Marriott International, Inc. (MAR) Q1 2013 Earnings Report, Transcript and Summary

Stephen Pettibone - Vice President of Investor Relations Frits D. van Paasschen - Chief Executive Officer, President and Director Vasant M. Prabhu - Vice Chairman, Chief Financial Officer and Executive Vice President

Carlo Santarelli - Deutsche Bank AG, Research Division Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division Shaun C. Kelley - BofA Merrill Lynch, Research Division William A. Crow - Raymond James & Associates, Inc., Research Division Joshua Attie - Citigroup Inc, Research Division Harry C. Curtis - Nomura Securities Co. Ltd., Research Division Steven E. Kent - Goldman Sachs Group Inc., Research Division Felicia R. Hendrix - Barclays Capital, Research Division Joseph Greff - JP Morgan Chase & Co, Research Division Thomas Allen - Morgan Stanley, Research Division Robin M. Farley - UBS Investment Bank, Research Division Ian Rennardson - Jefferies & Company, Inc., Research Division Ian C. Weissman - ISI Group Inc., Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Good morning, and welcome to Starwood Hotels & Resorts First Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's First Quarter 2013 Earnings Call. Joining me today are Frits van Paasschen, our CEO and President; and Vasant Prabhu, our Vice Chairman and CFO. Before we begin, I'd like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood's annual report on Form 10-K and in our other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call on our website at www.starwoodhotels.com. With that, I'm pleased to turn the call over to Frits for his comments.

Thanks, Stephen, and welcome, everyone, to today's call. I'll cover 3 topics in my prepared remarks today. First, a brief recap of our Q1 results and a look at our business around the world. Second, some comments on our month-long relocation to Dubai. And third, a look at how we've grown our fee business over the last few years. Before I turn to these 3 topics, though, I want to talk briefly about the shocking events at the Boston Marathon. I've mentioned this before, but our presence around the world means we often find ourselves at the front line of what's happening, whether it's the turmoil of the Arab Spring, protests in Athens, unrest in Bangkok or the aftermath of Fukushima. The most inspiring stories I've heard in my career are about our associates and how they've cared for victims, protected stranded travelers or helped relief efforts. Boston was another one of those situations. I want to recognize and thank our associates, especially at the Westin Copley and The Sheraton Boston, for their response to this terrible event. Most companies say their business is about people, but at moments like these, it's hard to imagine a business that relies more on the skill and the spirit of its teams than Starwood. With that, I'll turn now to my first topic. We're happy to report that we had a very solid first quarter across the board. We said last quarter that 2013 looked to be a somewhat better version of 2012. The trends we're seeing in the globalizing recovery has continued along those lines. Of course, any of a number of disruptions could change all of this, there are base case assumptions call for more of what we're seeing now. Our EBITDA, not including Bal Harbour residential sales, came in well…

Thank you, Frits. As you have seen, we had a great start to 2013, especially in North America. We significantly exceeded our profit expectations with strong results from owned hotels, vacation ownership and continued tight control of SG&A costs. Before I review business trends around the globe, I'll spend a few minutes summarizing the main points from our Investor Day in Dubai, for those of you who might have missed it. As many of you know, Starwood has been a company in transformation for the past decade on 3 major fronts. First, from owning hotels to owning relationships. On this front, we have sold 124 hotels since 2000 for almost $8.4 billion. In Dubai, we announced our intent to sell another $3 billion of hotel assets by 2016, market conditions permitting. This will achieve our asset-light goal of delivering 80% of profits from management and franchise fees by 2016. Second, from a U.S.-centric to a global enterprise. On this front, we have gone from earning 37% of our fees from outside the U.S. in 2000 to 56% today. With over 80% of our pipeline outside the U.S., we are well on our way to achieving our goal of 80% non-U.S. fees. Third, Starwood pioneered and continues to lead the industry in moving from price point brands to lifestyle brands. Building on the launch of W, the Westin Heavenly program and the revitalization of Sheraton, we have repositioned Le Méridien, created the St. Regis brand from a single iconic hotel, launched Aloft and Element. All these transformations have created a company with a faster growth trajectory, low cyclicality, higher margin, greater capital efficiency and significant cash generation potential. As a result, we have delivered a superior value to you, our shareholders, over the past decade with total returns of 256% through…

Thank you, Vasant. We'd now like to open up the call to your questions. [Operator Instructions] Sylvia, can we have the first question, please.

Your first question comes from line of Carlo Santarelli from Deutsche Bank.

Just to clarify, Vasant, you obviously laid it out pretty nicely in terms of your thoughts on uses of cash. But given the -- a little bit of a slowdown in the buyback in the quarter, could you first maybe quantify how much of the quarter you are actually able to be in the market and how you're thinking about the next 6 to 12 months with respect to your balance sheet?

Sure. I mean, we've been very clear about this for several years. I mean, we started out with a view that we should reinvest in our business, we have done that. We lowered our debt, we don't need to anymore, and don't plan to. We regularly review with our board our buyback parameters, certainly, with an eye on intrinsic value. So as you can see, we were buyers earlier in the quarter when the stock was below $60. We do review price goals and at what prices would we be buyers, and so that's not a static number. As you can see, it has changed over time. And we'll continue to do that as we go forward. I don't know, Frits, if you wanted to add some.

No. I think the answer still remains a philosophical one. We recognize that we're in a good position in terms of our leverage that we have cash coming in. And as we've said repeatedly, we'll find ways to return that to shareholders. But for us to speak in specific terms, prospectively, we feel in our view isn't a prudent thing to do.

Yes. I think the only thing we would point to, as always, is history. I mean, if you go back and look at our history, we have been very good in looking at what are the options for deploying cash and have been very good in terms of returning cash we cannot productively deploy to shareholders to the tune of $8 billion or more over the past several years.

Your next question comes from Patrick Scholes from SunTrust.

A question for you on your REVPAR out of China and Asia. I'm sure you look at the monthly Smith Travel International results. Certainly, you performed much better than Smith Travel had on the results. I wonder if you can help me reconcile why that may be?

I think in the broadest terms, we do see, and this is something I alluded to, continued outperformance of our hotels relative to their concept mix. I think that, that accounts for a good deal of the outperformance relative to the overall industry numbers. I think in addition to that, you always have the impact of mixed hotel -- of hotels geographically. And as you could see, both within China and throughout the region, there was a pretty big range of performance in different locations, and some of that mix has to do with it as well. And then I think that there is always the benefit of some additional momentum that you have when you have a lot of new hotels in the region. Now whether the base of our hotels is a percentage of the total that are new relative to others is greater, is something you guys could work out. But that's another thing that I think continues to push our results.

Your next question comes from Shaun Kelly from Bank of America.

Just wondering if you guys could comment a little bit about maybe the overall M&A environment. As we continue to track it, it still looks on the hotel -- and I'm talking on the individual assets side, still looks fairly kind of fairly slow. Could you just talk a little bit about what you guys are seeing? We did see a big asset trade in London in the quarter and are you guys seeing any material pickup from interested parties?

Yes. Look, I think that -- even on the assets side, when you look at the kinds of properties that we're talking about, the upper upscale and beyond, it's still a bit of a lumpy market. And I think that the more important point that I could share with you on this is that qualitatively, there's clearly more interest than there was 12 months ago. And 12 months ago, there was more interest certainly than the year or 2 before that as well. And clearly, that's a combination of low long-term interest rates, improving profitability in the sector, and I think a sense that we all have that this overall global recovery still has some legs in front of it. Our sense is that volume in this kind of environment should continue to pick up. And if you look at the simple calculation of our pace of asset sales in the first quarter and our goal by the end of 2016, we have a ways to go in terms of dollar volume. On the other hand in terms of absolute number of hotels, I think we're closer to where we need to be. The reality is, as long as we're selling 1 or 2 hotels at a time, it takes the same amount of energy and work and also identifying opportunities to sell a hotel that's large and valuable as one that's smaller on the scale. Vasant, you may want to add something to this.

No. I think what we're seeing is certainly -- mobile, certainly a lot of interest you get in the U.S. It's the public REITs. There's the sovereign wealth funds and high net worth outside the U.S. But I think the main point we would make is we do have quite a few hotels that, as always, we're testing the market on. We are not yet seeing a market that is looking for what you might call large deals, truly multi-hotel deals, billion dollar plus deals. It is still a market for 1 and 2 hotels at a time, and that's what Frits talked about. That does drive your pace and we'll see how that evolves.

Your next question comes from Bill Crow from Raymond James. William A. Crow - Raymond James & Associates, Inc., Research Division: Vasant, on the asset sales, you've done a great job in the U.S. Obviously, Europe is maybe a year away from a fundamental perspective and a pricing perspective. To what extent to the tax laws make it challenging to distribute the proceeds to shareholders when you start selling the European portfolio?

As you know, we've been doing a fair amount of tax planning over the years, and we do have the ability to sell our European assets. Most of them tax efficiently, as well as to repatriate the cash. At this point, we really have no cash strapped outside the U.S. We do have demand for some of those unique hotels in Italy. Over time, hopefully, we will be selling them and we do have plans by which we could bring the cash back to the U.S. So it can be repatriated.

Your next question comes from Joshua Attie from Citi.

If I could just follow up on Bill's question. Vasant, could you explain exactly what you mean when you say you have the ability to sell the European assets tax efficiently and repatriate the cash? Do you mean that you have NOL or capital loss carryforwards that you could use or is there some other method? Could explain to us how that would work?

No. It's a structure that we put in place a while ago. It's what the tax basis in those infrastructures is. It's how you structure the sale, whether it's an asset sale or a stock sale. Typically, we require our buyers to work with us on a structure that is good for them and good for us. And essentially, we knew going back a while that most of our hotels are going to be for sale. So we've always had an intent of setting things up in a way that allows us to sell them with limited leakage. And in the case of international assets, with the ability to bring the cash back.

Your next question comes from Harry Curtis from Nomura.

A quick question on improving return on invested capital, it's a stated goal of yours. How does your vacation ownership segment fit into that? Do you think that it could be spun off at some point?

Yes. So Harry, I think the general part to your question, first, in terms of return on invested capital, by having scaled back our business to where it is today, we're in locations and with projects that by themselves intrinsically have a very favorable IRRs, and so we can continue to run the business at its current size with returns that we feel are very well in excess of any risk-adjusted weighted average cost of capital for us. In terms of the more specific part of your question, in spinning off the business. So far we think it's been, from our own perspective, and I'm not going to compare us to anybody else because situations may be different. But from our own perspective as Starwood, given the cash that we've pulled out of this business, we're very happy to have kept this into our portfolio. Also, we think that the synergies, the strength of working our brands together, the strength of our teams, all point to having a successful business as part of what we're doing. You may have noticed Vasant having mentioned the move of the Westin St. John into vacation ownership. And I think it becomes an interesting example of how we can get out of some of our owned assets more efficiently from a tax perspective by doing that. So as of right now, no plans to spinoff.

Your next question comes from Steven Kent from Goldman Sachs.

Just to continue on this asset sale issue. What indicators give you confidence that you can, in fact, wait 3 or 4 years to sell hotels to achieve asset light? As you've mentioned, you are seeing high asset sale multiples, strong interest broadly. And then together with that, given your low leverage and the potential for $3 billion in asset sales, why are you not more aggressive in share buyback today or soon, before the positive impact of these asset sales boost your share price?

Steve, when it comes to asset sales, as you know, we've always been unwilling to give you sort of precise dates on when certain assets would be sold. For the very reason that you can't predict markets nor do you want to put yourself in a position where you have to sell something just because you said you were going to sell it. I don't think -- we know more about this than, let's say, anybody else in our business. What we know is that we are ready. What we also know is that our assets -- we work on our assets to make them ready for sale. We are ready to move fast when the market is there. We are always testing the market. We are always willing to sell. If someone walks in tomorrow and offers us the price we want on our entire portfolio of owned hotels, it's for sale. So the key here is to be ready. The key here is to move fast and not be tied to timetables and so on. So could we be done faster than 2016? Yes, depending on market conditions. Could it take all the way through 2016? It won't be because we say we only sell -- we were going to sell x number of hotels a year, it will all be driven by market conditions. And the second question was on buybacks. Look, I mean, on buybacks, too, our goal is to be disciplined and be focused on buying back when we can, buy back at levels that are good relative to intrinsic value. You have seen us be very aggressive on buybacks in the past so, again, this is something that we will review on a regular basis and you should expect that our past behavior will tell you a lot about what we might do in the future.

Your next question comes from Felicia Hendrix from Barclays.

Vasant, just wanted to reconcile your worldwide REVPAR growth outlook. So that was reiterated, you said North America was going to be at the high end. China now moves to the midpoint of the range from what you had said previously, high end to the range or above the high end. Europe sounds like now it's going to be kind of flattish or maybe slightly worse than what you said last quarter. So obviously, a lot of moving parts in there and we're dealing with ranges, but I'm just trying to reconcile maybe what's better than what you thought last quarter because a lot of the things that you highlighted were a little bit worse.

I think the easy way to answer it is the U.S. is better than we expected. So clearly, the U.S. is trending and certainly helped by the holiday shift in Q2, it's trending at the high end, if not higher than the range. China is a little softer than we expected, but holding at somewhere in the 5% to 6% level. The rest of Asia is doing just fine. So I would say the big changes, the U.S. being better, China being a little softer and Europe really no change. We did have a soft start, but Q1 doesn't matter. We're still projecting the kind of growth 2% to 3% that we've seen in the last few years. So I think the best way to answer it is that most of the difference is in the U.S. and China.

Your next question comes from Joe Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Most of my questions have been asked and answered. But one comment or question in the earnings press release this morning when it comes to your outlook and guidance. You admitted in the paragraph, from about a quarter ago and I guess the last bunch of quarters, talking about operating in an uncertain world, and macro and political tail risks and things like that. And that wasn't in there, this go around. Can we talk about why you took that out? I guess, that implies a couple of things, you're either feeling that the macro risks are lessening or you're just getting used to operating in a world of uncertainty. If you can just help us understand that, that would be great.

It's very much what you just said. You shouldn't read too much into it. I think we've all come to believe that we live in a world where there is, as Frits like to say, it's a world with -- you operate under scenarios. Our baseline scenario is what we always talk about. We continue to be mindful of the fact that there are a variety of things out there that could impact things. We've said that many times, you've heard us. That's the only reason it's not there. In fact, we probably didn't spend much time talking about whether it should or shouldn't be in there. So it's what you said, Joe, at the very end, that explains it.

Yes. And I think, Joe, just to draw your attention to it as well. If you look at the text of my prepared remarks this morning, I did allude a few times to the fact that our outlook, by and large, is consistent with what we've seen so far this quarter and as a continuation of last year, with the caveats of this being an uncertain world and particularly both the U.S. fiscal and job creation situation, as well as, whether there will be more downstream impact from the transition in China. But I think that we continue to operate in a world that has uncertainty. As we run our business, we do plan for scenarios and recognize that fairly unexpectedly, the picture could change from an overall macro and lodging outlook. We have no reason to believe that anymore or less likely today than otherwise, just by virtue of the fact that these are sometimes strokes literally out of the blue.

Your next question comes from Thomas Allen from Morgan Stanley.

Related to sequestration. Did you feel any impact from the air traffic control furlough issues we saw last week? It seems like the issue has been fixed. But longer term, how should we think about your mix of drive to versus flying customers and benefits and risks associated with that exposure?

I think this was a brief enough situation that there was really no impact to our business. We do operate in gateway cities. So much of the business that comes to us is drive to, but it sort of depends on where in the country you're looking. I don't know, Frits...

Look, I think the reality is any real disruption in the air traffic is cutting off a big source of the oxygen that the hotel business breathes. So I think that's a reality today, as well as any time in the past. This particular hiccup in terms of air traffic didn't amount to much, overall, relative to our earnings. But look, that's just one of those uncertainties in terms of the disruptions that I alluded to in answering the last question from Joe.

Your next question comes from Robin Farley from UBS.

My question is on the management incentive fees. I wonder if you could talk about what percent of hotels are paying that in total and domestic and international as well? And just kind of what percent of those fees overall are coming from international? That was really my question. I also just wanted to clarify something that you gave an answer to a prior question that's sounded different than your introductory remarks about Asia. When you talked about coming in the midpoint of the range and rather than at the high end or above. It had sounded in your opening remarks like that was just Q2. Are you in fact changing that on a full year basis? That's what your Q&A response sounded.

So for incentive fees on same-store basis, if you look at it that way, about 60% -- a little over 60% of our same-store managed properties are paying incentive fees. Outside of the U.S., if you look at it purely in the outside of U.S., that number is about 75%. And it's not that much lower if you look at the all-in taking into account ramping.

Yes. In terms of the expectations for growth on a full year basis, I think the expectations in China are probably more in the middle of the range than they might have been when we last talked to you. And the expectations for the U.S. and North America in general are at the high end of the range than we last talked to you. And those would be sort of the modest changes. Now of course, North America being a larger business, performing better, does help. China is a large business, but North America is in fact our largest business.

Yes. And I know we've said this before, but it's, I think, useful to emphasize this. We make calls like this based on what we're seeing. And the reality of our business is, outside of the group business, our actual specific insight into what will be happening for 2 or 3 quarters from now isn't all that great. And that's a function of the fact that a big part of our business is transient and the booking cycle there is much shorter than the time frame we're talking about as we project. So a lot of this has to do with more qualitative conversations that we're having with our own operating teams, with our sales organizations and with some of our customers. So I want to make sure that there were not implying a greater degree of precision in terms of our outlook than that.

Your next question comes from Ian Rennardson from Jefferies. Ian Rennardson - Jefferies & Company, Inc., Research Division: Talking about the guidance for the year. You beat underlying EBITDA by $22 million in Q1, but your guidance for the year is up $13 million, if we add back the $8 million from disposals. Why the caution? What's stopping you being more positive about the full year?

Well, you mentioned one. Another one I didn't mention in my remarks is, we do have some modest ForEx headwinds. I mean, the move of the yen, as you know, has been quite substantial. And the Australian dollar and the Canadian dollar are also a little weaker than they were earlier in the year. So the exchange rate impacts at another $3 million to $4 million. Beyond that, it's early in the year. We just need to see how the year revolves. While we might not have spent some of the severance expense that we anticipated in Q1, we do have some adjustments that may happen as the year progresses and there could be some more there. So those are some the reasons, and we'll see how the year goes.

SG&A tends to be fairly lumpy in our business, we're still guiding to that 3% to 5% range.

Your next question comes from Ian Weissman from ISI.

Just following up on Robins question about incentive management fees. You mentioned that in the United States, 60% of your hotels are paying fees. How would that compare to the prior cycle at a similar, let's call it, 3 or 4 years into the recovery?

Sorry, did you say inside the U.S., 60% of the increase...

No.

Not what you said.

No, no, no. That's all in. Outside of the U.S., it's 76% are paying fees, the number of incentive fees. I don't have the...

In the U.S., it's probably in the 30% range, if I remember right. On a global basis, it's 60%. As you know, we get 90% of our incentive fees from outside the U.S. Many of our management contracts in the U.S. like the ones that host a fairly recent and they get into incentive fees later in their life cycle. So that's why our incentive fees are lower in the U.S. typically.

Your next question comes from Jeffrey Donnelly from Wells Fargo.

Vasant, I just want to clarify a few points on the dispositions, concerning the $3 billion of assets you intend to sell. Are those asset sales phased because a bid-ask spread exists today that you expect will close in the coming year? And it sounds like you've got hurdle prices for each of those assets that you are targeting to sell. Can you talk about how those prices were determined and is their price today different than maybe the price in 2 to 3 years? I'm just curious maybe what the gap is in those numbers?

You always have a point of view on what price you should yet. The market will tell you what price you can get. You can then make some judgments on whether holding can get you a better price or not. That's a function of a variety of factors like what's the profit trajectory of the hotel and what are your thoughts on what the demand for that kind of asset could be in the future. We are more than willing to adjust our expectations if we decide that on some kind of long-term metric or value, the value we're getting is reasonable and acceptable. So it's not, as you know, an exact science. And it's not like we have a price that we will not budge from. In the end, the market speaks and we have to decide if we will accept it. It's a classic decision of whether you hold or sell. In occasional situations, we may have a preferred time to sell. It may be due to some tax planning we're doing or specific things going on with the hotel, whether it's better to renovate before we sell or not. There could be other issues that may require that we not sell the hotel now rather than later. So those would be considerations that we have.

Your final question comes from Patrick Scholes from SunTrust.

The question is 2 part concerning group and groups in Westin. First on groups, it looks like in the last previous earnings call, you talked about group pace tracking in the mid-single digits for the year. How did that pace performed in the first quarter? Better or worse than you had previously been tracking? And then second one it concerns the Westin REVPAR result in the quarter. It looks like it was definitely underperforming for you, why may that be and is that at all related to higher percentage of group business for that group?

Yes. Group pace has been performing in sort of the low- to mid-single-digit range for quite sometime now. I think it's been relatively steady. So no change that we'd highlight there in terms of Westin.

And Westin, all the data we have at the Westin brand performs from a REVPAR index standpoint. As you know, very often when you look at numbers, you're looking at aggregates that are driven by where the hotels happen to be, and they're in dollars as reported rather than local currencies. So we always tell investors not to focus too much on brand level, REVPAR in any particular quarter because it is very much a function of where the hotels and that brand happen to be. And it doesn't tell you a whole lot about how the brand is really doing.

I think, for us, the more encouraging aspect is that, overall, across the whole portfolio of hotels and brands, we continue to have our REVPAR index grow faster than the marketplace. And that's probably the best like-for-like comparison you see across the business.

Thanks, Frits and Vasant. I want to thank all of you for joining us today for our first quarter earnings call. We appreciate your interest in Starwood Hotels & Resorts. If you have any other questions, feel free to reach out to us. Take care.

Ladies and gentlemen, this concludes today's Starwood Hotels & Resorts First Quarter 2013 Earnings Conference Call. You may now disconnect.