Earnings Call Transcript
Hilton Worldwide Holdings Inc. (HLT)
Earnings Call Transcript - HLT Q4 2020
Operator, Operator
Good morning, and welcome to the Hilton Fourth Quarter and Full-Year 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s prepared remarks, there will be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Jill Slattery, Vice President, Investor Relations. Please go ahead.
Jill Slattery, Vice President, Investor Relations
Thank you, Chad. Welcome to Hilton’s fourth quarter and full-year 2020 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 publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factor section of our most recently filed Form 10-K as supplemented by our 10-Q filed on November 4, 2020. 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. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our fourth quarter and full-year results. Following their remarks, we’ll be happy to take your questions. With that, I’m pleased to turn the call over to Chris.
Chris Nassetta, President and CEO
Thank you, Jill, and good morning, everyone. We certainly appreciate you all joining us today and I hope everybody is staying well. I want to start with something difficult. I want to start by extending my most heartfelt condolences to the Sorenson family and the thousands of Marriott associates around the world following the heartbreaking news of Arne’s passing. To say I’m deeply saddened by that loss would be an understatement. I, as many of you, had the opportunity to work with Arne in a number of capacities throughout my career, including earlier on at Host. I think it’s very fair to say he was an exceptional leader, but also an incredible person and a great friend. Our industry is better because of him, and I am a better professional and a better person because of him. On behalf of everyone at Hilton and the entire Marriott family, you are in our thoughts. As we all know, this past year has presented unique challenges, including a pandemic that devastated lives, communities, and businesses across the world, widespread economic declines, and acts of social injustice. Due to the extraordinary levels of disruption, our industry experienced demand declines we’ve never seen before in our 101-year history. Guided by our founding purpose to make the world a better place through the light and warmth of hospitality, we acted quickly to ensure the safety and well-being of our people. We also took steps to protect our business by rightsizing our cost structure and enhancing our liquidity position while continuing to drive net unit growth and increase our network effect. As a result of these new developments, we expect to recover from the pandemic as a stronger, higher-margin business that is even better positioned to deliver performance for our owners and strong free cash flow for our shareholders. While it’s certainly been a very difficult year, we’re proud of everything we’ve accomplished, but we certainly could not have done it without the support of all of our stakeholders. For that, I’d like to extend a heartfelt thank you to all of our loyal customers, our important owner partners, our communities who supported us and enabled us to support them, our team members who gave their hearts and souls to our business, and our shareholders who stood by us. Because of our amazing people, we’ve been able to lean on our award-winning culture, which earned the number one best place to work in the United States for the second consecutive year and the number three world’s best workplace to help get us through these trying times. Turning to results for the full year, system-wide RevPAR declined 57% with adjusted EBITDA down only modestly more, illustrating the resiliency of our fee-based model. We also demonstrated the strength of our brands and power of our customer-centric strategy by achieving market share gains across every region even in a distressed business environment. For the quarter, system-wide RevPAR declined 59%, relatively in line with our expectations. The positive momentum and demand that we saw through the summer and early fall were disrupted in November and December by rising COVID cases, tightening travel restrictions, and further hotel suspensions, particularly in Europe. Similar to the third quarter, drive-to-leisure travel drove an outsized portion of demand. Business transient and group trends showed modest sequential improvement versus the prior quarter, but overall demand remained quite muted. As we look to the year ahead, we remain optimistic that accelerating vaccine distribution will lead to easing government restrictions and unlock pent-up travel demand for the first quarter. Overall, trends so far appear to be similar to the fourth quarter, with modest increases in demand in the U.S. offsetting stalled recoveries in Europe and Asia-Pacific. We expect improving fundamentals heading into spring, with essentially all system-wide rooms reopened by the end of the second quarter. We expect a more pronounced recovery in the back half of the year driven by increased leisure demand and meaningful rebounds in corporate transient and group business. Over the last year, the personal savings rate in the United States has nearly doubled, increasing by more than $1.6 trillion to $2.9 trillion, with the potential to go even higher given additional stimulus. We expect this to drive greater leisure demand as travel restrictions ease and markets reopen to tourism. Additionally, conversations with our large corporate customers along with sequential upticks in business transient booking pace year-to-date indicate that there is pent-up demand for business travel that should drive a recovery in corporate transient trends as the year progresses. On the group side, we saw a meaningful step up in new group demand in January, with our back half group position showing significant sequential improvement versus the first half of the year. With roughly 70% of bookings made within a week of travel, overall visibility remains limited. However, we continue to see signs of optimism. In fact, the vast majority of our large corporate accounts agreed to extend 2020 negotiated rates into this year. Despite the challenges in 2020, we opened more than 400 hotels, totaling nearly 56,000 rooms and achieved net unit growth of 5.1%, slightly ahead of guidance. Fourth quarter openings were up nearly 30% year-over-year, largely driven by new development in China, where our focus service brands continue to command a disproportionate share of industry growth. We also celebrated our 1 millionth milestone and the openings of our 300th hotel in China, our 600th DoubleTree hotel, and our 900th Hilton Garden Inn. We ended the year with 397,000 rooms in our development pipeline, up 3% year-over-year. While the market disruption weighed on new development signings, conversion signings increased more than 30% versus the prior year. As owners looked to benefit from the strength of our network, we anticipate continued positive momentum in conversion activity, particularly through DoubleTree and our Collection brands. During the quarter, we signed agreements to expand our Curio Collection in Mexico and bring our Tapestry Collection to Portugal. This marks one of several new Tapestry hotels scheduled to open across Europe this year. We also announced plans to debut LXR in the Seychelles with Mango House Seychelles; the property will deliver a truly unique hospitality experience with spacious guestrooms and suites and five world-class food and beverage venues. Scheduled to open in the coming months, the hotel underscores our commitment to further expanding our resort portfolio. Building on that momentum, we kicked off 2021 with an agreement to bring LXR to Bali. Additionally, we celebrated the opening of Oceana Santa Monica, which marked LXR's U.S. debut, as well as the Waldorf Astoria Monarch Beach Resort and the Hilton Vancouver Downtown, which was converted from a competitor brand. With these notable openings and many exciting development opportunities in front of us, we are confident in our ability to continue delivering solid growth over the next several years. The pandemic rapidly changed guest behaviors, priorities, and concerns; we listened to our customers and moved quickly to launch modifications to our Honors Loyalty Program, deliver industry-leading standards of cleanliness and hygiene with Hilton CleanStay, and provide flexible distraction-free environments for remote work with Workspaces by Hilton. Additionally, with an even stronger focus on recovery last month, we implemented Hilton EventReady Hybrid Solutions, an expanded set of resources to help event planners address the dramatic shift towards hybrid meetings as group business rebounds. Our flexibility and innovation drove continued growth in our Honors network, ending the year with more than 112 million members who accounted for approximately 60% of system-wide occupancy. Throughout 2020, we also remained focused on our corporate responsibility and our commitment to our ESG initiatives. We’re proud to contribute to our communities, and we’re honored to be named the global industry leader in the Dow Jones Sustainability Index for the second year in a row. In a year marked by challenge and change, we effectively executed our crisis response strategy, carefully managed key stakeholder relationships, and continued to press forward on strategic opportunities. I’m confident that there are brighter days ahead, and that we are in a stronger, more resilient position than ever before. With that, I’m going to turn the call over to Kevin for a few more details on the fourth quarter and the full year.
Kevin Jacobs, CFO and President, Global Development
Thanks, Chris, and good morning, everyone. Before I begin, I’d like to echo Chris’s sentiments about Arne; my thoughts are certainly with his family and with my many friends at Marriott, who I know are hurting this morning. During the quarter, system-wide RevPAR declined 59.2% versus the prior year on a comparable and currency-neutral basis as the pandemic continued to disrupt the demand environment. Relative to the third quarter, occupancy was modestly lower, partially due to seasonality and further tempered by rising COVID cases and associated travel restrictions. Adjusted EBITDA was $204 million in the fourth quarter, down 65% year-over-year. Results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter. Management and franchise fees decreased 50% less than RevPAR decreased as franchise fee declines were somewhat mitigated by better than expected honors license fees and development fees. Overall, revenue declines were mitigated by continued cost control at both the corporate and property levels. For the full year, our corporate G&A expenses were down nearly 30% year-over-year, at the high end of our expectations. Our ownership portfolio posted a loss for the quarter due to the challenging demand environment, temporary closures in Europe, and fixed operating costs, including fixed rent payments at some of our lease properties. Continued cost control measures coupled with one-time items mitigated segment losses. For the quarter, diluted loss per share adjusted for special items was $0.10. Turning to our balance sheet, we continue to enhance our liquidity position and preserve our financial flexibility. Over the last few months, we opportunistically refinanced $3.4 billion of senior notes to extend our maturities at lower rates. In January, we also repaid $250 million of the outstanding balance under our $1.75 billion revolving credit facility. On a pro forma basis, taking these transactions into effect as of year-end 2020, we’ve lowered our weighted average cost of debt to 3.6% and extended our weighted average maturity to 7.2 years. We have no major debt maturities until 2024 and maintain a well-staggered maturity thereafter. Further details on our fourth quarter and full-year 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 all of you this morning, so we ask that you limit yourself to one question. Chad, can we have our first question, please?
Operator, Operator
Certainly. We will now begin our question-and-answer session. And the first question will come from Joe Greff with JPMorgan. Please go ahead.
Joe Greff, Analyst
Good morning, guys.
Chris Nassetta, President and CEO
Good morning, Joe.
Joe Greff, Analyst
Nice to hear your voices. Chris, I just want to start off with a big picture question. I’m sure you’ll get a lot of questions about 2021 net rooms growth and how you’re thinking about pipeline growth from here. But Chris, I’d love to hear your thoughts on how you’re thinking about your business three years out post-vaccine. What’s different about your business in terms of individual business transient travel, group travel, leisure travel relative to pre-COVID? What’s different do you think about full-service and limited-service development in the future relative to pre-COVID?
Chris Nassetta, President and CEO
Yes, it’s a great question. A lot to unpack there. But I think, Joe, when you go out three or four years, I think demand is going to look a lot like it did in 2017, 2018, and 2019. The makeup of the business as between business transient, leisure transient, and group at that point in time will likely look quite similar. Now, certain of the types of travel underneath the demand, particularly in business transient and the group side, might change for different reasons, meaning there’ll be a substitution effect clearly in certain types of travel being substituted with Zoom calls and digital opportunities. But there’ll also be replaced with other forms of travel. We’ve seen this throughout history; going back, there were always arguments that technological advancements would truncate the need to travel and congregate. The reality is, generally, it accelerates demand, because it offers more efficiency and speeds things up. It continues to connect the world and speed up globalization, necessitating face-to-face opportunities. Having spent more years in this industry than I care to admit, I think while there may be some substitution effect, it will look a lot like it did. Our business, a couple of comments since you asked, will be a stronger, faster-growing, higher-margin business. Because over the next three years, we’ll continue to grow our unit growth by 4% to 5%. So we’ll be a bigger company, and the units we had pre-COVID, if you believe what I believe about demand levels, will produce revenue similar to previous levels. Our new units will also be producing and with a lower cost structure, having taken significant cost out on a cash basis. In simple math, with more units generating similar fee flows through the system, it equals a higher margin business. So it’s sort of an odd time to be optimistic, but as we discuss things around our board table, we’re proud of what we’ve accomplished during this hard year and we put ourselves in the best position possible. I believe the business will ultimately be better for it, producing higher margins and increasing free cash flow, which will allow us to return even more capital to our shareholders than pre-COVID, driving incredible long-term returns. Regarding limited service versus full service, I’ve discussed many times before the megatrend in our industry is mid-market brands. This continues to be the bulk of population growth, particularly in emerging markets. We have the best mid-market brands globally and they continue to outstrip the competition in Europe and Asia Pacific, particularly in China. Our careful brand management has positioned us well, and I’m confident that this megatrend only strengthens in a post-COVID world. The bulk of growth, I believe, will occur in this mid-market segment.
Joe Greff, Analyst
Great. That’s helpful. Appreciate it, Chris. Thank you.
Operator, Operator
The next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Carlo Santarelli, Analyst
Hey guys. Good morning. And thanks for taking the questions.
Chris Nassetta, President and CEO
Hey, Carlo.
Carlo Santarelli, Analyst
Chris Nassetta, President and CEO
Carlo, we can’t hear you very well. Could you speak up a little, sorry?
Carlo Santarelli, Analyst
I’m sorry, guys. Do you hear me a little better?
Chris Nassetta, President and CEO
Yes, yes, yes. Sorry.
Carlo Santarelli, Analyst
So I appreciate you taking my question. You’ve spent some time talk about how you’re thinking about the pipeline and the conversions. Today, the growth algorithm over the next 12 to 24 months, how do you see conversion activity representing?
Chris Nassetta, President and CEO
I think I got all that, you are kind of cutting in and out. So I’ll answer what I think I heard. So in terms of net unit growth, we feel the same way we have for the last few quarters. We delivered a little bit better at 5.1% because we had a huge fourth quarter in terms of deliveries. Over the next few years, we think we’ll deliver 4% to 5%. I still feel good about that. This year, it’ll probably be more at the midpoint to the high end of that. We feel comfortable because of successes we’re having on the conversion side, which takes advantage of downturns that are very fertile ground. Over the past five or six years, we’ve evolved from having one conversion brand – DoubleTree, to now having four, between our three soft brands and DoubleTree, all of which are producing for us. Our signings for conversions were up 30% last year, our starts were up 40%, and our fourth quarter opens were up about 44%. We were circa 20% of overall net unit growth in conversions, and I think you’ll see over the next few years that will become a larger component of overall net unit growth, potentially into the upper 20s, low 30s. Our team remains focused on conversions and we’re starting to see progress in the numbers that I described.
Carlo Santarelli, Analyst
No. Thanks very much.
Operator, Operator
The next question is from Shaun Kelley with Bank of America. Please go ahead.
Shaun Kelley, Analyst
Hi, good morning, everyone. And thanks for all the remarks. Chris or Kevin, maybe sort of going down the same path as you just did for net units on digging in on the G&A cadence a little bit more. Obviously, I think there’s some noise with stock-based comp, but Chris, I think you referred to overall cash expense savings in a higher margin profile looking out a few years. Could you help us kind of build on that for 2021 relative to 2019 levels?
Kevin Jacobs, CFO and President, Global Development
Yes, Shaun, I’ll take that one. You pointed out some of it regarding GAAP G&A side, which includes stock comp that’s non-cash. We ended up about 20% better in 2020 over 2019 on a cash basis, and we think 2021 versus 2019 will be down in the mid-teens on a cash basis. So how can that trend going forward? Given it didn’t look overall wages and benefits would have grown faster than core inflation over time, that’s probably not going to trend in an easy way.
Shaun Kelley, Analyst
Thank you very much.
Operator, Operator
The next question comes from David Katz with Jefferies. Please go ahead.
David Katz, Analyst
Hi, good morning, everyone. Good to hear everyone’s voices.
Chris Nassetta, President and CEO
You too, David.
David Katz, Analyst
Thank you. Chris, in your comments, you talked about pent-up demand for corporate travel and made some comments around group. I’d love some depth on that: how broad-based is it across various industries?
Chris Nassetta, President and CEO
Yes, I can give you what I do have. I talked about the leisure side and we all know people want to travel again. As people started to do that, not that many have, and certainly the higher-end leisure business has not really begun to travel. So I think as we pass this mass vaccination period over the next 90 days, when you get to late spring and summer, everything I’m hearing suggests there will be many eager individuals willing to travel. Concerning business transient, while it’s more anecdotal, there is significant pent-up demand there as evidenced by our discussions with key customers. We see booking trends moving in the right direction, even without an all-clear sign. These trends are clear day by day and that’s encouraging. For group business, the trend lines on lead volumes are positive, but still need the mass vaccination effort to ramp up for a safe gathering, but leads are up significantly.
David Katz, Analyst
Thanks very much. Good luck.
Operator, Operator
Next question is from Stephen Grambling with Goldman Sachs. Please go ahead.
Stephen Grambling, Analyst
Good morning. Thanks for taking the questions.
Chris Nassetta, President and CEO
Good morning.
Stephen Grambling, Analyst
On your comments about the second half 2021 trends, im curious how did leisure business and group segments fare in China in the fourth quarter before additional lockdowns?
Chris Nassetta, President and CEO
China was rapidly approaching normalcy with slightly higher leisure components, which is typical. Group business was lagging a bit. We were running about 10 points off average occupancy as a result of lockdowns. However, we have not seen significant substitution effects from that. We suspect the domestic market will return to regular demand patterns quite rapidly.
Stephen Grambling, Analyst
And one quick follow-up, what percentage of the China business is normally international inbound?
Chris Nassetta, President and CEO
Yes, it's about 10%.
Operator, Operator
Next question will be from Bill Crow with Raymond James. Please go ahead.
Bill Crow, Analyst
Good morning, Chris and Kevin.
Chris Nassetta, President and CEO
Good morning, Bill.
Kevin Jacobs, CFO and President, Global Development
Good morning, Bill.
Bill Crow, Analyst
I’ve got a two-parter on unit growth. Are there economic differences to Hilton between adding a conversion DoubleTree versus opening a new Hampton Inn?
Chris Nassetta, President and CEO
Yes, the difference lies in timing. Conversions happen faster, usually within 6 to 12 months. New builds can take 12 to 48 months, but the fee structures are quite similar.
Kevin Jacobs, CFO and President, Global Development
That’s right. The absolute level of fees tends to be a little bit higher with DoubleTree.
Bill Crow, Analyst
And would the $15 national minimum wage impact development economics for select service, like your Tru hotels that can be in smaller markets?
Chris Nassetta, President and CEO
It could impact. We need to raise the minimum wage as necessary, but the timing and manner of implementation matter. A staged rollout helps owners prepare. We think the hospitality industry is the slowest to recover jobs. So I hope rational thought prevails, and we see an incremental increase.
Bill Crow, Analyst
Thank you for your time. Appreciate it.
Operator, Operator
Next question comes from Patrick Scholes with Truist Securities. Please go ahead.
Patrick Scholes, Analyst
Hi, good morning, everyone.
Chris Nassetta, President and CEO
Good morning, Patrick.
Patrick Scholes, Analyst
I’m curious about your interest in tuck-in brand acquisitions today versus your historical strategy of building a brand from scratch. Are you open to international acquisitions?
Chris Nassetta, President and CEO
Thanks, Patrick. My position remains the same. We’ve produced great brands organically for 13 years without acquisitions as our portfolio continues to lead the market. We don't seek to acquire brands unless they meet our rigorous criteria. However, I’m open to regional brands that are strong but haven't historically been on the radar. We remain focused on maintaining our strong position and will proceed accordingly if opportunities align with our strategy.
Patrick Scholes, Analyst
Great. Thank you.
Operator, Operator
Next question will be from Robin Farley with UBS. Please go ahead.
Robin Farley, Analyst
Great. Thank you. I actually have two half questions since they are both follow-ups. One is just on the group commentary. I’ve got to think that for 2022, there will be group events that haven’t taken place in three years. I’ve got to think your volume for 2022 would be better than 2019. Is it just too early to see that in your growth?
Chris Nassetta, President and CEO
It’s too early to say. However, I suspect the second half of this year could lead to a lot of demand, specifically for larger groups that require planning and execution. This would also impact 2022 bookings significantly.
Robin Farley, Analyst
Great, super helpful. The other follow-up was on the unit growth comments. Does it sound like maybe 2022 would be at the lower end based on construction delays? Is that how we should think about those?
Chris Nassetta, President and CEO
I don’t think it would be that low. Having opened 5.1% last year, much of it is in production. I think we will still aim for 4% to 5% net unit growth next year.
Robin Farley, Analyst
Okay, great. Thanks very much.
Chris Nassetta, President and CEO
Yes.
Operator, Operator
Next question comes from Richard Clarke with Bernstein. Please go ahead.
Richard Clarke, Analyst
Thanks for taking my questions. Just wondering about conversations with owners on upsides for take rates and if you can enact them given the context?
Chris Nassetta, President and CEO
Our published rates are about 5.6% on average for our brands, and the effective rate is about 5%. We are not increasing those rates soon, but with contracts turning we anticipate slight annual increases.
Richard Clarke, Analyst
And Phased CapEx holidays, how urgent is it for owners to begin renovations?
Chris Nassetta, President and CEO
That balance is delicate. It’s crucial to maintain product quality in our portfolio since we are market share leaders. We’ve given grace, but must ensure all inventories are maintained. I suspect we will have to re-engage with owners to help them get back on their feet before full-scale renovations begin.
Richard Clarke, Analyst
Wonderful. Thanks very much.
Operator, Operator
Next question comes from Smedes Rose with Citi. Please go ahead.
Smedes Rose, Analyst
Hi, thanks.
Chris Nassetta, President and CEO
Hey Smedes.
Smedes Rose, Analyst
I want to follow up on your comments regarding group bookings improving sequentially. Is there any geographic shift away from higher-cost cities to lower-cost areas due to these trends?
Chris Nassetta, President and CEO
The demand is currently more prevalent outside the primary markets, as we also see this increase in SMERF business, which is typically more concentrated in secondary and tertiary markets. However, I expect these trends to normalize if the situation improves and we get back to a more traditional group gathering taking place.
Smedes Rose, Analyst
Okay. Thank you. One final follow-up on your impairment charge from the quarter.
Kevin Jacobs, CFO and President, Global Development
Yes, mostly in the ownership segment. This was included in the pre-announcement for the bond deal reflecting challenges due to the crisis and recoverability of certain assets.
Smedes Rose, Analyst
Thank you.
Operator, Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any closing remarks.
Chris Nassetta, President and CEO
Again, thank you all for joining us today. 2020 will go in the record books for sure as a challenging year not only for our company but the industry. As I stated earlier, we are proud of what we accomplished. We believe the business is in a terrific position. As I’ve described earlier, we hope as we get to spring, summer, and certainly in the second half of the year, our situation will improve significantly. We look forward to discussing positive trends after the first quarter. Thank you, everyone, and please stay well.
Operator, Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.