Marriott International Reports Strong Third Quarter Results
Bethesda, MD .-• Worldwide systemwide comparable revenue per available room (REVPAR) rose 7.7 percent (6.6 percent using constant dollars) for the third quarter ended September 7, 2007.
• Worldwide company-operated comparable REVPAR increased 9.0 percent (7.3 percent using constant dollars). Worldwide company-operated house profit margins rose 180 basis points. House profit per available room climbed 12.2 percent.
• Combined base, franchise and incentive fees increased 15 percent to $302 million as a result of continued REVPAR growth, property-level margin improvement and unit expansion.
• Approximately 7,200 rooms opened during the quarter, including nearly 2,200 rooms outside of the United States.
• The company’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled approximately 115,000 rooms. Over 50 percent of the full-service pipeline is outside of the United States.
• Marriott repurchased 10.7 million shares of the company’s common stock for $462 million during the third quarter; year-to-date, through October 2, 2007, the company repurchased 30.8 million shares for $1.4 billion.
• Assuming worldwide systemwide REVPAR growth of 5 to 7 percent in 2008, the company expects earnings per share of $2.10 to $2.25. Excluding earnings from synthetic fuel operations, as well as the 2007 ESOP tax settlement, and gains and other income in both years, 2008 earnings per share should grow 18 percent to 26 percent over 2007.
• To assist investors evaluating Marriott’s business model, the company updated its long-term growth outlook through 2010. Assuming systemwide REVPAR growth of 3, 5, or 7 percent compounded through 2010 and the addition of 85,000 to 100,000 rooms, the company estimates earnings per share growth of 16 percent, 21 percent or 26 percent, respectively, compounded from 2007 to 2010.
BETHESDA, MD – October 4, 2007 – Marriott International, Inc. (NYSE:MAR) today reported third quarter 2007 adjusted net income of $122 million and adjusted diluted earnings per share (EPS) of $0.31. In the third quarter of 2006, adjusted net income totaled $144 million and adjusted EPS was $0.34. Adjusted results for both years exclude the impact of the company’s synthetic fuel business. Strong REVPAR and unit expansion in the quarter led to a 15 percent increase in combined fees but was offset by a decline in timeshare profits and a higher effective tax rate. While the timeshare business reported results in the third quarter that exceeded the guidance the company provided on July 12, 2007, the year-over-year comparison was impacted by the 2006 reversal of a $15 million pretax contingency reserve related to marketing incentives.
The company’s EPS guidance for the 2007 third quarter, disclosed on July 12, 2007, totaled $0.27 to $0.31 and excluded the company’s synthetic fuel business.
Reported net income was $131 million in the third quarter of 2007 compared to $141 million in the year ago quarter. Reported EPS was $0.33 in both the third quarters of 2007 and 2006.
J.W. Marriott, Jr., Marriott International’s chairman and chief executive officer, said, “Working together to serve our guests, we achieved another great quarter for our company. Worldwide comparable REVPAR increased 7.7 percent. Transient REVPAR for our Marriott branded hotels was up 10 percent. Leveraging technology and system size, we continued to drive higher property-level profits. In the third quarter, worldwide company-operated house profit per available room increased 12.2 percent and house profit margins expanded 180 basis points.
“Our brands are the best in the industry and are getting even better. Marriott Hotels & Resorts came out on top for the second year in a row on TripAdvisor’s® annual survey of business travelers. More than 1,500 individuals responded to the survey, which also named Courtyard by Marriott one of the top five hotel chains for business travel. In late July, JD Power and Associates released its 2007 North America Hotel Guest Satisfaction study, measuring overall guest hotel satisfaction across six hotel segments. The Ritz-Carlton brand came in number one in the luxury segment and the JW Marriott brand came in second.
“Based on favorable group bookings, 2008 is shaping up as another strong year for Marriott International. Our growing pipeline of new hotels implies strong unit growth, and ongoing brand initiatives should enable us to increase our already substantial lead over the competition.”
In the 2007 third quarter (12 week period from June 16, 2007 to September 7, 2007), REVPAR for the company’s comparable worldwide systemwide properties increased 7.7 percent (6.6 percent using constant dollars). North American REVPAR for the company’s comparable company-operated properties increased 7.2 percent.
Third quarter international company-operated comparable REVPAR increased 12.9 percent (7.5 percent using constant dollars), including a 10.8 percent increase in average daily rate (5.5 percent using constant dollars) and a 1.4 percentage point improvement in occupancy to 76.8 percent. The strong showing of the company’s international hotels was especially gratifying given tough comparisons to Germany’s World Cup business in 2006.
In the third quarter, Marriott added 50 new properties (7,163 rooms) to its worldwide lodging portfolio, including Renaissance hotels in Shanghai, China and Paris, France. The company also added the spectacular Abama Hotel & Spa in Tenerife, Spain and the Ritz-Carlton hotel in Moscow to the Ritz-Carlton system. Six properties (1,046 rooms) exited the system during the quarter. At quarter-end, the company’s lodging group encompassed 2,942 hotels and timeshare resorts for a total of 527,307 rooms.
MARRIOTT REVENUES totaled $3.0 billion, a 12 percent increase from the same period in 2006. Base management and franchise fees rose 15 percent to $246 million as a result of REVPAR improvement, unit expansion and higher relicensing fees. Incentive fees rose 14 percent to $56 million, driven by strong REVPAR and higher property-level house profit margins. The 2006 quarter included $10 million of incentive fees that were calculated based on prior period results, but earned and due in the third quarter of 2006.
During the quarter, strong rate growth, higher food and beverage profits, moderating utility costs, and improved productivity drove property-level house profit margins up 180 basis points worldwide and 190 basis points in North America. In the 2007 third quarter, 59 percent of the company’s managed properties paid incentive fees, compared to 54 percent in the year ago quarter. Year-to-date 66 percent of the company’s managed properties paid incentive management fees compared to 60 percent in 2006.
Owned, leased, corporate housing and other revenue increased 10 percent in the third quarter, to $262 million, primarily driven by outstanding demand at the new leased Ritz-Carlton property in Tokyo. The solid growth was partially offset by the conversion of hotels to management and franchise contracts and the impact of renovation activity at several hotels. The 2006 third quarter revenues included termination fee income totaling $13 million.
Timeshare sales and services revenue increased 4 percent in the third quarter, driven by higher services and financing revenue. Net of direct expenses, results declined $31 million reflecting lower development profits and the comparison to the 2006 third quarter $15 million reversal of a contingency reserve related to marketing incentives. The company’s Las Vegas timeshare resort reported higher development profits as a result of reaching higher reportability thresholds this year. However, this strength was more than offset by lower results from resorts nearing sell-out in Aruba, Orlando and Hilton Head.
Third quarter contract sales, including joint ventures, declined 1 percent to $350 million. Higher contract sales from the new Marriott Vacation Club timeshare resort in Marco Island were similarly offset by lower contract sales at resorts nearing sell-out. In addition, third quarter contract sales reflected a tough comparison to last year’s successful launch of The Ritz-Carlton whole ownership project in San Francisco and the Marriott Vacation Club timeshare resort in St. Kitts. New resorts in Kauai, Orlando, Singer Island, Lake Tahoe and Vail should begin contract sales in 2008.
General, administrative and other expenses for the third quarter totaled $164 million, a 10 percent increase compared to the prior year, reflecting higher expenses associated with new hotel development, brand initiatives and the impact of foreign exchange.
SYNTHETIC FUEL operations contributed $0.02 per share of after-tax earnings during the 2007 third quarter, compared to a loss of $0.01 in the year ago quarter, reflecting higher production levels in 2007. The 2007 results included an estimated 20 percent phase out of tax credits retroactive to the beginning of the year, compared with a 51 percent estimated phase out in 2006. Excluding the impact of the synthetic fuel operations, the effective tax rate was approximately 43.5 percent in the third quarter of 2007. The effective tax rate in the third quarter of 2007 reflected the impact of a lower German tax rate on deferred tax assets, combined with a change in the mix of taxable income between countries. The fourth quarter tax rate (excluding the impact of synthetic fuel operations) is expected to be approximately 36 percent. The 2008 tax rate is expected to be between 35 percent and 36 percent.
GAINS AND OTHER INCOME totaled $30 million (excluding $3 million of expenses related to synthetic fuel) and included $22 million of gains on the sale of real estate, $2 million of gains from the sale of the company’s interest in four joint ventures and $6 million of preferred returns from joint venture investments and other income. The prior year’s third quarter gains included $4 million of gains on the sale of real estate, $3 million of gains from the sale of the company’s interest in a joint venture and $3 million of preferred returns from joint venture investments.
INTEREST EXPENSE increased $13 million to $42 million, primarily due to higher interest rates and higher average borrowings, including senior debt issued during the 2007 third quarter. The company’s repurchase of 40 million shares of common stock at $1.8 billion, over the past four quarters, contributed to the increase in debt.
INTEREST INCOME totaled $6 million during the quarter, down from $11 million in the year ago quarter. Interest income in 2006 included $3 million of income from the reversal of a reserve for a previously impaired loan. Interest income in 2007 was reduced by a $2 million mark-to-market expense associated with oil price hedges for the synthetic fuel operations. In 2006, the mark-to-market expense was $3 million.
EQUITY IN EARNINGS/(LOSSES) reflect Marriott’s share of income or losses in equity joint venture investments. Improved results at the timeshare joint venture projects and the reopening of a hotel in Mexico following the hurricane in 2005 contributed to the $9 million increase in equity in earnings.
At the end of the 2007 third quarter, total debt was $2,948 million and cash balances totaled $208 million, compared to $1,833 million in total debt and $193 million of cash at the end of 2006.
The company repurchased 10.7 million shares of common stock in the third quarter of 2007 at a cost of $462 million. Year-to-date, through October 2, 2007, the company repurchased 30.8 million shares of common stock at a cost of $1.4 billion. The remaining share repurchase authorization as of October 2, 2007 totaled 43.4 million shares. The company expects to repurchase approximately $1.6 billion of its common stock during 2007.
FOURTH QUARTER 2007 OUTLOOK
The company expects worldwide systemwide comparable REVPAR and North American company-operated comparable REVPAR to increase 6 to 8 percent in the fourth quarter. Assuming a 150 to 200 basis point improvement in North American house profit margins, the company expects total fee revenue for the fourth quarter of approximately $445 million to $455 million, an increase of 14 to 17 percent.
The company expects timeshare sales and services revenue, net of expenses, to decline 14 to 17 percent in the fourth quarter. In the prior year’s quarter, several projects reached higher reportability thresholds. In the 2007 quarter, the company anticipates that timeshare contract sales will decline 15 percent. The 2006 quarter benefited from a surge in contract sales in Hawaii when a new project received final government approvals. Gains on the sale of timeshare mortgage notes, which are included in timeshare sales and services revenue, are expected to total approximately $40 million in the fourth quarter of 2007.
The company expects gains and other income to total approximately $15 million in the fourth quarter of 2007, excluding the impact of the synthetic fuel business.
Based upon the above assumptions, the company expects EPS for the 2007 fourth quarter to total $0.61 to $0.63.
Given the risk created by volatility in oil prices, the company’s earnings guidance does not include earnings from the synthetic fuel business.
The company expects investment spending in 2007 to total approximately $1,125 million, including $60 million for maintenance capital spending, $650 million for capital expenditures and acquisitions, $170 million for timeshare development, $25 million in new mezzanine financing and mortgage loans for hotels developed by owners and franchisees, and $220 million in equity and other investments (including timeshare equity investments). Included in capital expenditures is approximately $200 million already invested in land in Las Vegas. The company plans to develop a 3,500-room convention hotel with one-half million square feet of meeting space and a 75,000 square foot casino. Marriott expects partners to complete development of the hotel and operate the casino.
The company expects nearly 30,000 new room openings (gross) in 2007.
Based on preliminary planning, the company expects that worldwide systemwide comparable REVPAR and North American company-operated comparable REVPAR will both increase 5 to 7 percent in 2008. Assuming a 50 to 100 basis point improvement in North American house profit margins for the year and approximately 30,000 new room openings (gross), the company expects total fee revenue of $1,540 million to $1,570 million.
The company anticipates investment spending in 2008 to total approximately $750 million to $850 million.
The company’s 2008 outlook assumes share repurchases of $1.25 billion to $1.5 billion.
The company expects to permanently shut down its synthetic fuel facilities and cease production of synthetic fuel by December 31, 2007. The company expects costs associated with shutting down the synthetic fuel facilities will be immaterial.
With few hotels anticipated to be owned at the end of 2007, the company expects owned, leased, corporate housing and other revenue, net of direct expenses in 2008 to be flat compared to 2007 levels. With few assets available to be sold, gains and other income are expected to decline $62 million to approximately $30 million.
Given the above assumptions, the company expects earnings per share of $2.10 to $2.25 in 2008. Excluding earnings from synthetic fuel operations, as well as the ESOP tax settlement and gains and other income in both years, the company expects EPS to grow 18 to 26 percent in 2008.
Under the above assumptions, the company currently estimates the following results for the fourth quarter, full year 2007 (excluding the impact of the second quarter 2007 ESOP tax settlement and the synthetic fuel business) and full year 2008.
In October 2006, Marriott held an analyst meeting in Paris where the company outlined its long- term growth prospects through 2009. In conjunction with its annual planning process and to assist investors with their evaluation of the long-term performance of Marriott’s business model, the company has updated this outlook through the year 2010.
Similar to its Paris forecast for the period 2007 to 2009, Marriott expects to increase the number of its systemwide hotel rooms by 85,000 to 100,000 from 2008 to 2010, with approximately one third of the new rooms located outside North America. At the end of the third quarter 2007, over 115,000 rooms were under construction, awaiting conversion, or approved for development. Further, assuming worldwide systemwide REVPAR increases of 3, 5 or 7 percent compounded from 2007 to 2010, the company expects total fee revenue in 2010 to total approximately $1,820 million, $1,970 million, or $2,120 million respectively, a growth rate of approximately 9, 12, or 14 percent compounded annually.
Marriott’s timeshare business also continues to offer very attractive long-term growth opportunities. Timeshare projects under development today represent nearly $8 billion of potential revenue for the future. With a growing proportion of Ritz-Carlton fractional and residential products expected to begin sales, timeshare segment results could grow by 10 to 15 percent from 2007 to 2010 compounded.
Under the 3, 5 or 7 percent REVPAR growth assumption, Marriott’s earnings per share could total $3.00, $3.40 or $3.80 respectively, a growth rate of 16 percent, 21 percent or 26 percent, respectively, compounded from 2007 to 2010 (excluding the impact of Marriott synthetic fuel business and the ESOP tax settlement in 2007).
A continued effort to optimize Marriott’s capital structure, together with strong cash flow from operations and capital recycling, should fuel the company’s significant growth as well as continued stock repurchases. The company’s ongoing leverage target for adjusted debt to adjusted EBITDA remains approximately 3.0x to 3.25x and is likely to be at the lower end of the range for 2007. Through the third quarter of 2007, Marriott repurchased $4.6 billion in common stock over the past three years, roughly 28 percent of the company’s outstanding shares. The company plans to invest roughly $1.6 billion in share repurchases in 2007. While use of the company’s cash flow may vary as investment opportunities arise, given its cash flow characteristics, the company estimates that it could invest $4.5 billion to $5 billion in share repurchases in 2008 through 2010. This is possible due to the significant cash flow generated by Marriott’s business and can still be accomplished while maintaining the company’s commitment to a strong BBB credit rating.
“We are gratified that our 2007 year-to-date results and updated analysis reinforces the conclusions we communicated in Paris,” said Arne Sorenson, Chief Financial Officer. “Marriott remains the leading hotel management and franchise company with 20 different brands including two new brands announced since the Paris meeting. Our brand leadership drives owner preference and substantial unit growth. And our business model, combined with our strong brands and service culture, provide solid long-term earnings and cash flow growth. Finally, over time, our share repurchases offer accelerating earnings accretion. There are few businesses that offer these attractive growth characteristics.”
Marriott International, Inc. (NYSE:MAR) will conduct its quarterly earnings review for the investment community and news media on Thursday, October 4, 2007 at 10 a.m. Eastern Time (ET). The conference call will be webcast simultaneously via Marriott’s investor relations website at http://www.marriott.com/investor, click the “Recent Investor News” tab and click on the quarterly conference call link. A replay will be available at that same website until November 4, 2007. The webcast will also be available as a podcast from the same site.
The telephone dial-in number for the conference call is 719-457-2693. A telephone replay of the conference call will also be available by telephone from 1 p.m. ET, Thursday, October 4, 2007 until 8 p.m. ET, Thursday, October 11, 2007. To access the replay, call 719-457-0820. The reservation number for the recording is 2614627.
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