Marriott International Inc (MAR) — Q4 2019 Earnings Call Transcript

Welcome to our fourth quarter 2019 earnings conference call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer; Jackie Burka McConagha, our new Senior Vice President, Investor Relations; and Betsy Dahm, Vice President, Investor Relations. 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 yesterday, along with our comments today, are effective only today and will not be updated as actual events unfold. In our discussion today, we will talk about 2019 results excluding merger-related costs and reimbursed revenues and related expenses. GAAP results appear on pages A1 and A2 of the earnings release, but our remarks today will largely refer to the adjusted results that appear on the non-GAAP reconciliation pages. Of course, you can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks on our Investor Relations website. As we begin our call this morning, it is obvious that the question you are most interested in is the impact of the coronavirus or COVID-19 on our business around the world. In the six weeks or so that we have been intensely watching this crisis, we have learned much, but there's still a great deal we do not know. In our press release and in our comments this morning, we will give you some yardsticks to help measure what the impact to our P&L might be. While this is still guesswork to some extent, we know one thing with confidence: this will pass. And when it does, the impact to our business will quickly fade. So let's talk about our results. We are pleased with our solid performance in 2019, finishing the year on a high note. In the fourth quarter, we continued to add to our RevPAR index gains, increased hotel profit margins, recycled a meaningful amount of capital and signed a significant number of new hotel deals. We grew our system to more than 7,300 properties and expanded our global rooms pipeline to a record of more than 0.5 million rooms. With nearly 1.4 million rooms in 134 countries and territories, we offer unrivaled choices for our customers. In 2019, our development team signed 815 hotel agreements for a record 136,000 rooms, with each of our international regions setting records in organic signings. Over 220,000 of the rooms in our 515,000-room pipeline are already under construction. Using 2019's pace of openings, our under-construction pipeline represents nearly three years of gross rooms growth, while our total pipeline represents well over six years of implied rooms growth. At year end, 7% of global industry rooms flew one of our flags, while our share of STR's worldwide under-construction pipeline led the industry at 19%. To be sure, our signings were impressive, but we are not just focused on adding units. We are focused on adding valuable hotels that drive higher fees per room and enhance our brands. Luxury and upper upscale rooms comprise over half of our distribution globally, which is one reason our fees per room lead the industry. During 2019, we expanded this lead by signing a record 45,000 rooms in these tiers. At year-end, the number of our global luxury and upper upscale rooms under construction totaled more than the next three competitors combined according to STR. Other milestone achievements in 2019 included multiple launches from our new loyalty program Marriott Bonvoy, to our new home rental program Homes & Villas by Marriott International, and our all-inclusive platform, which was augmented by our recent acquisition of the Elegant Hotels Group in Barbados. These expanded offerings and program enhancements provide meaningful value to our owners and guests, help to drive loyalty engagement and provide additional ways for members to earn and redeem points. Homes & Villas provides the opportunity for our guests to stay at 7,500 premium and luxury rental homes in 200 locations around the world. In the all-inclusive segment, our guests can currently choose from 10 resorts with seven more projects in the pipeline. In the fourth quarter, we launched our Eat Around Town offering where Marriott Bonvoy members can earn points by dining at more than 11,000 restaurants in the U.S. We also introduced peak, off-peak redemption options providing members with better value when they redeem points on lower demand nights. In addition to benefiting guests, the new award schedule helps owners fill more rooms by shifting demand from stronger periods to slower ones. Finally, we are piloting a program in select international markets that lets local members earn and redeem points by dining at our hotel restaurants. The response from our members has been extremely positive. Collectively these efforts, coupled with the strength of our brands and our broad distribution, drove Marriott Bonvoy membership to over 141 million members at the end of January. This powerful platform remains a key competitive advantage. In 2019, paid room revenues from loyalty members increased 11%. Redemptions were also meaningfully higher as our Bonvoy travelers enjoyed the wide range of choices offered by the program. Member share of occupied rooms topped 52% worldwide in 2019, up 250 basis points versus 2018 and reached 58% in North America, up 320 basis points year-over-year. We also continue to see solid growth from our co-branded credit cards with sign-ups 12% higher year-over-year. With an improved yield management approach and an increase in Bonvoy members, more of our guests booked direct in 2019. Worldwide direct bookings, including group sales, rooms booked by our reservation centers, and bookings made on our digital platforms, represented approximately three-quarters of total room nights booked during the year. Direct digital bookings alone represented one-third of room nights. Mobile bookings, a component of direct digital bookings, were up a strong 64% over the year. At the same time, the percentage of nights booked through OTAs declined year-over-year. Guests' intent to recommend and staff service scores increased during 2019, thanks to the efforts of our outstanding associates. We also saw impressive revenue share gains across our portfolio. Overall, our global RevPAR index accelerated throughout the year, rising 240 basis points in the fourth quarter. For the full year 2019, our global RevPAR index improved an impressive 200 basis points. Each of our continents saw growth in index, with meaningful gains from both legacy Marriott and legacy Starwood portfolios globally. It is worth mentioning that we are particularly pleased with the progress we are making with the Sheraton brand. Over the last three years, approximately 50% of Sheraton hotels worldwide have undergone, are undergoing, or have committed to undergo renovation. We sold the Sheraton Phoenix downtown last month, after purchasing it just 18 months earlier, and we signed a valuable long-term management agreement. We are confident that the Sheraton Phoenix downtown will serve as a showcase to encourage renovations at additional Sheraton hotels. Before we discuss our 2020 outlook, let me talk a bit more about the coronavirus situation. Clearly, this is a major humanitarian crisis. Our thoughts are with many people impacted. As the virus emerged in Wuhan earlier this year, our teams assisted guests and provided support for associates whose lives have been significantly disrupted. I couldn't be prouder of our associates in the Asia-Pacific region who have worked tirelessly. We continue to waive cancellation fees for hotel stays through March 15 for guests with reservations at our hotels in Greater China and for guests from Greater China with reservations at Marriott destinations globally. We began to see the impact of the coronavirus on our business in mid-January, with occupancy declines gradually spreading from Wuhan to other markets in the Asia-Pacific region. In February, RevPAR at our hotels in Greater China declined almost 90% versus the same period last year. At the end of 2019, we had 375 properties with roughly 122,000 rooms across Greater China, representing 9% of our total global rooms. Around 90 of these properties are currently closed. In the Asia-Pacific region outside Greater China, what we call APAC, February RevPAR declined roughly 25% year-over-year. For APAC, we had 412 properties with 100,000 rooms at year-end 2019, representing 7% of our total worldwide rooms. February RevPAR in the Asia-Pacific region overall has been running down around 50% compared to February of last year. Outbound travelers from China in 2019 made up less than 1% of room nights in our system outside of Asia-Pacific and around 0.5 of 1% of room nights in North America. To date, apart from a handful of citywide event cancellations, we have not seen a significant impact on overall demand outside of the Asia-Pacific region, so the situation obviously remains fluid. Given the uncertainty surrounding the length and severity of the coronavirus situation, we cannot fully estimate the financial impact to our business at this time. So, in our press release and our remarks today, we are providing a base case first quarter and full-year 2020 outlook that does not reflect any impact from the outbreak. This base case reflects the 2020 outlook our teams had prepared as part of the company's budget process, based on the pre-coronavirus environment, including hotel-by-hotel forecasts, group booking trends, and expected supply growth. Leeny will frame how first quarter results could be impacted by the coronavirus based on current trends. Now let's start with our base case RevPAR outlook for 2020, not impacted by coronavirus. On a global constant currency basis, we estimate global system-wide RevPAR in 2020 will increase 1% to 2% in the first quarter and will be flat to up 2% for the full year. In North America, recent estimates for U.S. GDP growth point to a modestly slower pace of economic growth in 2020 with lodging demand forecasted to increase around 2%. Industry supply growth is expected to remain around 2%, with upscale supply expected to grow 4%. We expect leisure demand will continue to outpace business transient demand, as there has yet to be a step-up in business investment levels. Overall, this implies a continuation of low RevPAR growth in the U.S. Our group sales organization in North America had a great fourth quarter in 2019, with bookings for all future periods up 5.5%. With this strength, our group revenue on the books in North America for 2020 is up at a mid-single-digit rate. We have completed roughly 80% of our corporate rate negotiations. While we can't predict corporate volumes, completed negotiated room rates are running up 1% to 2% for comparable accounts. Our first quarter is off to a strong start with the benefit of easy comps in markets like Washington D.C. and Hawaii as well as continuing RevPAR index gains. We expect base case North America RevPAR will increase 1% to 2% for the first quarter. For the full year, we expect it to be around the midpoint of the global range of flat to up 2%. For the Asia-Pacific region, we assume base case RevPAR growth of 2% to 4% for 2020, with weak results in Hong Kong expected to continue for the first half of the year before lapping easier comps in the back half. Again, this does not include any impact from the virus outbreak. Base case RevPAR in Europe could grow 2% to 4% for the year, driven again by strong demand from U.S. travelers and strength in Eastern European markets. For the Middle East and Africa region, we assume base case RevPAR could grow at a low single-digit rate in 2020. We believe the region will benefit from higher RevPAR in Saudi Arabia, Qatar, and Africa, somewhat offset by lower RevPAR in the UAE. Continued new lodging supply in Dubai will likely challenge 2020 RevPAR growth in the UAE, despite the Expo 2020 event that begins in the fourth quarter. In the Caribbean and Latin America region, base case RevPAR could grow at a low single-digit rate for 2020, reflecting more modest economic growth and political uncertainty in some markets. For 2020, we assume 5% to 5.25% net rooms growth, including deletions in the 1% to 1.5% range. Preconstruction and construction delays persist around the world. Again, our rooms growth assumption does not include any impact from the coronavirus situation. Before I turn the call over to Leeny, I want to thank all our global associates for their continued hard work, especially those in the Asia-Pacific region who have shown such empathy and skill managing through this challenging time. Our culture is distinctive, and it is a real competitive advantage. I feel very fortunate to work with such purpose-driven and caring individuals. On a personal note, I had surgery in November and the doctors were pleased with how it went. As part of my treatment plan, I am undergoing a few months of post-surgery chemotherapy. While I am now fashionably bald, I feel really good. I'm grateful I've been able to work throughout, and I want to thank all of you for your good wishes and support throughout this battle. And now Leeny will walk through our financials in more detail.

Thank you, Arne. Our fourth quarter adjusted diluted earnings per share grew 9% to $1.57, which was $0.11 ahead of the midpoint of our guidance of $1.44 to $1.47. We picked up $0.03 of outperformance from fees, primarily due to better-than-expected incentive management fees in North America and $0.06 from a lower than expected tax rate due to higher windfall tax impact and other discrete items. We also benefited from gains on the sale of two hotels in North America, which totaled $0.32. These favorable items were partially offset by $0.26 from two asset impairments, $0.03 of greater than expected general and administrative expenses related to legal costs, bad debt, and unfavorable foreign exchange, and $0.01 from lower joint venture earnings. Fourth quarter 2019 system-wide comparable global RevPAR rose 1.1% in constant dollars year-over-year. North American RevPAR in the quarter increased nearly 1% with RevPAR among our full-service brands up 2.4%. Leisure markets like Hawaii and Orlando showed notable strength. Our RevPAR in the Asia-Pacific region increased 0.3% in the fourth quarter. RevPAR in Hong Kong declined 54% due to continued protests while RevPAR in Mainland China increased 2.4%. Excluding Hong Kong, RevPAR for the Asia-Pacific region rose 3.5%, with strength in Singapore and India. Our RevPAR in Europe rose 2.8% in the fourth quarter benefiting from continued significant U.S. demand and robust loyalty program activity. Eastern Europe was particularly strong due to increases in both rate and occupancy, while in Southern Europe, Italy, Spain, and Portugal also saw healthy RevPAR increases. Fourth quarter RevPAR in the Middle East and Africa region increased 2.8% with strong growth in Riyadh and Mecca in Saudi Arabia. Qatar also posted solid results, despite the continued political tensions in the region. RevPAR in the Caribbean and Latin America region rose 0.5% in the fourth quarter, with strength in the Caribbean and Mexico, partially offset by declines in Chile and Panama. Our fourth quarter gross fee revenue increased 7% versus last year to $974 million due to room additions, higher REVPAR, improved net house profits at managed hotels in North America and Europe, and continued strong growth in other franchise fees. Depreciation, amortization and other expenses increased to $179 million in the quarter. We recognized a $15 million impairment charge associated with the sale of a North American hotel and a $99 million impairment charge related to a leased hotel in North America. Our fourth quarter adjusted tax rate of 21% was higher than the prior year largely due to favorable discrete items in the year-ago quarter. For the full year 2019, our gross fees grew 5% and our adjusted EBITDA increased 3%. Excluding asset impairments and gains in 2018 and 2019, adjusted EPS grew 6% year-over-year to $5.92. During the year, we returned $2.9 billion to shareholders including $2.3 billion from share repurchases, thanks to successful asset recycling, strong cash flow generation, and a reduction in cash balances. Our loyalty program had net cash outflows in 2019. This was primarily due to the marketing spend related to Bonvoy's launch in the first quarter and significantly higher redemptions as members explored the many new locations and experiences offered by the integrated and enhanced program. We expect the Bonvoy program to continue to be a net user of cash in 2020, although meaningfully improved from 2019 levels. We received proceeds from recycled assets of $470 million during 2019, including proceeds of roughly $310 million from the sale of the St. Regis New York and $100 million from the sale of the Sheraton Gateway hotel in Toronto. Now let's talk more about our base case outlook for 2020. As you know, it does not include any impact from coronavirus, merger-related costs and charges, reimbursed revenue or reimbursed expenses and it assumes no additional asset sales. For full year 2020, given our assumptions for global RevPAR, our base case outlook shows gross fee revenue could increase 4% to 6% to reach $3.96 billion to $4.04 billion. Growth should be driven primarily by room additions and other franchise fees, partially offset by headwinds from renovations, property terminations, and roughly $10 million of unfavorable foreign exchange. Other franchise fees, which include credit card branding fees, hotel application and relicensing fees, timeshare licensing fees, and residential branding fees are expected to grow roughly 10% to $630 million to $640 million. We also expect that incentive fees will decline slightly given continued pressure on house profit margins. We assume owned, leased, and other revenue net of direct expenses will total $295 million to $305 million in 2020, flat to up low single-digits. These results include slightly lower termination fees offset by a similar amount of favorable year-over-year impact from bought and sold hotels. We assume general and administrative expenses will total $950 million to $960 million in 2020, up 1% to 2% versus 2019. We expect a 2020 effective tax rate of 23.3%. We assume 2020 adjusted EBITDA will total roughly $3.7 billion to $3.8 billion or 3% to 6% over 2019 levels. On the bottom line, we assume 2020 diluted EPS will be $6.30 to $6.53, up 6% to 10% versus $5.92, 2019's adjusted diluted EPS excluding the impact of asset sale gains and impairments. For first quarter 2020, our base case forecast assumes global RevPAR growth of 1% to 2% and a 5% to 6% increase in gross fee revenues to reach $940 million to $950 million. Our tax rate in the first quarter is expected to be roughly 21%, four percentage points higher than a year ago as a result of higher windfall benefit and discrete items in the prior year quarter. This translates to 5% to 7% growth in diluted earnings per share to $1.47 to $1.50 and 4% to 6% growth in adjusted EBITDA. We remain disciplined in our approach to capital allocation. Using the base case assumptions, 2020 investment spending could total $700 million to $800 million. This includes around $200 million of maintenance investment spending, roughly $200 million of system investments that will largely be reimbursed by owners over time, and $300 million to support new unit growth. We expect roughly three-quarters of this new unit investment will be associated with luxury and upper upscale properties. These projects typically provide higher fees per room and attractive 20-plus year agreements. Projects where we invest our own capital are expected to generate a substantially higher value per key over the life of the contract on average compared to full-service deals with no Marriott capital. Under our base case and assuming this level of investment, we would expect to return more than $2.4 billion of cash to shareholders through share repurchase and dividends for the full year 2020, assuming no impact from the coronavirus and no additional asset sales. Note that this outlook assumes roughly $200 million higher cash tax payments than in 2019, primarily due to timing. We remain committed to our strong investment-grade credit rating. We ended the year within our 3.0 times to 3.5 times debt to EBITDAR target range. Our base case model assumes we will remain within this target range. We will continue to evaluate the impact of the coronavirus situation on the company's cash flow and debt levels and manage leverage within our targeted range.

Turning back to the coronavirus situation. Leeny noted our distribution in the Asia-Pacific region. From a financial perspective, 2019 gross fees earned in the Asia-Pacific region totaled $477 million, representing 12% of our global gross fee revenue. Greater China generated about half of the fees in Asia-Pacific, representing roughly 6% of both global fees and total adjusted EBITDA. Our base case model assumes Asia-Pacific fees in 2020 will total roughly $500 million to $510 million, with Greater China fees again constituting about half of that amount. Assuming the current low occupancy and RevPAR levels in the Asia-Pacific region continue, we estimate the region will earn roughly $25 million less in fees and EBITDA per month compared to our 2020 base case. This means that for the first quarter, given our results in Asia-Pacific to date and assuming the same low levels of RevPAR in March as we've seen in February and no meaningful impact outside of Asia-Pacific, total gross fees and total adjusted EBITDA in the first quarter could be roughly $60 million below our base case and diluted EPS could be roughly $0.14 per share below our base case. The analysis we are providing today has the benefit of actual results through the first two months of the quarter. There's still a great deal we do not know, including the length and global scope of the virus and the impact of potential supply chain disruptions on the global economy. As Leeny noted, despite these unknowns, the virus will run its course. And when it does, its impact will not be long-lasting. We entered 2020 with tremendous competitive momentum in RevPAR, unit growth, and brand strength, alongside an industry-leading loyalty program. This momentum will carry us through this crisis and beyond. We'll now open the line for questions. Please limit yourself to one question so that we can speak to as many of you as possible.

Good morning everyone. Thank you for the insights on the sensitivities. I understand this is a rapidly changing situation, and we're all trying to navigate the global travel environment. With that in mind, Leeny, considering the sensitivities you mentioned earlier, are we simply projecting the current trend for Mainland China and Asia-Pacific when we talk about that $25 million? Have we also considered the spread into areas like South Korea and Japan? I recognize that Western Europe may not be included in that sensitivity, but does it account for the potential worsening situation in broader APAC? Additionally, could you share any sensitivities as we look to expand into Western Europe, which we now know presents challenges, and as we approach the U.S., which seems increasingly probable?

Thanks, Shaun. Sure. Let me start. So the sensitivity we've given you is based on where we are in February, which is, as Arne described, is Asia-Pacific RevPAR being down about 50%. But obviously that is massively skewed by Greater China being down 90%, while the rest of Asia-Pacific is down meaningfully less. So that is based on an assumption that they stay roughly the same and that we continue to have no meaningful impact outside of Asia-Pacific. As you pointed out in your comment and your question, this is an extremely fluid situation. We are actually now reopening hotels in China every day. But at the same time, how this exactly spreads to other continents remains to be seen. Just in terms of the other continents, I think you're familiar with our basic layout of fees, which is that again broadly speaking, you know that North America is roughly two-thirds, Greater China, Asia-Pacific we described as being roughly 16%; CALA 4%; Europe 9%; and EMEA at 4%. So all of these line up relatively well with our fee distribution as you look throughout the world. The only other thing I'll mention, Shaun, is just to remember that from an IMS perspective, Asia-Pacific accounts for roughly one-third of our incentive management fees. North America accounts for another one-third, and the rest of international accounts for about one-third. So all of that fits into the equation that we gave you of the $25 million per month.

Thank you very much.

Hi. Thank you very much. This is Arpine for Robin. It sounds like unit growth of around 5% doesn't include any virus impact. And you mentioned in your release that if the situation were to get worse there will be an impact on unit growth. Is there any impact currently that's not included that you quantify? And I know this could be challenging, but maybe you could provide some sensitivity similar to how you quantify the impact in terms of unit growth?

Good morning. It's too early to provide a specific numerical sensitivity regarding openings. The situation in Asia-Pacific is particularly intense. We opened about 1,000 rooms in January in China, but that was just at the very start of the coronavirus outbreak. Looking ahead to the next few months, with around 90 hotels closed and RevPAR down nearly 90% in the market, there isn't much urgency to open hotels, even if they're ready. However, if they are ready, they will likely open before the end of the year. The impact on full-year numbers may be minimal, although some delays wouldn't be surprising. In other parts of the world, it's more challenging to assess the situation. We've been in touch with our design and construction teams as well as various partners. Generally, decorative furnishings and certain types of furniture and fabrics are most likely to be sourced from China. We believe the openings planned for early 2020 likely already have their supplies in hand or on the way, so they may not be significantly affected. That said, we, along with many other industries, are monitoring the potential long-term supply impacts. While the focus here is mainly on hotel openings rather than operational supplies, we wouldn't be surprised to see some further delays in the construction schedule, especially as the virus situation continues.

The only thing I'll add is to remember that new hotels opened throughout the year, and they're all ramping up starting from zero. So, their fee contribution in year one is extremely small relative to overall fees. Now obviously, year two is more important. But the year one impact frankly from a bit lower openings is not meaningful.

Thank you.

Good morning, everyone. There are many questions. I will focus on something a bit more tangible, specifically the increase in your termination fees and your comments regarding the renovations to the Sheraton brand. Was the increase in termination fees mainly related to the Sheraton brand, or is it a mix of brands? Also, how do you view the pipeline for the legacy brands into 2021?

Sure. Harry, we'll cover those. So first of all, let's talk about termination fees. Overall termination fees in 2019 were meaningfully lower than they were in 2018, and we actually expect termination fees in 2020 to be even lower still. So, the ones in Q4 really a question about timing and which hotels close and they can have varying amounts associated with them. The other point I would mention, if you remember last year, we had deleted rooms that started to get closer to 2%, while this year we are squarely at 1% in terminations, which is on the lower end of our 1% to 1.5% guidance that we've given. So, I think from that standpoint, I think we feel good about the progression of how it's going with our portfolio. I think in terms of the pipeline that we see both in terms of legacy brands and the Starwood portfolio brands, I think as we've described in Q4, we really kind of topped out a spectacular year in terms of new deal signings. And they were happily very well distributed across all of our brands with some notable growth in some of the Starwood legacy brands.

Okay, very good. Thank you.

Hi. Good morning, everybody. You touched on this in the press release and your earlier comments, Arne, about the solid RevPAR index growth both in the fourth quarter and for the full year. Can you talk about how the Starwood legacy properties in North America performed and how much of the index seen would you attribute to those assets? And then when you think about the performance in RevPAR growth this year, obviously Greater China coronavirus neutral. How do you look at the Starwood legacy properties performing versus the Marriott legacy properties?

Yeah. It's obviously a big world. But as we mentioned in the comments, both legacy Marriott and legacy Starwood portfolios have been really performing extraordinarily well on index, both in Q4 and full year 2019, and as we start 2020 and both really hundreds of basis points. In Q4, there were some easy comparisons. Obviously, we had a strike last year in the United States, which impacted San Francisco and Hawaii probably most. They had probably a bit more impact on the legacy Starwood portfolio than on the legacy Marriott portfolio. But even there, the RevPAR index performance in Q4 of last year was down meaningfully less than it was up this year in Q4. So whether you look at strikes or you look at a little bit of integration noise in Q4 of 2018, we not only made up that ground but we lapped it. There are other sort of spectacular numbers. You can see from our Q4 China RevPAR numbers, excluding Hong Kong at plus 2.5%. I think the China team's RevPAR index growth for the two portfolios of plus 600 to 700 basis points. And it's all cylinders moving. It's the loyalty program. It is the digital platforms and the way they're performing. It is the sales team. There's good news sort of across the portfolio, and it is very much shared by both the Marriott and the Starwood portfolios.

Thank you.

You bet.

Hi, good morning, everyone. Thanks for taking my questions. So, maybe a question for Leeny. If I look back at your operating cash prior to 2019, you were run rating about $2.4 billion before some of these cash headwinds that you've called out, particularly on the Bonvoy redemptions, but also with the cash taxes. So, can you help me think about what you're expecting for 2020? And does 2021 get back to sort of that prior run rate level that you can grow from? And obviously, I realize that a lot of that depends on how long this coronavirus impact lasts. But I guess what I'm ultimately getting at is, were there any benefits to pre-2019 cash flow that you just don't expect to see anymore?

So yeah. A couple of things that I pointed out. One is that we definitely had a bit of a benefit on the cash tax side in 2019 that we will then pay for in 2020 relative, for example on the cash taxes that we're paying on our asset sales. So, that is a bit of timing that will even out obviously over time. On the loyalty side, I think that is the one that is worth spending a little time talking about. And there, I think you definitely saw that in 2018, we saw the loyalty program behave more in its more historical pattern of being a net cash positive part of our story. And this year, it moved to being several hundred million of a net cash user. And that you really need to think of within the context of the introduction of Bonvoy. There was some pent-up demand relative to our customers being excited about being able to explore all of our properties and used their points at a much more expanded portfolio. We also had the introduction of Bonvoy, which moves some timing of marketing expenses from 2018 to 2019. You put that together, and I think in the first year of the program, you definitely saw a fairly unusual pattern for the program. We are quite confident that that will smooth out over time and return to its more normal pattern. We do think it will still be a user in 2020, but much less of a cash user. And things that we've talked about, like the introduction of peak, off-peak, which manages the demand a little bit better in terms of the points that it costs at the different properties both in low and high demand times, all of that will work towards getting this program to where it behaves more like it has in the past.

Okay. Thank you very much.

Hi, good morning.

Hi, Patrick.

Are you seeing any discernible uptick in cancellation activity outside of the Asia-Pacific regions? At areas say like airport hotels or in general...

Yes. The news over the weekend regarding the coronavirus wasn't positive, particularly in South Korea and Italy, with some mention of Iran as well. We don't have any operations in Iran, so there’s no measurable impact from that region. However, we are still very early into this situation. We’re meeting daily with our team via phone to gather data and assess market performance, while also listening to our customers’ concerns. Starting with Asia-Pacific, despite your focus on other areas, I’ll mention this region first. In China, around 90 hotels have closed, and RevPAR is down approximately 90%. The most recent figure I have shows a year-over-year drop of about 87%, which is slightly better than 90%. The Chinese government is trying to gradually reopen some activities. For instance, in Macau, we saw occupancy drop to about 1% to 2%, but it's now up to around 7% to 8%. Still, this is significantly lower compared to last year. It's too early to draw conclusions about the reopening efforts in China since schools remain closed, and the timeline for recovery is unclear. However, there is a glimmer of hope that we've reached a bottom in China, and perhaps conditions will improve slightly. Looking at the broader Asia-Pacific region, the trends are in line with what might be expected. For example, in Singapore, RevPAR declined by about 50% year-over-year based on recent data. In contrast, India experienced a 5% increase before President Trump's visit, which wasn't influenced by that. India's economy is not heavily reliant on travel from China, setting it apart with its own economic story. As for South Korea and Italy, we anticipate both cancellations and a drop in RevPAR. It's still early to make definitive assessments. In some Italian cities, we’ve noticed a decrease in occupancy, though it's too soon to make sweeping predictions about the entire country. When everything is taken into account, our estimated run rate of $25 million per month might turn out to be conservative, as we expect to see impacts in Europe and other global markets that aren't solely reliant on Chinese travel. This $25 million figure primarily reflects our exposure to the China travel market and Asia-Pacific overall. While we anticipate that the next few weeks or possibly months will be challenging, we maintain that this situation will eventually conclude. We cannot predict when this will happen, but we believe that travel will return as people's confidence grows in traveling to places like Seoul without fear of infection. Next question.

Hi. Thank you.

Good morning, Smedes.

Good morning. I wanted to ask about your capital expenditure, specifically the $300 million allocated for new unit growth. How does that compare to 2019? Are you noticing more opportunities that you're looking to pursue, or is the competitive landscape becoming more challenging? Could you provide some additional insight into this expenditure?

Sure. So generally I'd say similar maybe a tad higher relative to 2019. But again it ties, as I said before, to the reality that these are generally on fantastic full-service and luxury projects that are well worth the investment. I think it ties to our success in signing new deals in these hotels around the world where the owners want our brands, and generally the market is competitive for capital for those projects. But when we look at the value that we get on these hotels, we expect it to be meaningfully higher than the ones that require no capital. So again a little bit higher but not meaningfully.

Okay. Thank you.

Hi. Good morning everyone. A couple of questions on the loyalty program.

Good morning.

Question on the loyalty program. You mentioned the positive impact of the redemption activity in the quarter. How did points earnings trend in the quarter? And are you happy with the level of activity around earning points in the system? And given the positive impact of redemptions, does it make sense to run the loyalty program in a more cash-neutral position over time rather than cash-positive position over time?

We talked about our penetration, which includes both paid and redeemed nights as a percentage of total nights in the hotels, and those numbers are significantly improving. This indicates that the program is expanding enough to accommodate our roughly 5% unit growth while also driving increased penetration in comped hotels, which we are very pleased with. We're seeing paid nights increase by about 10%, and there has been a significant rise in redeemed nights as well, which is gratifying for us. However, obtaining share of wallet data is a bit more challenging, as we have to make some assumptions there. We don't have the internal tools necessary to measure share of wallet accurately, but we are confident that we are increasing it through our loyalty program and among our loyalty members. Looking ahead, as Leeny mentioned regarding cash flow impacts from 2019 and 2020, there's every reason to believe that the loyalty program will return to being a positive cash flow generator for us on an annual basis. This will be largely driven by our continued growth in the program and in our hotel portfolio. As we proceed, we will issue more points for paid stays than are redeemed. We anticipate seeing increased revenues flowing into this program from credit card partners, restaurant partners, and other sources beyond just the hotels. It's somewhat unusual for the loyalty program to be cash flow negative in 2019, but it makes sense given the program's launch with a new name and the effort to engage this large number of customers. Overall, we're more pleased than disappointed, as it reflects the engagement of our loyalty members with the program and with us.

Thank you.

You bet.

Good morning, everybody. Arne…

Hey, Bill.

Good morning. You kind of classified the areas outside of China as not materially impacted today. I saw in the STR data yesterday that occupancy was down 100 basis points or more kind of everywhere, different segments and everything else. I'm wondering if that's kind of the start of the impact that we should expect to see. What are you seeing as far as real-time inbound international travel from areas outside of China and cancellations when you think about maybe the gateway markets?

I think the fair response, Bill, is we're asking the same question you're asking. What we get back at the moment is very much anecdotal, doesn't really show up in our data yet. We obviously get our weekly flashes and we get a daily look if we want to dig in and get a daily look. And by and large, you look at the U.S. market, for example, which just as a reminder, is basically 95% to 96% domestic travel. So, all business in the United States coming from international markets is in the 4% range, maybe 4.5%. And big markets in that would include neighboring markets like Canada and Mexico, which probably have a different kind of travel profile if you will than the travel coming in from further abroad. And there, we've got very, very few cases in the U.S.; obviously, we're all watching that to look at. But we're not really seeing a measurable impact yet. We're instead seeing, as we mentioned in the prepared remarks, a handful of group things really globally, which have canceled so far. I suspect it will step up a little bit, but we will watch that on a day-to-day basis. And overwhelmingly, obviously that depends not just on time, but what are the incidences of the cases of this virus in various markets in the world and how travelers react to that.

I appreciate that. If I could follow up and ask if there are any lessons learned from past experiences with SARS, bird flu, and various coronaviruses or flu-like illnesses over the last 15 years that can guide the company moving forward.

Yeah, Leeny will have that precise number here that is worth talking about. But the comparison to SARS, which is probably the most similar virus, is very hard to make. I think if you go back to 2003, I'm guessing here a little bit, Chinese annual outbound travel would have been, I don't know, sub-10 million trips a year. Last year, we were probably closer to 150 million China trips. So, the relevance of China to the rest of the world is dramatically different. The second thing I think if you look at Marriott's own story, we mentioned we've got 375 hotels open in China at the end of the year. Those are not all comp, but our comp hotels are probably two-thirds of that or something like that, maybe a little bit more than that. I think if you go back to 2003, we had 11 or 12 comp hotels. They would have been mostly in Hong Kong probably and then a couple of cities in China. And so, I don't think there's much that we can really take from that other than when SARS ended, it ended. And people got back fairly quickly. That doesn't mean they get back the day after, but it does mean they get back within a month or two or three.

Roughly a quarter.

Yeah. Pretty quickly. But ultimately that depends on people being able to look and say yes, it looks like that's behind us. And so I think that's the comparison that's easiest to draw. It's logical not just SARS and MERS, but other unfortunate events that have occurred tell us that travelers are pretty resilient. And one of the reasons to be concerned is behind them they're going to get back on the road.

Great. Thank you.

You bet.

Hi, good morning and thanks for taking my question. Arne, great to hear you sounding well and I'm sure looking fabulous.

Thank you for that.

I wanted to discuss the IMF dynamic related to your point that this will eventually conclude. How should we consider the implications for management contracts in the future? Are there any embedded triggers within those contracts that might help accelerate the earning of IMFs on the back end? What is your perspective on this?

I think the short answer is no. It's a nice idea, but the way these incentive fees function is that they are mostly based on annual tests. If there is an owner's priority, it tends to be fixed and doesn't increase, which is great for us over time. However, they also don't usually decrease. In fact, I am not aware of any instances where an owner's priority decreases based on performance. The disappointing aspect is that if you consider this as a three-month issue in 2020, although that’s just a guess, the test remains an annual test. In the United States, especially where we have owner's priorities in managed hotels, any impact during those three months will affect incentive fee earnings in 2020 but won't affect 2021. That’s the main idea. In Asia, where typically there is no owner's priority, we probably won't experience the same lingering impact. So if business in China drops for three months and then rebounds, we will lose a quarter of the incentive fees we would normally earn. By Q3 or Q4, we should return to a pace similar to what we've experienced in the past.

So, the only thing I'll add, David, is just to remember the reality that internationally, we earn 80% of our hotels' earned incentive fees in 2019, while in North America, it was 56%. So, and these are very similar numbers to a year ago with a little bit lower number in North America because of the cost pressures and the low REVPAR. And the other thing I'll mention is that it is the case in Asia-Pacific that it's quite common that there is a slight increase in the amount of IMF as you increase your GOP margin. So, it is the case that as you are losing RevPAR at first, it's a pretty dramatic drop. But then obviously the closer you get to zero, you're down at a lower level of earning IMF. So, there's less to lose. But Arne's point is the right one that these are annual tests. So, you got to really look at the end of the year what you earned for the year, and that will determine what you make.

Thanks for all the detail.

Good morning, everyone.

Good morning.

Just kind of a two-parter. First on Avendra proceeds. How much is left there to be allocated? And then a second along the same lines on business interruption insurance, I know owners can get made whole. But is it possible for you guys to recoup any lost income? And then how might the Avendra proceeds be part of this to help you and your owners during this down period?

So let's just kind of, as a quick refresher on Avendra. When we sold Avendra, there was a gain of call it $650 million that we're going to use to offset costs that otherwise would have been charged to the owner. And I would say that we are roughly halfway through those monies. And again, as we think about all the different programs and things that we're doing, those are obviously a part of what we would expect going forward, that we would continue to use to offset costs that otherwise would get charged. But honestly, we do think of them as things that are kind of core to what we want to do for the hotel system. I don't think of them as really ones that we kind of use to plug a hole. We've thought of them more as kind of ways to invest in the system. And though of course, it's great that we do have it and we can use it. I think at this point we continue to expect that we will be able to use it to invest in the system.

And then on business interruption insurance. I think the right assumption here is that there will be relatively few policies that are implicated by the coronavirus. We'll obviously watch that and make sure we study it. But my guess is neither the owners nor Marriott are going to get substantial business interruption proceeds from this.

In Asia-Pacific, most of the hotels procure their own, and so it will depend on the reading of each of those contracts of what their insurance policies say. But we would not necessarily expect a big amount at least in Asia-Pacific.

That’s helpful. Thank you.

You bet.

Good morning, everyone. I'm just hoping to learn a little bit more about the profile of the owner in Greater China. Are they capitalized to the point where they can absorb a prolonged closing of their hotels?

It's a good question. Of the 375 hotels that we had opened at year-end 2019, I know of only one that was not owned by a Chinese investor. Those investors cover the gamut. I think there are many which are government-owned entities, but not all. There are a number that are substantial real estate companies that own hotels but also do residential development in the rest. And obviously, we've been in communication with owners continuously throughout the six or seven weeks that we've been looking at this. We have had really no indication yet that there are owners under severe pressure. At the same time, when RevPAR is down 90%, it's a fair assumption that none of these hotels are producing positive cash flow to service debt or to do anything else. I think one of the advantages of the economic system that China has is the government is involved not just sometimes through the ownership with government-owned entities, but on the lending side as well. And I think the government will have the tools in order to make sure that people will be able to navigate through this without foreclosures and without sort of significant long-term consequences.

Great. Thank you.

You bet.

Great. Thanks a lot.

Good morning.

I just had a quick follow-up. Good morning. Thank you. Just had a quick follow-up on the coronavirus impact. So all the indications are that in the past week, the travel booking trends have gotten significantly worse, understanding that it's only one week. Could you give us more insight on what you're seeing in the U.S. in particular in terms of bookings for future states over the past week? Thanks.

Yes. And I again, as we mentioned before, we were picking up a few anecdotes, but we're not really picking up yet in the data anything that we can really measure or predict from. I think it is brand new. Obviously, you had over the weekend stories that are focused on these other markets outside of China, but also outside of the United States and Italy and South Korea and the like. You've got the President for the first time speaking about it really last night. The U.S.-focused discussion is obviously brand new. The numbers of cases in the United States are still tiny. My wife and I were at a dinner in Washington last night with a bunch of folks who are obviously asking questions around this. We don't have a single case in the Greater Washington area, and that's the case in most markets across the United States. So, I think it's way too early to expect that the data is going to be very revealing to us. But at the same time, when you get the President doing a press conference on it, that's by itself not a good thing, and it will cause more travels to stop and think about it. And again, it's one of the reasons I would say that the $25 million a month number that we've used as a yard stick is probably at this point a bit light, but we don't know what other number to give you.

Thanks, Arne. That's really helpful. If I could ask about something completely different, what do you think are the key drivers behind the RPI improvements that are allowing you to see that growth year-over-year? What is the outlook for that going forward? Also, could you provide the actual RPI level that you finished up with in 2019? Thanks.

Yes. I believe the loyalty program is the most significant aspect to highlight. We discussed overall penetration, providing both the North America and global figures. The percentage of total rooms that come from paid and redeem nights is higher in the U.S., likely because our brand is more recognized here and we've been operating for a longer period. It’s also higher in select brand hotels compared to full-service hotels due to less group business and a stronger focus on transient guests. Despite these variations, we’re seeing very healthy increases in penetration outside the U.S., as well as in full-service hotels and resort locations, which is all tied back to loyalty. We won’t disclose our index by brand or segment today, but I receive a monthly global index report that includes a chart covering from 2014 to the current month. This chart categorizes performance into three segments: luxury, upper upscale, and upscale/select brands. Each of these segments has reached an all-time high compared to the figures in the 2014 chart, and they continue to grow.

That's great. Thanks a lot.

You bet.

Thanks so much for taking my question. First, curious throughout the course of 2019, a number of players in travel alluded to changes that Google was making which resulted in less free organic traffic coming to their travel websites and a greater reliance on paid as Google changes up how they monetize things with their Google hotel ads product. I was curious if you have seen any impact in your business at all from that in the second half of 2019 and into 2020.

We are closely monitoring Google's activities. Over the past three to four years, we've seen an increase in the paid search volume from Google. However, we didn't notice a significant change for us in the latter half of 2019. It's important to note that we prefer not to pay for paid search when someone is searching for our brand. For instance, if someone searches for Marriott New York, we generally don't want to pay for that as we believe that person is looking for a Marriott hotel and will find our site regardless of whether it's through Google or another source. Similarly, if someone searches for Hyatt New York, we also typically won't pay for that as they seem focused on a different brand. This situation differs for online travel agencies (OTAs), as they sell Marriott rooms or Hyatt rooms as well. If an OTA can attract someone from Google to their site and earn a commission on that transaction, their approach is different from ours. In summary, the changes in Google's strategy tend to affect OTAs more significantly than they impact us. Nonetheless, we are monitoring this situation very carefully. We maintain a good partnership with Google and benefit from substantial volume through our digital channels. We will seek methods to leverage these tools to attract customers who are not currently part of our loyalty program. If we can do this cost-effectively, we will pursue that opportunity.

And unrelated follow-up, maybe I missed it. I don't think I heard anything about the election year, what impact that could be what you've seen in the last couple and maybe how it relates to group vs leisure vs trend here.

Our experience over the years indicates that during a Presidential Election year in Washington, transient demand tends to decline. However, group bookings in Washington for 2020 are looking quite strong, leading us to believe that the market will perform reasonably well. It's also important to note that cities hosting conventions are likely to experience increased demand, while those that did not host conventions last year will also benefit from this incremental demand. We are currently accommodating many politicians in our hotels across various markets, and we’re pleased to have them.

Great. Thanks.

Stuart Gordon, actually from Berenberg. Just on the shareholder returns how are you thinking just over how you phase these through the year, given what's happening just now? And just a quick follow-up could you break out the other fees between credit card fees and the other fee components within that bucket?

Sure. It's important for us to find the right balance. We aim to maximize returns for our shareholders when we have excess capital, and we are committed to doing this. At the same time, we are dedicated to maintaining our strong credit rating. This requires us to carefully consider both current conditions and anticipated developments as we progress through the year. We've provided our baseline scenario without accounting for the coronavirus. However, in light of your question, we will need to consider real-life impacts, which will influence our approach to share repurchasing. We are reviewing all options regarding cash management, expenses, fees, and other factors to balance these priorities. If you take my estimate of a $60 million impact on EBITDA in the first quarter, it will certainly affect our share repurchase plans for the rest of the year. Regarding credit card fees, we expect to report $410 million for the year. Additionally, we have timeshare branding fees of about $100 million, with the remainder divided among residential branding fees and smaller categories including app and relicensing fees. Looking forward to 2020, we anticipate this group as a whole will grow by about 10%. Specifically, I would estimate the growth of the credit card component to be in the mid-single-digits, around 6%.

Great. Thanks very much for the color.

You're welcome.

All right. Thank you all very much. We appreciate your time and interest this morning. Get on the road, come stay with us.