Hilton Hotels' 2Q Profit Up 39 Percent
-- Comparable owned hotel RevPAR increases 8.3%, margins 30.5%
-- Fees increase 10% from RevPAR growth, new units
-- Timeshare revenue up 24%
-- Diluted EPS increases 36% to $.19
Hilton Hotels Corporation (NYSE:HLT) today reported financial results for the second quarter and six months ended June 30, 2004, with the quarter's results highlighted by strong revenue per available room (RevPAR) growth at its comparable owned hotels, a significant increase in fee income and continued strong brand performance, another outstanding quarter in its vacation ownership business, and significant margin gains.
The company reported second quarter 2004 net income of $75 million, a 39 percent increase from $54 million in the 2003 period. Diluted net income per share was $.19 in the second quarter, compared with $.14 in the 2003 quarter, a 36 percent increase. The 2004 second quarter was impacted by the following non-recurring items, which combined to benefit the quarter by approximately $.01 per share: 1) a $3 million pre-tax gain on asset dispositions, 2) a $2 million pre-tax note receivable reserve, and 3) a $5 million benefit to the tax provision from the utilization of tax loss carryforwards.
Hilton reported second quarter total operating income of $188 million (a 15 percent increase from $164 million in the 2003 period) on total revenue of $1.065 billion (a 9 percent increase from $976 million in the 2003 quarter). Total company earnings before interest, taxes, depreciation, amortization, and non-recurring items ("Adjusted EBITDA") were $278 million, compared with $252 million in the 2003 period, an increase of 10 percent. Adjusting for the impact of owned hotel sales since the first quarter of 2003 and the consolidation of a previously unconsolidated managed property in the 2004 first quarter, revenue, operating income, and Adjusted EBITDA increased 11 percent, 16 percent, and 13 percent, respectively.
Owned Hotel Results
Continued strong business transient trends, improvement in group travel, and the start of a strong summer travel season combined to bring significant occupancy and/or rate increases to most of the company's major owned hotels in both business and leisure destinations.
Particularly good results were posted by company-owned hotels in New York City, the Washington, D.C. area, Hawaii, New Orleans, Boston, Phoenix, and San Diego. Occupancy levels at or near 90 percent, with significant rate increases as well, were achieved in New York and Boston. San Francisco continues to show improvement, while Chicago -- owing to a comparative lack of citywide conventions -- remains a challenging market for 2004.
Across all brands, revenue from the company's owned hotels (majority owned and controlled hotels) were $546 million, a 3 percent increase from $531 million in the 2003 period. The impact of property sales limited the revenue growth. Total revenue from comparable owned properties was up 8 percent in the quarter. RevPAR from comparable owned hotels increased 8.3 percent, in spite of the aforementioned softness in Chicago, which adversely impacted RevPAR growth by 2.3 points. Comparable owned hotel occupancy increased 3.3 points in the quarter to 76.7 percent, while average daily rate (ADR) increased 3.6 percent to $153.00. Continued improvement in the mix of business enabled second quarter RevPAR growth to be more ADR-driven than in previous periods.
Total owned hotel expenses in the second quarter were up marginally at $380 million (a 1 percent increase), reflecting the previously mentioned property sales. Expenses at the comparable owned hotels increased 6 percent in the quarter, primarily due to an increase in occupied rooms.
Excluding the impact of property sales on owned hotel revenue and expenses, owned hotel margins in the 2004 second quarter, when compared to the 2003 period, improved 140 basis points to 30.5 percent. Margin improvement resulted from a combination of the aforementioned ADR increase, an increase in food-and-beverage revenue resulting from more group room nights, and cost-per-occupied room that was approximately flat with the 2003 quarter.
Systemwide RevPAR; Management/Franchise Fees
The improved business trends that benefited the company's owned hotels in the second quarter, combined with favorable year-over-year comparisons, resulted in each of Hilton's brands reporting significant RevPAR increases in the quarter. Systemwide RevPAR growth at the company's brands (including franchise properties) was as follows: Hilton Garden Inn, 9.6 percent; Hilton, 9.5 percent; Doubletree, 8.5 percent; Embassy Suites, 6.9 percent; Hampton Inn, 6.0 percent; and Homewood Suites by Hilton, 5.9 percent.
These RevPAR gains (which accounted for approximately half of the company's fee growth in the quarter) and the addition of new units (which accounted for the other half) enabled the company to show a 10 percent increase in management and franchise fees in the quarter to $97 million.
RevPAR index figures (year-to-date May 2004 as measured by Smith Travel Research) show continued and significant occupancy and rate premiums for the following Hilton brands: Embassy Suites, 123.3; Homewood Suites by Hilton, 119.0; Hampton Inn, 117.9; Hilton Garden Inn, 116.1; and Hilton, 108.8. Doubletree's RevPAR index was 98.9.
Brand Development/Unit Growth
In the second quarter 2004, the company added 38 properties and 4,938 rooms to its system as follows: Hampton Inn, 21 hotels and 1,815 rooms; Hilton Garden Inn, 9 hotels and 1,183 rooms; Homewood Suites by Hilton, 4 hotels and 374 rooms; Doubletree, 3 hotels and 1,116 rooms; and Hilton, 1 property and 450 rooms.
Seven hotels and 922 rooms were removed from the system during the quarter. At June 30, 2004, the Hilton system consisted of 2,216 properties and 352,885 rooms. The company had more than 425 hotels and approximately 58,000 rooms in its development pipeline at June 30, 2004.
Development highlights during the quarter and early July included the conversion to the Hilton brand of a 332-room full-service hotel in Indianapolis, scheduled for mid-August; the beginning of renovation of six Doubletree properties recently acquired by USAA Real Estate Co. in suburban Kansas City, Houston, Anaheim, St. Louis, and Tulsa; the opening of Doubletree's first hotel in Canada, at Niagara Falls; and a new-build Doubletree in Bay City, Mich. (outside Detroit); groundbreaking for the first Homewood Suites by Hilton hotel in Canada, in Toronto; the opening of the Conrad Miami, the first freestanding Conrad Hotel in North America; and the signing of a management contract for a new Conrad Hotel in Indianapolis, scheduled to open in 2006.
In July, it was announced that both Hilton Garden Inn and Homewood Suites by Hilton earned first-place rankings for customer satisfaction in their respective categories from J.D. Power & Associates, while Embassy Suites and Hampton Inn each garnered top three rankings in their categories.
Hilton Grand Vacations
Hilton Grand Vacations Company (HGVC), the company's vacation ownership business, had another strong quarter with increases in overall unit sales and average unit sales price. HGVC had second quarter revenue of $98 million, an increase of 24 percent from $79 million in the 2003 period. Expenses were $71 million in the 2004 second quarter compared with $58 million in the 2003 period. Overall unit sales in the quarter were up 34 percent, while the average unit sales price increased 7 percent.
HGVC sales continue to be strong in its three focus destinations of Hawaii, Las Vegas, and Orlando, with a particularly exceptional sales pace at its two newest properties in the latter two markets. Development of Phase II at HGVC's new Las Vegas Strip resort is on schedule to begin by year-end 2004, and development of another phase at its new Orlando property is expected to begin in early 2005.
Distribution/Technology
Improving demand in all segments -- business transient, group, and leisure -- resulted in significant increases in both call volume and gross reservations. In the second quarter 2004, call volume through Hilton's call centers was up 6 percent over the 2003 period, with gross reservations through Hilton Reservations Worldwide (HRW), the Global Distribution System (GDS), and all Internet sources up almost 12 percent (up nearly 14 percent in June alone.) Year-to-date June 30, 2004, call volume through Hilton's call centers was up more than 7 percent from the 2003 period, with gross reservations through HRW, GDS, and the Internet up approximately 14 percent.
In the second quarter, online bookings through the company's proprietary branded websites increased approximately 25 percent over the 2003 period.
Furthering its industry leadership position in the use of technology to enhance customer service, and based on successful tests at the Hilton New York and Hilton Chicago, the company said that self-service check-in kiosks would be installed at approximately 45 of its owned and/or managed hotels by year-end 2004.
Corporate Finance
At June 30, 2004, Hilton had total debt of $3.6 billion (net of $325 million allocated to Caesars Entertainment, Inc. and repaid by Caesars in July 2004, and $100 million of debt resulting from the consolidation of a managed hotel, which is non-recourse to Hilton.) This represents a reduction of $81 million during the second quarter. Borrowings under the company's $1 billion revolving credit facility were completely repaid during the second quarter. Approximately 13 percent of the company's debt is floating rate debt. Total cash and equivalents (including restricted cash) were approximately $295 million at June 30, 2004. The company's average basic and diluted share counts for the second quarter were 383 million and 391 million, respectively.
Consolidated net interest expense (interest expense net of interest and dividend income) declined by $4 million in the second quarter due primarily to lower average debt balances.
Hilton's debt currently has an average life of 9.4 years, at an average cost of approximately 6.7 percent.
Net corporate expense increased to $25 million due to the aforementioned $2 million note receivable reserve, the corporate-related costs associated with awards under the company's equity compensation plan, and higher legal costs.
The company's effective tax rate in the second quarter was 34 percent. During the quarter, the company's provision for income tax benefited from the utilization of tax loss carryforwards of approximately $5 million as a result of the sale of its interest in Travelweb, and the sale of Doubletree properties in Bakersfield and Modesto, Calif. Excluding this benefit, the company's effective tax rate was approximately 38 percent.
Total hotel capital expenditures in the quarter were $38 million, with an additional $6 million expended for timeshare development.
Six-Month Results
For the six-month period ended June 30, 2004, Hilton reported net income of $112 million, compared to $63 million in the corresponding 2003 period. Diluted net income per share was $.29 versus $.17 in the 2003 period. Operating income for the six months was $319 million (compared with $250 million in the 2003 period) based on revenue of $2.059 billion (versus $1.885 billion in the 2003 period.) For the 2004 six-month period, when compared to the same period last year, total company Adjusted EBITDA increased 11 percent to $497 million. Excluding the impact of owned hotel sales since the first quarter 2003, Adjusted EBITDA increased 14 percent.
Updated 2004 Outlook
Based on its strong second quarter results and positive outlook for the remainder of the year, the company updated and increased its estimates for full-year 2004 as follows:
Total revenue $4.170 billion range
Total Adjusted EBITDA $1 billion range
Total operating income $650 million range
Comparable owned hotel RevPAR Increase of 6-8%
Diluted earnings per share Mid to high $.50 range
