Marriott International

Ladies and gentlemen, thank you for standing by and welcome to the Marriott International's fourth quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Arne Sorensen. Thank you, and please go ahead.

Welcome to our fourth quarter 2019 earnings conference call. Joining me today are Leni Oberg, Executive Vice President and Chief Financial Officer, Jackie Burka-McConaghy, our new Senior Vice President, Investor Relations, and Betsy Dahm, Vice President, 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 today, we will talk about 2019 results excluding merger-related costs and reimbursed revenues and related expenses. GAAP results appear on pages A1 and A2 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 on our investor relations website. As we begin our call this morning, it is obvious that the question you are most interested in is the impact of the coronavirus or COVID-19 on our business around the world. In the six weeks or so that we have been intensely watching this crisis, we have learned much, but there's still a great deal we do not know. In our press release and in our comments this morning, we will give you some yardsticks to help measure what the impact to our P&L might be. While this is still guesswork to some extent, We know one thing with confidence, this will pass. And when it does, the impact to our business will quickly fade. So let's talk about our results. We are pleased with our solid performance in 2019, finishing the year on a high note. In the fourth quarter, we continued to add to our REVPAR index gains, increased hotel profit margins, recycled a meaningful amount of capital and signed a significant number of new hotel deals. We grew our system to more than 7,300 properties and expanded our global rooms pipeline to a record of more than half a million rooms. With nearly 1.4 million rooms in 134 countries and territories, we offer unrivaled choices for our customers. In 2019, our development team signed 815 hotel agreements for a record 136,000 rooms. with each of our international regions setting records in organic signings. Over 220,000 of the rooms in our 515,000-room pipeline are already under construction. Using 2019's pace of openings, our under-construction pipeline represents nearly three years of gross rooms growth, while our total pipeline represents well over six years of implied rooms growth. At year end, 7% of global industry rooms flew one of our flags, while our share of STR's worldwide under construction pipeline led the industry at 19%. To be sure, our signings were impressive, but we are not just focused on adding units. We are focused on adding valuable hotels that drive higher fees per room and enhance our brands. Luxury and upper upscale rooms comprise over half of our distribution globally, which is one reason our fees per room lead the industry. During 2019, we expanded this lead by signing a record 45,000 rooms in these tiers. At year end, the number of our global luxury and upper upscale rooms under construction totaled more than the next three competitors combined, according to SDR. Other milestone achievements in 2019 included multiple launches from our new loyalty program, Marriott Bonvoy, to our new home rental program, Homes and Villas by Marriott International, to our all-inclusive platform, which was augmented by our recent acquisition of the Elegant Hotels Group in Barbados. These expanded offerings and program enhancements provide meaningful value to our owners and guests, help to drive loyalty engagement, and provide additional ways for members to earn and redeem points. Homes and Villas provides the opportunity for our guests to stay at 7,500 premium and luxury rental homes in 200 locations around the world. In the all-inclusive segment, our guests can currently choose from 10 resorts, with seven more projects in the pipeline. In the fourth quarter, we launched our Eat Around Town offering, where Marriott Bonvoy members can earn points by dining at more than 11,000 restaurants in the U.S. We also introduced peak, off-peak redemption awards, providing members with better value when they redeem points on lower-demand nights. In addition to benefiting guests, the new award schedule helps owners fill more rooms by shifting demand from stronger periods to slower ones. Finally, we are piloting a program in select international markets that lets local members earn and redeem points dining at our hotel restaurants. The response from our members has been extremely positive. Collectively, these efforts, coupled with the strength of our brands and our broad distribution, drove Marriott Bonvoy membership to over 141 million members at the end of January. This powerful platform remains a key competitive advantage, and in 2019, paid room revenues from loyalty members increased 11%. Redemptions were also meaningfully higher as our Bonvoy travelers enjoyed the wide range of choices offered by the program. Member share of occupied rooms topped 52% worldwide in 2019, up 250 basis points versus 2018 and reached 58% in North America, up 320 basis points year over year. We also continue to see solid growth from our co-branded credit cards with signups 12% higher year over year. With an improved yield management approach and an increase in Bonvoy members, more of our guests booked direct in 2019. Worldwide direct bookings, including group sales, Rooms booked by our reservation centers and bookings made on our digital platforms represented approximately three-quarters of total room nights booked during the year. Direct digital bookings alone represented one-third of room nights. Mobile bookings, a component of direct digital bookings, were up a strong 64 percent over the year. At the same time, the percentage of nights booked through OTAs declined year over year. Guest intent to recommend and staff service cores increased during 2019, thanks to the efforts of our outstanding associates. We also saw impressive revenue share gains across our portfolio. Overall, our global RevPAR index accelerated throughout the year, rising 240 basis points in the fourth quarter. For the full year 2019, our global RevPAR index improved an impressive 200 basis points. Each of our continents saw growth in index, with meaningful gains from both Legacy Marriott and Legacy Starwood portfolios globally. It is worth mentioning that we are particularly pleased with the progress we are making with the Sheraton brand. Over the last three years, approximately 50% of Sheraton hotels worldwide have undergone, are undergoing, or have committed to undergo a renovation. We sold the Sheraton Phoenix downtown last month after purchasing it just 18 months earlier, and we signed a valuable long-term management agreement. We are confident that the Sheraton Phoenix Downtown will serve as a showcase to encourage renovations at additional Sheraton hotels. Before we discuss our 2020 outlook, let me talk a bit more about the coronavirus situation. Clearly, this is a major humanitarian crisis and our thoughts are with the many people impacted. As the virus emerged in Wuhan earlier this year, our teams assisted guests and provided support for associates whose lives have been significantly disrupted. I couldn't be prouder of our associates in the Asia Pacific region who have worked tirelessly. We continue to waive cancellation fees for hotel stays through March 15 for guests with reservations at our hotels in greater China and for guests from greater China with reservations at Marriott destinations globally. We began to see the impact of the coronavirus on our business in mid January, with occupancy declines gradually spreading from Wuhan to other markets in the Asia Pacific region. In February, RevPar at our hotels in Greater China declined almost 90% versus the same period last year. At the end of 2019, we had 375 properties with roughly 122,000 rooms across Greater China, representing 9% of our total global rooms. Around 90 of these properties are currently closed. In the Asia Pacific region outside greater China, what we call APEC, February RevPAR declined roughly 25% year over year. For APEC, we had 412 properties with 100,000 rooms at year end 2019, representing 7% of our total worldwide rooms. February RevPAR in the Asia Pacific region overall has been running down around 50% compared to February of last year. Outbound travelers from China in 2019 made up less than 1% of room nights in our system outside of Asia Pacific and around half of 1% of room nights in North America. To date, apart from a handful of citywide event cancellations, we have not seen a significant impact on overall demand outside of the Asia Pacific region, though the situation obviously remains fluid. Given the uncertainty surrounding the length and severity of the coronavirus situation, we cannot fully estimate the financial impact to our business at this time. So in our press release and our remarks today, we are providing a base case first quarter and full year 2020 outlook that does not reflect any impact from the outbreak. This base case reflects the 2020 outlook our teams had prepared as part of the company's budget process based on the pre-coronavirus environment, including hotel by hotel forecasts, group booking trends, and expected supply growth. Lieny will frame how first quarter results could be impacted by the coronavirus based on current trends. Now let's start with our base case RevPAR outlook for 2020 not impacted by coronavirus. On a global constant currency basis, we estimate global system-wide RevPAR in 2020 will increase 1 to 2% in the first quarter and will be flat to up 2% for the full year. In North America, recent estimates for US GDP growth point to a modestly slower pace of economic growth in 2020, with lodging demand forecasted to increase around 2%. Industry supply growth is expected to also remain around 2%, with upscale supply expected to grow 4%. We expect leisure demand will continue to outpace business transient demand, as there has yet to be a step up in business investment levels. Overall, this implies a continuation of low REVPAR growth in the US. Our group sales organization, North America, had a great fourth quarter in 2019 with bookings for all future periods up 5.5%. With this strength, our group revenue on the books in North America for 2020 is up at a mid single digit rate. We have completed roughly 80% of our corporate rate negotiations. And while we can't predict corporate volumes, completed negotiated room rates are running up 1% to 2% for comparable accounts. Our first quarter is off to a strong start with the benefit of easy comps in markets like Washington, D.C. and Hawaii, as well as continuing REVPAR index gains. We expect base case North America REVPAR will increase 1% to 2% for the first quarter. For the full year, we expect it to be around the midpoint of the global range of flat to up 2%. For the Asia Pacific region, we assume base case RevPAR could grow 2 to 4% for 2020, with weak results in Hong Kong expected to continue for the first half of the year before lapping easier comps in the back half. Again, this does not include any impact from the virus outbreak. Base case RevPAR in Europe could grow 2% to 4%, excuse me, for the year, driven again by strong demand from U.S. travelers and strength in Eastern European markets. For the Middle East and Africa region, we assume base case REVPAR could grow at a low single-digit rate in 2020. We believe the region will benefit from higher REVPAR in Saudi Arabia, Qatar, and Africa, somewhat offset by lower REVPAR in the UAE. Continued new lodging supply in Dubai will likely challenge 2020 REVPAR growth in the UAE, despite the Expo 2020 event that begins in the fourth quarter. In the Caribbean and Latin America region, base case REVPAR could grow at a low single-digit rate for 2020, reflecting more modest economic growth and political uncertainty in some markets. For 2020, we assume 5% to 5.25% net rooms growth, including deletions in the 1% to 1.5% range. Pre-construction and construction delays persist around the world. Again, our rooms growth assumption does not include any impact from the coronavirus situation. Before I turn the call over to Leni, I want to thank all our global associates for their continued hard work, especially those in the Asia Pacific region who have shown such empathy and skill managing through this challenging time. Our culture is distinctive, and it is a real competitive advantage. And I feel very fortunate to work with such purpose-driven and caring individuals. On a personal note, I had surgery in November, and the doctors were pleased with how it went. As part of my treatment plan, I'm undergoing a few months of post-surgery chemotherapy, and while I am now fashionably bald, I feel really good. I'm grateful I've been able to work throughout, and I want to thank all of you for your good wishes and support throughout this battle. And now Lene will walk through our financials in more detail. Lene?

Thank you, Arnie. Our fourth quarter adjusted diluted earnings per share grew 9 percent to $1.57, which was 11 cents ahead of the midpoint of our guidance of $1.44 to $1.47. We picked up three cents of outperformance from fees, primarily due to better-than-expected incentive management fees in North America, and six cents from a lower-than-expected tax rate due to higher windfall tax impact and other discrete items. We also benefited from gains on the sale of two hotels in North America, which totaled 32 cents. These favorable items were partially offset by 26 cents from two asset impairments, 3 cents of greater than expected general and administrative expenses related to legal costs, bad debt, and unfavorable foreign exchange, and 1 cent from lower joint venture earnings. Fourth quarter, 2019 system-wide comparable global REVPAR rose 1.1% in constant dollars year over year. North American REVPAR in the quarter increased nearly 1%, with REVPAR among our full-service brands up 2.4%. Leisure markets like Hawaii and Orlando showed notable strength. Our REVPAR in the Asia-Pacific region increased 0.3% in the fourth quarter. RevPAR in Hong Kong declined 54% due to continued protests, while RevPAR in mainland China increased 2.4%. Excluding Hong Kong, RevPAR for the Asia Pacific region rose 3.5%, with strength in Singapore and India. Our RevPAR in Europe rose 2.8% in the fourth quarter, benefiting from continued significant U.S. demand and robust loyalty program activity. Eastern Europe was particularly strong due to increases in both rate and , while in southern Europe, Italy, Spain, and Portugal also saw healthy revpar increases. Fourth quarter revpar in the Middle East and Africa region increased 2.8% with strong growth in Riyadh and Mecca in Saudi Arabia. Qatar also posted solid results despite the continued political tensions in the region. REVPAR in the Caribbean and Latin America region rose half a percent in the fourth quarter, with strength in the Caribbean and Mexico, partially offset by declines in Chile and Panama. Our fourth quarter gross fee revenue increased 7% versus last year to $974 million due to room additions, higher REVPAR, improved net house profits at managed hotels in North America and Europe, and continued strong growth in other franchise fees. Depreciation, amortization, and other expense increased to $179 million in the quarter. We recognized a $15 million impairment charge associated with the sale of a North American hotel and a $99 million impairment charge related to a leased hotel in North America. Our fourth quarter adjusted tax rate of 21 percent was higher than the prior year, largely due to favorable discrete items in the year-ago quarter. For full year 2019, our gross fees grew 5 percent and our adjusted EBITDA increased 3 percent. Excluding asset impairments and gains in 2018 and 2019, adjusted EPS grew 6 percent year-over-year to $5.92. During the year, we returned $2.9 billion to shareholders, including $2.3 billion from share repurchases thanks to successful asset recycling, strong cash flow generation, and a reduction in cash balances. Our loyalty program had net cash outflows in 2019. This was primarily due to the marketing spend related to Bonvoy's launch in the first quarter and significantly higher redemptions as members explored the many new locations and experiences offered by the integrated and enhanced program. We expect the Bonvoy program to continue to be a net user of cash in 2020, although meaningfully improved from 2019 levels. We received proceeds from recycled assets of $470 million during 2019, including proceeds of roughly $310 million from the sale of the St. Regis New York and $100 million from the sale of the Sheridan Gateway Hotel in Toronto. Now, let's talk more about our base case outlook for 2020. As you know, it does not include any impact from coronavirus, merger-related costs and charges, cost-reimbursed revenue or reimbursed expenses, and it assumes no additional asset sales. For full year 2020, given our assumptions for global REVPAR, our base case outlook shows gross fee revenue could increase 4% to 6%. to reach 3.96 to 4.04 billion. Growth should be driven primarily by room additions and other franchise fees, particularly offset, partially offset by headwinds from renovations, property terminations, and roughly 10 million of unfavorable foreign exchange. Other franchise fees, which include credit card branding fees, hotel application and relicensing fees, timeshare licensing fees, and residential branding fees are expected to grow roughly 10% to $630 to $640 million. We also expect that incentive fees will decline slightly given continued pressure on house profit margins. We assumed owned, leased, and other revenue net of direct expenses will total $295 to $305 million in 2020, flat to up low single digits. These results include slightly lower termination fees, offset by a similar amount of favorable year-over-year impact from bought and sold hotels. We assume general and administrative expenses will total $950 to $960 million in 2020, up 1 to 2 percent versus 2019. And we expect a 2020 effective tax rate of 23.3 percent. We assume 2020 adjusted EBITDA will total roughly 3.7 to 3.8 billion or 3 to 6 percent over 2019 levels. On the bottom line, we assume 2020 diluted EPS will be $6.30 to $6.53, up 6 to 10 percent versus $5.92, 2019's adjusted diluted EPS excluding the impact of asset sale gains and impairment. For first quarter 2020, our base case forecast assumes global REVPAR growth of 1 to 2 percent and a 5 to 6 percent increase in gross fee revenues to reach 940 to 950 million. Our tax rate in the first quarter is expected to be roughly 21 percent, four percentage points higher than a year ago, as a result of higher windfall benefit and discrete items in the prior year quarter. This translates to 5 to 7 percent growth in diluted earnings per share, to 147 to 150, and 4 to 6 percent growth in adjusted EBITDA. We remain disciplined in our approach to capital allocation. Using the base case assumptions, 2020 investment spending could total 700 to 800 million. This includes around 200 million of maintenance investment spending, roughly $200 million of system investments that will largely be reimbursed by owners over time, and $300 million to support new unit growth. We expect roughly three-quarters of this new unit investment will be associated with luxury and upper upscale properties. These projects typically provide higher fees per room and attractive 20-plus year agreements. Projects where we invest our own capital are expected to generate a substantially higher value per key over the life of the contract on average compared to full-service deals with no Marriott capital. Under our base case in assuming this level of investment, we would expect to return more than $2.4 billion of cash to shareholders through share repurchase and dividends for the full year 2020, assuming no impact from the coronavirus and no additional asset sales. Note that this outlook assumes roughly $200 million higher cash tax payments than in 2019, primarily due to timing. We remain committed to our strong investment grade credit rating. We ended the year within our 3.0 to 3.5 times debt to EBITDAR target range, and our base case model assumes we will remain within this target range. We will continue to evaluate the impact of the coronavirus situation on the company's cash flow and debt levels to manage leverage within our targeted range. Turning back to the coronavirus situation, Arne noted our distribution in the Asia Pacific region. From a financial perspective, 2019 gross fees earned in the Asia Pacific region totaled $477 million, representing 12% of our global gross fee revenue. Greater China generated about half of the fees in Asia Pacific, representing roughly 6% of both global fees and total adjusted EBITDA. Our base case model assumes Asia Pacific fees in 2020 will total roughly $500 to $510 million, with Greater China fees again constituting about half of that amount. Assuming the current low occupancy and REVPAR levels in the Asia Pacific region continue, we estimate the region will earn roughly 25 million less in fees and EBITDA per month as compared to our 2020 base case. This means that for the first quarter, given our results in Asia Pacific to date and assuming the same low levels of REVPAR in March as we've seen in February and no meaningful impact outside of Asia Pacific, total gross fees and total adjusted EBITDA in the first quarter could be roughly 60 million below our base case and diluted EPS could be roughly 14 cents per share below our base case. The analysis we are providing today has the benefit of actual results through the first two months of the quarter. There's still a great deal we do not know, including the length and global scope of the virus and the impact of potential supply chain disruptions on the global economy. As Arne noted, despite these unknowns, the virus will run its course. And when it does, its impact will not be long-lasting. We entered 2020 with tremendous competitive momentum in rev par, unit growth, and brand strength, and with an industry-leading loyalty program. This momentum will carry us through this crisis and beyond. We'll now open the line for questions. Please limit yourself to one question so that we can speak to you, to as many of you as possible.