Hilton Worldwide Holdings Inc. (NYSE:HLT) Q1 2024 Earnings Call Transcript

Hilton Worldwide Holdings Inc. (NYSE:HLT) Q1 2024 Earnings Call Transcript April 24, 2024

Hilton Worldwide Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Hilton First Quarter 2024 Earnings Conference Call. [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 first quarter 2024 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 risk 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 first quarter results and discuss our expectations for the year. Following their remarks, we will be happy to take your questions. With that, I am pleased to turn the call over to Chris.

Chris Nassetta: Thanks, Jill. Good morning, everyone and thanks for joining us today. We are pleased to report strong first quarter results, which continue to demonstrate the power of our business model and the strength of our development story. Both adjusted EBITDA and adjusted EPS meaningfully exceeded the high end of our guidance even with RevPAR growth at the low end of our expected range. We also announced several new partnerships and additions to our brand portfolio, which will enable us to build even more loyalty with customers and help accelerate growth. Turning results for the quarter, system-wide RevPAR increased 2% year-over-year, which was at the low end of our guidance range as renovations, inclement weather and unfavorable holiday shifts weighed on results more than we anticipated.

Leisure transient RevPAR exceeded our expectations even with tough year-over-year comparisons given continued strength in international markets and holiday shifts. Business transient recovery remained steady with RevPAR across large corporates, up more than 3%, driven by strong demand in consulting and government contracting. Group RevPAR rose nearly 5% year-over-year, led by strong convention and social demand. Additionally, corporate groups continue to grow as a percentage of booking mix and booking windows continue to lengthen. As we look to the rest of the year, we continue to expect system-wide RevPAR growth of 2% to 4%, with the U.S. towards the low end of the range and continued strength in international markets. We expect positive RevPAR growth across all major segments, led by group performance at or above the high end of the range, business transient around the midpoint and leisure transient towards the lower end of the range.

For the full year, group position is up 13% versus last year. Turning to development. We started the year off strong, building on the positive momentum from 2023. In the quarter, we opened more than 100 hotels totaling approximately 17,000 rooms and achieved net unit growth of 5.6%. Hotel openings span nearly all brands, demonstrating the strength and breadth of our industry-leading brand portfolio. Conversions accounted for 30% of openings, largely driven by DoubleTree and Spark. In the quarter, we celebrated the addition of a number of new luxury and lifestyle properties, including the debut of LXR in Hawaii, the introduction of the Waldorf and Canopy brands to the Seychelles, and the highly anticipated opening of the Conrad Orlando. Located within the newly developed Evermore Orlando Resort complex, the Conrad Orlando features five distinct dining venues, an 8-acre lagoon and expansive pool complex, a world class spa and extensive meeting and event space.

We also achieved several milestones in the quarter, including the opening of our 800th hotel in Asia-Pacific, our 225th hotel in the CALA region, and reached 25,000 true rooms globally. Additionally, Hampton opened its 3,000th property worldwide. Since its launch 40 years ago, the Hampton brand has been a category leader with the largest global pipeline of any focused service brand and the recently announced new North American prototype. Hampton continues to demonstrate the strength of our legacy brands and the power of our innovative approach to brand evolution. We are confident that the best is yet to come for this iconic brand. In the quarter, we signed 30,000 rooms, increasing our pipeline to a record 472,000 rooms, up 2% from last quarter and up 10% year-over-year.

Signings meaningfully outperformed our expectations driven by strength in international markets. In Asia-Pacific, we signed agreements for 4 new Conrad properties, further strengthening our luxury pipeline. Globally, an interest in Hilton Garden Inn remained particularly strong with the brand achieving the highest quarter of signings in its history. System-wide construction starts also outperformed expectations, up roughly 45% versus last year, with all major regions meaningfully higher. Approximately half of our pipeline is under construction and we continue to have more rooms under construction than any other hotel company, accounting for more than 20% of industry share and nearly 4x our share of existing supply. We also recently announced several exciting partnerships and tuck-in acquisitions, further accelerating our expansion into the fast-growing lifestyle and experiences categories.

Earlier this month, we acquired a controlling interest in Sydell Group to expand the Nomad brand from its existing London flagship location to high-end markets all around the world. Our development teams are fully engaged and we have a great pipeline building. Additionally, we announced an agreement with AJ Capital to acquire the Graduate Hotels brand, a collection of over 30 lifestyle hotels in university anchored towns, each Graduate hotel, steeped in local history, charm and nostalgia is designed to reflect the unique character of its local university, offering the perfect setting for game-based graduations, reunions and campus visits. Graduate presents a unique opportunity to serve more guests, especially in markets where we are not present today.

With thousands of colleges and universities around the world, we believe the addressable market for the brand is 400 to 500 hotels globally. For the rapidly increasing number of travelers looking to prioritize exploration and adventure, we recently announced an exclusive partnership with the premier outdoor hospitality company, AutoCamp. Stays will be bookable on Hilton’s direct channels in the coming months and we will offer our guests an experience that blends the spirit of an outdoor adventure with the hospitality and design forward nicking of a boutique hotel. Hilton Honors members will be able to earn and redeem points on stays and enjoy exclusive membership benefits while experiencing sought-after locations around the United States, including several properties adjacent to popular national parks.

Along with our previously announced exclusive partnership with small luxury hotels of the world, these offerings provide incredible opportunities to further accelerate our growth and enhance our network effect by broadening and deepening our customer offerings in some of the industry’s fastest growing markets and segments. As a result of our strong pipeline and all the great progress we have seen to-date for the full year we expect net unit growth of 6% to 6.5%, excluding the planned addition of Graduate. To provide even more personalized experiences for our guests, we continue to leverage our industry-leading technology platforms. From a digitally enabled concierge for our luxury brands, to the ability to choose your room from a floor plan and control your in-room entertainment from your mobile device, we continue to fully integrate the digital experience.

Additionally, recent initiatives like add-ons, Hilton for Business and improved search functionality are driving even greater conversion and higher revenue. We also continue to be recognized for our incredible workplace culture, Fortune and Great Place to Work recently named Hilton, the number one on the list of Best Companies to Work For in the United States, marking our ninth consecutive year on the list and our sixth consecutive year in the top 10. In total, we won 20 Great Place to Work awards around the world with 5 number one wins. These recognitions follow our ranking as the number one world’s best workplace and make Hilton the only hospitality company to have earned the top spot on these prestigious lists. Overall, we are very pleased with our first quarter results and we expect our industry leading brands, strong development story and powerful business model to continue to drive growth.

Now I’m going to turn the call over to Kevin for a few more details on our 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 2% versus the prior year on a comparable and currency-neutral basis. Growth was largely driven by strong international performance and continued recovery in group. Adjusted EBITDA was $750 million in the first quarter, up 17% year-over-year and exceeding the high-end of our guidance range. Our performance was driven by better-than-expected fee growth largely due to better-than-expected international RevPAR performance, license fee growth and timing items. Management and franchise fees grew 14% year-over-year. For the quarter diluted earnings per share adjusted for special items was $1.53. Turning to our regional performance. First quarter comparable U.S. RevPAR was down 40 basis points year-over-year as renovations, holiday shifts and weather impacts dampened transient trends.

Group performance remained strong. In the Americas outside the U.S., first quarter RevPAR increased 7% year-over-year with strong transient demand driving RevPAR growth of 10% in urban markets. In Europe, RevPAR grew 10% year-over-year with solid performance across all segments. A number of large events in the region drove strong group performance across several key cities. In the Middle East and Africa region, RevPAR increased 15% year-over-year, led by both rate and occupancy growth. Several prominent events, including the Asian Cup in Qatar and holidays in Saudi Arabia contributed to strong performance in the region. In the Asia-Pacific region, first quarter RevPAR was up 8% year-over-year, led by rate growth in Japan and Korea. China RevPAR was flat in the quarter, with strong results in January and February, offset by difficult year-over-year comparisons in March.

RevPAR in China’s top cities increased 6% in the quarter, but an uptick in outbound travel pressured demand in secondary and tertiary markets, which benefited early in recovery from strong domestic travel. Turning to development. We ended the quarter with more than 472,000 rooms in our pipeline, up 10% year-over-year with approximately 60% of those rooms located outside the U.S. and nearly half of them under construction. Looking to the year ahead, we expect net unit growth of 6% to 6.5%, excluding the planned acquisition of Graduate Hotels. Moving to guidance. For the second quarter, we expect system-wide RevPAR growth of 2% to 4% year-over-year. We expect adjusted EBITDA of between $890 million and $910 million and diluted EPS adjusted for special items to be between $1.80 and $1.86.

For full year 2024, we expect RevPAR growth of 2% to 4%. We forecast adjusted EBITDA of between $3.375 billion and $3.425 billion. We forecast diluted EPS adjusted for special items of between $6.89 and $7.03. Please note that our guidance ranges do not incorporate future share repurchases or any contribution from Graduate Hotels, which we expect to close in the second quarter. Moving on to capital return. We paid a cash dividend of $0.15 per share during the first quarter for a total of $39 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 $900 million to shareholders in the form of buybacks and dividends. And for the full year, we expect to return approximately $3 billion.

Further details on our first quarter results can be found in the earnings results 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: Of course. The first question today comes from Stephen Grambling with Morgan Stanley. Please go ahead.

Stephen Grambling: Hey, good morning.

Chris Nassetta: Good morning.

Stephen Grambling: I think I just touch on the guidance in the first quarter. It seems like, clearly, some positive commentary in there. I just want to make sure I’m clear. I guess, when you put it all in the blender, if you will, what’s really changed in your mind as you look at the back half of the year and take into account what you’ve seen in the first quarter, both as it relates to development versus some of the deals you’ve made and then also what you are seeing on RevPAR? Thank you.

Chris Nassetta: Sure. Happy to cover that. That’s a broad array of topics. So, really – really artful question, Stephen. I would say when you flush it all out, obviously, and Kevin covered it in his prepared comments, the first quarter from a RevPAR point of view is a little bit lighter than we thought, but sort of easily explained on the basis of what Kevin already talked about. We had a lot more under construction than we had anticipated which is a good thing, but not enough rooms out of inventory in a lot of those assets, particularly in our limited service brands to take it out of the comp set. So, that weighed on is weather, definitely, we didn’t anticipate what was going on – what happened in the Northeast at the beginning of the year.

And then while we certainly knew about the holiday shift of Easter moving in, it was a little more impactful and spring break sort of ended up being like a rolling 4 weeks of spring break. And so we underestimated that. As we think about the full year, the way to think – the way I think about our outlook is the way I think most people are thinking about the broader economy and that is the broader economy is reasonably strong. It seems to be very resilient. Obviously, employment numbers are quite good. Corporate profits, it depends on the industry, are still quite strong. And so as we sort of factor for that for the rest of the year and we think about the various segments, it leads us to feel about the way we did when we talked to you last time.

Meaning if we look at the big segments, the group business is still incredibly strong. The demand is great. Every month that goes by, it’s very strong. While the first quarter was certainly choppy because of the movement of the holiday and all that, when you talk to customers, which we do all the time and I do, I think you get a very positive view about their people traveling more for business transient. And because the economy has been resilient and employment has been strong, I think it helps with the underpinning, while leisure certainly is normalizing from super high levels. It gives you, I think, a reasonable amount of confidence that it’s still going to be relatively strong, modest growth, mostly in the form of rate because we continue to have a decent amount of pricing power.

And so when you sort of like put that all in the gunculator and spit it out at the end of the day, from a RevPAR, from a top line point of view, that’s why we maintained our guidance. First quarter, a little bit more choppy, but the reality is some of that reverses because of the holiday shift, we’ll get the benefit in the second quarter, and we feel about the same based on a pretty consistent consensus view that the economy is going to maintain relative strength. On the development side, between Kevin and my comments, you heard, I mean, we’re – we feel like we have a lot of momentum. I said it on the last call, that I think we were on the slope up. And I said – and we said it at our Investor Day that we – over the next few years, we think we’ll be at 6% to 7% in NUG, that’s where we think we’re going to be – the reality is we had strong expectations carrying over momentum from the end of the year, but it was better in terms of signings and starts and openings, frankly, that a little bit than we thought.

And so as we look at the year and we look around the world and work with our development teams. I mean the reality is we think we’re going to sign more deals than we’ve ever signed, and we’re going to start more deals and more hotels under construction than where we’re going to sign. That obviously is helped by conversions, but it’s also new development. I mean if you look at the new development versus conversions, they’re both up in sort of the low teens. So there’s a lot of momentum. What’s driving that? Of course, we think people have a lot of interest in our brands because of their best-performing brands. But if you look at the broader system because of the relative strength of this economy and many other economies around the world, people are largely very profitable.

And as a result, we’re being very profitable in their existing portfolio, their desire is to continue to expand their businesses. And so we feel very, very good about what’s going on. The financing environment, I’ll leave some other things for maybe other questions I can keep going. But that’s sort of both from a revenue top line point of view and a little bit of color on both and unit growth to give you a sense of how we think about the outlook for the year.

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

Joe Greff: Good morning, everybody.

Chris Nassetta: Good morning, Joe.

Joe Greff: Chris, just kind of going back to your comments on how you’re viewing the balance of this year, you mentioned all three major segments you would expect to be degrees of up year-over-year from a RevPAR growth perspective. If you were to bifurcate it between the full-service chain scale segments and the select service chain scale segments, would you expect the lower-end chain scale segments to be positive year-over-year?