Hilton looks global to offset weak US

Tempo public space
Tempo public space

Hilton said that it would lean on its global portfolio to offset weakness in the US, where supply was expected to “modestly” exceed demand for this year.

The company was the first of the global branded groups to comment on the impact of the coronavirus, reporting 150 hotels closed in China.

Christopher Nassetta, president & CEO, told analysts on the group’s full-year earnings call that it expected roughly a 0.5 point impact in net unit growth in China and a $25m to $50m impact on full-year adjusted Ebitda. The forecast impact was based on three to six months of escalation, followed by three to six months of recovery, using the Sars outbreak as a model.

China represented 2.7% of group Ebitda and, in terms of system-wide revenues outside of China, around 0.7% and in the US, around 0.2%.

Looking at the wider group’s development, for the full year it reported net unit growth of 6.6%, opening approximately 470 properties, growing its portfolio to more than 6,100 sites. Hilton increased its pipeline by 6% year-over-year to more than 387,000 rooms or roughly 40% of its existing base. Of the rooms in the pipeline, 215,000 rooms were located outside the US, and 193,000 rooms were under construction.

Nassetta said: “On the supply side in the US, the growth forecast is slightly below the long-term average of 2% and is expected to modestly exceed demand growth for the year, which could pressure occupancy and limit rate growth.

“The US has been in a slowing mode in development. We've been doing fine, but it has been slowing. I suspect in a low growth environment that will continue to happen. I suspect we'll continue to get it a disproportionate share of it if we do our job and we intend to.

“We have always been able to sort of pivot and find the pockets of demand and where capital is available to continue to grow and grow in a way that our owners are profiting. But also, we're continuing to build our network effect so that we're continuing to strengthen our overall ecosystem for our customers.

“The world is a big place.”

Nassetta confirmed that, following the launch of Tempo, its “approachable” lifestyle brand earlier this year, the group was working on a luxury lifestyle brand, which it would launch “someday”, commenting “it's not going to be a gargantuan brand by number of units”.

Adjusted Ebitda was $586m for the fourth quarter and $2.31bn for the full year, the latter up 10% on the year. Commenting on the fourth quarter CFO Kevin Jacobs said: “Our performance was largely driven by better-than-expected licence fees and greater cost control as well as roughly $10m of timing and unique items that offset the impact of lower-than-expected revpar.”

System-wide comparable revpar decreased 1.0% and increased 0.8%  on a currency neutral basis for the fourth quarter and full year, respectively

Hilton's outlook excluded any potential impact of the coronavirus. Revpar growth of 0% to 1% and adjusted Ebitda of $2.42bn to $2.47bn were forecast for the full year, with revpar expected to be roughly flat for the first quarter.

The CEO said: “We expect 2020 top line growth to be similar to modestly softer than 2019. Consumer sentiment remains strong, but macro forecasts continue to call for positive, but decelerating GDP and non-residential fixed investment growth.”

Insight: The current sector take on the coronavirus outbreak is very much it has happened before, it will happen again. And that is not to be flippant or callous in terms of lives affected, but to point to Sars, which took its toll on performance, but from which the sector bounced back. With each of these outbreaks - and there will be more - government response will be crucial and, outside any travel bans, it is likely that, as with terrorism, bounce back time will shorten.

For Hilton, the impact in China will be less than at InterContinental Hotels Group, which has made the country a focus and whose results the sector awaits next week. The cruise sector was also expected to feel the bite, along with those exposed to Macau casinos.

Outside that which it cannot control, Hilton looked to the weakness in the US which it could in part control by limiting its expansion in the region, if that wouldn’t make for a terrible long-term business strategy. Nassetta has spoken in previous calls about expected growth in conversions during downturns and this slowdown was likely to see more of the same. The launch of Tempo will also present options for owners looking to present a bargain to the nervy consumer.

Hilton was hoping that its current brand stable will be enough to grow globally and offset domestic weakness without adding more - 18 must be sufficient, surely - and it has been vehemently opposed to spending cash on buying any new flags in from outside. This frugal approach has served it well - it has a nifty NUG - and now it must show owners that can see them through more pressing times.