MAR 2Q2010 CONF CALL NOTES
“This is an exciting time for Marriott. Business and leisure stays at our hotels are trending up. Revenue per available room increased more than expected in the second quarter and room rates at company-operated hotels in North America rose for the first time in nearly two years. We anticipate even more favorable pricing in the second half of 2010 and into 2011. Combined with productivity improvements achieved over the last year, strong unit growth and increasing demand, we look forward to growing cash flow and strong earnings in 2010 and beyond.”
- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International
CONF CALL NOTES:
- Business is showing strong results which are continuing in the second quarter.
- In period 5 (May) room rates rose for the first time (1%) and in June, they rose 3% (period 6). Primarily due to mix shift.
- 75% of their company operated hotels increased rates in period 6. Corporate and premium rates rose 10%.
- Roughly 15% of their rooms are under price guarantees negotiated previously. When negotiations start this year for group rate, they expect rates to be up.
- Corporate group nights were up 10% YoY, with 20% booked within 3 months of arrival.
- Group business for the quarter paid rates that were up 5% YoY. Revenue is up 10-15% for group business booked 12 months out. Expect Group revenue to be up 2-4% in 2010.
- Business in Europe and UK remained strong, benefiting from increased American tourism despite weak economies.
- Asia is very strong, and China is benefiting from the Expo in Shanghai.
- 3 cents of the upside was due to higher fee revenue and 1 penny was due to better timeshare results
- Have 22 hotels under construction in China, and will shortly be MAR's largest market outside the US.
- Have another 5 hotels awaiting conversion to the Autograph brand.
- Have seen a modest uptick in interest to develop their limited service brands.
- Timeshare was driven by cost efficiencies, lower marketing, and an 11% increase in rental revenues.
- Have only 17 hotels on or near the Gulf coast. Announced a beach guarantee for those hotels that allows guests to cancel if beaches close.
- Guidance assumes that strong RevPAR growth they are seeing continues through the 2H of the year.
- Introduced point program to give guests more flexibility to take longer or shorter trips. Also, now that they are selling a system vs. a specific location, they can now build less locations and better leverage sales centers regardless of availability. This will also lower the % of revenues that are deferred since they will only need to sell developed units.
- Don't expect to develop any new timeshare product in the foreseeable future.
- Will reach leverage targets by year end and are turning focus towards value enhancing investments.
- Acquired Seville hotel in Miami which will be converted into an Edition hotel post renovation.
Q&A
- Expense reduction program and how they can keep costs in check in the future
- Think that they can have fewer managers at their hotels. Obviously hourly staff will grow with occupancy. Can keep the procurement efficiencies. Zero bonus compensation and frozen base pay are not sustainable.
- Timeshare margins?
- More about not chasing that marginal customer.
- Think that the will see higher closing percentages with the new points program which means margins can continue to improve.
- 2H RevPAR system-wide outlook - mix of ADR/Occupancy
- Expect to continue to see good performance around rate.
- Rate growth is by and large driven by corporate travel and group; the next few months are leisure driven, so 3rd quarter will be more challenged but expect that to reverse in the 4Q.
- Occupancy comps will become tougher.
- Is their increase in room openings this year pull forward some demand from 2011?
- Feel pretty good about 25-30k gross room openings in 2011 since 50% of their pipeline is under construction.
- It will take several years to get back to the same levels of hotels paying incentive fees (60-65% in last peak). Their all-time high was 72% of hotels paying fees.
- Timeshare - former pricing was 25-30k per week. Average pricing on weeks was up about 5% in the quarter. They dropped their pricing aggressively last year (15-20%) so they expect to do meaningfully less going forward. Expect pricing to increase.
- Worldwide house profit margins were up 90bps for both domestic and international
- Termination fees were also included in their guidance so they claim, at least vs. their guidance, that that didn't drive the upside.
- Have seen very little cancellation because of the Gulf spill, but expect less bookings.
- If operating profits in NA move up 20%, then it just moves a small number of hotels into the black.
- Where did the growth this quarter in incentive fees come from? New additions (especially in Asia) and increases in results from hotels that were already paying and also had $1-2MM of fees accrued in prior quarters paid this quarter. There is some seasonality though in the incentive fees - and 3Q is seasonally a weak quarter since that quarter is driven by leisure. NY is already paying incentive fees. Courtyard that they manage - none are paying incentives today.
- The incentive fees:
- In the US, they don't get any fees until an owner priority fee is hit and then can get about 25% of profits.
- International: no owner's priority but more like a high single digit fee from day one.
- Giving existing owners the ability to participate in the point program and using the point program for new buyers. Fee to opt into the point program (conversion fees) won't move the needle for them because there are costs associated with switching to this new system.
- Supply growth that they are seeing this year is primarily limited service and that's impacting the growth in those brands.
- They aren't seeing any change in corporate demand in Europe, despite the sovereign debt crisis.
- Color on corporate negotiated rate process
- It's about 12-15% of their room mix.
- In a quarter, they will be into those conversions but few will be completed. More of a year-end event.
- Expect that rates will be up meaningfully over what was negotiated last year.
- What sectors are driving strength?
- Generally, it's across the board since everyone was hit last year or at least frightened.
- Some special corporate rates are down 20% from peak rates. Expect those to be up high single digits on rate for 2011.
- Share buyback?
- First, they want to remain investment grade/ below 3x leverage.
- Second, they want to make good investments.
- Unlikely to see a buyback in 2010 though, but they do look to return cash to shareholders.
- Seeing a very modest increase in the booking window.
- Property level revenue forecast have started to come up closer to their guidance.
- Had $6MM of termination fees booked in 3Q2009, which will not repeat in 2010.
