Hilton Worldwide Holdings' (HLT) CEO Christopher Nassetta on Q1 2016 Results - Earnings Call Transcript

| About: Hilton Worldwide (HLT)

Hilton Worldwide Holdings Inc. (NYSE:HLT)

Q1 2016 Earnings Conference Call

April 27, 2016 10:00 am ET


Christian Charnaux - IR

Christopher J. Nassetta - President and CEO

Kevin J. Jacobs - EVP and CFO


William A. Crow - Raymond James

Steven Kent - Goldman Sachs

Harry C. Curtis - Nomura Securities

Vince Ciepiel - Cleveland Research Company

Rich Hightower - Evercore ISI

Joseph R. Greff - JP Morgan

Shaun C. Kelley - Bank of America Merrill Lynch

Wes Golladay - RBC Capital Markets

Patrick Scholes - SunTrust Robinson Humphrey

Jeffrey J. Donnelly - Wells Fargo Securities

Robin M. Farley - UBS Securities

David Loeb - Robert W. Baird & Co.

Felicia Kantor Hendrix - Barclays Capital

Thomas Allen - Morgan Stanley

Chad Beynon - Macquarie

David Katz - Telsey Advisory Group


Good morning and welcome to the Hilton Worldwide Holdings First Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Christian Charnaux, Senior Vice President of Investor Relations. Please go ahead.

Christian Charnaux

Thank you, Denise. Welcome to the Hilton Worldwide first quarter 2016 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K.

In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our Web-site at www.hiltonworldwide.com.

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment and the Company's outlook. Kevin Jacobs, our Executive Vice President and Chief Financial Officer, will then review our first quarter results and provide greater details on our expectations for the remainder of the year. Following their remarks, we will be available to respond to your questions.

With that, I'm pleased to turn the call over to Chris.

Christopher J. Nassetta

Thank you, Christian. Good morning everyone and thanks for joining us today. We're pleased to report first quarter performance in line with our expectations, driven by growth across all three of our businesses. We've also made great progress on the initiatives that we discussed last quarter, including the spins of our real estate and timeshare businesses as well as our initiatives to strengthen our direct relationship with customers, both of which I'll update you on in just a few minutes.

As we discussed on our last call, we believe fundamentals will support solid top line growth this year. The best visibility we have on the demand side continues to be in the group business segment, which remains healthy. We have less visibility in the transient demand which makes up the largest portion of our business and historically tracks more closely with macro indicators such as GDP growth.

Within transient, we continue to see relative strength in leisure, with softer corporate business driven by weaker macro conditions. We did see strong U.S. booking pace across all segments and channels in-the-month, for-the-month of April, particularly in corporate transient.

Looking forward, consensus forecasts are for full-year U.S. GDP growth to be modestly lower than last year at plus or minus 2%, with Q2 through Q4 meaningfully stronger than Q1. As a result, we are maintaining our 2016 RevPAR growth expectations of 3% to 5% which assumes U.S. GDP growth of roughly 1.5% to 2.5% for the year, and we're also maintaining our adjusted EBITDA and EPS guidance.

While we expect to continue capitalizing on these positive fundamentals, we also remain very focused on driving value beyond what the broader economy gives us. Our distinct high-quality brands with global presence create a powerful network effect, driving greater value for our customers and hotel owners alike. As a result, Hilton has led the industry in both market share premiums and organic net unit growth as a percentage of installed base for the past several years, a trend we expect to continue.

We signed a record 100,000 rooms in 2015 and are on track to top that in 2016 with 26,000 rooms approved for development in the first quarter. With nearly 1.1 million rooms open or under development, including nearly 300,000 rooms in the pipeline, we maintained our No. 1 position in global supply, active pipeline and rooms under construction according to Star.

More importantly, our net unit growth continues to accelerate off a larger base of rooms, with 45,000 to 50,000 net rooms expected to join our system in 2016, a 10% increase year-over-year at the midpoint. Nearly 25% of the more than 1,700 hotels in our pipeline will fly flags of brands that did not exist seven years ago. At no material cost to us, we have organically developed carefully targeted new brands that further strengthen our network effect by bringing new customers into our system and offering more opportunities for existing customers to stay with us.

We launched our latest brand, Tru by Hilton, in the mid-scale space just three months ago with 130 deals committed or in process, and since that time we have averaged one Tru deal per day. As of today, we have 48 hotels in the pipeline and 170 more deals committed or in progress, and that's driven almost entirely by existing Hampton owners. We believe Tru is already the fastest growing new development brand launched in U.S. lodging history and we expect to open development more broadly in the near term including to owners not currently in the Hilton system.

The ebbs and flows of capital markets continue to naturally constrain supply growth disproportionately favoring global branded systems like ours that can drive leading returns for hotel owners. New brands like Tru, Home2, Canopy and Curio help supercharge our growth but we continue to have tremendous opportunities ahead following demand and capital patterns around the world with all of our brands.

Outside the U.S. in particular which represents more than half of our pipeline, we believe we are in the infancy of our potential growth. Deploying our brands into new geographies like Hampton into China or DoubleTree into Europe made up nearly one-third of our gross openings over the last 12 months. We have global scale in a business where scale matters and are using it to drive a more direct relationship with all of our customers.

In February, we launched 'Stop Clicking Around', our largest global marketing campaign ever, highlighting the key customer benefits of our network effect and its scale, namely that joining Hilton HHonors and booking directly with Hilton offers customers the best value and a better experience. Early results are very positive with HHonors enrolments increasing nearly 90% since launch, helping drive HHonors occupancy to a record 55% in the quarter, an increase of more than 4 points versus last year.

The business we've received through Web Direct is higher than it's ever been and is growing faster than ever, thanks to increasing share shift. The share of Web Direct channels in our distribution mix is growing 5x that of the OTA share growth in the quarter, and business generated from our mobile app is up nearly 150% year-over-year with downloads exceeding 70,000 a week, an increase of 200% over last year.

One of the most important metrics of our success is RevPAR index premiums. We continued to gain share in the quarter with our system increasing its RevPAR index premium 90 basis points with every brand in every region gaining market share.

Lastly, a quick update on the spins we announced last quarter. As discussed, simplifying Hilton as a capital-light fee-based business while fully activating our real estate and timeshare businesses as stand-alone companies should realize significant benefits for all three companies and our shareholders. We're very pleased with the progress on the spins to date and remain on track to file Form 10 registration statements with the SEC this quarter and to execute the spins by year end.

Also this morning, we were very pleased to announce the leadership team for our real estate company with Tom Baltimore as CEO and Sean Dell'Orto as CFO. I'm thrilled that Tom, a respected leader in our sector with experiences spanning REIT, private equity and operating companies, including senior roles at both Hilton and Marriott, will be leading the REIT. I've known Tom for 30 years and believe his proven leadership and track record as a capital allocator should further the company's potential to create meaningful value for shareholders over the long term.

We're also giving up one of our best and brightest with Sean moving over to REIT as Chief Financial Officer. As many of you know, Sean currently serves as Hilton's Treasurer and has been integral in our corporate strategy, capital markets and investor relations activities since joining us in 2010 including our IPO. Sean joined us from Crestline Hotels & Resorts where he was CFO. We look forward to partnering with Tom and Sean in their new roles.

And with that, I'd like to turn the call over to Kevin who will give you a little bit more detail on the quarter. Kevin?

Kevin J. Jacobs

Thanks, Chris, and good morning everyone. First quarter RevPAR growth of 2.1% was at the low end of our guidance range, largely reflecting lower macroeconomic growth in the quarter and a larger than expected impact from the Easter calendar shift. Weakness in corporate transient demand was a 60 basis point drag on total occupancy for the quarter, but we still expect modest occupancy growth for the full year.

Transient RevPAR grew 2.4% in the quarter. Results were supported by solid leisure revenue trends that were up in the mid-single-digits, but offset by weaker corporate transient and oil and gas markets which were down nearly 5%. As Chris mentioned, we have seen stabilization in corporate transient so far in April with solid in-the-month for-the-month increases in pace.

Group business in the quarter continued to perform in line with expectations, with group room revenue increasing nearly 4% in our Americas owned and managed portfolio and over 15% at our big six assets in what is a seasonally slow group quarter. Results were led by robust performance at our Hawaiian and San Francisco properties and boosted by strong bookings in the smurf and company meeting segments.

Even more importantly, group position for Americas owned and managed hotels continues to track up in the mid-single-digits and pace in-the-year for-the-year was up in the high single digits during the first quarter, driven by both volume and rate.

Adjusted EBITDA in the quarter increased to $653 million, exceeding the high-end of our guidance range, driven by solid results across all three of our businesses and including roughly $10 million of favorable timing items in timeshare. System-wide adjusted EBITDA margins increased a solid 260 basis points versus the prior period to 38.9%.

Diluted earnings per share adjusted for special items increased 42% for the quarter to $0.17, at the high end of our guidance range.

Turning to our segments, Management and Franchise beat expectations totaling $409 million in the quarter, an increase of nearly 5% year-over-year. Our fee segment growth rate was affected by some large franchise sales transactions during Q1 of last year.

In the Ownership segment, RevPAR grew 3.1% in the quarter as growth was tempered by softer demand in Chicago and New York and supported by strong RevPAR growth in San Francisco, Orlando and Hawaii, which all benefited from strong group trends. Adjusted EBITDA for the Ownership segment was $207 million, up 13% versus Q1 2015 when adjusted for the sale of the Hilton Sydney.

Timeshare revenues totaled $326 million in the quarter, increasing 2% year-over-year as we lapped strong sales from the Grand Islander project in Waikiki last year. Segment adjusted EBITDA was $95 million in the quarter, an increase of 28%, which was driven by favorable sales mix and resort operations results. We continue to make progress on our ongoing shift to a capital efficient business with third-party intervals increasing to 64% of intervals sold for the quarter and accounting for 85% of our inventory or 110,000 units.

Now turning to our regional performance and outlook, in the U.S., comparable RevPAR grew 1.8% in the quarter. Hawaii and Northern California markets were strong with RevPAR growth in the high single digits, driven by rate gains across all segments. Reduced city-wides continued to affect Chicago while oil markets struggled with weaker demand and increasing supply in New York continued to weigh on pricing power.

International inbound revenues declined in the quarter continuing late 2015 trends as weak demand from Canada and Brazil failed to offset increases from China, the U.K. and Japan. We expect this softness to continue but have less of an impact as comps get easier in the back half of the year. For full year 2016, we continue to forecast U.S. RevPAR growth in the low to mid single digits.

In the Americas outside of the U.S., RevPAR rose 4.4% in the quarter. Although Brazil remained an overhang on the region given a deepening recession and weakening currency, the Olympics this summer should provide a much-needed boost in demand. Our Latin American properties continued to perform well given a broader strengthening in leisure trends. For full-year 2016, we continue to expect RevPAR growth in the region to be mid-single-digits.

RevPAR in Europe increased 2.9% in the first quarter, supported by strong market share gains of 230 basis points. Continental Europe performed well with strong transient group demand particularly across Germany and Prague. The U.K., namely London, remained soft and security concerns continued to pressure our results in Turkey. The tragic events in Brussels had a local effect on business but have not meaningfully affected regional performance. For full-year 2016, we continue to expect low to mid single-digit RevPAR growth for the European region.

The Middle East and Africa region struggled with RevPAR down 4.7% in the quarter, given continued weakness in Egypt and depressed leisure demand in the UAE. With uncertainty in the region expected to continue weighing on results, our full-year 2016 RevPAR forecast assumes growth is flat to slightly down in the region.

In the Asia-Pacific region, RevPAR increased 7.1% in the quarter with continued strength in Japan and China, our largest regional markets. Business in Japan has been particularly strong, especially in Tokyo, and we have not seen a meaningful impact from the recent earthquakes. RevPAR growth in Greater China reaccelerated to 8% in the quarter as an uptick in group business across key cities drove occupancy gains. We also saw strength in Taiwan, Singapore, India and Malaysia. We expect RevPAR in the Asia-Pacific region to increase in the mid to high single digits for the year with RevPAR in China up 5% to 6%.

Moving on to capital allocation, during the first quarter we paid a quarterly cash dividend of $0.07 per share. Our Board has authorized a quarterly cash dividend of $0.07 per share for the second quarter of 2016 as well. We remain committed to achieving a low investment grade credit profile and still expect to initiate a stock buyback program subsequent to the execution of our spin transactions, which we expect to complete later this year.

As Chris mentioned, we are maintaining our full-year 2016 RevPAR growth guidance of 3% to 5% and also are maintaining our full-year adjusted EBITDA and EPS guidance ranges. Please note that our full-year guidance does not incorporate the impact of our intended real estate and timeshare spins.

For the second quarter of 2016, we expect 3% to 5% system-wide RevPAR growth supported by stabilizing macro trends and the Easter shift. We expect adjusted EBITDA of between $790 million and $810 million and diluted EPS adjusted for special items of $0.25 to $0.27.

Further details on our first quarter results can be found in the earnings release we distributed earlier this morning. As a reminder, we unfortunately cannot provide many additional details on the proposed spins until we file Form 10 registration statements, which we still expect to occur later this quarter. In addition to the filings, we also expect to provide additional information on the strategy and financial performance of all three companies prior to the execution of the spins.

This completes our prepared remarks. We would now like to open the line for any questions you may have. In order to speak to as many of you as possible, we ask that you limit yourself to one question. Denise, can we have our first question please?

Question-and-Answer Session


[Operator Instructions] Your first question will come from Bill Crow of Raymond James. Please go ahead.

William A. Crow

Congratulations on the hires on the REIT side, that's great. Chris, my question is on guidance and the range that you provided, we appreciate you provided any guidance, but 3% to 5%, given the first quarter and the outlook for the second quarter, to hit the high end would imply something north of 6% for the back half of the year, and I'm just curious whether that's even possible at this point given some of the dynamics around the industry?

Christopher J. Nassetta

Bill, thanks for the question. I assumed we would get that first and probably second, third, fourth and fifth as well because I know that's what's on everybody's mind, is trying to get a little color. So let me try and give you that color and maybe answer some other questions that are likely to come up.

I think that what we tried to triangulate around what we are seeing both in the business now and what we see on a forward-looking basis where we do have sight lines and try to match it up with a perspective on and an expectation on broader economic growth, and that's why we connected the 3% to 5% to 1.5% to 2.5% broader GDP growth because obviously the largest part of our business which is the corporate transient business is fairly directly related to broader economic growth.

And so while first quarter obviously in the low 2s is below the range in 3% to 5% that we're giving, the confidence we have in the 3% to 5% is based really on three different things, okay. One is a little bit of the reverse of the Easter effect. I'm not going to say that that's tremendously dramatic but that's a benefit.

The second is that as I said in our – and Kevin said in the prepared comments, we have a very good group position on the books for the rest of the year. For the full year the numbers are quite healthy, but that is distributed, as is always the case, every quarter is a little bit different every year depending on how that group cycled through a lot of the big hotels, in this particular year the way it's distributed is, across the system Q1 is actually quite weak, was quite weak from a group position point of view and Q2, Q3 and Q4 are much stronger with particularly a little bit heavier strength in Q2 and Q3, reasonably good numbers in Q4, a little less than Q2 and Q3. So we have a much stronger group base coming into Q2 through Q4 which we think will help.

The other thing is, and this gets back to the broader economic growth issue, if you think about what's been going on with corporate transient which is what's been really weak because leisure has been strong and driving the results in the fourth quarter and frankly in the first quarter that were a bit lower than what we would have hoped or expected, it had to do with the fact that the world froze up. I mean you had things going on with fears of what was going to happen with China's economy, terrorism in Paris, terrorism in Brussels and other things going on that drove the capital markets, the equity capital markets downward. Companies were losing 20%, 30% of their equity market cap. Well, you know that scares people.

There was a lot of fear in the air at the end of last year and certainly the first couple of months of this year, and the result of that, and we saw it very dramatically, was people freezed. They stopped making decisions on discretionary spending, on travel, on CapEx spend, and the result is the economic growth numbers come down. I think when you see the print on Q1, it's going to be quite low and that rippled through to our business.

So what's different? In addition to the group and the reversal of the Easter effect, why do I feel like 3% to 5% is reasonable for the full-year and for Q2? It's because I sort of told you, as I say it to our guys, the great thaw is on, meaning the world is not – make no mistake, I'm not trying to be a Pollyanna – the world is not, there are things going on in the world that aren't great, but relative to what we saw at the end of last year and the first couple of months of this year, there's a heck of a lot more stability.

The equity markets obviously have come back. Valuations not just in our industry but broadly have come back. And I'd say there is an air about stability and that ultimately I think translates into more economic growth. Certainly to get to a 2% sort of consensus for GDP off of what I think will be very low numbers in the first quarter, it anticipates Q2 through Q4 being a lot better. That is what we believe will happen all things being equal, meaning that the stability that exists today are relative to stability continues.

Do we have any sight lines into that? Some, I mean I talked about group which continues not only to be good in terms of position but pace is good. So we see the first quarter pace of group bookings for the rest of the year have been very healthy of late. April feels pretty darn good, okay, and certainly relative to what we experienced in the first quarter. And why is it better in April? Because corporate business is coming back.

Now that's not a huge dataset admittedly. You're looking at not even a full month of data. But there is the beginning in my mind of a trend. So that's a long-winded way of saying that if you think that you're going to get through a broader growth number that is around consensus, it by definition means that you're going to see some better things happening in the business.

Now obviously 3% to 5% growth is not – we're not suggesting we're going back to 2014 type transient growth numbers or the first half of last year. It's obviously the growth is somewhat more tempered than that, but we do believe, again all things being equal for these three primary reasons, that you're going to see performance in Q2 through Q4 that is superior to Q1 performance.

Kevin J. Jacobs

As it relates to the high-end, you know that's why we gave you a range. So you would have to believe – I agree, you would have to believe that broader economic growth is meaningfully above consensus to get that, but that's why we gave a range. We assumed that we are forecasting somewhere in the midpoint of our range and we've given you a range of outcomes if the economy and broader growth is lower or higher.

William A. Crow

Appreciate the insights. Thanks.


The next question will come from Steven Kent of Goldman Sachs. Please go ahead.

Steven Kent

Two questions. First is the $9 million in costs that were incurred from the spin-offs in the first quarter 2016, how much should we start to put into our models for the remainder of the year, just general numbers? I know they are extraordinary but I just want to have some sense for what that's going to look like. And then separately, I mean you continue to show very strong margin growth. I just want to understand the balance of the shift towards asset-light, more franchising, more management versus the opportunity to reduce expense structure at the owned hotels and what initiatives do you have on both sides of those to improve the margins?

Christopher J. Nassetta

On the first, unfortunately I'm not going to satisfy your need there. We're going to have a lot of information that we're going to – we're just around the bend from filing the Form 10 that will give you a much better sense of what we think and supplemental information ultimately that will give you a much better sense of the cost. So if you could just wait a teeny amount of additional time, I think we'll give you some clarity on that. We'd rather do it in a more complete way as we give disclosures on both companies.

On the margin side, obviously yes, we're growing margins in all three businesses. Going forward, all three of those businesses, as we get to the spins, are going to be doing that as independent companies. One of the things I'd talk about here is, and I understand why the market seems to be exceptionally focused on top line, everything is about top line, we don't get a lot of questions on margins and bottom line, so I appreciate it because we're running a very big global complex business and it starts at the top line but driving cost and margins to get it to the bottom line which I think frankly we've done quite an effective job not just in this quarter but for years and years while we've been public and while we've been private, I honestly don't think gets sort of enough attention or discussion.

Probably on the limits of time on this call, it would be hard to go into all of those initiatives. I mean part of the margin growth is obviously coming from the really industry-leading growth that we're getting on the new unit side and continuing to see all of the new units coming-in in the Management and Franchise segment where essentially those are 100% margin business additions, but on the Timeshare side, as you'll see as we break that business apart, you'll see in the Form 10, we have done a tremendous amount of work there to drive what I believe are industry-leading margins by just being much more efficient on how we sell and distribute the product.

And then inside the hotels, we have hundreds of initiatives that are going on all the time on the labor side, labor management side, making sure we're driving efficiency in every way possible on procurement, et cetera. So there is a constantly evolving but long list of things that we're doing in the hotels. I think it's fair to say we are exceptionally focused not just on driving top line but cost, and ultimately we are running the whole business and trying to drive margins as high as we can to get as much EBITDA to the bottom line as possible.


The next question will come from Harry Curtis of Nomura. Please go ahead.

Harry C. Curtis

I've been getting a reasonable number of questions on the topic of the Marriott-Starwood merger and its potential impact on Hilton and whether or not it puts you at a competitive disadvantage. So I wonder if you could take a minute and give us your thoughts on what circumstances that might be right and then where it misses the mark?

Christopher J. Nassetta

I'm happy to answer it in some ways. I don't want to get snarky about what our competitors are doing. I think the way to think about it is that we have chosen a path proactively which is a different path than others, including them have taken, and that started with the fact that we did not get involved in the process of when Starwood last summer put themselves in play, and that was related to the fact that as we looked at it and we looked at what our opportunity was, we were very focused on having purebred brands that were market segment leaders in their individual segments, that were category killers and that each of our individual existing brands we wanted to be described that way, and any individual brand that we might add to the system, and we obviously have had a number, we wanted to fall in that category.

And as a result to drive the highest market share by brand, the highest average market share, which ultimately we thought and think will drive, as a result of resonating with customers, will drive the highest organic growth, and we chose not to want to have the distractions that would come with doing something like that. And I think if you look at our numbers and what we're driving in terms of organic growth, as I said in my prepared comments, we've been leading the industry for the last several years, I think we'll continue to lead the industry, and I think what we're focused on is making sure that every brand we have really resonates with customers and with owners and that we continue to drive that growth and I think that sort of the story.

In terms of scale, I said in my comments, we are in a business where scale matters and we think we have enough scale. I think my attitude, our attitude at this point when you have existing system and pipeline that's 1.1 million rooms, we're big enough and we're in the game of quality at this size as opposed to quantity.


Our next question will come from Vince Ciepiel of Cleveland Research. Please go ahead.

Vince Ciepiel

I was wondering if you could comment a little bit more on supply growth. It seems like your pipeline continues to act nicely. Could you comment on what products specifically you think are adding to that? And then also, could you maybe speak to as you think about supply growth over the next couple of years, any natural suppressors that you're starting to see come into place that could put a ceiling on supply growth?

Christopher J. Nassetta

First, thanks for the question, and an important one as well. I think there already is a natural ceiling on supply growth. I mean it is creeping up a little bit but it's still well below long-term averages and I suspect will be lower than people think as it has been the last couple of years when the year is out. It's going to be somewhere in my mind between 1.5% and 1.75% against the 2.5% long-term average.

So I think very much in check, and I think the reason that it's in check is really simple and that is, while there is capital available, it's limited amounts of capital, and the basic economics only support a certain amount of development and largely what you would find is that is in the limited service space. We happen to have in my mind the best limited service brands out there. So from the standpoint of what we're seeing product-wise, it's all as described or a little bit as described in my prepared comments.

Now Tru with our new brand, Home2, Homewood, Hilton Garden Inn, Hampton, that's the large majority certainly in the U.S. of what we see getting done largely in secondary and tertiary markets. Why is that getting done? Two reasons. That's where the economics make sense where demand growth is heavy enough, where pricing structures and cost to build makes sense so owners can get the economics.

And why are we getting disproportionately 2.5x our existing system size in the U.S.? There is a simple reason. Our brands are strong enough, market share is strong enough that while there is limited financing, we are getting a disproportionate amount of that financing.

So I've said it before, we're sort of in a sweet spot for us which is there are some pretty decent natural constraints on supply, but yet we're getting a disproportionate share of what's available to get done because we're one of the most financeable and we're driving the best economics for owners so they want to continue to invest with us.

Vince Ciepiel

Great, thanks. And then maybe another big picture question. I think that you mentioned that you guys expect occupancy to swing positive for the year. If you look in the quarter, you have occupancy slightly down and somewhat more modest rate growth. When you think back over historical cycles and kind of where we are within a hotel that's relatively full, do you need occupancy to swing positive for rate to accelerate from the first quarter level or is it something else that could cause rate to accelerate, maybe confidence or something like that?

Christopher J. Nassetta

No, I don't think you need occupancy. I think you're going to see the vast majority of RevPAR growth in the industry and certainly for us be rate at this point and then that's what you would expect at this point. We've been saying that this would come for the last couple of years. I think the reason we think – first of all, first quarter if you just neutralize for the Easter effect, would've been positive, a slightly positive occupancy growth. So I think it's just a reversal of that, a much stronger group base and some basic pick-up off a very weak corporate transient demand as I described in my first answer that's going to drive some modest occupancy growth. I don't think it's going to be big time occupancy growth. I think it's just sort of reversal of some of those three trends that drive more volume in the last three quarters of the year.


The next question will come from Rich Hightower of Evercore ISI. Please go ahead.

Rich Hightower

One quick question on the Hilton flagship brand that I noticed just scanning the room count, it does look like the brand lost a handful of managed hotels in every region except for Asia-Pac but then there looks to be basically a one-for-one offset in the franchised segment. Can we assume those are basically the same hotels just converting to franchise agreements, and then is that a trend that we should expect to continue?

Christopher J. Nassetta

I don't think it's a major trend. I think it was one portfolio that we have in the U.K. in some of our leased estates that as we were restructuring some of that relationship, we flipped from managed to franchise. So I don't see it as a big trend. I think it was fairly unique to that transaction.

Rich Hightower

Okay, that's helpful, Chris. And then one quick follow-up, just on the outlook for energy markets, it does seem like the outlook for Houston and some other places might be incrementally better over the next 12 to 18 months given what may appear to be a bottoming in oil prices. Are you actually seeing any fundamental acceleration in demand in those markets or is it just a function of easy comps going forward?

Christopher J. Nassetta

Not yet, not yet. I think you got two opportunities there. One, the comps get much, much easier really in third and fourth quarter. If you look at the dive in those markets last year, first quarter not so much, second quarter it started, third and fourth quarter was in full swing. So you're going to get much easier comps in those markets in Q3 and Q4. And you have to believe, although I will say, we haven't seen it yet that with oil prices off the bottom and moving back up, it will provide a little bit more of a stability on the demand side in those markets, but we'll have to wait and see that happen.

Rich Hightower

Right. Great. Thanks.


The next question will come from Joe Greff of JP Morgan. Please go ahead.

Joseph R. Greff

I have a question for you guys on your full-year 2016 guidance, and [indiscernible] with this, when I look back at the Q1 results, you hit the lower end of the range for RevPAR growth guidance, yet you were above the higher end of the EBITDA range or above the higher end of the EBITDA range. So when I look at the full-year guidance for 2016 at the lower end to the higher end of RevPAR growth, does that correspond exactly to the lower and higher end of EBITDA growth, i.e., if you hit the middle of the road in terms of RevPAR growth, are you something a little bit north of middle of the road for EBITDA growth?

Christopher J. Nassetta

That's a very fair question, Joe, given first quarter, and if we've done our job, those should match up. In the first quarter they didn't match up exactly, in part really to do with timing on some of the timeshare stuff that moved $10 million or $12 million from one quarter to the next. It would have otherwise generally been lined up. So our guidance on both EBITDA and RevPAR were intending to match up between low and high end.

Joseph R. Greff

Okay, great. Thank you. And then with respect to, Chris, your comments about April, and maybe I missed this, but did you actually talked about what April month-to-date RevPAR growth was and could you talk about it [indiscernible]?

Christopher J. Nassetta

I did not and I don't want to get into month-to-month too much, but here's what I'd say. Relative – April is trending sort of at or a little bit above the midpoint of our guidance for the quarter, so a lot better than Q1, and in the places that you want to see it, good group base but also corporate business coming back.

Joseph R. Greff

Good enough. Thank you.


The next question will be from Shaun Kelley of Bank of America Merrill Lynch. Please go ahead.

Shaun C. Kelley

Chris, in the prepared remarks you mentioned a little bit about the 'Stop Clicking Around' campaign and some of the success you've had across the metrics. That's something that I think you are likely to probably hear more about as time goes forward. Could you give us a little perspective here, number one, how big is the direct booking channel for Hilton on their Web-sites and apps relative to the OTA channel? And then secondarily, where does the benefit here accrue, does it accrue to Hilton or is it really more of a pass-through to the owners but helps the brands in the long-term?

Christopher J. Nassetta

I think it helps everybody. I think here's the underpinning of it, Shaun, is that we're trying to deliver the best value and best experience for our customers, and what Stop Clicking Around is really intended to do is in a fairly loud way admittedly make it clear to customers how they are going to have the best experience and where they are going to get the best value because I think not all customers really understand that, okay. So we're trying to put an exclamation point on it, and I think if you look at the stats early days, but if you look at the stats in the first quarter, I think it reflects that customers are getting it and that so far we're having very good success, but it's a long-term strategy and you definitely will hear more about it.

In terms of what's the beneficiary of it, I think everybody benefits from it. In the end I think the customers benefit because they are going to get a better experience and they are going to get a better value. Clearly the system, all of our owners benefit because in the end it is a much more – not only do their customers end up happier because it's a better experience and they get a better value but they get that value at a lower cost because our direct channels are the most efficient way to distribute our product.

And so, yes, the largest benefit is really going to flow through to the system, meaning all of our owners, and we are obviously very serious about not only driving market share at the highest levels as described in my prepared comments, to drive returns to owners and incremental growth for us but driving the best bottom line possible. The more that we can have a direct relationship with our customers, the more efficiently we can distribute our product and our owners' product, the better their returns are going to be, the happier they are going to be, the more hotels they're going to build into the system.

In terms of percentages, I would say our direct channels are sort of a quarter of our business and growing at a very rapid pace. The OTAs are plus or minus kind of 10% of our business. So our direct channels are significantly larger than those channels, and as I described in my prepared comments, growing at this point at a much faster pace.

Shaun C. Kelley

And just to be clear, the direct channels are excluding property direct and call center, all that, this is just the web?

Christopher J. Nassetta

Correct. These are online. This is Hilton.com and the app, mobile and online.


Our next question will come from Wes Golladay of RBC Capital Markets. Please go ahead.

Wes Golladay

You mentioned that everything froze in the first quarter, yet easy comps in the second half. I think a big concern is the decelerating industry demand. Would you expect a V-shaped recovery or a steep acceleration in the industry demand in the second half?

Christopher J. Nassetta

That's hard to say. I mean I think you're going to see an acceleration in demand unless something else goes wrong. I think we're already starting to see the early signs of that. How to describe it as a V or U, I don't know. I'd probably describe it as U, but a long U.

Again, I wasn't trying to suggest – I think it's very positive. I think we see great telltale signs that it's happening. I think just – I say to our guys here, common sense tells you it's going to happen because it wasn't just the beginning of this year, the end of last year we went into a deep freeze and we definitely have been witnessing a [sign] [ph] across the broader economy. That just have to ultimately drive incremental business.

Exactly how much, it's hard to see. That's why we've been I think tried to be quite reasonable in giving a range of outcomes that are not suggesting a big steep V-shaped recovery but certainly a decent uptick from what we saw in Q4 on the corporate transient and Q1.


Our next question will come from Patrick Scholes of SunTrust. Please go ahead.

Patrick Scholes

Question for you on the performance of the Hampton Inn brand. It definitely looked like it underperformed what I would have expected based on the Smith Travel results for the quarter, and that's your largest brand by room count. How do I reconcile that underperformance versus your commentary on gaining RevPAR index?

Christopher J. Nassetta

I don't know, I'd have to dig into it, Pat, to understand it more clearly. There's nothing going on I would say. It's been a lot of time with all of the brand heads on all of the brands. I can't say I've dissected the first quarter of Hampton but there's not a broader issue and in fact Hampton did gain market share in the system. So it could have to do with – the only thing I could guess is, when you're looking at Smith Travel data, we're comp and Smith Travel is non-comp. I'm not saying that's the answer, just I'd have to dig into it.

I mean if you think about where all the new supply is coming in, it's in that segment and those are all ramping up when they come in new and it's a disproportionately large chunk of new supply. My guess is that probably explains it but I'm happy to work with our team and dig in a little bit more.

We did gain share on a comp basis in the Hampton. Hampton is doing great. We're signing up owners. I'd say Hampton is one of the most successful brands and most desired brands that exist in this space with the ownership community.

Kevin J. Jacobs

We did gain share on all brands in the first quarter, but it's just varying degrees of share gain that blended to the nearly 100 basis points that we mentioned. And as Chris mentioned, you have independents and then you have non-comp hotels in the STR data. So you can get different answers on a quarter to quarter basis.

Patrick Scholes

Okay, fair enough. Can I ask one last completely unrelated follow-up question, and that's do you gentlemen care to take a stab at what you see RevPAR being for the months of May and June? I know you mentioned April already.

Christopher J. Nassetta

Not really, no. I mean I really don't want to give the business forecasting by the month or trying to give color. I'll give you a little color though just based on what we see, it's a fair question by the way, Pat, I know you guys are looking for any forward-looking color and I would too. So I think it's fair rather than give you a number of exactly what our forecast is, what I would say is Q2 has a better group base.

That group base is distributed overall more heavily in April and June than May and we've seen as I said in April a nice uptick in the corporate business. Our sightlines in the May and June, what we do have, suggest pretty decent trajectory on that basis if everything stays as I said sort of relatively stable in the world. And so I would expect that, again I said it earlier, we're kind of forecasting a range of 3% to 5%. That means we're hoping to be somewhere around the midpoint. I think it will be distributed with April and June being stronger than May, just in part because of the group base being so much stronger in April and particularly June.

Patrick Scholes

Okay, fair enough. Thank you.


The next question will come from Jeff Donnelly of Wells Fargo. Please go ahead.

Jeffrey J. Donnelly

Considering the spin, I'm just curious, do you expect the leased hotels are going to stay with the brand or can they go to the REIT, and I guess in broad strokes, I know you can't be specific, how are you just thinking about the G&A load of the REIT? I'm curious if you think you could be more efficient in say [indiscernible].

Christopher J. Nassetta

I'd say on that, we're going to give you the Form 10 and you'll know where everything goes. But the overarching theory is we're trying to make all these companies really great companies and set them up for success. And so things that fit within the REIT you should assume are going to be in the REIT largely and things that don't would not.

And so I think the sum and substance of the EBITDA related to leases will end up remaining an OpCo, both because it doesn't fit within the REIT structure really because most of that is international, and importantly in those parts of the world that's how we have our tenure in those assets. Many of which that drive the largest part of that EBITDA are very important strategic assets.

So it makes sense for that to stay back in OpCo. Even though they'll be there, and you'll see when we do all the disclosures, it will be a relatively small component. The bulk of all of the real estate ownership EBITDA will be moving out.

On the G&A side, we'll give you more – I'm not going to pick on others, I think you can look at our G&A at Hilton and compare it to our competitors and given my earlier comments about we are very top line but also cost and bottom-line focused and we think we do a really good job running a tight ship. We are going to be as efficient as anybody out there. Let's leave it at that and we'll give you more color on that both through the Form 10s and supplemental disclosures that will go along with that.

Jeffrey J. Donnelly

And maybe just as a quick follow-up, in the wake of Starwood deal, do you think there's room for more consolidation to happen in the industry or do you think it's a dead topic for the foreseeable future?

Christopher J. Nassetta

You're talking about an OpCo world or…

Jeffrey J. Donnelly

In OpCo world because given the number of people who [are going to be] [ph] pursuing Starwood.

Christopher J. Nassetta

I think you will continue to see more of it. There aren't tons of logical combinations when you really dig into it, but my view is you're at that stage of the cycle, I think people have figured out that scale matters, there are some that have it and some that don't and I do think – I'm not going to in any way suggest anybody is scrambling around because I don't see that, but I do think people are taking deep breaths and saying, are there things that we could do to try and get some of that scale because I think there is something to this network effect that we've been articulating prior to and since the IPO, and I think proving out in both average market share of our brands and leading organic net unit growth, and I think when people look at that, look at what others have done with Marwood, et cetera, I think it has to make them think. Now what they do, I don't know. Again, I just don't sense people scrambling around in a mad dash but it'd be surprising to me if you didn't continue to see some incremental M&A activity.


Our next question will come from Robin Farley of UBS. Please go ahead.

Robin M. Farley

I actually have two questions, I'm going to try and package it as one [indiscernible]. I'm wondering on the Q1 in group, I think on your prior call you had actually said that Q1 the group was looking strong. So I wonder if there was maybe a lot of cancellation of group kind of during the quarter, if you have any color on that.

Christopher J. Nassetta

So, no. In fact what's interesting on group, I was going through the stats with the team over the last week or two, not only we are not seeing any increases in cancel or attrition activity, it's gone down year-over-year, so a very good trend. I was sort of surprised myself. I assumed it would be stable, not that it would necessarily go up, but it's actually been going down.

So I think we're mixing and matching comp sets unfortunately and that's – when I think we commented in the first quarter, I think we were really highlighting some of the bigger group assets, and what we were talking about today in terms of weakness in group and the group position was the whole system because I think everybody seems to be and should be really focused on our system-wide RevPAR growth in the first quarter and what we think for the system-wide at 3% to 5% for the full year. So it's a little bit of a comp set thing.

If you look at our big, we call them our sort of top 120, or you look at the big six assets, they did actually have a reasonably strong first quarter in group. If you take it through the whole system, group revenues were up sort of 1%,. They were up depending on the bigger hotels, they were up 3% to 4%, okay. So I think that's the differential.

Robin M. Farley

Okay, that's helpful clarification. Thank you. My other question then has to do with cancellation and rebooking, but now this is not a question about group, this is just kind of overall business and a lot of this I think would be transient, both leisure and corporate maybe, are you seeing a change in pattern, an increase in consumers cancelling and rebooking closer to the time of stay as rates come down a little bit? It's something we've heard from others and I'm just wondering if it's something that you're seeing too, if there is any way to sort of quantify how that's changing. I know you had experimented with ways to create friction on that but it sounds like it's been difficult to do [indiscernible] that the consumers are kind of resistant to non-refundable or cancellation fees. So I'm just wondering if you could sort of talk about how much that cancelling rebook behavior may have increased versus last year, that kind of thing?

Christopher J. Nassetta

I don't think we've seen a big increase year-over-year in that. I think if you look over the last two or three years, we've seen a significant increase both by customer, because of customer behavior, but also technologies and apps that have come out that have accelerated the behaviour. We did do it, and so yes, like others we have seen that trend. It's more prevalent in certain major markets around the country. It's not as prevalent throughout the system.

We do think it's an important issue. We are working hard on it. We did do the test, as I mentioned I think on one of the last couple of calls. Not necessarily that that's what exactly we want to do, but we wanted to get a sense of how our customers responded to it. We're working on a bunch of different approaches to it.

And the trick here is to do something that makes sense for customers or that's what we're in the business of doing, is serving customers, but is also thoughtful relative to how we manage the inventory for ourselves and all of our owners. We're one of the very few businesses I can think of that ties up basically all of its inventory with no downside risk, and particularly in today's world with new technologies and these kinds of behaviors, that has a cost to it. Now that cost ultimately is going to be borne at some point by the consumer. So while it may seem like it's good for them, it may ultimately not be so good.

So I don't have the answer yet. We're doing – we have all of our – as I say, we've got all our scientists working on it and we're trying to figure out as probably a little bit later this year how do we come up with a way to price our products in a way that customers understand it, it works for them for the various things, the needs that they may have but it's a more sensible way to manage inventory, and we're making some progress on it.

Nothing to announce, nothing to scare consumers about. We're not going to do dumb things relative to that don't make sense for consumers, but we – there are other businesses, there are ways to be able to look at pricing for those that need more or less flexibility and to create different sorts of pricing structure. So we'll give you more when we have it. We're very focused on it because I think it's in everybody's interest, customers and owners and the system.

Robin M. Farley

Okay, great. Thank you very much.


Your next question will come from David Loeb of Baird. Please go ahead.

David Loeb

I promise only one question [indiscernible]. Chris, the pace of signings has been torrid but while openings have been strong, they've been a bit slower than signings. Are you seeing any issues that are slowing openings like economic issues, financing challenges, construction costs, and when do you see the pace of openings accelerating meaningfully?

Christopher J. Nassetta

Not anything dramatic. I mean there are parts of the world, China being the best example, where you have seen as they over the last year or two have sort of been evolving their economy and shifting to more of a services versus an infrastructure based economy, you have definitely seen a slowdown there relative and a lengthening of development period between signings and openings. But there's nowhere else in the world, maybe a little bit in Europe as it's had, as Europe has had its ups and downs, but broadly speaking, if I went and actually statistically looked at the timelines that we've had historically between signings and openings, they are following pretty normal patterns maybe outside of those, particularly China and about a little bit of Europe, outside of those examples. So I think so goes on the lag to the signings. You can sort of prognosticate that the openings will pick up as you get to the gestation period for development.

David Loeb

So when do you see that curve really bending up the opening curve? So when do you think we start seeing the substantial increase in openings?

Christopher J. Nassetta

Given that we have doubled our net unit growth percentage at the same time we've been growing the Company since 2007 or 2008 by 50%, I think you've been seeing it. We've gone from sort of a low point of unit growth of 3% in 2010 to 6% to 7%. So we doubled our growth rate. At the same time, the Company has gotten 50% bigger. So I'd say you are seeing it. Hopefully appreciating it.

David Loeb

We are. Thank you.


The next question will come from Felicia Hendrix of Barclays. Please go ahead.

Felicia Kantor Hendrix

First, I just wanted to congratulate you on Tom Baltimore. We have a tremendous amount of respect for Tom and all he has done at RLJ and we're assuming he's going to do the same for Hilton REIT, go congratulations there.

Christopher J. Nassetta

I am confident. As I said in my comments, I've known Tom for 30 years. Tom was not just on the list, Tom was the No. 1 top person on our list, and we couldn't be more pleased that he was willing to come provide the leadership of our new REIT. So it's an exciting day for all of us.

Felicia Kantor Hendrix

That's just great. I know you talked a lot around this but I want to understand the impact of Easter a bit more. You definitely discussed your outlook for an improvement in April, but how much of that April recovery what you're seeing has benefited from the Easter shift?

Christopher J. Nassetta

Some of it for sure. I mean there's no question. It'd be hard, Felicia, for me to give you an exact number at this point, maybe when we get through the month and we have, we can scrub all the data we can. There's no question the reverse impact is benefiting you, but there's also no question – and I'm not trying to pound the [indiscernible], there's no question we're also seeing broadly unrelated to that a modest pick-up in corporate transient business. It's there, I've been talking to a ton of corporate customers.

The great thaw that I described, it's going on. And what I can't tell you is like what is the result in terms of broader growth, exactly what is the shape of the uptick, but I think all things being equal meaning things stay in a relatively stable mode, it's just hard creating Easter effect, it's hard to apply common sense and not believe that you're going to see corporate transient pick-up.

Felicia Kantor Hendrix

Okay, that's helpful. Thanks. And just finally, Kevin, you didn't appear to prepay any debt in the quarter. I think you did that for most of last year. So just wondering, are you preserving cash for another purpose later this year such as share repurchases or is there any other reason behind that?

Kevin J. Jacobs

Yes, we have, Felicia, these two big transactions coming up that as Chris said earlier in response to Steve's question have some expense associated with them. So that's in – and also as I said in my prepared remarks, we fully expect to target the same credit rating and start a share repurchase program once we get the spins or ask our Board to start a share repurchase program once we get our spins complete, but we're really just saving our cash for the transactions.

Christopher J. Nassetta

Yes, we're hunkered down to get these things done and there are a lot of moving pieces all of which are manageable but we want to sort of get it done and create three pure-play companies and we'll get back on it.

Felicia Kantor Hendrix

It completely makes sense. Thanks.


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

Thomas Allen

China RevPAR accelerated from 3% last quarter to 8% this quarter. Did that surprise you at all? And you didn't change your guidance for the year. So just trying to hear your latest thoughts.

Christopher J. Nassetta

It did honestly surprised us to the upside a little bit. In talking to our China teams, I talk to our teams constantly around the world, they were a little bit surprised and part of what's going on is just sort of part of the great thaw. The reason for the great thaw is I think there is a little bit more stability in the Chinese economy. Certainly the world is starting to settle down on China. I think if you're in China, which our guys are, and operating running businesses I think, it feels like things are to our teams more stable, the business is showing up.

And so, yes, we feel pretty good about what will happen for the year ahead. I'm not going to say we're being conservative. It's not going to make a huge difference in the numbers. Therefore a little off given it's a relatively low percentage of our overall EBITDA. But things are reasonably good. Surprised a little bit to the upside, not so much so that we thought we should change our guidance at this point. Some of it driven by some particularly strong group bookings and some of the bigger hotels in China, but all good. It's nothing but good.

And same thing on the development side. We shifted the strategy there appropriately a couple of years ago to more of the midscale side of things, and we're continuing when others are not to accelerate both signings and particularly accelerate openings. I think we'll probably open 20% more rooms this year than we did last and last year was I think the best year we've ever had in openings in China. So, China feels reasonably good.


The next question will come from Chad Beynon of Macquarie. Please go ahead.

Chad Beynon

Just wanted to get a better understanding of what you're seeing in the first quarter and kind of going forward from a cost standpoint at your owned and managed properties with respect to labor, taxes, insurance, some of the inflationary things and kind of your outlook over the next 18 months on some of these important cost line items?

Kevin J. Jacobs

On an overall basis for the segment, we've seen cost per occupied room for the first quarter was still below 2%. So we've had pretty good cost containment there. On the U.S. hotels, we'll detail all this in the Form 10s and the like and how it breaks up, a little bit higher but we've been doing a good job of containing costs even in a wage and benefit environment that's been pretty high growth across the nation.


The next question will be from David Katz of Telsey Group. Please go ahead.

David Katz

So if you could – I think you've sort of given some pretty positive context around the development landscape. Can you talk about the financing environment for hotels which I think obviously is an important driver of new franchising deals, new management deals, what are you seeing in terms of LTVs and the size of deal opportunities, et cetera, and directionally where you think that's headed?

Christopher J. Nassetta

I'll let Kevin maybe get into more specifics because he's more active day to day and working with our owners. But at a high level, I think it's been reasonably steady. I think most of our stuff if you use the U.S. because it's a big chunk of where the development is occurring, most of it is getting financed by local and regional banks where you have owner-operator, some big, some small, that are financing with generally a decent chunk of equity or recourse on the debt. It's the way they do the business, and the local and regional banks have continued to be pretty stable.

The end of last year and very beginning of this year when all the world in my description froze up, you were starting to see little telltale signs certainly on Wall Street of less capital available. I would say in my opinion, it didn't really trickle through the main Street very much and now with the world being stabilized with a whole bunch of our owners that are building these things a few weeks ago and I asked them, you're seeing any difference in your ability. Then they said, no, maybe a teeny bit more expensive, a little bit more equity, but no real difference in sort of the mainstream kind of lending environment or nothing that they viewed as material, the best quality, developers are still able to get it and still able to finance our stuff. Kevin, I don't know [indiscernible].

Kevin J. Jacobs

Yes, I think that's a good way of describing the Wall Street versus Main Street. I mean you know the main street side of it is where the lion's share of our development is getting done, especially in the U.S. On the Wall Street side of it, I think for existing cash flowing assets, when you had the world freeze up the way Chris described it, CMBS in particular, spreads did gap out quite a bit, but those markets have re-stabilized and they are looking a lot stronger than they were.

But again on the main Street side of it, I think specific to your question about development, that is almost all local, they are highly equitised, they are financed on a loan to cost basis and it's just a little bit different environment than some of the things you've been hearing out of Wall Street.

David Katz

Got it. If I could ask one more smaller question, and I recognize that it's a smaller piece of your business, but given the split, it's relevant, we did hear a timeshare competitor talk about default activity yesterday. And I wondered if you had any perspective on your timeshare business and whether there has been any change directionally or anything notable with respect to timeshare notes and your customers in your system?

Kevin J. Jacobs

David, we saw those comments of course like you did and we have not seen that – that particular activity has not existed in our business, and frankly our customers, who is a little bit different customer, has been quite strong. So our default rates are not picking up. Our average FICO on new loans is almost 750, so a quite high credit profile for our customers. And frankly I was just looking at our default rates. We're not up really at all in the quarter. So we're not seeing that issue.

David Katz

Understood. Thanks very much.


Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for his closing thoughts.

Christopher J. Nassetta

All right, just want to say thank you everybody for spending so much time with us this morning. We continue to make great progress. You should be looking out in the not-too-distant future for our Form 10 to get more information on the spins and we look forward to catching up with you on the next quarterly call or before. Thanks.


Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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