Marriott International

Ladies and gentlemen, thank you for standing by, and welcome to the Marriott International's fourth quarter 2018 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that while posing your question that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Arne Sorensen, Chief Executive Officer. Please go ahead, sir.

Good morning. Welcome to our fourth quarter 2018 earnings conference call. Joining me today are Leni Oberg, Executive Vice President and Chief Financial Officer, Laura Paugh, Senior Vice President, Investor Relations, and Betsy Dahm, Senior Director, Investor Relations. Let me remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued yesterday along with our comments today are effective only today and will not be updated as actual events unfold. In our discussion, we will talk about 2018 results compared to 2017 results adjusted for merger-related costs and charges, cost reimbursement revenue, and reimbursed expenses. In addition, the 2017 fourth quarter excludes the Avendra gain and the provisional tax charge resulting from recent tax reform, while the fourth quarter of 2018 excludes adjustments to the provisional tax charge resulting from recent tax reform. Of course, comparisons to our prior year reported GAAP results are in the press release, which you can find along with the reconciliation of non-GAAP financial measures on our website. We've accomplished a lot since the acquisition of Starwood in late 2016. We recently unified all three loyalty programs into our newly branded program, Marriott Bonvoy. Our operations and discipline teams are fully in place. We've created significant value through combining sales organizations, improving cost efficiencies, and negotiating new co-branded credit card agreements. And we've realized more than $250 million of corporate G&A savings. Today, we truly feel like one company. These integration efforts required extraordinary planning and execution by our team, and I couldn't be prouder of their work. In a transformation this large and all-encompassing, it would be surprising not to encounter some challenges. In late November, we disclosed a data security incident involving the legacy Starwood Reservation database. Beginning with our public announcement regarding the incident on November 30th, we rolled out a broad guest outreach effort. As we address customer issues, the number of calls to our dedicated call centers declined from over 40,000 in December to fewer than 6,000 calls in January, and less than 3,000 calls in February. It was encouraging to hear on their earnings call in January, Steven Squeary, CEO of American Express, note that his firm has seen no appreciable spike in credit card fraud resulting from this incident. Our forensic review of the incident is now complete, and as we said in January, the number of guest records involved is lower than we originally estimated. We are no longer using the Legacy Starwood Reservation system and we have implemented additional security measures on the Marriott network. We do not believe there has been any material RevPAR impact from this incident. Our board of directors has been very engaged in this matter. All of us remain committed to learn from this experience, work to improve our information security systems, and increase our ability to respond quickly to threats. So let's talk about 2018. Membership in Marriott Bonvoy reached nearly 125 million members at year end 2018, and it remains the largest and most valuable travel program in the hotel business. We have been adding on average 1.5 million members per month. Members are highly engaged. In 2018, reward redemptions increased 8% year over year and room nights sold to members increased 6%, both reaching record levels. Marriott Bonvoy members contributed roughly half of our room nights in 2018. Our hotels continue to deliver the great service our guests expect. We now offer keyless entry at over 1,400 hotels, and today mobile check-in and check-out is available at nearly all hotels. Our new enhanced reservation system, or ERS, was rolled out to over 800 hotels as of year end and should be available at over 2,000 hotels by year end 2019. ERS allows guests to select rooms based on a variety of room characteristics, such as bed type, view, high or low floor, and so on, with more photographs and hotel descriptions. Worldwide, 2018 full-service rev par rose 2.6%, and property-level house profit margins for our company-operated hotels increased 40 basis points, despite labor costs rising roughly 4%. We captured cost savings at properties, realize procurement benefits, and improve productivity. We reduced the amount of discounting at legacy Starwood hotels, and across our system, increased the proportion of bookings coming from our digital channels. In fact, in 2018, our direct digital room nights worldwide increased 11%, reaching 28% of all bookings, while OTA share of bookings remained flat. We believe the cost of our loyalty program is the lowest among our competitors in the hotel business while delivering the highest value to guests. While charge-out rate savings from our loyalty program differ by brand, on average, since the Starwood acquisition, the charge-out rate of our overall loyalty program has declined by roughly 50 to 60 basis points, benefiting from integration synergies as well as the new co-brand credit card agreements. Lower loyalty costs should also benefit hotel margins in 2019, since the charge-out rates declined most meaningfully late in 2018. Just over 100 hotels left the Marriott system in 2018, which strengthened our overall system quality. The deletion rate for legacy Marriott product totaled 1.3% of total rooms, while the rate for legacy Starwood product totaled 2.5%. Despite this, we grew our overall rooms distribution by nearly 5% net. By the way, RevPAR index and fees per room of the deleted hotels were, on average, meaningfully lower than the rest of our comparably branded hotels. We expect overall deletions to return to the more normal level of 1 to 1.5% of rooms in 2019, resulting in net system growth of roughly 5.5%. On the development front, we signed agreements for a record 125,000 rooms in 2018, equivalent to nearly 10% of our existing portfolio. Even more important, the net present value of the signed deals also reached record levels. Our pipeline increased for the 26th quarter in a row to reach a record 478,000 rooms, with 214,000 of those rooms already under construction. At year end, our market share of worldwide open rooms was 7%. Our market share of STRs worldwide under construction pipeline was a leading 20%. In North America alone, our market share of open rooms was 15%, while our market share of STRs under construction pipeline was 36%. We migrated Starwood Hotels to Marriott Systems late in the year in five waves from September to December, We shifted 11 brands, encompassing roughly 1,500 managed and franchised Starwood hotels, onto Marriott's platforms, including systems for reservations, revenue management, and sales and catering. This was a highly complex undertaking involving many people, processes, and technology. While further fine tuning and training is underway, this is a massive step to have behind us. So let's talk about the fourth quarter. Marriott's worldwide system-wide comparable rev par increased 1.3% on a constant dollar basis, and North America rev par rose 0.2%. North America system-wide rev par growth was impacted by a more robust industry demand environment and by labor strikes. Looking ahead for the first quarter of 2019, we expect system-wide North America rev par will increase 1 to 2%. With the favorable timing of Easter, group business is expected to be stronger in March. Encouragingly, North America REVPAR increased 50 basis points in January, despite the government shutdown and some lingering impact from the strikes, particularly in Hawaii. For full year 2019, we continue to expect North America system-wide REVPAR will increase one to 3%. We expect group business will increase at a low single digit rate during the year. Special corporate rate negotiations are nearly complete, and rates for comparable customers are also increasing at a low single-digit rate. In 2018, our North America region accounted for 68% of our hotel-based fees. In the Asia-Pacific region, constant dollar system-wide RevPAR rose more than 5% in the fourth quarter, consistent with our expectations. RevPAR growth in India and the larger cities in China remains strong, while new supply constrained REVPAR growth on Hainan Island in China and moderating manufacturing demand slowed REVPAR growth in southern China markets. Food and beverage sales in China were weak, reflecting more cautious corporate spending. On the other hand, outbound China leisure demand remained robust, resulting in strong demand in leisure markets across the Pacific Rim. For the first quarter and full year 2019, We expect RevPAR in the Asia Pacific region will increase at a mid single digit rate with continued strength in India and most major markets in China. Hotels in Japan should benefit from higher attendance for the 35th anniversary of Tokyo Disneyland. In 2018, our Asia Pacific region accounted for 15% of our hotel based fees. In Europe, fourth quarter RevPAR rose more than 5% with strong demand from US travelers in London. Center City Paris Hotel demand moderated due to yellow vest political demonstrations and the resulting closed tourist attractions. Barcelona demand was strong, benefiting from easy comparisons to last year's Catalonian political issue. Looking ahead, assuming no business disruption from Brexit, we expect RevPAR in Europe will grow at a mid single digit rate, both in the first quarter and full year 2019. Last year, our Europe region represented 9% of our hotel-based fees. RevPAR in the Caribbean and Latin America region increased nearly 7% in the fourth quarter compared to last year. Strong RevPAR growth at resort hotels in the Caribbean, particularly Aruba and Grand Cayman, was helped by the lack of new supply in the region and strong holiday demand. In South America, RevPAR was aided by the G20 meeting and currency devaluations in Argentina and Brazil. We expect first quarter and full year 2019 RevPar in the region will increase at a low single-digit rate as Caribbean hotels continue to reopen after the 2017 hurricanes. Our Kela region accounted for 4% of our hotel-based fees in 2018. In the Middle East and Africa, fourth quarter RevPar declined over 5%. RevPar in Egypt increased sharply in the quarter on strong tourist demand However, continued sanctions on Qatar and oversupply in a higher VAT in the UAE and Saudi Arabia continued to reduce RevPAR growth for the region overall. With the challenging political climate in the Middle East, we expect RevPAR in the region will decline at a low single-digit rate in the first quarter and will be flattish for full year 2019. In 2018, MEA accounted for 4% of our hotel-based fees. Beyond things I've already discussed, our 2018 successes on other fronts also give us greater confidence in the future. We'll talk more about these at the analyst meeting later this month. Our home sharing pilot in Europe attracted great interest from our loyalty program members and yielded significant learnings. We've made meaningful progress on transforming the Sheraton brand with new designs, higher guest satisfaction, and better margins. We rolled out new co-branded credit cards and generated record branding fees. And we exceeded our expecting bookings on our new Ritz-Carlton yacht. We believe that all of this, built on a foundation of industry-leading brands and the most powerful loyalty program in travel, as well as our long commitment to service excellence, will continue to propel Marriott's success. With a highly efficient cost structure, we should deliver leading profitability for our owners and franchisees. For all of this, I'd like to thank the Marriott Associates whose hard work made all of this possible. And, of course, to our many guests who have remained loyal and patient through the transition. To tell you more about the quarter, I'd love to turn the call over to Lene. Lene?

Thank you, Arne. For the fourth quarter of 2018, adjusted diluted earnings per share totaled $1.44, roughly five cents ahead of the midpoint of our guidance of $1.37 to $1.41. On the fee line, we picked up about a penny of outperformance, largely due to better-than-expected credit card branding fees and fees from new units. G&A was a penny better than expected, and the tax line yielded about 3 cents of outperformance, partially due to discrete tax items. Compared to the prior year, base fees increased 1 percent. The favorable impact of unit additions and RevPAR growth was largely offset by the impact of properties that converted to franchise as well as hotel deletions during the year. Franchise fees increased 13 percent in the quarter, reflecting unit growth, including properties converting to franchised, growth in credit card branding fees, and higher REVPAR. Non-property franchise fees, including application fees, relicensing fees, and fees from our timeshare, credit card, and residential businesses, together totaled over 140 million in the quarter, 24 percent higher than the prior year. Credit card branding fees alone increased 44 percent in the quarter to reach over $100 million for the quarter and $380 million for full year 2018. Incentive fees declined 4 percent year over year in the fourth quarter, largely due to a $7 million impact from the labor strikes, as well as difficult comparisons in the Middle East and unfavorable foreign exchange. Incentive fees were helped by new unit growth and higher net house profit at most hotels. owned, leased, and other revenue net of expenses totaled $88 million in the fourth quarter compared to $89 million in the year-ago quarter. Since the beginning of 2017 fourth quarter, we've sold seven owned hotels, in nearly all cases retaining long-term management agreements. Compared to the prior year, these asset sales reduced our fourth quarter 2018 owned-leased results by $14 million. Termination fees are also included on the owned-lease line. These fees totaled $15 million in the quarter compared to $4 million in the year-ago quarter. Depreciation and amortization increased to $62 million in the quarter compared to $53 million in the prior year. The increase was largely due to a $7 million favorable adjustment related to legacy Starwood IT systems in the 2017 quarter. General and administrative expenses totaled $242 million in the fourth quarter a 10 percent decline from the year-ago quarter, largely reflecting continued cost reductions due to the Starwood integration. Partially offsetting these cost savings was a $7 million expense associated with our supplemental investment in the workforce. Fourth quarter adjusted EBITDA increased 10 percent over adjusted EBITDA in the prior year. Compared to the prior year, fourth quarter 2018 adjusted EBITDA was negatively impacted by $12 million from sold hotels. Fourth quarter expenses associated with the data security incident that we disclosed on November 30 totaled $28 million pre-tax, offset by approximately $25 million of insurance recoveries as of year-end. The net of these amounts is either in reimbursed expenses line or the merger-related costs and charges line. Therefore, these expenses did not impact adjusted EPS or adjusted EBITDA results. The timing of the expenses associated with the data security incident may differ from the timing of the recognition of insurance recoveries. In the fourth quarter, we identified certain immaterial errors related to our accounting for our loyalty program, which resulted in the understatement of cost reimbursement revenue net of reimbursed expenses. in the first three quarters of 2018. Our 10-K, which should be filed later today, will include revised GAAP quarterly amounts reflecting the corrections of these errors, the impact of which is a $99 million increase to previously reported net income for the first three quarters of 2018 combined. In our 10-K, we will report a material weakness in internal control over financial reporting related to loyalty program accounting. We remain committed to maintaining effective internal controls and are in the process of instituting a remediation plan. These accounting adjustments were limited to the cost reimbursement revenue and reimbursed expenses lines on our P&L and the related tax impact. The adjustments are non-cash and do not impact our previously reported adjusted EPS or adjusted EBITDA amounts. For full year 2019, we expect fee revenue will increase 5 percent to 7 percent to reach 3.83 to 3.91 billion. We expect to achieve this despite 15 to 20 million dollar of unfavorable foreign exchange headwinds, low single-digit growth in incentive fees, and lost fees from terminated properties in 2018. We expect credit card branding fees alone will total 410 to 420 million, as a result of continued growth in the number of new cardholders and higher average spend. In 2019, owned, leased, and other revenue net of direct expenses should total $280 to $290 million, compared to $329 million in 2018. We expect termination fees will be roughly $20 million, or $45 to $50 million lower than 2018. During the first quarter of 2019, we closed on the purchase of the remaining 40% joint venture interest in AC Hotels, resulting in the company owning all of this highly successful and fast-growing global brand. We entered into our original AC joint venture agreement in 2011. Since then, we've almost tripled the distribution to 265 AC Hotels open or under development around the world. As a result of our purchase of the remaining interest, our joint venture earnings will be a bit lower in 2019, while fees and G&A will reflect our 100% ownership of the brand. We estimate general and administrative expenses will total $910 to $920 million in 2019, a 1% to 2% decline from 2018 levels. Recall that full-year 2018 G&A included a $51 million expense for our supplemental workforce investment. Because of our outstanding capital recycling in 2018, our 2018 adjusted diluted EPS included 65 cents per share of after-tax gains on the sale of owned and joint venture assets. 2018 results also reflected an effective tax rate of 19%. reflecting the benefit from windfall tax and some discrete items. Per full year 2019, we expect adjusted diluted EPS will total 587 to $6.10, a 2 to 5 percent decline from the 2018 adjusted diluted EPS of $6.21, reflecting a more typical effective tax rate of 23 percent for the year and no further asset sales. To summarize, compared to our adjusted EPS for 2018, our EPS estimate for 2019 assumes higher fees and lower G&A, offset by lower year-over-year termination fees, lower gains, a higher tax rate, and higher foreign exchange headwinds. We expect adjusted EBITDA will total roughly 3.62 to 3.72 billion, or 4 to 7 percent over 2018 levels. Our 2019 adjusted EBITDA will also face the headwinds from lower termination fees and foreign exchange. While we are hopeful we will sell additional assets in 2019, our guidance assumes no asset sales and no net expense from the data security incident. We remain disciplined in our approach to capital investment and share repurchase. We returned nearly $3.4 billion to shareholders through dividends and share repurchases through year-end 2018. This reflected the company's strong operating cash flow, the benefit of $650 million of asset recycling, including joint venture sales of two hotels, as well as loyalty program cash inflows. Our recent share repurchases have been modestly lower than we expected as we suspended share repurchases for a time while we worked through the data security incident and the loyalty accounting matter. Speaking of the loyalty program, it generated several hundred million dollars of cash in 2018, more than is typical in most years. This was in part due to a large one-time cash payment received from the credit card companies upon signing our co-branded credit card agreements. In 2019, we expect the loyalty program will likely be closer to cash flow neutral due to the timing of marketing and related costs associated with the launch of Marriott Bonvoy and higher redemptions. 2019 investment spending could total 500 to 700 million, including about 225 million in maintenance capex spending. We've already recycled nearly 1.9 billion of assets since closing the Starwood acquisition including 650 million in 2018. Thus far in 2019, we have repurchased 2.4 million shares for $300 million. For the full year, assuming no asset sales, we expect we will return at least 3 billion to shareholders through dividends and share repurchases. Our debt ratio on December 31st was within our targeted credit standard of 3 to 3.5 adjusted debt to combined adjusted EBITDAR. You will recall that our capital allocation strategy is built around our commitment to maintain a solid investment grade credit rating. We've targeted this rating in recognition of the value of financial flexibility in a cyclical business. We also strive to maintain the right balance between minimizing our cost of debt and having sufficient leverage to enhance returns. We know you're always eager for more information. We hope you can join us on March 18th, 2019 at the New York Marriott Marquis for our security analyst meeting where we will spend more time looking to our future opportunities. Please be sure to register for the conference with Investor Relations if you'll be coming. So that we can speak to as many of you as possible on today's call, we ask that you limit yourself to one question and one follow-up. We'll take your questions now.