Marriott International reported second quarter 2010 results, exceeding the company’s diluted EPS expectations and prior year results.
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SECOND QUARTER 2010 RESULTS
Second quarter 2010 net income totaled $119 million, a 42 percent increase compared to second quarter 2009 adjusted net income. Diluted EPS totaled $0.31, a 35 percent increase from adjusted diluted EPS in the year-ago quarter. On April 22, 2010, the company forecasted second quarter diluted EPS of $0.25 to $0.29.
Adjusted results for the 2009 second quarter excluded $57 million pretax ($30 million after-tax and $0.08 per diluted share) of restructuring costs and other charges and $17 million of non-cash charges ($0.05 per diluted share) in the provision for income taxes.
Reported net income totaled $119 million in the second quarter of 2010 compared to reported net income of $37 million in the year-ago quarter. Reported diluted EPS was $0.31 in the second quarter of 2010 compared to reported EPS of $0.10 in the second quarter of 2009.
J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, said, “This is an exciting time for Marriott. Business and leisure stays at our hotels are trending up. Revenue per available room increased more than expected in the second quarter and room rates at company-operated hotels in North America rose for the first time in nearly two years.
“Totaling approximately 95,000 rooms, our development pipeline reflects expanding global opportunities. We opened over 6,500 rooms during the quarter. With strong interest by owners and franchisees in our brands, we expect to open over 30,000 rooms in 2010, including conversions to our new brand, the Autograph Collection.
“We are seeing major international growth. At the end of the quarter, a record 39 percent of our development pipeline was outside North America as were two-thirds of our worldwide rooms under construction. During the quarter, we opened superb new international hotels in Phuket, Shanghai, St. Petersburg and Budapest.
“We anticipate even more favorable pricing in the second half of 2010 and into 2011. Combined with productivity improvements achieved over the last year, strong unit growth and increasing demand, we look forward to growing cash flow and strong earnings in 2010 and beyond.”
For the 2010 second quarter, REVPAR for worldwide comparable company-operated properties increased 9.9 percent (an 8.2 percent increase using constant dollars) and REVPAR for worldwide comparable systemwide properties increased 8.5 percent (a 7.0 percent increase using constant dollars).
International comparable company-operated REVPAR rose 14.1 percent (a 9.8 percent increase using constant dollars), including a 2.0 percent increase in average daily rate (a 1.8 percent decline using constant dollars) in the second quarter of 2010.
In North America, comparable company-operated REVPAR increased 7.9 percent (a 7.5 percent increase using constant dollars) in the second quarter of 2010. On a constant dollar basis, REVPAR for comparable company-operated North American full-service and luxury hotels (including Marriott Hotels & Resorts, The Ritz-Carlton and Renaissance Hotels) increased 9.0 percent with a 1.7 percent increase in average daily rate.
Marriott added 46 new properties (6,568 rooms) to its worldwide lodging portfolio in the 2010 second quarter and 14 properties (2,311 rooms) exited the system during the quarter. At quarter-end, the company’s lodging group encompassed 3,489 properties and timeshare resorts for a total of over 607,000 rooms.
The company’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled nearly 600 properties with approximately 95,000 rooms at quarter-end.
Early in the 2010 third quarter, the company launched Marriott Vacation Club Destinations (MVCD), a points-based program that offers increased usage and purchase flexibility to its owners. While Marriott Vacation Clubs in North America will offer this improved product to new customers going forward, existing owners will retain full rights and privileges of interval ownership as well as the opportunity to participate in MVCD.
MARRIOTT REVENUES totaled nearly $2.8 billion in the 2010 second quarter compared to approximately $2.6 billion for the second quarter of 2009. Base management and franchise fees rose 10 percent to $241 million reflecting higher REVPAR and fees from new hotels. Second quarter incentive management fees increased 31 percent to $46 million. In the second quarter, 25 percent of company-managed hotels earned incentive management fees compared to 23 percent in the year-ago quarter. Approximately 62 percent of incentive management fees came from hotels outside North America in the 2010 quarter compared to 61 percent in the 2009 quarter.
Worldwide comparable company-operated house profit margins increased 90 basis points in the second quarter reflecting higher occupancy, slight rate increases and strong productivity.
Owned, leased, corporate housing and other revenue, net of direct expenses, increased $10 million in the 2010 second quarter, to $31 million, including a $6 million favorable impact of hotel termination fees net of property closing costs. Operating results at owned and leased hotels improved year-over-year with stronger occupancy and margins.
Second quarter adjusted Timeshare segment contract sales decreased 21 percent to $167 million (excluding a $6 million allowance for fractional and residential contract cancellations recorded in the quarter) largely due to tough comparisons as a result of the 25th anniversary promotion in the year-ago quarter. In the prior year’s quarter, adjusted Timeshare segment contract sales totaled $212 million (excluding a $3 million allowance for fractional and residential contract cancellations).
In the second quarter, timeshare sales and services revenue totaled $289 million and, net of expenses, totaled $50 million for the quarter. Adjusting for restructuring and other charges, as well as the impact of consolidating securitized loans had that occurred at the beginning of 2009 rather than 2010, second quarter 2009 timeshare sales and services revenue would have totaled $331 million and, net of direct expenses, would have totaled $48 million. These adjustments for the 2009 quarter are shown on page A-11.
Despite lower contract sales, development revenue, net of expense, benefited from lower marketing and sales costs, as well as price increases year-over-year. Timeshare segment results include Timeshare sales and services revenue, net of direct expenses, as well as base management fees, equity earnings (losses), noncontrolling interest, interest expense and general, administrative and other expenses associated with the timeshare business. Timeshare segment results for the 2010 second quarter, shown on page A-9, totaled $30 million, including $14 million of interest expense related to the consolidation of securitized Timeshare notes. Adjusting for restructuring and other charges, as well as the impact of consolidating securitized loans had that occurred at the beginning of 2009 rather than 2010, second quarter 2009 timeshare segment results would have totaled $29 million, including $18 million of interest expense related to the consolidation of securitized Timeshare notes. These adjustments for the 2009 quarter are shown on page A-11.
GENERAL, ADMINISTRATIVE and OTHER expenses for the 2010 second quarter increased 4 percent to $142 million, compared to adjusted expenses of $136 million in the year-ago quarter, and included higher incentive compensation costs partially offset by lower legal and deferred compensation expenses.
GAINS AND OTHER INCOME totaled $3 million primarily reflecting $2 million of gains on the sale of real estate and $1 million of returns from joint venture investments. The prior year’s second quarter gains and other income totaled $3 million largely related to gains on the sale of real estate.
INTEREST EXPENSE increased $16 million to $44 million in the second quarter primarily due to $14 million of interest expense related to the consolidation of debt associated with securitized Timeshare notes, lower capitalized interest and interest expense associated with the company’s deferred compensation plan partially offset by the impact of lower debt balances and interest rates. Adjusting for the impact of consolidating securitized loans had that occurred at the beginning of 2009 rather than 2010, second quarter 2009 interest expense would have been $18 million higher.
Earnings before Interest Expense, Taxes, Depreciation and Amortization (EBITDA)
EBITDA totaled $278 million in the 2010 second quarter. In the 2009 second quarter, adjusted EBITDA totaled $220 million. If the consolidation of securitized timeshare notes had occurred at the beginning of 2009, adjusted EBITDA in the 2009 second quarter would have totaled $252 million.
BALANCE SHEET
At the end of the second quarter 2010, total debt was $2,911 million and cash balances totaled $100 million, compared to $2,298 million in debt and $115 million of cash at year-end 2009. Adjusting for the debt associated with securitized Timeshare mortgage notes now required to be consolidated under new accounting rules, adjusted total debt, net of cash, has declined by over $350 million since year-end 2009.
At the end of the 2010 second quarter, Marriott had borrowings of approximately $100 million outstanding under its $2.4 billion bank revolver, about $900 million lower than the end of the 2009 first quarter.
COMMON STOCK
Weighted average fully diluted shares outstanding used to calculate diluted EPS totaled 377.4 million in the 2010 second quarter compared to weighted average fully diluted shares outstanding of 366.0 million used to calculate adjusted diluted EPS in the year-ago quarter.
The remaining share repurchase authorization, as of June 18, 2010, totaled 21.3 million shares. No share repurchases are planned for 2010.
THIRD QUARTER 2010 OUTLOOK
For the third quarter, the company assumes comparable systemwide REVPAR on a constant dollar basis will increase 5 to 7 percent in North America, 7 to 9 percent outside North America and 6 to 8 percent worldwide.
The company assumes third quarter 2010 Timeshare contract sales will total $165 million to $175 million and Timeshare sales and services revenue, net of direct expenses, will total approximately $50 million to $55 million. With these assumptions, Timeshare segment results for the third quarter, including interest expense associated with securitized notes, are expected to total $30 million to $35 million.
FULL YEAR 2010 OUTLOOK
For the full year 2010, the company assumes comparable systemwide REVPAR on a constant dollar basis will increase 4 to 6 percent in North America, 6 to 8 percent outside North America and 4 to 6 percent worldwide.
The company expects to open over 30,000 rooms in 2010 as most hotels expected to open are already under construction or undergoing conversion from other brands.
The company continues to estimate that, on a full-year basis, one point of worldwide systemwide REVPAR impacts total fees by approximately $10 million to $15 million pretax and impacts owned, leased, corporate housing and other revenue, net of direct expense, by approximately $3 million to $5 million pretax.
For its timeshare business, the company assumes 2010 timeshare contract sales will be in line with 2009 levels. For 2010, Timeshare sales and services revenue, net of direct expenses, is expected to total $205 million to $215 million. Timeshare segment results for 2010, including interest expense associated with previously securitized notes, is expected to total $115 million to $125 million.
The company expects that its 2010 general, administrative and other expenses will total $650 million to $660 million reflecting higher incentive compensation.
| Third Quarter 2010 | Full Year 2010 | |
| Total fee revenue | $245 million to $255 million | $1,160 million to $1,180 million |
| Owned, leased, corporate housing and other revenue, net of direct expenses | Approx $10 million | Approx $95 million |
| Timeshare sales and services revenue, net of direct expenses | $50 million to $55 million | $205 million to $215 million |
| General, administrative and other expenses | Approx $155 million | $650 million to $660 million |
| Operating income | $150 million to $165 million | $800 million to $840 million |
| Gains and other income | Approx $5 million | Approx $20 million |
| Net interest expense1 | Approx $40 million | $165 million to $170 million |
| Equity in earnings (losses) | ($5) million to $0 | Approx ($30) million |
| Earnings per share | $0.18 to $0.22 | $1.05 to $1.13 |
| Tax rate | 36 percent |
1 Net of interest income
The company expects investment spending in 2010 will total approximately $500 million, including $50 million for maintenance capital spending and $200 million of other capital expenditures (including property acquisitions). Investment spending will also include new mezzanine financing and mortgage loans, contract acquisition costs, and equity and other investments. The investment in net timeshare development is not included above as the company expects cost of goods sold in the timeshare business will exceed timeshare inventory spending in 2010.
Based upon the assumptions above, full year 2010 EBITDA is expected to total $1,045 million to $1,085 million, a 7 to 11 percent increase over the prior year’s adjusted EBITDA including the impact of consolidating securitized loans had that occurred at the beginning of 2009 rather than 2010. Adjusted EBITDA for full year 2009 is shown on page A-15.