Marriott International, Inc.
Q4 2008 Earnings Call Transcript
Published:
- Operator:
- Welcome to the Marriott International fourth quarter 2008 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the call over to Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Arne Sorenson. Please go ahead, Sir.
- Arne Sorenson:
- Good morning everyone. Welcome to our year-end 2008 earnings conference call. Joining me today are Carl Berquist, Executive Vice President of Financial Information and Enterprise Risk Management; Laura Paugh, Senior Vice President of Investor Relations and Betsy Daum, Senior Director of Investor Relations. Before I get into the discussion of our results let me first 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 SEC filings which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued earlier this morning along with our comments today are effective only today, February 12, 2009 and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at www.marriott.com/investor. Before getting into the details of our 2008 results, let me pause to reflect a bit on the environment we face and how Marriott’s management is responding to that environment. Obviously economic conditions in the U.S. and now around the globe are difficult. Those conditions are having a profound impact on our business. As far as we can tell every public company in every industry has acknowledged the difficulty of predicting results for the future in this environment. We certainly share that view. Yet, we have to make judgments in the face of uncertainties so that we can run our business. After continued internal dialogue we have developed essentially two models to guide us in our decision making. In both models we assume that timeshare demand stays at the levels we experienced in December 2008 and January 2009 for the balance of the year and therefore that any improvement in demand will be no sooner than 2010. For lodging our more pessimistic scenario of minus 17% U.S. RevPar takes essentially the same line. Factoring in easy comparisons as the year progresses we think this RevPar level is essentially the current run rate. It goes without saying, therefore, that our minus 12% U.S. RevPar scenario is more optimistic. It contemplates some improvement whether from the economy generally or more likely from a reduction in the sense of paralysis that seems to be gripping many. Of course we invite you to consider which of these scenarios or another altogether you think most appropriate. For us, we are actively managing Marriott to size our balance sheet and our business to meet the more pessimistic scenario. Our efforts of course start with the drive to continue to expand our market share in RevPar and in new rooms growth. As we do so we will continue to reduce our investing activities and our cost structures to reflect this environment of weakened demand. We believe these steps will allow us not only to survive but to be in a position to seize opportunities and to prosper. The fourth quarter was one of the most challenging quarters we have ever faced. Adjusted diluted earnings per share declined 45% to $0.34. Fourth quarter pre-tax restructuring and other charges totaled $192 million of which $152 million were non-cash. Excluding our 53rd week in 2008 fourth quarter system wide, worldwide RevPar declined 8% or 7% on a constant dollar basis. Outside North America system wide RevPar also declined 8% in our fiscal fourth quarter or 5% on a constant dollar basis. We saw strength in markets in South America and the Middle East but weakness in Europe and Asia. Month-to-month fourth quarter RevPar progressively weakened in most markets around the world. There are very few places not affected by today’s economic climate. In North America we began the year with very weak leisure business. In the spring business travel declined led by a weakening financial sector. By the fourth quarter the industrial sector was also showing large declines. Group business also eroded as the year went on. In the fourth quarter corporate group revenue declined 13% at the Marriott brand as meeting planners deferred short-term training meetings, staff meetings and the like. We also saw more corporate cancellations impacting meetings that had been planned to occur either in the fourth quarter 2008 or some time in 2009. In contrast, fourth quarter association business at the Marriott brand showed some stability with RevPar flat year-over-year. All in all our current 2009 snapshot shows group revenue on the books for the Marriott brand down 12% due to expected attrition, cancellations and fewer new group bookings. Interestingly, we are not seeing trade down from full service to limited service brands at this time. With our broad brand portfolio we will be able to retain guest loyalty should that occur. However, with less corporate business the mix of our occupancy is changing. AAA and government business is up due to greater available inventory as well as aggressive marketing efforts. Our special corporate rate negotiations are over 85% complete. While our special corporate rates for 2009 seem to be holding roughly flat to last year on a comparable account basis, total special corporate rates are likely to end up about 5% lower than 2008 due to an unfavorable mix of special corporate customers. Corporate customers from relatively higher rate paying financial services firms, for example, are being supplanted by lower rated corporate and government business. While the changing mix of our business should impact our reported average daily rate we continue to monitor our rate structure and do not intend to lead the way down on corporate rates. We are gaining market share. Our comparable company operated U.S. RevPar index increased about ½ point in 2008 largely due to the quality of our brands and our efforts to drive the top line. One competitive advantage is Marriott Rewards. With over 30 million members the Marriott Rewards program accounted for nearly half of our rooms sold last year producing for our owners what we believe is the greatest number of room nights at the lowest cost in the industry. We launched our No Blackout Date program in January opening considerably more inventory to our most valuable guests. Marriott Rewards provides more than just purchase incentives for guests. It provides us with important customer knowledge. We have made significant investments over the past five years to better understand our guests and address what is most important to them. This allows us to create more relevant and targeted email and other marketing and to do so very quickly. We modified our marketing approach in 2008 to focus less on image advertising and more on short-term heads in beds and we focused on speed to market. While we can’t motivate a business traveler to take a trip they don’t need we can help stimulate leisure travel and increase share. In just 19 days we launched an effective leisure travel promotion called Rejuvenation. We currently have seven different leisure travel promotions deployed focusing on customers who we believe are most likely to respond to them. Marriott.com is an integral part of this marketing push. This powerful sales channel generated over $6 billion in sales in 2008 but it is not just a booking engine. Marriott.com is selling vacation packages, small group meetings, last minute leisure deals, gift cards and special offers for Marriott Rewards members. In 2008 we also rolled out Marriott.com mobile so travelers can now plan and book their reservations on virtually all web enabled handheld devices. On the group side we are taking an aggressive position to get business booked. In the fourth quarter we held a sales closing rally to encourage meeting planners to stop delaying and sign a contract. Our new sales organization, Sales Force One, was introduced in the mid-Atlantic region in 2007 allowing us to call on ten times more accounts in that region in 2008 with no additional staff. We added another region to Sales Force One in 2008 and will roll out the rest of the U.S. over the next two years. The numbers prove our success. In 2008 compared to the prior year we called on more accounts and grew our group revenue market share while also spending less per room on sales and marketing. We have experienced downturns before and we know cost control is important. As a result, despite RevPar declines fourth quarter worldwide house profit margins declined only 210 basis points. Teams throughout our company responded incredibly well implementing increasingly rigorous cost containment plans both from the top down and the bottom up finding new ways for the company and hotels to cut costs and operate more efficiently. Cross savings ranged from modifying menus and restaurant hours to reviewing room amenities, adjusting work schedules and implementing hiring freezes. We adopted systems that significantly leveraged our size and made operations more efficient. Turning to our P&L, base and franchise fees declined 6% in the fourth quarter reflecting the weak RevPar environment. Incentive fees also declined as lower hotel profits allowed fewer company operated hotels to reach their owner priorities. In the 2008 quarter 39% of company operated hotels booked incentive fees compared to 62% in the year-ago quarter. In the full year, 56% of company operated hotels booked incentive fees compared to 67% in the prior year. Owned, leased, corporate housing and other revenue net of direct expenses declined 31% during the quarter. At year end we owned only six hotels but we leased another 35 hotels. Our timeshare business was particularly hard hit by the economic climate. Contract sales of our core timeshare product declined 37% during the quarter while sales of our fractional and residential products were negative reflecting $150 million of sales reversals related to anticipated contract cancellations at three luxury projects. Tour flow at our core timeshare product declined 7% in the fourth quarter as we closed eight sales offices and one call center. Of the sales tours completed only 8% of touring customers bought timeshare compared to 13% in the prior year. Encouragingly, pricing remained firm increasing about 5% over the prior year’s quarter. Our timeshare business is focused on cash flow and profitability rather than revenue so we have cut overhead substantially including about ¼ of the non-operation staff. On an annualized basis we have reduced costs roughly $65-75 million across that business. In the fourth quarter we financed approximately 70% of our timeshare contracts compared to 80% in the prior year quarter. By December we had ended all financing incentives and were financing only about half of new timeshare contracts. We are optimistic that we will complete note sales in 2009 but pricing is likely to remain unfavorable so no note sale gain is assumed in our 2009 outlook. By the way, delinquencies for U.S. financed loans rose to 7.9% as of December 31 compared to 6.7% at year end 2007. Gross timeshare inventory spending in 2008 totaled $687 million or $299 million net of cost of goods sold. We expect to spend approximately $400 million in 2009 of gross inventory or $120-140 million net of cost of goods sold. We have cancelled pre-development projects and don’t expect to start any new projects in 2009. Turning now to hotel development we opened 11,000 managed and franchise rooms in the fourth quarter and 33,000 rooms for the full year consistent with expectations. Our pipeline of hotels under construction contracted or approved so that just over 125,000 rooms at the end of the fourth quarter down a bit from our third quarter pipeline but we expect to open over 30,000 rooms again this year. Of the rooms in today’s pipeline roughly 60% are in construction or conversion and another 10% are also financed but haven’t yet broken ground. Our pipeline declined a bit as some properties opened and as new hotel developers saw their bank commitments rescinded or had other financing problems. The weaker RevPar environment also impacted deals in their formative stages particularly luxury projects. Late in the quarter we saw a decline in U.S. franchise applications for new limited service hotels as franchisees became more cautious. The good news with respect to our hotel development pipeline is that we do not see any erosion in management contract terms. The value of our room additions is holding up. Though the number of our new build projects in our pipeline is likely to shrink somewhat going forward we expect conversions to pick up as hotel owners look for ways to drive cash flow. During the slow down earlier this decade from 2001 to 2003 over 20,000 hotel rooms joined our system from competitor brands. For Marriott during the fourth quarter the major credit rating agencies affirmed our BBB status while revising their outlooks to negative noting the challenging RevPar environment. At year end we had drawn down only $970 million of our $2.4 billion revolving line of credit so we continue to have substantial available capital. Our credit facility which matures in 2012 contains just one financial covenant and we are well within its limits. More important, our business model provides considerable stability in our cash flow and we have the flexibility to reduce our investment activities further if we choose. As a result we believe we will reduce our debt levels by approximately $600-700 million in 2009. So let’s talk about the first quarter of 2009. As I mentioned earlier our 2008 fiscal calendar quarter ended on January 2, placing the seasonally slow Christmas and New Year’s period into the 2008 fourth quarter and reducing the percentage change in reported RevPar in the fourth quarter by about 2-3 percentage points. Conversely, the calendar favorably impacts RevPar in our first quarter of 2009. Given current soft transient and group business we estimate our first quarter North American comparable company operated RevPar will decline by roughly 17% although if we adjust for the shifting week the real decline is closer to roughly 20%. Outside the U.S. we expect comparable company operated RevPar to decline roughly 15%. Given these assumptions total fee revenue is expected to decline 20-25% in the first quarter. Our fees are helped by unit expansion and by our shifting calendar but hurt by unfavorable foreign exchange rates. Owned leased corporate housing and other revenue net of direct expense is expected to decline to approximately $5-10 million. While we own or lease 41 hotels weak RevPar at nine properties accounts for the bulk of the expected profit weakness in the first quarter including hotels in Anaheim, Berlin, Tokyo and Frankfurt. Based on December and January sales trends timeshare contract sales are expected to total $150-160 million in the first quarter. We expect to complete a note sale during the quarter but given the economic climate no gain on the sale is expected. This puts our timeshare sales and services net of direct cost at a loss of about $10 million in this seasonally slow quarter. The G&A line reflects savings we have taken in our timeshare business as well as at corporate headquarters and in our lodging business. We estimate first quarter G&A at $145-150 million, a decline of roughly $15 million or 8-10% from the prior year. Including a benefit from lower interest rates we estimate the first quarter EPS at about $0.13 to $0.15 per share. Looking at the full year there is obviously considerable uncertainty. In our earnings release we have shared with you a very broad range of top line assumptions that we are using internally to manage our business. We are sharing these assumptions to help you model the business and we are not guiding you to any particular RevPar or timeshare scenario. Unfortunately the level of uncertainty is simply too high for us to have much confidence in predicting results. In this exercise for the full year 2009 our most optimistic assumption is a 12% decline in North American company operated RevPar and an 8% decline in company operated constant dollar RevPar outside North America. This implies improving economic conditions as well as easier comparisons as the year progresses. More conservatively we have considered a 17% decline in North American company operated RevPar and a 13% decline in company operated constant dollar RevPar outside North America. This scenario assumes that business conditions do not improve through the year but that comparisons ease in the latter part of the year. Given this wide range of RevPar assumptions and the more than 30,000 rooms expected to open in 2009 we believe our fee revenue could total $1.075 to $1.175 billion and owned lease corporate housing and other net of direct expense could total $65-85 million. For our timeshare business we assume a continued weak economic climate throughout 2009. If timeshare contract sales total approximately $800 million in 2009 consistent with our December and January seasonally adjusted run rate then timeshare sales and services net of direct costs could total approximately $70 million in 2009 and the timeshare segment profits could total roughly $45 million. While consumers have slowed their spending and are more cautious there is still interest in our products. The cost reductions we have already completed should reduce our timeshare 2009 G&A by about 20-25% versus 2008 levels. Should revenues continue to weaken in 2009 additional cost reductions and investment spending reductions would likely occur. Among our most important goals in 2009 we expect our timeshare business to be cash flow positive after all investing activities even if demand doesn’t improve. Overall, corporate G&A spending in 2009 should decline by roughly $100 million to roughly $640-665 million. The most significant cuts have been in timeshare and hotel development but every department in the company has reduced spending. We anticipate carrying back investment spending to about $500-600 million, $400 million less than we spent in 2008. Compared to 2008 this includes cuts in net timeshare spending, new capital expenditures and other investing activities. Running these assumptions through our model implies 2009 earnings per share of about $0.86 to $1.04 per share and about $600-700 million of lower total debt at year-end 2009, an impressive result given the severity of the downside scenario. Of course given the macro environment there are clearly risks to this outlook and we believe investors may have their own RevPar and timeshare scenarios in mind. So to encourage you do it yourselfers we would like to provide the following sensitivities
- Operator:
- (Operator Instructions) The first question comes from the line of Joseph Greff – J. P. Morgan.
- Joseph Greff:
- Under your 2009 scenario you mentioned that you expect to complete timeshare note sales. How much, I know you are not assuming any gains on those, but what sort of proceed total are you assuming and is that over the first quarter and third quarter?
- Arne Sorenson:
- I expect we will get the deal done in the first quarter. Probably we will try again in the third quarter although we have not committed obviously in any respect to precise timing. I think generally we would expect net proceeds to us in the $250-350 million range.
- Joseph Greff:
- For each?
- Arne Sorenson:
- No, total.
- Joseph Greff:
- On the subject of timeshare and you are reducing your investment now given the current economic environment but if you take a step back and you look at timeshare and you kind of think that maybe this is more of a semi-permanent issue in terms of reducing your investment in timeshare? I guess the parochial way of looking at it is in the best of times maybe high single digit or low double digit return and in obviously in the down cycle clearly we are seeing the returns there and the profitability being impacted but if you could touch on that a little bit please?
- Arne Sorenson:
- As we have talked over the years we have believed we can calibrate our timeshare investing to meet the specifitude of the demand environment. We are being put to a test of that proposition in this environment like we have never seen before. Even when you look at the 2001-2003 timeframe with a much stronger consumer we did not experience the fall off in demand nearly the way we are today. So we are working mightily to make sure we can make this business cash flow positive in this year which really means calibrating our spending to meet an extraordinarily reduced demand level. I think the team headquartered in Orlando that we have got running this business has done a fabulous job responding quickly both in terms of cost structure as well as reducing the investing space in the business. Having said all that, I think we have got to see how things develop here over the next year or two. To state the obvious we believe there are really strong synergies between the timeshare business and our lodging business. It is why we are in this space. Those synergies are really focused on customer loyalty. They focus on synergies around resort development, Marriott Rewards program and some of those powerful tools. I think it also should be reasonably obvious to anyone that in an environment like this one the best thing we can do is focus on operating the business and making sure we maximize the performance. That is really what we are focusing on doing.
- Joseph Greff:
- Of your fee revenue scenario, the $1.075 billion to $1.175 billion what is contemplated in terms of the incentive management fee component?
- Arne Sorenson:
- Incentive management fees will be down obviously more than any of our other fee lines. I suspect obviously the difference between the two scenarios are about five points in RevPar and there could be $40-50 million of incentive fee delta alone between those scenarios. I would expect in any event we are going to be down 50%-ish, maybe not quite. 40-50%.
- Operator:
- The next question comes from Celeste Brown – Morgan Stanley.
- Celeste Brown:
- Coming back to the timeshare note sale in the quarter or later in the year I assume that is part of your estimate for year-end debt you need to sell those notes?
- Arne Sorenson:
- Yes that is baked into that model. I’ll take advantage of your question and talk a little bit more about our confidence in this. We have three active discussions going on with very reliable partners in this area. Two very specific proposals, one of which has been approved by the credit committee and the other which has been approved at the highest levels of the partner we are having conversations with. So while the markets are obviously still nothing like they were in 2007 and even in early 2008 we have a pretty specific and concrete basis to be optimistic about our ability to get timeshare note sale deals done in 2009.
- Celeste Brown:
- Arne, you said no gain. Would you be selling this to get a discount?
- Arne Sorenson:
- I think what we are looking at now is roughly a push. There is enough complexity in the discount rates that need to be used for valuing the IO strips and the default rates and other things that go into this model it wouldn’t be surprising to me to see a few million dollars of gain or loss in these deals but roughly what we are looking at is a push.
- Celeste Brown:
- With regard to your cost cuts I know you are very focused on cash flow this year and getting through this year in as healthy shape as possible, but besides cutting timeshare investment were there other cuts that you made to your costs that as things get better you are going to need to ramp up? For example did you make a significant cut to your development team and as the world starts to feel better you are going to have to hire a lot of those people back?
- Arne Sorenson:
- As I said in the prepared remarks, every area of the company contributed to this and obviously this is not something that is done in the sense that we are still fighting through this weak environment and I suspect we will continue to be focused on efficiency. I think our timeshare team which I mentioned has done a great job. Our lodging group has done spectacularly well. I think the margin performance they posted in the fourth quarter is really very much to their credit. It is notwithstanding the fact I think they are years ahead of our competition in terms of driving margins. We have worried a little bit we had done so well the last few years we were going to find less and less opportunity to respond to this market. I still think that is the right watch word but they continue to sort of disprove their own fear by further enhancing efficiency. I think when you look at how it ultimately rolls up in the Marriot’s net admin which I think you are asking about there are bits of what we have cut that undoubtedly when economic conditions return will reverse. I think to the extent your example on development staffing is right as development pace declines a little bit that has had some impact on the number of developers we have had and it is certainly likely that at some point we get back to stronger economic times we will see development pace re-accelerate. That could be given the financing markets some way down the road so I don’t think that is necessarily something that needs to get built into a 2010 model. There are other things we have done. Almost all of the salaried people at Marriott we have frozen wages in 2009 versus 2008. That obviously does not lead to a reduction in 2009 versus 2008 but it keeps things flat and otherwise offsets growth that would be built in that model. You can have a philosophical debate about whether that is permanent or not in a sense that the new baseline becomes permanent and wages grow off of that. On the other hand we obviously are about paying people competitively and if that wage freeze makes us uncompetitive longer term then that is something we would have to respond to. These are, to come up with $100 million roughly so far of admin cuts, has involved dozens and dozens of different situations. Again, some of those will reverse when we get back to a stronger environment but we are working very hard to make sure as many of those are permanent as can be or can be converted to permanent through restructuring or efficiency moves that allow us to really use this as a new base to build from.
- Operator:
- The next question comes from Steve Kent – Goldman Sachs.
- Steve Kent:
- Could you just talk a little bit more about the luxury condo and residential and what the expectations there are? I know you took some charges and how should we think about that as a component of the timeshare business? Would you consider, by the way, on the securitizations would you consider taking them at a loss Arne or would you sort of keep them where they are? Finally, on timeshare I think you mentioned half of your customers are financing with you. Where else are they financing and are there ways for you to affiliate with maybe a regional bank or a bank to take some of this risk away from you? One final point, I just wanted to know whether Bill or you or anyone else within your organization is going to reach out to Washington D.C. and others to talk about how business travel and employing people is an important part of what we all do.
- Arne Sorenson:
- Mr. Marriott is on the hill as we speak I think having conversations about some of those things and maybe to talk about that a bit many of you are commenting on the so called AIG effect which is derived from AIG’s events at the St. Regis in Laguna not long after they were bailed out by the government. That somehow being a symbol of abject excess I suppose that should be stamped out of our system. While we won’t sit here today and necessarily say that every luxury meeting that any company was scheduling should be had even if they are at risk of failing that would be nonsense. We can sit here and say that there are hundreds of thousands of people employed in this industry today many of whom whose lives depend very much on the business at these hotels going forward and people holding their meetings and people doing their business trips and people doing their leisure travel. As a consequence there is certainly a risk of over-reaction in some of these conversations happening on the hill and we have got to make sure there is balance to that. We are going to do everything we can to make sure that voice is heard and that we can make it resonate somehow. We have got to get away from the symbolism of a corporate fat cat smoking his cigar on a golf course and instead think about the symbolism of people meeting and thinking together and creating ideas and building their cultures and those sorts of things all of which are very constructive. You asked four questions. That was one. Two, would we consider selling notes at a loss? Sure. Obviously we would prefer to sell at a gain and we are optimistic that we can meet what we described in our assumptions which is essentially a push compared to what we have got invested. But given RevPar performance and the amount of capital we have involved, given what we want very much to do on the balance sheet side which is to make sure we remain investment grade and we remain positioned to be able to seize opportunities we are not going to keep hundreds of millions of dollars tied up in timeshare notes if there is a reasonable deal that is available to us. Three, luxury fractional and that sort of thing how does that fit into the business? I think there we would say that I guess we have the least optimism around that product class. That product class is more like whole residential. As a consequence it is more likely to be sticky in a weakened demand environment and will take some time to come back. Therefore of all the possibilities in the future we think the likelihood of starting new luxury projects any time soon is very, very slim. We don’t expect that we will start many core timeshare projects either in the near term but we are hopeful we will see demand come back to the point where returns have improved significantly and that business can go forward. That certainly is much more possible to happen sooner than the luxury fractional does. Having said that in January where we have the Ritz-Carlton product we were pleasantly surprised by some of the fractional volume we saw and I think it gives us some optimism for the year. Partly that is a function of these resorts reaching opening so the product is very tangible and these are beautiful places. They are easier to sell obviously when they are right there before you and you are not trying to sell them off plans. So that will to some extent counteract the tough environment that we are in. Your last question was on financing and who finances the stuff. We financed about 50% of the core timeshare product in the last tail end of 2008. Likelihood of having another lender step in and finance core timeshare is something we will continue to look at but I wouldn’t view it as particularly high. These are average purchases in the $20,000 plus range. If they are not financed with us people tend to either not finance them and simply use cash or they finance them through other vehicles they have to finance their lifestyle. They are small enough purchases that seems to work for many.
- Operator:
- The next question comes from Jeffrey Donnelly – Wachovia Securities.
- Jeffrey Donnelly:
- I’m trying to get a handle on the risk of future impairments. I am not sure that is forecastable but I am curious are the impairments you recognized in the fourth quarter effectively contemplate the guidance you gave in 2009 or could the realization of your 2009 guidance eventually give rise to further impairments?
- Arne Sorenson:
- Good question. I think it is primarily the former. Obviously we have a detailed process we go through to assess whatever impairment in whatever product class is on the balance sheet and we have done that at year end and we believe what we have done is all inclusive at the moment. When we talk about minus 12-17% RevPar and we talk about maybe $100 million of total timeshare sales those are average figures which to meet them have assumptions for individual hotels and individual timeshare resorts. We know almost for a certainty that we will be wrong on the averages. We know for a total certainty the averages won’t work on every individual property. That is what ultimately will drive that risk. We have done the best job we can to make sure any of those risks we have been properly been dealt with so far but certainly in this environment you won’t hear any of us say that there is no risk of decline greater than anticipated in some assets on your balance sheet.
- Jeffrey Donnelly:
- Are you able to break out for us in timeshare business either cash flow or EBITDA? I would say break it out into three distinct areas the recurring fees, revenues and expenses associated with the management of the units, the interest you collect from the receivables portfolio and then I guess lastly the development in active sales, revenue and cost? I’m trying to isolate what is maybe the more stable recurring cash flow aspect of that business versus what is the more volatile or transaction aspect of it?
- Arne Sorenson:
- You ought to probably look at the 10K. I’m not sure how we break it out in the 10K. We did it quite a bit at our timeshare conference which is obviously extremely dated now a year later. We can certainly have some more dialogue. I hesitate to do that off the top of my head. You might look on page 12 of the press release schedules. A12.
- Jeffrey Donnelly:
- What was the balance of the loans to timeshare owners in 2008? As a follow-up to that can you also share with us what series or what issue you repurchased or some of the debt repurchases you commented on?
- Arne Sorenson:
- Yes the balance was a bit over $500 million on timeshare notes at year-end. You may ask as I said before $250-350 million of net proceeds in 2009. We will generate some more paper. You could say how do those numbers relate to each other and it is possible it could be more but we have a couple of things going on. Some of those notes are notes generated in Europe or with our Asia points program which are relatively less marketable. Though we have certainly not given up on that. Two, in this environment we will be probably advanced some place between 70-75% of the gross amount of the notes sold at the initial note sale, the balance being the essentially held back as further security to protect the buyers of those notes. It looks like maybe the number is $600 million in 2008.
- Jeffrey Donnelly:
- What was the series of the senior notes? I’m sorry.
- Arne Sorenson:
- I thought you asked about both timeshare and senior notes. Senior notes we bought each of our longest three terms. So there is a 15, 16 and 17 I think.
- Jeffrey Donnelly:
- This is more of a conceptual question; relatively speaking Marriott’s balance sheet condition is much better than some of your most obvious competitors out there and probably private. It is a positive for you but are you seeing at this point any of your competitors take steps on pricing concessions, etc. whether it is in the operation of the hotels or securing new management contracts that are very aggressive given their decidedly more stressed balance sheet position?
- Arne Sorenson:
- We are really not seeing that. We didn’t have it in the prepared remarks but we really haven’t seen any threat around management contract terms. I think our principal competitors have gotten over the last years longer term in focus and I think they appreciate value in the context of the new agreements they enter into. It is hard to work yourself out of a near-term balance sheet issue by adding a low fee terminable hotel. It takes awhile. So while there would be pressure and that is something we will be watching we don’t see a lot of threat of that so far. Around pricing I think the pricing pressure in the market is not likely to lead with our major competitors. It is likely to lead with the independents and franchisees across the various systems where any of them have severe financial pressure they are going to be more tempted to do something on pricing we might question but that is inevitable and that is probably already under way and probably already putting some pressure on pricing across the industry.
- Operator:
- The next question comes from C. Patrick Scholes – Friedman, Billings, Ramsey & Co.
- C. Patrick Scholes:
- You mentioned sales reversals in your timeshare business. Can you just give a little more color on exactly what that is? Is that something that was prepaid by customers and they decided to back out? And are there any sales reversal expectations in your timeshare guidance?
- Arne Sorenson:
- We essentially made an allowance for $113 million I think the number was of previously reported contract sales that we now expect not to close. Generally 100% or nearly 100% of that was Ritz-Carlton product. Most we would be holding deposits in the 10-20% range. I suspect it would never be less than 10% and in some instances it might be more than 20% but overwhelmingly it would be in the 10-20% range. While we have not given up on trying to close those sales I think as we have reached out to those kinds of customers which we do currently to see their intentions about whether or not they will close or whether they will just walk away from that deposit and go on we thought this was about the level of cancellation activity that we would see. So we posted that.
- C. Patrick Scholes:
- As far as a little more color on the product those deposits were made on was that more of closer to the higher end fractional?
- Arne Sorenson:
- Yes.
- C. Patrick Scholes:
- Okay so people basically were walking away from something variable like a real estate investment as opposed to a project?
- Betsy Daum:
- We also break that out on the table on the back of the timeshare segment. We show you it by brand.
- Operator:
- The next question comes from Smedes Rose – Keefe, Bruyette & Wood.
- Smedes Rose:
- You did talk about it sounds like about 30% of your development pipeline is not under construction or financed, which I would guess would equate to around 35,000 rooms. Do you have a sense of what amount of those might end up being cancelled?
- Arne Sorenson:
- Not really. That is the short answer. There is more risk in those rooms than there is in rooms that are under construction. There is obviously more risk in the rooms that are financed but not under construction yet than there are on the rooms under construction and the most risk on the projects that maybe we have received a franchise fee and it has been approved and we have got signed contracts but they haven’t either financed or started construction. Basically our partners have got flexibility to decide whether or not to proceed with that. The 125,000 room total we have given you hedges back our total by a significant amount in order to deal with some of that risk but clearly the risk over the next few quarters until conditions change is that we will see both that pipeline shrink as we open hotels out of the pipeline faster than we add them to the pipeline and as we see our partners decide maybe to abandon some projects or simply to delay construction. Only time is going to give us the answer to those questions.
- Smedes Rose:
- The other thing I wanted to ask you on your timeshare segment break out the base fee revenue which maybe we were wrong on this but I thought this was just kind of the fees paid by current owners of units. It declined to $7 million and it has been very consistent at more like $12-13 million a quarter. Is there something going on there that caused it to decline that much?
- Arne Sorenson:
- I guess we had a bit of a re-class on a base fee issue on a couple of resorts which net/net which is a non-comparable could be a few million of that. I don’t remember precisely the amount. Nothing beyond that.
- Smedes Rose:
- You mentioned some of your things going on in Washington. One of the things that President Obama embraced was the Employee Freedom Choice Act which basically allows for much faster and easier unionization. Do you have any sense of where the current administration’s commitment is to that and maybe what you are doing? I guess it is the least unionized brand. You have had throughout the most to lose on that front. Any comments on that?
- Arne Sorenson:
- I think the good news around this issue of the Employee Free Choice Act is that the level of awareness has increased significantly such that I’m sure many of you have seen stories in the NY Times or the Wall Street Journal or elsewhere reflecting the intensity of the debate between the unions who support this mightily and the employer base that almost uniformly opposes it. We obviously think it is bad policy. There are a few aspects of the deal that are particularly concerning to us including the one that essentially allows a work group to be organized without a private ballot that our associates or employees generally would be permitted to participate in. We are doing everything within our power both as Marriott and I think there are groups of lodging companies and groups of other employers that are trying to make sure we end up with something which is not the way this has been drafted up front. I wouldn’t pretend to tell you where President Obama is on this or really where the administration is. I think so far they have not taken any overt steps to move this forward and we will just have to see where that goes.
- Operator:
- The next question comes from William Truelove – UBS.
- William Truelove:
- Could you remind us what your most difficult corporate covenants are from a debt perspective?
- Arne Sorenson:
- We don’t really have anything that gives us significant concern. There is a debt to EBITDA covenant in our revolver and that covenant looks at basically simple debt. It does not look at debt equivalents from leases or guarantees or the like which go into our calculation with S&P and Moody’s. We have got lots of room under that covenant. I think the covenant is a four times covenant. I don’t have the year-end ratio but I think at the end of the third quarter we were at 2.1 times or something on that test. So you can see we have tremendous room. That is all that is out there.
- William Truelove:
- The second thing is another timeshare question but I know you said you were going to cancel seven projects that were in pre-development in 2009. How much would you have to spend, what is the total spend build out of the remaining projects that you have if you did nothing else new and how many years you think that would probably take? So you just built out what you have actually on your development?
- Arne Sorenson:
- I don’t know. I’m not sure it is terribly germane in the sense that we have gotten resort share that would have phases that on a piece of paper might be a construction start in 2014 or 2015 or 2016 and to answer your question could include the costs associated with that but we will never start those phases unless there is a demand environment that has returned that says the customer is there to do it. So probably the right question is how much does it cost to complete the phases presently under construction? While that is a germane question I will confess I don’t know the answer to it. The less germane question where you say alright if you built everything that you already own I am sure it is billions of dollars.
- William Truelove:
- I guess I was trying to figure out the things that you absolutely have to…because you don’t want to leave things half done, right?
- Arne Sorenson:
- That is where you have got considerable economic loss probably by abandoning construction that is well underway.
- William Truelove:
- You would probably imagine that given that you do build in phases that is probably 1-2 years of build out probably? So your additional spending this year plus maybe an additional $60-70 million in 2010 might be an approximation?
- Arne Sorenson:
- I hesitate. I suspect it is in the hundreds of millions, not the billions. But beyond giving you that range that is something we probably ought to make sure we were more thoughtful about giving to you.
- Operator:
- The next question comes from William Crow – Raymond James.
- William Crow:
- Given your comments about the calendar is it fair to assume that second quarter RevPar could be worse than first quarter? Simply because of the calendar shift?
- Arne Sorenson:
- The second quarter…what I would encourage you to do is go back and look at a 2-3 year comparison and essentially that is what we have done to come up with that minus 17% RevPar scenario so we have said if this is the experience we expect to have in the first quarter and now let’s look at what the impact of the comparisons are quarter by quarter as you look back what does that imply for RevPar for the succeeding quarters? I think second quarter would be close but I can’t tell you whether it is a point higher or lower. Same order of magnitude though.
- William Crow:
- Nobody has a real clear looking glass these days. I’m going to ask one last timeshare question which is more theoretical I guess but it is a business that thrives on momentum and it is a product that is sold, not bought. By winding down some of the new developments and given the lower visitation and sales rates don’t you risk losing your top sales people to other opportunities if there are other opportunities out there? Couldn’t the business kind of wind down by itself because of this?
- Arne Sorenson:
- I don’t think so. I’m glad you asked one more timeshare question at the end of the call. We sold $50-60 million of this product in the month of January and this is a product which sells for a reason. It appeals to an awful lot of folks. It is a way they can own their vacation forever. It is a product which really appeals to their desire for happiness in the best way. Experiences with their families and lots of years looking down the pipe and seeing what happens. As a consequence, even though we are in an extraordinarily difficult market we can over-react to this and say there is nobody to buy this stuff and that is simply not true. There are folks who will continue to look at this, albeit at meaningfully lower levels than what we saw before and with that our sales people and our associates who are involved in this business are delivering services and experiences to people which are a pleasure to deliver. That doesn’t mean they aren’t concerned. Some of them have already lost their jobs because of the reduced level but if we can right size this to meet the demand which we are about today we think those jobs should be fulfilling and people can continue to build their careers. If we can get those balances right we think this business can survive this environment and hopefully live to see a better day. We thank you all for your interest and participation this morning. As always we encourage you to get on the road and rest your head on the pillow of a Marriott Hotel.
- Operator:
- That does conclude today’s Marriott International conference call. We thank you for your participation and have a wonderful day.
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