Marriott’s second-quarter profit climbed 35 percent, thanks to higher room rates and increased sales across all business segments.
Second quarter 2006 net income was $186 million, an increase of 35 percent, and diluted earnings per share (EPS) of $0.43, an increase of 48 percent.
Adjusted net income was $182 million, an increase of 17 percent, and adjusted diluted earnings per share was $0.42, an increase of 27 percent.
The 2006 adjusted results exclude the impact of the company’s synthetic fuel business.
The 2005 adjusted results exclude the impact of the company’s synthetic fuel business and a $94 million pre-tax charge ($0.13 per share after-tax) due to the non-cash write-off of management agreements in connection with the CTF transaction.
The company’s EPS guidance for the 2006 second quarter, disclosed on April 20, 2006, totaled $0.38 to $0.40 and similarly excluded the company’s synthetic fuel business. All per share amounts are adjusted for the company’s two-for-one stock split completed on June 9, 2006.
J.W. Marriott, Jr., Marriott International’s chairman and chief executive officer, said, “Across our portfolio, and throughout our global system, business is exceptionally strong. Our hotels continue to thrive around the world, including such markets as New York, Boston, Atlanta, Miami, Chicago, Orlando, Los Angeles, Hong Kong and Santiago. Business transient and group demand in Western Europe was very strong in advance of this summer’s World Cup competition.
“REVPAR and margin improvements, particularly at large downtown and convention hotels in North America, dramatically increased incentive fees during the quarter. Incentive fees at U.S. managed hotels increased 61 percent. Higher effective room rates resulted from both price increases and improving customer mix. Property-level house profit margins improved due to higher room rates, continued focus on efficiency improvements and higher catering, spa and other property level revenue.
“As important as our financial measures, customer satisfaction scores also rose during the quarter reflecting substantial renovation activity in recent years as well as the rollout of new bedding and technology-enabled service initiatives. Marriott’s service initiatives focus on greater guest personalization, pre-arrival emails to help travelers with trip planning, and a virtual concierge that lets guests book spa appointments or golf tee times online anytime. We recently announced the rollout of new online airline check-in and boarding pass stations in Marriott Hotels & Resorts and Renaissance Hotels & Resorts lobbies. We continue to test new technology that further enhances guest experiences.
“Looking ahead, we expect operations to remain strong, with North American comparable company-operated REVPAR increasing 9 to 11 percent in 2006 and property-level house profit margins improving 225 to 275 basis points. We expect to open 25,000 new rooms this year, and our pipeline of hotel rooms under development has expanded to 80,000.”
In the 2006 second quarter (12 week period from March 25, 2006 to June 16, 2006), REVPAR for the company’s comparable worldwide systemwide properties increased 10.4 percent (10.7 percent using constant dollars). Systemwide comparable North American REVPAR increased 10.7 percent in the quarter, with average daily rates up 8.9 percent and occupancy up 1.2 percentage points, to 76.5 percent. REVPAR at the company’s comparable systemwide North American full-service hotels (including Marriott Hotels & Resorts, The Ritz-Carlton, and Renaissance Hotels & Resorts) increased by 10.5 percent during the quarter. North American systemwide REVPAR for the company’s comparable select- service and extended-stay brands (including Courtyard, Fairfield Inn, Residence Inn, TownePlace Suites, and SpringHill Suites) increased 11.0 percent. For the calendar quarter ended June 30, 2006, REVPAR for systemwide comparable North American properties increased 10.0 percent.
In the 2006 second quarter, international company-operated comparable REVPAR increased 9.6 percent (11.1 percent using constant dollars) including a 7.1 percent increase in average daily rates and a 1.7 percentage point improvement in occupancy to 75.5 percent. With strong demand from European and South American travelers, REVPAR in the Caribbean and Latin America increased nearly 18 percent (16 percent using constant dollars).
The company continued to experience strong demand in Asia and the United Kingdom while demand in Continental Europe improved in the second quarter, especially in the weeks leading up to the World Cup competition. REVPAR improved 3.1 percent (10.2 percent using constant dollars) in Germany and 4.0 percent (10.8 percent using constant dollars) in France.
Marriott added 33 new properties (4,853 rooms) to its worldwide lodging portfolio in the second quarter, including the elegant 338 room JW Marriott Hotel San Francisco. The company also opened a 227 room Marriott in Leicester, United Kingdom and five Courtyard hotels in Europe. Eleven properties (2,170 rooms) exited the system, including seven first generation Fairfield Inn properties (942 rooms). The Renaissance Hotel in Kapalua, Hawaii, was closed in the second quarter, pending conversion to a Ritz-Carlton Club resort. At quarter-end, the company’s lodging group encompassed 2,789 hotels and timeshare resorts for a total of 507,130 rooms.
Interest in all of the company’s brands continues to strengthen. Owners and franchisees are excited about what Marriott has done to refresh and reposition its brands. Marriott’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development increased to 80,000 rooms, up from 60,000 rooms in the year ago quarter and 75,000 rooms at the end of the 2006 first quarter. New in the pipeline are two exciting hotels under development, part of a venture designed to reinvigorate downtown Los Angeles. “L.A. Live,” is a mixed-use development project that will include two hotels, luxury residences, a 7,000-seat live performance venue, a movie theatre, fine dining and much more. Marriott’s role in the project includes an 877 room Marriott Hotel, a 123 room Ritz-Carlton Hotel and 430,000 square feet of Ritz-Carlton Residences.
MARRIOTT REVENUES totaled $2.9 billion in the 2006 second quarter, a 7 percent increase from the same period in 2005. Base and franchise fees rose 13 percent to $227 million as a result of unit growth and strong REVPAR improvement. Incentive fees climbed 48 percent to $77 million, driven by higher property-level house profit margins. Incentive fees in the 2006 second quarter were only $4 million, or 5 percent, shy of the fees earned in the same quarter of 2000, our peak year for earning incentive fees. In the 2006 second quarter, 56 percent of the company’s managed properties paid incentive fees, compared to 42 percent in the year ago quarter.
House profit margins for North American comparable company-operated properties increased 300 basis points during the quarter, while house profit margins for worldwide company-operated properties grew 280 basis points. Higher room rates, strong food and beverage profits and continued cost efficiency measures drove strong margins. Property-level EBITDA margins for comparable North American company-operated properties, calculated as if wholly owned, increased 320 basis points.
Second quarter owned, leased, corporate housing and other revenue benefited from strong results from the owned and leased hotels the company acquired in 2005. Seven hotels were sold during the 2006 second quarter. The company retained long-term management agreements for six of the hotels and obtained a franchise agreement for one hotel. During the 2005 second quarter, owned, leased, corporate housing and other revenue included a $10 million fee for the termination of a hotel management agreement.
Contract sales for the company’s timeshare, fractional and whole-ownership projects, including sales made by joint venture projects, surged 40 percent. Demand was particularly strong at the timeshare sequel project in Maui and new whole ownership joint venture projects under development in San Francisco and Kapalua. Approximately 95 percent of San Francisco’s whole ownership project, under construction, was sold within a month of initiating sales. Demand for our other resorts also continues to be strong, particularly in Las Vegas, Aruba, Hawaii and Orlando.
Timeshare interval, fractional and whole ownership sales and services revenue declined one percent in the 2006 second quarter. Reported revenue in the 2006 quarter was constrained by projects in early stages of development which did not reach revenue reporting thresholds, offset somewhat by higher revenues from marketing-related villa rentals. In contrast, the 2005 quarter reflected very strong financially reportable sales at projects at or nearing sell-out.
Timeshare interval, fractional and whole ownership sales and services revenue, net of direct expenses, declined 36 percent reflecting substantial sales and marketing costs for new projects in the early stages of development. Under the new timeshare accounting rules, most sales and marketing costs are expensed as incurred.
In the second half of 2006, the company plans to begin sales at the Marriott timeshare project in St. Kitts, and the Ritz-Carlton fractional and whole ownership projects in Miami Beach, and Kauai, Hawaii.
LODGING OPERATING INCOME for the second quarter of 2006 was $252 million compared to $77 million in the second quarter of 2005. In the 2006 quarter, strong results reflected outstanding fee growth from managed and franchised hotels and increased profits from owned and leased properties that the company acquired in 2005. General and administrative expenses were down 50 percent, to $141 million, primarily due to 2005 non comparable items. General and administrative expenses in the 2006 second quarter included $9 million associated with the new accounting rules requiring the expensing of all share- based compensation, offset by $2 million of foreign exchange gains, $4 million favorable impact related to the reversal of a guarantee reserve at one hotel, and $6 million lower deferred compensation expense. In the 2005 second quarter, the company recorded a $94 million charge associated with the CTF transaction, primarily related to the non-cash write-off of management agreements, $29 million of incentives paid to owners and franchisees to accelerate the roll-out of the new bedding program, $6 million related to guarantees at two hotels and a $12 million payment made to retain a management agreement.
SYNTHETIC FUEL operations contributed approximately $0.01 per share of after-tax earnings during the 2006 second quarter, compared to $0.09 in the year ago quarter. Lower synthetic fuel earnings reflected the suspension of production in April and an estimated 38 percent phase out of the 2006 tax credits due to higher oil prices. Excluding the impact of our synthetic fuel operations, the effective tax rate was approximately 35.9 percent in the second quarter of 2006. The company expects the tax rate for 2006, excluding synthetic fuel operations, to approximate 34.9 percent.
GAINS AND OTHER INCOME totaled $48 million (or $45 million excluding synthetic fuel) and included a $40 million gain on the sale of timeshare mortgage notes, $9 million of net gains from the sale of real estate, $29 million of net gains from the sale of our interest in four joint ventures and $4 million of preferred returns and other income. These gains were partially offset by a $37 million non-cash charge to adjust the carrying amount of a straight line rent receivable associated with a land lease which is subject to a purchase option that is likely to be exercised. Prior year’s second quarter gains included a $29 million gain on the sale of timeshare mortgage notes, $22 million of gains resulting from the sale or refinancing of real estate loans and $4 million of other gains.
INTEREST EXPENSE increased $9 million to $30 million, primarily due to higher commercial paper balances and higher interest rates. The company issued $350 million of new senior debt on June 14, 2006.
INTEREST INCOME totaled $12 million during the quarter, down from $25 million in the year ago quarter, primarily driven by loan repayments in 2005.
At the end of the 2006 second quarter, total debt was $1,561 million and cash balances totaled $364 million, compared to $1,737 million in total debt and $203 million of cash at the end of 2005. Consistent with the company’s strategy, Marriott recycled capital and generated cash proceeds of $810 million in the second quarter. The proceeds included $242 million from the sale of timeshare notes, $201 million from the sale of the company’s interests in four joint ventures (including the joint venture with Whitbread), $355 million from the sale of seven properties (including five hotels acquired in 2005 as part of the transaction with CTF Holdings Ltd), and $12 million from notes receivable repayments. The company used part of the proceeds to repurchase 10.5 million shares of common stock in the second quarter of 2006 at a cost of $380 million. Year-to-date, through July 10, 2006, the company repurchased 20.7 million shares of common stock at a cost of $733 million. The remaining share repurchase authorization, as of July 10, 2006 totaled 15 million shares.
The company expects North American company-operated REVPAR to increase 9 to 11 percent in 2006. Assuming a 225 to 275 basis point improvement in house profit margins and approximately 25,000 new room openings (gross), the company expects total fee revenue of $1,190 million to $1,210 million, an increase of 16 to 18 percent.
The company expects timeshare interval, fractional and whole ownership sales and services revenues, net of expenses, will decline approximately 3 percent in 2006, reflecting lower contract sales in 2005 resulting from limited inventory, and higher sales and marketing costs associated with new projects. With strong customer interest in the company’s new projects, Marriott continues to expect contract sales (including joint venture sales) to increase roughly 40 percent in 2006.
General, administrative and other expenses are expected to decline approximately 12 to 14 percent in 2006 to $650 million to $660 million from $753 million in 2005. The comparison reflects the impact in 2005 of the $94 million charge associated with the CTF transaction and $30 million in bedding incentives. This 2006 guidance includes an approximately $37 million pre-tax impact of the FAS No. 123(R), requiring the expensing of all share-based compensation (including stock options).
Given these above items, the company estimates that lodging operating income will total $950 million to $980 million in 2006, an increase of 36 to 40 percent over 2005.
The company expects lodging gains and other income to total approximately $130 million in 2006 (including approximately $75 million in timeshare mortgage note sale gains).
Net interest expense is expected to total $80 million, an increase of $25 million, primarily driven by loan repayments in 2005 resulting in reduced interest income, as well as higher average debt levels and interest rates.
Given the continued high level of oil prices and the uncertainty surrounding the availability of 2006 tax credits, the company suspended production at its four synthetic fuel facilities in April 2006. The company cannot yet predict whether or when the facilities will restart production and, as such, is unable to provide guidance for 2006 earnings from the synthetic fuel business. The net book value of the four facilities at the end of the second quarter 2006 was $15 million.
The company estimates North American company-operated REVPAR will grow 8 to 10 percent in the third quarter of 2006, with house profit margin growth of 225 to 275 basis points.