Hilton Hotel Corporation financial Report

Executive Summary

Hilton Hotels Corporation (HHC ) owns some of the top international brands of the hospitality industry . It has one of the largest networks of assets in top business and vacation destinations , and claims more than 70 customer satisfaction

The scrip has traded on the New York Stock Exchange at between 18 .70 and 26 .05 during the 52 week period ending March 17 , 2006 : the price on that day was 23 .94 , with a trading volume of 3 .254 million

HHC has revenues from owned properties , from others it manages or

to which it awards franchises , and from time shares . The latter is the focus of substantial expansion , as are the international operations through a subsidiary , Hilton International (HI

The financial structure is ripe for additional gearing , largely because the company has converted some owned properties to ones it runs for new buyers . Liquidity is also comfortable because collection of receivables have improved in the recent past , while inventories have remained steady as a proportion of revenue

Margins have begun to recover in 2004 after bottoming out in 2002 , if one considers the peak level of 2000 . Business volumes fluctuate , but again , 2004 has seen an upturn . The expansion plans for emerging markets abroad , and the expansion of the time share business hold positive prospects that the improvements of 2004 over 2003 will settle as a trend . However , public financial disclosures and statements do not spell out to what extent this domestic US business travel oriented business has prepared to address the different needs of vacation travelers and of diversity in the base of customers . Quality and environmental management standards followed by franchisees and by new acquisitions in far-flung destinations are other potential concerns

Financial Structure

Financial structure should be considered in the light of the nature of business . The hospitality traditionally depends on large physical assets in key locations , which typically take relatively long to build afresh or large amounts to acquire if already in operation . Demand for rooms tends to be seasonal , and is vulnerable to changes in the economy and to geo-political developments . The financial structure should therefore lend resilience against periods of downturns in revenue streams

Hilton Hotels Corporation has most of its traditional properties in the United States , though it has taken steps to increase the future share of international business . The company has structured its product lines in a manner that reduces the seasonal and gestation risks inherent to hospitality as an enterprise . HHC has innovatively built two lines of revenue in addition to the traditional way of running owned hotels Firstly , it uses its expertise in matters related to hospitality to run hotels owned by others . This approach includes selling fixed assets and then running the hotels for the new owners . Such a strategy improves the productivity of capital . Secondly , HHC leverages the 98 global awareness of its brand to build cash contributions from franchises Again , this approach brings in top and bottom line growth without any burdens on the balance sheet

A third major move by HHC is the establishment of HI as a subsidiary This gives the HHC management a great deal of flexibility is managing value delivery to its stakeholders . It also increases the degrees of freedom of HHC management in terms of dealing with the risks of the hospitality business . Since running hotels in the third world and in newly emerging economies can be rather different from conventions of the domestic US market , creating a specialized vehicle such as HI gives the corporation the competitive advantage of developing specialized and dedicated resources for foreign destinations

HI also leaves the core HHC management free to focus on new segments in the large and cash-rich US market . The time share business is quite different from that of hosting business guests and events . Vacation demand does not run in tandem with the worlds of commerce and industry and hence lends stability to the profits of HHC . This company treats time shares as a priority , and is focused on winning destinations such as Las Vegas , Orlando and Hawaii (Hilton Hotels Corporation , 2006

Overall HHC stands out for consistent and varied efforts to reduce some of the seasonal and gestation drawbacks of building large and expensive hotels and running them subsequently . Gearing holds important indications for the safety of borrowed bunds , and the potential for Hilton to access third party funds for expansion (Fitzgerald , 2003 ,

br 136 . Though the group has more than 2 thousand properties , there are a number of locations where it has opportunities for expansion . Gearing is especially important for companies such as Hilton which have relatively large numbers of alternatives for new projects . The group company has also increased its flexibility for expansion in to new territories by bringing down its debt as a proportion of equity by more than half between 2000 and 2004 (Competitors , 2006 . Equity was only 22 .39 of indicator of the promoter 's confidence in the business . Hilton could be a prime customer for lending institutions which want to expand their businesses . We may conclude that the financial structure of Hilton Hotel Corporation is conservative , sound and poised for rapid asset base expansion . The Hilton brand value is a related strength which has no place in the formal financial structure , but which is a significant and irreplaceable support in real life

5 Year Trends

Judicious Ratio Analysis can help understand trends underlying the arithmetic (Bernstein , and Wild , 1999 ,

40 . Ratios , calculated from financial statements , reflect both the internal financial durability of a company , as well as the impact of market and competitive factors Ratio analysis should be analyzed in context since the hospitality industry is subject to major international changes . The ratios we calculate from Hilton 's past financial statements may not necessarily be indicative of future prospects . The domestic hospitality business in the US has undergone significant changes . HHC itself is in the process of expanding its presence abroad . It also has ambitious plans for the related business of vacation homes . The 2000-2004 periods is only relevant in terms of how the HHC management has responded to changes in market conditions , covering share holders against emerging risks , and ensuring value delivery from new emergent opportunities

Hilton 's profitability trends indicate that it has moved in to lower margin segments of the business . The net margin has declined from 7 .88 in 2000 to 5 .74 in 2004 . However , there are some signs of recovery as the ratio had dropped to 4 .29 in 2003 . Similarly , cash flow to sales has recovered from 13 .3 in 2003 to 15 .03 in 2004 , though it is way below the 19 .00 achieved in 2000 . Hilton 's margins are better than those enjoyed by Marriott and the Intercontinental Group . The management has recognized in its financial statements , the collective bargaining strength of employees in this business sector (Hilton Hotels Corporation , 2006 . Profitability ratios for 2000-2004 should be seen in a sector-centric light because hospitality involves relatively high personnel costs . Clearly , the post 9 /11 scenario has not been conducive for stable growth in US business travel , which is a traditional cash-cow for HHC . The company , on the other hand , has taken a number of decisive steps to ensure that the improvement discerned in 2004 over 2003 , is sustained during the coming 5 year period . The dismal profitability records between 2001 and 2002 should be viewed as transient downturns from which HHC is set to recover

HHC has worked to reduce the share of debt in its capital structure The resultant equity expansion has meant that while the return on assets have declined marginally from 6 .17 in 2000 to 5 .12 in 2004 , the return on equity has crashed from 19 .00 in 2000 to just 7 .96 in 2003 , before slight recovery to 10 .18 in 2003 (Competitors , 2006 . This should not be viewed in a negative light , as the reduction of expensive debt has been an essential component of HHC 's recovery from the business depression in the US hospitality sector between 2001 and 2002

Business volumes show cyclical behavior . 5 year sales growth has hovered between 14 and 16 during the 2000-2004 years , except for declines in 2001 and 2002 . The annual change in sales growth shows greater variability , with 3 periods of annual decline between 2000 and 2004 . HHC has not reported on market shares and rank during this period , but it is likely that it has not suffered on these accounts . Brand strength and expansion of franchise and the vacation homes business mean that HHC medium-term revenue prospects remain strong even in the face of the downturn between 2000 and 2003

Liquidity is not a concern for Hilton . Receivables have declined from 51 .79 of current assets in 2000 to 30 .47 in 2004 , while inventories are back to less than 25 days after a 33 .05 days peak in 2002 . The current ration is 1 .76 in 2004 , and the quick ratio is 1 .28 . This is within the safe range by international norms though the quick ratio was only 0 .75 in 2000

Asset turnover has improved from 0 .38 in 2000 to 0 .50 in 2004 . This may be largely due to the conversion of many owned properties to managed operations of entities for those to who the assets have been sold

Overall , there are many aspects of ration analysis during 2000-2004 which are not relevant in the conventional sense for a company in a position such as HHC . It would be better to look at ratio development of projected business plans , and to draw action and control plans out of such targets . Unfortunately , financial disclosure norms for companies listed on stock exchanges do not require them to issue any supported guidance on how qualitative statements on strategic actions will translate in to numbers

Recent Trading

Common stock information for March 17 2006 was as follows

The stock price was 23 .94 , representing a 1 .70 change . The trading volume was 3 .254 million . The 52-week high was 26 .05 and the 52-week low was 18 .70

Present Status

Hilton is one of the most valuable brands in the hospitality industry it has an extensive network of properties and franchises throughout the world (About Hilton Hotels , 2006 . HHC has performed better than prime competitors such as Marriott and the International groups . It claims 98 brand awareness and 72 overall customer satisfaction , that are eminent markers of success by any standards . The company has reported to the New York Stock Exchange that its revenues from outside of the United States are not significant (Hilton Hotels Corporation , 2006 . We may conclude that HHC is the owner of some of the best brands in the business . It is a company in transition , branching in to new geographic segments and related business areas . It has shown definite signs of recovery from the effects of a downturn in the US hospitality business sector after 9 /11 and has restructured its financial structure by reducing the debt burden . Stated plans give sound reasons to express confidence in the ability of the company management to ensure profitable business growth in the foreseeable future

Future Outlook

Hilton has informed the New York Stock Exchange that it has retained operational control of 19 of the 20 majority-owned properties it sold in 2005 (Hilton Hotels Corporation , 2006 . This indicates a substantial shift in its approach to the business . The same report makes mention of aggressive expansion of time share projects in Las Vegas , Hawaii and Orlando . This shows a strategic repositioning from the business traveler to the segment for family vacations . Management statements indicate a shift to diverting expansion to Hilton International . It will be difficult for small operators and new entrants to match the Hilton brand goodwill . Hence , it makes sound business sense to build revenues by using the franchise route . Similarly , making deals to run hotels that change status from owned properties to ones sold to associates and to investors , will improve capital productivity , and deliver additional value to HHC shareholders . We may conclude that Hilton has begun to adapt its organizational structure to the new strategy that it has crafted (Hammond , 1994 , pp 97-154

Hilton has done well to expand its global portfolio , because it would not have the kind of future with the US as its dominant market , as its exceptional performance during 2000 and the previous years indicate International opportunities and new technology are opportunities for the best companies to grasp (Ohmae , 1990 , pp 172-192 . The mechanism of growing through a subsidiary has aspects to consider for which disclosures to the New York Stock Exchange are inadequate we know however , from management 's public statements that the international operations have not produced significant returns until 2005 (Hilton Hotels Corporation , 2006 . The company management has gone on record acknowledging the threat of growing Internet reservations for its rooms (Hilton Hotels Corporation , 2006

Hilton has shown signs as gleaned from its management and financial statements that the company has been able to look beyond its current success and develop industry foresight for the future of the enterprise (Hamel , and Prahalad , 1994 , pp 73-106 . This is one of the most stabilizing influences for its continued financial success in the future . It has been swift in recognizing new opportunities , and has also moved decisively to contain risks

Action Plan

Since there are a number of areas for which data is missing from the public statements and disclosures of HHC , it is worth preparing a list of issues for investors to seek further information and explanations This concluding section lists and outlines some of these aspects

The generic nature of global quality and environmental management standards indicates that the International Standards Organization may be relevant for Hilton , as it transits from a US domestic domination to a greater international presence , which will include franchised operations (Overview of the ISO System , 2005 . We do not have adequate information on the franchise control systems of Hilton from their public statements It is possible that franchises may dilute the crucial goodwill of the Hilton brand in future , if they do not follow the same high standards of quality and customer satisfaction . ISO 9000 will help HHC ensure that properties managed at remote locations set acceptable quality standards and that deviations are recorded for management audit . Similarly , the ISO 14000 brings product liability under control . It can help all properties which operate under the Hilton banner , deal with emergencies and to limit liabilities on HHC which may arise as a result of such exigencies . It will also encourage franchisees to reduce waste and to conserve their energy needs . This recommendation regarding ISO certification is made without access to how HHC actually controls the achievement of uniform standards at present

Hilton is also in the process of transition from serving business travelers to the vacation homes service . There is a need to review the internal capabilities of the company for this new segment (Payne , 2002 pp 1-20 . The superior quality that Hilton excels in providing may not be relevant for budget cost time share clients . The nature of cuisine will have to change from the formal to the more fun approach for children . Recreation facilities will mean more in Orlando than they have at airport properties in London . Hilton may have revamped its marketing for the new challenge-we simply do not know of this from public sources However , the company 's excellent financial record will be under threat if it makes investments in a new customer service without the requisite skill sets . Brand awareness may be as high amongst customers for time shares as for HHC 's traditional customer base , but the parameters for customer satisfaction will surely change . Locations such as Orlando , Las Vegas and Hawaii where HHC has important new time share projects , are all mature vacation destinations , with rather intense competition between existing operators . The specific HHC positioning in these markets is not known , so we cannot be sure that the new entrant will have a competitive advantage . Failures of these projects could jeopardize the entire corporate strategy of entering this new business segment . HHC 's internal marketing programs should be reviewed thoroughly in the latest Services Management format (Payne , 2002 , pp 1-20

It would be worth knowing more from the management on the margin nadir of 2003 , and how 2000 levels will be restored in the near term . It appears that some action is underway , as margins have recovered to an extent in 2004 . However , there are inadequate environmental and competitive factors to explain the decline during the first years of the 21st century . This aspect is important because the new countries in which HI is expanding , as well as the relative diversification in to time shares are not immune from the kind of threats which the US domestic market for business travelers suffered during the first years of this century . Concern over the viability of the strategy is especially relevant because the management has conceded that these new business initiatives have not resulted in any significant revenues for HHC as yet

References

`About Hilton Hotels , 2006 , Company Website , retrieved March 2006 from

HYPERLINK "http /www .hilton .com /en /hi /brand /about .jhtml jsessionid RU25PLIFVCBGKC SGBIV2VCQKIYFC5UUC http /www .hilton .com /en /hi /brand /about .jhtml jsessionid RU25PLIFVCBGKCS GBIV2VCQKIYFC5UUC

Bernstein , Leopold , A and Wild , John , J , 1999 , `Overview of Financial Statements Analysis , Analysis of Financial Statements ,

40 McGraw-Hill Professional

`Competitors , 2006 , Hilton Hotels Corp , Yahoo Finance , retrieved March 2006 from

HYPERLINK "http /finance .yahoo .com /q /co ?s HLT http /finance .yahoo .com /q /co ?s HLT

Fitzgerald , Ray , 2003 , `Testing Financial Statements , Business Finance for Managers ,

136 , Kogan Page

Hamel , Gary and Prahalad , C . K , 1994 , `Competing to Shape the Future Competing for the Future , pp 73-106 , Harvard Business School Press

Hammond , Thomas , H , 1994 , `Structure , Strategy and the Agenda of the Firm , Fundamental Issues in Strategy , pp 97-154 , edited by Rumelt Richard ,

, Schendel , Dan , E and Teece , David , J , Harvard Business School Press

`Hilton Hotels Corporation , 2006 , New York Stock Exchange Website retrieved March 2006 from HYPERLINK "http /www .nyse .com /listed /hlt .html http /www .nyse .com /listed /hlt .html

Ohmae , Kenichi , 1990 , `Development in a Bless World , The Bless World , pp 172-192 , Harper Collins Publishers

`Overview of the ISO System , 2005 , International Organization for Standardization Website , retrieved March 2006 from

HYPERLINK "http /www .iso .org /iso /en /ISOOnline .frontpage http /www .iso .org /iso /en /ISOOnline .frontpage

Payne , Adrian , 2002 , `The Nature of Services Marketing , The Essence of Services Marketing , pp 1-20 , Prentice-Hall

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