Q4 2019 Earnings Call
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I'd now like to hand, the conference over to your speaker today Arnie Sorenson. Thank you and please go ahead.
Welcome to our fourth quarter 2019 earnings conference call. Joining me today, our Leeny Oberg Executive Vice President and Chief Financial Officer, Jackie Burka, Mcgonigle artist Senior New Senior Vice President Investor Relations and Betsy Dom Vice President Investor Relations, Let me remind everyone that many of our comments today are not historical.
Facts and are considered forward looking statements under federal Securities laws. These statements are subject to numerous risks and uncertainties as described in our FCC filings, which could cause future results to differ materially from those expressed or implied by our comments forward looking statements in the press release that we issued yesterday along with her.
Our comments today, our effective only today and will not be updated as actual events.
In our discussion today, we will talk about 2019 results, excluding merger related costs and reimburse revenues and related expenses GAAP results appear on pages, a one of the two of the earnings release, but our remarks today will largely refer to the adjusted results that appear on the non-GAAP reconciliation pages of course you go.
And find our earnings release and reconciliations of all non-GAAP financial measures referred to in her remarks on our Investor Relations website.
As we begin or call. This morning. It is obvious that the question you were most interested in is the impact of the Corona virus or covert 19 on our business around the world in the six weeks or so that we have been intensely watching this crisis, we have learned much but there's still a great deal we do not know.
In our press release and in her comments. This morning, we will give you some yardsticks to help measure what the impact where piano might be.
Well this is still guesswork to some extent we know one same with confidence this will pass.
And when it does the impact to our business will quickly fade.
So let's talk about our results we're pleased with our solid performance in 29 team, finishing the year on a high note you.
During the fourth quarter, we continue to add to our Revpar index gains increased hotel profit margins recycled a meaningful amount of capital and signed a significant number of new hotel deals.
We grew our system to more than 7300 properties and expanded our global rooms pipeline to a record of more than half a million rooms, with nearly 1.4 million rooms in 134 countries and territories, we offer unrivaled choices for our customers.
In 2019 or development team signed 815 hotel agreements for a record 136000 rooms with each of our international regions setting records in organic signings over 220000 of the rooms in or 515000 room pipeline are already under construction using 29.
James piece of openings are under construction pipeline represents nearly three years gross rooms growth well, our total pipeline represents well over six years of implied rooms growth.
At year end, 7% of global industry rooms flu one of our flags, while our share of STR as worldwide under construction pipeline led the industry at 19%.
To be sure our signings were impressive but we're not just focused on adding units. We are focused on adding valuable hotels that drive higher fees per room, and enhance our brands luxury and upper upscale rooms comprise over half of our distribution globally, which is one reason our fees per room lead the industry.
During 2019, we expanded this lead by signing a record 45000 rooms in these two years.
At year end, the number of our global luxury and upper upscale rooms under construction totaled more than the next three competitors combined according to STR.
Other milestone achievements in 2019 included multiple launches from our new loyalty program myriad Bon voyage to our new home rental program homes and villas by Marriott International to our all inclusive platform, which was augmented by our recent acquisition.
Elegant hotels group in Barbados.
These expanded offerings and program enhancements provide meaningful value to our owners and guess helped to drive loyalty engagement and provide additional ways for members to earn and redeem points.
Homes and villas provides the opportunity for our guests to stay at 7500 premium and luxury rental homes in 200 locations around the world.
Can you all inclusive segment our guests can currently choose from 10 resorts with seven more projects and the pipeline.
The fourth quarter, we launched our eat around town offering where Marriott envoy members can earn points by dining at more than 11000 restaurants in the U.S. we.
We also introduced peak off peak redemption, our words, providing members with better value when they redeem points lower demand nights. In addition to benefiting guest the new awards schedule helps owners feel more rooms by shifting demand from stronger periods slower ones.
Finally, we are piloting a program in select international markets that lets local members earn and redeem points dining at our hotels restaurants. The response from our members has been extremely positive.
Collectively these efforts coupled with the strength of our brands in our broad distribution drove Marriott bond way membership to over 141 million members at the end of January this powerful platform remains a key competitive advantage and in 2019 paid room revenues from loyalty members increased 11%.
Redemptions were also meaningfully higher as our bond void travelers enjoyed a wide range of choices offered by the program member share of occupied rooms topped 52% worldwide in 2019 up 250 basis points versus 2018 and reached 58% in North America up 320.
Basis points year over year. We also continue to see solid growth from our Cobranded credit cards with sign ups, 12% higher year over year.
With an improved yield management approach and an increase in bonds away members more of our but guess booked direct in 2019.
Worldwide direct bookings, including group sales rooms booked by our reservation centers and bookings made on our digital platforms represented approximately three quarters of total room nights booked during the year.
Direct digital bookings alone represented one third of room nights mobile bookings a component of direct digital bookings were up a strong 64% over the year.
At same time, the percentage of nights booked through OTI has declined year over year.
Guest intend to recommend and staff service scores increased during 2019, thanks to the efforts of our outstanding Associates. We also saw impressive revenue share gains across our portfolio overall, our global Revpar index accelerated throughout the year rising 240 basis points in the fourth quarter.
For the full year 2019, our global Revpar index improved and impressive 200 basis points each of our continents saw growth in index with meaningful gains from both legacy Marriott and legacy Starwood portfolios globally.
It is worth mentioning that we're particularly pleased with the progress we are making with the Sheraton brand over the last three years approximately 50% of Sheraton hotels worldwide have undergone are undergoing or have committed to undergo a renovation.
We sold the Sheraton Phoenix downtown last month after purchasing it just 18 months earlier, and we signed a valuable long term management agreement. We are confident Sheraton Phoenix downtown will serve as a showcase to encourage renovations at additional Sheraton hotels.
Before we discuss our 2020 outlook, let me talk a bit more about the corona virus situation.
Clearly this is a major humanitarian crisis and our thoughts are with that many people impacted.
As the virus emerged in Han earlier this year, our teams assisted guests and provided support for associates, whose lives have been significantly disrupted.
I couldn't be prouder of our associates in the Asia Pacific region, who have worked tirelessly.
We continue to waive cancellation fees for hotel stays through March 15 for guests with reservations at our hotels in greater China and for guests from greater China with reservations at Marriott destinations globally.
We began to see the impact of the Corona virus on our business in mid January with occupancy declines gradually spreading from will happen to other markets in the Asia Pacific region.
In February Revpar at our hotels in greater China declined almost 90% versus the same period last year.
At the end of 2019, we had 375 properties with roughly 122000 rooms across greater China, representing 9% of our total global rooms.
Around 90 of these properties are currently closed.
In the Asia Pacific region outside China, Greater China.
What we call APEC February Revpar declined roughly 25% year over year.
For APAC, we had 412 properties with 100000 rooms at year end 2019, representing 7% of our total worldwide rooms.
Have you worry revpar in the Asia Pacific region overall has been running down around 50% compared to February of last year.
Outbound travelers from China in 29 team made up less than 1% of room nights in our system outside of Asia Pacific and around half of 1% of room nights in North America.
To date apart from a handful of citywide event cancellations, we have not seen a significant impact on overall demand outside of the Asia Pacific region, though the situation obviously remains fluid.
Given the uncertainties surrounding the length and severity of the Corona virus situation, we cannot fully estimate the financial impact to our business at this time so in our press release in our remarks today, we are providing a base case first quarter in full year 2020 outlook that does not reflect any impact from the outbreak.
This base case reflects the 2020 outlook our teams had prepared as part of the company's budget process based on the pre Corona virus environment, including hotel by hotel forecasts group booking trends and expected supply growth.
Leeny will frame, how first quarter results could be impacted by the Corona virus based on current trends.
Now, let's start with our base case Revpar outlook for 2020, not impacted by Corona virus.
On a global constant currency basis, we estimate global system wide Revpar in 2020 will increase 1% to 2% in the first quarter and will be flat to up 2% for the full year.
In North America recent estimates for U.S. GDP growth point to a modestly slower pace of economic growth in 2020.
With lodging demand forecasted to increase around 2%.
Industry supply growth is expected to also remain around 2% with upscale supply expected to grow 4%.
We expect leisure demand will continue to outpace business transient demand as there has yet to be a step up in business investment levels. Overall this implies a continuation of low revpar growth in the us.
Our group sales organization in North America had a great fourth quarter in 29 team with bookings for all future periods of 5.5%.
With this strength our group revenue on the books in North America for 2020 is up at a mid single digit rate.
We have completed roughly 80% of our corporate rate negotiations and while we can't predict corporate volumes completed negotiated room rates are running up 1% to 2% for comparable accounts.
Our first quarter is off to a strong start with the benefit of easy comps in markets like Washington, DC, and Hawaii as well as continuing Revpar index gains, we expect base case, North America, Revpar will increase 1% to 2% for the first quarter for the full year, we expected to be around the midpoint of the global range of flat.
<unk> up 2%.
For the Asia Pacific Region, we assume base case, revpar growth, 2% to 4% for 2020 with rig weak results in Hong Kong expected to continue for the first half of the year before lapping easier comps in the back half again. This does not include any impact from the virus outbreak.
Base case, Revpar in Europe could grow 2%, 2% to 4% excuse me for the year, driven again by strong demand from us travelers and strength in eastern European markets.
For the Middle Eastern Africa region, we assume base case revpar could grow at a low single digit rate in 2020, we believe the region will benefit from higher Revpar in Saudi Arabia, Qatar and Africa, somewhat offset by lower Revpar in the.
Continued new lodging supply in Dubai will likely challenge 2020, revpar growth in the EU.
Despite the Expo 2020 event that begins in the fourth quarter.
In the Caribbean in Latin America region base case, Revpar could grow at a low single digit rate for 2020, reflecting more modest economic growth and political uncertainty in some markets.
For 2020, we assume five to five in a quarter percent net rooms growth, including deletions in the one to one of the half percent range Preconstruction and contract construction delays persist around the world again, our rooms growth assumption does not include any impact from the Corona virus situation.
Before I turn the call over to Leeny I want to thank all our global associates for their continued hard work, especially those in the Asia Pacific region, who have shown such empathy and skill managing through this challenging time.
Our culture is distinctive and it is a real competitive advantage and I feel very fortunate to work with such purpose driven in carrying individuals.
On a personal note I had surgery in November and the doctors were pleased with how the wind as part of my treatment plan I'm undergoing a few months of post surgery chemotherapy and while I am now fashionably bald I feel really good.
Grateful I've been able to work throughout and I want to thank all of you for your good wishes and support throughout this battle.
And now Leeny will walk through our financials in more detail we.
Thank you Arnie, our fourth quarter adjusted diluted earnings per share grew 9% to $1.57, which was 11 cents ahead of the midpoint of our guidance of $1.44 to $1.47. We picked up three cents of outperformance from fees, primarily due to better than expected incentive management fees in North America.
And six cents from a lower than expected tax rate due to higher windfall tax impact and other discrete items.
We also benefited from gains on the sale of two hotels in North America, which totaled 32 cents. These favorable items were partially offset by 26 cents from two asset impairments three cents of greater than expected general and administrative expenses related to legal costs bad debt and unfavorable foreign exchange and.
One cents from lower joint venture earnings.
Fourth quarter 2019 system wide comparable global Revpar rose, 1.1% in constant dollars year over year, North American Revpar in the quarter increased nearly 1% with revpar among our full service brands up 2.4%.
Is your markets like Hawaii, and Orlando showed notable strength.
Our revpar in the Asia Pacific region increased 0.3% in the fourth quarter.
Revpar in Hong Kong declined 54% due to continued protest.
While revpar in mainland China increased 2.4%.
Excluding Hong Kong Revpar for the Asia Pacific Region Rose, 3.5% with strength in Singapore and India.
Our revpar in Europe rose, 2.8% in the fourth quarter benefiting from continued significant U.S. demand and robust loyalty program activity.
Eastern Europe was particularly strong due to increases in both rate and OCC, while in southern Europe, Italy, Spain, and Portugal also saw healthy revpar increases.
Fourth quarter Revpar in the Middle Eastern Africa region increased 2.8% with strong growth in Riyadh and Mecca in Saudi Arabia.
Qatar also posted solid results. Despite the continued political tensions in the region.
Revpar in the Caribbean in Latin America region Rose half a percent in the fourth quarter with strength in the Caribbean and Mexico, partially offset by declines in Chile and Panama.
Fourth quarter gross fee revenue increased 7% versus last year to 974 million due to room additions higher Revpar improved net net house profit that managed hotels in North America in Europe, and continued strong growth in other franchise fees.
Depreciation amortization and other expense increased to 179 million in the quarter, we recognize the 15 million dollar impairment charge associated with the sale of a north American hotel and a $99 million impairment charge related to at least hotel in North America.
Our fourth quarter adjusted tax rate of 21% was higher than the prior year largely due to favorable discrete items in the year ago quarter.
For full year 2019, our gross fees grew 5% and our adjusted EBITDA increased 3%.
Excluding asset impairments and gains in 2018, and 2019, adjusted EPS grew 6% year over year to $5 a 92 cents.
During the year, we returned 2.9 billion to shareholders, including 2.3 billion from share repurchases. Thanks to successful asset recycling strong cash flow generation and a reduction in cash balances.
Our loyalty program had net cash outflows in 2019. This was primarily due to the marketing spend related to bond voice launch in the first quarter and significantly higher redemptions as members explored the many new locations and experiences offered by the integrated and enhanced program we.
Aspect of envoy program to continue to be a net user of cash in 2020, although meaningfully improved from 2019 levels.
We received proceeds from recycled assets of 470 million during 2019, including proceeds of roughly 310 million from the sale of the Saint Regis, New York and 100 million from the sale of the Sheraton Gateway Hotel in Toronto.
Now, let's talk more about our base case outlook for 2020 as you know it does not include any impact from Corona virus merger related costs in charges cost reimbursement revenue or reimbursed expenses and it assumes no additional asset sales.
For full year 2020, given our assumptions for global Revpar, Our base case outlook shows gross fee revenue could increase 4% to 6% to reached 3.96 to 4.4 billion.
Growth should be driven primarily by room additions and other franchise fees, particularly offset partially offset by headwinds from renovations property terminations and roughly 10 million of unfavorable foreign exchange.
Other franchise fees, which include credit card branding fees hotel application and re licensing fees timeshare licensing fees and residential branding fees are expected to grow roughly 10% to 630 to 640 million.
We also expect that incentive fees will decline slightly given continued pressure on house profit margin.
We assumed owned leased and other revenue net of direct expenses will total 295 to 305 million in 2020 flat to up low single digits.
These results include slightly lower termination fees offset by similar amount of favorable year over year impact from bought and sold hotels.
We assume general and administrative expenses will totaled 950 960 million in 2020.
1% to 2% versus 2019.
And we expect a 2020 effective tax rate of 23.3%.
We assume 2020, adjusted EBITDA totaled roughly 3.7 to 3.8 billion or 3% to 6% over 2019 levels.
On the bottom line, we assume 2020 diluted EPS will be $6 and 30 to $6.53 up 6% to 10% versus $5. A 92 cents 2000, nineteens adjusted diluted EPS, excluding the impact of asset sale gains and impairments.
For first quarter 2020, our base case forecast assumes global revpar growth of 1% to 2% and a 5% to 6% increase in gross fee revenues to reach $940 million to $950 million our tax rate in the first quarter is expected to be roughly 21% four percentage points here.
Other than a year ago, as a result of higher windfall benefit and discrete items in the prior year quarter.
This translates to 5% to 7% growth and diluted earnings per share to 147 to 150, and 4% to 6% growth in adjusted EBITDA.
We remain disciplined in our approach to capital allocation using the base case assumptions 2020 investment spending could total 700 to 800 million. This includes around 200 million of maintenance investments spending roughly 200 million of system investments that will largely be reimbursed by owners over.
Time, and 300 million to support new unit growth.
We expect roughly three quarters of this new unit investment will be associated with luxury and upper upscale properties. These projects typically provide higher fees per room and attractive 20 plus year agreement.
Projects, where we invest our own capital are expected to generate a substantially higher value per key over the life of the contract on average compared to full service deals with Marriott capital.
Under our base case, and assuming this level of investment we would expect to return more than 2.4 billion of cash to shareholders through share repurchase and dividends for the full year 2020, assuming no impact from the Corona virus and no additional asset sales.
Note that this outlook assumes roughly 200 million higher cash tax payments spend in 2019, primarily due to timing.
We remain committed to our strong investment grade credit rating. We ended the year within our 3.0 to 3.5 times debt to EBITDA, our target range and our base case model assumes we will remain within this target range. We will continue to evaluate the impact of the Corona virus situation on the comp.
He is cash flow and debt levels to manage leverage within our targeted range.
Turning back to the Corona virus situation already noted our distribution in the Asia Pacific region from a financial perspective 2019 gross fees earned in the Asia Pacific region totaled 477 million.
Representing 12% of our global gross fee revenue.
Greater China generated about half of the fees in Asia Pacific, representing roughly 6% of both global fees and total adjusted EBITDA.
Our base case model assumes Asia Pacific and fees in 2020 will total roughly 500 to 510 million with greater China fees again, constituting about half that amount.
Assuming the current low occupancy in Revpar levels in the Asia Pacific Region continue we estimate the region will earn roughly 25 million less in fees and EBITDA per month as compared to our 2020 base case.
This means that for the first quarter given our results in Asia Pacific to date, and assuming the same low levels of Revpar in March as we've seen in February and no meaningful impact outside of Asia Pacific total gross fees and total adjusted EBITDA in the first quarter could be roughly 60 million below our base case.
And diluted EPS could be roughly 14 cents per share below our base case.
Analysis, we are providing today has the benefit of actual results through the first two months of the quarter Theres still a great deal, we do not know, including the length and global scope of the virus and the impact of potential supply chain disruptions on the global economy.
As already noted despite these unknowns the virus will run its course and when it does impact will not be long lasting we entered 2020 with tremendous competitive momentum in Revpar unit growth and brand strength.
With an industry, leading loyalty program. This momentum will carry us through this crisis and beyond.
Now open the line for questions. Please limit yourself to one question said that we can speak to you to as many of you as possible.
Ladies and gentlemen, as a reminder, if he would like to ask an audio question. Please press star one.
Your first question comes from the line of Shaun Kelley with Bank of America.
Hi, good morning, everyone.
Thank you for all the commentary in kind of the sensitivities.
I know this is a really kind of fluid dynamic and I think we're all trying to get hold of it for the global travel landscape.
So with that in mind.
Leeny as you think about some of the sensitivities you gave the last section of your prepared remarks.
Are we really need for that $25 million are we really just extrapolating current trend line for let's call it mainland China and Asia Pacific.
Or have we also accounted for the fact that.
This is spreading into where we know so far South Korea, Japan appreciate the Western Europe is not probably part of that sensitivity, but.
Is there any so the question is one does it does it include broader APAC getting worse and then second on any sensitivities you could provide for us as we start to branch out into Western Europe, which we now know.
As an issue and then as we move kind of towards the U.S., which seems increasingly likely.
Thanks, Sean I'm sure. It let me let me start so the sensitivity. We've given you is based on where we are in February which is as already described is Asia Pacific Revpar being down about 50%, but obviously that is massively skewed by.
Greater China being down.
90%, while the rest of Asia Pacific is down meaningfully less so that is based on an assumption that they stay roughly the same and that we continue to have no meaningful out impact outside of Asia Pacific.
As you pointed out in your comment in your question. This is extremely fluid situation. We are actually now reopening hotels in China.
Every day, but but at the same time, how this exactly spreads to other continents remains to be seen.
Just in terms of the other continents, I think you're you're familiar with our basic layout of fees, which is that again broadly speaking.
You know that North America is roughly two thirds.
Greater China Asia Pacific, We described as being roughly 16% kalla for percent you're up 9% in EMEA at 4% so.
All of these line up relatively well with our fee distribution.
As you look throughout the world. The only other thing I'll mention Sean is just to remember that from an IMAX perspective.
That.
Asia Pacific accounts for roughly one third of our incentive management fees North America accounts for another one third and the rest of international accounts for about a third so all of that fits into the equation that we gave you that 25 million per month from Asia Pacific.
Thank you very much.
Your next question comes from the line of Robin Farley with area.
Hi, Thank you very much this okay now for Robin It sounds like unit growth of around 5% doesn't include any a virus impact and you mentioned in your release study for situations where to get worse. There will be impacted unit growth is there any impact currently that's not included that you quantify and I know this could be challenging but.
Maybe you could provide some sensitivity.
Similar to how you quantify theme packs in terms of unit growth.
I think it's too first good morning.
It is too early to give you a numeric sensitivity to openings I think.
Obviously, you've got in Asia Pacific, particularly a very intense situation. We did open about 1000 rooms in January in China.
But in a sense, that's sort of before or at the very front end of this.
Corona virus I think if you look at the next few months.
Well, we've got about 90 hotels closed.
And revpar down nearly 90% in the market, there's not much urgency to get a hotel opened even if it's ready.
That if it's ready, though it will open before the end of year and so the impact on full year numbers may be nothing but it wouldn't be surprising to see some of this get delayed I think in the rest of the world.
Yes, it's much harder to assess we have talked to our.
Design and construction folks we've talked to a number of our partners.
And I think generally it is.
Decorative furnishings, and some furniture and maybe some fabrics that are.
Most likely to be sourced from China.
We think that the openings that we're sort of plan for the first part of 2020.
Are more likely to have had all of those supplies either in possession, Oregon route to them and so could will not be impacted.
But I think we and many other industry is of course are looking at what the longer term supply impact will be to.
The supplies that we need.
We see in this context is more about hotels opening in the operating supplies, but I think that there wouldn't be at all.
Rising to us to see some further extension of the construction schedule.
And certainly as long as this virus situation last the only thing I'll add is to remember that new hotels opened throughout the year and they're all ramping up starting from zero to their fee contribution in year, one is extremely small relative to overall fees.
Well, obviously year two is more important but.
The year, one impact frankly from a bit lower openings.
Not meaningful.
Thank you.
Your next question comes from the line of Harry Curtis with Internet.
Good morning, everyone.
So many questions good morning somebody unknowable question.
Answers to questions. So I.
Maybe I'll focus on something that's a little bit more tangible which would be the increase in your termination fees and your comments related to the renovations to the Sheraton brand are the.
The increase in termination fees, where those more tied to.
The Sheraton brand or is it a mix.
Of brands.
And do you see it did you see the.
What's the pipeline look like.
For kind of the legacy brands into 2021.
So sure Harry we will will cover those so first of all let's talk about termination fees overall termination fees in 2019 were meaningfully lower than they were in 2018, and we actually expect termination fees in 2020 to be even lower still so the one thing terminal in Q4 really a quick.
Justin about timing, and which hotels close and they can have varying amounts associated with them.
The other point I would mention if you remember last year, we had deleted rooms that started to get closer to 2%. While this year, we're squarely at 1% and terminations, which is on the lower end of our 1% to 1.5% guidance that we've given so I think from that standpoint, I think we feel good.
Good about the progression of how its going.
With our portfolio.
I think in terms of the pipeline that we see both in terms of legacy brands and in terms of.
Does the Starwood portfolio brands I think as as we've described in Q4, we really kind of topped out a spectacular year in terms of new deal signings and they were happily.
Very well distributed across all of our brands with some notable growth in some of the Starwood legacy brands.
Okay very good thank you.
Your next question comes from the line of Joe Greff with JP Morgan.
Good morning, everybody.
You touched on the on this in the press release and your earlier comments Arnie about that at the solid Revpar index growth both in the fourth quarter and for the full year.
Can you talk about how the Starwood legacy properties in North America performed how much of the 16.
Do you attribute to those assets.
And then when you think about the performance in Revpar growth this year.
Obviously, greater China criminal Vibrance neutral how do you look at the Starwood legacy properties performing versus the the Marriott legacy properties.
Yes, the it's obviously a big world, but as we mentioned in the in the comments, both legacy Marriott and legacy Starwood portfolios have been.
Really performing extraordinarily well.
Index, both in Q4 and full year 2019, and as we start 2020.
In both really hundreds of basis points.
In Q4, there were some easy comparisons obviously, we had a strike last year in the United States, which.
Impacted San Francisco in Hawaii, probably most.
They had probably a bit more impact on the legacy starwood portfolio than on the legacy Marriott portfolio, but even there the Revpar index performance in Q4 last year.
Was down a bit was down meaningfully less than it was up this year in Q4.
So so whether you look at strikes are you looking a little bit of integration noise. In Q4, 2018, we not only made up at ground, but we lapped it.
There are other sort of spectacular numbers you can see from our.
Q4, China Revpar numbers, excluding Hong Kong at plus 2.5% I think that China team saw Revpar index growth for the two portfolios of plus six to 700 basis points.
And that that is Oh, it's all cylinders moving its the loyalty program. It is.
The digital platforms and the way they are perform performing it is the sales team.
There's there's good news sort of across the portfolio and is very much shared by both the Marriott and Starwood portfolios.
Thank you.
You bet.
Your next question comes from the line of Jared showed yen with Wolfe research.
Hi, Good morning, everyone. Thanks for taking my question.
So maybe question for for Leeny, if I look back at your operating cash prior to 2018, you were run rating at about 2.4 billion before some of these cash headwinds that you've called out, particularly on the bond way redemptions, but also with the with the cash taxes. So can you help me think about what you're expecting for 2020.
And does 2021 get back to sort of that prior run rate level that you can grow from and obviously I realize that a lot of the depends on how long. This corona virus impact last but I guess, what I'm ultimately getting at is where there any benefits to pre 2018 cash flow that you just don't expect to see anymore.
So yes, so a couple of things that I pointed out why news that we definitely had a bit of a benefit on the cash tax side in 19 that we will then.
Pay for in 2020 relative for example on the cash taxes that were paying on our asset sales.
So that that is a bit of timing that will even out obviously over time.
On the loyalty side I think that is the one that is worth spending a little time talking about and there I think you definitely saw that in 2018, we saw the loyalty program behave more in its more historical pattern of being a cash net cash positive.
Part of our story and this year it moved to being several hundred million of a net cash use our and that you really need to think of within the context of the introduction of bond Boy I think there was some pent up demand relative to our.
Our customers being excited about being able to explore all of our properties and use their points at a much more expanded portfolio. We also had the introduction of bond boy, which move some timing of marketing expenses from 2018 to 2019, and you put that together and I think.
In the first year. The program you definitely saw a fairly unusual.
Pattern for the program, we are quite confident.
That that will smoothed out over time and returned to its more normal pattern. We do think it'll still be or user in 2020, but much less of a cash user and things that we've talked about like the introduction of peak off peak.
Which manages the demand a little bit better in terms of the points that it costs at a different properties both in low and high demand times all of that will work towards getting this program to a to where I think it behaves more like it has in the past.
Okay. Thank you very much.
Your next question comes from the line of Patrick Scholes This with Suntrust.
Hi, good morning.
Are you seeing any discernible uptick in cancellation activity.
Outside of the Asia Pacific regions.
At area say like.
Airport hotels.
Yes, let let's.
Obviously, the weekend news around Corona virus was not good.
You had.
South Korea in Italy, both.
And the around.
Story as well it little bit obviously, we don't have anything in Iran, and so theres no measurable impact there.
But we're just days into it. So we are essentially every day getting the team together by phone and getting data, where we look at.
Performance across these markets and we're listening to our customers obviously talk about it.
And let me let me give you a few anecdotes maybe start with Asia Pacific even though your Christian focuses on the rest of the World I'll talk about the rest of the world in the second.
China itself.
Leeny mentioned about 90 hotels closed.
We have.
Revpar down about 90% I think the the last full week number I had was minus 87% year over year, so not quite as bad as minus 90.
The Chinese government is trying to.
Ramp at least some things back up so we can see for example in Macau, we probably got down to 1% to 2% occupancy. We Nate we may now be at 78% occupancy now that's still down massively year over year I think it's too soon to put much stock in this effort to reopen.
Got it because it's early and you still have some schools closed and we don't really know exactly how this is going to come back, but there's at least some hope I suppose that weve.
Bottomed in China, and maybe things will get a little bit better you move around the rest of Asia Pacific and you see some things that you would expect so Singapore down about 50% revpar year over year.
Thats a again a recent week number that's not a full year February February number by contrast, India up 5% that was before president Trump's visit so thats not driven by.
His visit but is driven by the fact that India is really not much dependent on China travel.
And has got a different GDP story than one which is dependent.
The.
China story.
Obviously, when you look at South Korea in Italy, we will see.
Both cancellations and we will see declining revpar in those markets still too early to tell I know that some of the Italian cities.
We probably lost a few tens of points of occupancy.
In the first days, but thats not the country as a whole and it's far too soon to come up with.
Sort of predictions for that if you will I think win win when all is said and done.
We would have to characterize our $25 million a month.
Run rate as being probably a bit light because we're going to see some impact.
Europe, we're going to see some impact.
Other markets around the world, which is probably not.
Higher lead dependent on China travel and.
Our 25 million is basically a China travel story in apex story, but I think even though that we would expect this will be messy for.
The next few weeks if not maybe the next few months side. We go back to what we've said before and that is that this will and.
It's clear that it will end, we can't tell you when it will end, but when people start to get confidence that.
They don't need to be worried about.
On this if they're thinking about going to.
Sold for example that travel will come back and will probably come back fairly quickly.
Next question.
Your next question comes from the line of Smedes Rose from Citi.
Hi, Thank you.
I want to keep good morning, I just wanted to ask you you broke out for your Capex line items about 300 million towards new unit growth, how does that compare to 19 and just are you just seeing more opportunities that you want to go after or is that landscape, becoming more competitive maybe just a little color around that.
Sure.
Sure.
So generally I'd say, a similar maybe maybe a tad higher.
Relative to 19, but again it ties as I said before to the reality that these are generally on fantastic.
Full service and luxury projects that.
Our well worth the investment and I think it ties to our success in finding new deals in these hotels around the world.
Where the owners want our brands and generally the market is competitive for capital up for those projects, but when we look at the value.
That we get on these hotels, we expect it to be meaningfully higher than the ones that that require no capital.
So again and look a little bit higher but not meaningfully.
Okay. Thank you.
Your next question comes from the line of Anthony Powell with Barclays.
Hi, Good morning, everyone said couple of questions going and loyalty program morning.
Question on the loyalty program you mentioned the positive impact of the redemption activity in the quarter.
How to points earnings trend in the quarter in are you happy with the level of activity around earning points in the system and given the positive impact of redemptions does it make sense and run the will to from an or more of a cash neutral position over time, rather than cash positive position over time.
The.
Bunch of questions. There I mean, I think we've talked about our penetration to which is.
Both paid and redeem nights as a percentage of total might some hotels and we are seeing.
That does penetration numbers move meaningfully up.
And to state the obvious that means that program is growing enough to deal with the roughly 5% unit growth plus.
Drive increased penetration in comp hotels, and we're very pleased with that so we're seeing both paid.
About 10% or so.
And redeemed.
Significantly too and that's that's all gratifying for us.
I think.
While it's a little harder to get share of wallet data, because we guess on that a little bit we're obviously.
We don't have internally the kinds of tools, we need to to measure while it were quite convinced we are increasing share of wallet.
From the loyalty program and from our loyalty members I think longer term and leave these talked about.
The cash flow impacts in 2019 and 2020.
Theres absolutely no reason that the loyalty program will get back to being a positive cash flow generator for us on an annual basis.
That is obviously driven significantly by the fact that we continue to grow the program and we continue to grow our portfolio hotels and so as you do that.
We will tend to issue more.
Thanks for paid stays there.
And our redeemed and we will continue to see as we've done in the past, but there are more and more revenues coming into this program, which are coming in from.
Credit card partners or restaurant partners or other partners. Besides just the hotels that are participate in the program.
So so this is.
Obviously to be cash flow negative him a loyalty program in 2019 is unusual in a sense, we'd love to wave a wand didnt have it'd be something different but.
But it is actually quite logical given the launch of the program both marketed.
The new name and to get this massive group of customers to experiment with it and we are much more pleased and we are disappointed because it shows the engagement of our loyalty members with program with us.
Thank you.
Correct.
Your next question comes from the line of Bill Crow with Raymond James.
Hey, good morning, everybody, Hey, Bill Tony.
Good morning, you kind of classified the areas outside of China as no material impact today.
On the STR data yesterday that occupancy was down 100 basis points are more kind of everywhere different segments and everything else I'm wondering if that.
Kind of the start of the impact that we should expect to see what are you seeing as far as real time inbound international travel from areas outside of China.
Cancellations.
When you think about maybe the gateway markets.
I think the fair response Bill is speed is we're asking the same question you're asking.
And what we get back at the moment is very much anecdotal doesn't really show up in our data yet.
We obviously get our weekly flashes and we get a daily look if we want to dig in and get a daily look.
And by and large you look at the U.S. market for example, which just as a reminder, is basically 95% to 96% domestic travel so.
All business in the United States coming from international markets is that.
The 4% range than before and a half percent and big markets in that would include neighboring markets like Canada and Mexico.
Which probably have a different.
Kind of travel profile, if you will have them.
Travel coming in from further abroad.
And there you know we've got very very few cases.
Yes.
Obviously, we're all watching that to look at it but we're not really seem.
Measurable impact the we're instead scene you know.
As we mentioned in the prepared remarks.
A handful of of group.
Things really globally, which have cancelled so far.
I suspect it will step up a little bit.
We're going to watch that on a day to day basis and.
Overwhelmingly obviously that depends not just on time, but it depends on what are the incidences of the cases of this virus in various markets in the world and how to travelers react to them.
I appreciate that if I could just follow up and ask if there any takeaways from we went through Sars.
Bird flu.
We've gone through a number of different.
Corona virus or or or some sort of some sort of thing over the last.
What 15 years anything you've taken away from you can kind of guide your company based on Leeny Leeny will have the precise number here that is.
We're talking about but the comparison to Sars, which is probably the most similar virus is.
Very hard to make.
I think if you go back to 2003.
Im guessing here, a little bit Chinese annual outbound travel would have been.
Oh, I don't know sub 10 million trips a year and last year, we were probably closer to 150 million trying outbound trip so the relevance of China to.
The rest of the world is dramatically different.
The second thing I think if you look at Marriott's own story, we have we mentioned we've got 375 hotels opened in China at the end of year those are not all comp, but our comp hotels are probably.
Two thirds of that or something like that maybe a little bit more than that.
I think if you go back in 2003, we had had 11 or 12 12 comp hotels. They would have been mostly in Hong Kong probably.
And then a couple of cities in China, and so I don't I don't think theres much that we can really take from that other than.
When Sars ended it ended.
And people got back fairly quickly that doesn't mean, they get back the day after but it does mean, they get back within a month or two or three main roughly a quarter yes.
Pretty quick pretty quickly but.
Ultimately that depends on people being able to look and say, yes. It looks like that's behind us and so I think I think thats the comparison that easiest to draw it's logical.
Not just Sars and mergers but.
Other of other unfortunate events that have occurred.
Tell us that travelers are pretty resilient and when the reason to be concerned is behind them theyre going to get back and get on the road.
Great. Thank you.
But.
Your next question comes from the line of David Katz with Jefferies.
Okay.
Hi, good morning, and thanks for taking my question Arnie, Great to hear you sounding well and Im sure looking fabulous.
Thank you for that.
I wanted to.
Hi, as our you all.
I wanted to just touch on the IMF dynamic.
Your point that that at some point this will end.
How should we think about what happens to management contracts on the back and are there embedded triggers within some of those contracts that.
Move or slide.
That that can actually help you earn IMS faster on the back end of this.
You know how should we think about that.
I think the short answer is no I mean I think the.
It's a lovely thought but.
The way the way these incentive fees work.
Basically and Leeny correct me, if I'm wrong here, but the.
They're mostly annual tests.
If there is an owner's priority there mostly fixed and they don't.
Step up which is a fabulous thing for us over the length of time.
But similarly, they don't mostly step down in fact, I don't know of a single contracted wind owner's priority would step down based on performance I think the probably the disappointing thing here is if you hypothesized that this was a three month issue.
2020 and of course, that's a total gas, but just use it for the second discussion.
Test is still an annual test and so the in the United States, particularly where we've got owner's priority is typically a managed hotels.
The impact if there is one during those three months.
We'll have some lasting impact on incentive fee earnings in 2020, but will have no impact in 2021.
I think is the way to think about it if you go to Asia.
We are typically you don't have an owner's priority.
We will not have probably the hang up quite the hang over impacts of business disappears in China for three months and then has bounced back in does it.
Sort of norm fee, if you will.
We'll lose a quarter of the incentive fees, we would otherwise earn and so by the time you get to Q3 year Q4, we should be back to sort of a similar kind of pace as we've had in the past.
The only thing I'll add to that David is just to remember the reality that internationally, we earned 80% of our hotels earned incentive fees in 2019, while in North America was 56%. So these are very similar numbers too.
Year ago, with a little bit lower number in North America, because of the cost pressures in the low revpar.
The thing I mentioned is that it is the case in Asia Pacific, but it's quite common that there is a slight increase in the amount of IMF as you increase your GLP margin.
So it is the case that as you get full or in Fuller and you know really robust revpar that you can be earning an incentive fee that is instead of 6% it becomes 8% and so there is the reality that as you are losing.
Revpar at first it's a pretty dramatic drop but then obviously the closer you get to zero you are down at a lower level of earning IMF, so theres less to lose but R&D Arty's point is the right. When that these are annual test you got to really look at the end of the year.
What you earned for the year and that will determine what you make.
Thanks for all the detail.
Your next question comes from the line of Michael Bellisario with Baird.
Good morning, everyone.
Hi, good morning.
Just kind of a two parter first on Avenger proceeds proceeds how much is less there to be allocated in the second along the same lines on business interruption insurance I know owners can get made whole, but is it possible for you guys.
To recoup any loss income and then come I'd Avenger proceeds be part of this to help you in your owners during this down period.
So, let's just kind of as a quick refresher on event grow when we sold Ventra.
There was a gain of call it $650 million that we were going to use to offset cost that otherwise would have been charged to the owner and I would say that we are.
Roughly half way through.
Those monies and again as we think about all the different programs and things that we're doing those are obviously, a part of what we would expect going forward that we would continue to use.
To offset cost that otherwise would get charge, but but honestly, we do think of them as.
Things that are kind of core to what we want to do for the hotel system I don't think of them as really.
One that we kind of use it to plug a whole we've thought of them more as.
Kind of ways to invest in the system.
And though of course, it's great that we do have it and we can use that I think at this point, we continue to expect that we will be able to use it to invest in the system.
Mmm business interruption insurance I think the right assumption here is that there will be relatively few policies that are implicated by the corona virus.
We'll we'll obviously watch that and make sure. We study it but my guess is neither the owners are myriad are going to get substantial business interruption proceeds from this in Asia Pacific most of the hotels procure their own and so it will depend on the reading of of each of those contracts of what their insurance Paul.
Let's see say, but.
We would not necessarily expect a big amount at least in Asia Pacific.
That's helpful. Thank you.
You bet.
Your next question comes from the line of Wes Golladay with RBC capital.
Yes, good morning, everyone I'm, just hoping to learn a little bit more about the profile of the owner in greater China are they capitalize to the point, where they can absorb a prolonged close another hotel.
Good question.
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Of the 375 hotels that we had opened at year end 2019, I know of only one that was not owned by Chinese investor.
Those investors are.
Cover the gamut I think there are many which are.
Government.
Owned entities.
Not all there are a number that are substantial real estate companies that own.
Bone hotels, but also do residential development in the rest.
And obviously, we've been in communication with the owners.
Continuously throughout the six or seven weeks that we've been looking at this.
We have had really no indication yet there are owners under severe pressure.
At the same time, when Revpar is down 90%, it's a fair assumption that none of these hotels are.
Producing positive cash flow to service debt or to do anything else.
I think one of the advantages of the the economic system that China has.
Is the government is involved not just on sometimes through the ownership with government owned entities, but the lending side as well.
I think the government will have the tools in order to make sure that people will be able to navigate through.
This without foreclosures and without.
Sort of significant long term consequences.
Great. Thank you.
Yep.
Your next question comes from the line of Kevin Kopelman with Cowen.
Great. Thanks, a lot I just had one quick follow up good morning. Thank you.
Just had a quick follow up on the Corona buyer its impact so all the indications are that in the past week, the travel booking trends have gotten significantly worse.
Understanding that it's only one we could you give us more insight on what you're seeing in the us in particular in terms of bookings for future stays.
Over the past week.
Yes, and I again, as we mentioned before we're picking up a few anecdotes, but we're not really picking up yet in the data a anything that we can really.
What measure or predict from I think it is brand new.
Obviously, you had over the weekend.
Stories that we're focused on these other markets.
Side of China, but also outside of United States in Italy in South Korea, and the like.
You've got the president for the first time speaking about it really last night and so the the US focus discussion is obviously brand new that the numbers of cases in the United States are still tiny.
We were at a.
Wife, and I were at a dinner in Washington last night with a bunch folks were obviously asking questions around this.
And we don't have a single case in the greater Washington area.
Thats the case in most markets across across the United States. So I.
I think it's it's way too early to expect that the data is going to be very revealing to us.
But at same time, when you get the prison doing a press conference on it that's that's by itself not a good thing and it will cause more travels to stop and think about it.
And again, it's one of the reasons I would say that.
The 25 million a month number that we've used as a yardstick is probably at this point a bit light, but we don't know whether what other number to give you.
Thanks already Thats really helpful. And then if I could ask something completely different.
The ARPU I improvements.
What do you.
Can you call out I know the key drivers there there are allowing you to see that that rps improvement year over year, what's the outlook.
So that it's going forward and then if theres any way you could give us just that the actual RP level that you finished up playing I think with thanks.
Yes the.
The I mean loyalty the loyalty program is I think the thing that we would call out the most we've we've talked about.
Penetration generally we gave you the.
North American numbers and the global numbers for penetration again.
What percentage of total rooms is driven by both paid in redeem nights. It won't surprise you to know that the reduce the penetration numbers are higher in the U.S. just because our brand is better known we've been doing business here for longer.
And it's higher in.
Select brand hotels, and it would be in full service hotels, because you've got less group business and the hotels are overwhelmingly driven by transient business.
But even when you look at all those differences you see.
Very healthy increases in penetration outside the U.S. and in full service hotels ended in resort destinations.
All of which goes back to the loyalty and.
We're not going to we're not going to published today, what our index is by brand or even by segment I will tell you that I get monthly.
Global Index report and the cover that report is got a chart that starts in 2014 and ends essentially with the current month, it's been reported.
The the.
That summary chart breaks it down by three segments luxury being one segment.
Upper upscale being one segment and essentially upscale or dislike brands being another segment. In every one of those three is at an all time high compared to that the other numbers on in 2014 chart and they continue to go up.
That's great thank thought.
You bet.
Your next question comes from the line of Vince.
Ill with Cleveland Research.
Thanks, So much for taking my question for.
Curious throughout the course of 2019, a number of players in travel.
Changes that Google was making which resulted in less free organic traffic coming to their travel web sites and a greater reliance on paid.
As Google changes up how they monetize things with their Google Hotel adds products I was curious if you had seen any impacting your business at all from that in the second half of 1920.
Well, we're we're watching what Google is doing very very closely the.
Certainly if you look back over.
Oh, I don't know a three or four year period, we too have seem that.
Paid search volume coming out of Google has grown from what it was three or four years ago, We didnt see significant move in the second half of 29 team for us.
Now, having said that just as a reminder.
We obviously don't like to pay for paid search if somebody is searching our brand.
So imagine for the ticket discussion that somebody's got on Google and they've search Marriott New York.
We don't love to pay for that and often we don't usually we don't pay for that because we think that person is looking for a Marriott hotel and they're going to end up.
Finding our site, whether it's through Google or whether they come in through some other path.
Because.
They are focused on it.
In the same way if somebody goes on and searches Hyatt New York.
We're also not likely to pay for that because thats a customer that is.
Sadly, maybe but nevertheless focused on some other brands.
That is not necessarily the case in either instance for and OTN.
An OTA is going to also be selling marriott rooms, or high at rooms were other rooms, and if they can get somebody to come from Google to their site.
And collect commission associated with that even if they're selling the room that the customer seems to be looking at.
Thats going to go into their calculation in the way that's very different from ours and so I think.
The long winded way of saying that the first impact of.
Changes by Google in their strategy are much more relevant to the OTI is.
Then the artist somebody like us, but we are watching this very very carefully we've obviously got a good partnership with Google and.
There's a lot of volume that comes through our digital channels.
And we'll look for ways that we can use those tools to help us do we want to do which is particularly find customers who are not now in our loyalty ecosystem.
Find a way to bring them into our ecosystem and if we can do that in a way that is cost effective will do.
And unrelated follow up maybe I missed that I don't think I heard anything about election year.
What impact that could be what you've seen in the last couple and maybe how it relates to group versus leisure versus transceiver.
So that the.
Right. The experience we've had over decades is that in Washington during the presidential election year.
That tends to be bad for transient demand.
Having said that the group bookings in Washington for 2020 are quite strong and so we actually think Washington will perform reasonably well.
The only other point to make it is an obvious one which is wherever the convention is are they will get they'll get a benefit from it further conventions didnt occur.
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Well none of its conventions, obviously occurred last year. So those cities should help because those will be incremental demand.
Well, we've got lots politicians and in our hotels in the these various markets and we're glad to have them all.
Great. Thanks.
Your final question comes from the line of Stewart Gordon with Bernstein.
That should go up nicely from back just.
On the shareholder returns.
Are you thinking just know how do you feel the shoe the here given what's happening just snake and just a quick follow up could you break the other fees between credit card fees and the other fee components within that bucket. Thanks.
Absolutely so so.
It's a it's a careful balance we we really like to maximize the returns to shareholders.
When we've got excess capital and.
We have.
Commitment to do that we want to continue to do that at the same time, we have the same commitment to maintain our strong credit.
Rating and from that standpoint, we need to be looking very carefully at both what's happening now and what we expect to be happening as we move forward through the year.
So we've given you our base case without any impact from Corona, but the Corona virus, but that's due to your question. We're going to of course have to take into consideration real life and that will impact how we have to think about share repurchase but where.
Looking at everything we can on the cash side on the expense side on the fee side et cetera to continue to balance those two efforts, but but they absolutely as we continue to see what happens. If you assume my numbers were correct relative to 60 million of impact on the EBITDA line.
In Q1 that will have an impact on share repurchase for the year.
And then as you think about.
The other question, which was on.
The credit card fees, yet for the year, Oh, we had 410 million.
Ford credit card fees for the full year the rest.
You, probably remember that we have timeshare branding fees that that roughly approximate 100 million and then the rest is split between residential.
Branding fees as well as some other smaller categories and App and re licensing fee.
The the way I would describe it going forward in 2020 is that group as a whole we expect to grow.
Up towards 10% when I think about the credit card component of that I would call that kind of mid single digits, maybe around 60%.
Great. That's let me thanks very much color.
All right. Thank you all very much. We appreciate your time and interest this morning get on the road come stay with us.
This does conclude todays conference call you may now disconnect your lines.
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