Marriott International, Inc. (MAR) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Starwood Hotels & Resorts Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's Second Quarter 2013 Earnings Call. Joining me today are Frits van Paasschen, our CEO and President; and Vasant Prabhu, our Vice Chairman and CFO. Before we begin, I'd like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. Factors that could cause actual results to differ are discussed in Starwood's annual report on Form 10-K and in our other SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today's call on our website at www.starwoodhotels.com. With that, I'm pleased to turn the call over to Frits for his comments.

Thanks, Stephen and thank you, all, for joining us. In my prepared remarks today, I'll follow my usual format and cover 3 topics. First, a brief recap of our Q2 results and how they relate to the business environment around the world. Second, some thoughts in our luxury business, how it's changing and how we're responding. And third, I'll close with some brief comments on our progress towards asset light and returning capital to shareholders. Turning to our result. We had a strong second quarter with EBITDA of $303 million, and you'll note that does not include Bal Harbour residential sales. We saw a strong performance at our owned hotels in North America with REVPAR up nearly 10% and margins up a healthy 360 basis points. SVO performed well. Globally, our core management and franchise fees were up over 8%. Global company operated REVPAR was up over 4%, excluding the effects of the stronger dollar. Vasant in his prepared remarks will go on in more detail on our performance and outlook, so I'll take you through a high-level view of the forces that work around the world. For the third year in a row, the global economy entered the summer with a wobble. This year, fears emanated from all 3 major markets around the world. China's shadow banking system and local government finances, the deepening recession in Europe and lingering questions about the future of the euro system; and finally, the prospects that the Federal Reserve might be closer to tapering QE3. As we sit here now at the end of July, those fears seem less acute. And our view, in any case, is that the global recovery is continuing on its slow, if not so steady, pace. Tight supply in North America and Europe continues to be the order of the day, with virtually no new high-end hotels coming into the system. So we're not entirely surprised that our occupancies in North America this quarter surpassed 76%, and despite the dismal economic situation in Europe, occupancies were a healthy 72%. Summer wobble aside, we maintained our long-term bullish view on demand growth for high-end global travel and what it means for Starwood's future. Recent research showed that over the past 4 years, high-end travel spending was up nearly 40%, having grown twice as fast as global GDP. This supports our belief that globalization of business, rising wealth and a more digitally connected world continue to make this a travel-intensive recovery. Along these same lines, fast-growing markets around the world added to local demand to other markets. For example, we saw a 20% increase in outbound travelers from China for hotels in 2012. Speaking of China, growth in Q2 was slower than we expected. Our sense is that this had little to do with this financial upheaval I mentioned earlier. Viewed from our business, there were 3 other headwinds at work. But first, with the new government's austerity policy, which started last quarter with the government transition. From what we can see, government policies will continue to likely affect our business through the end of the year. Our sales teams had responded by redoubling their efforts on small accounts and other incremental business. A second headwind has been a combination of events, among them the Sichuan earthquake, flooding, bird flu and North Korean tensions. These events led to REVPAR declines in selected markets. The third headwind was a slowdown in GDP growth, which decelerated from just under 8% in the fourth quarter of last year to an estimated 7.5% for the second quarter. The long-term implications of a slower trajectory were unclear. But as we see it, if China can sustain 7%-plus GDP growth on an $8 trillion economy, that's the same increase in output as 11% growth was on $5 trillion economy a few years ago. And in the face of these headwinds, Starwood's business in China appears to have fared much better than the competition. In Q2, despite 24% more rooms than last year, our occupancy was up 230 basis points. Our REVPAR in China was up 1%. This compares very well with the overall market which was reported to be down 6%. Our REVPAR index is up strongly this year again, which also points to out-performance. We see this as proof positive of our first mover advantage and preemptive scale. It shows in the strength of our brands and in the explosive growth of SPG members. Our sales teams, call centers, along with their Chinese language mobile capabilities, enabled us to offset much of the lower government demand. And we continue to be able to staff our growing footprint of new hotels with seasoned operators. Let me put it this way: In good times, it may be harder to see whose team in China is stronger. But against these headwinds, our team stands out. As hotel owners take notice, this will bring us more new projects and give us a bigger lead. Stepping back, we've consistently said that the growth path for China has a long way to go upwards, but it will have its bumps and twists. Even after 30 years, China's population is only about halfway through its massive migration from the countryside to metro areas. All indications of the urbanization, driven by economic growth and by government policy, is set to continue. And more wealthy city dwellers in white collar jobs means more people with the means to travel. Shanghai today is a picture where China is headed. In that city already, life expectancies are on a par with Italy and incomes are as high as some regions of the U.K. Academic performance among its students is among the highest in the world. The rest of China has a long way to go before it reaches Shanghai's levels, but it's closing the gap. And China continues also to be also a growth driver for the rest of Asia Pacific, where REVPAR in Q2 is up over 5%. Even with the deceleration in China, the pace of development held throughout the region. As such, the long-term growth in travel demand keeps going. Excluding China, the number of SPG members in Asia-Pacific grew by another 20% over last year. Also, Chinese outbound travel fueled demand. For example, year-to-date, Chinese SPG guests with Laguna Nusa Dua and Bali has increased by 72%. Overall, occupancy in Asia Pacific, x China, was up 140 basis points to 67%. Across our other fast-growing markets, Africa and the Middle East REVPAR was up 8% and Latin America was up 1%. Once again, these markets are behaving less like regions and more like individual countries. You've seen unrest in Brazil, and most recently, Egypt. And while Argentine prospects remain uncertain, for now at least, they're not getting worse. Meanwhile, Dubai and other Gulf states are booming. We recently visited Mexico and are pleased to see the recovery there as well. Business transient travelers have been the first to come back and our teams expect to build on its momentum for group and leisure. Meanwhile, resource-rich economies, like Canada and Australia, felt the slowdown in demand for commodities. Both currencies have weakened and pulled the REVPAR growth below our system-wide average. Turning to Europe. The economic picture is still anemic overall, but as before, though, our business is holding up pretty well. We attribute this to tight supply and our ability to bring in global suppliers to Europe -- global travelers to Europe with SPG and our global sales team. That brings us to the U.S. We saw a record high occupancy this quarter. Despite this, our industry is yet to realize the rate growth that you might expect. Here are the numbers: REVPAR in the U.S. increased 5.5%, occupancy near 77% with rates at 4.5%. So why are rates lagging? Certainly, an uncertain economy hasn't helped. Also, group demand has been slow, which means that the order books are filling later, leaving group dependent properties either reluctant to push rates or turning to lower yield channels. As time passes, our sales teams are confident though, that rates will reflect the simple reality that many hotels are full. Before I turn to my next topic, I want to add a few more comments about group demand. Coming out of the crisis, group demand was slow to return. 4 years into the recovery, we have to ask whether these changes are the new normal. Group demand and group business now consists of a higher number of smaller meetings, usually with less F&B. Lead times are shorter. Corporations still seem reluctant to book big-budget mass meetings. So in response, we've adapted our approach to group sales, redeploying our sellers to prospect for demand, and we're using new systems to make it easier to tailor our group offerings and to meet demands of smaller groups. And we're targeting new accounts to gain occupancy. By contrast, one segment, globally, that continues to outperform is luxury. In Q2, our luxury brands grew REVPAR nearly 300 basis points faster than our other brands. And on a per key basis, luxury hotels generate 23% of hotel EBITDA from 11% of our rooms. Our luxury brands also have a highest REVPAR indices and highest guest loyalty scores. And based on our pipeline, luxury looked set to continue its growth. Let me put it this way, luxury is not a niche business, it's a $1.5 trillion industry, with travel as its largest category at over $300 billion. Back in 2009, I was asked, time and again, whether luxury was dead. I didn't think so then, and looking around the world today, there's no question that luxury is not only alive, but flourishing. Rising wealth, growing global business demand and more destinations that fuel demand. In our interconnected world, the scarcest resource is time. For luxury consumers, this puts a premium on experiences. Also, at some point, demand for more high-end shoes, cars and watches is inherently limited by closets, garages and wrists. But there's no such thing as too many experiences. Over the past 5 years, we've doubled our luxury footprint to over 35,000 rooms. We now have 160 luxury hotels in nearly 40 countries, and we're growing where demand is growing as well. About 90% of our pipeline, of about 70 hotels, is outside mature markets. Luxury is not just growing, it's morphing. The very definition of luxury is no longer in the hands of the patrician elite or the editors of fashion magazines. The age of the acquired taste is over. The new face of luxury consumers is more diverse, by geography, generation and gender, with tastes that are equally diverse. And thanks to technology, luxury travelers expect the purveyors of luxury to meet their tastes. Digital connectivity means that anybody can be in the know. Luxury has moved from esoteric to accessible. And most importantly, from prescribed to personalized. In simple terms, your definition of luxury today, isn't my definition. Luxury for you is exactly what you want it to be. At Starwood, we've done 3 things to grow our luxury business. We've reshaped our brand offerings, built on our global reach and invested in our centralized ability to deliver results. Starting with brands. Over the past decade, we reshaped our brands, properties, services and our food and beverage offerings. Our efforts have followed 3 key themes: high-touch service, authentic experiences and leading design. St. Regis, for example, takes a century of tradition and reinterprets it for the modern age, with its signature butler service as the ultimate high-touch service. Luxury Collection is built around global luxury icons like the Gritti Palace or the Alfonso XIII. The brand offers authentic indigenous experiences and the sense of place that are increasingly scarce in today's world of overrun destinations. And W defines what some would call millennial luxury. Defiantly charting a new way to experience a luxury hotel stay. Together, St. Regis, Luxury Collection and W sit comfortably alongside one another, each with their distinctive proposition. Being global is another key to our growth. Luxury travel is both originating from more home markets and arriving at more destinations. This is not a story about the West in decline. There are more millionaires in the U.S. than ever. This is a story about global wealth. There's more millionaires in Asia than in North America. In a couple of years, half of global luxury demand will come from outside of the mature economies. This underscores the value of having truly global brands led by teams that have the know-how to deliver market-by-market. It also pays to have hotels located in new destinations to meet new travel patterns. Moreover, as the largest luxury hotel company, Starwood benefits from what we call, the network effect. Each new hotel creates demand for other hotels in the system. Take, for example, the W Verbier. It was slated to open in December. As we've started taking reservations, over 40% have come from China. That's more than the U.S. and U.K. combined. And until now, you'd have been hard-pressed to find a Chinese skier in Verbier. This is thanks to W brand awareness in China, from our Ws in Taipei, Hong Kong and, most recently, Guangzhou. The other key for us is the centralized global support we bring to our properties. We call it, the power of Starwood. To be sure, a luxury experience is and always will be about service with a human touch. And today, more than ever, that service is made possible by better technology, in global reservations, revenue management, websites and mobile apps. These central systems, at the very least, free up resources to make high-touch staffing levels possible. But more than that, we enable properties to deliver better, more personalized services. Our luxury brands benefit from central services made possible by our overall scale. SPG also plays a major role in the power of Starwood. Members love the program, it's the best way to earn and redeem across, as we say, more luxury and more destinations. SPG enables our hotels to identify and understand our most valuable members. Our high-end hotels, in turn, create a member base of guests who frequent luxury hotels. To be sure, we reject the old yarn that luxury and loyalty don't mix. SPG share of occupancy is over 50% across our whole system, and among our 3 luxury brands, it stands at over 60%. So to sum it up, luxury represents a virtuous cycle and opportunity for us. As luxury grows and evolves, our brands, global presence and central systems will bring us more than our fair share of growth. And that growth means even more resources to build our brands and our ability to deliver results. Before I hand off to Vasant, I want to close with some comments on our progress towards being asset light and in returning capital to shareholders. We're actively in the process of selling off our hotels. Bear in mind, the process runs at its own pace. Data on the overall hotel transaction market suggests that the first half of the year saw an uptick in volume, in both the U.S. and in Europe. Despite this, the market is still well below where it was precrisis, when large portfolio deals were not unusual. So far this year, we've sold 4 hotels for $127 million compared to $16 million at this point in 2012. Market conditions permitting, we set a goal to sell $3 billion in assets by the end of 2016. This would put us on track to 20%, or less, of earnings from owned real estate. As you know, we're not a distressed seller of real estate, and you should expect us to complete transactions at the right price, with the right contracts and with the right partners. Which brings me to the return of capital. You'll notice that we did not meaningfully repurchase shares in the past quarter. Let me explain. From time to time, we impose blackout periods when we determine that it would not be appropriate for us to be in the market. So while we do intend to use our free cash flow and proceeds from asset sales to buy back stock, our ability is sometimes limited. We decided not to repurchase shares or file a 10b5-1 based on considerations before the start of our regular blackout period at the end of the second quarter. As we sit here today, you should know that those considerations are no longer relevant. I can assure you that we remain fully committed to returning capital to shareholders through share repurchase and dividend. And with that, I'll hand over to Vasant.

Thank you, Frits, and good morning. With great cost control and better vacation ownership results, we were able to exceed profit expectations in the second quarter despite soft revenues and exchange rate headwinds. What does all these mean for the second half of 2013? We'll take a quick trip around the world, talk about current trends and our outlook. North America started the year very strong. This continued into April, helped by the holiday shift. Then as you know, the industry hit a soft patch in mid-May, all the way through the end of the quarter. In the year, for the year group bookings have been weak this year, tracking in the low-single digits while bookings for future years have been strong. Group pays for 2014 and '15 is currently tracking in the mid-single digits. We expect group softness will persist through the year. Frits talked about some of the factors driving this trend, and what we're doing to respond. Transient demand, especially corporate travel, has remained robust, helped by a record low supply, occupancies hit new peaks. Rates were up 4%, accounting for 80% of the REVPAR increase. Rate realization has been held back by weak group demand, which is increasing room supply available for transient customers. It is important to note that 4% price realization in a 1% to 2% inflation environment is akin to 7% to 8% rate increases in a 4% inflation environment, which prevailed in prior cycles. We have pricing power even in this economy and rate realization will only accelerate as supply growth remains below 1% and demand continues to grow over 2%. We expect REVPAR growth in North America to step up in Q3 from June trends, followed by transient demand. Leisure travel in both July and August is looking strong, based on business on the books as we get into September, we will begin to get a better read on how group business might perform in Q4. North American REVPAR has been growing at about 6% through the first half, and we are projecting that this will continue, with rate accounting for 80% of the increase. In China, REVPAR growth continues to track well below the expectations we had at the start of the year. You may recall that we had projected a ramp in Chinese REVPAR growth, post the leadership change, to the high end of our guidance range. Instead, China was up only 1%, driving most of our global REVPAR growth shortfall. What matters when conditions are tough, is our ability to outperform the market, as we have been doing handily. We are gaining significant market share as evidenced by REVPAR out-performance versus market numbers provided by Smith Travel. The power of Starwood China is delivering for our owners. We think this slowdown makes us stronger in the long run as weak players struggle to survive. You know what Warren Buffett had to say about what happens when the tide goes out. A new leadership in China is determined to continue its austerity focus. As such, we expect that government-related business will remain challenged for the foreseeable future. We are reorienting our efforts to generate new sources of revenue from the private sector and consumer-oriented companies, which should benefit from the shift to consumption that the government seeks to drive. This is easier in the south and east, which have more diversified economies and higher per capita income, less so in the north and the west. As we enter the second half, we begin to lap the slowdown in China last year. As such, we expect REVPAR growth to pick up a bit to the 2% to 4% range. Across the rest of Asia, growth has been steady all year, up 5% to 6%. Driving this growth are Japan, up 13%; Thailand and Indonesia, both up over 9%; India remains a soft spot, and will likely remain weak until elections are completed later this year. Our results, as reported in dollars, have unfortunately been hurt by the sharp declines in the yen, the rupee, the Aussie dollar and other Asian currencies. In Q2, 5.3% local currency REVPAR growth translated into 0.3% dollar growth, a 500 basis point swing. Asia accounts for most of our exchange rate headwind this year. The good news is that demand trends remain stable in the rest of Asia, and we forecast growth rates to remain at the high end of our current global REVPAR outlook range of 5% to 6%. Europe is steady, but sluggish, as it has been for the past couple of years. REVPAR growth was up 2.5% in local currencies, an improvement over the past 2 quarters. It may surprise you that our strongest markets in Western Europe in Q2 were France, Italy and Spain, reflecting the mix of our business, which is global and pan-European in scope rather than local. We expect this 2% to 3% growth rate to continue into Q3 as leisure travel looks good for the summer and we may benefit from Ramadan ending earlier in August. We're lapping the London Olympics, so that will be a drag. While Greece is recovering well, Turkey could be challenged, if riots persist. Recent news on the economic front has been more positive and pro-growth policies are likely, as austerity fatigue sets in. We're cautiously optimistic that the worst may be behind us in Europe. Africa and the Middle East was our strongest region in Q2, up 7.5% in local currencies. As many of you know from our Investor Day in Dubai, we have a large business in the Gulf. This business grew REVPAR in the double digits. We have several significant hotels that have opened in the region, like the St. Regis Doha and the Westin Abu Dhabi, which are off to a great start. We expect growth rates in Q3 to tick down in this region for a couple of reasons: Egypt, which was recovering nicely, is impacted by the recent turmoil and Saudi visa restrictions are sharply reducing Ramadan-related travel. Things are expected to recover as we enter Q4. With the crisis in Argentina, and now, a slowdown in Brazil, Latin America has struggled this year. Brazil is down 6% in the quarter, hurt by the demonstrations, a slowing economy and the impact of major renovations at the Sheraton Rio, which remains in the same-store set. Mexico is helping mitigate some of this, as it grows from increasing business activity as well as the return of the American vacationer. And here's the good news, if you can call it that. As we enter Q3, we lapped the 16% decline in Argentina last year, we might actually see Latin American REVPAR grow 5% to 6%. As a result of all these trends, we have lowered the high end of our company operated REVPAR growth range globally by 100 basis points, from 5 to 7% to 5% to 6%. Also, as exchange rates have moved against us, we now have a 50 basis point exchange rate headwind for the year. With REVPAR growth coming down 100 basis points and exchange rates hitting us by another 50 basis points, we are lowering our fee growth range by 150 basis points to 7.5% to 9.5% from 9% to 11%. We still expect to open 75 to 80 hotels this year and grow our rooms by almost 4%. Our owned hotels performed well in Q2. In North America, owned hotels gain significant rev index and increased margins by as much as 360 basis points, a 9% REVPAR growth with rate up 7%. In Europe, we were able to increase owned EBITDA margins despite flat local currency REVPAR. In Asia, owned margins were up 370 basis points on 6% REVPAR growth. Latin America, however, dragged our owned margins down. Latin American margins declined 540 basis points due to the inflation, devaluation gap in Argentina and renovation impact of the Sheraton Rio. Our owned hotel performance remains on track for the year. We still expect 4% to 6% REVPAR growth and 75 to 125 basis points of margin improvement. Mostly due to the Aussie and Canadian dollars, exchange rates will reduce REVPAR, as reported in dollars, by 100 basis points. The first half benefited from a delay in renovations of the Westin Maui, but this will hurt the second half owned results. In addition to good same-store performance, owned hotel EBITDA is also helped by strong momentum at hotels coming out of renovation like the Gritti Palace, the Maria Christina and the Aloft San Francisco. As you know, we significantly scaled back our SG&A in 2008 and have held the line on cost since then. Our SG&A has grown no more than 3% each year, even as the business has recovered and we have added over 200 hotels, over 50,000 rooms, since the end of 2008. SG&A per room has continued to decline. In the second quarter, we were helped by the recognition, of some of the incentives we obtained from the State of Connecticut to move our corporate offices to Stamford. This was anticipated later in the year, as we received notification from the State that these had been earned in Q2. In the quarter, some of the $7 million benefit was offset by reserves or receivables and exchange rate impacts. Adjusted for these items, our core SG&A grew at 2% to 3% run rate, which is what we are now projecting for the full year. We will recognize future tranches of incentives related to our headquarters relocation for the next several years, the amounts will be in the $2 million to $3 million -- I'm sorry, in the $3 million to $4 million range each year. While the financial incentives we obtained from the state are clearly helpful, we're happy to report that our relocation has facilitated significant redevelopment in this part of Stamford, and has been very popular with our associates. Our vacation ownership business continues to perform very well. As you know, our priority here is to invest selectively with a focus on ROI rather than earnings growth. Doors were up, closed rates remain stable and price realization improved. Our loan portfolio continued to get better with defaults at both crisis lows. We will most likely complete our annual securitization of receivables in the fall. We still have 2 to 3 years of inventory at the current sales pace. We're selectively adding in Orlando, Palm Springs and converting our resort in St. John entirely to time share, over the next few years. Cash generation remains a priority for this business. We expect to deliver $200 million this year, bringing cash derived from this business to over $1 billion since 2009. We are raising our full year forecast for SVO profits. You should know that fourth quarter reported profit will be lower than last year, negatively impacted by GAAP deferral dynamics, as well as some renovation activity at the St. John Resort. We had another great quarter for sales in closings on Bal Harbour condos. We have now crossed the billion-dollar mark for sales and $250 million in reported profits. At the end of the quarter, we only had 22 condos left to sell or close. We have been raising prices and recent square footage rates have exceeded $1,500. Unfortunately, this gift we'll stop giving by the end of the year since we will be sold out. We are raising Bal Harbour profit expectations by $20 million to $110 million and cash flow to, at least, $175 million. This project has exceeded all our expectations. It has demonstrated the global power and appeal of the St. Regis brand. In summary, we are increasing our EBITDA outlook for the range due to Bal Harbour. X Bal Harbour, we've narrowed our range by lowering the high end by $5 million to $1.12 billion to $1.14 billion. It's important to note that since we first provided you with our outlook, we absorbed $8 million in profit loss from asset sales completed to date and $12 million from unfavorable exchange rate shift. We have offset lower fees due to the REVPAR shortfall and exchange rates, but x SG&A savings and higher vacation ownership profits. As I mentioned earlier, our second half is negatively impacted by some items that helped the first half. The early recognition of Connecticut incentives, as well as the delay in renovations at the Westin Maui. SVO will also be lower in Q4 for reasons I described. Inclusive of Bal Harbour, our full year EPS range is now $2.81 to $2.88. We have reduced our capital forecast and expect more cash from SB1 Bal Harbour increasing operating cash flow for the year by another $100 million. We hope this gives you some color on the trends we're seeing and the rationale for our outlook for the balance of 2013. As Frits indicated, we remain focused on asset sales. We have several conversations underway and we'll announce sales as they are completed. We remain committed to returning cash, we cannot productively deploy, to you, our shareholders, through dividends and buybacks. As we normally do, our board will declare our annual dividend later this year. Based on your input, we will also discuss moving to a quarterly dividend starting in 2014. Stock buybacks remain a priority. With that, I will turn this back to Stephen.

Thank you, Vasant. We now like to open up the call to your questions. [Operator Instructions] Sylvia, can we have the first question, please.

The first question comes from Shaun Kelley from Bank of America.

Great. So I guess I'd like to start off, Vasant, just -- you guys gave some color in the prepared remarks regarding the cash balance and the buybacks. Anymore color you could get there? I mean, by our measure, you guys are getting very close to kind of half a turn of net leverage, if we exclude the securitized debt, and that just seems wildly low relative to industry comps at this point. So any sense of where maybe that ratio could be by the end of the year, and how we should think about that?

Yes. I wouldn't want to make projections on where the ratio should be by the end of the year. I think we've made it very clear, we have no aspirations to being anything other than a BBB. Clearly, our ratios, as you've said, are well below those levels. BBB allows you to, as the rating agencies calculated, which, again, is a little different than the simple net debt-to-EBITDA calculation, as you all know, you have to add in some VISAs and some vacation ownership debt. So typically, it tends to about a turn higher. But as they calculated, we could be at 2.5 or 3. So there's clearly capacity. The reason we won't buy in on the stock, I think Frits addressed in his comments, we've returned -- we've been very good, as you know, in returning cash we can't deploy to you over the years, as much as $9 billion over the last decade, $5 billion or $6 billion just in the last 5 years. We will do that. We've told you sort of how we think about it. There were reasons why we couldn't be buyers in the second quarter, and those reasons are not relevant anymore. There are no constraints on our ability to buy. And clearly, there are no constraints in terms of our leverage and our ability to buy. So hopefully that answers your question.

And then, I guess, my follow-up would be on China. Obviously, the market continues to decelerate, at least as it did in the second quarter from the first, and you guys have been able to outperform, but can you give us a sense of what you saw across the quarter? Has it at least started to stabilize and kind of how do you think about just the overall business trend and your ability to continue to offset some of the softness there?

Yes. So Shaun, this is Frits. As you mentioned, overall, REVPAR did slow down second quarter versus first quarter in China. On the other hand, it's about on the same level of growth as where it was in the fourth quarter. In terms of our own ability to continue to outperform, we've had a string of quarters now where we've significantly outperformed the market. And our all indications are that the trends are continuing where they are. So no projection there as such, but I do think that there's no reason for us to feel that the trajectory of our business, relative to the overall market, is any different from where it was. And it goes back to the reasons for that, which are: the strength of our team, the strength of our brands, the availability of every resource to bring -- to bear, to bring guest to our hotels, whether that's through sales, call centers, web and mobile bookings, SPG and so forth.

Just a couple of things. You asked sort of how things looked fairly stable during the quarter. And the answer would be, yes, during the quarter, if you look at each month, it was roughly in the same range of the average for the quarter. So there's no -- there wasn't a sort of an improving or a declining trend. The other thing, as you all know, was last year, in the first half, we were up about 7% on average in REVPAR in China. In the second half, I think, we were up about 2%, which actually was a declining trend. So you do get to some easier comparisons as we mentioned. So our team is anticipating that we'll get a little bit up a tick up, 2% to 4%. Seems a more like stable right now than continuing to decline, but it's an evolving story. So we're watching it closely.

Your next question comes from Joe Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Frits, Vasant, have your second half 2013 expectations for hotel openings changed from where they were 3 months ago? And if the answer is, no, on an overall basis, can you talk about the geographic mix? If some are actually ahead or some have kind of pulled back?

As you saw, we said 75 to 80 openings this year. We haven't really seen any change. There's always some that are -- openings that often drop into the next year. But hotels are opening as we expected. There really isn't any geographic sort of trend that says, openings are slowing down, one place or another. Nothing is changing in terms of own views of how people are thinking about both the pace at which they put money to building hotels as well as signing hotels.

Your next question comes from Smedes Rose from Evercore Partners.

I wanted to get a little more color on -- you talked about asset sales and that you're in the market with assets. Has there been any change in pricing talk, given the rise in interest rates? Or any kinds of -- what kinds of buyers, I guess, are coming into the market place, if that changed at all?

Yes. So in terms of the effect of interest rates, short term, on pricing, the reality is that as we are in the discussions around the assets where we are, there hasn't, in the last few months, as the tenure has ticked up, been a change in pricing attitude. And as before, the strongest buyers remain some of the sovereign wealth funds as potential, and then REITs, which has been the strongest buyers of late. Private equity money coming in and other high net worth has still rather been spotty. So the change in interest rates versus the projection that the economic conditions, at least in North America, are improving, I guess, you'd have to say, on balance, haven't affected price expectations one way or the other.

Yes. I think the other couple of things to point out, as you know is that this industry is positively correlated to interest rates. In other words, we do better when interest rates go up, given that interest rates going up often reflects improving economies. And if you look at '95 to '98, or '04 to '07, real estate valuation of hotel assets have gone up as interest rates have gone up, reflecting profit expectations improving faster than what interest rates going up might do to valuations. So actually, interest rate going up, we think, would be, in the end, a net positive. The other thing in the quarter was you should know is that when there was an anxiety, there was definitely some kind of a pulling back on the table from some people just to wait and see how much things will adjust. As you know, some people use their stock as currency for buying. The stock took a hit for a while there, it's all come back now. And others just may -- just decided they might want to wait and see if sort of where things are going to readjust. So I think things have come back to normal and conversations are sort of proceeding. But there definitely was a little bit of a pull back from the table that may have delayed some deals.

Your next question comes from Robin Farley from UBS.

Two questions, I guess. One is, it looks like your inflight investment CapEx expectation went down by about $50 million. I'm just wondering it's relating to -- is that a project that you -- or a property you may be close to selling or kind of why that changed in inflight. And then also if you have just any comments about the pace of your pipeline in China given the supply growth there. Has your expectations for the pace of pipeline in China slowed at all?

Yes. The capital thing, as some of you may know, I mean we have a certain set of goal in terms of capital. Typically, we tend to under spend as we go through the year. There are delays that come up because of approval requirements, occasionally, we may sell a hotel or 2, and we recalibrate as the year goes by. I would say, some of the capital that we've got back this year probably won't come back because it does relate to a couple of asset sales we did, for example, the one in New Orleans. So that's what it reflects as it relates to the pipeline in China. Frits, you wanted to...

Yes, sure. So I -- I think, broadly speaking, Robin, we tend to be conservative in our outlook on capital expenditures so that we are able to have more capital, or cash, rather than less, if there's a change. In terms of the pipeline in China, I think the headline number is that, in spite of the openings that we have over the last 12 months, our actual pipeline is up just slightly from where it was, which would suggest that the rate of growth is still the same. We've watched for actually a number of years now, as to whether the projects that we're signing are still underway and meeting their milestones. And as of right now, those basic parameters are still roughly the same, which is to say, there aren't major projects that are significantly on hold. It is possible, although this would be speculation, that the length of time it takes to build a hotel could slow down in China, but we haven't yet seen that in a way that's demonstrable.

Yes. I think it's important also to point out is that we've maintained our pipeline in terms of rooms over the last couple of quarters, even as we've opened 4,000 rooms at the Sheraton Macau. It's not often that you have a 4,000 rooms, a single 4,000-room hotel open. As you know, when a hotel opens, it comes out of your pipeline, so then you have to fill the pipeline with those rooms. So we have seen some significant openings and still been able to maintain the size of our pipeline.

Next question comes from Bill Crow from Raymond James. William A. Crow - Raymond James & Associates, Inc., Research Division: Okay, a 2-parter on China, and then a clarification, if I could. On China, are you seeing any mix shift between domestic guests and international guests that are helping to sustain the positive REVPAR growth? And then second, are you seeing any change in the pace of visitation by Chinese citizens in the hotels in other parts of the world? And then the clarification, I think you mentioned, you reinforced your intent to sell $3 billion of assets by 2016. You said that would you leave you about 20% contribution from owned assets. What percent of your value do you think that $3 billion represents today?

Yes. I'll take the first China 2-parter there, Bill. I think in terms of mix of international versus domestic Chinese travelers at our properties, what we've seen is a continuing trend of our business actually skewing more and more to local Chinese travelers, and that's a function, obviously, of overall growth in primary demand and the number of people in China who've reached threshold incomes or employment that have enabled to travel and stay in our hotels. But the other driver of that, candidly, is that, as we move to Tier 2 and Tier 3 cities, what we see even just from the travel data before we enter those markets is that they're more heavily visited by local Chinese travelers than international ones. And if you reflect on that, I think that makes a logical sense. In terms of the Chinese visitation outside of the market, I mentioned in my own remarks that, in fact, at our non-Chinese hotels around the world, we've seen a 20% increase, overall, in Chinese visitors to those hotels with some really interesting spikes. And I mentioned the Laguna Nusa Dua in Bali and in Verbier as 2 pretty disparate, but dramatic, examples of what that means. And again, I think that points to the fact that even at a more moderate GDP growth, the number of people, every day, who are crossing into the realm of being possible Starwood travelers is increasing, the other place we see that, of course, is in the continuing growth in our SPG membership base, which in the last 2 years has been dramatic. In terms of our asset sale number, I'm going to hand over to Vasant here, but as I said in my remarks, we are focused on selling $3 billion worth of assets by the end of 2016, and Vasant, you may want to add some color.

Yes. I guess, your question is sort of an indirect way of asking how much do we think our owned assets are worth. I'm sure you all have opinions on that and we shared with you our perspectives on it at our Investor Day, and I would certainly direct you to that. But roughly speaking, if you go with per key valuations or multiple valuations and so on, selling $3 billion is probably about 60% to 65% of the value of our own real estate. Somewhere in that range would be our guess.

Your next question comes from the line of David Loeb from Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: I was just also looking for a clarification on what kinds of considerations would lead you to be out of the market for share buybacks? And further, if you could just talk a little bit about uses of capital to fund various kinds of growth initiatives. Have you looked, for example, at brand acquisitions? And what is your appetite for investing in that manner?

Yes. I don't think I want to speculate on what kinds of considerations might have caused us to not buyback stock in the quarter. I think what we said is probably all we want to say, or can say on that topic. And the second question was...

I think the other thing is what we said is those considerations are [indiscernible] and other reasons [indiscernible] behind us. The other question was, considering alternate uses for our capital, in terms of buying brands and so forth. First of all, as we've mentioned a number of times, we've been active in making sure that our existing owned real estate portfolio is as well prepared for sale as possible. And we found, in many cases that, particularly, iconic hotels, post renovation, have a much broader buyer base than pre, which is why we done things like -- make the St. Regis Florence conversion, and the Gritti Palace, for example, as well. And then, in terms of the looking at the market for other brands, and we said this repeatedly over time, the Le Méridien acquisition, which is now a number of years ago, has and continues to be a home run. We always look at the market for other possibilities. The reality is, and those of you familiar with the hotel business globally, and the kinds of brands that would make sense for us, it's a limited selection. And we've always felt that a good deal would be great, but not doing a not good deal is also good. So that's where we stand.

Your next question comes from Harry Curtis from Nomura Securities.

Just wanted to go back to the potential buyers of real estate assets. Can you get a little bit more specific about the appetite for private equity these days, and maybe what they were looking for in 2006, 2007, and what the factors are there? And if their appetite you think will remain lukewarm, relative to where we've been in the last year?

I don't think we've seen much change in the buyers who are out there. As we told you before, there are 2 kinds of buyers. There is the public REITs, who are primarily buyers in the U.S., who wants to use stock as currency to buy. As we told you before, they buy one hotel or 2 hotels at a time, issue some stock and then come back for more. And we've done multiple deals with various of the public REITs, as you've seen over the last couple of years. The other is the ultrahigh net worth individual, family/sovereign fund type buyer. Private equity hasn't been a player. You've got some smaller entities buying select sell hotels, types of things. But the private equity deals, that people who are willing to buy large quantities of hotels with high levels of leverage, that buyer isn't there. Two reasons, probably, one is the amount of financing available and, at least in a couple of cases where we've talked to them and they've approached us, we're not distressed sellers, so we're looking for full value, and therefore, we're probably not the ideal place for them to look for assets.

The next question comes from Jeff Donnelly from Wells Fargo.

First off, when you think about group business and the reasons why it hasn't recovered as robustly as people maybe have originally hoped for this cycle, what do you think is the function of cyclical drivers, such as lower employment or what not, versus secular changes, perhaps? For example, like maybe pharmaceutical companies were changing the way they market drugs to the public versus through doctors. What's your sense on -- I guess, I'm trying to think of how you recapture group and where it once was?

Yes. So Jeff, I made some comments earlier in this call about the group business. And I think what we're saying is that, at some point, you have to accept reality and that 4 years into an economic recovery where our transient demand has come back strongly. That group has had a different trajectory, you have to wonder whether they aren't some substantive or secular changes in the nature of group business. And to parse one from the other, I think, is always hard to do. And rather than speculate, I just make the observation that what we've absolutely seen as a shift to a larger number of a smaller meetings, that's more prevalent, by the way, among corporate demand than it is among associations. That the reluctance, this far into the recovery, for companies to do some of the much larger group meetings that they've done in the past, may reflect a change in the way they think about those meetings. And some of that, I think, has to do with changing business culture. Some of that we have to do with the fact that during the downturn, those bigger meetings might not have been missed as much. Now of course, we maintain the aspiration that more of that business will come back as time goes on, but as I mentioned in my remarks as well, what we've done is work to make sure that our sales teams are more able to get after different types of business and smaller group meetings. We invested in automation of our sales and our ability to deliver, flexibly, our ability to prospect for new accounts and to continue to fill those holes. And I think, overall, while the group business is, of course, important, particularly in North America, the fact that we're at record occupancies today and that hotels, in key markets, especially in the peak periods, are full, I think in the end is the best guarantor of -- not that I'm guaranteeing anything, given safe harbor, but it's the best way to ensure that rates will continue to go up and that's what we've been saying for some time.

Yes. And a bit on cyclical component, there are 2 things we can point to. One is the sequestration in the government business has definitely -- we've heard affected the number of people showing up for certain group meetings, especially association meetings, because government people are not showing up for them and some funding available for association meetings has gone away. Although, as Frits said, we think there's a structural element in this, too, on the association side. And then there's another small cyclical component here probably, because we did hear in the second quarter that when some of those concerns emerge about the economy and the taper, some people decided to wait till the end of the quarter before they made commitments. So there could be some small timing and cyclical aspects to it, but our view is what Frits outlined, which is there something structural and secular here.

Yes. I might just add last point which, to many of you, may be somewhat obvious, but I think important, and that is, as our business continues to expand in markets outside of the U.S., the group business in those market has historically and continues to be less group dependent. So the impact on our business of this changing complexion of group in North America is less important than -- for us, it's certainly would have been even a few years ago.

The next question comes from Thomas Allen from Morgan Stanley.

Can you talk a little bit about your recently announced expansion plans in Mexico? Maybe elaborate on the expected returns in that market relative to others. And then how do you expect your Latin American portfolio to develop over the next few years in terms of country exposure?

Yes. So the Mexican business, for us, I think, has been historically a strong and important one, and Mexico remains our biggest market in Latin America, with 24 out of the roughly 70 hotels in the region. And clearly, that's fueled by U.S. demand. Largely, that historically, has been driven by resorts, but also by some important urban and business properties. And certainly, in the longer-term, over the nearly 20 years since NAFTA, the Mexican economy has benefited greatly and has coupled itself more with the U.S. market than it has with the rest of the Latin American region. We continue to see a great deal of confidence among real estate investors and developers in Mexico, for Mexican markets, and that's been the source of our pipeline for our business there. At the same time, there's been an overall growth in the Latin American business. And when we look at markets like Brazil, for example, you see a massive growth in the middle class, very much along the lines of what we've seen in other parts of the world, including Asia. And then when you look at markets like Panama, which have become distinct financial centers, or the economic rebound and growth of places like Peru and Colombia, or the continued growth as commodity exports in Chile, we remain optimistic about the overall region. Argentina, of course and, to an extent, Uruguay have been a bit less inspiring of late. But overall, when we've introduced, for example, the Westin in Peru, which is the first Westin in South America, the W in Santiago, those have been very successful introductions of our brands into those markets, and they've created interest in other properties throughout the region.

Your next question comes from Ian Weissman from ISI Group.

In your comments on China, you mentioned government transition and the slowdown in the economy as sort of weighing on operations. How do you think about the meaningful pickup in supply and the impact on results going forward because the pipeline is pretty robust over the next few years?

Well, I think it's hard to make long-term forecasts or I should say, rather, it's hard to make near-term forecasts. I think the long-term forecast is pretty clear, in terms of where we stand, and that is growth in primary demand and the strength of where we stand in the marketplace to get more than our fair share of that. The other thing to look at is what results, to date, have shown us, and that is, as I mentioned, a 24% increase year-on-year in our room count in China, a 200 basis point-plus growth in occupancy at the same time. So far, at least, the growth in supply has not exceeded the growth in demand for our properties. Now whether that's going to be different a year from now or not, is something, as they say, is hard to forecast the weather in 5 or 10 years, we think that growth in demand will continue, we're pretty confident.

Yes. I mean, just to give you some more data. This issue is linked less to supply than it is to some of the other reasons we mentioned because, if you look at certain cities that we've highlighted in the past, we told you last year, cities like Hainan had huge amounts in new capacity. Hainan was up -- it was one our fastest growing markets in China in the second quarter. We told you Tianjin had a lot of new capacity where, in fact, we added a big chunk of it under our brands, that was up almost double digits. I would say the same about Shenzhen, Guangzhou. In fact, some of the declines has been in the markets where there hasn't been supply. It's linked to more to these other issues than it is to supply. So supply is being absorbed. It's more some of the other factors Frits mentioned.

We have time for one more question, please.

Your final question comes from Carlo Santarelli from Deutsche Bank.

Most of my questions have been answered, but just in terms when you look out to 2014 and, obviously, with the color that Vasant provided earlier on group pace, et cetera, when you think about just the U.S. business and you benchmark it against how your 2013 expectations are shaping up, directionally, do you guys see the opportunity where group contributes meaningfully enough for we can see a REVPAR acceleration in '14 in your domestic business?

I think it's too early to speculate about '14. Look, we remain, actually, as Frits said, very optimistic about the U.S. and, frankly, in general, in the developed world because of this extraordinary and sort of unprecedented lack of supply. And it isn't coming anytime soon. When you have less than 1% supply, when you have demand growing at over 2%, even in this economy, and when you have occupancies already at peaks, that only sets you up for something good to happen. Rates are already at 80%. We are seeing better group pace next year, so that can only help. Whether that all translates into an acceleration of REVPAR and all that, I think it's too early for us to make those kinds of projections. Certainly, we'll talk more about it as we get into the later part of this year.

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

Ladies and gentlemen, this concludes today's Starwood Hotels & Resorts Second Quarter 2013 Earnings Conference Call. You may now disconnect.