Marriott International Reports Outstanding Second Quarter 2005 Results

• 
  SAVE
• 
  SHARE
• 
  TEXT SIZE
• 
  PRINT
• 
  COMMENT
• 
  PDF

. October 14, 2008

NEW YORK, NY, July 14, 2005. Marriott International, Inc. today reported diluted earnings per share (EPS) of $0.59 in the second quarter of 2005 and net income of $138 million. Results included $94 million of pre-tax charges ($0.26 per share after-tax) primarily due to the non-cash write-off of management agreements in connection with the CTF transaction, $29 million of pre-tax costs ($0.08 per share after-tax) related to the company's new bedding incentive program, and $44 million of net income ($0.19 per share) from the synthetic fuel operations. EPS excluding the synthetic fuel operations, CTF transaction and bedding incentive program was $0.75 in the 2005 second quarter, up 39 percent from comparable EPS in the 2004 second quarter.

J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, said, "The economy continues to be strong and so does our business. In the second quarter, surging U.S. travel demand drove occupancy and room rates higher in most markets, from New York and Seattle to New Orleans and San Francisco. Marriott's occupancy and room rates improved due to accelerating corporate demand, growing group meeting attendance and increasing global travel.

"Outside the U.S., international tourist and business travel demand also increased, driving Marriott's international managed REVPAR to historic highs. We continue to expand to meet that international demand with nearly 60 hotels in over 30 countries outside North America in our development pipeline. Globally, our pipeline of properties under construction, awaiting conversion or approved for development increased during the quarter to approximately 370 hotels and 60,000 rooms.

"While we are generating strong results today, we are setting the stage for an even better Marriott experience tomorrow. We and our owners and franchisees continue to invest in product - our new bedding package, our internet and technology offerings, and new room and public space designs. In 2005, we are rolling out new luxurious bedding for 628,000 beds at approximately 2,400 hotels, and renovating 331 company-operated hotels worldwide.

"With robust industry demand, our increasing share of expected low industry supply growth and the strength of our brand preference, we expect continued pricing power and strong financial results for the remainder of 2005 and beyond," said Mr. Marriott.

In the second fiscal quarter (12 week period from March 26, 2005 to June 17, 2005), REVPAR for the company's 2,250 comparable worldwide systemwide properties increased by 11.1 percent (10.4 percent using constant dollars). Company-operated comparable North American REVPAR increased by 10 percent in the second quarter of 2005; occupancy was up 1 percentage point to 76.2 percent. Robust demand for the company's brands in North America resulted in an 8.5 percent increase in average daily rate. When calculated for the calendar quarter (April 1 - June 30), North American company-operated REVPAR increased 11.5 percent. REVPAR at the comparable company-operated North American full-service hotels (including Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, The Ritz-Carlton, and Renaissance Hotels & Resorts) increased by 10.3 percent during the quarter (12 percent for the calendar quarter), driven by an 8.2 percent increase in average daily rate and a 1.4 percentage point occupancy gain to 75.9 percent. North American company- operated REVPAR for comparable select-service and extended-stay brands (including Courtyard, Fairfield Inn, Residence Inn, TownePlace Suites, and SpringHill Suites) increased 9.2 percent (10.2 percent for the calendar quarter), driven by an 8.8 percent increase in average daily rate and a slight increase in occupancy to 76.6 percent.

International systemwide REVPAR increased 17.3 percent (13.4 percent using constant dollars), including a 13.6 percent increase in rate and a 2.4 percentage point increase in occupancy. The company experienced continued strength in Asia and the Middle East in the second quarter, with REVPAR in China up 23 percent and REVPAR in Egypt up 17 percent. Demand for the company's resorts in Mexico drove REVPAR up 14 percent in that market while REVPAR at the company's Caribbean hotels increased 16 percent.

The company added 34 hotels (5,932 rooms) to the worldwide lodging portfolio during the second quarter, including Marriott hotels in Okinawa and Beijing, the Renaissance Paris Vendome hotel and the Ritz-Carlton hotel in Jakarta. Five properties (670 rooms), all first generation Fairfield Inns, exited the system and one hotel (276 rooms) was closed for renovation. At quarter end, the company's lodging group encompassed 2,676 hotels and timeshare resorts (489,430 rooms).

MARRIOTT REVENUES totaled $2.7 billion in the second quarter of 2005, an 11 percent increase from 2004. Base management and franchise fees increased 13 percent to $201 million reflecting growth in units and REVPAR. Franchise fee growth was negatively impacted by the sale of the Ramada International franchise business in 2004, and the conversion of 46 hotels in the United Kingdom in the second quarter of 2005 from franchise to management agreements, which resulted in a shift from franchise to base management fees. With a nearly 10 percent increase in room rates at company-operated properties worldwide (using actual exchange rates), company-operated hotels generated house profit margins of 37.9 percent, a 170 basis point improvement over the prior year quarter. House profit margins for North American company-operated properties increased 120 basis points to 37.7 percent and house profit per available room increased nearly 12 percent. Property level EBITDA margins for North American company-operated properties, which include deductions for insurance and property taxes, but excludes management fees, increased 150 basis points.

Driven by the strong property level profits, incentive management fees rose 44 percent to $52 million. In the 2005 second quarter, including the 120 hotels in the Courtyard joint venture, 42 percent of the company's managed properties paid incentive fees, compared to 28 percent in the year ago quarter.

Property level room revenue booked through Marriott.com totaled $613 million during the second quarter, an increase of 43 percent over the prior year. Marriott.com represented 12 percent of total property level room reservations during the quarter.

Revenue from timeshare interval sales and services increased 19 percent during the second quarter of 2005, largely due to higher financially reportable development revenue. Timeshare contract sales, including sales made by joint venture projects declined 1 percent, primarily due to limited available inventory at the Ritz-Carlton fractional resorts in St. Thomas and Bachelor Gulch, Colorado. Those resorts experienced exceptional demand in 2004. Contract sales for the Marriott Vacation Club resorts rose 11 percent.

LODGING OPERATING INCOME benefited from higher fees and strong timeshare profits but showed a decline of 48 percent in the second quarter to $77 million, largely as a result of a $94 million charge associated with the CTF transaction, primarily related to the non-cash write-off of management agreements, which were replaced by new long-term management agreements, $29 million of incentives paid to owners and franchisees to accelerate the roll- out of the new bedding program, $6 million in expense related to guarantees at two hotels, and a $12 million payment made to retain a management agreement, offset in part by the receipt of a $10 million fee for the termination of a hotel management agreement.

SYNTHETIC FUEL. Net income generated from the synthetic fuel joint ventures totaled $44 million in the second quarter. The ventures contributed earnings per share of $0.19 compared to $0.13 in the prior year quarter. Following initiation of an IRS challenge to the placed-in-service date of three of the four synthetic fuel plants, the company amended the agreement with the joint venture partner, and Marriott received a larger allocation of the tax credits generated by the joint venture in the second quarter of 2005 compared to the 2004 second quarter. After the close of the second quarter the IRS ruled that the synthetic fuel plants met the placed-in-service requirement under Section 29 of the Internal Revenue Code. Subsequently, the company entered into an amended agreement with the joint venture partner and the allocation of tax credits returned to approximately 50 percent effective June 1, 2005. The company's tax benefit for the quarter was $20 million, including the $68 million tax benefit from the synthetic fuel operations.

GAINS AND OTHER INCOME (excluding synthetic fuel) in the second quarter included the $29 million gain on the sale of timeshare mortgage notes, $22 million of gains resulting from the sale or refinancing of real estate loans and $4 million of other gains. In the second quarter of 2004, gains from the timeshare note sale totaled $27 million and other gains totaled $12 million.

INTEREST EXPENSE declined $3 million to $21 million. The company retired its $275 million Series D senior notes in April 2005 and issued $350 million in new Series F senior notes in June 2005.

INTEREST INCOME was down $14 million to $25 million in the second quarter of 2005 due to lower notes receivable balances. Since the 2004 second quarter, the company's loan associated with the Ramada Two Flags joint venture was repaid, the company sold two real estate notes and as a result of refinancing, several notes were paid off, including the notes receivable associated with the Courtyard joint venture.

In the second quarter, the company received nearly $700 million in proceeds from notes receivable repayments and asset sales, including timeshare notes.

Adjusted earnings before interest expense, taxes, depreciation and amortization (Adjusted EBITDA) rose 20 percent to $334 million in the second quarter. Total debt at the end of the second quarter of 2005 was $1,432 million and the cash balance totaled $471 million, compared to $1,325 million of debt and $770 million of cash at the end of 2004. As a result of cash flows generated from strong operations and capital recycling, the company was able to repurchase $785 million of stock in the first half of 2005 and make substantial investments in its lodging business, while increasing debt, net of cash, only $400 million.

The company repurchased 7.2 million shares of common stock in the second quarter of 2005 at a cost of $457 million and has repurchased a total of 13.6 million shares year-to-date through July 13, 2005, at a cost of $872 million. The current remaining share repurchase authorization totals approximately 5 million shares.

OUTLOOK

Given the strong results year to date, the company continues to estimate 2005 systemwide North American REVPAR growth of 8 percent to 10 percent, primarily driven by rate. The company plans to open 25,000 to 30,000 new rooms. Under these assumptions, fees should grow to $1,020 million to $1,030 million in 2005, an increase of 17 to 18 percent over 2004.

Timeshare interval sales and services revenues, net of direct expenses, should increase approximately 25 to 28 percent for the year, to $261 million to $267 million. The company plans to complete another timeshare mortgage note sale transaction in the fourth quarter.

As part of the new bedding program that will add new luxurious bedding to 628,000 beds at approximately 2,400 hotels across eight brands worldwide, Marriott offered owners and franchisees an incentive to ensure that guests can enjoy the comfort and luxury of the new bedding by year-end 2005. In the second quarter, Marriott incurred a $29 million charge for bedding incentives and expects to incur additional costs of approximately $5 million in the third quarter.

The company expects general, administrative and other expenses to decrease from $607 million in 2004 to a range of $593 million to $599 million in 2005, excluding roughly $35 million for the bedding incentive program and the $94 million charge associated with the CTF transaction.

Given the above items, the company estimates that lodging operating income will total $710 million to $720 million in 2005 (including roughly $35 million of costs for the bedding incentives and the $94 million charge associated with the CTF transaction), an increase of 23 to 25 percent, or 46 to 48 percent without the impact of the bedding incentives and CTF charges.

The company's EPS guidance for 2005 includes roughly $0.49 to $0.51 of after tax earnings per share from the synthetic fuel business.

The company expects the notes receivable balance to continue to decline and anticipates reinvesting the cash in attractive investment opportunities, including share repurchases. With the reduction in the notes receivable balance, the company anticipates net interest (interest expense, interest income and provision for loan losses) will decline to an expense of roughly $45 million to $50 million in 2005 from income of $55 million in 2004.

In total, the company estimates full year 2005 EPS to range from $2.68 to $2.78 (including $0.10 of after-tax earnings per share impact for costs associated with the company's new bedding incentives, $0.49 to $0.51 of after- tax earnings per share benefit from the synthetic fuel business, and $0.26 of after-tax earnings per share impact from the charge associated with the CTF transaction).

In the third quarter 2005, the company anticipates North American systemwide REVPAR growth of 7 percent to 9 percent, with an approximately 1.5 to 2.0 percentage point improvement in house profit margins.