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Marriott International Reports Third Quarter 2017 Results Highlights

November 9, 2017 Financial No Comments Email Email

Marriott International, Inc. (NASDAQ: MAR) today reported third quarter 2017 results.

On September 23, 2016, Marriott completed its acquisition of Starwood Hotels & Resorts Worldwide (Starwood).  The discussion in the first section below reflects reported results for the third quarter in accordance with US generally accepted accounting principles (GAAP). http://www.seychelles.travel/ To further assist investors, the company is also providing (a) adjusted results that exclude merger-related adjustments; and (b) combined financials and selected performance information for 2016 that assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015, but use the estimated fair value of assets and liabilities as of the actual closing date of the acquisition.  Combined results also reflect other adjustments as described below.  Throughout this press release, the business associated with brands that were in Marriott’s portfolio before the Starwood acquisition are referred to as “Legacy-Marriott”, while the Starwood business and brands that the company acquired are referred to as “Legacy-Starwood.”

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 and combined results on pages A-3 and A-4 have been reclassified to conform to the current reporting.

Arne M. Sorenson, president and chief executive officer of Marriott International, said, “In the third quarter, many of our hotels were rocked by destructive hurricanes in the Caribbean, Texas, and Florida and the earthquakes in Mexico.  Our hotels in these markets continue to serve aid workers and emergency personnel, as well as guests displaced by property damage.  We are very proud of our associates who delivered great hospitality during this challenging time.

“The business related to the hurricane response increased North American lodging demand modestly in the third quarter, even as business transient and group demand was in line with expectations.  Outside North America, strong leisure demand in Asia and Europe drove RevPAR above our guidance.

“Owners and franchisees remain attracted to our terrific brands and strong hotel economics.  New project signings and approvals added 36,000 rooms to our development pipeline in the third quarter, increasing it to a record 450,000 rooms by the quarter-end, equal to 36 percent of our current distribution.  More than half of those rooms under development are located outside North America and 40 percent should fly one of Marriott’s luxury or upper upscale flags.

“It’s been just over a year since the completion of the Starwood acquisition.  We are pleased with our progress on the integration.  Our properties and general and administrative functions have already realized meaningful cost savings.  From the date of the acquisition through last week, we have recycled assets totaling more than $1.1 billion of our $1.5 billion goal.  Year-to-date through November 7, we have already returned $2.7 billion to shareholders through dividends and share repurchase and believe we could return nearly $3.5 billion in 2017.

“For 2018, we expect comparable systemwide RevPAR on a constant dollar basis will increase 1 to 3 percent worldwide and 3 to 5 percent outside North America, while RevPAR in North America should be flat to up 2 percent.  Group revenue pace for our North American full-service hotels is up nearly 2 percent.

“We anticipate our number of rooms will increase roughly 7 percent, gross, in 2018, while rooms deletions should total 1 to 1.5 percent during the year.”

Third Quarter 2017 GAAP – Financial Results As Reported

Marriott reported net income totaled $392 million in the 2017 third quarter, a 460 percent increase over 2016 third quarter net income of $70 million.  Reported diluted earnings per share (EPS) was $1.04 in the quarter, a 300 percent increase from diluted EPS of $0.26 in the year-ago quarter.

Base management and franchise fees totaled $695 million in the 2017 third quarter, compared to $470 million in the year-ago quarter.  The year-over-year increase in these fees is primarily attributable to the Starwood acquisition, higher RevPAR, unit growth and higher branding fees.

Third quarter worldwide incentive management fees increased to $136 million, compared to $81 million in the year-ago quarter.  The year-over-year increase was largely attributable to the Starwood acquisition.

Owned, leased, and other revenue, net of direct expenses, totaled $96 million in the 2017 third quarter, compared to $45 million in the year-ago quarter.  The year-over-year increase is primarily attributable to the Starwood acquisition, partially offset by lower results in Brazil due to the Olympics in the year-ago quarter.

Depreciation, amortization, and other expenses totaled $68 million in the third quarter, compared to $36 million in the year-ago quarter.  The year-over-year increase is primarily attributable to the Starwood acquisition.

General, administrative, and other expenses for the 2017 third quarter totaled $199 million, compared to $161 million in the year-ago quarter.  The year-over-year increase is primarily attributable to the Starwood acquisition, inclusive of general administrative cost savings from combined company synergies.

Interest expense, net, totaled $64 million in the third quarter compared to $46 million in the year-ago quarter.  The increase largely reflects a higher commercial paper balance, higher Senior Note balances due to debt assumed in the Starwood acquisition, which the company subsequently exchanged for new Marriott Senior Notes, partially offset by the maturity of Series I Senior Notes.

Equity in earnings for the 2017 third quarter totaled $6 million, compared to $3 million in the year-ago quarter.  The year-over-year increase is primarily attributable to the Starwood acquisition.

The provision for income taxes totaled $188 million in the third quarter, a 32.4 percent effective tax rate, compared to $61 million in the year-ago quarter, a 46.6 percent effective tax rate.  The provision for the third quarter of 2017 includes a $6 million tax benefit resulting from the adoption of Accounting Standards Update 2016-09 (“ASU 2016-09”), which changes the GAAP reporting of excess tax benefits associated with employee stock-based compensation.  In the third quarter of 2016, income before taxes included $237 million of merger-related costs, most of which were incurred in jurisdictions with lower tax rates.

For the third quarter, adjusted EBITDA totaled $831 million, a 64 percent increase over third quarter 2016 adjusted EBITDA of $506 million.  See page A-12 for the adjusted EBITDA calculation.

Third Quarter 2017 Financial Results As Adjusted Compared to Third Quarter 2016 Combined Financial Results

This information is being presented to allow shareholders to more easily compare the 2017 third quarter adjusted results with the combined results for the third quarter of 2016.  The combined results assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015, but use the estimated fair value of assets and liabilities as of the actual closing date of the acquisition.

Combined results for the 2016 third quarter discussed in this section make the following assumptions: (1) removes merger-related adjustments; (2) adjusts income taxes to reflect the company’s combined 2016 effective tax rate of 32.5 percent; (3) adjusts weighted average shares outstanding to include shares issued to Starwood shareholders; and (4) adjusts debt to reflect borrowing on the Credit Facility and issuance of Series Q and R Notes on January 1, 2015.  Adjusted results for the 2017 third quarter exclude merger-related adjustments.  See page A-3 for the calculation of adjusted results, as well as combined results for the year-ago quarter.

Third quarter 2017 adjusted net income totaled $413 million, a 20 percent increase over 2016 third quarter combined net income of $344 million.  Adjusted net income for the third quarter of 2017 excludes $22 million ($21 million after-tax) of merger-related adjustments.  Adjusted diluted EPS in the third quarter totaled $1.10, a 26 percent increase from combined diluted EPS of $0.87 in the year-ago quarter.

Base management and franchise fees totaled $695 million in the third quarter of 2017, an 8 percent increase over combined base management and franchise fees of $644 million in the year-ago quarter.  The year-over-year increase largely reflects higher RevPAR, unit growth and an increase in branding fees.

Third quarter incentive management fees increased to $136 million, compared to combined fees of $127 million in the 2016 third quarter.  The year-over-year increase was largely due to higher net house profit at many properties outside North America.

Adjusted owned, leased, and other revenue, net of direct expenses, totaled $94 million, compared to combined revenue, net of direct expenses of $116 million in the year-ago quarter.  The adjusted year-over-year decrease largely reflects the impact of hotels previously sold and lower results in Brazil and New York, partially offset by stronger results at other owned and leased hotels and $9 million of favorable purchase accounting revisions.  Combined revenue, net of expenses, for the third quarter of 2016 included $15 million of results from hotels subsequently sold.

Adjusted depreciation, amortization, and other expenses for the 2017 third quarter totaled $70 million, compared to combined expenses of $81 million in the year-ago quarter.  The year-over-year decrease was largely due to hotels previously sold or properties moved to assets held for sale.

Adjusted general, administrative, and other expenses for the 2017 third quarter totaled $201 million, compared to combined expenses of $237 million in the year-ago quarter.  The decrease in expenses year-over-year was largely due to general and administrative cost savings and $4 million of favorable purchase accounting revisions.

Interest expense, net, totaled $64 million in the third quarter, compared to combined net expense of $69 million in the year-ago quarter.  The decrease was largely due to the maturity of Series I Senior Notes.

The adjusted provision for income taxes totaled $189 million in the third quarter, a 31.4 percent effective rate, compared to the combined provision for taxes of $166 million in the 2016 third quarter, a 32.5 percent effective rate.  The adjusted provision for the third quarter of 2017 includes a $5 million tax benefit resulting from the adoption of ASU 2016-09.

For the third quarter, adjusted EBITDA totaled $831 million, a 7 percent increase over third quarter 2016 combined adjusted EBITDA of $775 million.  Combined adjusted EBITDA for the third quarter of 2016 included $15 million of results from hotels subsequently sold.  See page  A-12 for the adjusted EBITDA and combined adjusted EBITDA calculations.

Third Quarter 2017 Financial Results As Adjusted Compared to August 7, 2017 Guidance

On August 7, 2017, the company estimated total fee revenue for the third quarter would be $810 million to $825 million.  Actual total fee revenue of $831 million in the quarter was higher than estimated, largely reflecting RevPAR at the high end of the guidance range, better than expected branding fees, favorable foreign exchange and $3 million of previously deferred incentive management fees.

Marriott estimated owned, leased, and other revenue, net of direct expenses, for the third quarter would total approximately $75 million.  Actual adjusted results of $94 million in the quarter were higher than estimated, largely due to $9 million of favorable purchase accounting revisions, $4 million of termination fees and better than expected results at hotels in Canada.

The company estimated general, administrative, and other expenses for the third quarter would total approximately $215 million to $220 million.  Actual adjusted expenses of $201 million in the quarter were lower than expected largely due to a $6 million state tax incentive, $4 million of favorable purchase accounting revisions, and timing.

The company estimated interest expense, net, for the third quarter would total approximately $60 million.  Actual net expense of $64 million in the quarter was higher than expected, largely due to $3 million of unfavorable purchase accounting revisions.

The company estimated gains and other income for the third quarter would total approximately $0 million.  Actual gains of $6 million in the quarter were higher than expected, largely due to a settlement with tax authorities related to the sale of Starwood properties in 2008.

Selected Performance Information

Combined information for the 2016 third quarter presented in this section assumes Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015.

The company added 138 new properties (22,772 rooms) to its worldwide lodging portfolio during the 2017 third quarter, including The St. Regis, Astana in Kazakhstan, the Bulgari Hotel Beijing, and the Weligama Bay Marriott Resort & Spa, the company’s first hotel in Sri Lanka.  Twenty-seven properties (4,700 rooms) exited the system during the quarter.  At quarter-end, Marriott’s lodging system encompassed 6,401 properties and timeshare resorts with more than 1,239,000 rooms.

At quarter-end, the company’s worldwide development pipeline totaled 2,622 properties with approximately 450,000 rooms, including 975 properties with more than 175,000 rooms under construction and 222 properties with 41,000 rooms approved for development, but not yet subject to signed contracts.

In the 2017 third quarter, worldwide comparable systemwide constant dollar RevPAR increased 2.1 percent (a 2.4 percent increase using actual dollars).  North American comparable systemwide constant dollar RevPAR increased 0.4 percent (a 0.6 percent increase using actual dollars), and international comparable systemwide constant dollar RevPAR increased 6.7 percent (a 7.8 percent increase using actual dollars) for the same period.  These RevPAR growth statistics compare the third quarter of 2017 to combined comparable systemwide RevPAR for the third quarter of 2016.

In the 2017 third quarter, 64 percent of worldwide company-managed hotels earned incentive management fees.  In North America, 55 percent of company-managed hotels earned incentive management fees in the quarter, while 72 percent of company-managed hotels outside North America earned incentive management fees.  In addition, the company earned 64 percent of its incentive management fees in the 2017 third quarter at properties outside North America.

Worldwide comparable company-operated house profit margins increased 40 basis points in the third quarter, largely due to higher RevPAR, solid cost controls and synergies from the Starwood acquisition.  House profit margins for comparable company-operated properties outside North America rose 130 basis points, while North American comparable company-operated house profit margins declined 20 basis points in the third quarter.  These house profit margin statistics compare the third quarter of 2017 to combined comparable company-operated house profit margins for the third quarter of 2016.

Balance Sheet

At quarter-end, Marriott’s total debt was $8,669 million and cash balances totaled $508 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 reported diluted EPS totaled 376.6 million in the 2017 third quarter, compared to 270.5 million shares in the year-ago quarter.  Weighted average fully diluted shares outstanding used to calculate combined diluted EPS totaled 394.4 million in the 2016 third quarter.

The company repurchased 7.8 million shares of common stock in the third quarter at a cost of $800 million at an average price of $103.01.  Year-to-date through November 7, the company has repurchased 23.9 million shares for $2.4 billion at an average price of $98.17.

OUTLOOK

The following outlook for the fourth quarter and full year 2017 does not include merger-related adjustments, which the company cannot accurately forecast, but could total roughly $150 million on a full-year basis.

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.   In 2016, combined fees from credit cards and residential sales totaled $60 million in the fourth quarter and $210 million for the full year.  Application fees, relicensing fees and timeshare royalties will continue to be included in the Franchise fees line.  Comparisons to prior year combined results throughout this Outlook section reflect this change in reporting.  On February 15, 2017, the company issued further schedules setting forth combined quarterly and full year combined financial information for both 2015 and 2016 that reflect this change in presentation, and included those schedules in a Form 8-K filed on that date.  Those schedules are available on Marriott’s Investor Relations website at http://www.marriott.com/investor.

For the 2017 fourth quarter, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 2 to 3 percent in North America.  The company’s guidance for fourth quarter RevPAR growth in North America reflects the shift of the Jewish holidays, which occurred in the third quarter of 2017 compared to the fourth quarter of 2016.  The company expects fourth quarter comparable systemwide RevPAR on a constant dollar basis will increase 3 to 5 percent outside North America and 2 to 3 percent worldwide.

Marriott expects fourth quarter 2017 owned, leased, and other revenue, net of direct expenses, could total approximately $90 million.  This estimate reflects the negative impact of hotels previously sold, including the Sheraton Centre Toronto.

The company anticipates general, administrative, and other expenses for the fourth quarter will total $240 million to $245 million.  Compared to the expense estimates the company provided on August 7, these estimates reflect expenses delayed from the third quarter.

Marriott expects fourth quarter 2017 adjusted EBITDA could total $762 million to $777 million.  This estimate reflects the negative impact of hotels previously sold.  See page A-13 for the adjusted EBITDA calculation.

For the full year 2017, Marriott expects comparable systemwide RevPAR on a constant dollar basis for the combined company will increase 1 to 2 percent in North America, roughly 5 percent outside North America and 2 to 3 percent worldwide.

Marriott anticipates gross room additions of nearly 7 percent and room deletions of 1 to 1.5 percent for full year 2017.

The company assumes full year 2017 total fee revenue will total $3,287 million to $3,297 million.  Compared to the total fee revenue estimates the company provided on August 7, these fee revenue estimates reflect the outperformance in the third quarter, higher worldwide RevPAR guidance and higher branding and relicensing fees.

Marriott expects full year 2017 owned, leased, and other revenue, net of direct expenses, could total approximately $367 million.  This estimate reflects the negative impact of hotels previously sold.  Compared to the owned, leased and other revenue, net of direct expenses, estimates the company provided on August 7, these estimates reflect the outperformance in the third quarter, partially offset by the impact of the sale of the Sheraton Centre Toronto.

Marriott expects full year 2017 adjusted EBITDA could total $3,177 million to $3,192 million.  This estimate reflects the negative impact of hotels previously sold.  See page A-14 for the adjusted EBITDA calculation.

Fourth Quarter 2017 Full Year 2017
Total fee revenue1 $825 million to $835 million $3,287 million to $3,297 million
Owned, leased, and other          revenue, net of direct expenses1 Approx. $90 million Approx. $367 million
Depreciation, amortization, and other expenses Approx. $70 million Approx. $288 million
General, administrative, and other expenses $240 million to $245 million $877 million to $882 million
Operating income $600 million to $615 million $2,485 million to $2,500 million
Gains and other income Approx. $0 million Approx. $31 million
Net interest expense2 Approx. $65 million Approx. $257 million
Equity in earnings (losses) Approx. $5 million Approx. $34 million
Earnings per share3 $0.98 to $1.00 $4.22 to $4.24
Tax rate4 33.2 percent 30.2 percent

1Beginning in the first quarter of 2017, the company reports credit card and residential branding fees in Franchise fees revenue.  Prior to first quarter of 2017, those fees were reported in Owned, leased and other revenue.  Combined credit card and residential branding fees totaled $60 million in the Fourth Quarter of 2016 and $210 million for Full Year 2016.

2Net of interest income

3Guidance for Full Year 2017 EPS includes the $0.13 expected favorable impact from the adoption of ASU 2016-09.

4The tax rate guidance for Full Year 2017 includes the $51 million benefit from the adoption of ASU 2016-09, but does not include the impact of merger-related adjustments that have been or may be made.   Without the benefit from adoption of ASU 2016-09, the anticipated tax rate for Full Year 2017 would be 33.0 percent.

The company expects investment spending in 2017 will total approximately $550 million to $650 million, including approximately $175 million for maintenance capital.  Investment spending also includes other capital expenditures (including property acquisitions), new mezzanine financing and mortgage notes, contract acquisition costs, and equity and other investments.  Assuming this level of investment spending and no additional asset sales, nearly $3.5 billion could be returned to shareholders through share repurchases and dividends in 2017.

The company plans to continue to disclose adjusted results and EBITDA that exclude merger-related costs and charges arising from the Starwood acquisition.

Marriott International, Inc. (NASDAQ: MAR) will conduct its quarterly earnings review for the investment community and news media on Wednesday, November 8, 2017 at 10:00 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 November 8, 2018.

The telephone dial-in number for the conference call is 706-679-3455 and the conference ID is 86389048.  A telephone replay of the conference call will be available from 1:30 p.m. ET, Wednesday, November 8, 2017 until 11:00 p.m. ET, Wednesday, November 15, 2017.  To access the replay, call 404-537-3406.  The conference ID for the recording is 86389048.

Note on forward-looking statements:  This press release and accompanying schedules contain “forward-looking statements” within the meaning of federal securities laws, including RevPAR, profit margin and earnings trends, estimates and assumptions; the number of lodging properties we expect to add to or remove from our system in the future; our expectations about investment spending; and similar statements concerning anticipated future events and expectations that are not historical facts.  We caution you that these statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including those we identify below and other risk factors that we identify in our most recent quarterly report on Form 10-Q.  Risks that could affect forward-looking statements in this press release include changes in market conditions; changes in global and regional economies; supply and demand changes for hotel rooms; competitive conditions in the lodging industry; relationships with clients and property owners; the availability of capital to finance hotel growth and refurbishment; and the extent to which we are able to continue successfully integrating Starwood and realize the anticipated benefits of combining Starwood and Marriott.  Any of these factors could cause actual results to differ materially from the expectations we express or imply in this press release.  We make these forward-looking statements as of November 7, 2017.  We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Marriott International, Inc. (NASDAQ: MAR) is the world’s largest hotel company based in Bethesda, Maryland, USA, with more than 6,400 properties in 126 countries and territories. Marriott operates and franchises hotels and licenses vacation ownership resorts. The company’s 30 leading brands include: Bulgari®, The Ritz-Carlton® and The Ritz-Carlton Reserve®, St. Regis®, W®, EDITION®, JW Marriott®, The Luxury Collection®, Marriott Hotels®, Westin®, Le Méridien®, Renaissance® Hotels, Sheraton®, Delta Hotels by MarriottSM, Marriott Executive Apartments®, Marriott Vacation Club®, Autograph Collection® Hotels, Tribute Portfolio™, Design Hotels™, Gaylord Hotels®, Courtyard®, Four Points® by Sheraton, SpringHill Suites®, Fairfield Inn & Suites®, Residence Inn®, TownePlace Suites®, AC Hotels by Marriott®, Aloft®, Element®, Moxy® Hotels, and Protea Hotels by Marriott®. The company also operates award-winning loyalty programs: Marriott Rewards®, which includes The Ritz-Carlton Rewards®, and Starwood Preferred Guest®. For more information, please visit our website at www.marriott.com, and for the latest company news, visit www.marriottnewscenter.com and @MarriottIntl.

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