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Marriott International Reports Strong Fourth Quarter 2017 Results

February 17, 2018 Financial No Comments Email Email

Marriott International, Inc. (NASDAQ: MAR) today reported fourth quarter 2017 results.http://www.itcmchina.com/

The discussion in the first section below reflects reported results for the fourth quarter in accordance with U.S. generally accepted accounting principles (GAAP).  To further assist investors, the company is also providing adjusted results for the 2017 and 2016 fourth quarters that exclude merger-related adjustments associated with the company’s acquisition of Starwood Hotels & Resorts Worldwide (Starwood) on September 23, 2016.  In addition, the company has adjusted results for the 2017 fourth quarter to exclude the gain on the disposition of the company’s ownership interest in Avendra (Avendra gain) and the provisional charge resulting from the U.S. Tax Cuts and Jobs Act of 2017 (Tax Act).

Branding fees from credit cards and residential sales are reported in the Franchise fees line on the income statement.  Prior to the first quarter of 2017, those fees were reported in Owned, leased, and other revenue.  Reported results for the 2016 periods on pages A-1 and A-2, adjusted results on page A-3, and combined results on page A-4 have been reclassified to conform to the current reporting.

Arne M. Sorenson, president and chief executive officer of Marriott International, said, “2017 was a terrific year.  We made great progress on the integration of Starwood, capturing significant property and corporate overhead cost synergies while also increasing our worldwide RevPAR index.  We entered into a joint venture with Alibaba to better engage with Chinese customers and invested in PlacePass to provide our guests with even more experiential travel opportunities.  We also signed strategic new credit card agreements that will allow us to strengthen our customer offerings, generate significant benefits for our owners and franchisees, and provide higher branding fees for Marriott.

“In the first full year after acquiring Starwood, solid RevPAR gains, strong rooms growth, and property-level margin improvement combined to deliver record fee revenue.  With our owners and franchisees, we opened over 76,000 rooms during the year to reach over 1.25 million rooms.  Significant new signings drove our development pipeline to a record 460,000 rooms, over 80 percent of which are in the upscale, upper upscale or luxury tiers.  Compared to combined full year 2016 results, worldwide systemwide RevPAR rose 3 percent during the year; adjusted operating income increased 13 percent; and adjusted earnings per share increased 32 percent.  We returned $3.5 billion to shareholders in share repurchases and dividends during the year.

“In 2018, we anticipate our number of rooms will increase roughly 7 percent gross, while rooms deletions should total 1 to 1.5 percent during the year.  We also continue to expect global RevPAR will increase by 1 to 3 percent.  As a result of U.S. tax reform, we expect our effective tax rate in 2018 will decline meaningfully to approximately 22 percent.  Not including incremental asset sales, we expect to return roughly $2.5 billion to shareholders in share repurchases and dividends in 2018.

“Our company was founded on the principle of taking care of our associates, so they take care of our guests, who then keep coming back.  For 2018, we plan to invest in our workforce by offering an additional one-time contribution to the Marriott International retirement savings plans.  Structured as a $5-to-$1 company match of up to $1,000, the vast majority of participating associates should receive this incremental company contribution.  This contribution will be available to eligible associates at company-operated hotels, as well as those in corporate and regional offices, in the U.S.  We also expect to invest in global associate support programs.”

Fourth Quarter 2017 GAAP – Financial Results As Reported

Marriott reported net income totaled $201 million in the 2017 fourth quarter, an 18 percent decrease from 2016 fourth quarter net income of $244 million.  Reported diluted earnings per share (EPS) was $0.54 in the quarter, a 13 percent decrease from diluted EPS of $0.62 in the year-ago quarter.

Base management and franchise fees totaled $695 million in the 2017 fourth quarter, an 11 percent increase over base management and franchise fees of $624 million in the year-ago quarter.  The year-over-year increase in these fees is primarily attributable to higher RevPAR, unit growth, higher branding and relicensing fees, and higher other property-level sales.

Fourth quarter 2017 worldwide incentive management fees increased to $170 million, a 14 percent increase compared to incentive management fees of $149 million in the year-ago quarter.  The year-over-year increase was largely due to higher net house profit at full-service properties in North America and the Asia Pacific region.

Owned, leased, and other revenue, net of direct expenses, totaled $95 million in the 2017 fourth quarter, compared to $109 million in the year-ago quarter.  The year-over-year decrease largely reflects the negative impact from sold hotels, partially offset by stronger results at a few North American owned and leased hotels.

General, administrative, and other expenses for the 2017 fourth quarter totaled $259 million, compared to $234 million in the year-ago quarter.  The year-over-year increase was largely due to higher incentive compensation and $7 million of litigation reserves, partially offset by general and administrative cost savings.  General, administrative, and other expenses in the 2016 fourth quarter benefited from an $8 million favorable legal settlement.

Gains and other income, net, totaled $657 million in the 2017 fourth quarter, largely reflecting the $659 million Avendra gain.

Interest expense, net, totaled $58 million in the fourth quarter compared to $62 million in the year-ago quarter.  The decrease was largely due to the maturity of Series I Senior Notes.

Equity in earnings for the 2017 fourth quarter totaled $10 million, compared to $2 million in the year-ago quarter.  The year-over-year increase largely reflects a $5 million gain on the sale of a hotel in a North American joint venture.

The provision for income taxes totaled $978 million in the fourth quarter, an 83.0 percent effective tax rate, compared to $139 million in the year-ago quarter, a 36.3 percent effective tax rate.  With the enactment of the Tax Act, the fourth quarter 2017 tax provision includes a $567 million charge.  The charge is the net of a $745 million transition tax on accumulated foreign earnings, which will be paid over eight years, a $159 million tax benefit related to the revaluation of the company’s net deferred tax liabilities at lower rates, and $19 million of other tax benefits.  This tax charge is based on the company’s initial analysis of the Tax Act and may be adjusted in future periods.  The fourth quarter 2017 tax provision also includes $259 million of taxes related to the Avendra gain, a $34 million reduction of tax benefits related to lower merger-related costs and charges year-over-year and $17 million of taxes related to the increase in earnings.  These charges were partially offset by $21 million of tax benefits due to higher proportion of earnings in lower tax jurisdictions, a $10 million tax benefit resulting from the adoption of Accounting Standards Update 2016-09 (the stock-based compensation standard), which changes the GAAP reporting of excess tax benefits associated with employee stock-based compensation, and $7 million of net favorable discrete tax items.

Fourth Quarter 2017 Financial Results As Adjusted

Fourth quarter 2017 adjusted net income totaled $415 million, a 24 percent increase over 2016 fourth quarter adjusted net income of $334 million.  Adjusted net income for the fourth quarters of 2017 and 2016 exclude $59 million ($47 million after-tax) and $136 million ($90 million after-tax) of merger-related adjustments, respectively.  Adjusted net income for the fourth quarter of 2017 also excludes the $659 million ($400 million after-tax) Avendra gain and the $567 million provisional charge resulting from the Tax Act described above.  Adjusted diluted EPS in the fourth quarter totaled $1.12, a 32 percent increase from adjusted diluted EPS of $0.85 in the year-ago quarter.  See page A-3 for the calculation of adjusted results.

Base management and franchise fees totaled $695 million in the fourth quarter of 2017, an 11 percent increase over base management and franchise fees of $624 million in the year-ago quarter.  The year-over-year increase in these fees is primarily attributable to higher RevPAR, unit growth, higher branding and relicensing fees, and higher other property-level sales.

Fourth quarter 2017 worldwide incentive management fees increased to $170 million, a 14 percent increase compared to incentive management fees of $149 million in the year-ago quarter.  The year-over-year increase was largely due to higher net house profit at full-service properties in North America and the Asia Pacific region.

Owned, leased, and other revenue, net of direct expenses, totaled $95 million in the 2017 fourth quarter, compared to $109 million in the year-ago quarter.  The year-over-year decrease largely reflects the negative impact from sold hotels, partially offset by stronger results at a few North American owned and leased hotels.

General, administrative, and other expenses for the 2017 fourth quarter totaled $259 million, compared to $234 million in the year-ago quarter.  The year-over-year increase was largely due to higher incentive compensation and $7 million of litigation reserves, partially offset by general and administrative cost savings.  General, administrative, and other expenses in the 2016 fourth quarter benefited from an $8 million favorable legal settlement.

Interest expense, net, totaled $58 million in the fourth quarter, compared to net expense of $62 million in the year-ago quarter.  The decrease was largely due to the maturity of Series I Senior Notes.

Equity in earnings for the 2017 fourth quarter totaled $10 million, compared to $2 million in the year-ago quarter.  The year-over-year increase largely reflects a $5 million gain on the sale of a hotel in a North American joint venture.

The adjusted provision for income taxes totaled $164 million in the fourth quarter, a 28.3 percent effective rate, compared to the adjusted provision for income taxes of $185 million in the 2016 fourth quarter, a 35.6 percent effective rate.  The adjusted provision for the fourth quarter of 2017 includes $21 million of tax benefits due to higher proportion of earnings in lower tax jurisdictions, a $10 million tax benefit resulting from the adoption of the stock-based compensation standard and $7 million of net favorable discrete tax items, partially offset by $17 million of taxes related to the increase in earnings.

For the fourth quarter, adjusted EBITDA totaled $808 million, a 7 percent increase over fourth quarter 2016 adjusted EBITDA of $756 million.  Compared to the prior year, adjusted EBITDA for the fourth quarter of 2017 reflects a $16 million negative impact from sold hotels.  See page A-12 for the adjusted EBITDA calculations.

Fourth Quarter 2017 Financial Results Compared to November 7, 2017 Guidance

On November 7, 2017, the company estimated total fee revenue for the fourth quarter would be $825 million to $835 million.  Actual total fee revenue of $865 million in the quarter was higher than estimated, largely reflecting RevPAR above the high end of the guidance range and higher than anticipated hotel operating margins, higher than expected branding and relicensing fees, and the recognition of $3 million of previously deferred incentive management fees.

The company estimated owned, leased, and other revenue, net of direct expenses, for the fourth quarter would total approximately $90 million.  Actual results of $95 million in the quarter were higher than estimated, largely due to $3 million of termination fees.

The company estimated general, administrative, and other expenses for the fourth quarter would total $240 million to $245 million.  Actual expenses of $259 million in the quarter were higher than expected largely due to $7 million of litigation reserves and $5 million of higher than anticipated development expenses.

The company estimated interest expense, net, for the fourth quarter would total approximately $65 million.  Actual net expense of $58 million in the quarter was lower than expected due to lower commercial paper balances and the reversal of discount reserves resulting from early loan repayments.

The company estimated equity in earnings for the fourth quarter would total approximately $5 million.  Actual earnings of $10 million in the quarter were higher than expected, largely due to a $5 million gain on the sale of a hotel in a North American joint venture.

Selected Performance Information

The company added 132 new properties (21,061 rooms) to its worldwide lodging portfolio during the 2017 fourth quarter, including the Marriott Santa Cruz de la Sierra Hotel, the company’s first hotel in Bolivia, the Bulgari Resort Dubai, and the Delta Hotel Shanghai Baoshan, the first Delta Hotel in the Asia Pacific region.  Thirteen properties (2,786 rooms) exited the system during the quarter.  At year-end, Marriott’s lodging system encompassed 6,520 properties and timeshare resorts with nearly 1,258,000 rooms.

At year-end, the company’s worldwide development pipeline totaled 2,708 properties with more than 460,000 rooms, including 1,136 properties with roughly 201,000 rooms under construction and 165 properties with nearly 34,000 rooms approved for development, but not yet subject to signed contracts.

In the 2017 fourth quarter, worldwide comparable systemwide constant dollar RevPAR increased 4.6 percent (a 5.3 percent increase using actual dollars).  North American comparable systemwide constant dollar RevPAR increased 3.9 percent (a 4.1 percent increase using actual dollars), and international comparable systemwide constant dollar RevPAR increased 6.2 percent (an 8.4 percent increase using actual dollars) for the same period.

Full year 2017 comparisons to combined 2016 information presented below assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015.

The company added 473 new properties (76,589 rooms) to its worldwide lodging portfolio during 2017.  Sixty-nine properties (12,952 rooms) exited the system during the year.

For full year 2017, 71 percent of worldwide company-managed hotels earned incentive management fees compared to 70 percent in 2016.  In North America, 60 percent of company-managed hotels earned incentive management fees in 2017 compared to 60 percent a year ago.  Outside North America, 80 percent of company-managed hotels earned incentive management fees in 2017, compared to 78 percent in 2016.  In addition, the company earned 62 percent of its incentive management fees in 2017 at properties outside North America, compared to 61 percent a year ago.

Worldwide comparable company-operated house profit margins increased 80 basis points for full year 2017, largely due to higher RevPAR, better productivity, solid cost controls, and synergies from the Starwood acquisition.  House profit margins for comparable company-operated properties outside North America rose 130 basis points and North American comparable company-operated house profit margins increased 40 basis points over 2016.

Balance Sheet

At year-end, Marriott’s total debt was $8,238 million and cash balances totaled $383 million, compared to $8,506 million in debt and $858 million of cash at year-end 2016.

Marriott Common Stock

Weighted average fully diluted shares outstanding used to calculate both reported and adjusted diluted EPS totaled 369.9 million in the 2017 fourth quarter, compared to 394.0 million shares in the year-ago quarter.

The company repurchased 7.4 million shares of common stock in the fourth quarter at a cost of $925 million at an average price of $124.99.  For full year 2017, Marriott repurchased 29.2 million shares of common stock at a cost of $3.0 billion at an average price of $103.66.  To date in 2018, the company has repurchased 2.3 million shares for $315 million at an average price of $139.02.

OUTLOOK

In the 2018 first quarter, the company plans to adopt Accounting Standards Update 2014-09 (the new revenue standard), which changes the GAAP reporting for revenue and expense recognition for franchise application and relicensing fees, contract investment costs, the quarterly timing of incentive fee recognition, and centralized programs and services, among other items.  While the new revenue standard will result in changes to the reporting of certain revenue and expense items, Marriott’s cash flow and business fundamentals will not be impacted.  A discussion of expected revenue recognition changes can be found in the company’s Third Quarter 2017 Form 10-Q filed on November 8, 2017.  The Form 10-Q is available on Marriott’s Investor Relations website at http://www.marriott.com/investor.

Within the next few months, the company expects to provide full retrospective 2017 quarterly and full year statements of income as if the new revenue standard had been adopted on January 1, 2016.

Marriott’s earnings guidance for 2018 reflects adoption of the new revenue standard.  The company estimates a $50 million negative impact on 2018 operating income as a result of adopting the new revenue standard, not including the possible impact from centralized programs and services.  Centralized programs and services revenues include owner reimbursements for items such as reservations, loyalty, and sales and marketing, and are included in the Cost reimbursements line on the income statement.  The costs of providing those centralized programs and services are reflected in the Reimbursed costs line on the income statement.  The company provides these centralized programs and services on a breakeven basis, which will not change under the new revenue standard.  However, timing differences between the incurrence of the costs of these programs and services and the receipt of the related reimbursement to the company may increase or decrease operating and net income from quarter to quarter as a result of implementing the new revenue standard, as those timing differences will now be reflected on the income statement rather than the balance sheet.  The company will not change the operation of these programs and services nor will the cash flow of these expenses and reimbursements change.  Going forward, the company does not expect to provide earnings guidance for the impact of these timing differences and expects it will provide results that are adjusted to exclude Cost reimbursements and Reimbursed costs.

While the company does not expect a change in the amount of its annual incentive management fees due to the adoption of the new revenue standard, recognition of incentive fees may occur in different quarters over the year as compared to prior years.

The after-tax proceeds of the Avendra gain will be invested in Marriott’s hotel system over time.  The new revenue standard requires the expensing of any future spending of those proceeds when made.

The following outlook for full year 2018 does not include Cost reimbursements, Reimbursed costs, Merger-related costs and charges, nor the expenses related to the spending of Avendra proceeds, which the company cannot precisely forecast.

Due to meaningful changes resulting from adopting the new revenue standard and the first quarter 2018 migration to a single financial reporting platform, the company is providing abbreviated guidance for the first quarter of 2018.  The company expects to resume providing fulsome quarterly guidance in its May 2018 earnings press release.

For the 2018 first quarter, Marriott expects comparable systemwide RevPAR on a constant dollar basis in North America will be flat to up 2 percent.  The company’s guidance for first quarter RevPAR growth in North America reflects the unfavorable shift of the Easter holiday and tough comparisons to the 2017 U.S. Presidential Inauguration and Women’s March in Washington, D.C.  The company expects first quarter comparable systemwide RevPAR on a constant dollar basis will increase 3 to 5 percent outside North America and 1 to 3 percent worldwide.

The company expects to realize an approximately $45 million gain in the 2018 first quarter associated with the sale of the Sheraton Buenos Aires Hotel & Convention Center and Park Tower, a Luxury Collection Hotel.

For the full year 2018, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 1 to 2 percent in North America, 3 to 5 percent outside North America, and 1 to 3 percent worldwide.

Marriott anticipates gross room additions of roughly 7 percent and room deletions of 1 to 1.5 percent for full year 2018.

The company assumes full year 2018 fee revenue will total $3,535 million to $3,620 million, which includes $360 million to $380 million of credit card branding fees and reflects the impact of the new revenue standard.  The company anticipates full year 2018 incentive management fees will increase at a low single digit rate over 2017 full year incentive fees of $607 million.

Marriott expects full year 2018 owned, leased, and other revenue, net of direct expenses, could total $285 million to $295 million.  Compared to 2017 results, this estimate reflects the impact of the new revenue standard and the $55 million negative impact from sold hotels in 2017 and to date in 2018, but does not reflect additional asset sales in 2018.

Marriott expects full year 2018 general, administrative, and other expenses could total $935 million to $945 million.  This estimate reflects the impact of the new revenue standard and assumes $70 million of spending for half of the estimated cost of the company’s investments in its workforce.  This expense will not recur in 2019.  The company plans to fund the remaining $70 million through proceeds from the sale of Avendra.

Marriott expects full year 2018 adjusted EBITDA could total $3,315 million to $3,420 million, reflecting the impact of the new revenue standard.  This estimate reflects the roughly $50 million negative impact of hotels previously sold in 2017 and to date in 2018, but does not reflect additional asset sales in 2018.  The company’s outlook reflects the adoption of the new revenue standard.  Excluding the impact of the new revenue standard, the company estimates 2018 adjusted EBITDA would be $60 million higher.  See page A-13 for the adjusted EBITDA calculation.

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