HOT: ANALYST DAY NOTES, PART I

HOT: ANALYST DAY NOTES, PART I

HIGHLIGHTS FROM THE RELEASE

• We also remain committed to transitioning to a business that is 80% fee driven as we continue to monetize our high value, owned hotel portfolio and complete our transformation from owning hotels to building great relationships with guests and customers”
• “The Company’s three year financial scenario assumes a normal cyclical recovery with annual worldwide RevPAR increases of 7-9% through 2013, and would result in:
  • Annual EBITDA growth of 14-18%
  • Annual EPS growth of 35-42%
  • Excess Cash Flow of $1.7 billion to $2.2 billion (not inclusive of cash proceeds from any asset sales) over this time period
• At today's meeting, the Company will also reaffirm its current full year guidance for 2010, which was detailed in its third quarter 2010 earnings press release.”

CONF NOTES

Opening Comments

• Focus on a fee-based global revenue model
• 2011 and beyond they are focused on:
  • Getting hotel profitability past peak levels (given cost cuts and limited supply growth)
    
    • Despite unemployment close to 10%, they are seeing occupancies close to peak levels - evidence of benefit from limited supply growth 
  • Owning their guests - not just hotels
  • Global advantage- over 80% of HOT's pipeline is outside the US, skewed towards EM 
• 20% of their reservations come from online sources
• Why HOT?
  • Global with well-recognized brands and a large international pipeline
    • Advantage when the balance of power and growth is shifting towards emerging markets
  • Fee-based model with little capital at risk
  • Will generate huge free cash flow 

Global Operations

• 1,025 properties and 304,000 rooms
  • 57% of rooms in NA
  • 21% in EMEA
  • 18% in Asia Pacific
  • 4% in LA
• 54% of rooms are managed and SVO, 39% franchised, 7% owned
• Earnings allocations before overhead:
  • 57% fees
  • 25% owned
  • 18% SVO and other
• In 2010 Sheraton generates 44% of HOT's fees, followed by Westin at 27%, Le Meridian at 10%, W at 6%
• 49% of fees come from NA, 27% from EMEA, 21% from Asia Pacific, 3% in 2010
• NA has 543 hotels with 174,126 rooms
  • Pipeline: 13,000
• Asia Pacific has 169 hotels and 55,128 rooms
  • Pipeline: 52,000
• EMEA has 250 hotels and 61,619 rooms
  • Pipeline: 14,000
• Latin America has 63 hotels and 13,169 rooms
  • Pipeline: 5,000
• Expect supply growth to be about .4% in 2011 in North America and will help drive pricing power
  • 2% supply growth is the 40 year CAGR
• Think that their best opportunity to grow in NA is through their select service brands - a category where they are under-penetrated
  • Have 40 Alofts in NA already
• In Asia Pacific, their operating portfolio is over 40% larger than MAR's - their second largest competitor in the region
  • In 2009, domestic trips in China were already on par with those in the US
  • HOT has 62 hotels in China compared to 48 for MAR
  • They are the largest 4/5 star hotel operator in India with 30 hotels compared to only 12 for MAR. When you add their pipeline - they will have 45 hotels in India (42 by the same metric for MAR)
• EMEA - see a lot of conversion opportunities in Western Europe given the brand fragmentation.  Are focusing on growing their footprint in Eastern Europe through management contracts.
  • Occupancies are approaching peak levels
  • Only 34% of European hotels are branded in Europe, but 82% of the new build pipeline is under construction. In the US - 70% of hotels are branded.
  • In Africa and ME, HOT has 91 hotels compared to HLT with 46 hotels and MAR with 28 hotels. Current pipeline represents +30% unit growth.
• In Latin America, HOT has 63 hotels open compared to 43 at HLT and 42 at MAR
• Global Revenue Management:
  • Introducing dynamic revenue management and other tools to maximize yields
  • Sales maximization initiatives - like having a single point of contact for customers for a particular metro area
• Lean operations - identified 5 key opportunities
  • Staff to demand
  • Consistency of management structures
  • Leverage economies of scale for procurement
  • Brand Standard rationalization
  • Sustainability
• Food and Beverage is a big opportunity for them - $4BN of annual revenue.  Feel that they can drive additional growth in this area by optimizing menu pricing and have a better product to keep guest $$ at the property
  • In Asia - 40% of hotel revenues come from F&B.  They manage all the restaurants at their hotels, which have over 40% profit margins for F&B. 

Global Brands

• Basically went through defining the target market for each of their brands and some of the new concepts like - green design and heavenly bed
• HOT is the most global branded hotel company
• 1/2 customers are Starwood Preferred Guests
• In 2010, 200bps market share gain for Sheraton brand in China