Marriott International Reports Fourth Quarter Results
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Marriott International Reports Fourth Quarter Results
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2009-02-12
Marriott International, Inc. (NYSE:MAR) today reported fourth quarter 2008 adjusted income from continuing operations of $121 million, a 49 percent decline over the year-ago quarter, and adjusted diluted earnings per share (“EPS”) from continuing operations of $0.34, down 45 percent.
Adjusted results for the 2008 fourth quarter exclude $192 million pretax ($124 million after-tax and $0.35 per diluted share) of restructuring and other charges resulting from the significant economic decline affecting worldwide lodging and timeshare demand and the turmoil in the financial markets. Restructuring charges totaled $55 million pretax and included severance costs, facilities exit costs and the write-off of capitalized costs associated with discontinued development projects.
Other charges totaled $137 million pretax and primarily included charges against timeshare and lodging assets, guarantee charges and reserves for loan losses and accounts receivable. Of the total $192 million of restructuring costs and other charges, $152 million were non-cash. See the table on page A-15 of the accompanying schedules for the detail of these charges and their placement on the Consolidated Statements of Income.
Adjusted results for the 2008 fourth quarter also exclude $7 million of charges ($0.02 per diluted share) in the provision for taxes largely due to state taxes related to a settlement reached in May 2008 with the IRS regarding a 1995 leasing transaction.
The reported loss from continuing operations was $10 million in the fourth quarter of 2008 compared to reported income from continuing operations of $236 million in the year-ago quarter. Reported diluted losses per share from continuing operations was $0.03 in the fourth quarter of 2008 compared to diluted EPS from continuing operations of $0.62 in the fourth quarter of 2007.
J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, said, “Results in the fourth quarter of 2008 demonstrated the impact of economic disruption to our business. Despite these highly challenging times, our priorities are straightforward. First, we are focusing on driving higher market share at the property level and through new room additions. Second, we are enhancing our cash flow by reducing investments in new projects. And third, we are reducing costs in all areas of our business to reflect the realities of the marketplace.
“While none of these tasks will ever be fully complete, we can see that our approach is working. In 2008, we added 26,000 net hotel rooms to our system and we expect to do the same this year. With strong guest satisfaction, we increased our market share at our existing hotels. While worldwide REVPAR declined over 8 percent during the fourth quarter, our actions to reduce costs limited our house profit margin declines to just 210 basis points. In our timeshare business, we closed less productive sales offices, substantially reduced overhead and dramatically scaled back development, and we will do more if needed. We expect our timeshare business to remain profitable and to produce positive cash flow in 2009. Across our company, we reduced annualized general and administrative spending by about $100 million, making cuts in every department. Finally, we reduced our 2009 investment spending estimate by $400 million year-over-year. All in all, despite a weak economic climate, we anticipate reducing our debt by $600 to $700 million this year and maintaining our investment grade credit rating. These are the kinds of steps that will position us to seize new opportunities when they arise.”
Marriott’s 2008 fiscal year ended on January 2, 2009 and included 53 weeks compared to 52 weeks in 2007. Similarly, the fourth quarter ended on January 2, 2009 and included 17 weeks compared to 16 weeks in the 2007 fiscal quarter. Key lodging statistics are included in the schedules accompanying the press release beginning on page A-6. While fiscal fourth quarter revenue per available room (REVPAR) statistics for North America are included, they are not comparable due to differences in the length and seasonality of the reporting periods. As a result, the company has also provided North American and worldwide REVPAR statistics excluding the 53rd week, which the company believes are more meaningful year-over-year statistics.
Excluding the 53rd week in the 2008 fourth quarter, REVPAR for the company’s comparable worldwide company-operated properties declined 8.4 percent (7.3 percent using constant dollars) and REVPAR for the company’s worldwide systemwide properties declined 7.5 percent (6.8 percent using constant dollars).
Outside North America, the fourth quarter included the months from September to December in both years. International comparable company-operated REVPAR declined 8.8 percent (5.3 percent using constant dollars), including a 1.2 percent decline in average daily rate (a 2.5 percent increase using constant dollars) in the fourth quarter of 2008.
In North America, excluding the 53rd week in the fourth quarter of 2008, comparable company-operated REVPAR declined 8.3 percent. REVPAR at the company’s comparable company-operated North American full-service and luxury hotels (including Marriott Hotels & Resorts, The Ritz-Carlton and Renaissance Hotels & Resorts) was down 7.8 percent with a 3.1 percent decline in average daily rate.
Marriott added 78 new properties (11,451 rooms) to its worldwide lodging portfolio in the 2008 fourth quarter, including 59 limited-service hotels. Five properties (1,194 rooms) exited the system during the quarter. Rooms converted from competitor hotels accounted for 22 percent of gross room additions during the quarter. At year-end, the company’s lodging group encompassed 3,178 properties and timeshare resorts for a total of over 560,000 rooms.
The company’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled over 125,000 rooms. Nearly 30 percent of the development pipeline rooms are Marriott, Ritz-Carlton, Renaissance or Edition rooms, of which nearly 70 percent are located outside North America.
Reported results for the 2008 fourth quarter, the adjusted results and the associated reconciliations are shown on pages A-1 and A-12 of the accompanying schedules. The following paragraphs reflect adjusted results where indicated.
MARRIOTT REVENUES totaled approximately $3.8 billion in the 2008 fourth quarter compared to $4.1 billion for the fourth quarter of 2007. Base management and franchise fees declined 6 percent to $320 million reflecting lower REVPAR and a stronger U.S. dollar, offset in part by fees from new hotels. Base management fees reflected $4 million in proceeds from business interruption insurance in the 2007 fourth quarter. With continued soft lodging demand trends in the United States, fourth quarter incentive management fees declined 35 percent. The percentage of company-operated hotels earning incentive management fees decreased to 39 percent in the 2008 fourth quarter compared to 62 percent in the year-ago quarter.
Approximately 55 percent of incentive management fees came from hotels outside of North America in the 2008 quarter compared to about 40 percent in the 2007 quarter, reflecting more favorable incentive fee calculations internationally. The 2007 fourth quarter incentive management fees reflected $9 million in proceeds from business interruption insurance.
Worldwide comparable company-operated house profit margins declined 210 basis points in the fourth quarter reflecting the weak REVPAR environment, offset in part by significant cost savings. House profit margins for comparable company-operated properties outside North America declined 120 basis points and house profit per available room (“HP-PAR”) declined nearly 8 percent. North American comparable company-operated house profit margins declined 260 basis points from the year-ago quarter and HP-PAR declined about 16 percent.
Owned, leased, corporate housing and other revenue, net of direct expenses, declined $20 million in the 2008 fourth quarter, to $45 million, primarily reflecting the impact of lower profits in owned and leased hotels partially driven by the conversion of formerly owned hotels to managed, lower revenue from a services contract terminated at the end of 2007 and a reduction in branding and other fee income.
Fourth quarter Timeshare segment contract sales declined to $103 million reflecting weak demand. Contract sales were also reduced by allowances totaling $115 million for previously signed contracts now expected to cancel.
In the fourth quarter, adjusted timeshare sales and services revenue declined 28 percent to $386 million and, net of expenses, totaled $10 million for the quarter. Softer demand across all product lines continued to constrain development revenue. Financing revenue declined largely as a result of the absence of a note sale in the fourth quarter of 2008, compared to a $36 million note sale gain recognized in the fourth quarter of 2007, partially offset by increased interest income in the 2008 quarter.
Adjusted Timeshare segment results, which includes timeshare sales and services revenue, net of direct expenses, as well as base management fees, equity earnings, minority interest and general, administrative and other expenses associated with the timeshare business, totaled a loss of $2 million in the 2008 fourth quarter compared to income of $116 million in the prior year quarter.
ADJUSTED GENERAL, ADMINISTRATIVE and OTHER expenses for the 2008 fourth quarter totaled $238 million, compared to $250 million in the year-ago quarter. The 2008 fourth quarter included a $16 million favorable impact associated with deferred compensation (offset by a similar increase in the provision for taxes) and $4 million of lower legal costs partially offset by $3 million of higher receivables reserves, $4 million in foreign exchange losses and the roughly $5 million impact of the 53rd week. The company’s outlook for 2009 general, administrative and other expenses includes anticipated annual cost savings of approximately $95 million to $115 million.
ADJUSTED GAINS AND OTHER INCOME totaled $28 million and included a $28 million gain on the extinguishment of debt and $7 million of gains on the sale of real estate offset by a $4 million loss on the sale of an investment and $3 million unfavorable impact of preferred returns from joint venture investments and other income. The prior year’s fourth quarter gains totaled $20 million and included $10 million of gains on the sale of real estate, an $8 million gain from the sale of a stock investment and $2 million of preferred returns from joint venture investments and other income.
INTEREST EXPENSE decreased $7 million in the fourth quarter primarily due to lower interest rates.
After adjustments, there was no provision for loan losses in the fourth quarter. The provision for loan losses totaled $17 million in the fourth quarter of 2007 reflecting a $12 million reserve for a loan at one property and a $5 million reserve for a leveraged aircraft lease.
ADJUSTED EQUITY IN EARNINGS totaled $5 million in the quarter compared to $6 million in the year-ago quarter.
ADJUSTED INCOME TAXES
The adjusted provision for taxes reflected a $17 million unfavorable impact associated with deferred compensation (offset by a similar benefit in general, administrative and other expenses).
FULL YEAR 2008 RESULTS
For the full year 2008, adjusted income from continuing operations totaled $555 million, a decline of 26 percent, and adjusted diluted EPS from continuing operations was $1.51, a decline of 20 percent. Adjusted income from continuing operations and adjusted diluted EPS from continuing operations for 2008 exclude the $192 million pretax ($124 million after-tax and $0.34 per diluted share) restructuring and other charges discussed above. See the table on page A-15 of the accompanying schedules for the detail of these charges and their placement on the Consolidated Statements of Income.
Adjusted results for full year 2008 also exclude the $72 million ($0.20 per diluted share) impact of items included in the tax provision. Those items, $67 million of which were non-cash, reflected a $29 million charge primarily related to a 1994 tax planning transaction, a $24 million tax reserve related to the treatment of funds received from foreign subsidiaries that is in ongoing discussions with the Internal Revenue Service (“IRS”), and a $19 million expense due primarily to prior years’ tax adjustments, including a settlement with the IRS that resulted in a lower than expected refund of taxes associated with a 1995 leasing transaction.
Adjusted income from continuing operations and adjusted diluted EPS from continuing operations for 2007 exclude the $54 million after-tax charge ($0.14 per diluted share) for the Employee Stock Ownership Plan (“ESOP”) settlement agreement reached with the IRS and the Department of Labor in the 2007 second quarter.
Reported income from continuing operations was $359 million for full year 2008 compared to reported income of $697 million a year ago. Reported diluted EPS from continuing operations was $0.98 for 2008 compared to diluted EPS from continuing operations of $1.75 for 2007.
Excluding the 53rd week of 2008, REVPAR for the company’s comparable worldwide company-operated properties increased 0.6 percent (a decline of 0.4 percent using constant dollars). REVPAR for the company’s comparable worldwide systemwide properties increased 0.1 percent (a decline of 0.6 percent using constant dollars) over the prior year.
International comparable company-operated REVPAR for 2008 grew 6.7 percent (3.3 percent using constant dollars), including a 10.0 percent increase in average daily rate (6.5 percent increase using constant dollars).
In North America, excluding the 53rd week in fiscal 2008, comparable company-operated REVPAR declined 2.0 percent. REVPAR at the company’s comparable company-operated North American full-service and luxury hotels (including Marriott Hotels & Resorts, The Ritz-Carlton and Renaissance Hotels & Resorts) was down 1.3 percent with average daily rate growth of 1.0 percent.
Reported results for full year 2008, the adjusted results and the associated reconciliations are shown on pages A-2 and A-13 of the accompanying schedules. The following paragraphs reflect adjusted results where indicated.
MARRIOTT REVENUES totaled nearly $13 billion in 2008, roughly flat with 2007. Total fees in 2008 were $1,397 million, a decrease of 2 percent over the prior year. Base management and franchise fees grew $27 million in 2008, reflecting international REVPAR gains and worldwide unit growth offset in part by declines in North American REVPAR. Franchise relicensing fees declined by $13 million in 2008. Base management fees in 2007 included $6 million in proceeds from business interruption insurance. Incentive management fees declined 16 percent reflecting lower property-level margins due to North American REVPAR declines and increased wages and utility costs. In 2007, incentive management fees included $17 million that were based on prior period results but not earned and due until 2007 and $13 million in proceeds from business interruption insurance.
Owned, leased, corporate housing and other revenue, net of direct expenses, totaled $137 million in 2008 compared to $178 million in 2007. Results were primarily impacted by lower operating results at owned and leased properties, the conversion of some owned properties to management agreements, the impact of properties undergoing renovation, as well as $17 million lower revenue from a services contract terminated at the end of 2007.
Timeshare segment contract sales in 2008 declined 23 percent to $1,076 million reflecting significantly lower demand, the impact of projects approaching sellout and anticipated contract cancellations. The allowance for anticipated contract cancellations reduced contract sales by $115 million for the year.
Adjusted Timeshare sales and services revenue declined 15 percent to $1,484 million in 2008 reflecting lower revenue from projects approaching sell-out, a decline in demand for all Timeshare products, and lower reportability. Adjusted Timeshare sales and services revenue, net of direct expenses, totaled $147 million in 2008, a decrease of 58 percent. Adjusted Timeshare note sale gains totaled $28 million in 2008 compared to $81 million in 2007. Two note sale transactions were completed in 2007 compared to only one transaction in 2008. Timeshare direct expenses also included the $22 million impairment charge at the fractional and residential joint venture project referred to below.
Adjusted Timeshare segment results, which includes timeshare sales and services revenue, net of direct expenses, as well as base management fees, equity earnings, minority interest and general, administrative and other expenses associated with the timeshare business, totaled $121 million in 2008 compared to $306 million in the prior year. The segment results reflected a third quarter $10 million net pretax impairment charge for a fractional and residential consolidated joint venture project, adjusting the carrying value of the real estate to its estimated fair market value. The $10 million charge included a $22 million negative adjustment in timeshare direct expenses discussed above partially offset by a $12 million pretax ($8 million after-tax) benefit associated with the joint venture partner’s share, which is reflected in minority interest.
ADJUSTED GENERAL, ADMINISTRATIVE and OTHER expenses increased 3 percent to $751 million in 2008 and included a $4 million increase in foreign exchange losses and the $5 million unfavorable impact of the 53rd week, $28 million favorable impact associated with deferred compensation (offset by a similar increase in the provision for taxes) and $39 million of increased expenses largely associated with unit growth and development, systems improvements and initiatives to enhance our global brands. Adjusted general, administrative and other expenses in 2007 included an $11 million unfavorable impact associated with deferred compensation (offset by a similar decrease in the provision for taxes), as well as a $9 million benefit from the reversal of reserves established several years earlier that were no longer required.
ADJUSTED GAINS AND OTHER INCOME totaled $47 million in 2008 and included gains of $14 million from the sale of real estate, a $28 million gain on the extinguishment of debt, $6 million of preferred returns from several joint venture investments and other income and $3 million of gains on the sale of the company’s interests in two joint ventures partially offset by a $4 million loss on the sale of an investment. Gains of $97 million in 2007 included gains of $39 million from the sale of real estate, $12 million of gains associated with the forgiveness of debt, an $18 million gain from the sale of a stock investment, $13 million of gains on the sale of the company’s interests in five joint ventures and $15 million of preferred returns from several joint venture investments and other income.
ADJUSTED INTEREST EXPENSE declined $8 million to $163 million partially due to lower interest rates in 2008 and the maturity of our Series E Senior Notes in early 2008.
ADJUSTED EQUITY IN EARNINGS totaled $31 million in 2008, an increase of $16 million largely due to a $15 million gain on the sale of a joint venture’s assets.
ADJUSTED INCOME TAXES
The adjusted provision for taxes reflected the $29 million unfavorable impact associated with deferred compensation (offset by a similar benefit in general, administrative and other expenses).
MINORITY INTEREST, NET OF TAX increased $14 million in 2008. The increase largely reflected the adjustment of the carrying value of the fractional and residential project noted earlier. Since the project is a consolidated joint venture, the partner’s share of the adjustment was an $8 million after-tax benefit to minority interest.
BALANCE SHEET
At year-end 2008, total debt was $3,095 million and cash balances totaled $134 million, compared to $2,965 million in debt and $332 million of cash at year-end 2007. The company repurchased $109 million of its Senior Notes in 2008. At year-end 2008, Marriott had drawn down $969 million under its $2.4 billion bank revolver.
The company repurchased 11.9 million shares of common stock in 2008 at a cost of $371 million. Weighted average fully diluted shares outstanding totaled 359.4 million in the 2008 fourth quarter compared to 383.1 million in the year-ago quarter. The remaining share repurchase authorization, as of January 2, 2009, totaled 21.3 million shares. No share repurchases are planned in 2009.
OUTLOOK
While Marriott typically provides a range of guidance for future performance, the current global economic and financial climate makes predictions very difficult. For the first quarter of 2009, the company expects North American comparable company-operated REVPAR to decline roughly 17 percent, including the benefit of the shifting fiscal calendar, and comparable company-operated REVPAR outside North America to decline roughly 15 percent. Based on those assumptions, total fee revenue could decline 20 to 25 percent and owned, leased, corporate housing and other, net of direct expenses, could total $5 million to $10 million.
In the first quarter, the company expects Timeshare sales and services revenue, net of direct expenses, to total a loss of about $10 million. First quarter Timeshare contract sales are expected to total $150 million to $160 million.
General, administrative and other expenses are expected to total $145 million to $150 million in the first quarter of 2009, a decline of roughly $15 million from 2008.
Based upon the above assumptions, the company expects diluted EPS from continuing operations for the 2009 first quarter to total $0.13 to $0.15.
For the full year 2009, the company expects the business environment to remain unpredictable and, therefore, is unable to give its typical annual guidance. Instead, the company is providing a broad range of assumptions, which it’s using for internal planning purposes. For company-operated hotels outside North America, the company assumes an 8 to 13 percent decline in REVPAR on a constant dollar basis. For North American comparable company operated hotels, the company assumes a 12 to 17 percent decline in REVPAR. Room growth is expected to total over 30,000 rooms in 2009 as most hotels expected to open are already under construction or undergoing conversion from other brands. All in all, fee revenue under these assumptions could total roughly $1,075 million to $1,175 million in 2009. The company estimates that incentive management fees in 2009 would derive largely from international markets. Owned, leased, corporate housing and other revenue, net of direct expenses, could total $65 million to $85 million in 2009.
The timeshare business is more complex to forecast and model, particularly in this weak economic environment. In 2009, if Timeshare segment contract sales total roughly $800 million, consistent with recent performance, then Timeshare sales and services revenue, net of direct expenses, could total approximately $70 million. Base management fees associated with the timeshare business are likely to increase and timeshare site, regional and corporate overhead is likely to decline in 2009. While the company expects to complete timeshare note sales in 2009, pricing is likely to remain unfavorable, so no note sale gains are assumed. Under this scenario, Timeshare segment results for 2009 could total approximately $45 million.
The company’s general, administrative and other expenses are expected to total about $640 million to $665 million reflecting substantial savings compared to 2008 as a result of restructuring efforts and cost controls.
While the company cannot forecast results with any certainty, based upon the above assumptions, diluted EPS from continuing operations for 2009 could total $0.86 to $1.04 and, assuming the investment spending levels below, debt levels could decline $600 million to $700 million by year-end 2009.
The company expects investment spending to decline from approximately $950 million in 2008 to approximately $500 million to $600 million in 2009, including $30 million for maintenance capital spending, $130 million to $170 million for capital expenditures, $120 million to $140 million for net timeshare development, $130 million to $150 million in new mezzanine financing and mortgage loans for hotels developed by owners and franchisees, $50 million to $70 million for contract acquisition costs and $40 million in equity and other investments (including timeshare equity investments).
Marriott International, Inc. (NYSE:MAR) will conduct its quarterly earnings review for the investment community and news media on Thursday, February 12, 2009 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 and Upcoming Events” tab and click on the quarterly conference call link. A replay will be available at that same website until February 12, 2010. The webcast will also be available as a podcast from the same site.
The telephone dial-in number for the conference call is 719-325-4831. A telephone replay of the conference call will be available from 1 p.m. ET, Thursday, February 12, 2009 until 8 p.m. ET, Thursday, February 19, 2009. To access the replay, call 719-457-0820. The reservation number for the recording is 7210547.
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