Marriott International

Ladies and gentlemen, thank you for standing by, and welcome to Marriott International's third quarter 2019 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. Lastly, if you should require operator assistance, please press star zero. Thank you. I'll now turn the call over to Arne Sorensen, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone. Welcome to our third quarter 2019 earnings conference call. Joining me today are Leni Oberg, Executive Vice President and Chief Financial Officer, Laura Paugh, Senior Vice President, Investment Relations, and Betsy Dahm, Senior Director, Investor Relations. I should note 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 a press release that we issued last night along with our comments today, are effective only today, November 5, 2019, and will not be updated as actual events unfold. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks at www.marriott.com slash investor. So let's get started. We were pleased with our results in the third quarter. Our global system-wide REVPAR rose 1.5%, consistent with our guidance. Our global RevPAR index increased 210 basis points in the quarter, with strength in the U.S., Asia Pacific, and the Caribbean and Latin America. In the U.S. alone, RevPAR index increased nearly 200 basis points in the quarter, with U.S. transient index up 250 basis points. Marriott Bonvoy is on a roll. Global room revenue for Marriott Bonvoy members is up 12% year-to-date. Over the last nine months, members contributed 52% of system-wide room nights, a 320 basis point increase year-over-year. In the U.S. alone, members represented 58% of booked room nights in the nine months. Year-to-date loyalty point redemptions are up over 20%, driving better results at resorts and leisure destinations around the world. Social media feedback about the program has become decidedly favorable. In a recent survey of Bonvoy members, by an eight-to-one margin, respondents said they prefer the new Marriott Bonvoy loyalty program over either Marriott Rewards or SVG. Over the last nine months, Marriott Bonvoy membership increased by 12 million members to reach 137 million members, with nearly 40% of that increase coming from China, including a meaningful contribution from our Alibaba joint venture. Earlier this year, we launched Homes and Villas by Marriott International, our home rental business, with a growing number of premium homes and villas. Today, we offer 5,000 homes in 190 markets across the US, Europe, and the Caribbean and Latin America. In the third quarter, over 95% of our home rentals were booked by Marriott Envoy members, and nearly 30% of the home rentals were paid for with point redemptions. In another move popular with Bonvoy members, we recently announced our entry into the all-inclusive hotel business. After signing new management agreements for five new-build, all-inclusive resorts located in Mexico and the Dominican Republic, last month we announced our offer to acquire Elegant Hotels, which owns and operates seven hotels in Barbados, which would jumpstart our all-inclusive offering. We expect this acquisition will be complete by year-end 2019, subject to approval by elegant shareholders and satisfaction of other conditions. Our guests are increasingly booking online. Our direct digital channels leverage the popularity of Marriott Envoy and offer the lowest cost per reservation. Those channels, Marriott.com and Marriott Mobile, accounted for 32% of our room nights booked in the third quarter, over 400 basis points higher year-over-year. Also in the quarter, the percentage of room nights booked through OTAs declined nearly 100 basis points. Incidentally, earlier this year, we signed new agreements with Booking.com and Expedia, which we expect will result in better economics for our owners and give us enhanced control over how our products are presented by third-party sites. Our sales organization had a great quarter. For North America, new group business booked in the quarter for comparable hotels in all future periods increased 6% year over year. New revenue bookings made in the third quarter for 2020 increased 6% and new revenue bookings for 2021 rose 10%. We have opened many of our group sales offices during evenings and weekends to serve our customers at their convenience and to take advantage of the strong demand for our products. While our booking pace is down modestly for the fourth quarter 2019, Due to the timing of holidays, booking pace for comparable hotels for 2020 is up at a mid-single-digit rate year-over-year. About two-thirds of the group business expected for the year is already booked. In the third quarter, we opened nearly 18,000 rooms, more than any competitor worldwide. Our development pipeline increased to a record 495,000 rooms, 5% higher than the year-ago quarter. including 214,000 rooms under construction. Nearly 40% of the rooms in our pipeline are high-value upper upscale and luxury rooms in high-rev R markets. In 2019, we expect our room count will increase 5% to 5.25% net, reflecting increasing construction delays offset by lower-than-expected room deletions. For 2020, we expect similar net rooms growth. We continue to experience construction delays in North America, particularly in the top 25 markets, as well as in the Middle East and Europe. Permitting issues are also contributing to groundbreaking delays which impact openings for 2020. But signings are strong. In fact, 2019 room signings are approaching record 2018 levels. The vast majority of 2020 openings are already under construction. So let's talk about 2020 REVPAR growth. Estimates for U.S. GDP growth point to a slower pace of economic growth in 2020, with lodging supply growth continuing at about 2%. This implies continuing moderating rev par growth for the U.S. industry. At the same time, as I mentioned, our group revenue on the books in North America is quite strong, with booking pays up at a mid-single-digit rate. We are negotiating 2020 special corporate rates right now, And while only a few negotiations are complete, we expect 2020 special corporate rates will rise at a low single-digit rate. Recently announced U.S. government per diems weighted by our market distribution are set to rise 1.4% for the government's upcoming fiscal year. Today we are seeing good demand from both business and leisure transient customers reflecting preference for our brands and our loyalty program. But given the meaningful unknowns in the economy, We are estimating North America RevPAR growth in 2020 will increase around the midpoint of our 0 to 2% global RevPAR guide. For our Asia Pacific region, we are modeling 2020 RevPAR growth at a low single-digit rate, reflecting strong growth in Beijing, South China markets, India, and Japan, double-digit growth in room supply in Indonesia, Malaysia and the Maldives may constrain Revpar growth in those countries next year. Recent events in Hong Kong make that market quite difficult to forecast. Our Hong Kong Revpar declined 27% in the third quarter, albeit with a meaningful improvement in Revpar index as we outperform the industry. We expect Revpar at our Hong Kong hotels will decline roughly 40% in the fourth quarter. For the full year 2020, we are assuming a mid-single-digit revpar decline in the city. Obviously, any estimate for Hong Kong revpar performance is somewhat speculative. So while we hope comparisons will ease in the second half of 2020, we are only making a modeling assumption. For next year, we expect Europe revpar will grow at a low single-digit rate, constrained by new supply in Germany and the U.K. REVPAR in the Middle East and Africa should be flat to up slightly in 2020 with continued supply growth in the Middle East and improving demand in Africa. In the Caribbean and Latin America region, REVPAR should increase at a low single-digit rate next year, reflecting more modest economic growth and political uncertainty in some markets. At the same time, the region will benefit from newly comped luxury hotels in Panama and Costa Rica. As you know, our business model is focused on managing and franchising the finest lodging brands. Our past results have demonstrated how this allowed us to perform well throughout economic cycles. Investors favor our business model because of this stability, but we are much more than this. We have the deepest hotel brand offering and broadest property distribution in the world, which contributes to our most valuable loyalty program. Worldwide loyalty penetration has been increasing all year, and we believe there is further upside. Owners benefit from our strong RevPAR premiums and great economies of scale, particularly since our acquisition of Starwood. In North America, we have faced slowing industry RevPAR growth and rising wages for some time, yet savings from our greater scale and implementation of best practices since 2016 have contributed 220 basis points of house profit margin lift, and our managed hotels in North America. Today, the house profit margins for the Marriott Hotels brand in North America, for example, is 150 basis points higher than at the last cyclical peak in 2007. Strong economic results for owners contribute to owner preference for our brands, increasing market share, and our growing pipeline. While we have a 7% share of worldwide open rooms, We have a nearly 20% share of worldwide rooms under construction. We look for investment opportunities to leverage our distribution and our loyalty program, enhance our brand, and drive shareholder value. We've announced two such opportunities just recently. Our acquisition of Elegant Hotels, once complete, will firmly establish our all-inclusive presence, and our purchase and reinvention of the W Hotel Union Square should enhance the value of the W Hotel brand. Our successful sale of the St. Regis New York and the 10 other hotels we've sold over the past three years demonstrates strong owner demand for our brands and our commitment to our management and franchise strategy. In total, we've monetized over $2.2 billion of assets since the acquisition of Starwoods. To be sure, roughly 7% of our total fees are incentive fees from North American hotels. These incentive fees are subject to an owner priority return and admittedly vary more with RevPar than base and franchise fees, but the downside is limited. Further, the long-term value to shareholders from these properties is meaningful, as these are among our most prized and valuable hotels to our guests. As you can tell, I'm feeling very good about Marriott's prospects today and appreciate the company's compelling value. On a more personal note, I'm also appreciative for your many kind words of support. I've completed chemo, radiation, and immunotherapy over the last six months. Next up is surgery. I've been working throughout and am still getting in my morning runs. I'm sorry I'll have to miss our upcoming holiday party in New York, but expect to be with you on the next earnings call in February and look forward to seeing many of you in person in 2020. Before handling this over to Leni, let me pause a moment to recognize Laura Paugh. Sadly, this is her last quarterly earnings call. Laura was by my side for my first quarterly earnings call in October of 1998. She was already a veteran IR professional then and she has only gotten better and better in the 21 years we have sat next to each other for these calls. Laura, thank you. If I may be so bold, thank you for all of us at Marriott and for all of us in the industry. who analyze our stock and the other securities in the hospitality industry. You're simply the best. For more about the third quarter and our outlook, here's Lainey.

Thank you, Arnie. Our third quarter financial performance was solid. Adjusted diluted earnings per share totaled $1.47. While REF PAR growth and individual P&L line items were quite close to guidance, we were about two cents shy of the midpoint. Roughly a penny came from slightly higher than expected tax rate, and a bit over a penny came from weaker than expected hotel performance in Hong Kong. Global system-wide constant dollar RevPar rose 1.5% in the third quarter year over year. For North America alone, RevPar increased 1.3%. RevPar growth exceeded our expectations in D.C., Houston, and Hawaii on strong citywide and transient demand. On the other hand, New York City RevPAR continues to cope with both higher hotel supply and lower demand. RevPAR growth in Orlando and South Florida was constrained by Jeff's concern about Hurricane Dorian. RevPAR for our comparable hotels in the largest 25 markets increased 0.9% in the quarter. For group business in North America, comparable hotel RevPAR rose 2%. Group cancellations remained modest, and attendance at group meetings was strong. Transient REVPAR was up slightly year over year, reflecting steady corporate demand and stronger demand from leisure travelers. In the Asia-Pacific region, system-wide constant dollar REVPAR increased nearly 2% in the third quarter, constrained by events in Hong Kong and trade war impact on tertiary markets in China. Excluding Hong Kong, Respar in the Asia Pacific region increased nearly 3%. Larger markets in China were strong, particularly Beijing, Shanghai, and Guangzhou. Leisure demand for our hotels in China is growing, and outbound room nights sold to mainland Chinese travelers in the region increased by 9% in the quarter, with large numbers traveling to Japan, Thailand, South Korea, and Malaysia. In Europe, system-wide constant dollar rev par rose 2% in the third quarter compared to the prior year, 4%, excluding the impact of the World Cup in Russia last year. Europe continues to benefit from the strong dollar. Room nights sold to U.S. travelers increased 13% in the quarter, with particularly strong loyalty redemption demand in Italy, Greece, and Spain. London posted another strong quarter, with rev par up 6%. on strong US and Middle Eastern demand. In the Middle East and Africa region, system-wide constant dollar Revpar rose 2% in the third quarter with strong results in Saudi Arabia, Qatar, and Egypt, offset by weak performance in Dubai. In our Caribbean and Latin America region, Revpar rose 3% in the quarter with strong performance in Brazil. Our hotels in the Caribbean benefited from strong leisure demand and Mexico showed better results than in recent quarters. Gross fee revenues totaled $955 million in the third quarter, consistent with our guidance, and increased 2% over the prior year, reflecting unit growth and higher RESPAR. Residential branding fees declined $15 million, reflecting the uneven timing of residential projects from year to year. We continue to have a deep pipeline of residential projects under development. While her total fees met our expectations in the quarter, incentive fees declined a bit more than we expected, largely due to REVPAR and margin weakness in the Asia-Pacific region. Arne discussed third quarter REVPAR performance to the Hong Kong market. Total fees from our Hong Kong hotels declined 3 million during the third quarter compared to the prior year, and we estimate such fees could decline by 5 million in the fourth quarter. Currently, for the full year 2019, we expect our dozen hotels in Hong Kong will contribute roughly $30 million in total fees. Owned lease and other revenue net of expenses totaled $67 million in the third quarter, a $15 million decline from the prior year, largely due to lower termination fees. Results also reflected lower results in New York City and the impact of renovation at the Sheridan Grand Phoenix. Termination fees totaled $11 million in the quarter compared to $23 million in the prior year. Our adjusted EBITDA in the third quarter was flat year-over-year, reflecting $15 million lower residential branding fees, $12 million lower termination fees, and $17 million lower incentive fees offset by rooms and RESPAR growth. Our third quarter adjusted tax rate was a bit higher than expected due to a slightly different geographic mix of business. Compared to the prior year, our 2019 third quarter adjusted tax provision was higher, mainly due to prior year tax benefits from dispositions. Let's talk about the fourth quarter. For North America, we expect fourth quarter REVPAR will increase by zero to 1% year over year. Shifting holidays and other calendar anomalies should constrain revpar growth in the fourth quarter, but we should also benefit from favorable comparisons to last year's strikes. For the Asia-Pacific region, many economists expect China's economy will continue to weaken in the fourth quarter, which could further pressure revpar in China's secondary markets. With ongoing weakness in Hong Kong, overall Asia-Pacific revpar in the fourth quarter could be flat to down modestly. Excluding Hong Kong, we expect REVPAR in the Asia Pacific region will increase at a low single digit growth rate. We expect fourth quarter REVPAR in Europe will continue to grow at a low to mid single digit rate with strong results in Venice, London and Moscow. Middle East and Africa REVPAR should decline at a low single digit rate in the fourth quarter reflecting continued supply pressure in the UAE while REVPAR in the Caribbean and Latin America should increase at a low single-digit rate, benefiting from strong citywide events in Santiago and Rio de Janeiro and a strong holiday season in Aruba and Grand Cayman. For the fourth quarter 2019, we believe gross fee revenue will total $960 to $970 million, up 5% to 7% over the prior year's quarter due to REVPAR and unit growth. This is roughly 20 million lower than our last guidance at the midpoint, largely due to more modest REVPAR growth, the fee impact of events in Hong Kong, and unfavorable foreign exchange. We expect total incentive fees will be flattish in the fourth quarter. While incentive fees will be constrained by the REVPAR environment, fourth quarter IMF will also be helped by comparisons to last year's strikes and international unit growth. We continue to believe credit card fees could total $400 to $410 million for the full year 2019. Owns leased and other revenue net of direct expenses could total $85 million in the fourth quarter compared to $88 million in the prior year's fourth quarter, reflecting $5 to $10 million lower termination fees. Fourth quarter 2019 owns leased results also reflect the sale of the St. Regis New York and the purchase of the W Union Square. G&A should total $250 to $255 million in the fourth quarter, 3 to 5 percent over the prior year and consistent with our prior fourth quarter guidance. With these expectations, adjusted EBITDA in the fourth quarter should total $898 to $913 million, a 4 to 6 percent increase over the prior year's quarter. We expect our adjusted tax rate in the fourth quarter will be 25%, an increase over the prior year due to higher favorable discrete items in the prior year. Our effective tax rate for the fourth quarter is also a bit higher than our last guidance. These assumptions yield $1.44 to $1.47 diluted earnings per share for the fourth quarter, flat to up modestly from the year-ago quarter. For the full year 2019, We expect adjusted EBITDA will total 3.572 to 3.587 billion, a 3% increase over the prior year. And diluted earnings per share will total $5.87 to $5.90. Our full-year diluted earnings per share guidance includes the impact of gains on sales of assets totaling 2 cents per share in 2019 compared to 65 cents per share in 2018. Our 2019 earnings guidance does not reflect a gain on the sale of the St. Regis New York, which we expect will be significant. As always, our 2019 guidance does not include merger-related costs or reimbursed revenues and expenses or additional asset sales. Total investment spending for 2019 could total $1 to $1.1 billion, including roughly $225 million of maintenance spending, an estimated $199 million for elegant hotels, equity and debt, and the purchase of the W New York Union Square for $206 million. We expect $550 to $600 million of this total investment spending should be reimbursed or recycled over time. We sold to St. Regis, New York last week for $310 million, subject to a long-term management agreement. Year-to-date, we've repurchased 14.2 million shares for $1.83 billion, and we expect cash returns to shareholders through share repurchases and dividends will approach $3 billion in 2019. This assumes no asset sales in 2019 beyond those already completed. Our balance sheet remains in great shape. At September 30, our debt ratio was within our targeted credit standard of 3.0 to 3.5 times adjusted debt to adjusted EBITDAR. So before we take your questions, I want to also thank Laura for her innumerable contributions to Marriott. Personally, I want to thank her for her incredible mentorship to me over the years. It's hard for all of us to imagine life at Marriott without her guidance, her steady pen, and her wit. but we'll try hard to make her proud. So that we can speak with you as many as possible, we ask that you limit yourself to one question and one follow-up. Operator?