Marriott International, Inc. (MAR) Earnings Call Transcript & Summary

Good afternoon to those calling in from Europe. Good morning to anyone that's joining us from the U.S., and good morning to Leeny Oberg, the CFO of Marriott. We're delighted to be joining us -- with us this afternoon. I'm Richard Clarke, the global hotels analyst at Bernstein, and we'll be launching into a Q&A with Leeny very shortly. Just a small amount of housekeeping. If you've got any questions you'd like to include into the session, I've got plenty of questions on my own but very happy to include any questions from anyone outside of it. Please use the pigeon hole app on the -- which should be on your screen as you look at it. And I'd also encourage you to do the Procensus survey, which should also there should be a link to, which will be on the screen as well. So please submit questions. There's also opportunity to vote for questions. So if there are any on there that you particularly want pushed up the list, then that will happen. So Leeny, thanks very much. Thanks for joining. Good morning to you.

I think maybe we'll jump straight in with how we're looking at the recovery today and what we can talk about with that. And I thought maybe it might be useful to sort of break this down by market and maybe start in the U.S. And I think when we look at the industry data that we get, it seemed to trace a pretty strong recovery up to Labor Day, and it stepped back in the last couple of weeks since then. Is this the trend that you recognize? Are you still seeing some positive trends? And I guess the question on everyone's lips is, as we come out of the summer, are you beginning to see sort of the business travel begin to tick back up again and take the place of leisure travel.

Sure. So thank you, and good morning. I hope everyone is well and safe. It's great to be here today and talk about our business. And while this has been kind of nothing like we've ever seen before, we are pleased with the slow but steady progress that we're making around the world in terms of the return of lodging demand. Over the last few weeks, you clearly did see the benefit of really strong leisure demand in the U.S. at our hotels. And kind of since April, we've seen a steady march of occupancy from the really low levels to what we saw in the month of August of 39% occupancy in the U.S., and you clearly saw that, over Labor Day weekend, it spiked even higher. We saw Saturday night in the U.S. , we saw occupancy at 60% on the Saturday night of Labor Day weekend. As we have talked about before, the shift between leisure and business is not quite as big as you might think. It's not anything like a 70-30 sort of ratio that then switches from summer to fall. So while you've seen Smith Travel's numbers reflect -- over the past couple of weeks, reflect kind of more of a plateauing of the demand as compared to the steady march forward in occupancy, I think, again, it still has been steady. And so you still compare it to where we were at the -- in July and the beginning of August, and it continues to strengthen. And while you've clearly got folks who are not on the road necessarily quite as much for leisure because kids being back to school, et cetera, we have seen business transient pick up from months before -- from the months of the second quarter. And the other thing I'll point out is it's still clear that business transient is still moving, kind of starting from a much lower level than where leisure is at the moment, but it still has improved meaningfully from the months of April and May.

And I guess the other question is the other sector is the group travel. And I think sometimes, when I'm out there talking about yourself, people associate group travel, which is what we're doing now, conference travel. And there's a lot more that fits into group travel like weddings and birthdays and things like that. Where are we with terms of group travel at the moment? Are we still at the trough? Or have we begun to see any sort of signs of life within that?

Yes. Group is still -- as we've described, it's still down meaningfully, particularly the larger groups. When you think about small groups of small football clubs traveling or kind of the lacrosse teams in the U.S. doing their travels to a tournament on the weekend, we are seeing more of that than we were back in April and May, but that's small groups, and that is kind of nowhere near what makes up the bulk of our group business of our large corporate and association meetings in our larger hotels. That business is still extremely low. And there, what you're really seeing is that groups are not wanting to cancel until they really have to because of concerns about safety and lack of air travel to some markets. So there, you're continuing to see last-minute cancellations kind of waiting till they absolutely have to. And so the cancellations now really carry on into Q1 of '21 and even some in Q2. But for Q3 and '21 and beyond, what we happily are not seeing is that the large group customers canceling out into the out-years. So I think that speaks well for ultimately the desire to have these groups. But again, it's got to all be around the comfort with the containment of the virus.

So let's move on to China. China, I presume, is your market where you're seeing the closest to normality. How close are we to normality in China? And how -- do you think that acts as an encouraging sign for the rest of the world that it is possible to return to normality?

Yes. China has been clearly the shining star in terms of the most robust return of all 3 segments, both leisure, business transient and group. Now it's still the case that group is recovering more slowly than leisure. But when you look at the overall business and you see that occupancy levels in China reached 65% in the month of August, we're getting much closer to normal levels -- kind of similar levels of demand across the country, and we expect growing from there. One of the things that's interesting is that when you think about China, typically, 80% of their room nights are from folks within China. Right now, because you were seeing Chinese travelers increasing their travel outside of China, those travelers are now spending their nights inside of China, overwhelmingly, and that has actually been helpful to demand there. And so when I think of 2021, I think that's probably the most likely sizable market for us that could return to RevPAR levels approaching 2019 levels the first.

And so if we think back to probably what I think is probably one of the most common questions that we get asked on the sector is, is there going to be some kind of permanent impairment to travel, the group travel, the business travel? Does China, in your mind, returning back to normality, provide a leading indicator that, in fact, travel does ultimately recover? Or is China a special case when it comes to that?

No. I do think it absolutely represents the resilience of demand in our business. One of the things that I think is important to recognize is the trends in global travel leading up to the pandemic. I think there's kind of a quick desire to focus on the short term, the near term and the, "wow, this is incredible," which it has been extraordinarily challenging. But if you look at the trends in global travel, leading up to the pandemic, it was frankly nothing but positive for our industry. You saw increasing numbers around the world of customers traveling internationally. So whether it was from China to the U.S., whether it was from Mexico to Europe, whether it was from the U.S. to Vietnam, you were seeing really an explosion and ease of travel to traveling internationally and also great comfort in traveling domestically. So there, I think the growth in those trips bodes really well for us in the long term. And the reality that I think one of the kind of truth that's come out of the pandemic is that people really miss it. They miss going out and meeting new people. They miss going out and having new experiences, seeing new cultures, et cetera. So I think that actually argues for the reality that all business types will rebound. Whether they all rebound to exactly the same level and exactly the same makeup, we will see. Could there be more business trips that are a mix of business and leisure? I think there probably could, but that's actually not bad for our business.

In my spare time, I like to read old annual reports, and I read your 2001 10-K the other day. I noticed in there that there was some commentary around how after September 11, there was a very effective shift toward leisure demand but also some very positive points around how loyalty members traveled actually more and became a bigger slice of it. Are those 2 trends repeating? Are you once again marketing yourself more as a leisure organization, maybe trying to remix away? And how's the loyalty paying out? Is that being helpful in this scenario?

So 2 things, and the answer is yes and yes. So first of all, on the leisure side, that's the strongest segment of demand right now. So needless to say, we are making sure that we try to get well more than our fair share of that demand and making sure that we are efficient in trying to drive that demand. So whether it is through Bonvoy Escapes, which is a great way to help customers see particular opportunities near them, whether it's geotargeting, where we can show where there are hotels that have availability within a driving range, all of those opportunities can help us make sure that of the leisure demand that is out there that we're getting more than our fair share. We've also got an absolutely tremendous portfolio of resort hotels. And when you think about kind of what we have to offer through Marriott Bonvoy, we've got almost double the number of resorts, rooms as compared to our closest large brand competitor. Those are great opportunities to be able to give our customers lots of choices as they consider the leisure experiences they want. I think everybody through this pandemic, while their business travel may not be quite the same, the desire to have a change of scenery is very strong, and making sure that we get a lot of that demand is where we're focusing our marketing strategies. And then when you think about Bonvoy, I think this is where the entire platform for Bonvoy and the ability that it gives us to drive a deeper relationship with our customer is so critical in a time like this. Because when you think, Richard, about how you want to make sure that you know you're going to have a very clean experience, exactly what the hotel is doing to manage that, how you can do everything through your phone to be able to limit the kind of direct person-to-person contact that you need to have, all of that is enabled by Bonvoy. And in addition to that, you've got things like HVMI, Homes & Villas by Marriott, which gives our Bonvoy members another opportunity to be able to choose their experience and use their points. There, again, that ecosystem, we think, does drive meaningfully more business our way than, for example, through the OTAs.

Maybe now just moving on to the non U.S., non-Chinese market, you've been on record in the past, talking about how the U.S. market is very domestically focused. You've commented today that China benefits from -- is benefiting from a domestic increase in demand. What about the rest of the world? Your hotels and the rest of the world, are they more dependent on cross-border travel? Are they more urban-focused rather than rural? And maybe where does that put you in the recovery in the other markets?

Sure. So you're right, very, very global portfolio that we have. And let's take the 75% of the rooms that have overwhelmingly domestic customers and put them aside. So you've got the U.S. at 3/4. And of the -- between the U.S. and China, you've got 3/4 of our rooms that are overwhelmingly driven by domestic travelers. The remaining 25% is -- has a much higher percentage of guests coming from outside the borders, and I use Caribbean, Latin America as the one that is the most the other way, which is roughly 60% of the visitors come from outside Caribbean, Latin America to our hotels. So it's no surprise. That's where we've got the largest proportion of our hotels still closed is in Caribbean, Latin America and Europe and Asia Pacific outside of Greater China. But really with -- for example, in Caribbean, Latin America, we've still got 1/4 of our hotels close. For the overall -- when you look at the U.S., it's under 4% closed. So you can see the disparity there and the dependence on the -- both, I would say, cross-border travel and then, to some extent, in some markets, the long-haul travel. And that is both a function of what's going on with the airlines but also government regulations. I think there are many places in Europe where, frankly, U.S. citizens are still not allowed to travel in Europe or certainly not easily. And that all then impacts the amount of demand that they have coming into their markets.

So maybe just taking a couple of questions from the audience here. If business is shifting significantly towards leisure, does -- how does that affect your fundamentals? Is that lower ADR? Is that lower margin for you in terms of business?

Yes. So I mean it's a good question, and let's think about kind of broadly speaking, overall, globally, about 50% -- and I'm talking 2019, so a classic year. About 50% of our nights would be business transient. About another 20% would be group, of which that is -- it's a split. But I would say the larger groups, the larger portion of that is business, and then leisure is 30%. So that kind of says overwhelmingly, broadly speaking, we are roughly 2/3 business-related nights and then 1/3 leisure. But when you think about the revenues, while they are slightly more weighted on the business side, it's only slightly. So I would say a couple of percent when you look at that as compared to just the nights. And then the other thing is that group often comes along with food and beverage. And so on that side, you've got extra profit for the hotels that comes there as compared to when you or I might go for 1 night of business travel, where you actually might not use the hotel's food and beverage outlets at all. So classically, the leisure rates or the leisure transient traveler are going to have a heavier weighting towards discounting. And from that perspective, you could see that there is a little bit tougher side on the profitability side, and you want group to come back to add that F&B. But I'll also say that we have done incredible work to actually lower the breakeven profitability of our hotels by anywhere from 300 basis points roughly in North America to 500 basis points at quite a large number of our international hotels. And in that regard, I think we are well positioned to manage through to the extent there's a little bit of shift in the revenues. The other thing I'll say is that when we've gone back and looked at kind of classic business months of work versus holiday, so June and July versus September and October, the shift between those nights is not as great as you might think, only a few percentage points globally. And so in that regard, while you could see that continue to shift, the current shift we have is obviously bigger than that. But in a normal year, it's only a couple of points. And while that may -- that shift may continue for a while, I think it is not a fundamental change to the industry that is bad in any way.

Great. And you mentioned there, nicely segueing into the next topic, on sort of your owner health. Obviously, you say you've done some good work to lower their breakeven occupancy. What is the state of your -- of the owner's health at the moment? How much concern do you -- that you might see any meaningful number of exits from the portfolio?

Well, as you know, this is, in many respects, a function of how long this lasts. We are obviously pleased to see demand returning. We are hopeful that it will continue to build. And overwhelmingly, our hotels have been able to manage through it. We've been able to lower costs. We've been able to manage payment plans with owners and franchisees in a way that kind of go beyond just the normal 30-day cycle, which is kind of typically what they have done in the past. And while the payment plans we've worked on are still quite short term, they have been helpful to the owners. And many, many of the charges that we have going to the properties are based on revenues in any event, so they're going to naturally fluctuate. When I think about kind of where our receivables are compared to back in February and March, remember, I'm charging out far, far less than what we used to charge out to the hotels because their revenues are down. So in that respect, obviously, we've tried to do everything we can to kind of make it easier for them to manage the cash tightness as well as lower the cost for them. And generally, they've been able to get through it, to access capital, if they've needed to, or to have enough resources on hand to keep paying their bills. One of the -- I think the linchpins under this is our owners want to preserve the value of their assets. And overwhelmingly, I think, over time, kind of both lenders and owners will represent that holding on to the strongest brands is one of the best ways to preserve the value of the asset and making sure that they're paying their bills is key to having the name over the door.

So maybe that leads nicely into the non-Marriott hotels or the independent sector. One of your competitors was at a conference this week, suggesting that maybe as many as 20% of independent hotels could be in financial peril. Is that a number you'd recognize? And therefore, does this lead to an exciting conversion opportunity? And are you sort of seeing an increase in the number of conversions coming into your network as the independent sector begins to suffer more than the branded sector?

So there are a couple of historic tendencies that would lead you to this thesis, and one is that typically in tougher times in economic cycles or in demand is that the strong brands tend to drive higher RevPAR premiums. It's a bit of -- well, those hotels are now available. That's where I really preferred to stay, so now I can stay there. And in that regard, I think having a stronger pull on the revenue line is a real strength of ours and something that has, in the past, led to more conversions. We are quite bullish on our conversion opportunities, and we are seeing a higher level of conversations on that front as a result of the pandemic. It's too soon to say exactly what -- where that puts us in terms of percentage of conversions. I think year-to-date, through the first 2 quarters, 16% of the rooms that we added to the system this year were conversions. We've seen it range in past cycles anywhere from kind of 15% to, I think in a few quarters, 25%. So again, we are excited about the opportunity. I think the other thing that is particularly exciting from my standpoint is now, in this particular time, we've got a portfolio of soft brands that's a wider range than what we had during the Great Recession. And there, being able to offer Tribute, Luxury Collection, Autograph, all of those, in addition to our main brand -- our more kind of standard brands, is a fantastic range of opportunities that then gives an independent owner the ability to have his or her cake and eat it, too. So you get to be part of Bonvoy and our efficient costs to the hotel as well as the revenue driving but also keep the uniqueness of that owner's product.

And maybe coming on from that to the overall unit growth picture, the last industry data point from August suggested that at an industry level, both signings and new openings are up year-on-year. And I guess maybe it's just nice to parallel. Do you recognize that? Are you kind of -- where do you think we can come out in terms of net unit growth? And one of the questions we've got from the audience has been after the global financial crisis in '08, '09, we really did see unit growth fall off for a number of years, down to -- at an industry level, near 0. Is this situation different? Can we be a bit more bullish on the outlook for unit growth this time?

Well, it's a fair question and one that I think depends overwhelmingly on 2 things. Number one is, first of all, obviously, controlling this pandemic and getting back as soon as possible to what we would all consider life as normal. And that then leads you to the second one, which is about macroeconomic health. At the end of the day, you've got to have a healthy economy to drive business travel, to drive business meetings, drive investment, drive consumer spend, ties into unemployment, et cetera. So I do think kind of the impact of this pandemic on overall economic health of various countries will have an impact on how quickly some of these -- some of the hotels -- new hotel projects come onboard and get built and opened. So we'll need to see where that -- how that -- how this resolves. I think generally, though, when we look at the fact that we've got about 46% of our pipeline is already under construction, and generally, while we've seen a few projects that we're going to enter construction kind of sit on the sidelines, we still are seeing similar proportions of the overall pipeline actually being built and moving through, which I think, kind of in the near term, gives us comfort that we will continue to see good strong additions to the portfolio. To your earlier question, exactly how many hotels could fall out because they just can't get through this financially, again, I think, to some extent, depends on how long the pandemic lasts. But again, we do -- we're comfortable we can get back up to closer to where we started this year in terms of the 5% or 5.5%. But at this point, I can't really predict whether is that '21, '22 or 23 because of, again, my first point about how long we're really in the current rut that we're in.