Hilton Worldwide Holdings Inc. (NYSE:HLT) Q4 2022 Earnings Call Transcript

Hilton Worldwide Holdings Inc. (NYSE:HLT) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning, and welcome to the Hilton Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery Chapman, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Jill Slattery Chapman: Thank you, Chad. Welcome to Hilton’s fourth quarter and full year 2022 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 and first quarter 2022 10-Q. 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 fourth quarter and full year results and discuss our expectations for the year. Following their results, we’ll be happy to take your questions. With that, I’m pleased to turn the call over to Chris.

Chris Nassetta: Thank you, Jill. Good morning, everyone, and thanks for joining us today. We’re happy to report a strong end of another year of continued growth. Together with our team members, owners and communities, we’ve navigated through the most challenging times our industry has experienced and are deep into recovery throughout the world. During the year, we continued investing in new innovations and partnerships that meet guests’ evolving needs and further strengthen our value proposition for Hilton Honors members and owners. We remain committed to delivering reliable and friendly experiences to our guests and we continue to enhance our network through our strategic and disciplined approach to development, enabling us to serve even more guests across more destinations for any stay occasion they may have.

Our strategy drove strong performance for the year with system-wide RevPAR up 42.5% versus 2021 and approximately 1% shy of 2019 levels. Both adjusted EBITDA and EPS surpassed our expectations and prior peaks with margins of roughly 69%, up more than 300 basis points year-over-year and more than 800 basis points over 2019 levels. Strong results and higher margins enabled us to generate the highest levels of free cash flow in our history and returned more than $1.7 billion to shareholders for the full year. Turning to results for the quarter. System-wide RevPAR grew 24.8% year-over-year and increased 7.5% compared to 2019 with performance improving sequentially versus the third quarter. We saw continued progression across all segments with leisure, business transient and group RevPAR all exceeding 2019 levels.

System-wide occupancy reached 67%, up from the third quarter and just 3 points shy of prior peak levels. Overall rates remained robust, increasing 13% versus 2019 with all segments exceeding expectations. As expected, leisure trends remained strong throughout the quarter, with RevPAR surpassing 2019 levels by approximately 12%, modestly ahead of third quarter performance. Strong leisure transient demand continued to drive rates up in the high-teens compared to 2019. Business transient RevPAR also continued to improve, with business travel up 3% versus 2019, nearly all industries saw continued recovery compared to the prior quarter. Small and medium-sized businesses remained an important and growing part of our business travel segment, accounting for roughly 85% of our segment mix and enhancing our overall resiliency.

Group saw the biggest quarter-over-quarter improvement with RevPAR fully recovering to 2019 levels, driven by both occupancy and ADR gains. Company meetings boosted performance improving more than 7 points versus the third quarter. As we look to the year ahead, acknowledging macroeconomic uncertainty we expect system-wide top line growth of 4% to 8% versus 2022. We expect performance to be driven by continued growth in all segments and aided by easy first quarter comps due to Omicron, meaningful recovery across Asia and solid growth in U.S. urban markets as group business continues to recover. Comprising roughly 20% of our normalized mix, group is a segment with the greatest visibility. For 2023, group position is up 25% year-over-year and nearly back to 2019 levels.

Even with robust forward bookings, the pipeline still remains strong with tentative bookings up more than 20% versus last year, helped by rising demand for company meetings as organizations bring their teams back together. Additionally, pricing for new bookings is up in the low double digits and lead volumes in January were at all-time highs. Turning to the development side. We continue to deliver on our commitment to capital-light growth. For the full year, we added nearly a hotel a day, totaling more than 58,000 rooms and celebrated the opening of our 7,000th hotel. Since our go-private transaction 15 years ago, we’ve more than doubled the size of our system. Our rooms in the U.S. are up nearly 100%, and our international portfolio is now 3.5 times larger.

Additionally, we’ve added 10 new brands to our system, more than doubling our portfolio of brands. We achieved all of this without any acquisitions and more than 90% of the deals in our current pipeline did not have any key money or other financial support. In the fourth quarter, we celebrated the opening of our 60,000th Home2 Suites room, our 150,000th DoubleTree room, our 200th hotel in CALA and 600th hotel in Asia Pacific, including our first Hilton Garden Inn in Japan. We also saw continued strength in construction starts throughout the year, leading to starts of more than 70,000 rooms for the full year. In the U.S., starts increased more than 9% versus 2021. We now have more rooms under construction than all major competitors. With a record pipeline of more than 416,000 rooms, half of which are under construction, we expect net unit growth of 5% to 5.5% for the year and remain confident in our ability to return to 6% to 7% net unit growth over the next couple of years.

Our disciplined development strategy continues to enhance our network effect and enables us to serve more guests across more destinations for any stay occasion. Building on this commitment, last month, we launched our newest brand, Spark by Hilton, a value-driven product that delivers our signature reliable and friendly service at an accessible price. Spark provides a simple, consistent and comfortable stay with practical amenities and unexpected touches, filling an open space in the industry by creating a new premium economy lodging option to meet the needs of even more guests and owners. Premium economy represents a large and growing segment of travelers, totaling nearly 70 million annually in the U.S. alone, for which, we have not had a tailored brand to serve.

This cost-effective all conversion brand offers a streamlined reinvestment plan, focused on core guest elements and enables owners to leverage our industry-leading commercial engines and powerful network effect. To date, we have more than 200 deals in various stages of negotiation, almost all of which are conversions from third parties. Additionally, we’ve identified more than 100 U.S. markets with no Hilton-branded products, providing a great opportunity for the brand and the Company to expand its presence. As a testament to the strength of our system and our continued success of our customer-focused strategy, Hilton Honors surpassed 150 million members during the fourth quarter and remains the fastest-growing hotel loyalty program. Honors members accounted for approximately 64% of occupancy in the quarter, up more than 300 basis points year-over-year and roughly in line with 2019.

Additionally, we welcomed approximately 200 million guests to our properties during the year, exceeding pre-pandemic peak levels. We remain focused on ensuring Hilton has a positive impact on the communities we serve. For the sixth consecutive year, we were included on both the World and North America Dow Jones Sustainability Indices, the most prestigious ranking for corporate sustainability performance. And for the seventh consecutive year, we were ranked among the World’s Best Places to Work by Fortune and Great Place to Work. As our performance demonstrates, our team members have proven that we can handle whatever comes our way. And because of our hard work and discipline, we are incredibly well positioned for the future. We’re at a pivotal moment with great opportunities ahead and a new golden age of travel.

And we’re more confident than ever that our team is poised to deliver in 2023 and beyond. Now, I’ll turn the call over to Kevin to give a little bit more detail on the quarter and the expectations for the full year.

Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 24.8% versus the prior year on a comparable and currency neutral basis and increased 7.5% compared to 2019. Growth was driven by continued strength in leisure as well as steady recovery in business transient and group travel. Strength over the holiday travel season also benefited results. Adjusted EBITDA was $740 million in the fourth quarter, up 45% year-over-year and exceeding the high end of our guidance range. Outperformance was driven by better-than-expected fee growth, particularly in the Americas, Europe and the Middle East, as well as roughly $30 million in COVID-related government subsidies, which benefited our ownership portfolio.

Recovery in Japan following borders reopening in October also contributed to strong performance in ownership. Management and franchise fees grew 31% year-over-year, driven by continued RevPAR improvement. Good cost discipline further benefited results. For the fourth quarter, diluted earnings per share adjusted for special items was $1.59, increasing 121% year-over-year and exceeding the high end of our guidance range. Turning to our regional performance. Fourth quarter comparable U.S. RevPAR grew 20% year-over-year and increased 8% versus 2019. All three segments showed quarter-over-quarter improvement as compared to €˜19, with performance continuing to be led by strong leisure demand. Both business transient and group RevPAR recovered to above 2019 peak levels for the first time since the pandemic began, driven by continued recovery in occupancy and strong rate.

In the Americas outside of the U.S., fourth quarter RevPAR increased 53% year-over-year and 25% versus 2019. Performance was driven by strong leisure demand over the holiday travel season, particularly at resort properties where RevPAR was up over 60% versus peak levels. In Europe, RevPAR grew 67% year-over-year and 20% versus 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 26% year-over-year and 34% versus 2019. The region benefited from international inbound travel during the World Cup in Qatar. In the Asia Pacific region, fourth quarter RevPAR was up 29% year-over-year and down 19% versus 2019.

RevPAR in China was down 37% compared to 2019, taking a step back quarter-over-quarter as loosening travel restrictions led to a surge of new COVID cases. Demand is expected to gradually recover throughout the year, but remains volatile in the near term due to rising infections. The rest of the Asia Pacific region saw significant improvement with RevPAR, excluding China, up 8% versus 2019. Performance was largely driven by strength in Japan following borders reopening. Turning to development. For the full year, we grew net units 4.7%, modestly lower than expected, largely due to the ongoing COVID environment in China, which weighed on fourth quarter openings. Conversions accounted for 24% of our gross openings for the year. And additionally, our pipeline grew year-over-year, ending 2022 at more than 416,000 rooms, with nearly 60% of those located outside the U.S. and roughly half under construction.

Looking to the year ahead, despite the near-term macroeconomic uncertainty, we are encouraged by the robust demand for Hilton-branded products in both the U.S. and international markets. For full year 2023, we expect net unit growth of between 5% and 5.5%. Turning to the balance sheet. In January, we completed an amendment to our revolving credit facility to increase the borrowing capacity under the facility to $2 billion and extend the maturity to 2028. As we look ahead, we continue to remain confident in the strength of our liquidity position and financial flexibility. Moving to guidance. For the first quarter, we expect system-wide RevPAR growth to be between 23% and 27% year-over-year. We expect adjusted EBITDA of between $590 million and $610 million, and diluted EPS adjusted for special items to be between $1.08 and $1.14.

For full year 2023, we expect RevPAR growth between 4% and 8%. We forecast adjusted EBITDA of between $2.8 billion and $2.9 billion. We forecast diluted EPS adjusted for special items of between $5.42 and $5.68. 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 fourth quarter for a total of $123 million in dividends for the year. For full year 2022, we returned more than $1.7 billion to shareholders in the form of buybacks and dividends. In the first quarter, our Board authorized a quarterly cash dividend of $0.15 per share. For the full year, we expect to return between $1.7 billion and $2.1 billion to shareholders in the form of buybacks and dividends.

Further details on our fourth quarter and full year results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with as many of you as possible, so we ask that you limit yourself to one question. Chad, can we have our first question, please?

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Q&A Session

Operator: Our first question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli: Hey, guys. Thank you. And thanks for all the color you provided. Kevin or Chris, whoever wants to kind of tackle it, obviously, given the strength in the first quarter and acknowledging there’s seasonality and it doesn’t flow this simply, it does look like, at least for the back half of the year, you guys are looking at a flattening out. Could you kind of — RevPAR, could you more or less frame kind of how you’re thinking about the back half from a macro perspective? And what’s more or less embedded in your guidance as it relates to the economy?

Chris Nassetta: Yes. I mean, listen, you can see in the fourth quarter — first of all, thanks for the question. I think that is the $64,000 question on everybody’s mind. I mean, you could see in the fourth quarter, we had really good strength across all the segments. We’re early in the year. But in the first quarter, we continue to see that that strength continue in substance relative to 2019, obviously, versus 2022, it’s way up because of the Omicron impact. But we continue, from a fundamentals of the industry point of view, to feel very good about things. I mean, if the fundamentals are supply and demand, that’s what ultimately drives the result. The supply side is quite muted. We’re currently experiencing — using the U.S. market, which is our biggest market, as an example, equal to the lowest levels of supply that we’ve seen.

Thankfully, we get more than our fair share. But overall in the market, very low levels of supply. And that continues to be met with very strong demand. And we have not seen, for the record, any weakening. We have not — we haven’t like seen any telltale signs. There are no threats of like any of our major segments sort of backing up. What I think is driving that is some of those cyclical and secular sort of tailwinds. First, you continue to see consumers shifting how they’re spending their money. So, maybe they’re spending a little bit less, but how they’re spending it, it continues to be shifted more towards experiences where sort of exhibit A on the experience side. The international markets are opening up. People — you’re starting to see not just inbound to the U.S. but across the world, people traveling.

Asia Pacific is opening up pretty fully. It will take a little bit more time. We saw that happen in Japan in the fourth quarter, which raged. We had strong results. So, we get the full benefit of that. China is obviously going through sort of what we went through 12 to 18 months ago with herd immunity and the like. But our view is that’s happening quite rapidly. On the ground, you’re already starting to see significant travel within China in terms of uptick. And we expect, particularly in the second half of the year, you’re going to have a big tailwind from that. And there continues to be broader pent-up demand across all segments. I mean, you could argue in the leisure side, some of that has — the people have been doing a lot of it, but we don’t see them slowing down.

So, we continue to think people partly because of the shift in — as I mentioned, towards experiences, we continue to see strength there. On the business transient side, still good demand, very strong demand and growing demand, lots of pent-up demand. And as I mentioned in my prepared remarks, we finished the second half of last year on the group side as people really got comfortable, we were through COVID and they could start planning events. They’ve been planning them like crazy. Even the biggest groups, all the association stuff, that really starts to hit the second half of this year because of all of the planning. Some of that’s happening. I’ve been in a lot of big events, speaking at them lately. But the group demand, which I think is pretty resilient, just because people have gone years without doing things that they need to do for survival, is pretty resilient.

So, those are — the economics of supply and demand are really good. To be specific, Carlo, and a very fair question, when we’ve given you a range of 4% to 8%, what did we sort of build into it? I mean, part of the reason that you’re suggesting a flattening or decel because, let’s be honest, it’s math. I mean, we’re going to be way up. You saw our guidance for the first quarter. The world was partly shut down in the first quarter last year. So, that’s just a comparability issue. But we have anticipated, right or wrong, we’ve tried to be conservative that the second half of the year, you’ll see macro economic conditions slow. So, if you were to categorize it, I would describe it as we have assumed in the second half of the year sort of a plateauing related to what we think will be a moderate recessionary environment in the second half of this year.

And that’s what we have sort of built into what we’ve suggested to you in the numbers today.

Carlo Santarelli: Great, Chris. Thanks. That’s super helpful. And then just one follow-up. As you guys think about €˜23 and obviously, some projects that likely were slated for the fourth quarter, as you mentioned, kind of slipping into €˜23. As it pertains to conversion activity as a percentage of the unit growth this year, would you think that that 24% is better, or would you think it’s higher or lower than that 24% that you experienced in €˜22?

Kevin Jacobs: Yes. Carl, we think it’s going to be higher. I mean a couple of different reasons. One, conversions continue to be more important as the world gets a little bit tougher, although those conditionings are loosening. It has been tougher for new construction, as you know. So conversions become even more important. And then, Spark, as we’ve talked about in our prepared remarks, is a 100% conversion brand. So, we don’t think there’s going to be a ton of those introduced this year. But by the end of the year, we’ll start delivering those. And so that will drive a little bit higher level of conversion. So, the way we think about it, we don’t guide specifically, but higher than that 24%, say, probably 30% or higher for the year.

Operator: Thank you. And the next question will be from Joe Greff from JP Morgan. Please go ahead.

Joe Greff: So, I just wanted to see, Chris, if you could talk about what’s embedded in the second half of this year’s guidance with respect to U.S. occupancy and pricing changes on a year-over-year basis?

Chris Nassetta: Yes. I mean, I’m not going to get highly specific because we gave you a range and it would be hard to do the range that way. But I would say, directionally, the way to think about it is that occupancy sort of flattens out. We don’t believe — and at least in the numbers we’re giving you, we don’t anticipate that occupancy even gets back to 2019 levels. RevPAR levels, we think, throughout the year will be higher because of rate integrity. For all the reasons I described in my filibuster off of Carlo’s question, we do continue to believe we will have good pricing power, at least through this year, simply because there is no capacity addition really coming into the market. But in U.S. — the question about the U.S. market, and we do have these both cyclical and secular tailwinds that are giving us increases in demand that we think are going to allow us to continue to have pricing power.

We’re not — assuming in the second half of the year that pricing power is increasing, I would say, we assume it’s flattening or maybe even modestly lower to get to the ranges in numbers that we’ve suggested to you. So, on the occupancy side, if the world is better than everybody thinks, there may be some opportunities. Again, we — at a very high level, we’ve assumed not a crash landing, sort of soft to bumpy landing in the U.S. with a moderate recessionary environment in the second half. But with some structural things that are going to help the business globally that I talked about and help the business in the U.S. in terms of spending patterns, group demand and pent-up demand on certain categories of business travel.

Joe Greff: Great. And just as my follow-up, Chris or Kevin, when you think about the fees not related to RevPAR growth in the franchise and the licensing line, specifically the credit fees as well as royalty fees coming from timeshare, do you think that grows in line with RevPAR, or how are you thinking about how that changes over the course of this year versus last year?

Kevin Jacobs: Yes. Joe, I think, look, historically — or not historically, over the last few years, it’s been less volatile, right? So, if RevPAR was up 45%ish for the year this year, those fees were up something less than that, although still very robustly. And HGV is public, so you can look at what they’ve grown when they report. I think in a more normalized RevPAR environment of 4% to 8%, they should grow slightly high — they should grow at a rate that’s better than the overall business. And so largely dependent on spend, although our credit card program set a record for spend in the fourth quarter and for the full year, would spend about 50% higher than it was even in 2019. So, that program is doing quite well, although it should be — it should grow better than RevPAR over time, but it will be a little bit less volatile than it’s been just given what’s been going on in the world.

Operator: The next question is from Shaun Kelley from Bank of America. Please go ahead.