Marriott Reports EPS

Marriott International, Inc. (NYSE:MAR) today reported diluted earnings per share from continuing operations of $0.38 in the third quarter of 2003, which ended on September 12, 2003. Income from continuing operations, net of taxes and minority interest, for the quarter was $93 million, a decline of 18 percent from the year ago quarter. The decline in the quarter’s income resulted primarily from the absence of a timeshare note sale during the quarter, while prior year results included $12 million ($0.05 per share) in after-tax timeshare note sale gains.
J.W. Marriott, Jr., chairman and chief executive officer of Marriott International, said, “We are pleased to report higher year-over-year revenue per available room (REVPAR) for our full service brands. Since the fourth quarter is more dependent on business travel and group business, we can’t be certain that these trends will continue in the fourth quarter, but it does appear to us that the early stage of a recovery in transient demand is underway. Our early estimates for 2004 are for three to four percent REVPAR growth in North America, suggesting that 2003 should be the trough in REVPAR.
“Our rooms growth is stronger than we predicted at the beginning of this year, even as supply growth in the U.S. hotel industry continues to decline. With our owners and franchisees, we added 8,578 rooms to our system in the third quarter and we continue to see heightened levels of interest in converting competitor hotels to our brands. We estimate that we will add over 30,000 new rooms to our system in 2003. Our pipeline of properties under construction, awaiting conversion, or approved for development currently totals more than 47,000 rooms worldwide.

During the quarter, we opened our 1,000 room J.W. Marriott hotel and 584 room Ritz-Carlton hotel at the 500-acre Grande Lakes Orlando resort. This one-of-a kind resort is off to a tremendous start and introduces an exciting luxury experience to the Orlando market.”

MARRIOTT LODGING profits totaled $140 million during the third quarter of 2003, down 13 percent from the prior year, reflecting the absence of a timeshare note sale during the quarter. Lodging profits in the third quarter of 2002 included an $18 million pre-tax ($12 million after-tax) gain on the sale of timeshare notes. Base management and franchise fees were $147 million in the third quarter of 2003, up seven percent from a year ago as a result of new unit growth. Incentive management fees were $18 million in the third quarter, down $7 million from a year ago, as a result of lower operating results at our managed hotels. North American hotel margins declined 2.3 percentage points during the quarter, as lower room rates and higher insurance and benefits costs offset labor productivity gains. Gains and gain amortization totaled $15 million during the 2003 third quarter, including a $9 million pre-tax gain on the sale of an international hotel investment. In the prior year’s quarter, gains and gain amortization totaled $10 million.
For the 2003 third quarter (12 weeks ended September 12, 2003), REVPAR for comparable company-operated North American properties decreased by 0.5 percent, driven by lower average room rates. REVPAR at North American full-service hotels (including Marriott Hotels & Resorts, The Ritz-Carlton, and Renaissance Hotels & Resorts) increased 0.4 percent in the quarter for managed comparable hotels, while North American REVPAR for select-service and extended-stay brands (including Courtyard, Fairfield Inn, Residence Inn, TownePlace Suites, and SpringHill Suites) posted a REVPAR decline of 2.7 percent. The Ritz-Carlton brand in North America experienced strong demand, particularly at its resort properties, with comparable REVPAR up 5.6 percent for the quarter.

Our third quarter profits for international lodging were higher than the prior year, reflecting the sale of an international hotel investment. Continued strong demand for our Caribbean and Mexican resorts resulted in 8.7 percent REVPAR growth on a constant dollar basis in the Caribbean/Latin America region. The soft economy in continental Europe continued to pressure hotel results in that region. Although Asia’s REVPAR was hurt by Severe Acute Respiratory Syndrome (SARS) in the third quarter, occupancy levels improved over the summer and had returned to pre-SARS levels in most markets by the beginning of September.
Marriott`s timeshare business reported 23 percent growth in contract sales in the third quarter. Contract sales were strong at timeshare resorts in Aruba, Hawaii, and South Carolina but remained weak in Orlando and Lake Tahoe. Contract sales at our four Ritz-Carlton Club resorts doubled during the quarter. Overall profits in the timeshare business decreased to $23 million in the quarter, due to the absence of a timeshare note sale. We expect to complete a note sale transaction during the fourth quarter of 2003 in line with our previously announced plan to complete two note sales during 2003 versus four smaller note sale transactions in 2002.
We added 46 hotels and timeshare resorts (8,578 rooms) to our worldwide lodging portfolio during the third quarter, while eight hotels (1,018 rooms) exited the system. Six Marriott Hotels & Resorts (2,730 rooms) opened during the quarter, including three conversions comprising 1,030 rooms. One Ritz-Carlton hotel (584 rooms), two Renaissance hotels (549 rooms), nine Courtyards (1,077 rooms), and seven Residence Inns (902 rooms) also opened during the quarter. One-third of our room additions were located outside the United States and over 20 percent were conversions from competitor brands. At the end of the third quarter, our lodging group encompassed 2,678 hotels and timeshare resorts (484,957 rooms).

CORPORATE EXPENSES were $35 million in the third quarter of 2003 compared to $25 million a year ago, in part a result of higher legal fees related to two ongoing lawsuits, higher deferred compensation plan expenses and a charge taken in connection with excess office space, partially offset by the receipt of insurance proceeds. Interest expense in the quarter was $26 million, up $7 million from a year ago, primarily reflecting lower levels of capitalized interest. Synthetic fuel operations contributed approximately $21 million ($0.09 per share), after-tax, during the third quarter of 2003, similar to the prior year’s results. Minority interest of $29 million in the quarter represents the allocation of the synthetic fuel purchaser’s share of operating losses, tax benefits and tax credits.


At the end of the third quarter, total debt was $1.7 billion and cash balances totaled $113 million compared to $1.7 billion of debt and $144 million of cash at June 20, 2003. We owned eight hotels at the end of the quarter.

We repurchased 3 million shares of common stock during the third quarter at a total cost of $121 million and have repurchased approximately 9.1 million shares year to date in 2003 for a total cost of $316 million. At quarter end, our remaining share authorization totaled approximately 14 million shares.

We completed the sale of one hotel, subject to a long-term operating agreement, and two land parcels for $49 million during the third quarter, as well as 14 senior living communities for $184 million. We also sold a 50 percent interest in our synthetic fuel business for $25 million. We will receive additional profits over the life of the synthetic fuel joint venture based on the amount of tax credits produced and allocated to the purchaser. In the event that a satisfactory private letter ruling from the Internal Revenue Service regarding the new synthetic fuel ownership structure is not obtained by December 15, 2003, the synfuel purchaser will have a one time right to return its ownership interest to Marriott. We believe that the exercise of this right would have no impact on Marriott’s earnings in 2003.
We closed our distribution services business in 2002 and completed the sale of our senior living business in the 2003 first quarter. Therefore, we show the financial results for those businesses as discontinued operations for 2002 and 2003. Losses per share from discontinued operations were $0.01 in the third quarter of 2003 versus losses of $0.04 a year ago.

There are early signs that a strengthening economy is beginning to impact individual business travel positively. Combined with already strong leisure business, we are optimistic about 2004. However, group bookings for this year’s fourth quarter continue to be weak and improve only as we look into early 2004. Based on these dynamics, we continue to estimate REVPAR growth for the 2003 fourth quarter of - 2 to +2 percent versus last year.
We estimate lodging profits will total $225 million to $235 million in the 2003 fourth quarter, including estimated timeshare profits of $60 million to $62 million. This assumes completion of a timeshare mortgage note sale transaction with a gain of approximately $30 million. Including approximately $0.12 in after-tax earnings per share from our synthetic fuel operations, we anticipate that earnings per share from continuing operations will total $0.60 to $0.62 per share in the fourth quarter. Further, we estimate 2003 full year earnings per share from continuing operations, including synthetic fuel, to range from $1.86 to $1.88.
Our expectation for 2004 REVPAR is three to four percent growth. Assuming nearly flat house profit margins, completion of timeshare mortgage note sale transactions in the second and fourth quarters, 25,000 to 30,000 new room openings, and $0.33 to $0.36 of after-tax earnings per share from our synthetic fuel business, we estimate 2004 diluted earnings per share from continuing operations will range from $2.06 to $2.16. With these assumptions, our estimated range for 2004 lodging results is $770 million to $790 million.
Assuming REVPAR growth of two percent to four percent in the first quarter of 2004, we currently estimate first quarter earnings per share from continuing operations of $0.38 to $0.42, including $0.06 of earnings from synthetic fuel. Our range for lodging results for the first quarter of 2004 is $155 million to $165 million.
We expect investment spending in 2003 to include approximately $75 million for maintenance capital spending and approximately $100 million to $125 million for new company-developed hotels. We anticipate timeshare investment spending to total approximately $175 million to $200 million. We also expect to invest approximately $200 million in equity slivers, mezzanine financing and mortgage loans for hotels developed by our owners and franchisees. We expect that total investment spending in 2003 will be roughly $550 million to $600 million. In 2004, we estimate total investment spending levels to be roughly $500 million.