Marriott International, Inc. today reported fourth quarter 2018 results.
Arne M. Sorenson, president and chief executive officer of Marriott International, said, “Our team delivered solid results in 2018 even as we worked to complete the integration of Starwood Hotels & Resorts. Our rooms grew by nearly 5 percent, net; worldwide revenue per available room, or RevPAR, increased nearly 3 percent; general and administrative expenses rose only 1 percent; and adjusted earnings per share surged 48 percent. We ended the year with a record 1.3 million rooms operating under our 30 leading lodging brands. During the year, we reduced operating costs for owners, increased the value of our loyalty program for customers, and improved guest “intent to recommend” scores.
“We continue to grow our market share of industry rooms. According to STR, our worldwide market share of rooms at year-end 2018 stood at 7 percent, while our share of rooms under construction totaled a leading 20 percent. We expect rooms growth will accelerate, as we signed contracts for a record 125,000 rooms in 2018 and our development pipeline increased to a record 478,000 rooms. Select-service signings were especially strong in North America, particularly for Residence Inn, Fairfield Inn & Suites, and Courtyard.
“In the fourth quarter, North America systemwide RevPAR increased 0.2 percent and worldwide systemwide RevPAR increased 1.3 percent. North American RevPAR growth in the quarter was impacted by labor strikes in eight North American markets and weaker than expected transient demand for the industry.
“We expect North America RevPAR will increase 1 to 2 percent in the first quarter, reflecting the impact of the government shutdown offset by a favorable calendar comparison. Outside North America, RevPAR growth is expected to moderate slightly in the first quarter due to the slower economic growth outlook in the Asia Pacific region.
“For the full year 2019, we expect North America and worldwide RevPAR growth of 1 to 3 percent and rooms growth of roughly 5.5 percent, net. This should yield an increase in total fee revenue of 5 to 7 percent, despite foreign exchange headwinds. It should also enable us to return at least $3 billion to shareholders in share repurchases and dividends in 2019, even assuming no asset sales for the year.
“We are pleased that, just over two years since the acquisition, the integration of Starwood is nearly complete. With the announcement of our new loyalty brand, Marriott Bonvoy, just a few weeks ago, customers are enjoying the meaningful benefits of the combined company. I am very grateful for all the hard work and dedication of Marriott associates around the world who made the integration happen.”
Fourth Quarter 2018 Results
In the 2018 first quarter, the company adopted Accounting Standards Update 2014-09. Please see the “Accounting Update” section of this release for more information.
Marriott’s reported net income totaled $317 million in the 2018 fourth quarter, compared to 2017 fourth quarter reported net income of $114 million. Reported diluted earnings per share (EPS) totaled $0.92 in the quarter, compared to reported diluted EPS of $0.31 in the year-ago quarter.
Fourth quarter 2018 adjusted net income totaled $497 million, a 23 percent increase over 2017 fourth quarter adjusted net income of $403 million. Adjusted diluted EPS in the fourth quarter totaled $1.44, a 32 percent increase from adjusted diluted EPS of $1.09 in the year-ago quarter. See page A-3 for the calculation of adjusted results. Adjusted results exclude merger-related costs and charges, cost reimbursement revenue, and reimbursed expenses. Adjusted results for the 2018 fourth quarter also exclude adjustments to the provisional tax charge resulting from the U.S. Tax Cuts and Jobs Act of 2017 (Tax Act). Adjusted results for the 2017 fourth quarter also exclude the Avendra gain and the provisional tax charge resulting from the Tax Act.
Base management and franchise fees totaled $743 million in the 2018 fourth quarter, an 8 percent increase over base management and franchise fees of $688 million in the year-ago quarter. The year-over-year increase in these fees is primarily attributable to unit growth, higher credit card branding fees and higher RevPAR.
Fourth quarter 2018 incentive management fees totaled $167 million, a 4 percent decrease compared to incentive management fees of $174 million in the year-ago quarter. The year-over-year decrease largely reflects the impact of labor strikes, unfavorable comparisons in the Middle East, and unfavorable foreign exchange, partially offset by new units and higher net house profit at most hotels.
Owned, leased, and other revenue, net of direct expenses, totaled $88 million in the 2018 fourth quarter, compared to $89 million in the year-ago quarter. Compared to the year-ago quarter, results were negatively impacted by $14 million from hotels sold during or after the fourth quarter of 2017. That negative impact was mostly offset by higher termination fees year-over-year.
Depreciation, amortization and other expenses totaled $62 million in the 2018 fourth quarter, compared to $53 million in the year-ago quarter. The $9 million increase largely reflects the unfavorable comparison to a $7 million adjustment related to Legacy-Starwood IT systems in the year-ago quarter.
General, administrative, and other expenses for the 2018 fourth quarter totaled $242 million, compared to $270 million in the year-ago quarter. The year-over-year decrease largely reflects cost synergies, partially offset by the $7 million expense in the 2018 fourth quarter for the company’s supplemental investments in its workforce. Those supplemental investments totaled $51 million for full year 2018.
In the 2018 fourth quarter, the company incurred $28 million of expenses and recognized $25 million of insurance proceeds related to the data security incident it disclosed on November 30, 2018. The $3 million of net expenses are reflected in either the Reimbursed expenses or Merger-related costs and charges lines of the Statements of Income, which have been excluded from adjusted net income, adjusted EPS and adjusted EBITDA.
Gains and other income, net, totaled $3 million, compared to $657 million in the year-ago quarter. Gains and other income, net, in the 2017 fourth quarter reflected the $659 million Avendra gain.
Interest expense, net, totaled $88 million in the fourth quarter compared to $58 million in the year-ago quarter. The increase is largely due to higher interest rates and debt balances, and lower interest income.
Equity in earnings for the fourth quarter totaled $8 million, compared to $11 million in the year-ago quarter. The year-over-year decrease largely reflects the $5 million gain on the sale of a hotel in a North American joint venture in the 2017 fourth quarter.
The reported provision for income taxes totaled $28 million in the fourth quarter, an 8.1 percent reported effective tax rate, compared to $920 million in the year-ago quarter, an 89 percent reported effective tax rate. The 2017 fourth quarter reported tax provision reflects a $563 million charge related to the enactment of the Tax Act. The lower reported effective tax rate in the 2018 fourth quarter largely reflects a lower corporate tax rate as a result of the Tax Act and favorable discrete items.
For the fourth quarter, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $864 million, a 10 percent increase over fourth quarter 2017 adjusted EBITDA of $789 million. Compared to the prior year, adjusted EBITDA for the fourth quarter of 2018 was negatively impacted by $12 million from sold hotels. See page A-11 for the adjusted EBITDA calculations.
Fourth Quarter 2018 Results Compared to November 5, 2018 Guidance
On November 5, 2018, the company estimated gross fee revenues for the fourth quarter would be $900 million to $910 million. Actual gross fee revenues of $910 million in the quarter were at the high end of the estimate, largely reflecting greater than expected credit card branding fees and fees from new units.
Marriott estimated an adjusted effective tax rate of 19.2 percent for the 2018 fourth quarter. The adjusted provision for income taxes totaled $106 million in the fourth quarter, a 17.6 percent effective rate. The tax rate was lower than expected partially due to favorable discrete items.
The company estimated adjusted EBITDA for the fourth quarter would total $847 million to $862 million. Actual adjusted EBITDA of $864 million reflects unit growth, stronger than expected credit card branding fees and lower than expected general, administrative, and other expenses.
Selected Performance Information
The company added 146 new properties (23,942 rooms) to its worldwide lodging portfolio during the 2018 fourth quarter, including The Westin Maldives Miriandhoo Resort, The Abu Dhabi EDITION and the W Costa Rica – Reserva Conchal. Twenty-two properties (5,188 rooms) exited the system during the quarter. At year-end, Marriott’s lodging system encompassed 6,906 properties and timeshare resorts with more than 1,317,000 rooms.
The company added 494 new properties (80,255 rooms) to its worldwide lodging portfolio during 2018. One hundred and seven properties (21,176 rooms) exited the system during the year.
At year-end, the company’s worldwide development pipeline totaled 2,882 properties with more than 478,000 rooms, including 1,150 properties with approximately 214,000 rooms under construction and 141 properties with nearly 23,000 rooms approved for development, but not yet subject to signed contracts.
In the 2018 fourth quarter, worldwide comparable systemwide constant dollar RevPAR increased 1.3 percent (a 0.1 percent increase using actual dollars). North American comparable systemwide constant dollar RevPAR increased 0.2 percent (flat using actual dollars), and international comparable systemwide constant dollar RevPAR increased 4.0 percent (a 0.3 percent increase using actual dollars) for the same period.
Worldwide comparable company-operated house profit margins were flat in the fourth quarter, reflecting solid cost controls and synergies from the Starwood acquisition offset by the impact of modest RevPAR growth and higher wages. House profit margins for comparable company-operated properties outside North America rose 20 basis points and North American comparable company-operated house profit margins decreased 20 basis points in the fourth quarter.
For full year 2018, worldwide comparable systemwide constant dollar RevPAR increased 2.6 percent (a 2.9 percent increase using actual dollars). North American comparable systemwide constant dollar RevPAR increased 1.5 percent (a 1.6 percent increase using actual dollars), and international comparable systemwide constant dollar RevPAR increased 5.5 percent (a 6.5 percent increase using actual dollars) for the same period.
Worldwide comparable company-operated house profit margins increased 40 basis points for full year 2018, 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 70 basis points and North American comparable company-operated house profit margins increased 10 basis points over 2017.
Balance Sheet
At year-end, Marriott’s total debt was $9,347 million and cash balances totaled $316 million, compared to $8,238 million in debt and $383 million of cash at year-end 2017.
In November 2018, the company issued $550 million of floating rate Series Y Senior Notes due in 2020, $350 million of Series Z Senior Notes due in 2023 with a 4.15 percent interest rate coupon, and $300 million of Series AA Senior Notes due in 2028 with a 4.65 percent interest rate coupon. The company expects to use the net proceeds for general corporate purposes.
Marriott Common Stock
Weighted average fully diluted shares outstanding used to calculate both reported and adjusted diluted EPS totaled 345.7 million in the 2018 fourth quarter, compared to 369.9 million shares in the year-ago quarter.
The company repurchased 3.0 million shares of common stock in the 2018 fourth quarter for $336 million at an average price of $113.85 per share. For full year 2018, Marriott repurchased 21.5 million shares for $2.8 billion at an average price of $130.67 per share. Year-to-date through February 28, the company has repurchased 2.4 million shares for $300 million at an average price of $126.31 per share. The company suspended repurchases for a time due to the data security incident and the loyalty accounting matter described below.
On February 15, 2019, the board of directors increased the company’s authorization to repurchase shares by 25.0 million for a total authorization of 33.3 million shares as of February 28, 2019.
Accounting Update
In the 2018 fourth quarter, the company identified certain immaterial errors related to loyalty program accounting, which resulted in the understatement of cost reimbursement revenue, net of reimbursed expenses, in the first three quarters of 2018. The company will provide revised information for each of the first three quarters of 2018 in its 2018 Annual Report on Form 10-K (Form 10-K), which the company expects to file with the SEC on March 1, 2019. The revised amounts will increase net income by $99 million for the first three quarters of 2018 combined. The revisions do not impact adjusted EPS, adjusted EBITDA nor the company’s cash position.
In the 2018 first quarter, the company adopted 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 results in changes to the reporting of certain revenue and expense items, Marriott’s cash flow and business fundamentals are not impacted. A discussion of revenue recognition changes can be found in the 2017 Form 10-K the company filed on February 15, 2018, which is available on Marriott’s Investor Relations website at http://www.marriott.com/investor.
The company has elected to use the full retrospective method in the adoption of the new revenue standard. As such, the company’s financial statements in SEC filings will show prior year quarterly and full year results as if the new revenue standard had been adopted on January 1, 2016. The company furnished a Form 8-K on July 25, 2018, which presented the effect of adoption of the new revenue standard on Marriott’s 2017 quarterly and full year unaudited results of operations and related financial measures.
In the first quarter of 2019, the company plans to adopt Accounting Standards Update 2016-02 (the new lease standard), which brings substantially all leases onto the balance sheet, including operating leases. While the company is still assessing the potential impact of this new accounting standard on its financial statements, it anticipates no impact to the Income Statements or Statements of Cash Flows. A discussion of the expected impact of the lease changes can be found in the company’s 2018 Form 10-K, which the company expects to file on March 1, 2019.
2019 Outlook
The following outlook for first quarter and full year 2019 does not include merger-related costs and charges, cost reimbursement revenue or reimbursed expenses, which the company cannot accurately forecast and which may be significant.
For the 2019 first quarter, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 1 to 2 percent in North America, 2 to 4 percent outside North America, and 1 to 3 percent worldwide.
The company assumes first quarter 2019 gross fee revenues will total $885 million to $905 million, a 5 to 7 percent increase over first quarter 2018 gross fee revenues of $845 million, including an estimated $9 million of unfavorable foreign exchange. The company anticipates first quarter 2019 incentive management fees will decrease at a low single-digit rate over first quarter 2018 incentive management fees of $155 million due to unfavorable foreign exchange and the ongoing impact of reduced bookings resulting from the fourth quarter 2018 labor strikes.
Marriott expects first quarter 2019 owned, leased, and other revenue, net of direct expenses, could total $50 million. This estimate reflects lower year-over-year termination fees of roughly $25 million but does not reflect any asset sales that may occur in the first quarter of 2019.
The company assumes first quarter 2019 general, administrative, and other expenses could total $215 million to $220 million, a 11 to 13 percent decline from first quarter 2018 expenses of $247 million. First quarter 2018 general, administrative, and other expenses included a $35 million expense for the company’s supplemental investments in its workforce.
The company expects first quarter 2019 diluted EPS could total $1.30 to $1.35, down 3 percent to up 1 percent compared to first quarter 2018 adjusted diluted EPS of $1.34. First quarter adjusted 2018 results include $53 million ($0.11) of asset sale gains in gains and other income, net. First quarter 2019 guidance does not assume any asset sale gains in gains and other income, net.
Marriott expects first quarter 2019 adjusted EBITDA could total $820 million to $845 million, a 6 to 10 percent increase over first quarter 2018 adjusted EBITDA of $770 million. This estimate does not reflect any asset sales that may occur in the first quarter of 2019. See page A-12 for the adjusted EBITDA calculation.
For the full year 2019, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 1 to 3 percent in North America, 2 to 4 percent outside North America, and 1 to 3 percent worldwide.
Marriott anticipates net room additions of roughly 5.5 percent for full year 2019, which assumes deletions of 1 to 1.5 percent.
The company assumes full year 2019 gross fee revenues will total $3,830 million to $3,910 million, a 5 to 7 percent increase over 2018 gross fee revenues of $3,638 million, including $15 million to $20 million of unfavorable foreign exchange. Full year 2019 estimated gross fee revenues include $410 million to $420 million of credit card branding fees, compared to $380 million for full year 2018. The company anticipates full year 2019 incentive management fees will increase at a low single-digit rate over 2018 full year incentive management fees of $649 million.
Marriott expects full year 2019 owned, leased, and other revenue, net of direct expenses, could total $280 million to $290 million. This estimate reflects stronger results at owned and leased hotels, offset by $45 million to $50 million of lower year-over-year termination fees. This outlook for full year 2019 does not reflect any asset sales that may occur during the year.
The company assumes full year 2019 general, administrative, and other expenses could total $910 million to $920 million, a 1 to 2 percent decrease from full year 2018 expenses of $927 million. Full year 2018 general, administrative, and other expenses included a $51 million expense for the company’s supplemental investments in its workforce, which is not expected to repeat in 2019.
The company expects full year 2019 diluted EPS could total $5.87 to $6.10, a 2 to 5 percent decline from 2018 adjusted diluted EPS of $6.21. Full year adjusted 2018 results include $183 million ($0.44) of asset sale gains in gains and other income, net and $65 million ($0.21) of asset sale gains in equity in earnings. Full year 2019 guidance does not assume any asset sale gains in either gains and other income, net, or equity in earnings.
Marriott expects full year 2019 adjusted EBITDA could total $3,615 million to $3,715 million, a 4 to 7 percent increase over 2018 adjusted EBITDA of $3,473 million. See page A-13 for the adjusted EBITDA calculation.
| First Quarter 20191 | Full Year 20191 | |
| Gross fee revenues | $885 million to $905 million | $3,830 million to $3,910 million |
| Contract investment amortization | Approx. $15 million | Approx. $60 million |
| Owned, leased and other revenue, net of direct expenses | Approx. $50 million | $280 million to $290 million |
| Depreciation, amortization, and other expenses | Approx. $55 million | Approx. $215 million |
| General, administrative, and other expenses | $215 million to $220 million | $910 million to $920 million |
| Operating income | $645 million to $670 million | $2,915 million to $3,015 million |
| Gains and other income | Approx. $0 million | Approx. $5 million |
| Net interest expense | Approx. $95 million | Approx. $385 million |
| Equity in earnings (losses) | Approx. $10 million | Approx. $25 million |
| Earnings per share – diluted | $1.30 to $1.35 | $5.87 to $6.10 |
| Effective tax rate | 21 percent | 23 percent |
1The outlook provided in this table does not include merger-related costs and charges, cost reimbursement revenue or reimbursed expenses, which the company cannot accurately forecast and which may be significant.
The company expects investment spending in 2019 will total approximately $500 million to $700 million, including approximately $225 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, at least $3 billion could be returned to shareholders through share repurchases and dividends in 2019.
Marriott International, Inc. (NASDAQ: MAR) will conduct its quarterly earnings review for the investment community and news media on Friday, March 1, 2019 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 on “Events & Presentations” and click on the quarterly conference call link. A replay will be available at that same website until March 1, 2020.
The telephone dial-in number for the conference call is 706-679-3455 and the conference ID is 4365548. A telephone replay of the conference call will be available from 1:00 p.m. ET, Friday, March 1, 2019 until 8:00 p.m. ET, Friday, March 8, 2019. To access the replay, call 404-537-3406. The conference ID for the recording is 4365548.
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