Hilton posts big beat; Nassetta remains bullish

Hilton posted better than expected earnings for 4Q22 on Thursday buoyed by the ongoing recovery in global travel, especially on the group and meetings side of the ledger.

Hilton President and CEO Chris Nassetta said small- and medium-sized meeting businesses remained an important and growing part of Hilton’s business travel segment, accounting for roughly 85% of their segment mix and enhancing overall resiliency. “Group saw the biggest quarter-over-quarter improvement with RevPAR fully recovering to 2019 levels driven by both occupancy and ADR. company meetings boosted performance, improving more than seven points versus the third quarter.”

For 4Q22, RevPAR growth versus 2019 was +7.5%, beating R.W. Baird’s +5% estimate. Adjusted EPS was $1.59 versus the Street’s $1.22; adjusted EBITDA was $740 million versus the Street’s $666 million. In addition, franchise fees were $689 million (+$11 million Baird estimate), while owned/leased fees were $69 million ($34 million Baird estimate).

Hilton, now with the highest levels of free cash flow in its history, returned >$1.7 billion to shareholders in 2022, and 2023 guidance calls for capital returns of $1.7-$2.1 billion.

System-wide comparable RevPAR increased 24.8% and 42.5% (1% shy of 2019), on a currency neutral basis, for the fourth quarter and full year, respectively, compared to the same periods in 2021.

“We saw continued progression across all segments with leisure, business transient and group RevPAR all exceeding 2019 levels,” Nassetta said during the earnings call on Thursday. “System-wide occupancy reached 67%, up from the third quarter and just three points shy of prior peak levels. Overall, rates remained robust, increasing 13% versus 2019, with all segments exceeding expectations. As expected, leisure trends remain strong throughout the quarter with RevPAR surpassing 2019 levels by approximately 12%.”

If the fundamentals are supply and demand, that’s what ultimately drives the results. The supply side is quite muted… and that continues to be met with very strong demand. For the record, we have not seen any weakening. We have not seen any telltale signs. There are no threads of any of our major segments sort of backing up.

Chris Nassetta

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Looking ahead, Nassetta said Hilton expects performance to be driven by continued growth in all segments and aided by easy first quarter comps due to Omicron. He said Hilton expects meaningful recovery across Asia, and solid growth in U.S. urban markets as group business continues to recover. “Comprising roughly 20% of our normalized mix, group is a segment with the greatest visibility for 2023,” he said. “Group position is up 25% year-over-year, and nearly back to 2019 levels. Even with robust forward bookings, the pipeline remains strong with tentative bookings up more than 20% versus last year, helped by rising demand for company meetings as organizations bring their teams back together. Additionally, pricing for new bookings is up in the low-double-digits, and lead volumes in January were at all-time highs.”

Hilton approved 24,400 new rooms for development during the fourth quarter, bringing its pipeline to 416,400 rooms as of December 31, 2022.

Nassetta added that more than 90% of the deals in Hilton’s current pipeline do not have any key money or other financial support. “We also saw continued strength in construction starts throughout the year with more than 70,000 rooms for the full year, an increase of more than 9% versus 2021,” he said, adding the Hilton remains confident in its ability to return to 6% to 7% net unit growth over the next couple of years.

Hilton’s newly launched premium economy conversion brand, Spark by Hilton, has more than 200 hotels in various stages of negotiation and 98% of those deals are coming from third-party brands, according to Nassetta.

Full-year guidance for RevPAR stands at +4-8% y/y; adjusted EBITDA of $2.8 billion to $2.9 billion, which is slightly ahead of consensus; and adjusted EPS stands at $5.42-5.68. Full-year net unit growth is now guiding at 5% to 5.5% with analysts suggesting some 2022 projects may have been pushed into 2023, especially from China.

When asked about how macroeconomic conditions might impact performance in the second half of 2023, again Nassetta’s tone remained bullish.

“If the fundamentals are supply and demand, that’s what ultimately drives the results,” Nassetta said. “The supply side is quite muted… and that continues to be met with very strong demand. For the record, we have not seen any weakening. We have not seen any telltale signs. There are no threads of any of our major segments sort of backing up. What I think is driving that are both secular and cyclical tailwinds. First you continue to see consumers shifting how they’re spending their money. Maybe they’re spending a little bit less but how they’re spending it continues to shift more towards experiences, and we’re Exhibit A on the experience side. The international markets are opening – not just inbound to the U.S., but across the world.”

Nassetta said that while Asia Pacific begins to open and markets like Japan “raged” in the fourth quarter, it will take China a bit more time to ramp-up but predicts it will happen rapidly. “You’re already starting to see significant travel within China. We expect, particularly in the second half of the year, to see a big tail tailwind from that. And there continues to be broader, pent-up demand across all segments.”

Referring again to group business, Nassetta added that “they’ve been planning like crazy” and those results will start to hit in the second half of this year.