Hilton Worldwide Holdings Inc. (NYSE:HLT) Q1 2023 Earnings Call Transcript

Hilton Worldwide Holdings Inc. (NYSE:HLT) Q1 2023 Earnings Call Transcript April 26, 2023

Hilton Worldwide Holdings Inc. beats earnings expectations. Reported EPS is $1.24, expectations were $1.13.

Operator: Good morning, and welcome to the Hilton’s First Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Brian Kucaj, Senior Director, Investor Relations. You may begin.

Brian Kucaj: Thank you, Chad. Welcome to Hilton’s First Quarter 2023 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 Factors 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 Nassetta, 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 first quarter results and discuss our expectations for the year. Following their remarks, we will be happy to take your questions. With that, I’m pleased to turn the call over to Chris.

Christopher Nassetta: Thanks, Brian. Good morning, everyone, and thanks for joining us today. We’re pleased to report that demand for travel remains strong, maintaining the trend that we saw in the back half of last year, which led to both our top and bottom line results finishing the quarter above the high end of our guidance. As we move forward, fundamentals remain strong, and we expect secular tailwinds to continue to support growth. Despite continued macroeconomic uncertainty, we’re optimistic that the power of our network effect, our industry-leading RevPAR premiums and our fee-based capital-light business model will continue to drive strong operating performance, unit growth and meaningful cash flow, enabling us to return an increasing amount of capital to shareholders.

In the first quarter, system-wide RevPAR grew 30% year-over-year and 8% compared to 2019. Rate continued to drive growth, up 11% compared to 2019, and system-wide occupancy reached 68%, up from the prior quarter and just 2 points shy of peak levels. Globally, all segments outperformed expectations, and the lifting of COVID restrictions in China drove significant recovery in demand across Asia Pacific throughout the quarter. As a result, RevPAR in the month of March exceeded 2019 levels across all regions and segments for the first time since the pandemic began. Given our strong results and positive momentum, we’re raising both top and bottom line guidance for the full year, which Kevin will cover in more detail in just a few minutes. Turning to the segment details.

Leisure trends remained strong throughout the quarter with RevPAR surpassing 2019 by approximately 15%, ahead of prior quarter performance. Strong leisure transient demand continue to drive rates up in the mid-teens above 2019 and occupancy fully recovered back to 2019 levels, driven by the surge in travel in Asia Pacific. Business transient also continued to improve with RevPAR up 4% from 2019, reflecting the resiliency of business travel, particularly for small and medium-sized businesses, which remained roughly 85% of our segment mix. Recovery in group remains robust with RevPAR finishing roughly in line with 2019 with steady improvement each month in the quarter and March exceeding 2019 by 5%. Demand for future bookings also remained strong with full year group position up 28% year-over-year and 3% versus 2019.

Additionally, new group leads ended in the quarter 13% higher than 2019, an increase of 6 points compared to prior quarter. Looking at the full year, based on the better-than-expected Q1 results, the accelerated demand across Asia and continued positive momentum in group, we now expect full year system-wide top line growth between 8% and 11% versus 2022, assuming some slowdown in the back half of the year due to macroeconomic uncertainty, particularly in the U.S. Turning to development. In the first quarter, we opened 64 properties totaling over 9,000 rooms, celebrating several milestones, including the opening of our 500th hotel in China, our 100th addition to the Tapestry Collection and the opening of the Canopy Toronto Yorkville, the Lifestyle brand’s debut in Canada.

We also opened 2 new Embassy Suite resort properties in Virginia Beach and Aruba with the Aruba addition marking the brand’s 10th international property. And after recently being ranked the #1 Hotel Franchise in Entrepreneur Magazine’s Franchise 500 for a record-breaking 14th year in a row, Hampton by Hilton expanded its global presence to 37 countries with the brand’s first property in Ecuador. While we expect to see some impact from the current financing environment, we are encouraged by the progress on the signings and starts front. We signed approximately 25,000 rooms during the quarter, growing our pipeline to a record 428,000 rooms, more than half of which are currently under construction. Signings in the quarter outpaced prior year across all regions.

And conversion signings in the quarter were 24% higher than prior year, benefiting in part from the rollout of our newly-launched brand, Spark by Hilton. The initial interest in Spark has been tremendous. We currently have more than 300 deals in various stages of negotiation, and our teams are working hard to deliver this exciting new premium economy conversion brand with hotels opening later this year. Hilton Garden Inn also continues to be an engine of global growth with 14 new signings across 6 countries in the quarter and over 60 working deals in 22 countries. Additionally, in April, we announced the signing of the Waldorf Astoria Jaipur, marking the debut of the brand in India and further demonstrating our commitment to expanding our world-class luxury brands across the globe.

Construction starts for the quarter totaled over 19,000 rooms, up nearly 20% from prior year, and starts in the U.S. were up more than 50% year-over-year. Our global under construction pipeline is up 8% compared to March 2022. And per STR, we continue to lead the industry in total rooms under construction. Taking all this into account, we still expect to deliver net unit growth within our guidance range this year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years. On the loyalty front, Hilton Honors grew to more than 158 million members, a 19% increase year-over-year and remains the fastest-growing hotel loyalty program. In the quarter, Hilton Honors members accounted for 62% of occupancy, an increase of 200 basis points year-over-year.

Additionally, in an effort to further provide our loyal guests with an elevated wellness experience, in April, we announced the international expansion of our partnership with Peloton, bringing Peloton bikes to properties across the UK, Germany, Canada and Puerto Rico, building on our existing partnership to make Peloton bikes available in all U.S. hotels. As one of the world’s largest hospitality companies, we recognize Hilton has the responsibility to protect the planet and to support the communities we serve to ensure our hotel destinations remain vibrant and resilient for generations of travelers to come. In early April, we published our 2022 Travel with Purpose Report, outlining our latest progress towards our 2030 environmental, social and governance goals, including our efforts to reduce our environmental impact while creating engines of opportunity within our communities and preserving the beautiful destinations where we live, work and travel.

We remain committed to driving responsible travel and tourism globally while furthering positive environmental and social impact and sound governance across our operations and our communities. All of our success would not be possible without the dedicated efforts of our talented team, and we continue to be recognized for our remarkable workplace culture. Recently, Great Place to Work and Fortune ranked Hilton the #2 workplace in the U.S., our eighth consecutive year on the list, and once again, the top-ranked hospitality company, an accomplishment I’m truly proud of. Overall, despite macroeconomic uncertainty, we believe that our world-class brands, dedicated team members and resilient business model have us incredibly well positioned for the future.

Now I’ll turn the call over to Kevin for a few more details on the quarter and our expectations for the full year.

Kevin Jacobs : Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 30% versus the prior year on a comparable and currency-neutral basis and increased 8% compared to 2019. Growth was driven by strong demand in APAC as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $641 million in the first quarter, up 43% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth across all regions as well as strong performance in Europe and Japan benefiting our ownership portfolio. Management and franchise fees grew 30% year-over-year, driven by continued RevPAR improvement.

Continued good cost discipline further benefited results. For the quarter, diluted earnings per share adjusted for special items was $1.24, increasing 75% year-over-year and exceeding the high end of our guidance range. Turning to our regional performance. First quarter comparable U.S. RevPAR grew 21% year-over-year with performance continuing to be led by strong leisure demand. Both business transient and group RevPAR finished above 2019 peak levels for the second consecutive quarter, driven by strong rate growth. In the Americas outside the U.S., first quarter RevPAR increased 56% year-over-year and 35% versus 2019. Performance was driven by strong leisure demand at resort properties where RevPAR was up over 60% compared to peak levels. In Europe, RevPAR grew 68% year-over-year and was 13% higher than 2019.

Performance benefited from continued strength in leisure demand and recovery in international inbound travel, particularly from the U.S. In the Middle East and Africa region, RevPAR increased 32% year-over-year and 42% versus 2019, led by strong rate growth and group demand. In the Asia Pacific region, first quarter RevPAR was up 91% year-over-year and down only 4% versus 2019. RevPAR in China was down 5% compared to 2019, 32 points better than prior quarter as demand recovery accelerated due to the lifting of COVID restrictions. The rest of the Asia Pacific region also saw a significant improvement with RevPAR, excluding China, up 19% versus 2019, representing an 11-point improvement versus prior quarter. Turning to development. Our pipeline grew year-over-year and sequentially and now totals 428,000 rooms with nearly 60% located outside the U.S. and over half under construction.

Looking at the full year, despite the near-term macroeconomic uncertainty, we still expect net unit growth between 5% and 5.5%. Moving to guidance. For the second quarter, we expect system-wide RevPAR growth to be between 10% and 12% year-over-year. We expect adjusted EBITDA of between $770 million and $790 million and diluted EPS adjusted for special items to be between $1.54 and $1.59. For full year 2023, we expect RevPAR growth of between 8% and 11%. We forecast adjusted EBITDA of between $2.875 billion and $2.95 billion. We forecast diluted EPS adjusted for special items of between $5.68 and $5.88. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return. We paid a cash dividend of 15% — $0.15 per share during the first quarter for a total of $41 million.

Our Board also authorized a quarterly dividend of $0.15 per share in the second quarter. Year-to-date, we have returned more than $600 million to shareholders in the form of buybacks and dividends, and we expect to return between $1.8 billion and $2.2 billion for the full year. Further details on our first 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, please. Chad, can we have our first question?

See also 15 Best Retirement Communities For Active Adults and 25 Countries with the Best Hospitals in the World.

Q&A Session

Operator: And the first question is from Carlo Santarelli from Deutsche Bank.

Carlo Santarelli : Chris, just in terms of the way you guys are thinking about the year, your guidance, obviously, from a RevPAR perspective, up about 350 basis points at the midpoint. First quarter obviously contributes some of that lift. You guys spoke to a tougher macroeconomic situation in the second half of the year on your fourth quarter call. How much has your outlook on the second half changed as obviously, you get some contribution from the first quarter, you have a lot of visibility in the second quarter? Just trying to understand within the context of that guidance, if you’ve had any kind of change or pushing out of when you guys believe or when you’re interpreting the macroeconomic conditions will toughen.

Christopher Nassetta : Yes, a really good question. Obviously, I think I used the macroeconomic uncertainty two or three times for a reason because there is an uncertain environment. I mean, what we’re seeing today is, as you heard in what you saw in our numbers and in the prepared comments is very good strength across all our segments. Leisure continues to be super strong. Business transient in the quarter, both demand and pricing, has returned to prior peak levels and group is motoring on its way. It’s just longer in gestation to get there. But based on the trends, it’s going to get there in the second half of the year, I think, with a great deal of certainty. So we are not — you didn’t really ask it this way, but I think part of it is we’re not seeing any cracks in terms of demand patterns.

There is a lot of momentum. I sit at this very table every Monday morning with my entire executive committee, representing every region of the world. And the first question I ask, are you seeing any cracks? Any issues with demand broadly? Any issues regionally? Any issues from a segment point of view? And the truth is we’re just not seeing it. Having said that, we know here in the U.S. and in many other places around the world, there’s an inflation issue. Now it’s being — it is being managed. It’s becoming — it is in the process of normalizing, particularly here in the U.S., but it’s not there. And the Fed has said it’s going to deal with it. I believe that — I take them at their word. And I think ultimately, that means you’re going to continue to have a slowing of the broader economic environment that, at some point, has to have some impact on us.

It hasn’t yet for a bunch of reasons, I suggested: one, I still think we have a lot of pent-up demand; two, we are still benefiting from a secular shift in spending patterns broadly. So while people may have a little less to spend, they’re spending more of it on experiences and a lot less of it on things. You see that throughout the economy. And international travel is finally, with China opening up, while it’s not back anywhere near where it has been, international travel is really on a steep up-slope. And all of those things are keeping the momentum in demand in the business. Recognizing also, by the way, that capacity additions are at historical lows and are probably going to stay there for a while. So when I said very quickly in my comments, fundamentals remain strong, I mean, fundamentals are supply and demand.

Demand is good for the reasons I suggest that supply in the industry is anemic. Thankfully, we get a lot more than our fair share of the supply, so that’s good for us. But the basic fundamentals in the business are good. Having said all of that, we do expect things will slow down. You asked a question which I’m actually going to answer, which is, do I feel any differently than I did sitting here a quarter ago. And I would say, yes, I would say number one, the economy appears to be more resilient. Inflation is being tamed. I have a higher degree of confidence at this point. I’m not the right person to ask, but well, I’ll tell you what I think. I have a higher degree of confidence that the Fed will land the plane reasonably well and that we’re not going to have a deep dark kind of recession.

We’re going to have a slowdown, maybe a recession. It feels a lot more like it will be reasonably modest at this point. So I feel better about that. And I definitely feel like things have been pushed out a little bit. One, just time has gone by. We have now a quarter under our belt. We’re deep into understanding half of the year. I mean, we’re not done. There’s a bunch of the second quarter left, but we have pretty good sight lines at this point into Q2. And that feels like the momentum is continuing. So you get a half a year sort of under your belt. It gives you more confidence. And so I feel better about, thus why we increased our guidance on the top line and bottom line because I feel like there’s enough momentum in our business. The economy broadly is pretty resilient.

There’s more confidence in the Fed being able to sort of do this without wreaking too much havoc. So I’d say net-net, yes, I feel a bit better. Having said that, we did and I said it intentionally in the prepared comments, we do assume because we are sentient and we know what’s going on, that at some point, you will see some slowing. I think realistically, it’s more late third quarter and into the fourth quarter. I honestly think there’s a chance it kicks into next year, given the broader momentum and the strength of the consumer broadly. But I don’t know. And so what we’ve tried to do in our guidance is, build in an expectation that this — these efforts of the Fed here and in other parts of the world will eventually work and that we’re going to see some, at least, modest slowdown.

And so that’s sort of what — we feel better than we did. We still think there’s a lot of uncertainty, and we’ve tried to factor for that in our guidance in the second half of the year.

Carlo Santarelli : Great. Thank you, Chris. And then if I could, just one quick follow-up. In the period, obviously, I think managed franchise RevPAR was 29%. Unit growth on the franchise side was 4.4. The fees — franchise fees grew about 23%. I’m assuming that, that’s a comp issue with some ancillary non-RevPAR fees in the 1Q of ’22?