Profits rise for Hilton in Q3

1st Nov 2006

Hilton Hotels said its third quarter earnings soared 31 percent on strong demand at its U.S. domestic properties. However, profits grew only modestly at 10%.

This comes as the company continues aggressive refurbishing of some of its high profile hotels, including the Waldorf-Astoria in New York, as well as a marketing campaign designed to reinvigorate the Hilton brand.

Full statement

Hilton Hotels Corporation reported financial results for the third quarter and nine months ended September 30, 2006.

Third quarter highlights compared to third quarter 2005 are as follows:


—Recurring diluted EPS of $.31 vs. $.22 in 2005, an increase of 41%.

—Total company Adjusted EBITDA of $440 million, up 58%.

—Pro forma worldwide comparable owned RevPAR increased 9.8% driven by strong rate increases and high demand in most major markets. Pro forma worldwide comparable owned margins improved 70 basis points.

—Fees up 47% to $175 million on strong RevPAR and unit growth and the favorable impact of the Hilton International acquisition.

—Timeshare profitability up 17%

Hilton reported third quarter 2006 net income of $117 million compared with $89 million in the 2005 quarter. Diluted net income per share was $.29 in the 2006 third quarter, versus $.22 in the 2005 period.

On a recurring basis, diluted EPS was $.31 in the 2006 third quarter, versus $.22 in the 2005 period. In total, non-recurring items adversely impacted the 2006 quarter by approximately $.02 per share as follows:

—$12 million pre-tax charge ($.02 per share) to increase a guarantee reserve for one managed hotel (included in other operating expenses);

—$10 million pre-tax loss ($.02 per share) on foreign currency transactions;

—$13 million pre-tax gain ($.02 per share) on asset sales and other items

The company reported third quarter 2006 total operating income of $315 million (a 55 percent increase from the 2005 quarter), on total revenue of $2.207 billion (a 100 percent increase from $1.102 billion in the 2005 quarter). Total company earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) were $440 million, an increase of 58 percent from $279 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 $649 million in the third quarter 2006, a 33 percent increase from $489 million in the 2005 quarter. Total owned hotel expenses were up 33 percent in the quarter to $464 million.

On a pro forma basis, as if the acquisition of Hilton International (HI) had occurred January 1, 2005, comparable North America (U.S.) owned revenue and expenses increased 5.9 percent and 5.8 percent, respectively. Pro forma comparable revenue growth in the quarter was significantly impacted by disruptions due to renovations. The pro forma comparable expenses were impacted by higher insurance and marketing costs.

On a pro forma basis, revenue-per-available-room (RevPAR) from comparable North America (N.A.) owned hotels increased 7.4 percent (120 percent rate driven.) Pro forma comparable N.A. owned hotel occupancy decreased 1.2 points to 82.7 percent, while ADR increased 8.9 percent to $194.34. Particularly strong RevPAR growth was reported at the company’s owned hotels in Boston, Chicago, and New York. RevPAR growth at the Waldorf=Astoria in New York and the Hilton Hawaiian Village was significantly impacted by renovation disruptions. Excluding the impact of the renovation disruptions, pro forma RevPAR from comparable N.A. owned hotels would have increased approximately 8.4 percent. Food and beverage business at both properties undergoing renovations was also adversely impacted due to group business disruptions.

Comparable N.A. owned hotel margins in the third quarter increased 10 basis points to 29.0 percent. The aforementioned renovation disruptions and higher insurance and marketing costs impacted margins by approximately 190 basis points.

Pro forma comparable international owned revenue and expenses increased 15.4 percent and 11.2 percent, respectively. Pro forma RevPAR from international comparable owned hotels increased 17.5 percent (68 percent rate driven.) Occupancy increased 3.9 points to 75.2 percent, while ADR increased 11.3 percent to $145.79. Strong results were reported in London, Dresden, Zurich, and Paris. Excluding the impact of foreign exchange, RevPAR from international comparable owned hotels increased 12.5 percent. Pro forma comparable international owned margins improved 270 basis points to 27.9 percent.

On a worldwide basis, pro forma comparable owned RevPAR increased 9.8 percent (92 percent rate driven,) with margins increasing 70 basis points to 28.6 percent. Excluding the impact of foreign exchange, worldwide pro forma comparable owned RevPAR increased 8.6 percent.

Leased Hotels

Revenue from leased hotels was $679 million in the third quarter 2006 compared to $28 million in the 2005 quarter, while leased hotel expenses were $578 million in the current quarter versus $24 million last year. The EBITDAR-to-rent coverage ratio was 1.7 times in the quarter.

Pro forma comparable leased revenue increased 9.9 percent, leased expenses increased 8.5 percent and margins increased 110 basis points to 15.2 percent. RevPAR from comparable leased properties increased 12.1 percent. Excluding the impact of foreign exchange, RevPAR from comparable leased hotels increased 8.1 percent.

System-wide RevPAR; Management/Franchise Fees

All 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 third quarter RevPAR gains as follows: Conrad, 13.4 percent; Hilton, 9.8 percent; Doubletree, 9.5 percent; Scandic, 9.0 percent; Embassy Suites, 8.3 percent; Hampton, 7.6 percent; Hilton Garden Inn, 7.4 percent; and Homewood Suites by Hilton, 6.3 percent.

Management and franchise fees increased 47 percent in the third quarter to $175 million, benefiting from RevPAR gains, the addition of new units, and the acquisition of HI.

Brand Development/Unit Growth

In the third quarter, the company added 60 properties and 8,070 rooms to its system as follows: Hampton Inn, 29 hotels and 2,849 rooms; Doubletree, 7 hotels and 1,839 rooms; Hilton, 8 hotels and 1,584 rooms; Homewood Suites by Hilton, 10 hotels and 976 suites; Hilton Garden Inn, 6 hotels and 774 rooms; Hilton Grand Vacations Company, 48 units.

Twenty-six properties and 4,186 rooms were removed from the system during the quarter.

During the third quarter, the company added new full-service hotels in Evian, France; Palermo, Italy; Baton Rouge; Annapolis; Baltimore; London (at Tower Bridge); and the Seychelles. The company also announced future openings in Moscow, Russia, and Bogota, Columbia. During the quarter, the company celebrated its 1,000th opening since the 1999 acquisition of Promus Hotels at the Embassy Suites Fort Myers/Estero, Florida. In addition, during the quarter the company opened one Hilton Garden Inn in Germany and, early in the fourth quarter, one in Italy - the first properties in Europe for the brand.

On October 30, the company announced plans for a 360-room Doubletree Hotel in Tianjin, China’s fourth largest city, marking Doubletree’s initial entry into the China market.

At September 30, 2006, the Hilton worldwide system consisted of 2,895 properties and 496,504 rooms. The company’s current development pipeline is its biggest yet, and the largest for any U.S.-based hotel company, with more than 775 hotels and 110,000 rooms at September 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 development pipeline over the next two years.

Hilton Grand Vacations

Hilton Grand Vacations Company (HGVC), the company’s vacation ownership business, reported a 17 percent increase in profitability in the third quarter of 2006 compared to 2005, due primarily to a 6 percent increase in average unit sales price and a 2 percent increase in unit sales.

HGVC had third quarter revenue of $152 million, a 7 percent increase from $142 million in the 2005 quarter. Expenses were $111 million in the third quarter, compared with $107 million in the 2005 period.


Hilton reported that its proprietary websites collectively rank as one of the largest revenue-generating commercial/retail websites in the world, excluding those that generate advertising revenue. In the third quarter, reservations booked through Hilton’s websites increased 39 percent. For the nine-month period ended September 30, 2006, reservations booked through Hilton’s websites increased 33 percent.

Over the last five years, the share of reservations booked through Hilton’s websites has grown from 9 percent of total reservations to 17 percent of total reservations, making it the largest central distribution channel for the company. Annual revenue booked through the company’s proprietary websites has grown from $709 million to $2.5 billion over the period. The share of reservations booked by third-party online agencies has remained flat at 3 percent over the period.

Asset Dispositions

Hilton noted that it intends to begin marketing for sale the following five hotels located in the U.S.: the 599-room Hilton Boston Logan, the 504-room Hilton Atlanta Airport, the 317-room Hilton New Orleans Airport, the 219-room Embassy Suites Memphis and the 140-room Homewood Suites Memphis.

Additionally, the company recently began marketing for sale the following two hotels: the 1,119-room Hilton Washington and the 251-room Hilton Caledonian located in Edinburgh, Scotland.

As previously announced, during the third quarter the company completed the sale of the LivingWell standalone health club system, five Canadian hotels, and the Drake Hotel leasehold in Chicago. Additionally, during the third quarter, the company announced that it began marketing for sale 10 hotels in continental Europe. Hilton also announced in the quarter that it is exploring strategic alternatives for the Scandic brand, a system of 129 hotels and 22,800 rooms, including the possible sale of all or part of the business.

Earlier this month, the company announced the exchange of contracts to sell two hotels located in the U.K., the 1,054-room Hilton London Metropole and the 794-room Hilton Birmingham Metropole, for GBP 417 million. The sale is expected to close by year-end, with the company retaining management of both hotels under long-term contracts.

Corporate Finance

At September 30, 2006, Hilton had total debt of $7.8 billion (net of $505 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 $7.8 billion, approximately 58 percent is floating rate debt. Total cash and equivalents (including restricted cash of $265 million) were approximately $379 million at September 30, 2006.

The company’s average basic and diluted share counts for the third quarter were 386 million and 420 million, respectively. Hilton’s debt currently has an average life of 6.1 years, at an average cost of approximately 6.5 percent.

Hilton’s effective tax rate in the third quarter 2006 was 31.2 percent. The reduction in effective rate is due to the company’s ability to utilize more foreign tax credits resulting primarily from the sale of five Canadian hotels.

Total capital expenditures in the third quarter were $147 million, including $20 million for timeshare development.


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