong group performance, particularly in urban markets. In the Americas outside the U.S., second quarter RevPAR increased 7% year-over-year, driven by strong results in leisure markets. In Europe, RevPAR grew 7% year-over-year with solid performance across all segments and continued strength from international inbound travel. In the Middle East and Africa region, RevPAR increased 11% year-over-year with growth in both rate and occupancy led by strong group and leisure performance. In the Asia-Pacific region, second quarter REVPAR was up 1% year-over-year. REVPAR in APAC-X China increased 11%, led by continued strength in Japan and Korea. China REVPAR declined 5% in the quarter, with difficult year-over-year domestic travel comparisons and limited international inbound travel negatively affecting results, which weighed on REVPAR results for the region, but accounts for less than 3% of overall fees. Turning to development, we ended the quarter with approximately 508,000 rooms in our pipeline, up 15% year over year, with approximately 60% of those rooms located outside the U.S. and nearly half of them under construction. For the full year, we expect net unit growth of 7% to 7.5%. Moving to guidance, for the third quarter, we expect system-wide REF PAR growth of 2% to 3% year over year. We expect adjusted EBITDA of between $875 million and $890 million. and diluted EPS adjusted for special items to be between $1.80 and $1.85. For full year 2024, we expect REF PAR growth of 2% to 3%. We forecast adjusted EBITDA of between $3.375 billion and $3.405 billion. We are bringing down the high end of our guidance to reflect slightly lower REF PAR growth expectations and FX movements. We forecast diluted EPS adjusted for special items of between $6.93 and $7.03. Please note that our guidance ranges do not incorporate further 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 $37 million. Our Board also authorized a quarterly dividend of 15 cents per share in the third quarter. Year-to-date, we have returned nearly $1.8 billion to shareholders in the form of buybacks and dividends, and for the full year, we expect to return approximately $3 billion. Further details on our second quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chad, can we have our first question?

Thank you. We will now begin our question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. And the first question will be from Joe Gruff with J.P. Morgan. Please go ahead.

Good morning, guys. Thanks for taking my question. I was hoping you'd give us a little bit more detail. Obviously, on the net room growth side of things, Chris and Kevin, clearly going to 7% to 7.5% is obviously a very good thing. Can you talk about what's added versus a quarter ago with particular attention with SLS and some of the newly acquired brands, as well as, you know, maybe what's different on a sort of organic same brand basis versus a quarter ago?

Yeah, I'd be happy to. I think the way to think about it is what's being added essentially is Um, is graduate. I mean, if we, if you look at our, our prior guidance, we had incorporated a, a, a guesstimate on what we would do for SLH. Um, we are doing better than that. And so I think in the end, that's going to probably be about a point and a half of nug graduate, which we said would be separate and apart is about a half a point. And so I think if you sort of unwind all that and compare it against prior guidance, the organic is slightly less but has 100% to do with some things that are just moving from the fourth quarter into the first quarter of next year. But as I said in my comments in terms of feeling good about what's going on the development side, I mean, for the full year, we're going to hit, you know, historically high levels on signings. We're going to hit historically high levels on starts. And that is both of those excluding any sort of partnerships or acquisitions. And obviously that's, you know, then translating into very good results. We feel very good about the momentum into next year. Most everybody was at our investor day in the spring where we articulated a sort of algorithm story of 6% to 7% organically. And we feel very, very good about being able to deliver on that. Obviously, this year is going to be above the higher end of that because of some of the inorganic things. But if we fast forward to next year, Our expectation certainly is organically we will be solidly in that range, just given the signings, the starts, and looking at how that's going to play out in the next couple years.

Thank you. And the next question will be from Carlo Santorelli from Deutsche Bank. Please go ahead.

Hey, Chris. I think you addressed most of what I was going to ask. But at the end of your remarks there, you did talk about organic growth and the outline you laid out at the analyst day. When you think about kind of contract acquisition spend over the next several years and acknowledging kind of that 6% net unit growth range, Should we be thinking something similar to what you've kind of been spending in terms of contract acquisition spend this year to date, last, et cetera?

Yes. Well, last year was elevated because of a few very specific deals, which we've noted over the last couple calls. This year will moderate and be lower than last year. And I think on a go-forward basis, I'd look at the next year as sort of being comparable to where we'll end up this year. We're not really seeing – any material difference, notwithstanding a lot of noise in the market. I think in the quarter, Kevin helped me. You know, our key money percentage of deals in the second quarter was like 7 or 8 percent. Overall, key money is still less than 10 percent, so 90-plus percent, you know, fully, you know, free of any form of incentive. And we haven't really seen those stats really move around a whole lot. Again, we had an elevated year or two. coming out of COVID because we got some really cool opportunities on some very big, you know, super high end luxury and, you know, and sort of resort convention type assets. And we took advantage of that, but, um, we're getting back to more normalized levels, which again, will be lower than last year, this year. And I think we'll continue at that kind of level over the next two or three years.

Great. Thanks. And then you mentioned group pace, um, plus 10 for this year and the outlook for the next few years you mentioned was mid-teens. In terms of 25, 26, what kind of percentage of your group is expected group roommates on the books for 25?

I don't have the exact number in my head, but I would guess at this point for 25, it's probably 40 to 50%. And for 26, it's probably a quarter. something like that. By the end of the year, you know, we'll be for 25, we'll probably cross over at 60 to 70%. Those would be sort of the typical numbers. And group is sort of getting back to, you know, pre-COVID typical levels. Like even if you look in the second quarter at group mix, it was pretty much at, you know, where we were pre-COVID. I mean, of overall mix in Q2, it was 20%, which is exactly what it was. pre-COVID. So it's sort of, you know, group, it's taken a while because of the long lead nature of it and planning and all that goes into it, particularly with the larger groups and the city-wide. But that, you know, that's sort of, you know, now hitting on all cylinders and normalizing. So yeah, I would think it'd be in those percentages. So I think it's a, you know, they're a very good indicator. We sit around this very table, you know, with all of our senior team, including head of sales and his team. And they feel very good. There's no sense of, you know, sort of slowing on demand and pricing and, you know, the group demand pricing and overall attitude in that segment remains quite good, quite strong. And as I mentioned in the comments, the booking window is is extending. I mean, our overall booking window extended in the quarter and is at this point pretty much the booking window is back to, you know, obviously got super short during COVID, but it's pretty much now back to normalized level. Extended in the second quarter and pretty much got us back to pre-COVID levels. And the group booking window continues to extend just because people have to go further out. There's just not enough space available for their needs.

Perfect. Thank you very much. And the next question is from Sean Kelly with Bank of America. Merrill Lynch, please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. Morning, Chris. So wanted to maybe just go high level and get a few of your views on the kind of latest on the consumer and just maybe the broader macro. Obviously, a lot of cross currents out there. I think what we continue to see repeatedly is some softness and leisure at the margin in the U.S., you know, contrasting that with the fairly solid corporate environment. But behaviorally, what caught your eye, you know, just operationally through the quarter as we got into maybe the summer travel season? What do you think is changing at the margin? Thanks.

Yeah, a great question, and obviously we spend a lot of time talking to people and looking at a lot of data in our business. Let me do it maybe through the lens of walking around the world a little bit to talk about what's going on. So starting with Asia, maybe I'll finish at home, start with Asia-Pacific. Asia-Pacific, as you heard in Kevin's commentary, is sort of a tale of two cities, China and then APAC-X China. So in China, I think Kevin covered it nicely. In China, there is actually, you know, a very significant amount of travel going on. We do expect to end the year sort of down probably circa 5%. But what's going on in China is obviously they have, you know, economic issues. So their economy is slow, but really the travel business is still quite robust. But what's happening is they've opened up a lot of corridors, for inter-Asia travel that is visa-free, and Chinese travelers love to travel, and they're getting out of China and they're going around, and there's just not enough inbound travel yet into China. There's not enough flights from Europe and the US and other parts of the world to compensate for that. And that's gonna take time. I mean, I was there during the quarter at a US-China travel summit that the State Department sponsored with their equivalent. And we were talking about, you know, how we're going to get, you know, stimulate more travel, more flights. And by the way, the flights have tripled or quadrupled, you know, even since then. So, I mean, there is progress, but it's still going to take some time. So I think, you know, China is a complex story, but that's what's going on. You know, travel in aggregate, similar to where it was, sort of not better or worse, but more people leaving, not enough coming in, I suspect, over the next year or two. you know, we will get to a different place. Hopefully their economy starts to pick up, but you'll have a lot more inbound travel. The rest of Asia Pacific, quite strong, you know, particularly led by Korea and Japan. And we haven't seen any real signs of weakening in those markets. And I should say India, for that matter, no real signs of weakening. And those are the real APAC ex-China markets that are driving performance. And then coming to EMEA, again, sort of a bit of a tale of two cities. The Middle East remains quite strong pretty much across the board. Europe, I would say, is still very, very strong in an absolute sense, but a touch weaker than what we had seen a quarter ago, led by what you're talking, you know, implied in your question, which is some of the leisure business. Again, you're still at the high end of high single-digit sort of year-over-year growth, so it's not like it's a, it's not a bad story. It's just a little, it's come off just a little bit. And then coming, you know, coming, you know, I could keep lots of other places in the world, but these are the big markets. Coming home to the U.S. is exactly what's implied and sort of what you would guess from what I've already said. If you break apart the segments, group is still raging. You know, business transient is still grinding up, not at a rapid pace, but still grinding up. Both of those segments maintaining great pricing power. And then leisure transient, you know, has been normalizing, you know, because we're just getting back to a more normal life. And it was at very elevated levels. you know, particularly on weekends, but broadly. And so we continue to see sort of normalization there. And the consumer, if you break it apart, you know, and sort of segments in the lower sort of half of consumers, maybe even the lower three quarters. I mean, you can read the data's all out there. They had bank accounts, you know, and checking accounts full of money. coming out of COVID, they've spent all that money. They're now borrowing more. And so, you know, they have less available, less disposable income and capacity to do anything, including travel. You go up to the upper echelons and people still have pretty fat bank accounts and checking accounts and wherewithal. And so, you know, what the impact of that is, you know, some, you know, continued normalization of, on leisure transient. And the reason I use normalization is not to be cute. I mean, for the full year, you know, if you look at it, you know, we think we will globally see growth in all segments. I said that quickly in my prepared comments. It'll be very, very low in leisure transient, but positive, a little bit, you know, higher on business transient, and then, you know, very, very strong for the reasons I've described on meetings and events. So it is not, you know, at least in our world and what we have seen year to date and what we expect for the rest of the year, it's not cratering in any way. It's just soft, but definitely softening for the reasons I described.

Thank you so much.

And the next question will be from Stephen Grambling from Morgan Stanley. Please go ahead.

Hi, thanks. We'd love to hear some incremental detail on effectively the non-REVPAR-related fees, both within the management and franchise fees as well as the other revenue line as we just think about how the outlook has changed and any puts and takes to think about not only this year but maybe longer term.

Yeah, sure, Steve. And I think, look, obviously the non-REVPAR-driven fees are outperformed. We still had very strong core fee growth in the quarter, you know, based on our algorithm, but non-REF PAR driven fees outperformed in the first half of the year. Some of that is a little bit of timing as it relates to over the trajectory of the quarters of this year. But I'd say longer term, all of those parts of the business, right, we've talked about license fees, we've talked about other income, we've talked about ancillary lines of business, our investor days. All of those parts of the business should continue to grow at algorithm or above over time. So you're seeing a little bit of timing issues this year, but then over time it should be additive to the algorithm overall.

And just to clarify, are the timing issues just related to deals that were struck, partnerships that were struck, or just lapping over changes in terms?

Not on partnerships or deals, just a little bit of comparability year over year and just a little bit of strength in the early part of the year in some of those parts of the business.

Got it. Thank you.

And I should say a handful of one-time items in there, but nothing related to the partnerships.

Thank you. And the next question will be from David Capps with Jefferies. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. And it's perfectly... because I wanted to follow on to the prior one, which is related to non-REVPAR fees. Can you talk a bit about your ability to affect or influence that growth? Meaning, you know, is there just more resource toward identifying and executing on those opportunities? Or, you know, is the world just evolving in a way that's sort of driving that growth on your behalf? You know, which benefits from your scale?

Yeah, I mean, being born and raised a control freak, nothing, I don't view anything as outside of some ability to have influence, other than maybe the super broad macro, which we'll, I'm sure, talk more about at some point. So there are, David, a bunch of different things we can do. I'm not going to get into granular detail, but I mean, you can see it in some of the actions that we publicly talk about, like with our Amex co-brand cards and the things that we're doing there to sort of reintroduce cards, change the benefits. And so I think the way you should look at it is, as Kevin described, we're in constant state of dialogue with all of our third-party partners on how to maximize these cards. We have a very serious seat at the table. We have lots of sort of contractual rights built into our relationship. But we also, in the bulk of it, and particularly in our largest one with American Express, have a longstanding and very close partnership. It's always in both of our interests to be making sure these things are performing. We both have dedicated teams in our companies, in the case of Amex, you know, we and they, but in our other partnerships that we have as well. And we have people literally grinding every day to figure out what we could do to modify the offer to customers to ultimately get them more to sign up, in the case of CoBrand. um and to enhance their their desire to spend you know we're in constant you know dialogue with like hilton grand vacations do you think about it amx and hgv are probably the two biggest about the value proposition there you can see um in a very material way we were deeply involved in you know the blue green and diamond acquisitions those you know you know those were things that we worked on very closely with them to, you know, to ultimately drive a much better outcome by effectively creating new brands within that space. So I can go on and on. The short answer is we don't leave anything for chance. I mean, we're all over this stuff. We have rights, and we have great partnerships, and we are very aligned, always trying to figure out how to modify programs and adjust the offers to customers to drive better outcomes.

Super helpful. Lots more on this. Thanks very much.

Thank you. And the next question is from Robin Farley with UBS. Please go ahead.

Great, thanks. Just circling back to the unit growth guide for next year, I think it's something like 30% more rooms under construction than you did in 2019, if my math is right. So you don't really necessarily need an acceleration in conversions, but some others are talking about that. I wonder if you could just sort of characterize what you think is going on in the conversion environment in terms of, you know, are there things that would drive that to accelerate in 2025 or for you not necessarily?

Yeah, I mean, I agree. That's why I feel good about being in the 6% to 7% range. I mean, effectively, if you take out all the partnerships and everything, it is by being solidly in that range, it is accelerating. So it is organically reflective of the strength. conversions, you know, we do think are accelerating. I mean, you know, for the full year, we're going to have conversions over 50%. But again, that's in part driven by partnerships, you know, acquisition and partnership. If you strip all of that stuff out, conversions are going to go from like 30% to just under 40%. So we are having great success in conversions. We believe strongly that That has everything to do with the strength of our brands and the strength of our commercial engines driving better outcomes for our owners. And so we are getting a hugely disproportionate share of conversions. And if we do our job, which we intend to do, I think that will continue. So, um, the sixth, you know, being solidly in six to seven next year, it is reflective of the benefit of, of, uh, the acceleration we're seeing and signing starts conversions, all of that baked in. It's obviously a little bit early in that it's August to give a tighter range. But as we get closer to it, we will. But we feel very comfortable being solidly in that range.

Great. Thanks. That's very helpful. And then if I could, just one clarification. Kevin's comments on kind of the timing of fee growth and that the first half outperformed and the idea that it will, over time, it will, you know, that sort of algorithm is the same. Does that mean like sort of for the full year the algorithm will be the same or was that more that like, you know, I'm just thinking about if second half would be slightly below algorithm, but the full year still comes in in line, or was the comment that... Yeah, if you look at our guidance, that is what is implied.

I mean, the first part of the year in terms of, I don't know what metric you're looking at, but if you just look at EBITDA growth, it will be higher in the first half of the year because of some of the stuff that Kevin was talking about on timing. As a result, it will be lower, but for the full year... It'll be in the ranges we talked about, which when I round it, it's sort of like EBITDA growth of 10%. I mean, I think, you know, and I'm patting us on the back, but I guess that's my job. I mean, when I think about, you know, what's going on in the world and our ability to do that, I think it's striking. The reality is, as much as I said I'm a control freak and I wish we could control everything, we don't control the macro. You know that better than we do. And the macro environment is weakening a touch, okay? That's just what's going on, not dramatically so, but it's weakening a touch, thus why we brought the top end of our REVPAR guidance down and shaved a little bit of the top end of our EBITDA guidance. Frankly, a lot of that shave had to do with FX changes, honestly. If you take out FX, it didn't really move a whole lot from an EBITDA point of view. But even in the face of all that, At the same time that REBPAR, the midpoint of REBPAR is coming down, the midpoint of unit growth is going up, and the result is pretty much the same, which is, if you think about back to Investor Day, we said we're going to deliver plus or minus 10% EBITDA growth on average. We're going to do it, even in an environment that I would argue from a macro point of view is not super strong. and maybe, you know, and softening a touch because of the success that we're having in executing what I think is a very thoughtful plan and strategy on the development side, we are still getting to circa 10% EBITDA growth in that environment. And I think, you know, that is a demonstration both of the resilience of the core business and the model And this is the PADIS on the back, and I'm patting Kevin on the back as he runs development, the success that we're having in what is a really good development strategy being super well executed.

Great. Perfect. Thank you.

And the next question is from Smeeds Rose with Citi. Please go ahead. Hi, thanks.

Just, I guess, to follow up on the growth outlook a little bit, just looking at sort of the implied RESPA ranges, it's kind of one and change to three and change through the back half of the year. I mean, is the higher end just a reflection of maybe what happens with U.S. economic growth, or is there something else in particular that you think could drive you towards the higher end of that implied outlook?

Yeah, I mean, it applies two to three really for both quarters, Smeeds. I think if you think about it, if you look at what's going on so far in the third quarter, it has been a touch softer. And as we get into the fourth quarter, the expectation would be as the bigger business travel months of October and the first part of November kick in, particularly in the U.S., that there would be a little bit of strengthening in REVPAR growth, as supported also by, I should mention, by our group position here. So if you think about that, and then if you think about the mix of the business, we still are largely, you know, 70% plus or minus of our revenue comes from the United States. And so what happens in the U.S. will be a driver. But supported by our group position, supported by, you know, strengthening the bigger group hotels in the urban markets, and what we think will be stronger business travel in the early part of the fourth quarter, that's kind of what's playing out over the balance of the year.

Thank you. Appreciate it.

And the next question is from Brant Montour with Barclays. Please go ahead.

Good morning, everybody. Thanks for taking my question. Good morning. So good morning. So Chris and Kevin, so implied in the fact that EBITDA, you know, the guidance for the full year didn't really come down, but you did cut REVPAR. We're left to assume that there's some, you know, incremental fees potentially from that extra NUG from SLH. correct me if I'm wrong there, but the follow-on question is if you could just remind us the economics of the SLH hotels and what you're implying to sort of, you know, accrue in fees from them as we go through the rest of the year.

Yeah, I think your implication is right. Some of it is, you know, fees doing better in SLH. Some of it's non-REBPAR fees doing better. And the way to think about economics on SLH is, We get sort of normal fees relative to what we would get in a typical franchise arrangement, but for the fact that we get paid on the business we generate there versus 100% of revenues. Now, recognize that the average rate of these hotels is probably five to seven times, six or seven times our system-wide average rate. So in the end, we feel very good about the economics.

Okay, that's super helpful. And then the follow-on question, just a clarification on some of your comments, Kevin, on the back half, REVPAR. I know U.S. is the big one, but U.S. and China may be taken separately. What are you implying for the back half on those two buckets versus the July run rate? Are you implying any reacceleration or sort of straight lining, or what's qualitatively what you guys are thinking there?

Yeah, I mean, we haven't given a July run rate for us, but if you look at what's going on in the industry, it does imply an acceleration in the back half of the year relative to July, if that's your specific question.

And I think that acceleration, Kevin said this, Grant, would be fourth quarter oriented. I think third quarter, you know, you will likely see, you know, you're in a transition where Leisure is softer and you don't have all the business travel and the meetings and events so third quarter. If you look at it third versus fourth I think third quarter will be weaker fourth quarter a lot stronger for the reasons Kevin described one. You know, we in the we fully expect more normalized business transient travel, particularly as you get. you know, a week or so past Labor Day, you know, and end October, November, it will get cooking. And we have a very strong group base in the fourth quarter that supports a stronger fourth quarter than third.

Perfect. Thanks, everyone.

And the next question is from Patrick Scholes with Truist Securities. Please go ahead. Hello. Good morning, everyone. Hey.

Morning. Good morning.

Have you seen any impact on ADR growth or even customer demand from bundling the hotel rate and the resort or amenity fees into a single rate quote? Thank you.

No, not yet. I didn't think, look, it's sort of early days on sort of those changes. But I mean, really, in the end, that's about more transparency. And we do not see any impact to ADA. We have not seen any impact, nor do we expect any from that change.

Okay. And a follow-up question for Kevin. You folks have done exceptionally well with EBITDA margin expansion, really far and away the best in my coverage universe since 2019. Any high level thoughts about how much more room you have to go or how should we think about potential for EBITDA margin growth over the next several years? Thank you.

Yeah, I think thanks for the question, Patrick. We appreciate that because we think it's been a very good story. We talked about this a little bit at the investor day, but for those who weren't there or need a reminder, we think there's 50 to 100 basis points a year of embedded margin growth increases in the business. As we shift, obviously, the growth in the business is all through the fee segment. So those fees come in at 100 percent margin and improve the margins of the business. And so that combined with really good cost control, which I think we have, you know, like Like Chris said earlier, I think we'll pat ourselves on the back a little bit on that. I think we're really good about being disciplined about cost control. And so what that's done is you can see our margins are 1,000 basis points higher than they were pre-COVID, and we think that that will continue to grow. Again, there'll be different – there'll be puts and takes depending on what's going on in the economy and how we do and where we are relative to our – annual algorithm projections, but for the most part, you should think about it as 50 to 100 basis points of embedded growth.

Yeah, and some years will be better, some worse. This is going to be a year that's better, so I think we expect to be over 100 basis points in EBITDA margin growth this year.

Okay. Thank you for the clarity. I'm all set.

And the next question is from Chad Bannon with Macquarie. Please go ahead.

Morning. Thanks for taking my question. I wanted to focus on conversions, which for you guys and a lot of your peers are just becoming a bigger component of net unit growth and maybe said differently, a more predictable piece. So as you think about the net unit growth beyond in 25 and 26 and some of the new brands that you've rolled out, which are helping on conversions, should this lift just in terms of percentage of NUG, and how does the cycle play into that with rates coming down? Thanks.

Yeah, it's a really good question. I think it's obviously a bit of both. I mean, we've had years in the past. This is the part of the cycle where, you know, particularly when capital gets more constrained and more expensive for new builds, and this is the part of the cycle where you typically lean into conversions because they're just easier to finance. You've got a trading hotel. You've got cash flowing. We are obviously leaning in to our lifestyle brands, which our soft brands tend to be more driven towards conversions. Spark is a 100% conversion brand. So we are doing things strategically to increase our share of conversions. So I think it's both. I think part of it's cyclical in nature. Like I said, you've seen times when conversions have been a bigger part of the story. This is a part of that cycle. But some of these are like, I don't want to say permanent, but sort of semi-permanently where We're doing things strategically to focus on being able to take share, and we're doing it. I think last year for the full year we were something like 40% of the conversion deals done in the entire U.S. We're higher than that so far this year. And so, you know, the network effect we create, the ref part next we drive, the fact that our brands are stronger and the fact that we're strategically focusing on it I think should mean – that it's additive to the overall growth trajectory of the company over time rather than just being cyclical, but cyclicality matters as well.

Thank you very much.

Sure.

The next question is from Dwayne Fenigworth with Evercore ISI. Please go ahead.

Hey, good morning. Thank you. Just on Spark, you mentioned 27 hotels. Any themes there? in terms of the brands or types of properties they're converting from and what the average investment by owners is. And then my follow-up on the 400 SLH, generally where are they located and any more detail you can offer about the profile of these properties coming in as well. Thank you.

Yeah, so I'll take, you know, the first part I would say on Spark is everything's going the way we, it's the way we thought and the way it's planned. I mean, 95 plus percent of the conversion, are from you know third-party brands i think you know not going to get into specifically which brands those are from but i think people can figure that out and it's it's been sort of what we what we've expected um and and the owner investment is coming in in line with what we what with what we thought there have been a little bit of increases in construction costs as has been well documented in the industry but still coming in within the ranges and then so far early days the rev par index The performance of the hotels has been quite strong and, again, maybe even a little bit better than what we've expected, which is creating momentum in that area. And then SLH breaks down 60% in EMEA, 20% in the Americas, and 20% in Asia Pacific. And I'd say that, you know, they're small hotels by definition, small luxury hotels. I think on average they're 45 to 50 rooms, something like that. As we've talked about, really unique properties in really high-rated, high-rev par markets. And that's all been, I think the pace of people signing up has been better than we thought, but the profile is, you know, exactly what we thought when we went into it.

Thank you.

Sure.

And the next question is from Dan Pulitzer from Wells Fargo. Please go ahead.

Hey, good morning, everyone, and thanks for taking my question. Just a quick one on China. I believe you said that China was 3% of overall fees. I assume that over-indexes in terms of the intensive management fees. But how should we think about that relative to that line item and maybe any guardrails for intensive management fees as we think about the rest of the year and as it relates to China?

No, I think, look, for China, it's no different than our normal fee structure. If we manage, it's base fee off the top and a percentage of GOP at the bottom. So that's not really different than any of our other international management agreements. And then, you know, we're growing a big franchise business now in China, so that's just straight franchise fees, right, 5%-ish franchise fees off the top. And so that's really, you know, the fee composition in China is really in line with the broader business. And then for IMF, you know, there's a couple of things going on with IMF. This maybe isn't exactly what you asked, but, you know, we've got a little bit of FX. We've got a couple of contracts that converted from management to franchise sort of at the same economics. So you're just seeing some shifts from one IMF segment to the other. If you adjust for those two factors and a couple of timing items, IMF would be sort of low double-digit growth for the year, so a little bit better than the overall business. And it's, I think, 9% or 10% of fees. So nothing much really going on there.

Thank you. Helpful.

And our next question is from Richard Clark with Bernstein. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Just looking at some of the other regions like Middle East and Africa, Asia, China, the ones that are really delivering the double-digit growth at the moment, Just your outlook for that for the second half, can they keep that pace and momentum, or are we going to sort of see a convergence of global REVPAR around your guidance number?

No, I think we feel good about the second half and those regions that are really performing at that level. As I was trying to say when I did my little around-the-world exercise earlier, We do, you know, think they're softening in certain segments in certain parts of the world for the reasons I described, but not in those. We think APAC X China is going to have a very good second half of the year. We think Middle East Africa will as well in those two cases. And those are the two that are really, you know, at the highest levels of REVPAR performance.

And then maybe just a clarification. Maybe this is related to your previous comment, Kevin, but I noticed that – I think about a thousand Waldorf Astoria rooms have left the system and about 300 Conrad. I guess that's probably Edinburgh and the New York one, but just any color around those hotels leaving the system and what it means for those brands.

No, I mean, we had a couple of Waldorf's that we converted to, actually stayed in the system and converted to different brands. These were a couple of the hotels that have been in Waldorf for a long time, kind of, you know, going back to when Waldorf was more of a collection brand than sort of the brand it is today. And so other than the one you mentioned in New York, the Waldorf's that shifted out have stayed in the system, and they're now Curios. One's an LXR, and two of them are Curios.

And that was at ARV. urging. With what we're strategically trying to do with Waldorf, if you think about all the existing Waldorfs, the new Bill Waldorfs that are coming, Waldorf is really hitting on all cylinders. The product is extraordinary. The new products are off the charts. And so there are, like any brand that's been around for a while, there are some that really don't quite fit the bill. But The good news is with 24 brands, you know, we have a home for, you know, not for everything, but we have a home for most things. And those properties that left Waldorf are terrific properties. They just weren't, you know, sort of meeting the mark on Waldorf, but they met the mark in other brands.

Makes sense. Thank you.

And the next question is from Kevin Kopelman with TD Cowan. Please go ahead.

Oh, thanks a lot. Just a couple of quick housekeeping. The first one is on your FX assumption. Is it safe to assume that that was set before the U.S. dollar kind of started weakening on Friday? And then the second one was if you could, could you give us pipeline approvals in second quarter ex-graduate? Thanks.

Yeah, so the first one, the answer is no. I mean, technically, you know, our forecast was set before Friday, but I don't think Friday's move is going to have a material effect on the full year for FX. It did, as we mentioned, you know, it did get a little bit worse over the, become a little bit more of a headwind over the course of the quarter, which affected our guidance range for the full year. And then, sorry, the second part of your question?

The second one was just you had that huge approvals number. I think some of it was maybe incorporating graduate hotels, but I know underlying was also strong. If you could just give us pipeline approvals, ex-graduate.

44. If I have that right.

Yeah, we gave it. We gave it. It's in the press release.

44,000 and change.

And you're right. Oh, perfect. It does incorporate both momentum in the existing brands and the new stuff.

I'd say that's pretty strong. Thank you very much.

Sure.

And the next question is from Connor Cunningham with Mellius Research. Please go ahead.

Hi, everyone. Thank you. Just on the conversations with developers, I'm just curious on how that's changed over the past six months. I assume that there's a lot more comfortability around financing and credit availability. And then another one, just Airbnb called out booking hesitation on just longer-term rentals. I mean, I realize your extended stay business is not exactly the same, but are you seeing any hesitancy I'm a longer booker stuff in general. Thank you.

Yeah, no, the second part's easy. We're not. And I think, you know, I'm not going to comment on what Airbnb said and you haven't had a ton of time to study what they said, but that's a very different business. The composition of their business, 90, 95% leisure, you know, all long-term stay. So I'll let them comment on that part of the business. We're not seeing any, any changes. And Chris even talked about booking windows, normalizing and things like that earlier in the call. So nothing, nothing there. And then, sorry, the first part was?

Just on the evolution of your discussions with developers. Oh, yeah.

Yeah, I'd say they're largely consistent. I mean, developers remain excited about the future for travel and the setup. I think that overall capital is, you know, a little bit less expensive than it was, right? It's coming off of peaks. I think there's an expectation that it'll come down later. There is, you know, it is a more constrained credit environment based on, you know, the lending community's views of the macro and what they're worried about is going to happen. But there's still capital available for good projects, which is why you're seeing our construction starts go up. And we're taking share in environments where capital is more constrained. We've said this a bunch of times. But, you know, rising tides lift all boats. When the tide's going out, you know, the stronger brands that are – that lenders have more confidence lending to and developers have more confidence affiliating their hotels with are going to take share, and that's what's happening.

Appreciate it. Thank you.

Sure.

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

Thank you, Chad, and thank you, as always, for spending an hour of your day with us. Obviously, we're super pleased with being able to deliver on second quarter, and, you know, we feel very good about our outlook for the full year, as I described. While the macro environment's a little bit weaker, our development story's incrementally stronger, and the net result is pretty much our ability to deliver at algorithm, which we're excited about. We will look forward to catching up with you after the third quarter to give you the latest and greatest and hope everybody enjoys what you can of the rest of summer. Take care and thanks.

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