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MAR 4Q09 CONF CALL


"In the fourth quarter, leisure travelers responded to aggressive marketing campaigns and special offers and, even adjusting
for easier year-over-year comparisons, business travel showed signs of improvement, particularly in international markets. With
solid cost controls, we translated the stronger-than-expected occupancy to better-than-expected incentive fee revenue.
Demand for timeshare intervals improved modestly from third quarter levels which, combined with a successful note sale and
reductions in investment spending, allowed the timeshare business to generate over $150 million of cash flow after investing
activities for full year 2009.

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

Highlights from the Release

  • "We're thrilled to have two new exciting brands, EDITION and the Autograph Collection, opening their first hotels in 2010 with more expected to come. Our global development pipeline totals nearly 100,000 rooms."
  • "Nearly 35 percent of these development pipeline rooms are Marriott, Ritz-Carlton, Renaissance, EDITION or Autograph rooms, of which nearly 75 percent are located outside North America."
    • So 26% of the development pipeline is international full service and new brand brands

CONF CALL

  • Corporate demand is picking up
  • December group bookings were ahead of last year
  • January occupancies were improving
  • Group room nights on the books for 2010 are 2% below where they were last year with rates down 3%
  • Expect in the year bookings to improve from this levels
  • Special corporate business could help mix and rates as corporate becomes a higher % of total business
  • Base and franchise fees will improve with RevPAR and unit growth
  • Incentive fees: only 51% was earned from NA properties in 2009. 25% of their portfolio earned fees in 2009, but in NA only 11% of hotels earned incentive fees
  • With relatively few NA hotels earning incentive fees - 40% can from DC and 20% came from NY - 3 other markets plus NY & DC accounted for 80% of NA revenues.  Even if profits increase by 20% in NA, only a few more would generate incentive fees
  • International incentive fees: 30% from EMEA, 30% Asia. ME & Asia incentive fees don't have an owner's priority.
  • Have 130 international hotels in the pipeline and 90 of those are already under construction
  • Focused on conversion opportunities. Up until now they haven't seen a large pick up in conversions. With nearly $40BN of mortgages on hotels coming due in the next 2 years they expect more conversion opportunities.  In 2009 they converted 19 hotels, and their 100,000 room pipeline includes 30% from conversions.
  • Timeshare attributed to 6 cents of better EPS plus 3 cents came from better demand
  • G&A and taxes were 3 cents worse than expected related to guarantee hotel payments
  • Adjusting for comparable periods (adjusted for calendar shifts) RevPAR would have been 1% better
  • Corporate business: comparable room nights were flat in the 4Q and rose in period 13
  • International occupancy increased 4% in December
  • In 1Q2010 expect London and Paris occupancies to increase double digit in the first quarter
  • Group revenues on the books in China are up y-o-y in 1Q2010
  • Korea had positive RevPAR growth due to positive Japanese demand in 4Q09
  • Mexico continues to suffer from lingering H1N1 and crime
  • Costs are likely to rise in 2010 and margins are likely to be under pressure from lower ADRs in 2010, looking for more cost cuts
  • Maintenance fees from unsold units and better securitization market helped them perform better than expected in 4Q09
  • New timeshare inventory spending to be lower than 2009 spending and 100MM lower than cost of goods sold, and therefore net cash flow from timeshare to be $175-200MM in 2010
  • Excluding impact from deferred comp G&A decreased 20% in the Q
  • Actual room openings exceeded estimates due to favorable construction timing
  • 50% of the rooms in their pipeline are under construction and 6% are awaiting conversion
  • Cut overhead dramatically at timeshare
  • Over 50% of their customers pay for their 1 week product in cash, so securitization program will be smaller
  • Assumed $15MM of performance related charges (guarantees) in 2010
  • 378MM shares in 2010
  • Don't expect any net timeshare development spending since they have plenty of inventory
  • New accounting rules would have increased timeshare EBITDA by $75MM
  • Expect debt to decrease by $400-500MM 

Q&A

  • FX impact in 4Q09 was less than $1MM and don't expect it to be material in 1Q2010. 60-70% hedged for Euro and Pound in 2010
  • Where does occupancy needs to be to see rates rise?
    • Some of what they are seeing is just due to very easy comps from Dec & Jan last year (which were so bad) since no one was traveling
    • In the first stage of ADR improvements - it will be all about mix shift vs. rate increases.  There was a lot of very promotional deals in 2009.  So it will likely take a few quarters of positive occupancy to see the benefits of mix shift on rate.  But real rate increases may not come until 2011
  • Incentive fees?
    • With -2 to 2% RevPAR in 2010, house margins will be under pressure (even at +2%).  So that will put more pressure on incentive fees, offset by international increase in units and higher % mix (without owner's priority). On balance expect incentive fees to be modestly lower than those seen in 2009
  • Want to continue maintaining their investment grade ratings by reducing debt. No assumption of stock buybacks
  • Expect that new opening pace for hotels to continue to decline in 2010 & 2011, too soon to know about 2012 & 2013. Expect transactions on existing hotels to pick up and thereby drive more conversion activity in 2011 & 2012, and perhaps that can offset the decline in new build in NA. Internationally there is still a lot of opportunity to grow. Ballpark # of room openings should remain in this same level
  • Autograph hotels will contribute at the same level as franchise full service
  • Seeing a significant increase in volumes in Jan - occupancy growth is very strong at the high end hotels, because people are no longer "paralyzed" in regards to travel
  • Mix in 2009: Corporate & Special Corporate where 28-29% usually runs higher in normal times, and they are seeing it begin to increase
  • Period 13 (month of Dec): saw that the increase in travel was due to more corporate travel
  • When will MAR start enforcing brand standards?
    • Sometime in 2010, but varies by situation
  • Will see modest hourly wage growth, health care, management wages.  No more reductions for headcount reductions. Plus they will need to start paying bonuses. So they will see more margin pressure in the 2010
  • Capital expenditures: $150-200MM is identified capex,  balance is unidentified - so they can opportunistic btw Mezz/equity/JV, but will probably be back half weighted
  • What is the price difference between highest and lowest paying guests? 2x differential - premium could be 2x better than promotional leisure.  Negotiated corporate is about 50-60% better than most promotional rate.  
    • Obviously these are very skewed numbers that probably don't adjust for seasonality
  • Should sensitivity to RevPAR growth increase as things recover? (yes bc of maintenance were at 22MM per point of RevPAR and when things recover they will have even more sensitivity to 1 point of RevPAR given the increased room base)
  • NY is going to see some supply growth in 2010, but also seeing a return of the business traveler.  Have seen pretty strong occupancy growth already - think that the market will really outperform in 2010.
  • Group usually runs at 40% at MAR full service and is running at 37% now.  Special Corporate & Corporate is running at 28%, in 2007 it was 30%.
  • Timeshare as a % of profits in the future? Unlikely that it will ever get close to % of contribution that is was at the peak