Marriott International

Good afternoon and welcome to Merit International's first quarter 2019 earnings conference call. At this time, all participants have been placed in the listen-only mode. After today's prepared remarks, there will be a question and answer session. If you wish to ask a question at that time, simply press star, then the number one on your telephone keypad. I would now like to turn the call over to Arne Sorensen, President and Chief Executive Officer. Please go ahead, sir.

Good afternoon, everyone. Welcome to our first quarter 2019 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. First, 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 and 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 earlier today, along with our comments, are effective only today, May 10, 2019, and will not be updated as actual events unfold. In our discussion today, we will talk about results excluding merger-related costs and reimbursed revenues and related expenses. GAAP results appear on page A1 of the earnings release. but our remarks today will largely refer to the adjusted results that appear on the non-GAAP reconciliation pages. Of course, you can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks also on our website. Before proceeding to talk about our results, let me take a minute to talk about the announcement we made last week about my cancer diagnosis. As we mentioned, I have stage 2 pancreatic cancer. Thankfully, the medical team at Johns Hopkins has seen this many times before. They believe we have caught it early, that it is operable, and that the course of treatment is proven. I am grateful for all the messages of support from the investment community, as well as from Marriott's community of associates and business partners around the world. With the support of an extraordinary strong team of Marriott executives, we are going to soldier on. Now, last month we opened our 7,000th property, the 27-story St. Regis Hong Kong. After opening this landmark hotel, our development pipeline at quarter end totaled roughly 475,000 rooms compared to 463,000 rooms at the end of the first quarter 2018. Gross room openings totaled nearly 19,000 rooms in the first quarter compared to 15,000 rooms in the year-ago quarter. Net room openings were almost double. from the number from the prior year. Almost 216,000 rooms in our pipeline, or 45%, are already under construction, the largest number of under construction rooms in our industry. At our current pace of openings, our under construction pipeline represents the equivalent of two and a half years of embedded gross rooms growth. The remainder of our pipeline represents another two and a half years of growth. Our legacy Starwood brands account for roughly 30% of our development pipeline. Among our 17 luxury and upper upscale brands, the rooms pipeline for the Sheraton brand is second only in size to the Marriott brand. In the first quarter of 2019, we opened four new Sheraton hotels and signed three new Sheraton deals, including a new built 250-room Sheraton hotel in Bradenton, Florida. More than a quarter of Sheraton's existing portfolio is is under or has committed to renovation. Our limited service brands are growing rapidly. Globally, our limited service pipeline largely upscale brands, includes more than 285,000 rooms, nearly two and a half times the number of pipeline rooms in those brands five years ago. Outside North America, our limited service pipeline is now nearly three and a half times its size in 2014. We are growing these brands in markets around the world with a variety of approaches, from modular construction to urban high-rises to multi-brand hotel complexes. We are developing new prototype designs for Fairfield Inn and Town Place Suites to better suit smaller markets, and we continue to add development talent to make these deals happen because the growth opportunity is meaningful. We see evidence that owners and franchisees prefer our brands. According to STR, more than one in three rooms that are under construction in the U.S. today will fly one of our flags. And while our existing distribution globally is more modest, still one in five hotels under construction globally will be flagged with a Marriott brand. We continue to expect to see net rooms growth total approximately 5.5% in 2019, with rooms deletions of about one to one and a half percent. we deleted 3,000 rooms in the first quarter of 2019. I visited several markets in China in late March. The big news there is Marriott Bonvoy and Alibaba. Less than two years ago, we formed a new joint venture with Alibaba to improve service and sales for Chinese guests. In the first quarter of 2019, property revenue from our newly designed Alibaba channel more than tripled year over year, while the level of new Marriott Bonvoy enrollments in China doubled over the prior year quarter. We are excited to welcome these new members to our hotels around the world. Marriott Bonvoy offers guests the largest and most compelling collection of hotels and experiences. At the end of the first quarter, membership at Marriott Bonvoy reached nearly 130 million worldwide, up roughly 5 million from year end 2018. Approximately 40% of the new signups came from China. Worldwide loyalty redemption revenue at our hotels rose at a double digit rate in the first quarter. We recently announced our home rental initiative. In a survey we conducted in 2018, we found that over one quarter of our loyalty program members who responded had used home rentals in the prior 12 months. During our home rental pilot in 2018, which was available in a few European cities, nearly 90% of our guests were Marriott Bonvoy members, and over 80% were traveling for leisure. The average length of stay in our pilot was more than triple that for the typical hotel guest. With a successful European pilot, we decided to launch Homes and Villas by Marriott International, offering guests access to a growing number of premium and luxury homes and villas in over 100 destinations across the US, Europe, the Caribbean, and Latin America. Our commitment to providing travelers with full residences including kitchens and other amenities, guided our selection of homes. Our desire to complement our core hotel offerings similarly influenced our selection of markets. We will work with select property management companies who are already managing these homes and estimate roughly 40% of these markets we are launching in are new to Marriott. We believe our highly curated home rental product fully integrated into our loyalty program for earning and redeeming points, will enhance Marriott Bonvoy member travel experiences and increase the value of our loyalty program. Home rentals should enable our loyalty members to stay with Marriott throughout any travel experience, allow us to leverage our strong brands and expertise in an evolving competitive landscape, and ultimately drive a greater share of wallet for our portfolio. In April, we signed a new multi-year agreement with Expedia, which should enhance our leisure packaging platform, Vacations by Marriott, and leverage Expedia's technology for a new business opportunity to be launched in the fourth quarter of 2019. With the changes in the agreement, we expect our owners and franchisees will see improved overall economics from the relationship. In the first quarter, worldwide house profit for comparable company-operated hotels increased an impressive 1.6%. While the integration is largely complete, our hotels continue to benefit from synergies associated with the Starwood merger. On the revenue side, we reduced discounting at legacy Starwood hotels in the first quarter and across our system increased the proportion of bookings coming from our digital channels. Direct digital revenue bookings at our hotels globally increased over 20% in the quarter and now represent over 30% of room nights. Revenues booked on our mobile app increased more than 70% year over year, while our revenues booked on OTAs worldwide declined 4%. Yielding OTA business helped hotel profitability, even as it likely depressed our first quarter RevPAR growth by a few tenths of a percentage point. Our global RevPAR index rose 100 basis points in the quarter. Let's talk briefly about the regions. System-wide constant dollar RevPAR in our Asia Pacific region increased 3% in the quarter. RevPAR growth was strong in India, Japan, Indonesia, and in the major markets in Greater China, but was somewhat offset by weaker results in South Korea, Thailand, and the Hainan Island market in China. In the second quarter, we expect mid-single-digit RevPAR growth in the region, with fewer headwinds from South Korea and Hainan Island. Future RevPAR performance will depend somewhat on the economic impact of ongoing U.S.-China trade negotiations, particularly in markets that rely on manufacturing. While we await the outcome of those negotiations, our forecast assumes Asia-Pacific RevPAR will increase at a mid-single-digit rate for the full year 2019. In the Middle East and Africa, system-wide constant dollar RevPAR declined 4% year-over-year, Revpar growth in the UAE declined 8% on flat demand, as supply growth in Dubai increased by 11%. At the same time, Revpar in Cairo and the Red Sea resorts rose sharply on strong Eastern European demand. For the second quarter, we expect MEA Revpar will again decline, albeit less significantly than in the first quarter. Significant supply growth in Dubai is likely to persist. but we should see stronger demand in the holy cities in Saudi Arabia. Ramadan started May 6th, 10 days earlier than last year, which should push some business travel in the region from second quarter to later in the year. For the full year, we expect RevPAR will decline at a low single-digit rate in the MEA region. In Europe, system-wide constant dollar RevPAR rose 2% in the first quarter. U.S. travel to many markets in Europe was strong, with considerable numbers of loyalty redemptions. RevPAR in London increased by 4% year over year. At the same time, Brexit uncertainty kept many UK travelers at home, constraining growth in many warm weather European destinations. Travelers avoided center city Paris due to the continued yellow vest demonstrations. With the Biennale in Venice beginning this month and strong US demand expected to continue in most markets, we believe RevPAR in Europe will increase at a mid single digit rate in the second quarter and for the full year. In the Caribbean and Latin America regions, system-wide constant dollar RevPAR increased nearly 4% in the quarter. In the Caribbean, RevPAR rose 8% on strong demand as several U.S. airlines increased lift to the islands. RevPAR growth in Brazil was very strong on record demand during Carnival in Rio de Janeiro, while continued travel warnings took RevPAR in Mexico down 3%. Looking ahead, we expect RevPAR growth in Kayla will moderate a bit, increasing at a low single-digit rate in the second quarter and full year as competitor hotels reopen in the Caribbean. System-wide, RevPAR in North America rose nearly 1% in the first quarter. RevPAR was constrained by the partial federal government shutdown in January, tough comparisons to hurricane recovery in Florida and Houston, and the lingering impact from the fourth-quarter labor strike in Hawaii. Excluding these factors, we estimate our system-wide REVPAR growth would have been roughly 70 basis points better than the reported number. Our REVPAR index in the U.S. increased nearly 100 basis points in the first quarter. Group REVPAR across North America increased 3% on strong citywide demand in Atlanta and San Francisco and the favorable impact of the timing of Easter. While Easter timing will present a headwind for group business in the second quarter, The negative hurricane and government shutdown impact should be behind us. Our group revenue booking pace for the full year 2019 is flat. New bookings for 2019 increased in the first quarter and surged in April. So we expect group rev par will be higher for the year. First quarter transient rev par from our largest 300 corporate accounts in North America rose 3%, but overall transient rev par was flattish in the first quarter. largely due to weak demand in March. Given this, we expect North American RevPAR will increase by one to 2% in the second quarter and one to 3% for the full year. Marriott is a dynamic company. We've created a powerful lodging portfolio, managing and franchising across the highest value tiers. With the Starwood acquisition, we recognize that we are in a unique position to truly delight sophisticated frequent travelers with an unparalleled loyalty program and a wide range of travel experiences. The more our guests are engaged in our loyalty program, the more profitable business opportunities we can pursue, even outside the traditional lodging space, such as credit card and residential branding. This year, we expect to earn $440 to $450 million in credit card and residential branding fees. Incidentally, credit card sign-ups rose 20% in the first quarter, year over year. In addition to unit additions and RevPAR growth, such opportunities should drive higher returns to our shareholders, even as we retain our asset-light approach to business. Before turning the call over to Leni Oberg, let me take a moment to recognize our extraordinary investor relations leader, Laura Pau. We announced this morning that Laura will retire from Marriott at year end. Laura Pau's nearly 40 years at Marriott have literally included our entire history. of modern-day investor relations. When she began, Marriott, like many other companies, did not even do quarterly earnings calls such as this one. She has not only built this discipline for us, she has been recognized by you as one of the best investor relations professionals in the entire public company universe, not just the hospitality space. She has been a partner, a mentor, and a friend to me for over 20 years of involvement in investor relations, All of us are grateful for her service and expertise. Thank you, Laura. Now, for some more thoughts about the first quarter performance and our outlook, let me turn things over to Lene.

Thank you, Arnie. I, too, would like to express my deep appreciation for Laura's countless contributions and dedication to our company. Her strategic insights and determination to get the right answers have no doubt contributed meaningfully to our shareholder value over the years. While I will personally miss her a great deal, I know you will all join me in wishing her a very happy retirement and celebrating her accomplishments during the rest of this year. Now on to the results. For the first quarter of 2019, adjusted diluted earnings per share totaled $1.41 compared to $1.34 in the year-ago quarter. This was eight cents over the midpoint of our guidance of $1.30 to $1.35. largely due to better than expected windfall tax benefits and other favorable discrete items on the tax line. Recall that in the prior year quarter, adjusted EPS included 11 cents from gains on hotel sales. Gross fee revenues totaled $895 million, a 6% increase year over year, largely due to unit growth and higher incentive fees and credit card branding fees. Incentive fees increased 5% with good margin performance and strength at our Florida and California resorts during their strong seasons. Credit card fees alone totaled $93 million, up 8%, while other non-property fees totaled $39 million. With a stronger U.S. dollar, first quarter fee revenue reflected nearly $7 million of year-over-year unfavorable impact from foreign exchange net of hedges. Owned, leased, and other revenue net of expenses totaled $50 million in the first quarter, a $20 million decline from the prior year due to $21 million of lower termination fees. General and administrative expenses totaled $222 million compared to $247 million in the prior year quarter. G&A in the first quarter of 2018 included a $35 million expense for a supplementary retirement savings plan contribution. First quarter adjusted EBITDA rose 7% year over year to $821 million, consistent with our 6% to 10% growth guidance. While not included in adjusted EBITDA, expenses associated with last year's data security incident totaled $44 million in the first quarter, netted against $46 million of insurance recovery. We expect gross fee revenue for the second quarter will total $990 million to $1.01 billion a 4 to 6 percent increase over the prior year. Our second quarter fee revenue estimate assumes higher credit card branding fees, but modestly lower incentive fees due to property renovations and unfavorable foreign exchange. We expect owned lease and other revenue net of direct expenses will total roughly 80 million in the second quarter, while G&A should be 225 to 230 million. Our guidance assumes no further asset sales in 2019 beyond those that have already been completed. These assumptions yield $1.52 to $1.58 diluted earnings per share for the second quarter. Recall that the second quarter last year included 26 cents in gains from the sale of hotels. Adjusted EBITDA in the second quarter should total $940 to $965 million flat to up three percent over the prior year. For the full year 2019, we believe gross fee revenue could increase six to eight percent over the prior year with about 15 million over our last guidance due to stronger expected incentive fees. We believe incentive fees will increase at a mid single digit rate for the year and continue to expect our credit card and residential branding fees will total 440 to $450 million in 2019. Last year, our gross fees were constrained by strikes in several markets in the fourth quarter. Owned, leased, and other revenue, net of direct expense, should total roughly $285 to $295 million for the year, a roughly $40 million decline year over year. Termination fees totaled $69 million in 2018, and we expect such fees will total 25 to 30 million in 2019, a bit improved from our prior forecast for this year. Results from our Marriott Homes and Villas business will be included in the owned, leased, and other line and are expected to be immaterial. G&A should total 920 to 930 million for 2019, about 10 million higher than our last estimate due to higher bad debt expense and admin spending. These assumptions yield $5.97 to $6.19 diluted earnings per share for 2019. Recall that the prior year included 65 cents in gains from the sale of owned and joint venture assets. Adjusted EBITDA should total $3.615 billion to $3.715 billion, 4% to 7% over 2018 adjusted EBITDA, an estimate that is unchanged from last quarter. As we discussed last quarter, our 2019 guidance does not include merger-related costs and the timing impact of reimbursed revenues and expenses. Investment spending for the year could total 600 to 800 million, including roughly 225 million of maintenance spending. The remainder includes capital expenditures, loan advances, equity investments, and contract investments. Roughly a quarter of our total investment spending relates to systems initiatives that should be reimbursed over time. We repurchased nearly 8 million shares from January 1 through May 8 for nearly $1.2 billion and continue to expect to return at least $3 billion to shareholders through share repurchases and dividends in 2019. This assumes no further asset sales during the year. Our balance sheet remains in great shape. At March 31st, our debt ratio was within our targeted credit standard of 3 to 3.5 times adjusted debt to EBITDAR. We have modeled our 2019 income statement and cash flow forecast at a 3.3 times target. Now, Laura would like to add a few remarks.