Marriott International Reports Strong 2007 First Quarter Earnings
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Marriott International Reports Strong 2007 First Quarter Earnings
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Category: Worldwide
This is a press release selected by our editorial committee and published online for free on 2007-04-19
Marriott International Reports Strong 2007 First Quarter Earnings; Outstanding House Profit Margins Drive Incentive Fees
Worldwide systemwide comparable revenue per available room (REVPAR) rose 6.6 percent for the fiscal quarter ended March 23; For the calendar quarter ended March 31, worldwide systemwide comparable REVPAR increased 7.6 percent;
• House profit margins for worldwide company-operated comparable properties rose approximately 160 basis points, driving incentive management fees up 20 percent;
• Combined base, franchise and incentive fee revenue totaled $296 million, up 10 percent over 2006 first quarter;
• Approximately 4,800 rooms opened during the quarter, including 1,100 rooms outside the United States. Nearly 20 percent of total hotel room openings were conversions from competitor brands;
• The company’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled over 100,000 rooms;
• Marriott repurchased 9.5 million shares of the company’s common stock for $451 million during the first quarter.
WASHINGTON, D.C. – April 19, 2007 – Marriott International, Inc. (NYSE: MAR) today reported adjusted diluted earnings per share from continuing operations (EPS) of $0.40 in the first quarter of 2007, up 5 percent from the first quarter 2006 adjusted EPS. Adjusted EPS excludes the results of the company’s synthetic fuel business. The company’s EPS guidance for the first quarter 2007, disclosed on February 8, 2007, totaled $0.35 to $0.39 and similarly excluded the results of the company’s synthetic fuel business.
Reported income from continuing operations was $182 million in the first quarter of 2007 and $170 million in the year ago quarter. Reported EPS from continuing operations was $0.44 in the first quarter of 2007 and $0.39 in the first quarter of 2006. The company’s synthetic fuel business contributed approximately $18 million after-tax ($0.04 per share) to 2007 first quarter earnings and $3 million after-tax ($0.01 per share) to 2006 first quarter earnings.
J.W. Marriott, Jr., Marriott International Chairman and Chief Executive Officer, said, “Our company posted solid performance in the first quarter of 2007. Business travel remains strong worldwide, and in the United States, lodging demand was particularly robust in Manhattan, Miami and Orlando. Across the globe, Mumbai, Moscow and Dubai performed exceptionally well, reflecting surging economies in those markets. In the quarter, we leveraged good REVPAR growth into excellent profit improvement. Worldwide house profit margins increased 160 basis points, exceeding 38 percent. Increasingly profitable hotels drove our incentive fees to over $70 million, up 20 percent versus the 2006 first quarter.
“Owners and franchisees continue to prefer Marriott brands which results in more hotels flying our flags around the world. Today, we have 106,000 rooms open outside the U.S. and another 27,000 in our international pipeline of rooms under development.
“We remain committed to delivering outstanding profit growth and maximizing total shareholder returns. Over the past 5 years, we have repurchased 167 million shares for approximately $5 billion and 44 million shares for $1.8 billion in the last 12 months alone.
“Our success over the past 80 years is rooted in our values and culture. With a proven business model, strong management team and the best associates in the industry, we look forward to decades more of industry leadership.”
In the 2007 first quarter (12 week period from December 30, 2006 to March 23, 2007), REVPAR for the company’s comparable worldwide systemwide properties increased 6.6 percent (6.0 percent using constant dollars). Average daily rates increased 8.3 percent (7.6 percent using constant dollars). Calendar quarter REVPAR for the company’s comparable worldwide systemwide properties increased 7.6 percent (6.6 percent using constant dollars).
In North America, company-operated comparable REVPAR rose 5.2 percent for the fiscal quarter ended March 23, 2007. REVPAR for company-operated Marriott Hotels located in downtown markets increased 9.1 percent.
Calendar quarter REVPAR for worldwide company-operated comparable properties increased 8.9 percent (7.3 percent using constant dollars). Calendar quarter REVPAR for North American company-operated comparable full-service properties increased 6.7 percent.
REVPAR growth was strong across international markets, including Cairo where the Marriott hotel recently completed extensive renovations and in Cancun, where the hotels reopened in mid 2006. In the first quarter, international systemwide comparable REVPAR increased 16.2 percent (11.1 percent using constant dollars), including a 13.8 percent increase in average daily rate and a 1.4 percentage point increase in occupancy. Economic growth and an expanding middle class contributed to strong REVPAR growth in India and China. Demand was also strong in the Caribbean, Eastern Europe and France.
The company added 35 hotels and timeshare resorts (4,783 rooms) to its worldwide lodging portfolio during the first quarter of 2007. Fifteen properties (3,054 rooms) exited the system, including nine first generation Fairfield Inn properties (1,129 rooms). Four of the hotels (871 rooms) added to the system in the first quarter were conversions from competitor brands, including a 200 room hotel in Visalia, California and a 300 room property in Colorado Springs, Colorado. Twenty-four percent of the hotel room additions are in international locations, including the 300 room Renaissance in Wuhan, China and the 175 room Sharq Village & Spa in Doha, Qatar, managed by The Ritz-Carlton. At quarter-end, the company had 2,868 lodging properties (517,202 rooms) open. The company had over 100,000 rooms in its worldwide pipeline of hotel rooms under construction, awaiting conversion or approved for development and expects to open approximately 30,000 rooms (gross) in 2007.
MARRIOTT REVENUES totaled $2.9 billion in the 2007 first quarter, a 7 percent increase from the same period in 2006. Base management and franchise fees rose 8 percent primarily due to higher REVPAR and unit growth. In the 2006 first quarter, the company recognized base fees of $5 million that were calculated based on prior period results, but not earned and due until the first quarter of 2006. Incentive management fees climbed 20 percent as a result of solid REVPAR growth and the robust property-level house profit margins.
House profit margins for North American comparable company-operated properties increased 170 basis points during the quarter, while house profit margins for worldwide company-operated properties grew 160 basis points. Favorable room rates and continued productivity improvements drove property-level margins.
Owned, leased, corporate housing and other revenue declined slightly to $250 million, largely due to the sale of properties that were owned in the year ago quarter. In addition, an ongoing property renovation at one owned hotel also constrained performance.
Timeshare sales and services revenue increased 21 percent in the first quarter of 2007, primarily driven by the 2006 contract sales at the company’s Maui resort which were not reportable in the prior year. In addition, several other projects reached higher reportability thresholds in the quarter.
Timeshare sales and services revenue, net of direct expenses, totaled $57 million, exceeding the $45 million to $50 million expected for the quarter. The outperformance was attributable to the favorable mix of financially reportable sales which resulted in better than expected development profits, especially at the company’s projects located in Hawaii, St. Kitts and St. Thomas.
Contract sales for the company’s timeshare, fractional and whole ownership projects, including sales made by joint venture projects, grew 5 percent in the first quarter. The increase reflected sales at fractional and whole ownership projects in Hawaii and San Francisco and a new timeshare resort in St. Kitts, which began sales in the third quarter of 2006.
GENERAL, ADMINISTRATIVE and OTHER expenses decreased slightly to $147 million in the 2007 first quarter, benefiting from $9 million associated with the reversal of reserves established several years ago that are no longer required.
SYNTHETIC FUEL operations contributed $18 million ($0.04 per share) of after-tax earnings in the first quarter of 2007, compared to $3 million ($0.01 per share) in the year ago quarter. Higher synthetic fuel earnings reflected increased production levels, partially offset by a $6 million mark-to-market expense associated with oil price hedges (recorded as an offset to interest income). Given the level of oil prices during the quarter, the synthetic fuel earnings for the 2007 first quarter do not reflect a provision for an estimated phase-out of 2007 tax credits. The 2006 first quarter results assumed an estimated 20 percent phase-out of the 2006 tax credits due to higher average oil prices during the quarter. Excluding the impact of the synthetic fuel business, the company’s tax rate would have been 34.4 percent for the first quarter.
GAINS AND OTHER INCOME totaled $35 million in the first quarter (excluding $12 million of expenses related to synthetic fuel) and included gains of $2 million from the sale of real estate, $9 million of gains associated with forgiveness of debt, $3 million of preferred returns from several joint venture investments, an $11 million gain on the sale of a stock investment, and a $10 million gain on the sale of the company’s interest in a joint venture. Prior year gains of $38 million (excluding $4 million of expenses related to synthetic fuel) included $7 million of gains from the sale of real estate, $25 million from the redemption of preferred stock in a joint venture, $5 million of preferred returns and a $1 million gain on the sale of a note.
INTEREST EXPENSE totaled $33 million in the first quarter, up $6 million over the 2006 first quarter, primarily due to higher interest rates and higher average borrowings, including senior debt issued in the second quarter of 2006.
INTEREST INCOME decreased $8 million to $3 million, primarily driven by loan repayments since the 2006 first quarter and a $6 million mark-to-market expense associated with oil price hedges for the synthetic fuel operations.
BALANCE SHEET
At the end of first quarter 2007, total debt was $2,418 million and cash balances totaled $124 million, compared to $1,833 million in debt and $193 million of cash at the end of 2006. The company repurchased 9.5 million shares of common stock in the first quarter of 2007 at a cost of $451 million. The remaining share repurchase authorization, as of March 23, 2007, totaled approximately 24.7 million shares.
OUTLOOK
REVPAR growth strengthened in February and March and the company expects solid growth for the remainder of the year, particularly from international markets and U.S. full-service hotels in urban markets. However, given the weaker year-over-year growth in January, coupled with more modest REVPAR growth in the limited service hotels, the company believes comparable North American REVPAR will increase 6 to 8 percent in 2007. The company expects comparable worldwide REVPAR to increase 7 to 9 percent. With continued focus on property-level cost efficiencies, the company anticipates that North American house profit margins will improve 150 to 200 basis points in 2007, exceeding house profit margins reported in the peak year of 2000. Assuming approximately 30,000 new room openings (gross), the company expects total fee revenue of $1,390 million to $1,410 million, an increase of 14 to 15 percent.
The company is currently producing synthetic fuel at four facilities and has hedge agreements to minimize operating losses that could occur if there is a sustained material increase in oil prices in 2007. Given the risk created by the volatility in oil prices, the company's overall 2007 earnings guidance does not include earnings from the synthetic fuel business. Under the applicable section of the Internal Revenue Code, tax credits will not be available for synthetic fuel produced after 2007.
The company expects timeshare interval sales and services revenue, net of direct expenses, will total $330 million to $340 million in 2007. Contract sales are expected to increase approximately 5 to 10 percent in 2007, as the company expects strong contract sales to continue in Hawaii, St. Kitts and San Francisco. The company plans to sell timeshare mortgage notes in the second and fourth quarters. For the full year, gains on the sale of those notes, which are included in timeshare sales and services revenue, are expected to be approximately $75 million.
The company expects gains and other income to total approximately $60 million in 2007, compared to $74 million in 2006, excluding the impact of the synthetic fuel business.
Assuming roughly $1.5 billion of share repurchases during the year, the company believes that net interest expense will range from $120 million to $130 million for the full year.
In the second quarter of 2007, the company expects REVPAR for all comparable North American properties to grow towards the lower end of the 6 to 8 percent range, with property-level house profit margin growth of 125 to 175 basis points.
Under the above assumptions, the company currently estimates the following results for the second quarter and full year 2007:
2nd Quarter 2007 Full Year 2007
Total fee revenue $355 million to $365 million $1,390 million to $1,410 million
Owned, leased, corporate housing and other, net of direct expenses Approx. $40 million $165 million to $175 million
Timeshare interval sales and services, net of direct expenses1 $45 million to $50 million $330 million to $340 million
General, administrative & other expense Approx. $170 million $690 million to $700 million
Lodging operating income $335 million to $350 million $1,185 million to $1,235 million
Gains (excluding synthetic fuel)2 $10 million to $15 million Approx. $60 million
Net interest expense3 Approx. $30 million $120 million to $130 million
Equity in earnings/(losses) $0 to $5 million $10 million to $20 million
Earnings per share from synthetic fuel No guidance No guidance
Earnings per share excluding synfuel $0.51 to $0.55 $1.84 to $1.94
Effective tax rate excluding synthetic fuel 34.5 percent 34.5 percent
1 Assumes timeshare mortgage note sale gains of $40 million in second quarter 2007 and $75 million for full year 2007
2 Excludes timeshare mortgage note sale gains
3 Net of interest income, and assuming roughly $1.5 billion of share repurchases
The company expects investment spending in 2007 to total $1.1 billion to $1.2 billion, including $60 million for maintenance capital spending, $600 million to $650 million for capital expenditures and acquisitions, $210 million to $250 million for timeshare development, $30 million to $40 million in new mezzanine financing and mortgage loans for hotels developed by owners and franchisees, and approximately $200 million in equity and other investments (including timeshare equity investments).
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