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Not horrible but can't afford to miss big expectations. 

 

“We continue to generate substantial cash flow and repurchase stock, returning over $700 million to shareholders through share repurchases and dividends year-to-date. Clearly, we have plenty of reason for optimism.”

- J.W. Marriott, Jr., Marriott International chairman and chief executive officer

 

HIGHLIGHTS FROM THE RELEASE

  • REVPAR for worldwide comparable systemwide properties: 6.8% (7.7% actual dollars)
  • International comparable systemwide REVPAR: 7.3% (11.9% actual dollars)
    • "Excluding the Middle East and Japan markets, international comparable systemwide constant dollar REVPAR rose 12.4 percent (a 17.5 percent increase using actual dollars)."
  • "North America, comparable systemwide REVPAR increased 6.6 percent"
    • "While hotels in Washington, D.C. continued to reflect weaker demand associated with a shorter Congressional calendar and concerns regarding government budgets, most North American markets reflected both strong demand increases and modest supply growth. Excluding the Washington, D.C. market, North American comparable systemwide REVPAR rose 7.1 percent in the quarter."
  • "Marriott added 32 new properties (4,512 rooms) to its... portfolio in the 2011 second quarter. Ten properties (1,603 rooms) exited the system during the quarter"
  • "Pipeline of hotels under construction, awaiting conversion or approved for development increased to 635 properties with over 100,000 rooms at quarter-end."
  • "While incentive fees rose in most markets around the world, growth was constrained by lower incentive fees in the Middle East and slightly lower incentive fees in the Greater Washington, D.C. market."
    • 25% of company-managed hotels earned incentive management fees
  • NA comparable company-operated house profit margins: +100bps
  • International "house profit margins for comparable company-operated properties ....increased 10 basis points and
    were challenged by lower REVPAR in the Middle East and Japan. Excluding the Middle East and Japan markets, international house profit margins in the 2011 second quarter increased approximately 160 basis points."
  • $4MM of lower termination fees negatively impacted owned, leased, corporate housing and other revenue, net of direct expenses
  • "Contract sales to existing owners represented more than 61% of sales in the quarter compared to 48% in the year-ago quarter. While sales to existing customers were strong, with fewer sales to new customers year-over-year and a lower average contract price, second quarter timeshare contract sales were flat compared to the year-ago quarter. Fractional and residential contract sales declined by $4 million due to continued weak demand for luxury products."
  • "Timeshare sales and services revenue, net of expenses, declined...largely due to lower interest income on a smaller mortgage portfolio and, to a lesser extent, higher product costs....reflected greater than expected deferred revenue"
  • "The increase in [G&A] expenses reflected several non-routine items including $7 million of higher legal expenses, a $5 million payment related to the performance of one hotel, $3 million of transaction-related expenses associated with the spin-off of the timeshare business, as well as higher costs associated with growth in international markets and routine compensation increases."
  • "The company repurchased 10.6 million shares of common stock in the second quarter of 2011 at a cost of $375 million."
  • 3Q Guidance:
    • NA comp systemwide RevPAR: +5-7% "reflecting strong demand in most markets, but continued weak
      demand in Washington, D.C."
    • International comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
    • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 100bps lower including ME & Japan
    • Timeshare:
      • Contract sales: $165-175MM
      • Sales and service revenue, net of direct expenses: $40-45MM
      • Segment results: $25-30MM
    • G&A: $165-170MM "reflecting higher year-over-year workout costs, as well as higher costs in
      international growth markets"
  • FY Guidance (excludes timeshare spin-off impact):
    • RevPAR guidance remained unchanged from last quarter
      • NA comp systemwide RevPAR: +6-8% (unchanged)
      • International comp systemwide RevPAR: +7-9% (constant dollars) excluding ME & Japan. ME & Japan could drag down RevPAR by 200bps
      • WW comp systemwide RevPAR: +6-8% (constant dollars) excluding ME & Japan or 50-75bps lower including ME & Japan
    • 35,000 room additions in 2011
    • Fees: $1,305-1,325MM (took down top end by $10MM)
    • Owned, leased, corporate housing and other revenue, net of direct expenses: $120-125MM (took up the bottom end)
    • Timeshare:
      • Contract sales: "slightly below 2010 levels"
      • Sales and service revenue, net of direct expenses: $205-215MM
        • "$10 million lower than prior guidance largely due to lower reportability and higher
          rental expenses"
      • Segment results: $140-150MM
    • G&A: $710-720MM "reflecting several non-routine items including higher workout costs and year-to-date
      transaction-related expenses associated with the planned spin-off of the timeshare business, as
      well as higher costs associated with growth in international markets"
      • $5MM higher than prior guidance
    • House profit margins in NA +100-125bps and 150bps internationally ex ME & Japan
    • EBITDA: $1,135 to $1,180MM (lowered by $20-35MM)
    • EPS: $1.35 to $1.43 (took down top end by 2 cents)

CONF CALL NOTES

  • Remains very bullish about the long term prospects for the industry and Marriott in particular
  • Transient business is back in a big way - occupancy increased 3.5%, reaching peak levels this quarter
  • Later this year, they plan to introduce a new Courtyard prototype for China
  • Fee revenue was a penny shy of expectations due to weaker Greater DC market.  Deferred revenue in timeshare hurt them by 2 cents. This was offset by 1 penny benefit of share buyback, 2 cent benefit of lower G&A due to a reversal of a charge
  • Washington DC RevPAR only rose 1% - approx 5% of their systemwide rooms are located in this market.  In 2010 - 6% of their WW fee revenues and 13% of incentive fees came from this market
  • Group RevPAR at MAR brand increased 2%. Group bookings made in the Q for later in 2011 increased 18%.  Booked business for 2012 in the quarter was 19% higher than last year. 
  • Timeshare results were hurt by higher sales and marketing costs and higher deferred revenues
  • $5MM reversal of loan loss provision and lower expected workout costs benefited G&A in the quarter
  • RevPAR growth in Europe is expected to moderate in 2H11 and Shanghai Expo comps are difficult for China
  • With more leisure in the 3rd Q, they expect 3Q NA RevPAR to be weaker than 1H levels but 4Q to be better than 3Q
  • Expect that there could be material costs from the timeshare spin off in the 2H11 which aren't included in guidance
  • Expect to remain aggressive in their share repurchase activity
  • Timeshare spin-off details:
    • Think that there is still a lot of upside from the points program
    • Modest non-securitized debt
    • Near term cash needs are modest given their existing inventory. Expect to generate meaningful amounts of FCF in the future.
    • Plan on selling off some land as well - have lots of beach front property
    • Will seek out opportunities with 3rd parties

Q&A

  • Cash tax benefit from the spin-off will be several hundred million - with half recognized immediately and the balance over the next few years
  • Back half guidance for NA implies a large ramp in the 4Q
    • Around 7%
    • Sounds like they will be at the low end of their 6-8% guidance
  • Have incurred $6-8MM of transaction related expenses so far - but some of those will be capitalized.
  • D.C. distribution for them is about 2x industry average. Expect that D.C. to bump along at flat RevPAR levels for the balance of the year. Expect that 2012 could be weak as well with the Presidential election and budget crisis
  • Japan is suffering from less inbound travel and less domestic activity... seeing some signs of comeback - like in the F&B business. Still expect 4Q to be down 20-30% YoY.
  • Middle East:
    • Egypt: believe that it will come back but driven by wholesale European business but it's unlikely that that business will come back until there is real stability - so it's likely a 12-18 month recovery story
    • Jordan is more stable than Egypt but not great
    • Their guidance assumes that ME remains weak
  • Bought back $25MM in stock after the quarter close -They were not in a blackout period last month.
  • When Arnie said that it would take longer to get back to peak profits - its was relative to RevPAR which is already back at peak... not signaling a change in their long term guidance that they presented at their analyst day.
  • Despite leisure travel being more price elastic than business, they have been pleased with leisure demand since their customer is relatively affluent.
  • Seeing a broad recovery - steady as she goes - with business transient being the most robust, seeing group bookings build steadily, and good leisure performance
  • Why was 2Q group business RevPAR - paid and stayed - only up 2%?
    • Because it's a lagging metric indicative of bookings 2 years ago.  However, business booked more recently is much better - it does take a while to build that book of business though
  • Impact of last terror event in Mumbai was not material on India's RevPAR results. Do not expect that yesterday's terror event to have a significant impact.
  • ME accounted for $30-35MM of fee income in 2010.
  • Special corporate negotiations are not underway yet for 2012. Special corporate rates are still down double digit from peak and expect to see healthy growth next year if economic recovery continues
  • Sales force one?
    • Still very early in the process to evaluate the success of that rollout
  • Group RevPAR growth for STR was 8% - why was their growth so much worse?
    • Think that their hotels are larger and do larger events which have longer lead times and that can explain why their numbers are weaker than those reported by STR. Some of that could also be geographic mix.
    • Not sure where this analyst got his numbers from but industry RevPAR for group was up 3-4% not 8%
  • What % of their group business is on the books for 4Q?
    • 90% or so. Think that their RevPAR is probably up low single digits.  Maybe revenue growth will be up close to mid-single digits
  • Deferred revenue in timeshare relates to financed sales.  They ran higher first day incentives and as a result some of their sales didn't meet the 10% recognition criteria to recognize the sales. So those sales will likely be deferred until early next year.
  • They are not losing share to their competitors according to their competitive set data. Their under performance due to the reported STR data for UUP data is due to their larger group business and geographic distribution.
    • Have more suburban hotels
    • Detroit, Atlanta and D.C are outsized for them vs. comp set
  • Timeshare sales in 2Q will likely be reported in 2H2011 - however, if the promotions continue 2011, sales are likely to spill into 2012. They have deliberately focused on their existing owners in the first year of the points program introduction. Over time they expect that the ratio of sales goes back to the historical averages of 50/50.
  • Why did they need to roll out the extra promotional activity in the Q?
    • In 2009/2010 they made a concerted effort to reduce their financing offers. Now financing is around 40%.  Instead of doing more discounting like they did in the last 2 years, they are raising prices but offering more financing and incentives.