Starwood Beats Q1 Earnings and Revenues

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The FINANCIAL — Starwood Hotels & Resorts Worldwide, Inc. on April 29 reported first quarter 2015 financial results.

First Quarter 2015 Highlights

Excluding special items, EPS from continuing operations was $0.65. Including special items, EPS from continuing operations was $0.58.

Adjusted EBITDA was $274 million.

Excluding special items, income from continuing operations was $110 million. Including special items, income from continuing operations was $99 million.

Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.2% in constant dollars (1.9% in actual dollars) compared to 2014. Systemwide REVPAR for Same-Store Hotels in North America increased 6.8% in constant dollars (5.8% in actual dollars).

Management fees, franchise fees and other income decreased 3.2% compared to 2014. Core fees increased 1.6% compared to 2014.

Earnings from Starwood’s vacation ownership and residential business increased approximately $4 million compared to 2014.

During the quarter, the Company signed 33 hotel management and franchise contracts, representing approximately 6,000 rooms, and opened 20 hotels and resorts with approximately 3,200 rooms.

During the quarter, the Company paid a quarterly dividend of $0.375 per share and repurchased 1.6 million shares at a total cost of $123 million and a weighted average price of $78.29 per share.

On April 16, 2015, the Company introduced Tribute Portfolio, its tenth brand and second collection of independent hotels.

First Quarter 2015 Earnings Summary

Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the first quarter of 2015 of $0.58 compared to $0.71 in the first quarter of 2014. Excluding special items, EPS from continuing operations was $0.65 for the first quarter of 2015 compared to $0.63 in the first quarter of 2014.

Special items in the first quarter of 2015, which totaled a charge of $11 million (after-tax), included restructuring and other special charges totaling $31 million (pre-tax), partially offset by a pre-tax gain of $18 million primarily related to the sale of a minority partnership interest in a hotel. Special items in the first quarter of 2014 totaled a benefit of $14 million (after-tax). Excluding special items, the effective income tax rate in the first quarter of 2015 was 32.5% compared to 32.2% in the first quarter of 2014, according to Starwood.

Income from continuing operations was $99 million in the first quarter of 2015, compared to $136 million in the first quarter of 2014. Excluding special items, income from continuing operations was $110 million in the first quarter of 2015 compared to $122 million in the first quarter of 2014.

Net income was $99 million and $0.58 per share in the first quarter of 2015, compared to $137 million and $0.72 per share in the first quarter of 2014.

Adam Aron, CEO on an interim basis, said, “In the first quarter, our overall results were ahead of our expectations, and with the actions we are taking to improve our performance going forward, we are modestly increasing our guidance range for both Adjusted EBITDA and EPS excluding special items for full year 2015.

“Looking ahead, we are taking meaningful steps to accelerate the pace of our growth. The recent launch of our tenth brand – Tribute Portfolio – is just one of several key initiatives that we will be launching in the near term as we look to expand our footprint and better serve our guests. At the same time, we are actively working to increase our operational efficiency — with a special focus on reducing costs and more smartly deploying our resources — to become a leaner and more competitive partner for our hotel owners.”

First Quarter 2015 Operating Results

Management and Franchise Revenues

Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.2% in constant dollars (1.9% in actual dollars) compared to the first quarter of 2014. International Systemwide REVPAR for Same-Store Hotels increased 3.3% in constant dollars (decreased 2.7% in actual dollars).

Worldwide Same-Store Company-Operated gross operating profit margins increased approximately

70 basis points compared to 2014. International gross operating profit margins for Same-Store Company- Operated properties increased approximately 50 basis points. North American Same-Store Company- Operated gross operating profit margins increased approximately 100 basis points.

Management fees, franchise fees and other income were $240 million, down $8 million, or 3.2% compared to the first quarter of 2014. Core fees, which were negatively impacted by foreign exchange rates, increased 1.6% to $191 million. Other management and franchise revenues decreased 15.1% or $8 million, primarily due to a significant termination fee in the prior year associated with the exit of one hotel from the system.

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Development

During the first quarter of 2015, the Company signed 33 hotel management and franchise contracts, representing approximately 6,000 rooms, of which 28 are new builds and five are conversions from other brands. At March 31, 2015, the Company had approximately 490 hotels in the active pipeline representing approximately 110,000 rooms.

During the first quarter of 2015, 20 new hotels and resorts (representing approximately 3,200 rooms) entered the system, including Royal Palm South Beach Miami, now a Tribute Portfolio hotel (Florida, 393 rooms), Le Méridien Gurgaon, Delhi NCR (India, 285 rooms), The St. Regis Istanbul (Turkey, 118 rooms), Sheraton McKinney Hotel (Texas, 187 rooms), and Aloft New Orleans Downtown (Louisiana, 188 rooms). During the quarter, six properties (representing approximately 1,300 rooms) were removed from the system.

Owned Hotels

Worldwide REVPAR at Starwood Same-Store Owned Hotels increased 8.4% in constant dollars (2.8% in actual dollars) when compared to 2014. REVPAR at Starwood Same-Store Owned Hotels in North America increased 7.6% in constant dollars (5.0% actual dollars). Internationally, Starwood Same-Store Owned Hotel REVPAR increased 9.7% in constant dollars (decreased 0.6% in actual dollars).

Revenues at Starwood Same-Store Owned Hotels Worldwide increased 9.0% in constant dollars (3.4% in actual dollars) while costs and expenses increased 8.2% in constant dollars (2.1% in actual dollars) when compared to 2014. Margins at these hotels increased approximately 110 basis points compared to 2014.

Revenues at Starwood Same-Store Owned Hotels in North America increased 8.5% in constant dollars (5.9% in actual dollars) while costs and expenses increased 6.6% in constant dollars (3.9% in actual dollars) when compared to 2014. Margins at these hotels increased approximately 140 basis points compared to 2014.

Internationally, revenues at Starwood Same-Store Owned Hotels increased 10.0% in constant dollars (decreased 0.9% in actual dollars) while costs and expenses increased 10.7% in constant dollars (decreased 0.9% in actual dollars) when compared to 2014. Margins at these hotels remained flat compared to 2014.

Revenues at Owned Hotels, which were negatively impacted by asset sales since the first quarter of 2014, were $316 million, compared to $364 million in 2014. Expenses at Owned Hotels were $262 million compared to $301 million in 2014.

Vacation Ownership

Total vacation ownership revenues increased 17.0% to $186 million in the first quarter of 2015 when compared to 2014 primarily due to the timing of deferred revenues and an increase in revenues from resort operations. Originated contract sales of vacation ownership intervals decreased 1.2% when compared to 2014, due to the average price per vacation ownership unit sold decreasing 2.1% to approximately $16,400, partially offset by a 1.5% increase in the number of contracts signed.

Residential

During the first quarter of 2015, the Company’s residential revenues were $1 million compared to $15 million in the prior year as the St. Regis Bal Harbour residential project sold out in early 2014.

Selling, General, Administrative and Other

During the first quarter of 2015, selling, general, administrative and other expenses (“SG&A”) decreased 4.2% to $91 million compared to $95 million in 2014 primarily due to cost containment efforts, the impact of foreign exchange, and the timing of expenses.

Capital

Gross capital spending during the quarter included approximately $30 million of maintenance capital and $34 million of development capital.

Restructuring and Other Special Charges

During the first quarter of 2015, the Company recorded $8 million in restructuring costs associated with severance and $23 million of other special charges. Other special charges primarily consist of a $7 million severance charge associated with the resignation of the Company’s prior President and Chief Executive Officer, the establishment of a $6 million reserve related to potential liabilities assumed in connection with the 2005 acquisition of Le Méridien, and $6 million of costs associated with the planned spin-off of the Company’s vacation ownership business.

Dividend

On February 9, 2015, the Company declared a regular quarterly dividend of $0.375 per share, which was paid on March 26, 2015. The total dividends paid in the first quarter of 2015 were approximately $64 million.

Share Repurchases

In the first quarter of 2015, the Company repurchased 1.6 million shares at a total cost of approximately $123 million and a weighted average price of $78.29 per share. As of March 31, 2015, approximately $706 million remained under the Company’s share repurchase authorization.

Balance Sheet

At March 31, 2015, the Company had gross debt of $2.5 billion, cash and cash equivalents of $623 million (including $50 million of restricted cash) and net debt of $1.9 billion, compared to net debt of $1.7 billion as of December 31, 2014, in each case excluding debt and restricted cash associated with securitized vacation ownership notes receivable. Net debt at March 31, 2015, including $229 million of debt and $12 million of restricted cash associated with securitized vacation ownership notes receivable, was $2.1 billion.

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Outlook

The following outlook assumes the planned spin-off of the vacation ownership business occurs on December 31, 2015. Transaction costs related to the planned spin-off are not included in full year SG&A guidance.

Shifts in exchange rates since 2014 will negatively impact full year earnings by approximately $45 million ($10 million additional impact since we provided our last outlook) if exchange rates stay at current levels.

Shifts in exchange rates since the second quarter of 2014 will negatively impact second quarter 2015 earnings by approximately $15 million if exchange rates stay at current levels.

For the full year 2015:

Adjusted EBITDA is expected to be approximately $1.185 billion to $1.210 billion (based on the assumptions below).

REVPAR increases at Same-Store Systemwide Hotels Worldwide of 5% to 7% in constant dollars (approximately 450 basis points lower in actual dollars at current exchange rates).

REVPAR increases at Same-Store Owned Hotels Worldwide of 4% to 6% in constant dollars (approximately 750 basis points lower in actual dollars at current exchange rates).

Margins at Same-Store Owned Hotels Worldwide increase 25 to 75 basis points.

Core fees increase approximately 3% to 5%.

Management fees, franchise fees and other income are expected to be approximately flat.

Earnings from the Company’s vacation ownership and residential business of approximately $150 million to $160 million.

SG&A decreases approximately 1% to 3%. Full year SG&A reflects the favorable impact of the implementation of a cost reduction plan that is expected to commence in the second quarter of 2015, foreign exchange, and other operational efficiencies. Run-rate SG&A savings from the cost reduction plan are expected to be approximately $25 million on an annual basis.

Significant non-recurring items in 2014 Adjusted EBITDA include $35 million related to five large one-time termination fees received by the Company and $11 million from the St. Regis Bal Harbour residential project, which is sold out.

Depreciation and amortization is expected to be approximately $315 million.

Interest expense is expected to be approximately $135 million.

Full year effective tax rate is expected to be approximately 32%, and cash taxes from operating earnings are expected to be approximately $130 million.

EPS before special items is expected to be approximately $2.94 to $3.04 (based on the assumptions above).

Cash flow from operations is expected to be approximately $850 million to $950 million (based on the assumptions above). Cash flow from operations includes vacation ownership investment in inventory expected to be approximately $160 million which includes approximately $80 million related to the development of the Westin Nanea Ocean Villas, the third phase of the Westin Ka’anapali Ocean Resort Villas.

Full year capital expenditures (excluding vacation ownership inventory) are expected to be approximately $200 million for maintenance, renovation and technology. In addition, in-flight investment projects and prior commitments for joint ventures and other investments are expected to total approximately $200 million.

For the three months ended June 30, 2015:

Adjusted EBITDA is expected to be approximately $290 million to $300 million (based on the assumptions below).

REVPAR increases at Same-Store Systemwide Hotels Worldwide of 5% to 7% in constant dollars (approximately 525 basis points lower in actual dollars at current exchange rates).

REVPAR increases at Same-Store Owned Hotels Worldwide of 4% to 6% in constant dollars (approximately 1000 basis points lower in actual dollars at current exchange rates).

Core fees are expected to be approximately flat.

Management fees, franchise fees and other income are expected to be approximately flat to down 2%.

Earnings from the Company’s vacation ownership and residential business of approximately $40 million to $45 million.

EPS is expected to be approximately $0.70 to $0.74 (based on the assumptions above).

Special Items

The Company’s special items netted to a pre-tax charge of $13 million ($11 million charge after-tax) in the first quarter of 2015 compared to a pre-tax charge of $36 million ($14 million benefit after-tax) in the same period of 2014.

 

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