SYgle>Industry Information>Hilton points to calendar shifts as drag on Q2 results

Hilton points to calendar shifts as drag on Q2 results

Column: industry Tag: Hilton,performance growth,second quarter Published: 2017-07-27 10:47 Source: Author:

Hilton’s hotel openings in the second quarter included the Conrad Osaka in Osaka, Japan, which represents the company’s commitment to growing both globally and in the luxury chain scale. (Photo: Hilton)

There’s “air in the balloon,” Hilton President and CEO Chris Nassetta said about his company’s performance growth, particularly in the U.S., during the second quarter.

“There’s just not a lot of compression in it, or as much as we would like,” he continued.

Nassetta was responding to a question during the company’s second-quarter earnings call about the factors that might be weighing down revenue per available room growth. Hilton’s U.S. hotels saw RevPAR grow just 0.5% for the quarter compared with Q2 2016.

That slow growth, Nassetta said, is a result of a “combo platter” of calendar and holiday shifts that had a negative effect on demand and, to a lesser extent, caution within the U.S. economy due to uncertainty over the status of policy changes expected under the administration of U.S. President Donald Trump.

But Nassetta stressed that, despite these factors, Hilton is seeing growth.

“It could be more positive, I think, if people had a little more certainty around what was going to happen with some of these big things that are swirling about legislatively,” he said, specifically referring to tax reform and health care.

“People are cautiously optimistic in the sense that they see the economy is continuing to show decent resiliency, obviously positive growth. I think everybody would like to see a little bit more clarity on public policy on some of the things they care about the most, to unleash a little bit more optimism in hiring, spending and consequently demand for hotel roomnights,” he said.

A greater hindrance on Q2 performance was the shift of the Easter holiday from March to April, and the fact that the Fourth of July holiday fell on a Tuesday this year. Calendar shifts weighed down Q2 performance by as much as 70 basis points, Nassetta said.

“There is a lot of crazy stuff going on with calendar, day of week and holiday shifts this year, more than average. If you look at the numbers and sort of cleanse … it of the holiday shifts, Q2 was better than Q1 (in the U.S.),” he said.

“I think that all these holiday shifts are creating the appearance that there’s a bunch of big stuff going on. There isn’t. In my opinion, what’s going on is sort of steady as she goes. …There’s some ups and downs, quarter by quarter, even when you cleanse it, but the bottom line on the business right now is you’ve got business transient that is growing, but not with as much strength as we would like—sort of the low to midpoint of our guidance range. You have group that’s been toward the midpoint of the range, and you have leisure transient that’s been at the high end … relative strength there.”

It’s a different picture around the world, Nassetta said, but because 72% of Hilton’s business is in the U.S., that drives the bulk of the results.

Q2 performance

According to an earnings news release, systemwide revenue per available room for the quarter was 1.8%, slightly above the midpoint of Q2 guidance set at between 1% and 3%. This was bolstered somewhat by RevPAR strength in Europe (+6.5%) and Asia/Pacific (+6.9), regions which each account for about 10% of Hilton’s rooms.

Hilton primarily credited increases in average daily rate for the RevPAR growth. Systemwide, ADR grew 1.2% in Q2, compared with the same quarter last year. ADR growth was highest (+2.9%) in Europe and the Americas, excluding the U.S., due largely to strong transient demand, Hilton EVP and CFO Kevin Jacobs said during the call with investors. Rate growth in Europe was also helped by favorable exchange rates, he said. ADR growth in the U.S. was 1.1%, while in the Asia/Pacific region, ADR declined 0.9%.

Systemwide occupancy for the quarter was nearly flat (+0.4% to 78.8%).

Development

The company also touted robust development in the quarter, during which it opened 107 hotels representing 15,600 rooms—a net unit growth of 13,400 rooms, “which is nearly 30% higher than in the second quarter of 2016,” the earnings release states.

Those openings included the first three Tru by Hilton?properties, and the first Tapestry by Hilton in Syracuse, New York.

Pipeline growth is globally focused with, as of 30 June, “332,000 rooms at 2,153 hotels throughout 104 countries and territories, including 36 countries and territories where Hilton does not currently have any open hotels,” according to the news release. “Of the rooms in the pipeline, 169,000 rooms, or more than half of the pipeline, were located outside the U.S.”

Hilton also is methodically growing its luxury footprint, projecting 15% growth in that chain scale this year. In the second quarter, luxury hotel openings included the Waldorf Astoria Beverly Hills, the Conrad Osaka in Japan, the Conrad Guangzhou in China and the Conrad San Luis Potosi in Mexico.

“Nearly one in four rooms in construction around the world are slated to be added to our system, and we continue to have more rooms under construction in Europe, the Middle East and Asia/Pacific than anyone,” Nassetta said, adding that the company is “on track to deliver roughly 6.5% net unit growth for the full year … and well on our way to achieving more than 100,000 rooms approved for the full year.”

Adjusted outlook

On the strength of Q2 results, the company announced it has raised full-year guidance on adjusted earnings before tax, depreciation and amortization to between $1.88 billion and $1.92 billion, an increase of $20 million at the midpoint. Adjusted EBITDA for the second quarter was $519 million, representing a 10% increase over the same quarter last year, and “exceeding the high end of our guidance,” Nassetta said.

Hilton also raised its expectations for full-year cash available for capital to between $1 billion and $1.1 billion, an increase of $100 million at the midpoint, according to the news release.

The company kept its guidance for full-year RevPAR growth at between 1% and 3%, which is even with its guidance for Q2. For the third quarter, RevPAR is projected to be flat to up 2% compared to Q3 2016, due in part to weaker group demand from a shift in Jewish holidays from September to October.

Asked if there is any chance that RevPAR could dip negative in Q3, Nassetta said, “I think it will be positive, though it will be low. If you cleanse it again for the holiday shifts, in my opinion, it’s clearly positive.”

Hilton’s stock was up 12% year to date as of press time. The Baird/STR Hotel Stock Index was up 23.4% for the same time period.

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