Hilton Worldwide Holdings Inc. (NYSE:HLT) Q4 2023 Earnings Call Transcript

Hilton Worldwide Holdings Inc. (NYSE:HLT) Q4 2023 Earnings Call Transcript February 7, 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 Fourth Quarter 2023 Earnings Conference call. All participants will be in a listen-only mode [Operator Instructions]. After today’s prepared remarks, there will be a question-and-answer session [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, M. J. Welcome to Hilton’s fourth quarter and full year 2023 earnings call. Before we begin, we would like to remind you that our discussion 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 of Global Development, will then review our fourth quarter and full year 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: Thank you, Jill. Good morning, everyone, and thanks for joining us today. We are happy to report a great end to what was another really strong year for Hilton. For the year, system-wide RevPAR grew 12.6% versus 2022 with solid growth across every major region and chain scale compared to 2019, RevPAR increased 10.7%. Strong top line performance drove record adjusted EBITDA of nearly $3.1 billion, up roughly 20% year-over-year to the highest level in our company’s history. During the year, we launched two new brands, introduced new innovations, expanded our partnerships and opened a near record number of rooms, all of which further strengthened our network and enabled us to welcome more guests than ever before.

Our strong top and bottom line performance drove significant free cash flow, enabling us to return $2.5 billion to shareholders. Turning to results for the quarter. System wide RevPAR increased 5.7% year-over-year, exceeding our expectations, driven by strong international and group trends. Group RevPAR rose 6% year-over-year due to an uptick in small company meetings and convention demand. Business transient recovery continued in the quarter with RevPAR up more than 4% [visited] by gains in both rate and occupancy. As expected, leisure transient RevPAR increased 3%, decelerating modestly versus the third quarter, largely due to seasonality. Compared to 2019, system wide RevPAR grew 13.5% in the quarter, up more than 200 basis points sequentially compared to the third quarter.

Demand continued to improve with December system wide occupancy reaching 2019 peak levels. Group RevPAR outperformed expectations, increasing 8% versus 2019 and up more than 700 basis points sequentially versus the third quarter. Business transient continued to recover growing 5% versus 2019. As expected, leisure RevPAR remained strong growing 25% versus 2019 and decelerating sequentially due to calendar shifts. As we look to the year ahead, we expect system wide top line growth of 2% to 4% versus 2023. We expect performance to be driven by continued growth across all major regions with international markets modestly outpacing the US. We also expect positive RevPAR growth across all segments, driven by continued recovery in business transient and group coupled with steady leisure demand.

We expect continued recovery in small company meetings and large association and convention business to drive strong group performance. For 2024, group positions is up 16% year-over-year with small companies meetings increasing as a percentage of mix, further demonstrating the value of small and medium sized businesses given higher rates and greater resiliency. Turning to development. We continue to see positive momentum throughout the year opening 24,000 rooms in the fourth quarter, marking the largest quarter of openings in our history. We achieved several milestones in the quarter, including the openings of our 250th Tru Hotel and our 1000th Hilton Garden Inn. We also reached 70,000 rooms globally for Home2. Additionally, we celebrated the opening of Signia by Hilton Atlanta, the city’s largest ground up development in over 40 years.

The property strategically located next to the Georgia World Congress Center and Mercedes-Benz Stadium features nearly a thousand rooms and over a hundred thousand square feet of meeting space, including the largest hotel ballroom in Georgia. For the full year, we opened 395 hotels, totaling approximately 63,000 rooms and achieved net unit growth of 4.9%. Conversion activity remains strong, accounting for 30% of openings and demonstrating the strong value proposition our system continues to deliver for owners. Full service and collection brands represented the large majority of conversions and continue to gain traction with owners. Both Curio and Tapestry open more hotels in 2023 than in any other year. Even with robust openings, our pipeline reached the highest level in our history, driven by record signings of 130,000 rooms, up 45% year-over-year and up 12% compared to pre-pandemic levels.

At year end, our pipeline totaled over 462,000 rooms with roughly half under construction following a strong year in construction starts. For the full year, starts increased 15%, driven by the US. We continue to have more rooms under construction than any other hotel company with approximately one in every five hotel rooms under construction globally slated to join our system. As we look to the year ahead, we expect continued positive momentum in signing starts and conversions to drive even stronger openings, boosted by our two newest brands, Spark and LivSmart Studios. For the full year, we continue to expect net unit growth to accelerate to the higher end of our 5.5% to 6% guidance range with the opportunity for further upside of 25 to 50 basis points from our exclusive partnership with Small Luxury Hotels of the World that we announced this morning.

This partnership will meaningfully expand our luxury distribution as we expect to add the majority of their over 500 hotels to our system. Adding this extraordinary portfolio with a heavy orientation to resort locations to our already strong and growing luxury portfolio will further enhance a powerful network effect and give our guests even more opportunities to dream, book, earn and burn points, and we’re doing so in a capital light way. The royalty rate will be in line with our existing brands, but fees will be paid only on the business driven through our channels. We expect over time to drive a meaningful portion of system revenues for SLH, and we’ll start to integrate hotels into our system later this spring. Last quarter, we announced Hilton for Business, our multifaceted program designed to transform the travel experience for small and medium sized businesses by providing a new booking Web site along with targeted benefits designed specifically for SMBs. The program launched in January with thousands of companies registering in just the first few weeks.

SMBs account for approximately 85% of our business transient mix and comprising meaningful and growing percentage of our group mix. Given its greater resiliency and higher rates, we think this important customer base provides significant opportunities to drive further growth. Overall, we remain focused on creating unique experiences in our hotels, including through innovative food and beverage offerings. We recently announced the launch of StiR Creative Collective, an in-house consulting and development arm that gives us the ability to work with our owners, operators and hotel teams to elevate food and beverage offerings to meet the evolving needs of our guests. Several noteworthy StiR projects have already launched at the Conrad Orlando, the Canopy by Hilton in Toronto and the new Signia in Atlanta.

In a business of people serving people, our team members are at the heart of absolutely everything we do. We recently celebrated the remarkable achievement of being named the number one world’s best workplace by Fortune and Great Place to Work. This recognition follows eight consecutive appearances on the world’s best list and marks the first time a hospitality company has achieved the top honor in this best in class program. Additionally, for the seventh consecutive year, we were honored to be included on both the world and North America Dow Jones sustainability indices, the most prestigious ranking for corporate sustainability performance. Overall, we’re extremely pleased with our performance with our world class brands and powerful commercial engines driving a record pipeline and accelerating net unit growth.

We’re confident in our ability to continue delivering value for all of our stakeholders in 2024 and beyond. Now, I’m going to turn the call over to Kevin to give a bit more detail on the quarter and our expectations for the year ahead.

Kevin Jacobs: Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 5.7% versus the prior year on a comparable and currency neutral basis. Growth was driven by strong international performance and continued recovery in group and business transient. Adjusted EBITDA was $803 million in the fourth quarter, up 9% 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 $1.68. Turning to our regional performance. Fourth quarter comparable US RevPAR grew 2% year-over-year with performance led by both business, transient and group.

Leisure transient in the US was flat with difficult year-over-year comparisons. Relative to 2019 peak levels, US RevPAR increased 11% in the fourth quarter, improving 100 basis points versus the third quarter. In the Americas outside the US, fourth quarter RevPAR increased 7% year-over-year with urban markets delivering RevPAR growth of 17% boosted by strong group business. In Europe, RevPAR grew 10% year-over-year with solid performance across all segments. Large events, including the Rugby World Cup in Paris, drove strong group performance across several key cities. In the Middle East and Africa region, RevPAR increased 12% year-over-year, led by strong rate growth. The COP 28 Climate Change Conference in Dubai, along with solid trends in Egypt, contributed to strong performance in the region.

In the Asia Pacific region, fourth quarter RevPAR was up 42% year-over-year, led by continued demand recovery across China and Japan and notable strength across all segments. RevPAR in China was up 73% year-over-year in the quarter with RevPAR in the Asia Pacific region, excluding China, up 18% year-over-year. Turning to development. As Chris mentioned, for the full year, we grew net units 4.9% and ended the year with over 462,000 rooms in our pipeline, which was up 11% year-over-year with approximately 60% located outside the US and nearly half under construction. Looking to the year ahead, we are excited about our strong development story and the robust demand for Hilton branded products in both the US and international markets. Moving to guidance.

For the first quarter, we expect system wide RevPAR growth of 2% to 4% year-over-year. We expect adjusted EBITDA to be between $690 million $710 million, and diluted EPS adjusted for special items to be between $1.36 and $1.44. For full year ‘24, we expect RevPAR growth of 2% to 4%. We forecast adjusted EBITDA of between $3.33 billion and $3.38 billion. We forecast diluted EPS adjusted for special items of between $6.80 and $6.94. Please note that our guidance ranges do not incorporate future share repurchases. Moving to capital return. We paid a cash dividend of $0.15 per share during the fourth quarter for a total of $158 million in dividends for the year. For full year 2023, we returned $2.5 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 approximately $3 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 yourselves to one question. M. J., can we have our first question please?

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Q&A Session

Operator: The first question today comes from Joe Greff with JP Morgan.

Joe Greff: Chris, I was hoping you can talk about M&A of brands. Obviously, there was an article earlier this week, suggesting you might be close with the Graduate Hotels brand. If you want to comment specifically on this, but I would just love to get your overall view on opportunities for you to acquire brands. And then since it’s something that you’ve been sort of not doing at all, maybe you can revisit some of the criteria for brand M&A.

Chris Nassetta: I’m happy to do that, Joe. I figured with all the rumor and all, I’d get asked this question. Obviously, first and foremost, you’re right, I’m not going to comment on market rumors and speculation on anything specific. I would say my attitude, our attitude on M&A is really the same as it’s always been. If nothing, we’ve been consistent and I’ve been consistent in what I’ve said. And that is we — the fact is, as you point out, we haven’t done any, but every time I’ve ever been asked for the last 10 years of being public, I’ve said never say never, but we have a very tough filtration system. And that filtration system at a high level is, number one, does something really — is something additive from the standpoint of the portfolio of brands that we have.

And from the standpoint of offering our customers, a product and experience that would be really additive to the family of brands that we have, number one. And number two, and importantly, can it be done in a way that’s accretive to the value of the company. For the last 16 years, going on 17 years that I’ve been here, we’ve looked at pretty much everything. I’ve said that to everybody and nothing is passed through that filter. So that’s the reason we haven’t done anything. The environment we’re in is a little bit different. There is, for a lot of reasons, interest rates and otherwise, more stress in the system than normal, that probably, I think, presents more opportunity to do things like this, but things that are quite modest in my view and that are what I view as sort of tuck-in acquisitions.

Now I still think the filtration system is really rigorous. And obviously, we’re not sitting here announcing any acquisitions. We announced a strategic exclusive partnership with SLH that we’re very excited about, and I’m sure we’ll talk about from other questions on the call. So that we don’t have anything to report. And to the extent that we do, obviously, you guys will be the first to know. And so summary is we have no different attitude. We continue to look at everything but the stress in the environment maybe provides a little bit more opportunity than we’ve seen in quite a long time.

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

Carlo Santarelli: Chris, you obviously — you talked about the strength in business transient and group that you kind of foresee for 2024. Given those mixes respectively are down couple of hundred basis points from pre-pandemic levels, I was kind of wondering where you think they settle for 2024? And what impact that mix shift has obviously presumably taking away from leisure demand to some degree on ADRs for the year?

Chris Nassetta: I think broadly, if you look at the segments, and I said it at a very high level in the prepared comments, we feel really good about all the segments. Business transient continues to recover. I mean the big corporates finished the year still a bit off, probably 5% off of where they were, but still but growing, every segment in that world is a little bit different. I mean most segments were relatively strong and either back to or beyond prior to pandemic levels with the exception of probably banking, technology and consulting, which were less. But blended together, they weren’t that far off. SMB segment is at or above, most of those segments are at or above. And when you blend all that together for the fourth quarter full year from a RevPAR point of view, business transient was ahead, but from an occupancy point of view was still a bit behind.

We do think that by the time we finish this year, assuming sort of the broader consensus view of a reasonably soft landing that by the time we get to the end of the year, we think will be at more normalized levels of demand. And we believe given very low supply numbers that are continuing and continued decent economic growth that we’re going to continue to have pricing power there and everywhere else. On the group side, I’ll give you a snippet of like group position being up 16%, that’s the best leading indicator. But anecdotally, sitting around this very table last week with all our teams from around the world and all of our commercial and sales leads, I’ve said it, the demand is off the hook. I mean the demand is really strong. Every quarter is the next new high watermark in terms of bookings for all future periods.

So we are seeing very good strength. We believe the group demand is quite sticky in the sense that a lot of it still is pent-up demand that are things people haven’t done for a long time that they need to do in addition to incremental new demand. You’re obviously seeing in the group space, the big association, citywide business start to come back, that’s super sticky business because of the time frames associated with the planning and the cost. So we think group will definitely lead the system. And as a result, you asked about rate, which I’ll cover on both, we think rate will be very strong. Just there is so much demand and there’s just a limited amount of space, if you think about it, not only is supply low broadly, but supply of hotels over the last 10 years that have been built that have a lot of meeting space has been [nimic].

And so you have a lot of demand — I mean, I was sitting around this table yesterday, we’re planning our own conferences for like sales conferences and general managers and all these things that we have to start going out three and four years, because we can’t get space in our own hotels. So demand is good as a result with very limited supply, pricing should be good. And then on leisure, we do think it will grow. We do think probably more in rate than volume, because the consumer, particularly our consumer, which is our median income levels, reasonably good. It’s in the 140,000 to 150,000 range. They still have plenty of money, plenty of desire to travel. And again, there’s just not a lot of new supply. So the fundamental economic setup is good.

Obviously, it got supercharged coming out of COVID, so it will probably — we think it will grow more rate than volume, but it will grow. But it will be third in line after continued recovery starting with group then business transient, then leisure transient. So we feel really good about — again, based on a broad consensus view that we have a rational sort of reasonably soft landing and continue to see decent — slowing broadly, but decent economic growth in 2024.

Carlo Santarelli: And then if I could, just a follow-up on Joe’s question from earlier. The guidance for 2024, I’m going to assume that SLH and any kind of tuck-in M&A that you guys do in 2024 would be on top of the guidance that you provided this morning…

Chris Nassetta: Correct. The 5.5% to 6% with a strong indication to the high end of that is pure organic. I said in my prepared comments, we think SLH depends on how rapidly hotels come in, which is why there’s a range, 25 to 50 basis points on top of that. And if we were to do anything else, it’s all on top of that. But that is the 5.5% to 6% were leading towards the high end of it is pure organic.

Operator: The next question comes from Shaun Kelley with Bank of America.

Shaun Kelley: Chris, wondering maybe you could build off of the last part there about SLH. And it’s pretty selective. But just A, can you give us a little bit more about the deal itself? And I think it sounds economically quite similar to what we see kind of in the normal course on the fee side, but any color you can provide there? And then I think more importantly is just big picture, do you think there are other collection and places out there that you could utilize your distribution capability and help other systems that may exist out there but not overlap directly with owners, which I know is going to be a sensitivity point for you.

Chris Nassetta: Well, first of all, on SLH, as you hopefully could tell from my prepared comments, we’re really excited about it. We’ve had a relationship there for a while. We’ve been working with them to figure this out and we’re really excited to be able to get it done. I mean if you think about it, it’s sort of like the moons and the stars aligned super well for us. We’re going to be able to bring the majority of 500 hotels that are super unique, small, obviously, Small Luxury — it’s Small Luxury but very heavy resort orientation and very heavily oriented to very niche markets that are super hard to get into. And so when you look at it vis-a-vis the overlap of our existing — we have 100 open luxury hotels, we have about another 60, 70 in the pipeline.

So a terrific portfolio and growing super rapidly. When you look at the overlap, there is really none just because this is a really unique collection of hotels. We did a bunch of focus groups and customer research around this over the last year and really feel like this offering from the standpoint of our customers, particularly our higher end customers is going to be super well received in terms of their ability to bucket through our channels, but earn points, burn their points, go on their vacations in these places and the like. And so we think it is literally the perfect combination. And an unbelievable way for us to take what is currently 100 — with pipeline 150, 160 hotel luxury portfolio and turn it into 600 or 700 scattered in all the best and most unique and hard to duplicate places around the world.