Hilton Worldwide Holdings Inc. (NYSE:HLT) Q3 2023 Earnings Call Transcript

Hilton Worldwide Holdings Inc. (NYSE:HLT) Q3 2023 Earnings Call Transcript October 25, 2023

Hilton Worldwide Holdings Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $1.66.

Operator: Hello, and welcome to the Hilton’s Third Quarter 2023 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 question. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jill Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Jill Chapman: Thank you, MJ. Welcome to Hilton’s third 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 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 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 third 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.

Chris Nassetta: Thanks, Jill, and good morning, everyone, and thanks for joining us today. I wanted to start today by saying that our thoughts are with all of those impacted by the tragic events that are unfolding in the Middle East. Our priority remains the safety and security of our team members and guests as well as helping in any way we can to support the relief efforts for the humanitarian crisis in the region through a number of organizations, including the International Committee for the Red Cross. Turning to results. We’re pleased to report another strong quarter with system-wide RevPAR, adjusted EBITDA and adjusted EPS all above the high-end of our guidance ranges. The strength of our brands, power of our commercial engines and resilient business model continue to drive strong top and bottom line performance.

This supports meaningful free cash flow generation and greater shareholder returns. Year-to-date, we’ve returned more than $1.9 billion to shareholders, and we remain on track to return $2.4 billion to $2.6 billion for the full year. In the quarter, system-wide RevPAR increased 6.8% year-over-year, boosted by strong international performance and continued recovery in business transient and group. Demand improved across all segments and regions with system-wide occupancy for the quarter reaching our highest level post-pandemic and only two percentage points off prior peak levels with September just one point shy of 2019. Group RevPAR rose 8% year-over-year, outperforming leisure and business transient RevPAR growth of 5% each. Compared to 2019, system-wide RevPAR grew 11.4% in the quarter with all segments accelerating sequentially versus the second quarter.

Overall performance was driven by both rate and occupancy. Steady rate growth and rising demand drove leisure RevPAR up 29% versus 2019, improving roughly 300 basis points versus the second quarter. Business transient RevPAR grew 7% with both large and small accounts improving. Adjusting for holiday and calendar shifts, mid-week RevPAR increased nearly 500 basis points versus the second quarter. On the group side, RevPAR exceeded 2019 peak levels for the first full quarter since the pandemic and we continue to see positive group booking trends in the quarter for all future periods. Group position for 2024 is now up 18% year-over-year, and lead demand in the quarter for all future arrivals increased more than 15%. As we look to the fourth quarter, we expect continued strength in international markets, along with continued improvement in business transient and group demand to drive further acceleration in RevPAR compared to 2019.

Better-than-expected third quarter performance and increased expectations for the fourth quarter, partially driven by better group bookings. As a result, we now expect full year RevPAR growth of 12% to 12.5%. Turning to development. We saw another quarter of robust signings with a near-record 35,500 rooms signed increasing 80% year-over-year. Our pipeline now stands at the highest in our history, totaling 457,000 rooms, up 4% versus the second quarter and 10% year-over-year. Signings in the quarter spanned our portfolio, demonstrating the benefits of a diversified industry-leading family of brands. Conversions accounted for 35% of signings increasing sequentially versus the second quarter. Overall, we remain on track to deliver the highest annual signings in our company’s history, surpassing 2019 record levels by double-digit percentage points.

We also delivered another strong quarter of construction starts with every major region exceeding our expectations, and the US in particular, delivering its strongest quarter of start since Q1 2020, up 18% year-over-year. Roughly half of our pipeline is currently under construction, and we continue to have more rooms under construction than any other hotel company accounting for more than 20% of industry share. In the quarter, we opened 107 hotels totaling nearly 16,000 rooms, up 22% year-over-year and 12% versus the second quarter. We achieved several milestones in the quarter, including the opening of our 700th hotel in the Asia-Pacific region, and we celebrated our 60th anniversary in Japan. We also opened our 300th lifestyle hotel in our 50,000th lifestyle room, including the global debut of Tempo by Hilton designed with well-being in mind, the brand’s first property is now open in the middle of Times Square, New York as part of the TSX development.

Additionally, Canopy launched in the south of France with the opening of the Canopy by Hilton Con making Hilton’s entry into the city and the latest addition to a growing portfolio of Canopy properties across Europe. Curio celebrated its debut in Savannah, Georgia. Tapestry increased its portfolio with the opening of the Bankers Alley Hotel in Nashville, and Motto expanded its signature flexible design and local vibe with its second hotel in New York City. During the quarter, we also celebrated the debut of our newest cost-effective conversion brand Spark by Hilton, the grand opening of the Spark by Hilton Mystic Groton in Connecticut solidified our foray into the premium economy segment. I just visited the property last week and was blown away.

I would encourage any of you that are in the area to go see it. Opening just eight months after launch, Spark is the fastest announcement to market brand in Hilton’s history, with more than 400 deals in negotiation; we think this is the start of a journey to reshape the premium economy segment while expanding our customer and our owner base. Announced just five months ago, Project H3 also continues to see tremendous demand with 350 deals in negotiation. In fact, later today, we’re breaking ground on the first ever property in Kokomo, Indiana, which we expect to open in late summer 2024. Positive momentum in openings has continued into the fourth quarter with several notable openings in October, including the 540 room Hilton Cancun, Mar Caribe and all-inclusive resorts.

Tomorrow, we’ll announce and open a 1,000-room conversion property in the Northeast part of the United States. We forecast conversions will account for approximately 30% of full year openings. For the full year, we continue to expect net unit growth of approximately 5%. We believe we have hit an inflection point and expect a meaningful uptick in openings in the fourth quarter with continued positive momentum into next year with forecast for our highest level of signings in the air, the largest pipeline in our history, nearing the largest under-construction pipeline in our history with identified 2024 openings and positive momentum in conversions, we are confident in our ability to accelerate net unit growth to 5.5% to 6% next year and to return to our prior 6% to 7% growth rate.

In terms of fee contribution, our algorithm is alive and well, and we expect fee growth above RevPAR plus net unit growth going forward. Our under-construction portfolio mix of roughly 60% focused service hotels and 40% full service remains in line with our existing supply. This balanced and diversified pipeline, along with rising RevPAR and royalty rates gives us confidence in our ability to continue delivering high quality growth with increasing fees per room. We also continue strengthening our value proposition for Hilton Honors members. In the quarter, Honors membership grew 19% year-over-year to more than 173 million members and remains the fastest growing hotel loyalty program. Members accounted for 64% of occupancy, up more than 200 basis points year-over-year.

Demonstrating our commitment to meeting the evolving preferences of our guests, we recently announced several new innovations. As part of our long-term commitment to digitally transform the business travel experience for millions of small and medium-sized enterprises, we will launch Hilton for Business early next year. The multifaceted program will feature a new booking website along with targeted benefits designs, especially for SMEs, which account for approximately 85% of our business mix. Additionally, we will expand our events booking capabilities, enabling customers to book meetings and event spaces with or without guestroom blocks directly on our website. For travelers who prioritize sustainability, we recently announced an expanded agreement with Tesla to install up to 20,000 universal wall connectors at 2,000 hotels making our planned EV charging network, the largest in the industry.

We also continue to be recognized for our culture. During the quarter, we were named the top hospitality employer in Europe and in Asia by Great Place to Work. And just yesterday, we were named the number one Best Workplace for Women in the United States for the fifth year in a row. The strong results we’re reporting today would not be possible without our more than 460,000 team members who spread the light and warmth the hospitality each and every day. Overall, we’re very pleased with the performance in the quarter, and we remain very optimistic about the tremendous opportunities that lie ahead with continued strong demand, coupled with our record pipeline and accelerating net unit growth forecast. We’re confident in our ability to further differentiate ourselves from the industry in the years ahead.

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

Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 6.8% versus the prior year on a comparable and currency-neutral basis. Growth was driven by strong international performance as well as continued strength in leisure and steady recovery in business transient and group travel. Adjusted EBITDA was $834 million in the third quarter, up 14% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth largely due to better-than-expected RevPAR performance and license fee growth. Management and franchise fees grew 12% year-over-year. For the quarter, diluted earnings per share adjusted for special items was $1.67, increasing 27% year-over-year and exceeding the high end of our guidance range.

Turning to regional performance. Third quarter comparable US RevPAR grew 3% year-over-year with performance led by continued recovery in both business transient and group. Leisure demand in the US remained strong even with tougher year-over-year comps. Relative to 2019 peak levels, US RevPAR increased 10% in the third quarter, improving 200 basis points versus the second quarter. In the Americas outside the US, third quarter RevPAR increased 11% year-over-year. Performance was driven by strong group demand, particularly in urban locations. In Europe, RevPAR grew 11% year-over-year. Performance benefited from continued strength in leisure demand and recovery in business travel. In the Middle East and Africa region, RevPAR increased 19% year-over-year led by both rate growth and strong demand from the summer travel season.

In the Asia-Pacific region, third quarter RevPAR was up 39% year-over-year, led by the continued demand recovery in China. RevPAR in China was up 38% year-over-year in the quarter and 12% higher than 2019. The rest of the Asia-Pacific region also saw significant growth with RevPAR, excluding China, up 40% year-over-year. Moving to our guidance. For the fourth quarter, we expect system-wide RevPAR growth to be between 4.5% and 5.5% year-over-year and 12% to 13% versus 2019 with continued sequential improvement versus the third quarter. We expect adjusted EBITDA of between $739 million and $759 million and diluted EPS adjusted for special items to be between $1.51 and $1.56. For the full year 2023, we expect RevPAR growth to be between 12% and 12.5%.

We forecast adjusted EBITDA of between $3.025 billion and $3.045 billion. We forecast diluted EPS adjusted for special items of between $6.04 and $6.09. Please note that our guidance ranges do not incorporate future share repurchases. Moving on to capital return, we paid a cash dividend of $0.15 per share during the third quarter for a total of $39 million. Our Board also authorized a quarterly dividend of $0.15 per share in the fourth quarter. Year-to-date, we have returned more than $1.9 billion to shareholders in the form of buybacks and dividends, and we expect to return between $2.4 billion and $2.6 billion for the full year. Further details on our third 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. MJ, can we have our first question, please?

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Q&A Session

Operator: Yes. Of course. [Operator Instructions] Our first question today comes from Shaun Kelley with Bank of America. Please go ahead.

Shaun Kelley: Hi, good morning, everyone. And thanks for taking my question.

Chris Nassetta: Good morning, Shaun.

Shaun Kelley: Good morning, Chris. So Chris, I think the big incremental here is obviously your 2024 improving net unit growth outlook. I think this is meaningfully better than what people were expecting out there. So you gave some color in terms of what you’re seeing on obviously, signings, starts and details. But just help us kind of dig in here a little bit. What would kind of give you the confidence to kind of bump that up from where we were a quarter ago? Is there something in particular you’d like to call out for us? And specifically, just remind us of exactly the activity levels you’re seeing here US as we know we’re fighting that sort of tougher construction and financing environment for owners broadly, it seems like you’re obviously able to buck that trend. Thank you.

Chris Nassetta: Yes. Yes, last quarter, we gave a broad range of five to six, which we felt good about, but a broader range for obvious reasons, we were middle of the year, and there was a lot of year left and thus a lot of time to see what was going to happen in signings and starts and success with conversions and the like. And so — as you saw from what we just reported on in Kevin’s and my comments, we continue to have great success in the third quarter and that’s continued in the fourth quarter. As I said in my prepared comments, we’re going to have a record year by double-digit percentage on signings. While starts aren’t quite back to where they were, they’re getting close to being back to where they were. We obviously have an elevated level of conversions from what we’ve seen in recent years at 30%, which we think is going to continue with across a broad range of brands and of course, including the addition of Spark.

And so the confidence we have is at this point in the year, we have a very granular model. This is — we always have a model, but in the middle of the year, by definition, we just don’t have as much information. Now, as I said in my comments quite briefly, we have identified — a lot of what we’re going to deliver next year is identified. Obviously, we have a bunch of conversions that we’ll do in the year for the year, but we have a lot — we’ve had a lot of success there. And so the confidence is ground up region-by-region, hotel-by-hotel with some, we think, reasonably conservative assumptions for what we’ll be able to execute on given the momentum we have in conversions, this is where we end up is 5.5 to 6. And so we wouldn’t say it if we didn’t believe it and it is a plan that is based on the underlying momentum and things that are largely in production.

As I looked at it, I know we get questions all the time about when are you going to get back to six to seven, and we obviously — and I said in my prepared comments, I have every confidence we will. I think it’s possible next year if a few things go our way. I think we could be at the bottom end of that range. But we’re still in October 2023. So we’re going to take it one step at a time. We refined it. We feel really good about 5.5 to 6, next time we talk, we’ll ever find it even more. And as I said, a few things go our way. Honestly, when I look at all of the data in a granular way, I think there’s probably more upside potential than downside risk at this point.

Kevin Jacobs: And then Shaun — just to circle back to the US, I think, look, the story, I mean, you’ve heard the story about things are a little bit more stressed with financing costs. But I think the story around if you are financed and you’re entitled and you’re ready to go and you want to build a hotel, you’re better off getting underway than leaving that asset as a non-performing asset. And I think that you think about that being fueled also by the fundamental environment where people are optimistic about growth, capacity additions are going to be constrained. We continue to take share. And so I think it’s a good story in the US as well.

Operator: The next question comes from Joe Greff with JPMorgan. Please go ahead.

Joe Greff: Good morning, guys. Thanks for taking my questions. Chris, just trying to understand, longer term, the accelerating net rooms growth. How — on average, how long is the typical full service or the typical limited service hotels staying in the pipeline? Is that time line narrowing? I mean understanding next year’s accelerating rooms growth is more a function of past periods gross room signings as well as starts that you’re seeing pick up here. But are you seeing the time line room staying in the pipeline narrow at all on a like-for-like basis?

Chris Nassetta: No, I would say every region is a little different. I don’t have a hard stat in my head. I’ll give you sort of a directional answer. I mean with limited service in the pipeline generally in the pipeline a couple of years, full service, I would say, on the order of three or four years, but it could vary greatly depending on what region of the world you’re in. But I think directionally, those are — if I average it all together, those are pretty good. And I would say what happened during COVID is that extended out a great deal because everything stopped and slowed down and then you have the supply chain issues even after things got moving again, we reopened. You have the supply chain things that slowed things down.

That has now come back down to being closer to where we were, but still a little bit more extended than where we were. And I think that has a lot to do with just in a lot of parts of the world, what Kevin just said. It’s just a little harder to get things done. And so it’s taking a little bit longer. People are getting financed, but if they had five projects they wanted to start, they’re maybe getting two or three of those finance and it’s taking a little bit longer. So I think there is a little bit longer gestation period. Now when 30% of the deliveries are conversions, obviously, that’s a super short gestation period from pipeline into NUG. And so that’s helping — if you take it on average, I would say, with an increase of conversions relative to being in the low 20s right before we were in COVID.

I would say the gestation period, the time and pipeline is about the same. Again, I’m doing sort of quick and dirty math in my head. But if you just look at pure new construction, it’s a little bit — it’s still a touch longer than it had been. And again, we sort of like not to repeat myself, we factored all of that in, meaning we know we have a team that is on the ground everywhere in the world, working with all of our owners on every project that’s under construction and what we think we’re going to deliver next year other than the end of the year for the year, which are largely obviously conversions at this point. Those are projects. They’re on the ground, they’re being — they’re under construction, and we have rational time lines for when we think that those will deliver.

Operator: The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli: Hey guys. Thank you for taking my question. Chris, you said earlier in the call that the kind of fee growth — you expect fee growth to outpace kind of the NUG plus RevPAR dynamic. I was wondering if you could kind of break down a little bit how to think about the NUG plus RevPAR dynamic for the operating business relative to kind of the fees and whatnot and how we should think about that fee component of that relationship?