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Hilton Reports Strong First Quarter 2006 Results

Hilton Reports Strong First Quarter 2006 Results

Category: Worldwide -
This is a press release selected by our editorial committee and published online for free on 2006-05-03

Hilton Hotels Corporation (NYSE:HLT) today reported financial results for the first quarter ended March 31, 2006. First quarter highlights, which include approximately five weeks of combined company results following the acquisition of the lodging assets of Hilton Group plc ("HI") on February 23, are as follows:

-- Reported diluted EPS of $.26 vs. $.16 in 2005, an increase of 63%.

-- Recurring diluted EPS of $.20 vs. $.15 in 2005, an increase of 33%.

-- Total company Adjusted EBITDA of $328 million up 30%.

-- Comparable owned RevPAR (excluding sold hotels, the acquired HI owned hotels and New Orleans) increased 9.0%, driven by strong rate increases and high demand in most major markets.

-- Fees up 49% to $152 million on strong RevPAR and unit growth, the HI acquisition and a one-time termination fee.

-- Timeshare profitability up 20%, driven by increase in average unit sales price.

Hilton reported first quarter 2006 net income of $104 million, compared with $64 million in the 2005 quarter. Diluted net income per share was $.26 in the 2006 first quarter, versus $.16 in the 2005 period, an increase of 63%. Non-recurring items combined to benefit the quarter by $.06 per share as follows:

-- $15 million pre tax benefit due to a contract termination fee;

-- $17 million pre tax benefit from foreign currency gains;

-- $4 million pre tax benefit due primarily to the combined impact of asset dispositions ($25 million book loss), a settlement recovery in Hawaii ($25 million benefit) and other items ($4 million benefit);

-- $9 million benefit to the tax provision due primarily to the closure of IRS audits for the years 2002 and 2003, and the required tax treatment on foreign currency gains; and

-- $12 million pre tax charge for costs related to the HI acquisition.

The 2005 first quarter benefited from non-recurring items totaling $.01 per share.

The company reported first quarter 2006 total operating income of $235 million (a 44% increase from the 2005 period,) on total revenue of $1.519 billion (a 41% increase from $1.076 billion in the 2005 quarter.) Total company earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") were $328 million, an increase of 30% from $252 million in the 2005 quarter.

Owned Hotel Results

Continued strong demand trends, primarily among business travelers, resulted in high single-digit or double-digit average daily rate (ADR) increases at many of the company's gateway hotels in the U.S. Business transient, group and leisure all showed significant ADR gains. These rate increases drove significant RevPAR gains at many of the company's U.S. owned properties.

Across all brands, revenue from the company's owned hotels (majority owned and controlled hotels) was $508 million in the first quarter 2006, a 3% increase from $495 million in the 2005 quarter. Total revenue from comparable owned hotels (excluding the impact of property sales dating back to January 1, 2005; the results of the acquired HI owned hotels since February 23, 2006; and two owned properties in New Orleans which were impacted by Hurricane Katrina) was up 7.4%.

RevPAR from comparable U.S. owned hotels increased 9.0%. Comparable owned U.S. hotel occupancy increased 1.5 points to 73.9%, while ADR increased 6.8% to $184.31. Approximately 77% of the quarterly RevPAR increase at comparable owned U.S. hotels was attributable to ADR gains. Particularly strong RevPAR growth was reported at the company's owned hotels in Chicago, Honolulu, Atlanta and Phoenix. The San Francisco/San Jose market showed significant improvement, with double-digit RevPAR gains at the company's owned hotels in those cities.

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. Additionally, the Hilton Washington saw a RevPAR decline due to difficult comparisons and an overall soft group market.

Total owned hotel expenses were up 1% in the quarter to $380 million. Expenses at the comparable owned U.S. hotels increased 7%, due primarily to increases in energy and marketing costs, and an increase in occupied rooms. Cost-per-occupied-room increased 5.2%.

Comparable owned U.S. hotel margins in the first quarter increased 50 basis points to 24.0%. The aforementioned renovation disruptions and higher energy and marketing costs impacted margins by approximately 140 basis points.

On a pro forma basis, as if the acquisition of HI had occurred January 1, 2005, comparable worldwide owned revenues and expenses increased 6.5% and 5.0%, respectively. RevPAR from worldwide comparable owned hotels increased 8.0%, with North America improving 9.7% and International improving 3.5% (U.S. dollar basis.) Particular strength was reported in the U.K. and Canada. Adjusting for the impact of foreign exchange, RevPAR from international comparable owned hotels increased 10.9%.

Pro forma worldwide owned margins improved 110 basis points to 23.9%, with North America (U.S. and Canada) improving 60 basis points to 23.1%, and International improving 270 basis points to 26.0%.

Leased Hotels

Revenue from leased hotels was $266 million in the first quarter 2006, compared to $28 million in the 2005 quarter, while leased expenses (including rents) were $230 million in the current quarter, versus $26 million last year. In the 2006 period, leased revenues and expenses include approximately five weeks of operations from the 200 leased hotels acquired in the HI transaction.

On a pro forma basis, as if the acquisition of HI had occurred January 1, 2005, leased revenues increased 1.6% and leased expenses declined 1.0%, and margins increased 240 basis points to 9.9%. RevPAR from leased properties increased 3.6% (on a U.S. dollar basis). Adjusting for the impact of foreign exchange, RevPAR from comparable leased hotels increased 12.6%, reflective of business strength in the U.K., Continental Europe and the Nordic region.

Systemwide RevPAR; Management/Franchise Fees

Most of the company's brands reported significant systemwide RevPAR increases, with particularly strong gains in ADR. On a systemwide 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 first quarter RevPAR gains (on a U.S. dollar basis) as follows: Hilton Garden Inn, 12.6%; Doubletree, 11.7%; Embassy Suites, 11.6%; Hampton Inn, 11.5%; Conrad, 10.4%; Homewood Suites by Hilton, 9.6%. The Hilton brand, at 8.8% RevPAR growth, and Scandic, at 0.8% RevPAR growth, were both impacted by exchange rate fluctuations. Adjusting for the impact of foreign exchange, RevPAR at the Hilton and Scandic brands increased 11.2% and 12.7%, respectively.

Management and franchise fees increased 49% in the first quarter to $152 million, benefiting from RevPAR gains and the addition of new units, and the acquisition of HI. Fees for the quarter also include a one-time $15 million management contract termination fee related to the Hilton Times Square. This property was sold in the quarter and converted to a long-term franchise.

Brand Development/Unit Growth

In addition to the 398 properties and 102,779 rooms from the HI acquisition, the company in the first quarter added 49 properties and 10,496 rooms to its system as follows: Hampton Inn, 20 hotels and 1,621 rooms; Hilton, 7 hotels and 3,428 rooms; Hilton Garden Inn, 7 hotels and 956 rooms; Doubletree, 6 hotels and 1,423 rooms; Homewood Suites by Hilton, 5 hotels and 509 rooms; Conrad, 1 hotel and 241 rooms; and other (Waldorf=Astoria Collection), 3 hotels and 2,318 rooms.

Thirteen hotels and 1,177 rooms were removed from the system during the quarter.

During the first quarter, the company added new Hilton hotels in the Seychelles, Bangkok, Florence, Sanya (China) and San Francisco, while Conrad opened its newest hotel in Indianapolis, and Doubletree opened a new resort in Tampa. Also during the quarter, the company entered into management agreements or began construction on new Hilton brand hotels in Orlando, Baltimore, San Diego and Kiev. Additionally, the company in April entered into a management agreement for a new Conrad hotel in Shanghai.

At March 31, 2006, the Hilton worldwide system consisted of 2,822 hotels and 486,767 rooms. The company's current development pipeline is its biggest yet, and the largest in the industry, with approximately 700 hotels and 100,000 rooms at March 31, 2006. Approximately 90% of the hotels in the current development pipeline are in The Americas (U.S., Canada, Mexico, South America), though international development is expected to comprise an increasingly larger percentage of the company's unit growth within the next two years.

Hilton Grand Vacations

Hilton Grand Vacations Company (HGVC), the company's vacation ownership business, reported a 20% increase in profitability in the first quarter, due primarily to an 8% increase in average unit sales price. 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 has begun development of new timeshare projects in Hawaii (both in Honolulu and on the Big Island) and Orlando. HGVC had first quarter revenue of $183 million, a 25% increase from $146 million in the 2005 quarter. Expenses were $134 million in the first quarter, compared with $105 million in the 2005 period.

Corporate Finance

On February 23, 2006, the company completed its acquisition of HI for approximately GBP 3.3 billion, equivalent to approximately $5.78 billion on the transaction date (including assumed debt of approximately $115 million, and excluding additional debt and capital lease obligations reflected under U.S. GAAP.) In connection with this transaction, the company entered into new senior credit facilities in an aggregate principal U.S. dollar equivalent of approximately $5.75 billion with a syndicate of financial institutions. The company borrowed an aggregate principal U.S. dollar equivalent amount of approximately $4.81 billion under these facilities to partially fund the HI acquisition. The balance of the transaction was funded from available cash.

At March 31, 2006, Hilton had total debt of $8.3 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 $8.3 billion, approximately 61% is floating rate debt. Total cash and equivalents (including restricted cash) were approximately $386 million at March 31, 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 first quarter were 383 million and 418 million, respectively.

Hilton's debt currently has an average life of 6.9 years, at an average cost of approximately 6.3%.

Hilton's effective tax rate in the first quarter 2006 was 32.9%. Excluding the aforementioned $9 million one-time tax benefit to the tax provision, the effective tax rate in the first quarter was 38.6%.

Total capital expenditures in the first quarter were approximately $150 million, including approximately $50 million expended for timeshare development.

2006 Outlook

he company provided the following estimates for full-year 2006:

total revenue: $8.040-$8.110 billion
Total Adjusted EBITDA: $1.720-$1.765 billion
Total operating income: $1.260-$1.305 billion
Pro forma comparable Nor. Amer. owned
RevPAR growth: 8-10%
Pro forma comparable Nor. Amer. owned
margin growth: 50-100 basis points
Pro forma comparable worldwide owned
RevPAR growth: 7-9%
Pro forma comparable worldwide owned
margin growth: 70-120 basis points
Pro forma comparable leased RevPAR
growth: 3-4%
Pro forma comparable leased margin
growth: 60-90 basis points
Management and franchise fee growth: 42-45% range
Timeshare profitability growth: 20% range
Diluted earnings per share: $1.12-$1.19
Recurring diluted EPS: $1.06-$1.13

Total capital spending in 2006 is expected to be approximately $760 million as follows: approximately $265 million for routine improvements, $195 million for timeshare projects, and $300 million for hotel renovation and special projects.

The company's 2006 guidance includes the impact of the required accounting change related to the expensing of unvested stock options (equal to approximately $12 million.) The guidance excludes the impact of future asset sales.

The company expects to add approximately 215 hotels and 35,000 rooms to its system in 2006.

"Solid operating results both in the U.S. and internationally, combined with the closing of the Hilton International transaction and our new position as the global industry leader, made for a very successful and exciting first quarter," said Stephen F. Bollenbach, co-chairman and chief executive officer of Hilton Hotels Corporation.

"The integration of our domestic and international operating, financial and development teams is proceeding smoothly and seamlessly, with major projects -- such as the worldwide introduction of our OnQ technology system and planting the seeds for international growth of our Family of Brands -- already underway."

Mr. Bollenbach continued: "Business fundamentals continue to be very strong, with high demand among both business and leisure travelers for our hotels in gateway cities. High occupancy levels are enabling us to achieve a more desirable mix of business. Renovations at a few of our bigger hotels took rooms out of service and impacted our margins in the quarter; we are working quickly to bring new and improved rooms to our customers at these properties. Rate increases continue to drive RevPAR growth in our most important U.S. markets. International RevPAR growth is still slightly more occupancy driven, but room rates in key international markets like London are steadily becoming a higher percentage of RevPAR gains.

"We continue to open more hotels in the U.S. than any other company, and we are finding that the appeal of our brands is extending to different corners of the world. We have had discussions with potential owners in a variety of countries regarding development of our mid-scale brands, and we look forward to making announcements as agreements are signed."

Mr. Bollenbach concluded: "We see no let-up in our most important markets, and these strong business trends -- coupled with our growing timeshare business and the new worldwide development opportunities at our fingertips -- point to exciting things ahead for the remainder of 2006 and beyond."

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