Marriott’s profit falls, bumps up outlook

Marriott, the world’s largest hotel chain by revenue has reported net income of $220 million down from $237 million during the same period of 2005. It has also bumped up its 2007 outlook.
RevPAR, or revenue per available room, a key industry measure, increased 8.4 percent during the fourth quarter for global systemwide properties open at least a year.

That included a 9.7 percent increase in North America and a 13.9 percent rise overseas, with the strongest results in markets including Hong Kong, Australia and Germany.

Full statement

Marriott reported adjusted diluted earnings per share (EPS) of $0.52 in the fourth quarter of 2006, up 13 percent from the fourth quarter 2005 adjusted earnings. 

Adjusted net income for the quarter was $219 million, a 7 percent increase over the prior year.  Adjusted EPS and net income exclude the results of the company’s synthetic fuel business.  The company’s EPS guidance for the fourth quarter, disclosed on October 5, 2006, totaled $0.46 to $0.51 and similarly excluded the results of the company’s synthetic fuel business.

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Reported net income was $220 million in the fourth quarter of 2006 and $237 million in the year ago quarter.  The company’s synthetic fuel business contributed approximately $1 million after-tax to 2006 earnings and $33 million after-tax ($0.07 per share) to 2005 earnings.


J.W. Marriott, Jr., Marriott International Chairman and Chief Executive Officer, said, “Today, we are reporting the final results of a terrific year.  We posted record REVPAR and earnings for 2006 and have the strongest worldwide pipeline of hotels in our history.  Business travelers reaffirmed their preference for our brands and group meeting planners were attracted to our re-energized hotels and legendary service.  Our consistent efforts to provide enhanced experiences, as well as our focus on keeping costs down, drove our hotels’ success ever higher.


“Across the globe, from the U.S. to the U.K, to Germany and China and India, demand for our hotels was fueled by economic strength and great brand positioning.


“In 2007, we celebrate our company’s 50th year in lodging and our 80th year in business. With well over half a million rooms in 68 countries, we have come a long way from our first 365 room hotel, the Twin Bridges Marriott, which opened just outside Washington, D.C. 50 years ago last month. We’re delivering strong and sustainable growth to shareholders, owners, customers, associates and our communities and we are inspired by the future.  The economy looks good this year and our commitment to leadership will serve us well, as we have the brands of choice in the lodging industry.”


In the 2006 fourth quarter (16 week period from September 9, 2006 to December 29, 2006), REVPAR for the company’s comparable worldwide systemwide properties increased 8.4 percent (7.8 percent using constant dollars).  Calendar quarter REVPAR for the company’s comparable worldwide systemwide properties increased 8.9 percent (8.3 percent using constant dollars).


Continuing a deliberate strategy of shifting business to higher rated segments, average daily rates for North American company-operated properties rose 9.7 percent, while occupancy declined modestly, resulting in REVPAR growth of 7.2 percent in the fourth quarter.  This pricing strategy helped drive company-operated North American house profit margins up 210 basis points over 2005 levels.


In the fourth quarter, international systemwide comparable REVPAR increased 13.9 percent (10.8 percent using constant dollars) including a 13.3 percent increase in average daily rate, with occupancy holding steady at over 74 percent.  Hong Kong, Australia, Malaysia, Germany and Costa Rica were particularly strong markets.


The company added 32 hotels and timeshare resorts (5,505 rooms) to its worldwide lodging portfolio during the fourth quarter of 2006.  Fifteen properties (2,281 rooms) exited the system,  including five first generation Fairfield Inn properties (666 rooms).  Approximately one-third of the rooms (1,865 rooms) added to the system in the fourth quarter were conversions from competitor brands.  Thirty-six percent of room additions were in international locations, including a 600 room Marriott hotel in Rome, Italy and a 250 room Ritz-Carlton in Beijing, China.  At year-end, the company’s lodging group encompassed 2,832 hotels and timeshare resorts (513,832 rooms).  The company’s worldwide pipeline of hotel rooms under construction, awaiting conversion or approved for development increased to approximately 100,000 rooms at year end 2006.  With the growing demand for the company’s products around the world, the pipeline outside North America increased to 27,000 rooms.


MARRIOTT REVENUES totaled $3.9 billion in the 2006 fourth quarter, a 6 percent increase from the same period in 2005.  Base management and franchise fees rose 14 percent primarily due to higher REVPAR and unit growth.  Incentive management fees surged 39 percent as a result of robust REVPAR growth and improved property-level house profit margins.


Worldwide comparable company-operated house profit margins increased 230 basis points during the quarter, driven by strong room rates and higher food and beverage revenue.


Owned, leased, corporate housing and other revenue was down slightly to $354 million, largely due to the sale of properties that were owned in the year ago quarter.  Offsetting those decreases were higher revenues associated with stronger demand as well as $8 million of termination fees received in the 2006 fourth quarter. 


Timeshare sales and services revenue increased 27 percent in the fourth quarter of 2006, reflecting the reportability of several projects with strong contract sales.  The $37 million gain from the sale of timeshare mortgage notes contributed to the strong revenue growth.  In 2005, timeshare mortgage note sale gains were included in gains and other income.  Excluding timeshare note sale gains, timeshare sales and services revenue increased 18 percent.


Timeshare sales and services revenue, net of direct expenses, totaled $133 million, reflecting higher reportable sales in Maui and Frenchman’s Reef.  The 2005 timeshare results included a $7 million charge in connection with the write-off of previously capitalized costs for one timeshare project while the 2006 results reflected the $37 million gain on the sale of timeshare mortgage notes.


Contract sales for the company’s timeshare, fractional and whole-ownership projects, including sales made by joint venture projects, grew 33 percent in the fourth quarter.  The increase reflected strong demand for the new timeshare resort in St. Kitts and a new fractional and whole ownership project in Kapalua.


GENERAL, ADMINISTRATIVE and OTHER expenses were up 21 percent in the fourth quarter to $237 million, largely due to the impact of the new accounting rules requiring the expensing of all share-based compensation ($12 million), higher severance costs, development write-offs, a performance cure payment and higher deferred compensation expense (the latter of which is offset by tax savings).


OPERATING INCOME (excluding synthetic fuel) for the fourth quarter was $338 million, up 35 percent compared to a year ago.  Marriott’s 2006 fourth quarter operating income benefited from strong fee growth as well as favorable results from the timeshare business. The fourth quarter results were partially offset by higher general and administrative expenses and lower owned leased and other profits.


SYNTHETIC FUEL.  With the decline in oil prices in the fourth quarter, the company resumed synthetic fuel production in October 2006.  Synthetic fuel operations contributed $1 million of after-tax earnings in the fourth quarter of 2006, compared to $33 million ($0.07 per share) in the year ago quarter.  Lower synthetic fuel earnings reflected decreased production levels, an estimated 39 percent phase-out of the 2006 tax credits due to higher average oil prices for the year and a $3 million mark-to-market expense associated with a hedge (recorded as an offset to interest income). Excluding the impact of our synthetic fuel operations, our tax rate for the 2006 fourth quarter was approximately 34.5 percent.


GAINS AND OTHER INCOME (excluding $17 million of expenses related to synthetic fuel) totaled $21 million in the fourth quarter, including gains of $12 million from the sale of our interest in a joint venture, $5 million of gains from the sale of real estate, and $4 million of preferred returns from joint venture investments.  Prior year gains of $72 million included a $40 million gain from a timeshare mortgage note sale, a $17 million gain on the sale of land leased to the Courtyard joint venture, $5 million of gains from the sale of other real estate, $6 million of preferred returns from joint venture investments and a $4 million gain on the sale of an equity interest in an international joint venture.


INTEREST INCOME declined $3 million to $11 million in the quarter, primarily driven by loan repayments in 2005 and a $3 million mark-to-market expense associated with the synthetic fuel investment, partially offset by higher cash balances and interest rates.


EQUITY IN EARNINGS reflects Marriott’s share of income or losses from joint venture investments.  Equity earnings totaled $1 million in the 2006 fourth quarter, compared to $18 million in the year ago quarter.  During the fourth quarter of 2005, the company earned a $15 million profit associated with the disposition of a hotel by a joint venture in which Marriott had an equity interest.


FULL YEAR 2006 RESULTS
For the full year 2006 adjusted income from continuing operations totaled $712 million, an increase of 16 percent, and adjusted diluted earnings per share from continuing operations of $1.65, an increase of 24 percent.  Adjusted results in 2006 exclude the results of the company’s synthetic fuel business.  Adjusted results in 2005 exclude the impact of a $94 million charge associated with the CTF transaction, a $17 million impairment charge associated with an aircraft investment and the results of the company’s synthetic fuel business. The company’s EPS guidance for 2006, disclosed on October 5, 2006, totaled $1.59 to $1.64 and similarly excluded the results of the company’s synthetic fuel business.

Full year 2006 reported net income was $608 million and EPS was $1.41 and included the impact of the $109 million after-tax charge ($0.25 per share) related to the change in timeshare accounting rules.  Full year 2005 reported net income was $669 million and EPS was $1.45.  The company’s synthetic fuel business contributed approximately $5 million after-tax ($0.01 per share) to 2006 earnings and $125 million after-tax ($0.27 per share) to 2005 earnings. Total fees in 2006 were $1,224 million, an increase of 19 percent over the prior year, reflecting higher REVPAR, improved margins and unit growth.

GENERAL, ADMINISTRATIVE and OTHER expenses in 2006 included $39 million associated with the new accounting rules requiring the expensing of all share-based compensation.  In 2005, the company recorded a $30 million charge for bedding incentives and $94 million of charges associated with the CTF transaction, primarily due to the non-cash write-off of management agreements.


OPERATING INCOME (excluding synthetic fuel) increased to $1,087 million, largely as a result of higher base and franchise fees, growth in incentive fees, strong results from our owned and leased properties, lower general and administrative expenses and favorable timeshare profits, including the impact of the reclassification of note sale gains.


GAINS AND OTHER INCOME totaled $74 million in 2006 (excluding $15 million of expenses related to synthetic fuel) and included gains of $26 million from the sale of real estate, $2 million of gains from the sale or refinancing of real estate loans, $15 million of preferred returns from several joint venture investments, $25 million from the redemption of preferred stock in a joint venture and $43 million of gains on the sale of the company’s interests in six joint ventures. 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 gains of $149 million (excluding $32 million for synthetic fuel) included $69 million from timeshare mortgage note sales, $34 million from the sale of real estate, $25 million of gains from the sale or refinancing of real estate loans, $14 million of preferred returns from several joint venture investments and $7 million of gains on the sale of the company’s interests in two joint ventures.


INTEREST EXPENSE net of INTEREST INCOME increased $52 million primarily due to higher average borrowings in 2006 compared to 2005, higher interest rates and loan repayments in 2005.


The 2005 provision for loan losses reflected a $17 million non-cash pre-tax charge associated with the impairment of a Delta Airline leveraged lease receivable and an $11 million reserve for a loan at one property.


EQUITY IN EARNINGS declined $33 million, to $3 million.  In 2005, the company recognized $30 million of equity earnings from the sale of hotels by three joint ventures in which Marriott had an equity interest.


BALANCE SHEET
At the end of 2006, total debt was $1,833 million and cash balances totaled $193 million compared to $1,737 million in debt and $203 million of cash at the end of 2005.  The company also repurchased 42 million shares of common stock in 2006 at a cost of $1.58 billion.  The remaining share repurchase authorization, as of year-end 2006, totaled approximately 34 million shares.

OUTLOOK
The company expects comparable North American REVPAR to increase 7 to 9 percent in 2007.  With continued focus on property-level cost efficiencies, the company expects North American house profit margins to improve 150 to 200 basis points, exceeding house profit margins reported in the peak year of 2000.  Assuming approximately 30,000 new room openings (gross), the company expects total fee revenue of $1,380 million to $1,400 million, an increase of 13 to 14 percent.


The company is currently producing synthetic fuel at three facilities and has entered into hedge agreements to minimize operating losses that could occur if there is a sustained material increase in oil prices in 2007. Given the uncertainty surrounding the availability of 2007 tax credits, the company is unable to provide guidance for 2007 earnings from the synthetic fuel business.  At year-end 2006, the net book value of the synthetic fuel facilities was approximately $5 million.

With a growing portion of its timeshare profits coming from joint ventures, the company expects timeshare interval sales and services revenues, net of expenses, will decline approximately 8 to 10 percent in 2007.  Contract sales (including joint venture sales) are expected to increase approximately 10 to 15 percent in 2007, as the company expects strong sales in Abaco, Bahamas and Kapalua, Hawaii and expects to begin sales in Kauai, Hawaii and Marco Island, Florida. The company expects to sell timeshare mortgage notes in the second and fourth quarters. For the full year, gains on the sale of those notes, which are included in timeshare sales and services revenues, are expected to be approximately $70 million.

In total, the company expects earnings from joint ventures reflected in equity in earnings will total $30 million to $40 million, including earnings from the timeshare joint ventures.

General, administrative and other expenses are expected to increase 1 to 3 percent in 2007.

Based on the above items, the company estimates that operating income (excluding synthetic fuel) will total $1,165 million to $1,225 million in 2007, an increase of 7 to 13 percent over 2006.

The company expects gains and other income to total approximately $40 million in 2007, compared to $74 million in 2006, excluding the impact of the synthetic fuel business.

Assuming roughly $1.5 billion of share repurchases during the year, net interest expense is expected to range from $120 million to $130 million for the full year.

In the first quarter of 2007, the company estimates REVPAR for comparable North American properties will grow towards the lower end of the 7 to 9 percent range, with house profit margin growth of 125 to 175 basis points.


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