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StockTalk
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TMF Interview With Marriott International CFO Arne Sorenson and Investor Relations Director Laura Paugh
May 11, 1999
With Yi-Hsin Chang (TMF Puck) and Warren Gump (TMF Gump)
Bethesda, Maryland-based Marriott International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAR)") else Response.Write("(NYSE: MAR)") end if %> is the world's second-largest lodging company, with more than 1,800 primarily franchised properties operating under such hotel brands as Courtyard, Marriott, Residence Inn, Fairfield Inn, SpringHill Suites, and Ritz-Carlton. Marriott also runs time-share resorts and senior living communities. In March 1998, the company spun off its food service and facilities management business, merging it with Sodexho Alliance's North American operations to form Sodexho Marriott Services. The Marriott family owns roughly 20% of Marriott International.
TMF: You completed the acquisition of ExecuStay Corp. in late March. Do you see corporate housing as a major component of growth for the company, and how do you plan to grow this area of your business?
Sorenson: I think corporate housing is not likely to ever be a huge percentage of our economics, but will be growing at a rate faster than the rest of the company as a whole. We decided to acquire ExecuStay because we thought it had huge value and huge potential for growth, particularly given its small base, with our core corporate customers. So the notion we had was to make ExecuStay a new subsidiary of ours, make our systems available to the ExecuStay sales force and operating crew, bring Marriott reliability and consistency to that service, and hopefully quickly grow them.
TMF: Outside of ExecuStay could you define your growth strategy for the company?
Sorenson: Well, I think there are really three growth vehicles. One is Rev PAR [Revenue Per Available Room] growth and margin growth in our existing hotels -- think of that as same-store growth if you will. Second is new unit growth through traditional development means -- by that we mean individual franchise and management agreements, some company-developed, which we typically sell and [then] retain management agreements. The third vehicle of growth would be through new acquisitions.
TMF: In 1993, you completed the spin-off of Host Marriott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMT)") else Response.Write("(NYSE: HMT)") end if %>, and in 1998 you spun off Marriott Management Services. Are there any other businesses you're considering divesting or spinning off?
Sorenson: None that in the short term we would plan to pursue or announce.
TMF: Going over to the lodging industry, which is obviously a major part of your business, what's your outlook for the domestic lodging industry?
Sorenson: More of the same. By that I think we mean Rev PAR growth continuing to exceed inflation. Performance at the hotels is healthy by historical standards. We're not seeing Rev PAR growth at the rates it's grown in '96, '97, and first half of '98, but having said that, Rev PAR is still, we believe, likely to grow throughout this year at a rate in excess of inflation, which will... grow our base and incentive management fees and our franchise fees.
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"Performance at the hotels is healthy by historical standards."
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We have had some supply issues in some markets, particularly with respect to limited-service product [economy hotels] for 18 months or so. Depending on the market, that supply is beginning to be digested, but depending on the market, we will in all likelihood continue to deal with isolated over-supply issues for another 12 months or so, I would guess.
Internationally, the world is obviously a big place, and the markets vary dramatically from area to area. Generally, we would describe the Middle East and Latin America as being the strongest and probably presenting the fewest issues, Western Europe and the United Kingdom next performing quite well. But again, country performance varies a little bit. In Asia, hopefully, knock on wood, we're nearing bottom, maybe at the bottom, maybe starting to pick up a little bit. But let's just say we're maybe close to the bottom for the time being.
TMF: Have you seen any signs that there is a turnaround there?
Sorenson: You know, in the hotel business the markets vary quite a bit. We have seen Japan performing fairly well over the last six to nine months, Korea performing better. I'm not sure that we would say that there's been dramatic improvement in the Southeast Asian markets like Hong Kong and Thailand, but there is some firming in various markets.
TMF: Now, how important are the international operations to your overall performance?
Sorenson: Given particularly what's happened in Asia, they're less important today than they used to be. Our international operations contribute to 6% of our operating profit in the lodging business in 1999. We expect that number will increase over the next two to three years.
TMF: How much do you expect that to increase?
Sorenson: We expect it to be two to three times what it is today over a three-, four-, five-year period of time.
TMF: That would be pretty substantial growth if you were to do it internally, does that mean that you're looking for some acquisitions there?
Sorenson: It's substantial growth. We think that we're capable of doing it internally. At the same time, we are continually looking at the acquisition front and [hoping] we find something with attractive valuations that we could do in that period of time.
TMF: You have operations in a wide range of areas in lodging, from inexpensive to luxury. Which sectors are performing best and worst and why?
Sorenson: Rev PAR performance is one measure that we can use to answer that question, and I think generally we would say that luxury and full-service [hotels], particularly in urban and resort destinations, are performing the best.
TMF: Are you talking domestically or worldwide?
Sorenson: I'm talking domestically really. Limited-service is performing less well, and that's because of the over-supply that we talked about a few minutes ago. There is more new product in some markets, more beds than are necessary.
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"Our international operations contribute to 6% of our operating profit in the lodging business in 1999. We expect that number will increase over the next two to three years."
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Another way to think about what's performing well for us is our traditional development pipeline. We have 70,000 specifically identified rooms that will be opening in the next 18 to 24 months, mostly with owning or franchising partners. We have healthy appetite from those partners for really all of those brands, including the limited-service brands.
So while there are some supply issues in some markets for limited-service brands, they continue to be, on an individual basis, pretty attractive economic propositions. Therefore we expect to continue to see good growth in terms of new unit additions -- really across all our brands. Of our 70,000-room near-term pipeline, roughly 40% are luxury and full-service. Also of that 70,000-room pipeline, roughly 20% are outside the U.S.
TMF: Several companies have recently introduced or upgraded their frequent-guest programs. How important are they and how is Marriott competing?
Sorenson: We've got the largest and most powerful frequent-guest program in the industry. We have looked at what our competitors have done, and we are quite comfortable that we still offer the best program and the most efficient earning of awards and attractive redemptions at approximately 1,500 hotels worldwide, and we think we compete very well. Our membership at Marriott Rewards is about 10 1/2 million people, but we get great repeat business from our rewards members and guests. They can earn not just free room upgrades and special amenities when they are otherwise paying for a hotel, but free vacations for their family. We think it's a pretty powerful program.
TMF: Do you think they are important to competing in the industry these days?
Sorenson: Yes, we think they've been important to competing in this industry for some number of years.
TMF: Do you see new types of programs or new areas, any types of marketing that you'll be involved in to better compete for guests?
Sorenson: Well, the newest area is really the Internet. We started Marriott.com, which is our Web page, in 1996, I believe. We've seen reservations roughly triple every year since it was started. Last year, I think we did about $50 million in reservations. We project essentially doubling of that for 1999. It is done very well in the lodging industry. I think 20% of all online lodging reservations in 1998 were booked on Marriott.com -- a pretty healthy percentage of a very diverse and disparate market. It's got nice features and nice tools, and we're continually evolving tools that we think customers like, and we think, in fact, ultimately will be a cheaper way for us to deliver booked room nights than traditional reservation channels.
TMF: And that covers pretty much all of your brands. Do you see having specialized pages for individual hotel names in the future?
Sorenson: Well, I think they will be linked pages with lots of different things that will include different brands, different markets. There's a mapping feature on Marriott.com now which is very attractive, so that you can log on and, I believe, type in the address of where your meetings are going to be in a particular city, and Marriott.com will tell you which hotel of ours is nearest, which brands they are, give you a description of them, and allow you to book rooms on them.
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"We've got the largest and most powerful frequent-guest program in the industry."
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I think we will also have links to Marriott Rewards account information, to corporate information about Marriott International, and the like. I can't talk about the technical side of this with you -- I'm sure you guys are [more] expert than we are -- about whether they are really separate Web pages or not, but they will be accessible through different brands and ultimately coordinated so that all of the information can be tapped.
Paugh: Today you can already look on our website and find significant information about each property -- local attractions and the like, so that travelers can get a good appreciation of what the property looks like and what's there before they make the reservations.
TMF: First-quarter contract sales at your timeshare operation jumped 32%. Is this a business sector that's poised for sustainable growth, and how big do you think this can become?
Sorenson: Our timeshare business is one that we're very excited about. We expect this year we'll launch two new brands in our timeshare area -- one luxury and one moderate. We'll roll those brands out. We've got a couple of projects for each, and so we're ready to really hit into sales with some momentum on those. Demographics and customer profiling and demand trends all would suggest that this is a business with a healthy growth rate for some time to come. People like to own an interval at a resort, particularly in the Marriott system, where they can trade that timeshare for a timeshare at another one of our resorts or convert it into Marriott Rewards points and stay at any of our 1,500 hotel redemption sites. It's a pretty neat product.
TMF: Could you tell me, just relative to the current Marriott Vacation Club International, how is that positioned relative to the two new brands?
Sorenson: Oh, comparable to Marriott hotel quality.
TMF: So sort of a full-service in between moderate and luxury?
Sorenson: Yes, exactly. Quality tier.
TMF: In your senior living communities, you've increased the number of units rapidly, but profit growth hasn't been as high as the other divisions. Can you talk about that a little bit?
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"We've seen [online] reservations roughly triple every year since it was started... I think 20% of all online lodging reservations in 1998 were booked on Marriott.com."
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Sorenson: Most of this is a function of the start-up -- the financial challenges associated with starting up an individual SLS [senior living services] community and particularly the way the accounting rules work. We'll open, I think, 35 senior living communities this year. Each one of those communities requires pre-opening efforts to market and get ready to open the doors. Each one of those communities also takes 12 to 24 months to fill up depending on the market and the type of product involved, and requires the property to get some meaningful distance toward filling up before they cross the line and start earning operating profits. And until that point, each one of those communities tends to be a negative on our profit contribution. That's what's driving the slower growth in our operating profit for that business, and it will continue to be an issue we've got to work through over the next year or two or three.
TMF: Are there any ways you can address that so it doesn't dampen results as much as it has in the past?
Sorenson: The best way to do that is for us to try and sell the communities before they open, in fact even before the pre-opening efforts get under way. We're having some success with that. Traditionally, we have sold the communities at opening and retained management agreements. It is not impossible to sell them earlier than opening, but most traditional buyers would tend to prefer to have an operating community at the time they buy it, so there is some tension there between us and the buyers of those communities, and we'll simply have to work through those. But that's really the only vehicle other than stopping growth altogether, which is obviously not very attractive to us, to avoid the pre-opening and start-up issues.
TMF: Do you find that the Marriott name adds value to the senior living community -- I don't get the sense that there's a lot of branding out there [in that] industry?
Sorenson: We think the Marriott brand name is perfect for the senior living services business. It's got the right connotations of reliability and consistency and conservatism that appeal to the kinds of guests that we want to stay in our communities.
TMF: Great. That's actually all of the time that we have. Is there anything else you'd like to add?
Sorenson: No.
TMF: Well, thank you so much for taking the time to talk to us today.
Sorenson: Yeah, it's a pleasure.
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