Marriott International Inc (MAR) — Q1 2015 Earnings Call Transcript

Thank you, Tina, and thanks to all of you for dialing into Starwood’s first quarter 2015 earnings call. Joining me today are Bruce Duncan, the Chairman of our Board of Directors; Adam Aron, our CEO, on an interim basis, and Tom Mangas, our CFO and Executive Vice President. Before we begin, I’d like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood’s Annual Report on Form 10-K and in our other SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today’s call on our website at www.starwoodhotels.com. With that, I am pleased to turn the call over to Bruce for his comments.

Thank you, Stephen. And thanks to all of you for joining us today. Before I turn the call over to Adam for an overview of the quarter and the initiatives Starwood is working on, and then on to Tom for a review of the financials, I want to begin with a brief comment on today’s other announcement. This morning, we announced that the Starwood board will be exploring the full range of strategic and financial alternatives to increase shareholder value. Our board has always been focused on maximizing long-term shareholder value and continuously considers potential value creating ideas and opportunities. As we promised when Adam was named CEO on an interim basis, we are taking aggressive steps to accelerate Starwood’s growth, improve performance, and sharpen our focus on operational excellence. You will hear more about that from Adam and Tom on today’s call. This is clearly a time of enormous opportunity and change in our industry. And accordingly, the board has decided to thoroughly explore the full range of strategic and financial alternatives available to Starwood in order to capitalize on our industry-leading global platform and best-in-class premium brands. Let me be clear, no option is off the table. As to timing, we will take the time we need to carefully review our alternatives and achieve the best results for our shareholders, business partners, and associates. I hope you can appreciate that we’re not going to say any more about the process at this time. Regarding permanent CEO succession, a thorough search process including external and internal candidates is proceeding on a parallel track, and our team is working with Korn Ferry to complete the search in a timely manner. We are also continuing to execute on our asset-light strategy and the other initiatives we will discuss later on this call. With that, I’d like to thank you again for tuning in today, and now I’d like to turn the call over to Adam.

Thank you, Bruce, and good afternoon everyone. While there’s been understandable attention to the board’s announcement this morning, we also have news with encouraging first quarter for Starwood. As Bruce mentioned, we’ll begin with a brief overview of our quarterly results and expectations for the second quarter and full year 2015 and then quickly discuss with you four topics: Initiatives we’re driving to one, accelerate the pace of our growth; two, sharpen our focus on strengthening the appeal of our brands, both to consumers and hotel owners; three, deliver on our asset-light strategy; and four, increase our operational efficiency. Our CFO Tom Mangas will then drill down on our financial results for Q1 and expectations beyond. At the conclusion of our prepared remarks, Bruce, Tom, and I will be delighted to take any questions you may have. Let’s start with our first quarter 2015 results. Adjusted EBITDA was $274 million and EPS before special items was $0.65; both were above the high end of our expectations. Our owned hotels performed particularly well in the quarter, increasing profit margins by some 110 basis points. Around the world, we grew REVPAR index, which is a proxy for our market share in the quarter for fully seven out of our nine brands that were in the marketplace in Q1. This all sets Starwood up for a better outlook for the full year 2015. Accordingly, we are raising our guidance range for the year. For the full year, we now expect adjusted EBITDA to be between $1.185 billion to $1.210 billion, up $10 million from the previous guidance range. We also now expect EPS to be between $2.94 to $3.04, again before special items, up $0.07 from the previous guidance range. Having been in this interim role as CEO at Starwood for merely 10 weeks but in that time having had the chance to visit all three of our divisions and meet with and listen to almost 1,000 of our hotel general managers, over 150 of our hotel owners, and countless of our passionate leaders and associates, this has been a time for me to do a ton of listening. That listening, combined with a long-standing proximity to the issues facing Starwood as a member of the board since 2006, has made it possible to put our senior leadership team in a position to rapidly come to some key conclusions about what Starwood should be doing right now to accelerate our progress on a broad array of fronts. Starwood is a company with many significant strengths, but we are well aware even so that we need to act boldly and intelligently and in some cases, differently than before in order to advance the pace of making real progress for our company. First, with respect to growth. The first quarter of 2015 started well. For new properties in our system, we opened 20 new Starwood Hotels in the first quarter, doubling the 10 hotels opened in the first quarter of 2014. We opened or converted new Starwood properties for nine of our 10 hotel brands including five Sheratons, three Westin, and Le Méridien hotels, three Luxury Collection and Tribute Portfolio hotels, one St. Regis, and eight Aloft, Four Points, and Element hotels. Of note, eight of the 20 opened hotels were conversions from other hotel company brands, which is encouraging and a high priority for us because conversions can be a meaningful part of Starwood’s growth but also those hotels can come into our system more quickly than the new build development. We also signed deals in the first quarter for 33 more new hotels, up 18% from the 28 signings in the first quarter last year. That number, 33, is the highest number of new deals we’ve signed in a first quarter since 2008. Five of the 33 are Sheraton hotels, five are Westins or Le Méridiens, and fully 22 are Four Points, Aloft, and Element luxury hotels. Of note, highlighting a pick-up in our North American development activity, first quarter signings for North American hotels are up 70% from the same quarter last year. Significant hotel deal flow is now coming into our development stats. To that end, we’re also pleased to be able to report that several conversions are now in work which we expect will open in calendar year 2015. Indeed, a handsome St. Regis conversion was announced just this morning and is now open to hotel guests, for example. We’re also seeing increasing demand from owners and developers for Le Méridien for both conversions as well as new builds. In fact, we’re planning to open more Le Méridien hotels in 2015 than in any year since we acquired the brand in 2005. More information on these 2015 conversions for the new openings and additional development signings will be announced at the appropriate time. Also in the quarter, at our behest, an independent third-party was commissioned to interview owners of more than 2,700 hotels and 500,000 hotel rooms globally. These included Starwood hotel owners and our competitor hotel owners. The results of these candid interviews are in and we’ve already gained meaningful insight about what Starwood does well now and specifically how we can and will do a better job stimulating growth as we move forward with the owner community. Being more communicative, more flexible, and more responsive with current and prospective hotel owners and speeding up Starwood decision making, all are actions that are now directly in our sights to enable us to continue to look for growth at an accelerated pace. An example of that accelerated pace was the fast-tracking of the launch of our 10th brand, the Tribute Portfolio on April 16th. We moved quickly to bring Tribute to market and did so with a comprehensive brand launch. Admittedly, this is still a void for Starwood. The Tribute Portfolio allows us to address the four-star upper upscale independent hotel markets and now gives Starwood a credible option in the autograph collection and now Tribute race. Our own five-star Luxury Collection brand has been in place for two decades with some 100 hotels and is a significant driver of pace for Starwood. Given Starwood’s considerable experience with collection brands as evidenced by the Luxury Collection, we have every confidence that Tribute is a brand that also will be a significant driver of fee growth for Starwood. We’re starting with the five deals we announced when the Tribute Portfolio brand launched and we anticipate rapid take-off and meaningful fee streams from Tribute, going from five hotels to 10, to 25, to 50 at a relatively fast pace. Given the conversations we’ve been having with owners, developer interest from around the world in Tribute has clearly been keen. We expect Tribute Portfolio to be a global brand within year one and we expect to get to 100 Tribute Portfolio hotels within four or five years. Second topic, we’re sharply focused on the strength and appeal of our now 10 hotel brands. Given Starwood’s longstanding reputation as an innovative brand builder, another key strategy to accelerate growth is to make sure that all of our brands are distinct and sharp and at the top of consumers’ minds through focused and effective marketing and sales efforts. That focus will start with Sheraton, our largest and one of our most important brands. Sheraton represents more than 40% of our global room footprint and has been for many years our fastest growing brand in absolute terms. In many parts of the world, Sheraton’s solid and enduring reputation makes it the brand of choice for hotel owners in emerging markets. But in certain developed markets like North America, Sheraton needs to be significantly reinvigorated with a boost that can only come from top-notch marketing. We believe it’s time that we once again elevate Sheraton as a global brand of choice, innovate with its product and design, focus on the fundamentals of providing excellent service, cut through with distinctive marketing communications and branding efforts. In short, crystallize for both consumers and hotel owners what the Sheraton brand stands for as a unique and differentiated brand. To that end, in conjunction with the NYU Hospitality Conference at the beginning of June, we will lay out a comprehensive and what we think is a bold marketing effort to give Sheraton its due place in the sun. We expect that plan then will be immediately implemented beginning in the second half of 2015. Once more, we believe we can accomplish all this with already budgeted, committed, or redeployed funding. So, we do not expect any incremental cost impact on Starwood’s bottom line or to that of our hotels as we move to drive top-line revenue growth at Sheraton. The attention we’re devoting to Sheraton will be devoted to each of our other brands in turn. There’s opportunity to grow revenue at a faster pace in each of our brands. Along with Sheraton, we’ve identified that Starwood can benefit most immediately from heightened marketing and sales activity focused on our Luxury Collection, Westin, W, and Aloft brands. To that end on Monday of this week, we announced internally a significant strengthening of our global brands group including putting some of Starwood’s strongest marketing executives in charge of high opportunity brands. Fully five of our ten brands will benefit from this new invigorated leadership. While we’re certainly aware that Starwood was late coming to the select serve hospitality segment, we are now making progress on select serve as well. We’re on track to open more select serve hotels in 2015 than in any year since 2009. While that’s a positive story, it does not change the fact that we’ve got fewer than 200 select serve properties in North America and just over 300 globally. Therefore, we’re putting additional dedicated development resources on the ground to grow our select serve footprint. We’re also allocating additional marketing spend this year to drive greater brand awareness of Aloft and are taking another hard look at the design of brand hallmarks at Aloft, Four Points, and Element to make sure that they’re cost-effective to build. Third, let me turn to asset dispositions. At Starwood, we continue to reaffirm our previously announced commitment to sell at least $800 million in hotel assets in 2015 on top of the $200 million to $250 million in hotel asset value included in the SVO spinoff, as well as reaffirming our $3 billion goal in cumulative asset sales through the end of 2016. The transaction market remains strong. And based on conversations that we have been having related to various specific assets, we’re confident that we’ll hit both targets. What’s more, with respect to the $800 million 2015 objective, we believe you’ll see this spread throughout the balance of this year rather than being backend loaded. We should be in a position to make more specific announcements on specific transactions rather soon. The fourth subject for me to cover is our tangible work to improve Starwood’s operational efficiency at the corporate level and throughout our network of hotels. It’s become one of our most repeated internal rallying cries of late in striving to deliver superior returns, both to our shareholders and for our hotel owners. We will need both to drive top-line revenue growth but also to better manage the cost side of our business. In doing so, Starwood could become a leaner, more nimble company, one that is less bureaucratic and one that makes decisions faster. That’s why over the past two months, we’ve had a companywide task force taking a concerted look at the costs associated with running our organization and putting each of our various programs under a microscope to determine what works well and what should be strengthened and conversely, what efforts should be jettisoned or sunsetted. As a result, we will be reducing overlap and redundancy. We also can and will give our divisions more flexibility to better adapt to local market conditions and situations. And I’ll particularly note we’ll be reducing our overhead costs. Tom Mangas will further cover our plan to generate $25 million in run rate SG&A savings in 2016 and beyond and how we’re also freeing up between $50 million and $60 million in centralized services funds for redeployment, the higher priority spending designed to stimulate revenue growth. As part of our cost-cutting work on corporate SG&A, it does make sense to call out one specific saving among many because leadership starts at the top. To show that we’re serious about getting leaner and serious about being more sensitive to costs, my first decision in cost-cutting was to cancel the lease on Starwood’s G-IV private aircraft. The vast majority of my travels since stepping in mid-February have been on commercial airlines. The opportunity to reduce our overhead expenditures in ways that will not negatively impact our hotel guests is well underway and will continue. With that, here is Tom Mangas, our CFO, to review the quarter in more detail.

Thank you, Adam. Good afternoon and thanks for joining us on the call. I’ll focus my remarks on our results in the first quarter, our guidance on the second quarter and full year, our restructuring efforts, and an update on our balance sheet. Worldwide system-wide REVPAR for same-store hotels in the first quarter was up 5.2% in constant dollars and 1.9% when accounted for foreign exchange impacts. The REVPAR growth was in the middle of our guidance range for the quarter and in line with our expectations. Worldwide system-wide average daily rate increased 2% in constant dollars and occupancy grew 180 basis points in North America and 230 basis points internationally. Our management and franchise fees or core fees grew 1.6% versus 2014, below our expectations of 3% to 5%, driven by about 50 basis points of additional FX headwinds in the latter half of the quarter and weaker Maldives, Macau, and Southeast Asia performance. Constant dollar core fee growth was approximately 5%. Management fees, franchise fees, and other income decreased 3.2% versus the last year, primarily due to a large termination fee in the first quarter of 2014. We had exceptionally strong performance at our owned hotels in the quarter with worldwide same-store owned hotel REVPAR up 8.4% in constant dollars. This was well above our expectations and reflected strength across almost our entire portfolio of hotels. Because of that strong REVPAR growth, we were able to drive margin improvement at owned hotels of 110 basis points. At the brand level, we were very pleased with our international and North America Aloft REVPAR growth of 24% and 13% respectively. At our vacation ownership and residential business, we exceeded our expectations with earnings of $50 million. These results were driven by strong resort performance, as well as an adjustment to our loan loss reserve as a result of continued improvements in the quality of our loan portfolio. The planned spin-off of our vacation ownership business remains on track and our team’s done hard work on the Form 10, which we expect to file with the SEC within the next couple of months. We still expect to complete the spin-off in the fourth quarter of this year. SG&A expense came in 4.2% below last year’s levels. While some of the cost decrease is due to timing differences, we’ve been taking a hard look at our costs. During the first quarter of 2015, we recorded restructuring and other special charges of $31 million. This included $8 million for cost restructuring activities for which we are already reaping benefits. These charges also included $7 million related to the departure of our former President and CEO in February, the establishment of a $6 million reserve related to liabilities assumed in the 2005 acquisition of Le Méridien, and finally, costs associated with the planned SVO spin-off. We expect to incur additional expenses during the year as we restructure our business to improve our efficiency and become a leaner, more agile company as Adam outlined in his remarks. I’ll cover what to expect in more detail as I’ll review our full year guidance. With our solid hotel top-line, strong vacation ownership results, and our focus on costs, we delivered adjusted EBITDA of $274 million, above our expectations, and earnings per share before special items of $0.65. At the end of the quarter, our pipeline stood at 490 hotels, representing 110,000 rooms, up 2% from the fourth quarter of 2014. Now, I’ll turn to the trends we’re seeing around the world and how that plays into our outlook for the second quarter and full year 2015. Starting with North America, system-wide REVPAR for same-store sales in the first quarter was up 6.8%. The rate grew 4.1%, and as I mentioned before, occupancy expanded roughly 180 basis points. We saw double-digit REVPAR growth in the West with exceptionally strong performance at our hotels in San Francisco and Phoenix. System-wide REVPAR at our hotels in the South grew over 8% with solid performance in Atlanta and Fort Lauderdale in particular. Hawaii remained weak due to the continued impact at our properties, due to lower inbound travel from Japan. As expected, our hotels in the North did not perform strongly with REVPAR up only 4.6%, driven down by the market REVPAR declines in New York City which has seen a large increase in supply over the past year. REVPAR at our owned and managed hotels in New York was approximately flat. We were pleased to see that across the New York region, our hotels grew REVPAR index nearly 500 basis points and our owned and managed hotels in New York region grew REVPAR index by over 800 basis points. Offsetting the marketplace REVPAR weakness in New York, we saw double-digit REVPAR increases at our hotels in Boston and Chicago. Many of you have asked what trends we’re seeing in our business due to the strong dollar. Looking at our SPG numbers, we did not see a material decrease in the number of international travelers inbound to either the U.S. overall or New York specifically in the first quarter. We have, however, seen a decrease in the average daily rate in New York from those international guests, which we believe is a pricing effect resulting from a stronger U.S. dollar. Forward bookings indicate that we may see a decline in the number of inbound travelers to U.S., but at this point, it is hard to quantify. Group demand in North America has been good with group revenue in the quarter up over 6% at our owned and managed hotels. Corporate group was very strong, up nearly 10% versus last year. That was helped by revenue production in the quarter for the quarter up double digits. Looking ahead, group revenue production into all years was also up double digits. That increase in production on top of that previously strong group bookings has moved our group revenue on the books for 2015 up mid-single digits versus last year. That’s an increase from the lower single-digit pace we had in the fourth quarter of 2014. Transient performance in the quarter was up 4%, driven mostly by increases in rate. As we look into the next quarter and the rest of the year, we expect North America REVPAR to remain strong with continued expansion of both rate and occupancy. Turning to Latin America, overall REVPAR grew 4.7% in the first quarter, including roughly 70 basis points of REVPAR index gains. As has been the case over the past few quarters, performance has varied across countries. REVPAR in Mexico continues to grow strongly, up over 20%, driven by very strong resort performance which benefited from the cold winter to the north. Brazil REVPAR was down this quarter as a result of the continued weak economic situation. Despite no material improvement in the Argentine economy, the performance at our hotels has stabilized there. Looking ahead, we expect similar trends across Latin America. We’re seeing encouraging trends in Europe with REVPAR up 5.1% in constant dollars, ahead of our expectations. Keep in mind, the first quarter in Europe is the seasonal low period for our mix of hotels, so it typically does not have the same weight as other quarters. Performance in Spain and Austria was very strong and Germany had a good book of tradeshow business. Looking ahead, we expect system-wide Europe REVPAR for same-store hotels to be slightly softer against the strong year base. While we expect performance at our hotels in the south of Europe to be strong, we are seeing weaker trends elsewhere in Europe. In contrast to what we saw in the U.S., the stronger U.S. dollar seems to be having a positive impact on travel to Europe from the U.S., Middle East, and China. Transient pace in Europe for the second quarter was up over 10% versus last year. We’re seeing double-digit growth in demand for U.S. and Middle Eastern travel into Europe and an increase of roughly 30% in Chinese travel into our European hotels, which we attribute to the weaker euro. REVPAR in the Middle East and Africa was up 0.8%, reflecting the continued challenges in Africa. In the Middle East where REVPAR was up 1.6% in constant dollars, strong performance at our hotels in Abu Dhabi was offset by weaker performance at our hotels in Dubai which have been negatively impacted by a lack of travel from Russia, but again partially offset by higher volumes of Chinese travelers. At our Dubai hotels, we maintained high occupancy and grew REVPAR index. We expect performance in the Middle East and Africa to remain soft in the second quarter. Turning to Greater China, REVPAR was up 0.4%; performance was pulled down by weaker demand in Hong Kong and the impact in Macau of the government anti-corruption campaign. REVPAR in Mainland China was up 3.2% with REVPAR index up 70 basis points. We expect the current trends to continue in Macau and Hong Kong. In Mainland China, we expect to see REVPAR improve modestly in the second quarter. REVPAR in Asia Pacific excluding greater China was up 5.7% in the first quarter in constant dollars. We saw a strong REVPAR performance in Australia, Japan, and Thailand where business is returning following last year’s unrest. The positive performance we had been enjoying in Indonesia reversed in the first quarter with REVPAR down, driven by new restrictions on government meetings at hotels and lower inbound travel to resorts from Russia, Australia, and the Middle East. While the situation in Indonesia will likely persist into the second quarter, we expect overall regional performance to benefit from continued improvements in performance in Thailand and India. Now turning to guidance: We expect worldwide system-wide REVPAR for the second quarter to be in the range of 5% to 7% on a constant dollar basis and 525 basis points lower on an actual U.S. dollar basis. That will result in core fees being roughly flat to last year. We expect total management fees, franchise fees, and other income to be down 2% to flat. This is lower than core fee growth due to a large termination fee for one hotel that we received in the second quarter of last year. We expect owned hotel REVPAR to be 4% to 6% in constant dollars and 1000 basis points lower in actual U.S. dollars. We expect our vacation ownership business to deliver earnings of $40 million to $45 million. Adjusted EBITDA for the quarter should be in the range of $290 million to $300 million, and adjusted EPS should be $0.70 to $0.74. For the full year, we are holding our worldwide system-wide REVPAR range of 5% to 7% in constant dollars. The dollar has continued to strengthen following our last earnings call, and the impact of FX for the full year is now 450 basis points on a REVPAR range. Versus 2014, FX is now roughly a $45 million headwind to 2015 EBITDA. Core fees should increase 3% to 5%, and total management fees, franchise fees, and other income should be approximately flat due to the approximately $35 million in non-recurring termination fees in 2014 associated with five hotels. Net, we expect 2015 to be a return to a normalized level of exits which we think is a good thing for the long-term business. We expect owned hotel REVPAR to be up 4% to 6% in constant dollars, 750 basis points lower in actual U.S. dollars. Remember, full-year owned EBITDA will be $43 million lower this year due to the hotels we sold during 2014. We expect our vacation ownership business to deliver earnings of $150 million to $160 million for the full year as we expect the favorability we saw in the first quarter to hold and extend in the coming quarters. We are taking our guidance range for SG&A for the full year down to minus 3% to minus 1%. This reduction reflects the work we’ve done subsequent to the end of the first quarter as we began developing a broader cost reduction plan that we expect to finalize in the next few weeks. We expect the restructuring to ultimately result in an annual run rate SG&A savings of approximately $25 million. That said, we expect second quarter SG&A to be up 3% to 5% due to our Tribute Portfolio launch and incremental Aloft marketing investment. In addition to the impact on our P&L, we expect the cost restructuring to result in savings in our centralized services of approximately $50 million to $60 million, which we plan to redeploy to more effective guest-impacting spend, like advertising. As we are in the initial stages of carrying out these plans, the specific timing of the charges and savings are still unknown. However, we expect to report further restructuring and other special charges totaling $30 million to $35 million over the next several quarters, with the initiative expected to end sometime in the middle of 2016. The second quarter will likely see the largest charge as we intend to move quickly, including exiting our airplane operations as Adam mentioned. We’re also conducting a review of several technology projects implemented in recent years to make sure we are deploying our resources against the key business drivers of our hotels. Depending on the outcome of those reviews, there could be additional charges if we determine that it changes strategy for those technologies. We will update you on that review when we report our second quarter 2015 results. Our expectations for top-line growth and the lower SG&A should enable us to deliver total adjusted EBITDA of $1.185 billion to $1.210 billion and EPS before special items of $2.94 to $3.04. Net, we’re fully offsetting FX headwinds we have experienced since our last earnings call and increasing our full-year guidance range on the back of our new cost savings effort and the strength of our vacation ownership business. Our outlook for cash flow from operations is essentially unchanged from our last guidance. Turning to our balance sheet and capital return. We ended the quarter with ratings agency leverage of approximately 2.5 times and 2.8 times for S&P annuities respectively. As you may have seen in our 10-K, we did repatriate roughly $385 million of offshore cash in the first quarter to reduce debt. During the quarter, we paid a quarterly dividend of $0.375 per share and repurchased 1.6 million shares at a total cost of $123 million. We continue to anticipate total repurchases of $300 million to $350 million for the full year. With that, I’ll turn the call back to Stephen, who will open the Q&A.

Thank you, Tom. We now like to open up the call to your questions. In the interest of time and fairness, please limit yourself to one question at a time and then we’ll take any follow-up questions you may have if time permits. Tina, can we have the first question please?

Adam, you mentioned a number of wins in the quarter for the company and it seems like you’re on the path to being positioned well and you’ve reversed some of the hurdles that had previously stood in the way of growth. So with these early wins in your pocket, I’m just wondering what the thought process was behind the strategic review announcement today?

Felicia, it’s always good to talk to you but given the question of our strategic alternatives, I am going to pass it to Bruce Duncan, our Chairman.

And I would say Felicia that again when we made the change to new leadership, our focus is on what we can do to accentuate growth. And we think that again we could always focus on maximizing long-term shareholder value and we think there is an enormous opportunity and change in our industry. We thought this is the right time to fully explore the full range of strategic financial alternatives. Again, when you look at Starwood, we got an industry-leading global platform and best-in-class premium brands. And we just want to look at all alternatives available to us.

I wanted to just go back to your comments around Sheraton which obviously REVPAR is at a discount to other brands in that upper upscale segment. Was it your suggestion that you can raise the REVPAR for that brand without asking owners to invest more in the brand or yourself invest more in the brand? Could you just regroup what you said on that?

I’ll be happy to. So let’s start with Sheraton. The management team presented a 60-page presentation to our Board of Directors about diagnosing the current situation of Sheraton and what we can do about it. When you think about how important Sheraton is as a brand right now, the fact that somewhere in the neighborhood of $9 billion flows through our 430ish hotels in 75 countries with the Sheraton flag, it just reminds you how important a part of Starwood Sheraton is. We have some terrific Sheraton properties around the world and we have some hotels that need more focus on the fundamentals of delivering service quality to our guests. In my prepared remarks, I said that what we’re going to be announcing at NYU is fairly broad and sweeping, literally it’s a 10-point plan to improve Sheraton’s performance in the marketplace. It took Sheraton some time to get into its current state, so it’s going to take the Sheraton brand some time to improve, but we believe that it will improve in two ways. One, for people who have Sheraton hotels today entrusted to us, we think we’ll be delivering better top line revenue and better bottom line profitability for our owners. We also think it would give more encouragement to the hotel developer community generally that Sheraton is a brand that is a good place to entrust their hotel assets. And if you look at the numbers in our first quarter announcement, Sheraton was the biggest single number of new openings and Sheraton was the biggest single number of signings, so in terms of the rooms added to our system. So, again I’m being a little circumspect on what is in those 10-point plan because that’s something that we’d like to announce closer to the NYU conference than today. But we were very clear that we said that we did not think this would drive incremental costs to our bottom line. Not because we weren’t going to invest any money in taking Sheraton forward as a brand but because we’ve done so much hard work over the past 10 weeks and our senior leadership team working together in looking at how we spend our existing centralized services funds and by cutting out the $50 million to $60 million that Tom Mangas and I both referenced. By cutting out some lower priority programs that produce returns that are more marginal and redeploying those funds in the things that we think will have much more impact, we can deploy the same amount of funds we’re spending now and investing now but do so in a way that we think we’ll get significantly greater return.

Can you just talk about capital allocation buyback and total cash return? I guess I want to put all of this, if you have a strategic review in place, how do you think about buyback, total cash return, the timeshare spin, and also your ability to recruit new people for some of these opportunities that you’re discussing? So, it’s all in the parameter of the strategic review change, how does that affect your capital allocation, timing on timeshare spend, and your ability to recruit new people?

This is Adam, I’ll take the recruit new people and pass your question off to Tom. Just Monday and putting out the announcement of the executives who’ll be leading our brand efforts, we were able to announce that someone who had been a Starwood veteran for a decade who left our company eight or nine years ago and is today the President and Chief Operating Officer of a legitimate but smaller hotel company is going to be rejoining Starwood, so that certainly is an example that in real-time we can attract talented people to our company. We also announced a number of internal promotions where some very able people inside our company were given a new chance to shine. As to capital allocations, I’ll let Tom respond.

So, right now, we’re not changing any of our guidance points; we are very early in the strategic review process. And as Bruce said, all ranges of options are on the table, nothing’s off the table. But until we go through the process and come to a conclusion, we’re maintaining our current guidance. We’re maintaining our current leverage levels of 2.5 to 3 times on an S&P measurement basis of net leverage to debt, and proceeding with our repurchase program where we indicated in our last call and it’s sustained in this call, a $300 million to $350 million repurchase program and proceeding with the spin. And we’re running the business the way we have laid it out. And when we conclude a strategic review process I’m sure the board will reveal those changes at that time.

Good afternoon. Turning to the midscale brands, Aloft and Element. In your effort to increase distribution in the midscale segment, are these the two brands that are going to lead you or are there others under development? Can you give us more information about how you get better penetration in the midscale segment?

Well, just so we give a comprehensive answer to your question, we are looking at other brands within the company, but specifically with respect to the midscale segment, Four Points, Aloft, and Element are the current vehicles that the company has at our disposal. We have 300 of them worldwide. While that’s significantly subscale to our competitors, it’s significantly ahead of starting a new brand from scratch if we started with hotel number one. So at the moment, we’re going with Aloft, Element, and Four Points; we certainly do want to take a look internally about whether we should add additional select serve or mid-serve brands but we’re nowhere in a position close to wanting to be able to publicly announce that we will do anything other than go forward with Four Points, Aloft, and Element.

Maybe to follow up on the earlier question but another strategic one. So, as we think about all the things that are going on, whether it’s launching Tribute; cost initiatives; the Sheraton repositioning; the timeshare spin; and then the broader strategic alternatives, my question is more probably for Bruce. But the question is, does that begin to impact at all the type of candidate you’d be looking for when you’re trying to dual track and hire a CEO, at the same time you’ve already embarked on some of these pretty significant initiatives and changes?

Again, our search for the new CEO is proceeding as previously announced. We are doing a thorough search process with both external and internal candidates. And again, it’s on a parallel track, and we’ve retained Korn Ferry and we want to complete the search in a timely manner. We’re encouraged with the candidates we have. And again we’re committed to identify the right leader with the relevant global experience to fill the CEO role and accelerate the company’s growth. So, we’re pretty excited about the candidates we’re seeing. And again, we’re going to do this in a timely manner.

A couple of questions for Bruce. One, I think at the outset of the call, Bruce, you mentioned in the context of talking about the full range of strategic alternatives you were exploring; you said this is an exciting time for the industry and the company. From your perspective, from the board’s perspective, can you elaborate on that comment a little bit? What do you exactly mean by that specifically? And then second part of that question, are you finding it more difficult to get external candidates to interview for the CEO spot given that it’s official today, but just given the potential for Starwood to explore strategic alternatives that might not necessitate an external candidate being hired? Thank you.

All right, let me start with the first one. Again, we’re excited because when you look at what Starwood, the position we’re in now and the strength we have with our unparalleled high-end global footprint and a reputation for innovation; we’ve got a great platform. You look at the work Adam and Tom and the team are doing in terms of accelerating growth and building upon our world-class brand. We’re pretty excited about the opportunity we have. But we think again we can even do more and that’s what everyone is working on. I also think that if you look out and you see the world today, the capital markets are good, so we think consolidation, it’s interesting to look at, and I think that we’re going to pursue all alternatives. And we think that that is the right thing to do in looking at how we can maximize value for our shareholders. But again, we’re going to take all the time we need on this to come up with the right solution that works for our shareholders, our business partners, and our associates, and we’re pretty excited about the position we have, that Starwood has as it is today. I would say in terms of the second one, in terms of attracting talent, I think there is no question that certain people you won’t be able to attract given what’s going on. But what we’re seeing right now, we’re pretty excited about the candidates we have in the pool and again we’re proceeding in a timely manner on that. And in the meantime, Adam and the team are moving full speed ahead executing on the strategy.

This one is for Bruce, although not about the process per se but just given your time on the board and say over the last 10 years what’s been the view of the board and of management in terms of looking at broadening the brand offering, including moving more aggressively into lower-end brands? Can you give us a little historical perspective there?

Well again, I would just say that from our standpoint, what I think is unique about Starwood and it’s very special, is our dominance in the upper upscale and luxury area. I think it’s fantastic. Again, as Adam pointed out, we’re a little subscale on the limited service areas with our three offerings and 300 hotels. But we’re very excited about the position we have. And the issue now is as we look for the financial alternatives, to look at what’s available and look at what we can do that makes the most sense. And we’re going to be doing that and we’re going to do a thorough review of both the strategic and financial alternatives we have in front of us to move our growth up.

Adam, you talked about doing asset sales and sort of having them culminated by the end of 2016 which by that definition kind of implies that asset sales are going to accelerate versus what was said under your predecessor. So, question here is one, what do you have to give up to get it? What are you going to be doing differently than what was contemplated during your predecessor’s time? Thank you.

Well, just to be clear, the $3 billion target by the end of 2016 is exactly what the company has heretofore laid out as its timeline. The $800 million target for 2015 plus the $200 million to $250 million on top of hotels going with the SVO spin are also in line with what the company has previously announced. So, there is not an acceleration as implied in your question. What is true however is our confidence that we will get this done. And in prior periods, some of you in this call might have been critical about Starwood about where we laser-like focused on asset sale dispositions. I can promise you that we are now, and what we are doing differently is making sure that any internal roadblocks or bottlenecks that slow down decision making are removed. And we can come to grips with opportunities for Starwood fast and sometimes opportunities for Starwood involve growth, and sometimes opportunities for Starwood mean capitalizing on how transaction markets and disposing of hotel assets all the while retaining long-term management and franchise agreements on an expeditious timeframe.

Just a question for you, Bruce; I’m curious if you are already a third of the way through asset sales and in the process of spinning out timeshare, can you talk about what the catalyst was for the decision to explore alternatives that wasn’t going to be accomplished by those initiatives? And I guess as a follow-up, do you give equal odds to a strategic brand acquisition as you do to maybe a partial or outright sale?

We are planning to examine all strategic and financial options, so every possibility is being considered. We won't speculate on the outcome, but our priority is to take the necessary time to find the best solution. We feel confident in our current position, which we believe is strong, but this is the right moment to review the markets and capital options. We will move forward with that process.

I guess I was going to ask you whether you think the company’s biggest challenge is its brand positioning or whether it’s too much owned assets. So I don’t know how much you will address that question but I also was going to ask you what do you think is the driver of the acceleration in REVPAR in China as well here after Q1?

Well, on this issue of brand positioning versus owned assets, Robin you’ve sort of posed almost as a dichotomy; they’re unique and different situations. My own view is the company is on a declared path to go asset-light. We’re highly confident in our ability to deliver on the asset-light strategy and we’ll do so. On the issue of brands in terms of an opportunity, while we sit with some very strong brands and several of Starwood’s 10 brands are real powerhouses in their categories, there are others of our brands that are not. And I’ve already talked about the fact that we’re going to turn the company on its head and focus on Sheraton, which is 40% of our company. With respect to facility in China, let me pass it to Tom.

Yes, I would simply say that as you look at the results in Mainland kind of specific, we think that improvement comes out of Mainland China. As you saw just a really tough February period there, Chinese New Year which for the entire market, the REVPARs were down almost high single digits; we just think that was a Chinese New Year phenomenon; we saw March whilst down, not nearly down that same level. So, it’s simply a trending assessment where we think that the second quarter is going to be better than some of the market dynamics we saw in the first quarter.

Two questions surprisingly on fundamentals. First, one of your peers earlier talked about there being a weather impact on both U.S. and system-wide REVPAR in the first quarter. You guys made some comments about the Northeast being slightly softer. Anyway, you could quantify the percent of weather impact to REVPAR? Second question, can you just talk about the Aloft REVPAR growth in the quarter, why it was so strong?

I’ll address the weather first. I live in the Northeast United States, and it was cold this winter. However, our REVPAR performance in North America was strong in the first quarter. This is one of the reasons we could raise our guidance for the year. We haven’t specifically measured the weather's impact and are pleased with the results we achieved in North America for Q1. Tom, could you elaborate on why Aloft is seeing improvement?

We are starting to see significant growth as our marketing initiatives gain traction. Our revenue per available room is increasing substantially. In North America, our Aloft REVPAR index has improved, but it has seen even greater growth in Asia, Europe, Africa, and the Middle East, where we are opening many hotels. This success is largely due to achieving critical mass and focusing our marketing efforts, which is a key aspect of our plans this year, including enhancing marketing support in the second quarter to further drive that growth.

But the question on guidance, just parsing out the different moving parts, there seems to be a lot of changes quarter-to-quarter. And so by my reading, you had a beat in the first quarter and then you’re raising the full year essentially by that amount and maybe slightly above that but we’ve got G&A savings; we’ve got that offset by a little worse on the FX side. Can you tell us, maybe articulate what your expectations are for the U.S., specifically for the balance of the year?

So, let me answer the first part. So, we are increasing the full-year guidance by $10 million; it is largely on the back of our vacation ownership success in the first quarter and carrying through to the year and on the back of SG&A, offsetting the FX headwind. And so that is how we’re delivering the full year. Relative to North America, North America has performed in line with our expectations this first quarter, and we really haven’t materially changed our outlook for the North America region in the year ahead versus what we had at the beginning of the year and I expect it to perform in a similar range as it performed in the current quarter.

Guys, in the past, the prior management team would often talk about the owned real estate business and the thoughts around potentially trying to spin that out into a REIT structure. One of the pushbacks I believe was always the scope and the friction cost. Is that something that is on the table today and is that even feasible in your view from a size perspective as well as the geographic skew perspective?

Let me first say that I think as we do the strategic review process, any of these ideas could come back on the table as Frits mentioned in our call in February, we did try a bundled sale process in the first-half of 2014 that didn’t go anywhere and that was part of our delay in getting asset sales out the door in 2014. I do think we suffered from a lack of critical mass. But U.S. assets that could fit well in a REIT structure; we’ve got several assets in Europe and so I think it is in Central and South America that can’t benefit from that kind of REIT spin. So we have been pursuing a course of one-off asset sales and as Adam said, I think we are expecting to have a more evenly balanced distribution of asset sales based on what we’re in the pipeline for disposals in 2015 than what you saw last year. But again, as I said, we’re not taking anything off the table in the context of the strategic review.

Let me first, Bruce and Adam, give kudos to the board for actually taking some concrete steps here over the last six months. It’s very much appreciated. My question really has to do with the strategic review and how that might impact unit growth. I mean that’s been the challenge to Starwood for a while and if you’re a developer and owner, how do you convince them to sign a long-term contract with you if you may be owned by somebody else in a year or the strategic review is ongoing?

We have some very strong brands. And no matter how the future of this company unfolds, our brands will endure; our brands will be potent; our brands can only be stronger than they are today. And those will be the messages we’ll be carrying out to the hotel ownership and development community. As I said in my earlier remarks, we’re also going to get much more aggressive in our communications with owners, and our flexibility in dealing with owners, and being responsive to owners. And this is a relationship business in many respects, and don’t underestimate how powerful it is if the senior management team of Starwood is in active dialogue with those people who control assets and are trying to figure out where they should best go. So, we have every confidence that we’ll continue to fare well in getting developers and owners to entrust their precious assets to the brands in the Starwood.

A quick question on select service. What is your appetite to use the balance sheet to increase ownership in the short-term to accelerate the growth in that segment?

This is Adam, I’ll take it. We have a significant appetite to use our balance sheet to accelerate growth and we’re already doing it right now. We’re in active dialogue with one owner and one developer and after another. If there is an opportunity to get to package with some owner developers and multiple hotel assets in select serve, that’s appealing to us. If your question is much bigger and broader than that in terms of when we use our balance sheet in a huge way to accelerate our growth select serve segment, that’s a question that harkens right back to the strategic and financial alternative review that Bruce discussed before. And we’re not going to make a comment beyond the statement that Bruce made which we think is important and clear and speaks for itself.

Thank you, Adam. I want to thank all of you for joining us today for our first quarter earnings call. We appreciate your interest in Starwood Hotels and Resorts. If you have any other questions, feel free to reach out. Take care.