Good afternoon, and welcome to Marriott International's First Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in the listen-only mode. After today's prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Arne Sorenson, President and Chief Executive Officer. Please go ahead, sir.

Good afternoon, everyone. Welcome to our first quarter 2019 earnings conference call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer; Laura Paugh, Senior Vice President, Investor Relations; and Betsy Dahm, Senior Director, Investor Relations. First let me remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities Laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued earlier today, along with our comments are effective only today May 10, 2019, and will not be updated as actual events unfold. In our discussion today, we will talk about results excluding merger-related costs and reimbursement revenues and related expenses. GAAP results appear on Page A1 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 also on our Web site. Before proceeding to talk about our results, let me take a minute to talk about the announcement we made last week about my cancer diagnosis. As we mentioned, I have Stage 2 pancreatic cancer. Thankfully, the medical team at Johns Hopkins has seen this many times before. They believe we have caught it early, that it is operable, and that the course of treatment is proven. I'm grateful for all the messages of support from the investment community as well as from Marriott's community of associates and business partners around the world. With the support of an extraordinary strong team of Marriott executives,…

Thank you, Arne. I too would like to express my deep appreciation for Laura's countless contributions and dedication to our Company. Her strategic insights and determination to get the right answers have no doubt contributed meaningfully to our shareholder value over the years. Well, I will personally miss her a great deal. I know you will all join me in wishing her very happy retirement and celebrating her accomplishments during the rest of this year. Now, onto the results, for the first quarter of 2019, adjusted diluted earnings per share totaled a $1.41 compared to $1.34 in the year ago quarter. This was $0.08 over the midpoint of our guidance of $1.30 to $1.35 largely due to better than expected windfall tax benefits and other favorable discrete items on the tax line. Recall that in the prior year quarter adjusted EPS included $0.11 from gains on hotel sales. Gross fee revenues totaled $895 million or 6% increase year-over-year, largely due to unit growth and higher incentive fees and credit card branding fees. Incentive fees increased 5% with good margin performance and strength at our Florida and California resorts during their strong season. Credit card fees alone totaled $93 million, up 8% while other non-property fees totaled $39 million. With the stronger US dollar, first quarter fee revenue reflected nearly $7 million of year-over-year unfavorable impact from foreign exchange net of hedges. Owned leased and other revenue, net of expenses totaled $15 million in the first quarter, a $20 million decline from the prior year due to $21 million of lower termination fees. General and administrative expenses totaled $222 million compared to $247 million in the prior year quarter. G&A in the first quarter of 2018 included a $35 million expense for supplementary retirement savings plan contribution. First quarter adjusted EBITDA…

Thanks, Leeny, and thanks for all the kind things both you and Arne have said. I have to say that the best part of my job at Investor Relations at Marriott is working with some very talented colleagues. IR is a team effort not only including the gifted [indiscernible] but many, many people throughout the organization, including the broad senior management team. When we talk about the collaborative nature of Marriott culture it is not a story. We have a very good time in IR. As I think you can tell we laugh a lot. We love working with Arne and Leeny they are just the smart forthcoming and engaged as they seen. The other best part of my job in IR is working with all of you. I'm always happiest when the phone rings and you want to talk about Marriott, our competitors the OTAs the economy or your summer vacations and many years I've done IR. I've seen the market move from unreasonable exuberance to irrational despair and back, I know you face meaningful pressure to deliver result, and I hope I have helped as you have evaluated the company. I will be here through the end of the year and look forward to seeing many of you in person at conferences and meetings in the next few months. So let's answer your questions. So we can speak to as many of you as possible, we ask that you limit yourself to one question and one followup if that's possible. We will take your questions now.

[Operator Instructions] Our first question comes from the line of David Katz of Jefferies.

Hi, afternoon, everyone.

Hey, David.

Good afternoon.

I have to admit I had probably four or five questions in my head, and I am struggling to remember any of them. I just wanted to wish all of you the best, but what I did want to talk about is we have started get into a range where just industry wide some of the metrics have started to be a bit choppy. And yet, the cash generation remains powerfully strong. If we were to paint a scenario, and I don't think you got quite this draconian at your analyst meeting, but if we were just start to talk about RevPAR that was down, call it 2% to 5%, have you sort of penciled out what the cash would like, and how your decision process would be altered under those kinds of circumstances? And I am again not calling or wishing for it, just thinking out loud.

Yes, I think – Lenny can jump in here. I think the best place for you to refer in terms of the financial model is to what we shared with you at the investor relations meeting, and you can do some of your own calibration of that and make some assumptions and probably be fairly close. We don't have a model other than that one that we shared with you then. And I guess I would just say thematically that while March was a disappointing month in many respects, it is to us not a harbinger of a predictably different environment than the one that we have been going through the last few quarters. So, thematically today, I think we would say it's steady as she goes for the next few quarters. We continue to see that when adjust for hurricanes and strikes and holidays and the like that we are poking along broadly between -- broadly around 1.5% sort of RevPAR growth. We might have been a tenth or two shy of that in first quarter 2019. But there is some good news too. We talked about good April bookings for example in group, a very strong performance for us for the month. And so, while you should do whatever modeling you think is appropriate and make whatever forecast you think is appropriate, I think our caution to all of us would be let's just expect for now that we are going to keep going at sort of the pace we have been going over the last few quarters.

The only thing I'll add David is -- and we did do a model that actually did assume a 5% decline in RevPAR as part of what we talked about at the security analyst meeting. And I'll point out a couple of things, one, we are obviously far less dependent on your classic North American incentive fees when you look at both our growth internationally as well as the credit card fees. And then second of all, I’ll talk that even in the great recession, we ended up with the lowest year being 3% growth in net rooms. And so, when you continue to see that sturdy strong rooms growth and a clearly less volatile franchise and management fee stream, I think it bodes well for really strong cash generation if we were looking at a recession.

Great. And my one follow-up literally is you made reference to bad debt expense, which I just looking back quickly I am not sure that we have seen that in some of the prior quarters. What's in there?

For sure. That's part of G&A, and that's obviously when you end up with let's say a terminated hotel that is part of what happens. You end up not getting all of your reimbursed costs back. It is in the G&A line. It can be a little bit lumpy. It's a really small number. But then obviously as we have said this year for our G&A as part of the increase in the overall G&A that we forecast for the company, about $5 million of that is from bad debt. That's related to a few international hotel situations in Middle East, Africa, and Asia-Pacific. That's I think is the easiest way to describe is one-off situations. But as you might imagine, the bad debt number for the company overall is way immaterial.

Understood. Thank you, and again, all the best.

Thank you.

Thank you.

Our next question comes from Shaun Kelley of Bank of America.

Hi, good afternoon, everyone. I would like to yes, say my best wishes to you Arne on a speedy recovery, and congratulations to Laura on what's been an incredible career. So my question will be just going over to the RevPAR performance that you saw on the quarter, I think as we look through the metrics that you provide, the numbers that standout to us were -- we look through the legacy Starwood brands. I think most of those at least on the full-service side seem to under-perform some of the chain scale averages and some of the performances that we saw in the Marriott legacy brands. I know these numbers bounce around, and we always want to pick at little patterns. But, could you just elaborate a little bit on that? And I think, Arne, in your prepared remarks you may have mentioned something about a reduction of discounting, so did that drive some of that RevPAR performance, or what should we expect going forward as you continue your integration path?

Yes. I think there are a few different factors that are going into this. But it’s a perfectly fair question. And one of the things, I think, we start with here is geographic distribution. So if you look at Smith Travel industry wide numbers for Q1, you see a 4 point difference in RevPAR performance between the top 25 markets and all others. Top 25 markets in the U.S. according to Smith Travel were down roughly 1% -- one full percent in RevPAR. The other markets were up 3%. So you've got a 4 point difference in RevPAR performance between those markets. Obviously, that's industry as a whole. That's not Marriott's portfolio uniquely. And I think when you look at Marriott in its entirety compared to some others in the industry or when you look at some of the Starwood brands compared to some of the Marriott brands, I think you will find that we are much more concentrated in the top 25 markets, and that is inevitably part of this. When we look at Marriott brand's legacy versus Starwood brand's legacy, we can see a couple of other things that are happening. One is the strike carryover in Hawaii, particularly where our bookings are a little bit longer window. First quarter was continued -- they had some strike impact even though strikes were done that is disproportionately impacting the Starwood Hotels. I think the second would be around OTAs, and we called out in the prepared remarks that OTA business is down 4% for the combined portfolio in Q1. Interestingly, the Starwood Hotels were about 10 points more reliant on OTA's list than the Marriott Hotels were. And as we have gone to one reservation system and once our unified revenue management strategy, the shift if you will from reliance on those third party OTA is to international digital channels probably cost a little bit. We thought it's maybe few tens of a point for the portfolio as a whole. The impacts are is probably a bit more disproportionate on the Starwood Hotels. And there are some changes on other discounting. Starwood had some deeper discount packaging that Marriott did not have. That's probably had an impact in it. But you roll all those things together, those are probably the principle drivers of the difference in the averages beneath of course the portfolio as a whole you will individual stories with individual assets.

And I guess my quick follow-up would then be just any changes you guys think about the broader integration process? And I know when the deal was originally contemplated I think there was some down the road revenue synergy opportunities that you were probably envisioning just to kind of how you think about those in the context of what you are actually able to deliver right now?

Yes, I think the time is ripe for that. I mean we have got the combined loyalty program launched. It is in market and being marketed. We have got strong credit card sign ups. We have got strong share wallet growth. I think there is a lot we can look at now to be optimistic about the future. And I think it's time to deliver the revenue upside.

Thank you very much.

You bet.

Our next question comes from the line of Jared Shojaian from Wolfe Research.

Hi, everybody. Thanks for taking my question.

Hey, Jared.

Just to stick with the same line questioning here. I mean called out RevPAR index being up a 100 basis points. And, we saw pretty sizeable increases from your peers as well. So I guess it's the conclusion that the independence are just meaningfully losing RevPAR share right now. And then on that idea, how do you think about the value proposition of branding today versus in the past? Because presumably, there's more value for owners today than there's really ever been? And does that give you the ability to push royalty rates a little bit harder?

Wouldn't that be nice? You obviously won't hear us be unbiased about the value of branding, we think we deliver extraordinary value to our owner and franchisee partners by plugging them into a system with a loyalty program and a very efficient reservation system that delivers substantial business to them at meaningfully, less cost, then would be the case otherwise, but I don't think you need to take our word for it, if you look at what's happening with the development pipeline. And we've talked about some of those statistics, but we're about 7% of the global industry today with, something like 20% of the hotels under construction heading towards our brand. So you can see investors, owners of real-estate, moving with their feet, because I think they see the strength of them. I think the other thing to remind everybody, and we don't want to get defensive sounding and we don't want to get too technical on RevPAR index. Our RevPAR index is a really important tool, particularly when you're looking at an individual hotel and how it's performing in its competitive set, but it is not the only measure that is out there to assess how portfolios are performing. In the wake of acquiring Starwood, we have found that many of our competitive sets include many of our own hotels, because there will be concentration, particularly in some of these urban markets, where we've got a significant number of full-service hotels. And so, we're measuring our performance against our own hotels, not exclusively, because we've got to have some others that are in there. And similarly, we are seeing to some extent, others who are competing in markets that we don't exist in. And so, if you think about the secondary, or some of the tertiary markets, our brands are not broadly distributed in those markets. And as a consequence, we don't have the impact maybe of newly ramping hotels in those markets, or of competition, maybe against some of the relatively weaker brands. All things put together, we are actually gratified in the midst of a massive integration, that in the midst of all of that, we still managed to take about 100 basis points index growth, both in the United States and globally in the first quarter of '19.

Great, thank you. And just on the pipeline, it was down quarter-over-quarter for the first time in several years. I know we shouldn't read too much into one quarter it's worth the pipeline data but I think the pipeline last year, and so far, this year is growing quite a slower than your 7% gross unit growth. So can you talk about that? And maybe what you're hearing from developers right now?

I don't think the very modest. I think we calculated 0.8% decline in the pipeline from quarter and Q4 is a trend. We opened well in the first quarter. Always at the end of the year, we probably have a little bit more coming on the pipeline than we do it other times and typically Q1 will be the slowest signings quarter part of that is because you've got to go through a reauthorization of the franchise circulars in most states, all those things combined, led to that modest negative in Q1. And we don't think we're necessarily see that in the quarters ahead, but having said that, we've said now for least a couple of years that sort of steady state or organic growth, particularly in the United States, United States is flattish. We are I think continuing to take share, maybe even building a little bit momentum of momentum, but in the 9th or 10th year of recovery with cost increases in construction and labor and length of the construction cycle. Even though financing is high and the absolute returns are quite good. I don't expect we'll see a meaningful ramp up for example, in development in the U.S., I think instead will be sort of poking along at flat levels, substantial bit flat levels, and growth quarter-over-quarter and year-over-year is going to depend a lot more on what happens in the rest of the world.

All right, thank you, and Laura, congratulations to you, well deserved, and Arne, my best wishes to you for a quick recovery.

Thank you.

Thank you.

Our next question comes from the line of Joe Greff of JP Morgan.

I was going to say good morning, but those are old conference calls. Good afternoon.

Thank you…

I guess 1 PM is better than 4.30 PM on a Friday. More seriously, Arne we wish you the best heartfelt, and Laura congratulations, we will definitely miss you.

Thank you.

My question, most of my questions have been answered, but one question I have is regarding the development pipeline, what percentage of the pipeline is North America or U.S. top 25 markets, full service? And what percentage of that would be financed or under construction?

We will have to go back to you on this. I think about 40% of the global pipeline is luxury enough [technical difficulty] so it's a pretty healthy mix, which is in the higher segment. I am certain that the percentage in the U.S. only, which is luxury and upper upscale is meaningfully lower than that, and that U.S. lean towards for us upscale principally not upper mid scale, we don't really have upper mid scale space. Am I close?

In the pipeline when we're looking [technical difficulty] it's about 10% of overall 475,000 - global pipeline of the North America pipeline, it's about 20%.

Thank you so much.

And I don't think we can give you the top 25 versus other markets, but with the information we've got here.

Obviously, full service…

Okay, thanks.

Our next question comes from the line of David Beckel of Bernstein.

Thanks a lot for the question. I'd also like to echo the sentiments or well-wishes Arne and congrats Laura on a tremendous career. My question, my first question has to do with RevPAR cadence given Q1 results Q2 guidance. Of course there's some timing issues, but back half implies, sort of a pretty healthy acceleration, particularly in the U.S., you talked a little bit about group strength giving you some confidence that will materialize, but there -- are there any other one-time items to be aware of there with respect to the calendar. And more generally, what gives you the confidence that demand and RevPAR will sort of seemingly reaccelerate through the back half of the year?

Yes, there is, I mean I think is one thing we can be probably annually blamed for, I suppose. And that is we often keep our range of full two points. And so obviously we started the year one to three. We're still at one to 3 after the first quarter. And if we were actually comparably precise in each quarter as the year went along, we would narrow that range more and more, because the more quarters put in the book, the less likely, it is that you're either going to hit the bottom or the top end of that. And I think that could be said here too, but maybe they get to the opposite fundamental point, our internal, I guess, if you were to take it sort of single point RevPAR forecast is essentially right in the middle of that range. And so, that tells you that basically when we're looking at trends in bookings and group bookings and year-over-year comparability issues. The most obvious in the fourth quarter, of course being the strikes, which we've had to struggle through in the fourth quarter 2018, but hopefully will not be in the fourth quarter of 2019. All of those things get us to a place where we think it is sort of the midpoint of that one to three years about the best prediction that we can make. It does suggest that in part, because of comparability issues and because of bookings maybe were a bit better in the second, in last two quarters than in the first two quarters, but not a dramatically different scenario. And it's not are sitting here saying we're going to have a different kind of economic environment and we have to today.

Great. Thanks for the color there. And just a quick follow-up, I know it's a CapEx increased by about $100 million. Can you give a little color as to why the increase?

Sure. Basically, we're up in the midpoint, about $100 million and it is a combination of little bit higher systems initiatives tool, which will actually be reimbursed over time from our owners, as well as, a loan for a particularly valuable management agreement. That's going to result in a meaningful property improvement program that will bring a hotel up to really fantastic brand standard for that brand.

Great, thank you very much.

Our next question comes from the line of Smedes Rose of Citi.

Thanks. Arne, Glad to hear that here in good hands and Laura is not going to be the same without - we look forward to catching up offline with you. I wanted to ask -- just you mentioned your opening remarks and new design for TownePlace and Fairfield ends. I think targeted at smaller markets. I'm just wondering is that answering some sort of unfilled demand that your developers are asking you to do. Are you trying to be more competitive with products that are already targeting the smaller markets or kind of maybe what's what does it mean for those that I guess for the pipeline for those two products.

I think it's actually both. But there, and I sense there the same issue, we have heard from a number of our franchisees that they want to expand in secondary into some even tertiary markets where a Fairfield or a place at either 90 rooms instead of at 125, 130 rooms is the better positioning for those markets and while we've had, we've had the ability of course to shrink the number of rooms in the hotel. If you're not shrinking the public space in a way that's commensurate with that you're probably putting a product that's a little bit over built in that market. And so we want to do something with those partners who want to grow in those markets to make sure that we've got something, which is true to the brand, but cost effective for them and competitive with competing product that might be there, and obviously you can see we've got a lot of different companies that participate in the select service space, particularly. And if you look at the tertiary markets, you'll see that we are probably less distributed there than many other companies in the United States.

Okay, thanks. And then just listening to all the hotels -- Expedia the new Expedia contractors come up some. It sounds like more than just, it's a little more nuance than just sort of lowering the commissions and it's more about more control over, maybe the way the rooms are put into the OTA systems, can you just provide maybe some just broad strokes that maybe just kind of the changes in the contract. How is…

I mean that's, that obviously we are now, I don't even know what round of new contract is with Expedia, but we've been renegotiated contracts for nearly 20 years I suppose I that and there is a similarity to some extent with each of them, but I think on some level we continue to look for cost effectiveness. We look for data transfer ability, the ability to understand who the customer is and have the systems understand the customer is. We look at inventory control, which is can we yield our inventory, can we make sure we're pricing our inventory on our own platform in a way that doesn't necessarily have to be offered up in every other platform. And those things were on the table here too and of course you would expect Expedia or another OTA to one-off in the opposite of what we want certainly, as it relates to the level of the commission. That's probably the clearest to see, but I think we are grateful for where we got with Expedia, we do think it will deliver economic benefits to our owners. We also think we are we don't have much to say about this today. You'll have to stay tuned, but we do have an idea with them with Expedia, that we think is attractive to both of us maybe a incremental place for them to make some economics in our space, but also space in which they can actually deliver more cost effective solution to us than some of the solutions that are available to us today. And so we're pleased with the outcome that we've got and look forward to seeing what we can accomplish with it.

Okay, thank you.

You bet.

Our next question comes from the line of Anthony Powell of Barclays.

Hi happy Friday, everyone and Anthony well-wishes, well-wishes to you Laura thanks for your help and openness over the years. So that the house profit margin increase in North America on pretty modest RevPAR was positive in the quarter. I think you've targeted 50 basis points of hotel level margin growth from the merger are you believe that currently do you think that could lead to upside to your incentive fee growth projection of 6% to 10% over the next few years.

So, couple of things, we basically have achieved in every year since we've acquired Starwood, 50 basis points of at least 50 basis points of margin improvement of apart from RevPAR and '17, '18. And it's our goal to do that again in '19 and quite frankly, Anthony, if our goal to do it again in '20. So I think whether it is from purchasing or from what we've seen in the loyalty program to productivity synergies to above property synergies through the PSF we've been thrilled with what we've been able to do and quite frankly with the hard work that the properties have put in to making that a reality. So we do continue to see the benefit. And I think you're seeing that come forth the incentive fees and in the process of the hotel.

Got it. So I think in your, in the Investor Day, you said 6% to 10% of growth over the next few years. Is that still the target or there may be upside to that.

Yeah, I think for now using what you've got in the Security Analyst Meeting is just right.

Got it. Okay, just one more.

We, one more certainly hope to beat it.

Got it. And just on the home rental business, this is more of an offering or amenity for core customer or do you think, this really scale to something that's meaningful in terms for over the next few years.

Well times going to tell. I mean I, we're taking a different strategy obviously then number have , we are not, we want to, we know that what we offer in this space. Our brand must stand behind that nobody is going to excuse us from a bad experience a home and villa rental kind of experience. You're not going to blame the host, they're going to say Marriott you put me in a product that was not cleaner or something else, happened in that space. And so that's one thing that we'll make we'll have an impact on the size of business long term. The second thing we're doing is we're really looking at the whole home market, we're not looking at a studio apartment we're not looking at extra bedrooms, we're looking at something which is meaningfully different from a traditional hotel room for obvious reasons. We think it makes them more complementary to the hotel space that we're in, we also think yet it helps skill on a gap if you will. One of the gaps that arguably we've had is that win larger families whether that's a single nuclear family or an extended family are traveling together hotels are not necessarily always the easiest place to because there may not be places for them together. Outside of the public spaces of the hotel and the more we can do something that solves both of those, the better off. We think we are I think though even define that way. It is a big market and a market that we can grow in; we obviously don't expect that there will be a material financial impact in 2019. We wouldn't tell you to build anything in this model till we get smarter about it in the years ahead. But we're really excited about it and we are really eager to learn what we can learn in this space.

Great, thank you.

You bet.

Our next question comes from the line of Bill Crow of Raymond James.

Good afternoon folks. And obviously share the sentiment that's already been said, or a 20 years of trying to me better I appreciate your efforts. I'm not sure they work, but I appreciate them - Arne, my question is really on the select service limited service space whether you think the consumer today is more discerning and what they're looking for and whether that's put older properties at a significant disadvantage to newly opened properties.

It's a good question. Good question, for lots of reasons, I mean I think the full service hotels have got it they very meaningful advantage. They've got function space they've got presence that a typical select service hotel can offer often food and beverage range that select service hotel can offer, and they can continue to be I think quite competitive, particularly in the right kinds of markets. I think at the same time you see select brands and we've got a number of these I think about Moxy and AC and Aloft and Element just to name a few. That come right to mind that are interesting, they can be lively they can be with energized by bar space or lobby space or maybe even flex Food & Beverage space and if they're in urban locations they give a better alternative I think in some respects, then the relatively lower rated hotels that might have been in the same market in a past generation. If they existed there in the first place. And so, we'll watch this altogether obviously one reason these brands are growing so well as I think our franchise partners see them and say, this is a pretty, pretty interesting new mouse trap and we want to be part of experimenting to see how this works. I think ultimately all these hotels can be successful and if they're positioned right and if there truly their brands. I think some of the newer select brands have the ability to punch above their weight in terms of rate per square footage, which I think will make them stronger over time. And ultimately where the growth settles is going to depend a little bit on that return and that return is both about current cash return for development costs, but it's also about capital preservation and what assets are going to hold their value the longest and that's still often going to be urban main and main kinds of locations that may deliver a little less percentage cash flow return but are going to hold their value extraordinarily well.

Okay, I'll leave it there. Thank you.

You bet.

Our next question comes from the line of Patrick Scholes of SunTrust.

Good afternoon. Let me just also reiterate Arne for a quick recovery and Laura, congratulations. Well deserved.

Thank you.

A question, you had talked about occupancy taking a bit of a hit in the quarter. I guess, less use of third-party OTAS. Is this something that we would expect to continue throughout the year and then is it also fair to think that's on the flip side, it certainly benefits owned hotels including yours, as well as IMS?

I mean I think we have seen, probably some of this the last few quarters. We certainly in the Marriott -- Legacy Marriott portfolio even before the integration of the reservations platforms, we have started to do some yielding of our inventory off of third-party sites when we predicted we didn't need that business. And so I suspect as we get further into the year, we will see some lapping of what we did in the past. I think what is accelerated, probably a bit is with going to one reservations platform is we brought the Starwood Hotels in sort of one fell swoop onto a little bit more aggressive approach that way and so we think we'll probably see some impact of that, we're going to watch this. I mean obviously we don't want to turn away business, if it's incremental to us. What we want to do, though, is make sure we're set up to maximize profitability of hotels and long-term and well you we've talked about this before. Well, RevPAR is the single measure, which is most available in the industry. It is not the measure, which is the most important, which is what kind of profits are you driving from the performance -- hotel as you compete for owner Capital. And as we've said before, we're quite compared to sacrifice a few tenths on the top line if it makes sense to drive enhanced profitability on the bottom line.

The only additional add to that is that I would not expect it to the second part of your question, I would not expect to materially impact only profit.

Thank you for the clear definition.

Our next question comes from the line of Robin Farley of UBS.

Great, thank you. I want to add my best wishes for Arne and Laura quite obviously I'm -- that Laura leaving the as many years of I've been doing this. I always learn something when I talk to Laura. So I think for all of us are understanding of the industries can be diminished by her going, but so let that stop you well deserved. So my question is incentive management fees. I wonder if you could give us sometimes you give color on kind of what percent was hotels are paying versus the previous kind of in North America, and then -- just with the guidance for management -- incentive metrics declines in Q2, you mentioned that's renovations, it seems like something that I'll the renovation disruption might be more than one quarter phenomenon, but your full-year guidance is still for that up mid single-digit for the incentive management fee. So I wonder if you could just talk to us about how, like, what's the sort of specific to Q2, but not necessarily an issue in later quarters about that. So, thank you.

Sure, absolutely. So let's first talk about percentage ownership on incentive fees. And in Q1, in '19, versus '18, it was up 300 basis points. So, 56% versus 53% a year ago, first quarter, so fits nicely with the discussion that we've been having, relative to margins, and also International Hotel growth. Relative to the full-year, last year '18 was up about a point over '17. It's too soon for us to kind of get into percentages for all of '19 but I think clearly the trend is moving in the right direction. So a couple things I mentioned on incentive fees in Q2, one of the things that's going on in Q2 and incentive fees is FX, we have expected that FX, albeit it's a little bit less bad than we expected a quarter ago, a quarter ago we said 15 to 20. Now we've got closer to 10. We do expect that FX impact negative FX impact, which clearly hits incentive fees to be largely in the first-half. So we are expecting a chunk of that to be in Q2. And then, you add on to that the reality that in Q1 we had a bunch of resorts that were getting this extra strong incentive fees, and then layer on top of it the renovations and Easter and that's where you get this overall change in the direction of the incentive fees in Q2.

Okay, great. That's very helpful. Thank you.

Our next question comes from the line of Thomas Allen of Morgan Stanley.

Hey, good afternoon and best wishes on a speedy recovery, Arne and Laura good luck in your retirement.

Thanks.

Thank you.

So at the beginning in your prepared remarks, you talked about two and a half years of embedded growth, just in the hotels in construction, and then another two and a half years in the pipeline. Is that saying for that for the current 5.5% to 6% growth, you're guiding it? Is that what you're implying?

Yes, I guess so. Yes, I don't know that we exactly. went back and tested the net unit growth number. And obviously, the 5.5% is net of deletions. We're not updating the deletions forecasts, but really simply looking at -- you look at the volume of rooms in that pipeline, and it looks about five years' worth of growth.

And just assuming, just a steady pace of opening, so, it -- just the today's pace, you got a lot of stuff in the pipeline.

It's consistent with what we talked about in the security analyst meeting, which obviously you'd expect higher room openings in 21 than you would expect in '19, but it is all consistent with this pipeline be it 478 or 475.

Okay, perfect. And then just since you announced homes and villas, what have you heard from owners?

They're curious, of course, they're deeply interested in where we're going with this, obviously 2000 homes and villas is a substantial increase from what we were doing last year. But it is not a significant number by itself when you compare it to the either the size of the hotel system we have today, or even the number of hotels we open every week. And so, it's less a question really about what are we doing today, than what might we be doing in the future? And I think as we go forward, we're going to make sure we're communicating with them and taking on board their interest, I think our owners are not monolithic. So it would be wrong to say that every one of them has exactly the same point of view. I do think there are many of them that acknowledge that this is a rational step for us to take. And if they were in our shoes, they'd be doing exactly the same thing. I think broadly, they appreciate the value of the loyalty program and know that this can enhance the loyalty program, which is to benefit not just of the homes and villas of business, but it's also to the benefit of the hotel business. And I think owners generally have a point of view, which is they'd like to grow with us, but maybe have nobody else grow with us, so that they can make sure that they capture as much of our customer base as they possibly can. I think they understand philosophically that that's not a world that they can necessarily have. But you put all that through the grinder and I think we've got a, very constructive set of conversations with our owners and I'm sure we'll be able to navigate this too with them well.

Helpful, thank you.

Our next question comes from one of Michael Bellisario of Baird.

Good afternoon.

Hi, there.

All the best to both of you, Arne, and Laura.

Thank you.

You gave us a 3% number. I think it's on the transient side for your largest accounts. I mean, did you see any different trend with some of your smaller accounts and any difference is between kind of larger and smaller customers in terms of the booking behavior that you saw?

Yes, I wouldn't say anything. Kind of notable, happily, some of our biggest customers like the professional services, areas, things like that. They were good. They were up meaningfully. So, some of the areas that you would expect, so I don't think there any particular trends of the larger versus the smaller, but certainly, professional services and example was up very strong.

And then you mentioned, I think you called it a surgeon group bookings in April, what was kind of the profile of that customer that was being more aggressive with their forward-looking bookings?

Well, they're actually that was group that we were talking about. That was group bookings, which obviously can cover a range everything from associations to government to corporations. And it was quite strong in the corporates. What I think one of the things that we were very pleased to see is that it was the surge was both in the year for the year as well as for all future periods, which was always very encouraging.

That's helpful. Thank you.

You bet.

Our next question comes from on this Kevin Kopelman of Cowen and Company.

Hi, thanks a lot. And first of all, best wishes to you, Arne, and congrats to Laura.

Thanks Kevin.

Thanks, Kevin.

I just had a quick one. Can you talk about free cash flow trends that you're seeing and that kind of one-time payment that you had in the first quarter and how you're expecting free cash flow trend for the year? Thanks.

The one-time payment, you're referencing.

You just talk about insurance costs related to profit sharing last year?

Yes, profit. That was profit sharing within a year ago, first quarter. So in that respect, we were talking about kind of year-over-year trend in G&A because obviously last year was weighted down by the $35 million. You could be talking about the profit sharing from our working capital changes.

Sorry, I'm talking about the outflow for accrued payroll and benefits.

Yes, yes.

You're aware. Yes.

Yes. And that is just a function of the fact that as you remember, we accrued for this supplemental benefit last year, but we actually paid it out in first quarter into our associate's accounts. And then second of all, we also moved up our profit-sharing timing from Q3 to Q1. So when you look at the working capital, use of cash in Q1 relative to normal, it looks particularly heavy, and that's because of about $200 million worth of timing differences in the cash flow.

Got it? And then just a follow-up on typically, your loyalty program has been a source of cash and you talked about how it might be different this year and you did have strong I think, redemptions in the first quarter. So any change to the outlook there for this year?

Yes, so good question. And again, to your kind of to finish off the rest of your earlier question, otherwise, in terms of the overall flow of cash, it's really the same as we expressed in the first quarter, so no fundamental change, we obviously haven't assumed any asset sales. So it's pretty similar. Yes, I would say loyalty might be between $50 million and $100 million, negative use of cash this year as compared to more neutral where we were a quarter ago. But that's also offset by a little bit higher net income. So you put that all together with maybe ever so slightly higher debt borrowings, and we end up in exactly the same place. And all of those I would say are in the $60 million to $75 million, so really kind of fine-tuning more than being any fundamental change.

Okay, got it. Thanks so much.

Thank you.

Our next question comes from one of Wes Golladay of RBC Capital Markets.

Hello, everyone. I just got a quick question on conversions. Now that bond boy has been launched. The programs have been integrating. Are you seeing an increase in interest promoters to convert to Marriott brands?

I think it's certainly at least steady, if not up a bit. Yes, I think the demand both for new build and for conversions is comparable. I think the feedback we're getting from our owners is very positive. I think they're have been questions already, obviously, about margin, which we've talked about, I think there is not maybe not unanimous but broad recognition that we're delivering the incremental margin performance because of what we've built here. And I think there's broad understanding that the revenue lift should come behind it. And not only an absolute revenue lift, but a mix of revenue sources, which is more cost effective. And so, the level of conversations we're having with our current and prospective partners are very robust.

And in certain markets that are more RevPAR challenge, like Middle East for sample, we're very encouraged with some of the conversion activity we see going on there where the benefits of the strong revenue pipeline of our brands is viewed as very attractive, as well as the margin.

Hey, can I get one more question? I want to -- looking at the limited service, the underperformance this quarter is a little bit more pronounced. And I assume some of that was related to their -- the relief efforts last year. Is that true? And how do you expect the gap between full service to trend throughout the year?

Yes, it's a good question. The -- I think the limited services, partly geographic distribution, maybe a little bit for us, partly age of product, I suppose maybe for courtyard, which we're working on, but I don't see a dramatic difference in performance between the segments as the year goes on.

Thank you very much, and best wishes and thanks for everything.

Thank you.

Thank you.

Our final question will come from line of Vince Ciepiel of Cleveland Research.

Great. Thanks. And best wishes to both Arne and Laura. I had two questions. And they're both related to share of wallet, one pretending to start with Marriott deal and the second on home sharing. So first on Starwood, Marriott, obviously had this base of legacy Marriott loyalty members, Starwood loyalty members, and I'm curious kind of what inning you think we're in of increasing share of wallet within those bases of legacy members? What type of overlap you're seeing of the legacy Marriott staying now at Starwood properties, and vice versa? I guess maybe a simple way of capturing it is, I think you've noted loyalty is 50% of the business now. How high do you think that could get?

Well, I'm not sure we actually know the answer. The second one, a couple of comments on absolute penetration of loyalty, and then maybe finish with what anywhere in. It was interesting to us that when we acquired Starwood and looked at the way the calculation was done for loyalty contribution of hotels, Starwood was seven or eight points higher than Marriott was, principally because the calculation was done differently. And we have synthesized those calculations now, so that they're the same. And actually, the loyalty contribution to the Starwood Hotels looks a whole lot more like what it does for the Marriott Hotels. And there's some arcane things in there about whether you count for example, a point in the eligible room that came in through an OTA channel but has a loyalty number attached to it, where maybe they can earn points from food and beverage, or you don't, and we don't so there are a bunch of things that go into their calculation. As we said, we're at about 50% of all of our rooms are coming from our loyalty programs. We think that number will grow. We are -- I think, in a very early inning, well, our customers were both Starwood and Marriott customers, I think we're pleased when we allowed linkage of the loyalty programs on the day of close to now have one single program means they don't have to go to two separate sites, if you will, to see what the options are in the other legacy portfolio. And that means the customers are just in the last few months now for the first time going on and looking at whatever destination they may be going to end seen a meaningfully broader selection to choose from than they did before. And it…

Thank you, happy Mother's Day to everybody.

Happy Mother's Day, everybody, make sure you take your mothers or your spouses or whoever is mother-like to you to one of our hotels and celebrate. Have a good weekend.

Thank you, ladies and gentlemen. This does conclude today's call. You may now disconnect.