Marriott International

Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marriott International's second quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Arne Sorensen. Please go ahead.

Good morning, everyone. Welcome to our second 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, 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 today, along with our comments, are effective only today, August 6, 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 revenue 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 websites. Before we move to specifics about the quarter, let me make a few observations about our results. Global economic growth is clearly slower than we anticipated when the year began. Demand growth for the U.S. lodging industry, as reported by STR, reflected the weaker U.S. economy, with lodging demand in the quarter up less than 2% year over year, about 50 basis points lower than the past couple of quarters. Combined with the relatively higher supply growth in the largest 25 U.S. markets, STR's RevPAR growth in these markets increased only 0.2 percent in the quarter, compared to plus 1.6 percent in secondary and tertiary markets. Marriott's North American system-wide RevPAR rose 0.7 percent in the quarter, and our system-wide RevPAR index in North America increased 100 basis points, with improvement across all luxury, premium, and select service portfolios. Despite the business climate, our North American sales team had a solid quarter. Gross group revenue bookings made in the second quarter for all future periods increased 6%, and booking pace for the next 12 months is up at a low single-digit rate, largely related to strong corporate demand. New group bookings at our legacy Starwood hotels were particularly strong in the quarter, as these hotels benefited from the completed integration of our sales organizations that occurred in early 2018. North American group sales were even stronger in July. On the transient side, we have seen meaningful and steady improvement in legacy Starwood Hotel performance since the cutover to Marriott Revenue Management Systems in the fourth quarter of 2018. We believe there is additional Revpar growth upside as we further fine-tune performance of these brands. With continuing trade disputes, Revpar in Greater China rose 2.6% in the quarter, reflecting moderating RevPAR growth in manufacturing markets like Shenzhen and Tianjin and in corporate destinations like Shanghai. Political demonstrations in Hong Kong also constrained RevPAR growth. At the same time, our RevPAR index in Greater China rose sharply again in the quarter. Elsewhere in Asia, demand for our hotels in Japan and India continued to show robust trends, with RevPAR up nearly 7% in the quarter. In Europe, transient room nights booked by U.S. travelers rose 8% as tourists enjoyed the FIFA Women's World Cup and the Biennale in Venice. By the way, congratulations to Megan Rapinoe and the entire U.S. women's national team on an impressive tournament. Europe also attracted a greater share of the strong outbound business from China, as our Chinese guests are enjoying more personalized hospitality through our LiYu service program. Room nights sold to Chinese guests traveling to Europe increased 34% in the quarter. Our hotels in Malaysia, Egypt, and Mexico also saw significant increases in Chinese demand. Globally, comparable hotel rev par on a constant dollar basis increased 1.2% in the second quarter, and global rev par index increased by more than 100 basis points, our strongest performance since our acquisition of Starwood. We remain focused on delivering leading profitability for owners and franchisees. Labor and benefit costs are rising in many markets, even as RevPAR growth moderates. Despite this, in the second quarter, we maintained flattish house profit margins across our company-operated system as we leveraged our scale and increased productivity. In addition to significant savings in procurement and lower loyalty charges, Our hotels benefited from lower commission rates on group intermediaries and a growing proportion of lower cost direct transient bookings. System-wide direct digital hotel revenue increased over 20% in the second quarter and now represent nearly one-third of property revenue globally, 38% of transient revenue alone. In China, our successful Alibaba joint venture helped to increase our direct digital revenue bookings in that market by 36% in the second quarter. Property revenues booked on OTAs worldwide declined 2% in the second quarter. Our new program services fund structure is also improving margins at our hotels. Launched at the beginning of this year, owners and franchisees are now paying a single amount that covers roughly 20 programs and services, including reservations, sales and marketing, and technology support. This simplified pricing is easier to understand and forecast, and we expect it will generate savings for the vast majority of our owners. This focus on owner returns and transparency is helping drive our share of new hotel development. Our global system totaled roughly 1.35 million rooms at the end of the second quarter and our worldwide pipeline reached a record 487,000 rooms. nearly 5% higher than a year ago and 3% higher than last quarter. Owners and franchisees are continuing to sign new deals at a rapid clip. In the second quarter, we added 29,000 rooms to our pipeline and opened more than 16,000 rooms. Over 20% of room openings in the quarter were conversions from competitor brands. At our expected 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 three and a half years of growth. In 2019, we expect our worldwide rooms distribution will increase by roughly five to five and a half percent, net of one to one and a half percent room deletions, a bit more modest than our prior guidance, reflecting opening delays in North America and the Middle East. We have not seen project cancellations for 2019 openings. Over the past few years, lengthened construction periods reflect labor shortages, a larger proportion of urban properties, and an increasing number of new projects using multiple brands. While construction delays have moderated our near-term rooms growth in 2019, our under-construction pipeline totaled 213,000 rooms at quarter end. Given the significant depth of our under-construction pipeline, we expect openings in 2020 will accelerate meaningfully. We continue to expand our lead in luxury lodging. We have over 700 luxury properties with 175,000 luxury rooms open or under development, nearly double the luxury portfolio of our next leading competitor. 60% of our 200 luxury pipeline properties are already under construction. Thus far in 2019, we have opened 15 luxury properties around the world and expect to open another 15 luxury projects by the end of the year. Worldwide leisure transient demand was solid in the second quarter, and we believe leisure offers a meaningful and incremental growth opportunity. Today, Marriott Bonvoy tours and activities offer 200,000 leisure experiences in 1,000 global destinations, and our Homes and Villas by Marriott International, which launched in May, now has nearly 2,500 homes in the Americas and Europe. In early 2020, We expect our Ritz-Carlton yacht will set sail on its first cruise from Fort Lauderdale to Barbados. Cruise bookings are running ahead of expectations. And in addition, yesterday we announced our intention to grow in the all-inclusive space after signing new management agreements for five new-build, all-inclusive resorts located in Mexico and the Dominican Republic. These projects will be added to our first all-inclusive project in Costa Rica, which joined our portfolio when we acquired Starwood. The all-inclusive market is growing rapidly and our Marriott Bonvoy members would like to see us in this space. We expect to expand our all-inclusive portfolio in popular leisure destinations in the Americas, Europe, and Southeast Asia with both new build projects and property conversions, leveraging our well-established full-service and luxury brands. Marriott Bonvoy is a key element of our leisure strategy. Marriott Bonvoy membership totaled roughly $133 million at quarter end, with strong signups in the Asia-Pacific region in the quarter. Year-to-date member occupancy penetration increased 160 basis points, and in the second quarter alone, bookings on the new Marriott Bonvoy app rose 70%. We are bullish about Marriott's future. We continue to leverage our scale for the benefit of our guests, owners, franchisees, and shareholders. Our strong brands are getting better. Owners and franchisees continue to add hotels to our already broad distribution. And most important, our culture focused on people remains front and center. Before I turn the call over to Leni to talk about our second quarter performance and outlook, let me give you a quick health update. I have almost completed chemo treatments, and they have gone well. The doctors are pleased with my progress so far. I still have radiation and surgery ahead, but so far everything is on schedule. I appreciate all the kind words and support from so many of you. Now, Lene, for the second quarter.

Thank you, Arnie. For the second quarter of 2019, adjusted diluted earnings per share totaled $1.56 compared to $1.73 in the year-ago quarter. This was slightly over the midpoint of our guidance of $1.52 to $1.58, despite global REVPAR growth below the midpoint of our guidance. Recall that in the 2018 second quarter, adjusted EPS included 26 cents from gains on asset sales. Gross fee revenues totaled nearly a billion in the quarter, up 5 percent over the prior year, largely due to RevPAR growth, unit growth, and higher branding fees. Credit card fees totaled 104 million, up 12 percent, driven by new credit card signups and higher spend. With a stronger U.S. dollar, second quarter fee revenue reflected $7 million of year-over-year unfavorable impact from foreign exchange net of hedges. Owned lease and other revenue net of expenses totaled $87 million in the second quarter, a $2 million decline from the prior year largely due to the net impact of sold hotels and renovations. Termination fees totaled $11 million in the quarter compared to $5 million in the prior year. Owned, leased, and other profits were stronger than expected in the quarter due to timing of non-operating expenses. Second quarter adjusted EBITDA totaled 952 million, consistent with our guidance. Our year-over-year growth in adjusted EBITDA was constrained by 6 million in lower profits from hotels under renovation and 8 million in unfavorable foreign exchange impact net of hedges. While not included in adjusted EBITDA, We recorded a $126 million non-tax deductible accrual in the second quarter for the fine proposed by the UK Information Commissioner's Office related to the data security incident we disclosed last year. We have the right to respond before the amount of the fine is finally determined, and as we have said, we intend to respond and vigorously defend our position. Looking ahead, We expect our North American REVPAR will increase 1 to 2 percent in both the third and fourth quarters, albeit at the lower end of that range in the fourth quarter. The third quarter should be helped by the impact of the shifting Jewish holidays and strong group business on the books, while the fourth quarter should be helped by easier comparisons to last year's strikes. In the Asia-Pacific region, we expect low single-digit REVPAR growth in the second half, reflecting cautious corporate demand in China and continued political demonstrations in Hong Kong. At the same time, we also believe there could be demand upside in India and Japan, where we have significant distribution. We expect rev-par growth in the Middle East and Africa region will be flattish in the third quarter, helped by the timing of Ramadan, and modestly lower in the fourth quarter. For Europe, we expect U.S. travel to the region will remain strong in the second half, but tough comps to last year's World Cup in Russia will likely hold Europe REVPAR growth to a low to mid single-digit rate in the second half. In the Caribbean and Latin America region, we expect REVPAR will grow at a low single-digit rate in the second half on easier comparisons in Mexico and strong ongoing leisure demand in the Caribbean. In summary, we expect worldwide system-wide REVPAR will increase 1 to 2 percent in both the third and fourth quarters, yielding 1 to 2 percent RevPAR growth for the full year. For the full year 2019, we believe gross fee revenue will total $3.82 to $3.85 billion, up 5 to 6 percent over the prior year. This is $50 million lower than our last guidance at the midpoint due to a modestly more conservative RevPAR outlook, negative foreign exchange impact, and fine-tuning of our credit card branding fee estimate. We believe credit card fees could total $400 to $410 million for the year. Incentive fees could be flattish for the full year, reflecting the impact of hotel renovations, modest RevPAR growth at full-service hotels in the U.S. and China, and unfavorable foreign exchange. Owned, leased, and other revenue net of direct expense could total roughly $295 million for the year reflecting roughly 35 million in lower termination fees compared to 2018. G&A should total 920 to 930 million for 2019, consistent with our prior guidance. These assumptions yield $5.97 to $6.06 diluted earnings per share for 2019. Recall that the full year 2018 included 65 cents in gains from the sale of owned and joint venture assets. Adjusted EBITDA in 2019 should total roughly 3.586 to 3.626 billion, 3 to 4% increase over 2018 adjusted EBITDA. Our year-over-year growth rate in adjusted EBITDA reflects unit growth, modest growth in REVPAR, and higher branding fees. At the same time, we estimate lower termination fees and negative foreign exchange impact combined create more than $50 million of headwinds, depressing our full-year adjusted EBITDA growth rate by more than 100 basis points. Our press release outlines our earnings expectations for the third and fourth quarters. Third-quarter incentive fees will likely decline due to a tough comparison to last year's World Cup and continued modest REVPAR growth in the largest U.S. markets. We also expect a decline in residential branding fees in the third quarter. In contrast, fourth quarter incentive fees should increase, benefiting from easy comparisons to last year's strikes in North America and international unit growth, and branding fees should move higher. As always, our 2019 guidance does not include merger-related costs or reimbursed revenues and expenses. Total investment spending for the year could total $650 to $750 million, including roughly $225 million of maintenance spending and $200 to $250 million that should be reimbursed or recycled over time. Our renovation of the Phoenix Sheraton downtown is well underway and includes new designs for the hotel's public space and rooms and should be completed by early 2020. We have already begun marketing the hotel subject to a long-term management agreement. Marriott Bonvoy point redemptions are running ahead of expectations in 2019 as members explore the new locations and experiences offered by the significantly improved program. As a result, we expect the net cash impact of the loyalty program will be a few hundred million dollars more negative in 2019 than we expected at the beginning of the year. but should improve significantly in 2020. We repurchased more than 12 million shares from January 1 through August 2 for $1.6 billion, and we expect cash return to shareholders through share repurchases and dividends will approach $3 billion in 2019. This assumes no asset sales in 2019 beyond those already completed and reflects our current EBITDA guidance. Our balance sheet remains in great shape. At June 30, our debt ratio was within our targeted credit standard of 3 to 3.5 times adjusted debt to adjusted EBITDAR. So, let's answer your questions. So that we can speak with as many of you as possible, we ask that you limit yourself to one question and one follow-up. We'll take your questions now.