Earnings Call Transcript - HLT Q1 2022

Operator, Operator

Good morning, and welcome to Hilton's First Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations and Corporate Development. You may begin.

Jill Slattery, Senior Vice President, Investor Relations and Corporate Development

Thank you, Chad. Welcome to Hilton's First Quarter 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 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'll be happy to take your questions. And with that, I'm pleased to turn the call over to Chris.

Christopher Nassetta, President and Chief Executive Officer

Thank you, Jill. Good morning, everyone, and thanks for joining us today. Before we begin, I'd like to take a minute to express our sadness at the tragic events continuing to unfold in Ukraine. Our hotels have always been a part of the fabric of the communities we serve, and we take our promise to make those communities better places to live and work very seriously. Along with the steps we've taken to protect our team members and guests, we've also partnered with American Express and our ownership community to donate up to 1 million room nights across Europe to support Ukrainian refugees and humanitarian relief efforts. Additionally, the Hilton Global Foundation has contributed to World Central Kitchen and Project Hope to further assist with the humanitarian aid. We are keeping our Hilton family and everyone impacted by these horrific events in our thoughts and hope for a peaceful resolution to this crisis. Our Hilton values and purpose-led culture have led us through uncertainty as well as recovery. Our team members around the world have worked hard to effectively navigate the challenges over the last 2 years, and as a result, have positioned Hilton even stronger for the future. As we look to the year ahead, we are optimistic that our industry-leading RevPAR premiums and fee-based capital-light business model, coupled with further demand recovery, will continue to drive strong performance and meaningful free cash flow, which will enable us to return significant capital to shareholders in a disciplined way. With recent performance exceeding our expectation, we were pleased to have resumed our Capital Return Program earlier than anticipated, beginning share repurchases in March. Through April, we had completed approximately $265 million of buybacks. Additionally, we have declared a $0.15 per share quarterly dividend, further highlighting the confidence in continued recovery and the strength of our model. For the year, we expect to return $1.4 billion to $1.8 billion to shareholders in the form of buybacks and dividends. Turning to results in the quarter, system-wide RevPAR increased more than 80% year-over-year, driving adjusted EBITDA up 126%. RevPAR was approximately 83% of 2019 levels with adjusted EBITDA at 90%. Despite a choppy start to the year given Omicron related demand pressures, trends picked up meaningfully month-over-month with RevPAR declines versus 2019 improving approximately 17 percentage points from January to March, down only 9% to 2019, driven by acceleration across all segments. In March, system-wide rates were up 3% compared to 2019. Strong leisure transient trends continued to boost weekend performance with RevPAR in the quarter exceeding 2019 levels and rates up approximately 9% versus prior peaks, acceleration in business transient and group trends drove meaningful improvement midweek. U.S. business transient RevPAR increased sequentially versus the fourth quarter, with March down only 9% compared to 2019 levels. Improving trends from large accounts, along with continued strength from SMEs results. In March, revenue from large accounts was just 12% below 2019. Overall business transient now comprises 45% of total segment mix just 10 points shy of prepandemic levels. For April, overall U.S. transient booked revenue for all future periods was up 17% versus 2019 levels, with rates up 10% and room nights up 7%. Weekday booked revenue was up 9% compared to 2019 and weekend booked revenue was up 38%, driven largely by strong rate gains. On the group side, social and smaller events continue to lead recovery, while demand for company meetings and conventions improved meaningfully throughout the quarter. In March, total group RevPAR was more than 75% of 2019 levels, improving approximately 25 points versus January. Additionally, group revenue booked in the first quarter for all future periods was down just 4% relative to 2019 levels, and total lead volume for all future periods was up 3.5%. Compared to 2019, our tentative booking revenue is up significantly with rate gains for company meetings up more than 13%. Additionally, rates on new group bookings for in-year arrivals are strong, up in the high single digits versus 2019. As we look to the balance of the year, we remain optimistic. Positive momentum has continued into the second quarter with April RevPAR tracking at roughly 95% of 2019 levels. While macro risks and uncertainty exist, forecast for economic growth remain healthy. Additionally, our ability to reprice rooms in real time creates a natural inflation hedge. We think there is a good likelihood that we'll reach 2019 system-wide RevPAR levels during the third quarter. For the full year, we expect leisure RevPAR to exceed 2019 peak levels given excess consumer savings, a strong job market, and pent-up demand. We expect business transient to be roughly back to 2019 levels by year-end, with expectations supported by rising corporate profits, rebounding demand from big businesses, and loosening travel restrictions. On the group side, we expect RevPAR to be at approximately 90% of 2019 levels by year-end, as demand for company meetings and convention business accelerates into the back half of the year. On the development front, our leading RevPAR index premiums and powerful commercial engines continued to drive out performance. In the quarter, we added more than 13,000 rooms and achieved 5% net unit growth. We continue to deliver on our commitment to discipline and strategic growth, celebrating important milestones across segments and geographies. We opened our 500th Homewood in the U.S., our 50th Hilton Garden Inn in Asia Pacific and debuted our largest hotel in the Asia Pacific region with the opening of the 1,080 room Hilton Singapore Orchard. With a contemporary design, innovative dining experiences and extensive meeting space, the property is a fantastic representation of our flagship brand and puts us in an even stronger position in Asia to usher in a new era of travel. Building on last quarter's momentum, we also continued expanding our lifestyle portfolio with the openings of Canopy Boston Downtown and Canopy New Orleans. Even with strong openings, we grew our pipeline to more than 410,000 rooms up year-over-year and versus the fourth quarter. We continue to lead the industry in new development signings with Home2 Suites surpassing all other competitor brands globally. We demonstrated our commitment to further expand our luxury and lifestyle portfolios in the world's most sought-after destinations with the signing of Waldorf Astoria Sydney, Conrad Austin Hotel & Residences, and Canopy Properties in Cannes and Downtown Nashville. We look forward to delivering world-class service and unforgettable experiences in these exciting destinations. Conversion signings in the quarter were up 15% year-over-year and represented nearly 20% of overall signings. In recent months, we signed agreements to bring our conversion-friendly brands, Curio and Tapestry to exciting destinations like the Galapagos Islands, San Sebastian Spain, Maui and Sonoma County, California. DoubleTree has continued to lead the way for European upscale growth with new conversion properties across France, Germany, and the Netherlands. While rising costs are pressuring construction starts, we are on track to deliver 5% net unit growth for the year and remain confident in our ability to return to a 6% to 7% growth rate over the next few years. Reliable and friendly service are at the heart of our promise to our guests and we continue to leverage our direct channels to offer them even more personalized experiences. Direct bookings continued to grow in the quarter that represent roughly 75% of our total bookings led by growth in Digital Direct. OTA mix continued to decline and is approaching pre-pandemic levels as increases in business transient and group demand shifted customer mix. In the quarter, Hilton Honors membership grew 15% to more than 133 million members. Honors members accounted for 60% of occupancy, flat versus the first quarter of 2019. And average nights per member were up 11% year-over-year as engagement continued to grow. As we continue recovering from the impacts of the pandemic, I am inspired every day by the dedication of our team members as we welcome more guests back to our hotels. It's because of them and our culture of hospitality that we continue to be recognized as a Great Place To Work. In fact, Hilton was recently named the #2 best company to work for in the United States by Fortune and Great Place to Work, something I'm truly proud of. And now I'll turn the call over to Kevin for more details on our results in the quarter and our expectations for the year ahead.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 80.5% versus the prior year on a comparable and currency-neutral basis. System-wide RevPAR was down 17% compared to 2019, impacted by the Omicron variant. Following a seasonally slow start to the year, demand picked up across all segments and regions in March, driven by continued strength in leisure demand and loosening corporate travel restrictions. Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $448 million in the first quarter. Results reflect the continued recovery in travel demand. Management and franchise fees grew 79%, driven by meaningful RevPAR improvement and strong Honors license fees. Continued cost control further benefited results. Our ownership portfolio posted a loss for the quarter due to the more challenging operating environment, particularly at the start of the year in Europe and Japan, where the portfolio is concentrated. Fixed rent payments at some of our leased properties also pressured results. However, performance improved throughout the quarter, driven by strengthening demand across Europe in March. Rebounding fundamentals, coupled with cost discipline should continue to drive significant growth in operating performance going forward. For the quarter, diluted earnings per share adjusted for special items was $0.71. Turning to our regional performance. First quarter comparable U.S. RevPAR grew 77% year-over-year and was down 13% versus 2019. While the Omicron variant weighed on demand at the beginning of the year, RevPAR improved 17 percentage points over the course of the quarter, which marks down less than 6% versus 2019. Leisure travel continued to lead the recovery with segment RevPAR exceeding 2019 levels for the quarter. Upticks in business transient and group travel, particularly in March, also contributed to solid performance in the quarter. In the Americas outside of the U.S., first quarter RevPAR increased 137% year-over-year and was down 17% versus 2019. The Omicron variant suppressed demand in January and February, but rebounded in March led by strong leisure demand, particularly at resort properties during the spring break season. In Europe, RevPAR grew 349% year-over-year and was down 30% to 2019. Travel demand accelerated following the Omicron outbreak with March RevPAR down 13% compared to 2019. The region benefited from easing travel restrictions and an increase in cross-border travel. In the Middle East and Africa region, RevPAR increased 121% year-over-year and was up 8% versus 2019. Performance continued to benefit from strong domestic leisure demand and greater international inbound travel as travel restrictions across Europe loosened. In the Asia Pacific region, first quarter RevPAR grew 11% year-over-year and was down 47% versus 2019. RevPAR in China was down 45% compared to 2019, as travel restrictions and reimposed lockdown suppressed demand. The rest of the Asia Pacific region saw modest improvement in demand recovery as more countries loosen border and arrival controls in March. Turning to development. As Chris mentioned, in the first quarter, we grew net units by 5%. Our pipeline grew sequentially, totaling over 410,000 rooms at the end of the quarter, with 60% of pipeline rooms located outside the U.S. and roughly half under construction. We continue to see robust demand for Hilton-branded properties, demonstrating owner and developer confidence in our strong commercial engines and industry-leading brands. For the full year, we expect signings to increase in the mid- to high-single-digit range year-over-year, and we expect net unit growth of approximately 5%. Moving to guidance. For the second quarter, we expect system-wide RevPAR growth to be between 45% and 50% year-over-year or down 5% to 10% compared to second quarter 2019. We expect adjusted EBITDA of between $590 million and $610 million, and diluted EPS, adjusted for special items, to be between $0.98 and $1.03. For the full year 2022, we expect RevPAR growth between 32% and 38%. Relative to 2019, we expect RevPAR growth to be down 5% to 9%. We forecast adjusted EBITDA of between $2.25 billion and $2.35 billion, representing a year-over-year increase of more than 40% at the midpoint, and essentially recovered to peak 2019 adjusted EBITDA. We forecast diluted EPS, adjusted for special items, of between $3.77 and $4.02. Please note that our guidance ranges do not incorporate future share repurchases. As Chris mentioned, we reinstated our share repurchase program in March, which had been suspended during the pandemic. Year-to-date through April, we completed approximately $265 million in buybacks and our Board also authorized a quarterly cash dividend of $0.15 per share in the second quarter. For the full year, we expect to return between $1.4 billion and $1.8 billion to shareholders in the form of buybacks and dividends, based on our adjusted EBITDA forecast and assuming the high end of our target leverage range of 3 to 3.5x. After demonstrating the strength and resiliency of our business model during the pandemic, we continue to evaluate the possibility of a modestly higher target leverage range in the future. Overall, we are proud of how we navigated the pandemic and remain confident in our ability to continue generating substantial free cash flow and delivering meaningful shareholder returns through buybacks and dividends. Further details on our first quarter results can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have.

Operator, Operator

And we would like to speak with all of you this morning, so we ask that you limit yourself to 1 question. Chad, can we have our first question, please?

Joseph Greff, Analyst, JPMorgan

Chris, how much of your second quarter and full year RevPAR guidance is occupancy-driven versus rate driven? How does moderating growth in leisure volumes, just given the tough comparisons and relatively higher growth in business transient group volumes, impact the blend of ADR and ADR growth in the second half?

Christopher Nassetta, President and Chief Executive Officer

We provided extensive insights on rate growth to show the strength we are experiencing. We are well-positioned as an inflation hedge since we can adjust prices constantly. With rising demand, we have effectively implemented these price increases and expect this trend to continue. As the year progresses, we anticipate that most of our Revenue Per Available Room (RevPAR) growth will stem from rate growth, though we also expect some growth in occupancy. Overall, the majority of our growth will be rate-driven. The leisure segment remains very robust; consumers still hold around $2.5 trillion in excess savings from the pandemic. While more people are traveling compared to last year, many are still eager to experience travel. Employment is strong, people have substantial savings, and generally feel secure, particularly in the U.S. We predict an exceptional leisure season this summer, surpassing last year's record levels. As we transition into fall and more people return to their offices, we're seeing an increase in business travel and group bookings, although the latter tends to take longer to recover due to the planning required. We believe the latter half of the year will show increasing strength, and we have seen business transient travel pick up recently, especially among larger corporations. In March, business travel was only 12% down compared to pre-pandemic numbers, and April's data suggests an even better recovery. Businesses are eager to travel, bolstered by strong profits and robust financial health. This, combined with the consumer landscape and the demand in the group sector, suggests a convergence of growth in the second half of the year into next year. We are optimistic about both short- and medium-term demand, particularly regarding pricing power, which reflects our guidance and capital return program.

Carlo Santarelli, Analyst, Deutsche Bank

Chris, you talked a little bit about kind of business transient back at 45% versus, I believe, that was probably closer to 55% prepandemic. And obviously, Group is probably a couple of hundred below its normal mix. As that stuff comes back and you think about maybe a full year 2023 and occupancy in general, what kind of pricing power do you think you have at occupancy levels that are kind of commensurate with 2019 levels, which I believe were kind of $143, $143-ish?

Christopher Nassetta, President and Chief Executive Officer

Yes, first regarding the mix, it's worth mentioning that before COVID, the business transient segment was around 55%, leisure transient was 25%, and group was 20%. During the height of the pandemic, those numbers shifted to 35% business transient, 55% leisure, and 10% group. Currently, it's at 45% business transient, 39% leisure, and 16% group. I've been discussing this for about two years. Initially, some may have doubted it, but as we move forward and the situation normalizes, I believe the business mix will closely resemble what it was pre-COVID. We're making progress toward that. While leisure transient may stay elevated for a while, it will trend back toward historical averages, becoming more like what it was rather than what we saw in 2023 and likely into 2024. In terms of broader pricing pressures, considering the laws of supply and demand, if we have a high-demand product with limited supply, which is increasingly the case across all segments, especially midweek, we expect to see significant pricing power next year. This will be further supported by a solid group base starting in the second half of this year and into next year.

Shaun Kelley, Analyst, Bank of America

Not to dwell too much on this, but Chris, you mentioned in your prepared comments that April was down only about 5%. That's already on the high end of the guidance you provided for the second quarter. It seems like the overall outlook is fairly optimistic. Could you help us understand that better? Also, what factors might lead to results being better than what you've outlined in the guidance, and what factors might have made you a bit more conservative?

Christopher Nassetta, President and Chief Executive Officer

Yes, the guidance we provided stands as is. Shaun, that's a relevant question. There are some comparison issues in certain months. However, if you consider my earlier response to Carlo, we believe we will continue to see robust leisure demand and a growing business transient and group base as we progress through the next few quarters this year and into next year. Our guidance does not indicate any signs of weakness; rather, we see overall strengthening.

Thomas Allen, Analyst, Morgan Stanley

Just a couple of follow-up questions on growth. What's your level of confidence in the 5% guide this year? Any updated thoughts on timing or gain back to 6% to 7%? And just how are developments in China going?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, we are confident in our guidance and believe we can achieve it. Much of what is contributing to this year’s performance is currently under construction, and we have a solid understanding of that progress. As Chris mentioned, returning to a growth range of 6% to 7% in the coming years relies on new project starts getting back to previous levels. This year, we anticipate that starts will be relatively flat or potentially slightly down, with a decline in the U.S. but an increase internationally, which aligns with our previous statements. We plan to initiate the construction of 66,000 rooms this year, which represents a strong rate of conversions. Additionally, we expect conversions, which were up 35% year-over-year in the first quarter, to account for around 25% or more of our deliveries this year, contributing positively to our overall growth. We believe that by 2024, we will return to that 6% to 7% growth rate.

Stephen Grambling, Analyst, Goldman Sachs

On the contract acquisition cost side, it looks like in your guidance, picked up a bit versus pre-pandemic levels. How should we think about this level versus a normalized run rate over the next few years? And is that investment coming in the form of loans and mezzanine equity? Or is it just straight investment in the deals about a future interest?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, sure. This year's guidance suggests a slight decrease compared to last year, but it's higher than in 2019. Overall, it's a positive narrative as we have mentioned in previous calls. Most of this involves key money, and while we occasionally provide some credit support or mezzanine loans, the majority is key money, which has increased from pre-pandemic levels. We have secured some significant deals like Monarch Beach and Resorts World Las Vegas. While some of these could involve conversions, they are year-specific deals and can be costly at the upper end. We anticipate guidance to be slightly lower than last year's, but we hope to maintain this level for the next few years as we aim to secure more than our fair share of these valuable deals. In conclusion, only 10% of our deals require any capital support from us, while the remaining 90% do not. Additionally, our contract acquisition cost remains competitive compared to our rivals.

David Katz, Analyst, Jefferies

I just wanted to go back to the notion of NUG and construction starts, et cetera, because we do continue to hear bits and pieces around supply chain and availability and cost of materials. Can you just elaborate maybe a bit more on what you're baking into your guide and your thoughts from that perspective?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, I'm happy to share that the factors influencing our situation are well understood. Input costs have increased, the labor market remains tight, and commodity prices are high, along with financing costs. While these challenges have persisted for some time, they are beginning to ease slightly, although they remain elevated. This situation is reflected in our guidance, which suggests that construction starts will be flat to slightly down this year. Without these challenges, we would likely see significant growth; however, starts are currently down about 25% compared to 2019. On a positive note, demand for our products is actually increasing, and we anticipate that our signings will rise in the mid- to high single digits this year. There is a strong desire among customers to initiate projects, although this is being hindered by the factors we've discussed. While these issues are expected to persist for some time, we believe that, like all cyclic trends, they will eventually improve. The increase in our signings gives us confidence that our construction starts will return to levels seen around 2019, and we expect our NUG to rebound to 6% to 7%.

Christopher Nassetta, President and Chief Executive Officer

I think that's right. The only thing I'd sort of add to that, and Kevin said earlier in his comments is, inflation is our friend and it's our owner's friend. So if you look at what we've done in the system during COVID as a result of sort of going through every granular, standard for every single brand, we've been able to drive a lot of efficiency at the hotel level. At the same time, obviously, labor costs have been going up. But when you put all of it into the gonkulator, so to speak, with the savings we've created with the inflationary pressures, which are driving their rate up, and obviously, expenses aren't 100% of revenues. So they've got positive leverage there. Even in the face of increased labor costs, we are very confident that across all of our brands on a sort of comparable basis, margins are higher. So the enthusiasm in our owner community and why, as Kevin rightly pointed out, we think signings are going to be up is that our brands are doing great. They're driving great cheer and people are optimistic with recovery, but they're also looking at an equation where they're going to be able to drive higher margins on the other side. Now we have to have the financing market sort of continue to input cost, all that, which will take a little bit of time. And in the meantime, we're having great success in the conversion world. We're going to probably, as Kevin said, increase conversions this year relative to last by 600 basis points of total NUG delivery. So we feel pretty good about where we are.

Richard Clarke, Analyst, Bernstein

Just one thing I noticed is the number of managed rooms has actually come down quarter-on-quarter by over 2,000, which is the biggest drop I can find. And some quite big drops by brand, DoubleTree, Waldorf, Astoria. Is this a strategy? Are you moving away from franchise towards managed towards more franchise? And if that's the case, maybe why are you leaning away from the incentive fees in the recovery? Or is this more an owner-led shift?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, Richard, that's a great question. I don't have the specific quarter-over-quarter data at hand, but it appears you might be correct in noting a significant shift. Some of this is due to conversions to franchise, which means they remain within the system rather than exiting it. This isn't a strategic move; as I mentioned earlier, 80% of our rooms under construction are outside the U.S., and the split between managed and franchise in these areas is roughly 50-50. We are responding to where the demand is in the developed world, where there's currently more interest in lower-end new constructions and deliveries. Essentially, we are following the demand, as we see increased customer and owner interest in franchising in developed regions, while in developing regions, the distribution remains about 50-50.

Vince Ciepiel, Analyst, Cleveland Research

I had a question on cross-border. Could you remind us like how much international arrivals is as a percentage of your U.S. room nights? I think it's pretty small, but kind of how that business is performing today versus pre-COVID if you've seen recent progress there? And then kind of the other way around, when you look at, say, your European business and North American guests heading there for this summer, can you describe kind of what you've seen with booking behavior in the last few months?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes. Sure, on a normalized basis and you pre-Covid the U.S. is about 95:5, right? About 95% of the customers comes from inside the U.S. 5% outside. Now in big cities like New York, San Francisco, L.A., that could be up to 20% for cross-border. That obviously plummeted during COVID, right, to near 0 and now is actually approaching pretty close to normalized mix, both in the U.S. and Europe. Europe is more about 2/3, 1/3 within the region and outside of the region. And again, that's actually back to approaching levels where it was pre-COVID as the world is opening up.

Christopher Nassetta, President and Chief Executive Officer

Thank you, Chad, and thank you all for joining us today. I think you could probably hear the enthusiasm in our voice. It's been quite a couple of years, but I do believe that the decisions we made, the actions we took during the pandemic have put Hilton in the best position it's ever been in from the standpoint of driving performance, margins, driving free cash flow and returning capital to shareholders in the years to come. We're super excited about what we think is going to play out for the rest of the year, and we'll look forward after the second quarter to updating you on that progress. Thanks again for the time today.

Operator, Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.