Marriott International Inc (MAR) — Q1 2016 Earnings Call Transcript

Good morning, everyone. Welcome to our first Quarter 2016 Earnings Conference Call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer, Laura Paugh, Senior Vice President Investor Relations, and Betsy Dahm, Senior Director Investor Relations. First, let me remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued last night, along with our comments today, are effective only today, April 28, 2016, and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at www.marriott.com/investor. So let's talk about the first quarter. In North America, comparable system-wide REVPAR rose 2.4% in the quarter. In January, North America system-wide REVPAR rose 3.1% despite the severe East Coast snowstorm. In February, REVPAR rose 3.4%. In March, REVPAR increased only 1% as group meeting planners avoided the week before and the week after Easter. All in all, we estimate the shifting Easter holiday period reduced our system-wide REVPAR growth by about 1% for the quarter. A natural first question would be why, with 2.4% North America system-wide REVPAR growth in Q1, do we think 3% to 5% growth is still the right range for the year? Our group business on the books gives us confidence in the remainder of the year, including higher transit room rates that are likely to come with stronger group compression in the second and third quarters. In fact, April REVPAR through the 23rd is up 5.2%. Group booking pays for our full-service hotels in North America is up 7% for the rest of the year. First Quarter REVPAR growth was strongest in Atlanta, Los Angeles, San Francisco, and the California Desert, while REVPAR in Chicago and Philadelphia declined due to unfavorable city-wide calendars. System-wide REVPAR at limited service hotels rose 2% in the quarter constrained by a combination of weak demand from the oil and gas industries and new upscale supply. REVPAR at Ritz-Carlton increased more than 6% as recently completed renovations pushed both occupancy and room rates higher, and the early Easter increased leisure business, particularly in Lake Tahoe and Bachelor Gulch where the snow was deep and the skiing was great. SER expects overall U.S. supply growth of 1.7% in 2016 and 1.9% in 2017. Interestingly, in the last six months, financing for new hotel construction in the U.S. has become more conservative. We understand that leverage levels on a new construction loan have declined from 70% to 75% a year ago to 60% to 65% today. Loan pricing and recourse levels have increased. In certain markets, construction costs are also higher, particularly labor. While we are not likely to see a material change in supply growth in the near term, longer-term we believe these conditions should discourage marginal new projects from going forward and could delay others. While new industry construction could moderate in the U.S. over time, we believe our brand conversions will likely accelerate. Our autograph brand raised 100 hotels worldwide in just six years, largely due to conversions. With 19 brands today and soon to be 30 brands, we now have even more opportunities for meaningful unit growth through conversions. Elsewhere in the world, in the Caribbean and Latin America, the good news was Mexico, where REVPAR rose nearly 30% in the first quarter. This expanding economy offers great opportunities from limited service development along with very strong REVPAR growth. Our warm weather resorts benefited from the shift in Easter in the first quarter but concerns about the zika virus triggered group cancellations in some markets in the region. In Europe, the economy grew modestly in the first quarter and system-wide REVPAR rose nearly 3%. The tragic events in Paris, Brussels, and Istanbul depressed occupancy rates in those markets, with some spillover concern impacting REVPAR results in London as well. Elsewhere in the UK, REVPAR remained very strong. In Spain, the economy is rapidly recovering, and our hotels benefited from strong demand from UK and U.S. travelers. Instability in the Middle East and North Africa further enhanced Spain's appeal as a vacation destination. Demand for our German hotels remains strong in the quarter with favorable fair business in Cologne and Berlin. In the Middle East, geopolitical unrest and low oil prices depressed hotel results in much of the region, while UAE occupancies remained over 80%. Room rates were lower with new supply on the market. For Egypt, there were fewer flights to the Red Sea Resorts, while in Saudi Arabia, hotel demand was constrained by lower government spending. Looking ahead, Ramadan will start in early June this year, about two weeks earlier than last year, which should hurt second quarter REVPAR comparisons in the Middle East. In Africa, our Protea Hotels performed very well, helped by strong local business and international tourism attracted by the weak South African Rand. Protea system-wide constant dollar REVPAR rose nearly 15% in the first quarter, and we expect that it will increase at a high single-digit rate for the full year. Our Asia Pacific region performed better than expected in the first quarter while economic growth in China has moderated. Consumer spending on travel remains strong. Shanghai and Beijing had very strong results in the quarter with REVPAR up in the high single digits. Nearly 60% of mainland China hotel demand comes from mainland Chinese travelers, and their numbers are growing. In the first quarter, the number of domestic Chinese travelers visiting our hotels in that market increased 7%, while the number of mainland Chinese travelers visiting our hotels abroad increased 25%. Thailand and Japan were particular beneficiaries. Hong Kong continued to see weak mainland China demand due to its strong currency pegged to the U.S. dollar. In India, the economy is strengthening, and first quarter REVPAR was at 14%. We see significant development opportunities outside North America, particularly from limited service hotels. Today, our international limited service development pipeline totals nearly 250 hotels with more than 47,000 rooms, a 30% increase in the last year. In Europe, after adding manpower to our development effort in recent years, we already have 70 limited service hotels in our development pipeline, including more than 40 Moxy and AC hotels. In India, half of our existing properties and 60% of our pipeline hotels are in limited service brands. In China, we recently signed a deal with Eastern Crown to launch Fairfield by Marriott. While none are yet in the pipeline, we expect to have 140 Fairfields signed in five years and 100 hotels opened by 2021. In Mexico, we already have 20 limited service hotels open and another 16 in the development pipeline. Finally, in the Middle East, our limited service hotels, Courtyard, Fairfield, Residence Inn, and Protea represent 40% of our pipeline in that region. Our unit growth is strong around the world; excluding Starwood, we expect our worldwide room distribution to grow by 8% or 7% net in 2016. Based on SER industry pipeline data, one in four hotels under construction in the U.S. will fly one of our flags and worldwide, one in seven hotels under construction will be flagged with a Marriott brand. We are already the biggest hotel company in the world when measured by total rooms opened. We signed over 100,000 rooms in both 2014 and 2015. Those signings give us great confidence in our openings in the years ahead. With our Starwood acquisition, we will become a more global company, able to better leverage global trends and seize opportunities. Following the acquisition, we estimate more than one-third of our rooms and fees will come from outside the U.S. We've talked a lot about the synergies in this transaction and the economies of scale that are inherent in this business, from GNA to reservations to the frequent traveler program to the back of the house. We expect to recognize meaningful top-line and bottom-line improvements over time, and unit growth should benefit as well. With a broader brand portfolio, we will be able to offer the right brand for each asset and market. This means we can play in more sandboxes than many of our competitors, winning the highest value opportunities. We still expect the Starwood transaction will close midyear 2016. We are awaiting regulatory approvals from the EU, China, Mexico, and Saudi Arabia. In the meantime, we continue to do the blocking and tackling to drive results and improve our business. In March, we introduced Marriott board member rates designed to reward loyalty members who book direct. The list of member-only perks continues to grow: loyalty points, mobile check-in and check-out, free Wi-Fi, and now lower rates. Today, 65% of transit room nights come from rewards members. This month, we announced enhancement to the rewards part of Marriott Rewards offering a wide array of curated special events and opportunities. In addition, an initial group of elite members will be invited to participate in a new elite concierge service. By developing a relationship with a member, the concierges will be able to anticipate their unique needs, ensuring the member's preferences are recognized and their desires are met before, during, and after their stay. And for Golden Platinum elites, guaranteed late checkouts should make traveling both more pleasurable and more productive. Marriott's competitive advantages are numerous: strong brands, widespread distribution, powerful sales channels, loyalty program and reservation systems, back-of-the-house efficiencies, owner and franchisee preference, and most important, culture focused on our people. We also know that success is never final, so we are working to be even better. Now let me turn things over to Leeny for more about the quarter.

Thank you, Arne. For the first quarter of 2016, adjusted diluted earnings per share totaled $0.87, four cents ahead of the midpoint of our guidance of $0.81 to $0.85. Fee revenue was in line with our expectations. Results on our owned, leased, and other lines contributed about $0.05 without performance, including $0.03 from branding fees from residential real estate and our Marriott Rewards credit card, and the balance largely coming from the performance of our owned and leased hotels. Adjusted general and administrative costs were better than expected by about a penny, mainly due to open associate positions. Interest and taxes were about $0.02 unfavorable, largely due to some discrete tax items in the quarter. All in all, it was a solid quarter. Total fee revenue increased 5%. As you know, 2016 is a leap year. The extra day in the quarter did not impact our REVPAR statistics, but we estimated it added about 1% to our property level, revenue and fee growth in the quarter. Base fees rose 4%, reflecting REVPAR and unit growth offset by more than $4 million of unfavorable foreign exchange. Incentive fees increased 13%, reflecting roughly $3 million of unfavorable foreign exchange impact and a $2 million favorable recognition of a deferred incentive fee. Worldwide, 63% of managed hotels earned an incentive fee in the quarter compared to 48% in the year-ago quarter. In North America, incentive fees rose 23%, with incentive fees for our limited service brands up 40% alone. Franchise fees were flat year over year. Strong unit growth and REVPAR improvement were offset by $15 million of lower relicensing fees and $2 million of unfavorable foreign exchange impact. Own, leased, and other revenue net of expenses totaled $81 million in the quarter, 29% higher than the prior year, largely driven by higher branding fees associated with sales of Ritz-Carlton residences and our co-branded credit cards. Our leased hotels in Tokyo and Jaragua showed much better results as they came out of renovations, but those results were offset by foregone owned profit from our Ritz-Carlton Saint Thomas Hotel, which became a company-managed property late last year. Adjusted general and administrative expenses increased by $10 million, largely reflecting routine cost increases. This quarter, we benefited from $10 million lower reserves for guaranteed funding, while the 2015 quarter benefited from $12 million associated with favorable litigation resolutions. We repurchased nearly 4 million shares during the quarter for approximately $225 million. We expect to complete the Starwood acquisition midyear and expect to resume share repurchases in late 2016 once our leverage ratios return to targeted levels. For our second quarter, our guidance assumed the Starwood transaction will close sometime after June 30. For Marriott's legacy business, we expect second quarter North American system-wide REVPAR will increase 3% to 5%, reflecting strong group business already on the books. We expect international system-wide REVPAR will increase 2% to 4%, reflecting strong Asia-Pacific trends, offset by weak REVPAR in the Middle East. We expect Marriott's fee revenue will increase 6% to 8% in the second quarter. We expect our owned, leased, and other results in the second quarter will increase roughly 25% with continued strong branding fees, lower pre-opening expenses, and higher profits from our owned and leased hotels. We expect G&A will increase 2% to 5%. Adjusted net interest expense should total roughly $40 million. All in all, we expect our second quarter adjusted EBITDA will total $495 million to $510 million, an increase of 8% to 12%. Adjusted EPS should total $0.96 to $1.00, an increase of 10% to 15% year over year. This forecast assumes no share repurchase during the quarter and does not include Starwood transition and transaction costs. Turning to the full year, we expect worldwide REVPAR for Marriott's legacy business will increase 3% to 5% combined with 7% net rooms growth, we expect our 2016 fee revenue will total roughly $2 billion, consistent with our forecast in February. Owned, leased, and other revenue net of direct expenses should total $310 million to $315 million, about $10 million ahead of our February forecast, largely due to stronger residential branding fees. We expect our full year adjusted general and administrative expenses will total $645 million to $655 million, about $5 million better than our last forecast, largely due to the open associate position that we mentioned about Q1. For the Marriott legacy business, 2016 investment spending could total $450 million to $550 million, including about $100 million in maintenance spending. Excluding Starwood, we expect to recycle roughly $200 million to $250 million through asset sales and loan repayments through 2016. Making an EPS projection for the full year of 2016 is difficult given the uncertain timing of the Starwood transaction. To assist you modelers, however, for full year 2016, we expect Marriott standalone adjusted EBITDA will total $1.9 billion to $1.965 billion, about $15 million better than our February forecast. Given that 2016 transition and transaction costs are uncertain at this point, we are not including these costs in our guidance but rather expect to break out such expenses as actual results are recognized as we did this quarter. When the transaction closes, we estimate that we will issue roughly $136 million Marriott shares and increase total debt by roughly $3.5 billion, representing an estimated $20 million in higher net interest cost per quarter. Incremental depreciation and amortization from the transaction will depend on purchase price accounting evaluations that have not yet been completed. In a recent 8K, we estimated incremental depreciation and amortization from the transaction at roughly $52 million per quarter. Like you, we will rely on Starwood's forecast of their REVPAR growth, unit growth, asset sale assumptions, and adjusted EBITDA for their business. We eagerly await their first quarter results in 2016 outlook. Our results in 2016 are likely to be messy; including Starwood, by the end of this year, we expect to be back to our targeted leverage range and have resumed share repurchases. We expect most of the corporate-level cost synergy associated with the transaction to be in place by the beginning of 2017. We are committed to completing asset sales promptly. Including Starwood, we could see continued strong unit growth in 2017, even with our larger size. Also, we continue to believe the transaction will be earnings per share neutral in 2017 before including the benefits of possible revenue synergy. We appreciate your interest in Marriott. So that we can speak to as many as possible, we ask that you limit yourself to one question and one follow-up. We will take questions now.

Hi, good morning, thank you. My first question, which is a two-parter. So Arne, I think what's on a lot of people's mind is the kind of Easter shift. So you talked about April being up 5.2%. I'm just wondering how much of that comes from Easter and then also as we know, April, Hilton said yesterday that they expect May to be weaker and then June to pick up. Are you seeing the same thing?

Well yeah, those are sort of detailed questions. I'm going to also sort of give you a general answer to the question that you haven't asked but I think is at the top of the mind for everybody. As we said in the prepared remarks, we think the negative REVPAR impact was about 1 point in Q1 due to the shift of Easter. The impact of Q2 could be about the same. Obviously the impact of one month of April would be larger and it could be nearly 2%. Important to keep in mind, though, that last week April still has Passover in it, so we'll look at the impact when the dust ultimately settles and give you more precise calculations, but it would be something close to 2%, we would think for April. When we look at our group bookings, which of course are the clearest long-term data that we have, we see April and June relatively better than May, but we see good group for Q2 as a whole. We see good group for Q3 as a whole. Q4 okay but not quite as good as Q2 and Q3, and as we said in the prepared remarks, we've got about a 7% increase group revenue on the books for Q2 through Q4 compared to the same time last year. The biggest question at the moment obviously is not so much about group but is about the trends and demand. So let's maybe start with basics. The transit demand correlates most closely with GDP growth. Statistics out this morning show that U.S. Q1 GDP growth was only 0.5%. Anemic, even in the context of the fairly moderate U.S. economic recovery we've been witnessing the last few years. The question for all of us, including for you, is do we expect the U.S. economy to perform at higher growth rates in the quarters ahead? We do. It seems reasonably clear that sentiment was profoundly negative early in this year, and that it has improved significantly since January. That plus other statistics around employment, growth, and other things suggest that the economy is poised to perform better than that 0.5% number in Q1. Based on our information, as opposed to GDP information, the U.S. market seems to us to be characterized by a number of short stories if you will. Let me give you a few examples. Houston weak because of the weakness in the oil patch. New York weak primarily because of supply growth but also maybe a bit because of the strength of the U.S. dollar and its impact on international rivals. Miami weak probably mostly because of the weakness in Brazil, one of the great source markets for Miami and to some extent maybe growth in luxury supply. San Francisco very strong, reflection of the strong health of the U.S. digital economy. Of course LA also quite strong. Now our biggest customers also tell us things that are quite different. Many of them tell us that their book of business is solid and reflects continued health in their business and from their purge of strength in the U.S. economy. Some wrestling with a flattish top line seem to be turning with greater attention to managing costs including their travel budgets. Now when we roll all of these anecdotes together you will have these markets. What we see is a collection of short stories but not a common theme let alone the same author. So our view, as reflected in our continued 3% to 5% REVPAR growth guidance, is that we expect the U.S. economy to continue to bump along with moderate GDP growth and therefore moderate occupancy growth which, when combined with ADR growth, should deliver 3% to 5% REVPAR growth for the year.

And Arne, just quickly, and then I'll go follow up on that. Previously you said that you expected to come in at the high end of that range. Is that still your view?

Well, the 3% to 5% is still the range that we think is appropriate. This question that I just addressed is a question that we're talking about internally as well and of course we've got forecasts that get rolled up from our properties around the world. We also have maybe a slightly more conservative view here based on recent trends but generally all of those forecasts are above the midpoint of that 3% to 5% range, and we would think as a consequence it's at least as likely we are at 5% as we are at 3%. This will, though, depend on what happens with transit demand in the quarters ahead.

Okay, that's all very helpful. Thank you.

Good morning everyone. Leeny, in your remarks towards the very end, where you're giving some helpful pieces of the merger, I think you mentioned that corporate-level synergies were expected to be in place by 2017. I was wondering if you could elaborate on that. Is the corporate level component, how much of that, or I mean directionally at least, is the $250 million that you guys have outlined and how much do we think is going to take more time?

We expect and aim to put into place so that starting January 1, you would see as a run rate. You would see that for the year we would achieve those $250 million synergies. Now that's obviously going to be on an adjusted basis, Sean, because we will continue to have some transition costs on certain technological systems we've got to run parallel systems until we get them put together. So you know by that standpoint we would hope by the end of 2017 that we've got that largely done but I think on a good basic solid running the company run rate you should see that in place in 2017.

That's helpful, and then I guess as a follow-up, you know for the last quarter, you have been talking and highlighting about being more on a residential branding fee side. Could you just talk a little bit more about why that comes through or is that recognized when residential units come online or is it recognized when you guys are signing contracts for stuff in the future?

Sure. Absolutely. You're right. It's clearly not quite as predictable as all of us would like. Let me talk a little bit about the residential branding fees. As I'm sure you know, these stem from projects and often they are connected to our hotels, but they stem from residential projects where our brand is a part of those projects and we earn a fee on the sale of those residences. We are not paid for those until they are not only sold but they are actually closed. So number one you've got something that opens so it's a little bit hard to predict exactly the pace of the sales and then the pace of the closings. But we have a project. Waikiki is a great example of one in Hawaii that began selling late last year and it's just been selling like hotcakes and basically we expect it to sell out this year, 300 units, and we had had it more spread across the year. While it turns out it was largely done in Q1 because it was so popular. The good news is this is a business that, although it is clearly cyclical related to the financing of real estate, it has been growing very nicely for us particularly internationally. So when you look at this year's fees, the average over the last call it five years has been about $15 million dollars a year. We do expect this year for that number to be closer to double that, but when you look over the next few years Sean, I think you're looking at a number of residential branding fees that probably is likely to be in the high 20s because we've got a great pipeline of projects that are moving along.

By the way, these projects are all fee projects for us, so we're not developing these like residential ourselves.

Right.

Thank you very much.

Great thanks. It looks like your incentive management fees of the percentage property paying incentive paying as your fees jumped up quite significantly year over year. Is that a level that you expect to see on a full year basis, that kind of increase?

Yes it is actually. It jumps up meaningfully largely because we had three managed portfolios of limited service hotels that IMS is calculated on a portfolio basis. So when they all come, you know when they hit that target, they all jump in to be in an incentive fee territory, so it's actually about 160 hotels that jumped into Q1 this year as compared to Q1 last year that jumps into incentive fee territory. Now I will say year over year the incentive fee last year for the full year, we did end up in the 60s for IMS fee participation, and we expect that to be similar this year but in Q1 last year in the first quarter those limited service hotels were not in incentive fee earning territory.

Okay. That's helpful. And one follow up if I could. You mentioned the cost savings to be fully in place kind of, it sounded like, the start of 2017 which I think is a little bit earlier or maybe you just sort of hadn't committed to a date where they would be fully in place. But should we still think about; I think you had previously said the transaction was going to be neutral to earnings per share in 2017 and 2018, so that maybe it wouldn't be accretive or I don't know if that implies that it would be accretive in 2019. But does that time frame move up with the comments this morning about cost savings being in place?

Let me just provide the typical warning which should be obvious. I think everybody. We haven't closed the transaction yet so there's still a lot of details that we don't know. Leeny in fact mentioned in her prepared remarks that the depreciation and amortization, for example, will not get finalized until the transaction closes because given the amount of stock that we're using in the deal, the amount that we pay really will not be defined until actual closing because it will be derived in significant extent from our own share price. Obviously the other aspects that start with operating business; until we close we won't understand with real detail. Generally though what we think is that the $250 million worth of synergy run rate which Leeny talked about for 2017 is included in our assumptions about a roughly neutral EPS impact from the transaction. It is probably the first time we've held it out there as being 2017 as opposed to a second year, I think is the way that we talked about it before. And again, we've got a lot of work to do to make sure that that happens because we can't guarantee it, but we think that with that we will get a relatively neutral performance on EPS. I think the upside from that accretion, in other words, will be driven more by revenue synergies and margin synergies at the property level and how that drives unit growth and then, of course, what we do with the powerful and substantial cash that's going to be generated by this confined business in either investing or returning that capital to shareholders.

And then the same thought on the accretion in 2018 versus 2019 or timing.

Stay tuned.

Yeah. A little too soon.

Okay. Great. Thank you.

Good morning. So Arne, you mentioned that there are elements of economic improvement that you've seen. How is that being reflected or was that reflected in the pace of your bookings in April versus the first quarter?

Oh, I actually don't have April group bookings if that's what you're talking about. I don't have April group bookings to date. I tend to get those at the end of the month, but we do have obviously the 5.2% REVPAR growth system wide in the U.S. to date for the month. Obviously, a piece of that is the impact of Easter, and you know I think what we would say is at the moment we see some positive signs compared to the last few months, but I wouldn't characterize our comments as sitting here and saying we've got a dramatic shift in transit this month compared to prior months. I think what we see is more steady than that. Again, we look at the group data that we've got on the books and we look at sort of the current conditions, and we still think this range is a solid one. I think it in fact does depend on GDP growth in the 2% range as opposed to those sort of 0.5% that it appears to be the case from Q1. Again, our view is that that's what we're likely to see.

Thank you. And Leeny, as a follow-up to your comment about revenue synergies not yet spelled out in the transaction. Can you give us perhaps the top three or four buckets that you're hoping to get revenue synergies from?

Sure. First and foremost, you know as we move through it, we're very excited about the growth opportunities that we see for the overall hotel portfolio from adding together Starwood into ours, so I think from a unit growth perspective that first and foremost we see opportunities there. We also see some opportunities through a variety of our partnerships as we think about being a much larger company in ways that as we become stronger and bigger that we'll be able to capitalize on those. And last but certainly not least, as we look at what we believe that we can do on the hotel margin side that we would benefit on our fees through being able to deliver better profits to our hotel owners.

And on the partnership side, is that really more revenue opportunity or more of a lower fee opportunity?

Lower across. You mean margin improvement? I think it's both.

Yeah, I think it's definitely some on the top line as well.

Got you. Okay. Thank you very much.

Hi. Good morning. A couple questions. One, how is the new push for direct bookings been going? You and one of your competitors have been pushing it pretty hard. Do you think it's boosting your REVPAR growth at all, sort of what's been the reaction? I just wanted to ask an operating question before I ask a deal question, which is could you just give us a sense as to how you'll handle the loyalty programs and the timeshare licensing programs? Whether you can give us an update on that? I tried to leave with the operating and then went to the deal question.

There you go. Thank you. The member-only rates that we rolled out are very new in the market. We announced them about a month ago, but they became effective a little bit after that. It's still quite early and we have not put as many dollars into marketing those rates yet. Obviously, they are visible online and we're doing some things. I think the early response has been positive, but it's too early to give you the kind of statistics that you've heard from some others who have been out there on the market longer with us. We've obviously done it because we're optimistic about this approach driving an increase in direct bookings and driving that much more awareness of the advantages of direct booking. With the sense of the loyalty programs, this is going to be very much a work in progress. It is clear that we will be running the Marriott Rewards and SPG programs for some period of time. I would think that that's got to be more like two years than a year, but part of that is systems driven. Part of that is making sure that we deal with our customers in a way that keeps them excited about these programs and has them participate with us in a way that they evolve. Of course as your question implies we have got a number of very powerful and strategic partners that are keenly interested in this program. Timeshare companies and credit card companies being of the most significant, but they're not the only ones, and we're going to want to make sure that we work with them in a way that is successful to them and respects their interest. We'll sort of keep you posted on this. Obviously, we'd like to get to a place where we have a program which allows our growing group of loyal customers to have the benefits of the full portfolio of 5,500 hotels plus another 2,000 or so hotels which are in the combined pipeline, whatever those precise numbers are, and the ability to grow from there. So we'll be working to get as much functionality between those programs as we can and eventually hopefully a full merger, but hopefully we'll see how that goes and we'll keep you posted on it.

Just from a direct booking side, have you shared with your franchise users and owners what the positive impact could be to their bottom line? Have you done that yet, or is it still too early to even give them indications of how favorable that can be?

Well, we have an ongoing conversation with our owners and franchisees with a number of advisory committees that are meeting with our leadership teams very, very regularly, and we have been talking about doing this well before we launched it and in the context of that, certainly have talked about the economic attributes of what we think is programmed to do. We haven't done that in a way that puts us in a position to give you a forecast for the impact, but we'll keep you posted on how we think it goes as it develops over the months ahead.

Okay. Thanks.

Good morning, guys.

Hi Joe.

Hi Joe.

Leeny, with respect to your earlier comments about revenue synergies not being included in your 2017 pro forma target for the Starwood transaction with respect to the timing of revenue synergies, and this is also for you Arne, are they mostly intermediate or longer-term in nature, or could we start to see these emerge in 2017?

We could, but again, as Arne described before, we're still several months away from closing. We've got a lot of work to do both looking at things related to the on-property cost and comparing it to our system as well as how we look at all these partnerships. So it could, but it's too soon to tell exactly when.

And presumably you'll call out the transition cost each quarter?

We will be calling out the transition and the transaction cost each and every quarter.

Great. My follow-up is if we assume the midpoint of your guidance for the Q2 for the balance of the year, would you expect group REVPAR to exceed transient REVPAR, or how do you do that?

Yes. I mean, one of the things, obviously, won't be lost on you, but if you look at the release that we put out last night, you can see a meaningful difference in the REVPAR for the managed portfolio of the United States and the franchise portfolio of the United States. Actually what we report externally is the managed portfolio and then system-wide, and the managed portfolio is nearly a full point higher in REVPAR than the system-wide numbers are.

So in other words, Arne, you're not assuming a big corporate transient rebound in the back part of the year?

Again, we would say steady, maybe a bit better because of the weakness in the first quarter, but this is not fundamentally based on a dramatically different environment than the one that we've seen over the last few quarters. I suspect the downside here is that if GDP is, for the balance of the year, more like 0.5% in Q1, we're going to be towards the bottom end of this range or in theory it could be below that. I think that's unlikely given the strength of the group business in the books, but obviously we can't know about transient business very far in advance. If we, on the other hand, see better quarters perform better, which I would expect to be the case, you know, transient should perform a bit better than it did in Q1 and maybe Q4, but I wouldn't characterize it as a dramatically different environment. That's not what's built into our forecast.

Great. Thank you.

I just wanted to talk a little bit about the group booking pace. You guys said early in your prepared remarks you were up for the remainder of the year; that is obviously a pretty strong number. You also had mentioned that one of the benefits of the group booking pace is an ability to have more transient pricing power. I guess the two questions I had was last quarter, you had mentioned 2Q was a big acceleration in group base, I think plus 2% for 1Q versus plus 9% for 2Q. I am wondering if that is still the case. If you are still a plus 9% or if things have moderated a little bit for 2Q as we have gotten closer? And then the second thing is, how are you guys thinking about the impact that your strong group booking pace will have on transient pricing power? Is there any way to try to quantify that?

Yes, a couple of things. I think our Q2 pace is probably down a little from that 9% but still in the high-single-digits, 7%-ish. And Q3 would be in the mid-double-digits, so pretty healthy, be careful about assuming that that is an awful development. When we start a year with high group bookings, it leaves a little bit less room for in-the-year for the year group bookings. And as a consequence, we often see the full-year number sort of moderate as the year goes along and that is not a sign of weakness. The other thing that is really important to bear in mind here is that the group business has the most power to help with pricing of a hotel in high occupancy, high demand months. So group business being up significantly in January, which is a relatively quiet month, or December which is a relatively quiet month, is going to be much less impactful in driving rates than in non-holiday impacted weeks and months like March, April, May, September, October, first half of November. And so, we think we have got, again, in a number of these times, the group business should be more powerful in helping us drive rate in the transient space.

Regarding the growth of your pipeline, it seems you have been increasing it by about 10,000 rooms each quarter. The first quarter appeared to be a bit different, and I'm curious if that was due to seasonality or some financing issues you mentioned earlier, Arne. Additionally, is there any hesitation from developers to build under your brands following the Starwood merger? Thank you.

The answer to the last part of the question is no. The pace seems to be steady for us. Remember one of the things, it is probably obvious to you, we tend to talk about our pipeline in round-ish numbers, 5,000 room increments usually as opposed to giving you the single number that we have in our pipeline for the obvious reason that we can only be so accurate in our pipeline. I think one of the things that happens in Q1 is you end up because of some rounding probably with a growth that is more in the 5,000 to 10,000 room range than exactly 5,000 or below 5,000. And so, that is what has driven it. We're seeing steady performance. You heard the prepared comments about debt markets being a little tougher in the early part of the year. I suspect as a consequence that particularly some of the more urban, more full scale, full service projects which are typically done with non-recourse debt financing as opposed to a guaranteed borrower. Those debt markets are a little tougher today. And as a consequence, I suspect we will see some projects pull back, but I don't think it is going to be significant for Marriott because of the strength of our brands.

Okay, and just my follow-up. Can you give us updated thinking by region on your 2016 RevPAR outlook? Thanks.

We are seeing stronger performance in the West, but the oil patch is weaker, and markets like New York are showing positive signs, though not significantly so. In other parts of the world, we are monitoring the Zika situation in the Caribbean and Latin America, which may have affected our RevPAR in Q1 and will likely influence Q2 as well. We anticipate continued strength in Mexico, while Brazil may not show much growth aside from the Olympics. In the Asia-Pacific region, we expect strong performance continuing based on existing trends. The Middle East is expected to be weak in Q2 due to Ramadan, but we expect improvements in Q3 and Q4. There are key developments needed there, such as enhanced airport safety in Egypt to attract more European flights to tourist areas and Cairo. In Europe, we were positively surprised in Q1, although the tragedy in Brussels late in the quarter will negatively impact Q2 more than Q1. The weakness seems to be focused on Brussels and Paris rather than affecting Europe broadly, so we still expect to see low- to mid-single-digit RevPAR growth in that region.

So, I wanted to ask about the structure of management contracts that you will be acquiring from Starwood. I think over time, we get a sense for the rhythm of incentive fees and how that kind of rolls for your company. But what does that look like for Starwood, and will you be making some major changes in those as you acquire properties and shift them from your owned portfolio into a managed portfolio? And then I have one quick follow-up.

Will we be making changes in the management contracts or in our approach to disclosure, what are you asking?

I'm essentially asking, are their management contracts different structurally from yours?

We don't think so. Starwood has been a very thoughtful and thorough manager we think. We occasionally, because management contracts get filed in SEC filings by either hotel owners or by brand companies, we have had some insight into specific management contracts. And generally the structures are the same, and the rights and obligations of Starwood seem to be comparable to those of ours. Starwood, because they skew a little bit more full-service than we do, also skew a little bit more towards managed as opposed to franchise than we do, which will make this a more relevant question I think in terms of the incentive fee performance. We obviously can't give you any sense really on what their incentive fee growth could be year over year; we have got some assumptions in our model but we don't have any detailed inside view on that yet. But we would think generally it is going to be about the same. Obviously we think their biggest owner is our biggest owner as well in Host, and I think the structure of those deals, as far as we know, is very similar.

I believe it’s appropriate to follow up on someone else's question regarding RevPAR growth. Over the years, we've discussed a point at which, assuming all else is equal, profit or earnings become neutral. As I recall, that RevPAR growth number is something greater than zero, specifically in the 3% range. As we head into next year, if we assume that RevPAR growth slows down, where do you anticipate that number will be for Marriott and the combined company? How do you view the point at which you are profit neutral, regardless of any unit growth or other factors?

Let's break it down. The main question is about hotel-level economics. We'll discuss Marriott's profit and loss statement shortly. You are correct that we have indicated that RevPAR growth of 2% to 3% is generally necessary to maintain stable profit margins in percentage terms, which implies that profit in dollar terms at the hotel level would also increase by 2% to 3% as revenue rises. In our Q1 results, we achieved approximately 2.4% RevPAR growth, while hotel-level margins increased by 90 basis points globally. This improvement is thanks to our operating team, who have managed to enhance margins despite relatively modest RevPAR growth. In reality, during Q1, we experienced modest RevPAR growth, and hotel level profits on average rose more in the 4% to 5% range rather than correlating with the 2.5% RevPAR growth. Looking ahead, expectations for growth will differ significantly by market. U.S. labor costs are expected to continue rising, influenced by political factors and, more importantly, by the tight labor market, which is likely to drive wage growth. I believe we may see wage growth in the U.S. of around 3% to 4%, or possibly 3% to 5% over the next few years. Consequently, we will still need that 2% to 3% RevPAR growth to maintain relatively flat margins. For Marriott, we have several different growth drivers. The top line will be influenced by same-store RevPAR growth, and we also have incentive fees tied to hotel profit increases. Additionally, our unit growth, which is entirely incremental, and the effective use of our capital will also contribute. Therefore, we expect our fee growth to significantly surpass whatever the market's RevPAR growth is. If we achieve 3% to 5% same-store RevPAR growth and food and beverage sales are increasing at the same rate, we should see base and franchise fees rise accordingly for existing hotels, plus additional upside from incentive fees. Moreover, we anticipate unit growth of around 7%, net of any losses. That was a lengthy answer to a brief question; I apologize for that.

Arne, I kind of want to hit on the topic you've been talking about since the very first question, but from a different perspective. What do you think is going on in corporations that is leading to pretty strong group business and good group ancillary spend, but relative transient weakness?

Well, it's probably not the best metaphor, but I see this situation as a collection of different short stories, each with its own context. I don't believe this is solely a macroeconomic issue; rather, it's influenced by unique company dynamics. While I won't mention specific companies out of respect for our partnerships, it's clear from the news that several large businesses are reducing their workforce due to difficulties in increasing revenue. At the same time, some major companies are facing pressure from activist shareholders to focus on profitability. Conversely, there are numerous companies experiencing solid growth, including firms in various sectors like accounting, consulting, and banking. These organizations report a stable level of economic activity that gives them reason to feel optimistic, which results in varying performance in revenue per available room in different locations. If these observations hold true, they seem to affect short-term trends more significantly than long-term outcomes. As long as these companies continue to perform well—which they generally are—they will hold their annual meetings and proceed with plans for launching new products or bringing customers together. As a result, they will maintain the meetings that were scheduled years in advance and will also book new meetings they anticipate having within the next year or two.

On a related note, the CEO of an ownership company said we're in or approaching a downturn in the industry. Do you see that?

I don't see that. In my experience dating back to the early 1990s, there has never been a downturn in our industry caused by supply. A downturn typically occurs due to a significant change in the demand environment. Such a change is unlikely unless there is a substantial shift in global GDP and economic growth. Therefore, we need to consider what we expect GDP to do in the upcoming quarters. If you are pessimistic about GDP, you should also be cautious about this industry since we cannot increase demand if economic activity is declining, which would lead to a broad decrease in demand.

I wanted to dig a little bit more in the group. You mentioned that those corporates are still booking those group meetings. And on prior calls, I think you have noted group production in the quarter for future periods up 10% and 7% the last two quarters. Did you see a similar level of kind of production growth in the first quarter? And then also, kind of 2017 and 2018 I think were noted to be pacing up high singles, is that still the case?

Yes. I think when you look at bookings in Q1 for all future periods, we were up about 5% compared to last year. But we, for 2017 and 2018, would have been up sort of twice that level. And so that is a bit lower. Now, to be fair, we had very robust growth in the first quarter of 2015 and strong growth in group bookings in the first quarter of 2014. And I actually think built on that growth, this is a good respectable number going forward.

And then on a different topic on leverage and capital returns. You mentioned that you plan to get back to repurchasing once the targeted leverage levels are reached. On prior calls, I think you threw out a few hundred million of potential share repurchase in 4Q. Is that still the current thinking?

Yes, that is about right.

Well, I wondered if you could help me clarify something here. I apologize, I may have misheard some of your commentary earlier in the call. But I thought I heard that you are not expecting a dramatically different environment for the rest of the year. However, when I run the math to get to that high end of your 3% to 5% range, it implies a material uptick in RevPAR in the magnitude of 6.5% growth for the back half. How do I reconcile sort of those two different items? Did I mishear?

I mean the commentary really is about the underlying strength in demand. And think about that as the transient business. I think we see continued modest growth in transient demand based on modest GDP growth and, with it, some pricing power. I think we do have a group dynamic as well though that overlays this, and that is, to some extent, moving a little bit independently from what is happening in the demand environment because it has got a longer lead time; and as we have talked about before, we have got a Q2 and Q3 group that is more robust than Q1. A big piece of that is Easter, but that is not the only piece of that, part of that is just the vicissitudes of the group booking cycle, if you will. And so, when we roll those things together we suspect we will have a stronger headline RevPAR number obviously in the balance of the year than we did in the first quarter of the year. We were below the 3% in the first quarter of the year. So, by definition of that, that way. But again, that would be a reflection more of a group and normalizing of the holiday time than a characterization by us that it depends on a dramatically healthier underlying economy than the sort of 2% GDP number which we assume to be the case.

Okay. Follow-up question, what was your group RevPAR result growth rate for 1Q?

Low-single-digits, about the same as our RevPAR as a whole. And again, there you've got to remember you have got Easter there which is going to have a pronounced impact particularly on group. I don't have the numbers in front of me, but my guess is January and February, our group Revenue per Available Room (RevPAR) was higher than the transient RevPAR. And then because of March and Easter, we end up essentially giving some of that back and ending up more or less in the same place.

Okay. And again, I could be wrong here. When I run the math on your group RevPAR expectation for quarters two to four versus your previous guidance back in February, it would seem that group pace has come down from about 7% to 5.5%. Is that correct that we have seen deceleration?

Order of magnitude that is right.

As Arne mentioned earlier, you should expect that to occur as the year progresses, especially when compared to last year where you were making bookings within the same year. To some extent, it is anticipated that this will happen as the year unfolds.

All right. Well, we thank you all for your time and attention this morning and, as always, look forward to welcoming you into our hotels as you travel. Be well.