Second-quarter earnings at Hilton Hotels Corp. failed to meet expectations due mainly to renovations at key properties despite a jump in revenue driven by higher room prices.

Shares of the Beverly Hills-based company have risen on an improved outlook for the remainder of the year.

Hilton reported second quarter 2006 net income of $144 million compared with $202 million in the 2005 quarter. Diluted net income per share was $.35 in the 2006 second quarter, versus $.49 in the 2005 period.

On a recurring basis, diluted EPS was $.32 in the 2006 second quarter, versus $.27 in the 2005 period. Non-recurring items benefited Q2 2006 by $.03 per share, vs. a benefit of $.22 per share in Q2 2005. Non-recurring items that benefited the 2006 quarter were as follows:

—$3 million pre tax benefit from foreign currency gains;

—$19 million pre tax benefit due primarily to asset dispositions ($10 million book gain), a settlement recovery in Hawaii ($8 million benefit), and other items ($1 million benefit).

The 2005 second quarter benefited from the following two non-recurring items:

—$.15 per share related primarily to asset sales;

—$.07 per share of tax benefit related primarily to the closure of IRS audits for the years 1997-2001.

The company reported second quarter 2006 total operating income of $366 million (a 49 percent increase from the 2005 quarter), on total revenue of $2.204 billion (an 87 percent increase from $1.176 billion in the 2005 quarter). Total company earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) were $489 million, an increase of 46 percent from $336 million in the 2005 quarter.

Owned Hotel Results

Continued strong demand trends and pricing power resulted in high single digit or double digit average daily rate (ADR) increases at many of the company’s gateway hotels around the world. Business transient, group and leisure segments each showed significant ADR improvement.

Across all brands, revenue from the company’s owned hotels (majority owned and controlled hotels) was $681 million in the second quarter 2006, an 18 percent increase from $575 million in the 2005 quarter. Total owned hotel expenses were up 22 percent in the quarter to $477 million.

On a pro forma basis, as if the acquisition of Hilton International (HI) had occurred January 1, 2005, comparable North America (U.S. and Canada) owned revenue and expenses increased 6.5 percent and 7.8 percent, respectively. Pro forma comparable revenue growth in the quarter was significantly impacted by disruptions due to renovations. The disproportionate increase in pro forma comparable expenses was due primarily to the impact of higher energy and marketing costs.

On a pro forma basis, revenue-per-available-room (RevPAR) from comparable N.A. owned hotels increased 9.6 percent (99 percent rate driven). Pro forma comparable N.A. owned hotel occupancy increased 0.1 point to 80.4 percent, while ADR increased 9.5 percent to $189.87. Particularly strong RevPAR growth was reported at the company’s owned hotels in Chicago, Atlanta, Phoenix, Boston, Washington D.C., and across Canada. RevPAR growth at the company’s owned hotels in New York City (the Waldorf=Astoria and the Hilton New York) and at the Hilton Hawaiian Village was significantly impacted by renovation disruptions, though all three properties showed double-digit ADR gains. Excluding the impact of the renovation disruption, pro forma RevPAR from comparable N.A. owned hotels would have increased approximately 12.6 percent. Food and beverage business at the three hotels was also adversely impacted due to group business disruptions. The current renovation phase at the Hilton New York was completed in July. The current renovation phases at the Waldorf=Astoria and Hilton Hawaiian Village are scheduled to be completed during the third quarter.

Comparable N.A. owned hotel margins in the second quarter decreased 80 basis points to 30.2 percent. The aforementioned renovation disruptions and higher energy and marketing costs impacted margins by approximately 160 basis points.

Pro forma comparable international owned revenue and expenses increased 8.0 percent and 6.0 percent, respectively. Pro forma RevPAR from international comparable owned hotels increased 9.2 percent (72 percent rate driven). Occupancy increased 2.3 points to 75.1 percent, while ADR increased 5.9 percent to $150.17. Strong results were reported in the U.K., particularly London, across continental Europe and in South America. Adjusting for the impact of foreign exchange, RevPAR from international comparable owned hotels increased 9.7 percent. Pro forma comparable international margins improved 130 basis points to 30.1 percent.

On a worldwide basis, pro forma comparable owned RevPAR increased 9.3 percent (90 percent rate driven), with margins declining 20 basis points to 30.2 percent.

Leased Hotels

Revenue from leased hotels was $671 million in the second quarter 2006 compared to $31 million in the 2005 quarter, while leased hotel expenses were $572 million in the current quarter versus $27 million last year. The EBITDAR-to-rent coverage ratio was 1.7 times in the quarter.

Pro forma leased revenue increased 1.7 percent, leased expenses increased 1.8 percent and margins declined 10 basis points to 15.1 percent. RevPAR from comparable leased properties increased 4.1 percent (on a U.S. dollar basis). Adjusting for the impact of foreign exchange, RevPAR from comparable leased hotels increased 4.8 percent.

System-wide RevPAR; Management/Franchise Fees

Most of the company’s brands reported significant system-wide RevPAR increases, with particularly strong gains in ADR. On a system-wide basis (including owned, leased, managed and franchised properties) and pro forma as if the acquisition of Hilton International had occurred January 1, 2005, the company’s brands showed second quarter RevPAR gains (on a U.S. dollar basis) as follows: Doubletree, 14.1 percent; Hampton Inn, 12.3 percent; Hilton Garden Inn, 10.5 percent; Embassy Suites, 9.5 percent; Hilton, 9.2 percent; Homewood Suites by Hilton, 8.2 percent; and Conrad, 7.1 percent. RevPAR for the Scandic brand declined 0.7 percent.

Management and franchise fees increased 50 percent in the second quarter to $175 million, benefiting from RevPAR gains and the addition of new units and the acquisition of HI.

Brand Development/Unit Growth

In the second quarter, the company added 55 properties and 8,362 rooms to its system as follows: Hampton Inn, 26 hotels and 2,292 rooms; Hilton Garden Inn, 13 hotels and 1,875 rooms; Hilton, 4 hotels and 1,545 rooms; Doubletree, 4 hotels and 965 rooms; Homewood Suites by Hilton, 5 hotels and 637 suites; Hilton Grand Vacations Company, 606 units; Embassy Suites, 1 hotel and 150 suites; and other, 2 hotels and 292 rooms.

Sixteen hotels and 2,509 rooms were removed from the system during the quarter.

During the second and early third quarter, the company added new hotels in major markets such as, Boston, St. Louis, Dallas, Jeddah (Saudi Arabia), New York (at J.F.K. Airport), London (at Canary Wharf), Montreal and Fiji. Additionally, during June and July, the company announced signed management or franchise agreements for its first four Hilton Garden Inns in Europe—two each in Germany and Italy, as well as its first Doubletree in Asia—in Thailand.

At June 30, 2006, the Hilton worldwide system consisted of 2,861 hotels and 492,620 rooms. The company’s current development pipeline is its biggest yet, and the largest for any U.S.-based hotel company, with more than 700 hotels and 100,000 rooms at June 30, 2006. Approximately 90 percent of the hotels in the current development pipeline are in the Americas (U.S., Canada, Mexico, and South America), though international development is expected to comprise an increasingly larger percentage of the company’s unit growth within the next two years.

In July, Hilton Garden Inn earned a first place ranking (for the fifth consecutive year) in the mid-scale full service segment of J.D. Power and Associates’ 2006 North America Hotel Guest Satisfaction Index Study.

Hilton Grand Vacations

Hilton Grand Vacations Company (HGVC), the company’s vacation ownership business, reported a 23 percent increase in profitability in the second quarter, due primarily to an 8 percent increase in average unit sales price and favorable impact from percentage of completion accounting in Las Vegas and Hawaii. Unit sales were flat with the 2005 quarter. The company reported that sales volume remained strong at HGVC’s properties in Las Vegas, Orlando and Hawaii. HGVC had second quarter revenue of $173 million, a 27 percent increase from $136 million in the 2005 quarter. Expenses were $125 million in the second quarter, compared with $97 million in the 2005 period. During the quarter, the company spent approximately $106 million to acquire land in New York City (on 57th Street between 6th and 7th Avenues) and Orlando (part of the Ruby Lake planned development west of I-4) that has been earmarked for future HGVC development.

Corporate Finance

At June 30, 2006, Hilton had total debt of $8.4 billion (net of approximately $500 million of debt and capital lease obligations resulting from the consolidation of certain joint venture entities and a managed hotel, which is non-recourse to Hilton). Of the $8.4 billion, approximately 61 percent is floating rate debt. Total cash and equivalents (including restricted cash) were approximately $348 million at June 30, 2006. The company noted that debt reduction is a priority, and will be accomplished through a combination of operating cash flow and proceeds from asset dispositions.

The company’s average basic and diluted share counts for the second quarter were 385 million and 419 million, respectively.

Hilton’s debt currently has an average life of 6.2 years, at an average cost of approximately 6.4 percent.

Hilton’s effective tax rate in the second quarter 2006 was 39 percent.

Total capital expenditures in the second quarter were $266 million, including $144 million expended for timeshare development and the aforementioned purchases of land.

Six-Month Results

For the six-month period ended June 30, 2006, Hilton reported net income of $248 million, compared to $266 million in the 2005 period. Diluted net income per share was $.61 versus $.65 in the 2005 period. Non-recurring items benefited the 2006 six-month period by $.09 per share, versus $.23 per share benefit in the 2005 six-month period. On a recurring basis, EPS was $.52 versus $.42 in the 2005 period, an increase of 24 percent. Operating income for the six months was $601 million (compared with $409 million in the 2005 period) on revenue of $3.723 billion (compared with $2.252 billion in the 2005 period). For the 2006 six-month period, when compared to the same period last year, total company Adjusted EBITDA increased 39 percent to $817 million.

The company’s 2006 guidance excludes the impact of future asset sales.

Total capital spending in 2006 is expected to be approximately $860 million as follows: approximately $235 million for routine improvements, $300 million for hotel renovation or special projects, and $325 million for timeshare projects.

The company expects to add approximately 225 hotels and 36,000 rooms to its system in 2006.

Stephen F. Bollenbach, co-chairman and chief executive officer of Hilton Hotels Corporation, said: “All three parts of our company—the hotels we own, our management and franchise fee business, and our timeshare operations—continue to perform extremely well as our unparalleled collection of respected brands remain the first choices for the world’s travelers and hotel owners.

“Strong demand is driving room rate growth in many of our most important markets, including New York, Hawaii, London and Chicago, a trend we see continuing due to limited new supply in urban centers and the ongoing rebound in the U.K. The renovation projects we have undertaken in New York and Hawaii, enhancing the guestrooms and improving the infrastructure of the important properties we own in those markets, are nearing completion and will have a positive impact on our results going forward.

“No one is opening more hotels in the U.S. than Hilton, a testament to the power of the Hilton Family of Brands. We anticipate our pipeline of more than 700 hotels to grow as we sign additional management and franchise agreements for our brands in Europe and Asia, as well as continuing our brand development success in North America. As we expected when we acquired Hilton International, the opportunities to introduce Hilton Garden Inn and Hampton Inn—along with our full-service Hilton and Doubletree brands—in new markets are plentiful and we are pursuing them aggressively. We are also finding excellent opportunities to expand our luxury presence through our Conrad and Waldorf=Astoria Collection brands. In addition, we were happy to have reached a favorable agreement with our labor unions that provided a new six-year agreement in Manhattan and established a structure for improved relations with UNITE HERE in the future.”

Mr. Bollenbach concluded: “Just a few short months after completing the Hilton International transaction, our global business is operating seamlessly, new worldwide technology, product and marketing initiatives are underway, and we are moving assertively to take full advantage of the wide range of opportunities to grow our business for the benefit of our shareholders, customers, team members and hotel owners.”

Hilton has also been nominated this year for a

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World Travel Award as World’s Leading Hotel Brand.
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