The super-charged tortoise...



"Feel great about the fundamentals of the business and positioning (the company) for this year and next year" Mr. Nassetta




Feel good about macro economic setup which in turn translates into an improved outlook and earnings guidance.



  • Transient revenues in Q2 increased 7% systemwide
  • Gov't business stabilized during Q2 with business up 3% after 5 quarters of declines. 
  • Group +5% systemwide and will pick up in H2 with M/HSD growth in 2H
  • Ancillary spend: Group spend +14% per group owned hotel and +12% across Americas portfolio. 
  • Development:
    • Opened 56 hotels, 8,000 rooms in Q2 with 694,000 rooms globally opened at Q2 end
    • 542 hotels - 106,000 rooms under construction in Mgmt & Franchise segment
    • Pipeline +18% YoY = 275,000 rooms
    • 21,000 new rooms approved in Q2
  • Curio potential for 1,200 hotel portfolio possible globally, 75 Curio's in discussions globally
  • Lifestyle Brand will be launched before year end



  • Favorable conditions in most markets.
  • US: strong fundamentals, high single digit RevPAR growth expectations
  • Mexico:  high single digit REVPAR
  • Europe: strong group and transient gains, soft France, better Turkey - confident in middle single digit RevPAR growth
  • ME/Africa: steady state, flat RevPAR due to geopolitical tensions
  • Asia/Pac: Japan & China strength, high single digit RevPAR
  • Time Share: 82% of supply is capital light
  • Corp Expense: incremental public company costs, not evenly distributed across quarters...
  • US Focused Service: 7.9% RevPAR: solid results
  • Outside the US: 8% REVPAR
  • China: 7% REVPAR
  • APAC tempered by HK and Singapore
  • Europe : Northern countries and France soft, Southern better
  • ME/Africa -3.7% in Q - virus fears, visa restrictions
  • Debt reduction:  substantially all FCF for debt retirement, $600m YTD, increasing debt reduction by $100m
  • Time Share securitization:  $350m upsized, 1.81% all in cost, tightest spread and terms
  • Cash $829m, $284m restricted



  • Outlook for H2, 5.5% to 7.5% RevPAR seems conservative versus YTD results?
    • HLT strongest results vs competition. Transient business strong.  Feel good mid-point - highest in the industry, will attempt to outperform mid-point and thus at the upper-end of guidance.
  • Pipeline: Brands/Geographies garnering interest?
    • US interest picked up on percentage basis, US today is a limited-service growth story. HLT getting 20% of new deals vs. only 10% of market currently.
  • Net-rooms acceleration in 2015?
    • Assumptions correct, great success in pipeline, most rooms under construction, but did not give specific 2015 guidance.  2014 was the nadir for units growth. Expect pipeline will accelerate.
  • Margin acceleration for owned hotel segment for H2 2014?
    • Strong H1 2014 growth, Q2 on higher end, by definition see margin growth temper, due to prior cost saves efforts.  Big 8 hotels will have an uptick from Q2 driven by group position.  Big 8 position high single digit, low double digit for Q3 and Q4
  • EBITDA growth 2015 results in 3x to 3.5x leverage by year end 2015, how should we think about capital structure?
    • Will end 2014 at low 4xs, by year end 2015 will be 3x to 4x, targeting lower investment grade rating...not in business of hoarding capital, will preserve balance sheet, but will look to return FCF to shareholders.  First a small dividend then remaining FCF through share repurchases or dividends based on ownership of company (whether or not BX is still a shareholder).
  • What has changed that will caused margins to continue to expand?
    • Today at the mid-cycle, getting high occupancy levels, ability to drive mix based on group return and strength of transient. Aggressive on mix and increasing ADR = higher flow through.
  • Real Estate: value realization at Waldorf and Hilton
    • Hilton Hawaiian Village, broke ground, expect to be selling units before year end.
    • Hilton: in design stage, construction early 1H, will product EBITDA before year end.  In registration for timeshare.
    • Waikea Village: registration for incremental time share, convert one or more towers to timeshare.  Not soon because have other inventory to sell prior to the tower conversion.  
    • Waldorf: nothing new to report, tax structure addressed to maximize value creation to shareholders.  Searching for counterpart to make deal happen. Will have more details before year end.
  • How to grow RevPAR sequentially?
    • RevPAR index gains helped HLT.  Every brand gained share.  1.7% improvement YoY. Revenue management efforts helped drive results. Have something unique vs. competitors. 
    • Market share premiums.  These premiums drive new development as well.
    • Driving customer loyalty for repeat business.
  • Key Money
    • Less than 5% involve key money, so 95% are "dry" deals.  HLT system offers real value to owners.
  • Strategic opportunities - would you consider lower fees?
    • May discount fees vs. strategic nature of new affiliation.  On occasion may consider discounting fees. 
  • Where are you interested in monetizing real estate - potential REIT spin-off? 
    • Less to do with cycle, more to do with value creation exercise. Given tax attributes of owned real estate, must do in a tax-beneficial manner. Would need to see divergence in multiples and thus value creation opportunity. Doing it today would not provide incremental value.  
  • APAC guidance - lowered?
    • Down modestly due to Singapore and Hong Kong, still feel good about Japan and China - being conservative due to Thailand disruption and Singapore weakness.
  • Waldorf - ability to pull cash out?
    • Need high quality, 5 star 400 room Waldorf Astoria branded hotel.  So opportunities to re-position. Getting timeshare is NOT a priority. Would love to get cash out, but most efficient manner will not include cash out but rather via JV and trade into other real estate.  
    • 1400+ rooms with 1.6m sq. ft. of zoned, so about 1.3m of opportunity.
  • BIg 8 - group mix last cycle?
    • About where assets were prior to downturn. Target is 40% group, today high 30%s
  •  IMFs - trajectory?
    • Would have been better but Middle East weighted on results. 80% of IMFs are outside the US.  Non-US IMFs are lower beta and do NOT sit behind a preferential return.  Mid-teens growth in 2014, but 2015 and later stronger because international assets/no prefs will see IMF growth of mid-20s%

WTW: Beggars on the Street (2Q14)

Takeaway: Management fired a warning shot for 2015, reinforcing our call that 2015 will be ugly. Consensus STILL doesn't get it, so we'll stay short


  1. 2Q14 SHOWED SOME IMPROVEMENT: WTW beat revenue estimates by a little over 2%, largely driven some pricing improvements internationally and some mild improvement on churn rate.  Adjusted EPS came in $0.98 vs. Consensus of $0.77, but much of that upside came from slashing marketing expense, which is where the company can't afford to be cutting if it wants to revive its business.  Total membership declines moderated from -18.6% in 1Q14 to -14.8% in 2Q14.  The company raised its EPS guidance to $1.65-$1.85 from $1.40-$1.85.  In short, the quarter came in better than expected, but wasn't all that impressive.  
  2. BUT NOT ENOUGH: In any given year, the first quarter is everything for WTW given seasonal attrition patterns.  After 1Q, we are monitoring attrition patterns to see what kind of a winter season is necessary to hit consensus estimates for the following year.  While we did see some improvement in its 2Q attrition rate, as it stands now, WTW will still need one of its strongest selling season on record in order to achieve 2015 consensus estimates.  Given that member acquisition costs have more than tripled in the last 3 years and the company is scaling back on marketing to preserve profitability, the prospects of that occurring are particularly slim.  In fact, if management doesn't plan to drastically increase its marketing spend, we would suspect that WTW may be heading for another all-time low in winter recruitment next year.  
  3. BEGGARS ON THE STREET: WTW told the street there is a $0.60 headwind to 2015; that is a massive number considering 2014 guidance is  $1.75 at the midpoint.  A significant driver of the headwind is management's expectation that both Monthly Pass and Online subscribers will decline in the mid-teens %.  In short, management is telling the street what we've been saying for some time now: 2015 will be an ugly year.  By announcing this on its 2Q14 call, management appears to be begging analysts to bring down their numbers before the company announces 2015 guidance.  Consensus 2015 revenue estimates have increased following the print, with expected revenue growth holding steady at -2.2% for 2015.  With consensus asleep behind the wheel, we see no problem riding the short from here.


Let us know if you have any questions, or would like to discuss in more detail


Hesham Shaaban, CFA



Thomas Tobin


Have You Been Watching the Russell 2000?

Takeaway: This correction in U.S. growth expectations is real.

The Russell 2000 is down -3.7% year-to-date (and down -7.2% since the VIX bottomed July 7th).


This correction in U.S. growth expectations is real. Yesterday’s PMI print of 52.6 JUL (vs 62.6 JUN) was a friendly reminder that its not Q2 GDP that matters - #Q3Slowing does.


Have You Been Watching the Russell 2000? - Russell 2000 Chart


Editor's note: This is a brief excerpt from CEO Keith McCullough's morning research.

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Wow! A shocking transaction that, along with the IGT/GTECH transactions, should transform the industry.




  • Immediately accretive to cash flow and EPS
  • Deal was done in 3 weeks and 1 day
  • Expect to close transaction quickly - early 2015
  • EBITDA multiple:  10.2x excluding synergies; with synergies, 6.8x LTM multiple
  • 80% of $220m cost synergies will be achieved by end of 1st year
    • $220m breakout
      • COGS: $33m
      • R&D: $43m
      • SG&A: $144m
  • Financing with 3 banks: BofA, JPM, and DB
  • Pro-forma combined rev (LTM ending 3/31/2014):  SGMS:  $1.649bn, BYI $1.363bn
  • Pro-forma EBITDA: SGMS $544m (not including $73m unrealized WMS synergies) BYI: $466m adjusted EBITDA (not including $30m from Shuffle Masters acquisition)
  • Combined pro-forma EBITDA  $1.366bn EBITDA
  • $25m on capex synergies on an annual basis in 2nd yr after completion of deal
  • Over $1bn in cash flow
  • Tax benefits:  SGMS has large net operating losses.  Can shelter $144m in US taxes by fully utilizing its NOLs.
  • BYI will realize full $30m synergies by end of June period


Q & A

  • SGMS:  approached BYI and they agreed
  • Disagree that number of suppliers shrinking.  Industry getting broader and broader.  Consolidation doesn't affect landscape.  Plenty of competition.
  • Leverage:  would like to return leverage ratio in the mid 4s
  • Comfortable with debt maturities
  • $220m synergies doesn't include the WMS synergies
  • Capex:  area of opportunity
  • SGMS will report 2Q earnings on Tuesday. 
  • Possible revenue synergies:  social gaming content across WMS, SciGames, and BYI.  Lottery systems and BYI systems integration opportunities.
  • SGMS and BYI:  excellent standing with regulators; not concerned with potential issues with SEC
    • SGMS+BYI market share still not as big as IGT
  • IGT/GTECH:   synergies complementary with SGMS/WMS deal
  • SGMS/BYI:  more overlap than IGT/GTECH
  • No changes with bond covenants
  • Intend to keep all the brands
  • Will file a 8k merger agreement shortly
  • Current Sales force:  one for slots, one for lottery systems


Client Talking Points


The phase transition in volatility (from bearish to bullish TREND) was already manifesting (11.94 was our TREND breakout signal line), so now we’ll get the immediate-term TRADE overbought volatility signal (see our Q3 Macro Theme of #VolatilityAsymmetry for longer-term context).


The Russell 2000 is down -3.7% year-to-date (and down -7.2% since the VIX bottomed July 7th) - this correction in U.S. growth expectations is real. Yesterday’s PMI print of 52.6 JUL (vs 62.6 JUN) was a friendly reminder that its not Q2 GDP that matters - #Q3Slowing does.


The bullish to bearish TREND reversals across all of the major European indices continues this morning – DAX down hard -1.9% remains bearish TREND – Portugal -3.3% continues to lead losers as it moves towards -10% year-to-date.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.



Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Long-Bond $TLT +11.6% YTD vs Russell 2000 -3.7% YTD #timestamped



It's the price of leadership to do the thing you believe has to be done at the time it must be done.

-Lyndon B. Johnson


Five year changes in the following; Live Cattle is up +88%, and Lean Hogs are up +115%.

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