HLT Q1 2014 CONF CALL NOTES

Disciplined management focused on opportunities and execution. High ROI projects on the way. Secondary coming in mid-June? 

PREPARED REMARKS

Overview

  • Q1 Results 6.6% RevPAR based on +3.6% ADR and +1.9% Occupancy
  • First time in many quarters, system-wide group revenue growth in Q1 outpaced transient revenue growth.
  • Consistent with view at the midpoint of the cycle, group business continues to build.
  • System-wide group revenue growth in the quarter of 7.4% YoY
  • Banqueting revenue >12% in U.S.-owned and managed hotels
  • Big Eight hotels, group F&B spend for occupied room was up ~30% and 13% in our U.S.-owned and managed hotels.
  • F&B trends drive an overall increase revenue of almost 10% over the same time period in our U.S.-owned and managed hotels
  • Transient >6% across system
  • Weather offset by Easter shift
  • U.S. owned and operated hotels operating margins +157 basis points YoY
  • Owned and operated hotels outside the U.S. operating margins +191 basis points on a currency neutral basis.
  •  EBITDA $544m, margins +400bps
  • Hilton NY:
    • 6th Avenue repositioning begin by year end, complete by 2Q15
    • Interval sales to begin 2H14, units complete in 2Q15
    • Retail to add $8m EBITDA, NPV of Timeshare + Retail = $165m
  • Q1 approved 107 hotels = 15,000 rooms
  • Waldorf Astoria Beverly Hills, first new build on West Coast on Wilshire & Santa Monica will be 170-room luxury hotel
  • Increased fee paying rooms by 8,000 rooms in Q1
  • Launch two new brands in 2H14

Remainder 2014

  • Group very strong with increase in volume and rate
  • Group 8 up HSD YoY
  • Corp Mtgs up 12% in US O&M YoY
  • "very optimistic" for 2014
  • AsiaPac:  Japan significant    China 6-7%, Thailand weak
  • Europe:  UK, Turkey lead; sluggish France   Europe up MSD
  • Middle East / Africa:  Egypt weak, Saudi weak, Africa strong:
  • Resulting in revised RevPAR, EBITDA, and EPS

Financial Performance

  • Total M&F Fees: top line, units driven.  Franchise fees better.  Franchise rate 4.6% and increasing
  • Ownership: 172 bps EBITDA margin growth and 5.1% RevPAR
  • Timeshare:  transient rental, lower corp support costs, favorable in sale prices
  • Corp Exp & Other: 1x $18m conversation into stock based comp program, new program flow thru G&A and included in EBITDA
  • US:  Rack rate business +11%, corp trans +6% YoY
  • AsiaPac:  RevPAR - Japan +25% in Qtr, China +7% in Qtr
  • Balance Sheet: reduce leverage, use substantial FCF to reduce debt and achieve investment grade rating.   paid $200m in Q1 and $100m today and interest rate now L+250 bps
  • Cash $287m. no borrowings on revolver
  • Timeshare EBITDA guidance increased. 
  • Expect to prepay debt of $700m-900m in 2014

Q&A

  • Confidence in 2H14 and into 2015 - optimistic because of transient strength in Q1 and continuing into Q2.  Group strength now growing faster than transient.  Big 8 in 2H up nearly 20% on Group.   Starting to see increases in ancillary spend, stronger F&B.
  • New Brands & CapEx - will not build any of new units on their balance sheet will use franchise model. 
  • First brand: 4+ star aggregate urban, iconic and resort brands.  conversion friendly.
  • Second brand: Lifestyle, launch in fall, working deals, upper upscale, 'accessible lifestyle'  not luxury, new builds, conversion friendly. 
  • Both brand focused on new units outside of HLT network, some new builds, mostly conversions.  Neither will impact 2014 net unit growth but will positive impact 2015 
  • NY impacts/any pause for 2H14 - no reason to change outlook.  Slowness due to supply, YoY superstorm Sandy, and weather.  Softer in Q1 but strengthen at muted pace due to supply.
  • Guided Q1 and 2H14 look conservative - flowed thru Q1 beat and feel conservative on guidance.
  • Timeshare - 60% of sales in asset light vs 50% in 2013.  Trajectory 80% of current 5 year inventory is capital light. 
  • Timeshare valued appropriately or consider spinning off - HLT committed to Timeshare.  HLT likes business.  Seeing increasing appetite for Timeshare product by consumers.
  • G&A - some Q1 timing issues were positive, will run-rate during remainder of year.  Expect G&A focus to remain at forefront will keep under control +3% to +5% for 2014 and 2015.
  • BIg 8 RevPAR - 5.1% and revenue growth slightly higher.  Surprised - no, but actually better than forecasts, growth depends on groups and group cycling. 
  • View on 2015 - very good sight lines, momentum building on pace.
  • NY Hilton retail repositioning - HLT doing work with consultants, no partners. 
  • Waldorf - deep into process to maximize value and how to execute against the asset in current form & structure. Considering how to significantly "enhance entire retail platform" given full-block exposure to Park Avenue.
  • Royalty Rates vs. 2013 - on track, raising rates 100 bps.  Had non-comp affiliates in Q1 2014
  • EBITDA Margin - expect 150 to 200 bps expansion in 2014