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

Hi, this is Stephen Grambling from Goldman Sachs. As we continue with our Travel and Leisure Conference, we couldn't be more excited or thankful to have our next presenter, Arne Sorenson, President and CEO of Marriott, the world's largest hotel chain with over 7,400 properties spanning almost 1.4 million rooms. Arne, thanks so much for taking the time.

Glad to be here.

I know you've been busy during the past few months, and during these challenging times, it's easy to get caught up in the near-term uncertainty. Help us take a step back to frame the long-term drivers for hotels, travel and Marriott?

Well, it's a good question. Good morning, everybody. I appreciate you taking the time to attend this session of the Goldman conference. Of course, we're all chagrin not to be in person in New York, which has been part of the annual hotel industry rhythm, I think, for many, many years. Stephen, you may know how long it's been exactly, but I can't remember a time when we didn't have this conference in New York, roughly the first week of June over the last 20 years or so. So I know it's been certainly part of my rhythm, and glad to have you all back. I think the question you pose sort of thinking about longer term first, often the version of that, that I hear from folks is what about the way we have changed our approach to work or travel in the COVID-19 world is likely to stick and maybe say it differently, what are the consequences to the way our business looks after COVID-19 and how does that differ from what -- how the way it looked before COVID-19. And I guess my first somewhat superficial answer would be, I don't think it looks that much difference after -- different afterwards than it did before. And maybe you'll accuse me of sticking my head in the sand a little bit and being unwilling to see the change. But I just think of the last 3 crises I've experienced in my relationship with Marriott, first one in '91 and '92; and then, of course, 2001 with the tech bubble bursting and 9/11 and the events which followed that; and then, of course, the Great Recession. And in every one, we have heard versions of there are some aspects of your business which will never come back. This time, it's probably fueled more by the technology. We're using video conferencing tools broadly in a way that is probably more profound than it's been the case before. Think about Zoom and Teams and Webex and the others. And secondly would be about remote work, I guess. And we seem to be talking about remote work in a way which is much more embracing of it than has ever been the case in the past and do those 2 things change business. I suppose the third would be whether or not group ever comes back. And I think that maybe take the last one, which is the easiest, I think, group will be the slowest of the segments to come back. But I think group will generally come back, that the importance of being together is well recognized and well understood. And when people feel like they can do that safely, which they will feel safe ultimately, that business will come back. I think the video conferencing and remote work will be interesting to see how they develop. I think sort of listening to maybe my adult children and their friends and talking to many, many customers, I think there are many who are getting tired of remote work, want to be back. Three of my adult kids live in New York, and they want to be back in New York, too, and engage in the sort of live interaction that they've got at their workplaces, and I think they want to be back to traveling as well. And I think we will see, as a consequence, most of this come back. It may take us a few years to get back to the levels we were at before. Don't misunderstand my comments as being too pollyannaish here. I do think we will continue to see the kinds of long-term shifts we have seen over the last 20 years towards more leisure as a total contribution to our business than what was the case in the past. But I do think we'll continue to see strong business transient travel and strong group ultimately return.

That's a great kickoff. And certainly, I have been experiencing that desire to get out with a number of young kids in the home. Turning to -- from the top line more so to margin. This is something we are asking all management teams at the conference. But on the heels of COVID-19, are there also puts and takes to think about as it relates to margins, permanent cost cuts versus safety cleanliness? And where do you think margins, whether that's defined as house margins or Marriott-specific margins, should shake out relative to 2019 levels?

Yes. So obviously, margins depend both on cost and on revenue. And so let's just put aside the revenue piece here, which is a little bit dangerous, of course, because it is -- the best margin performance is going to come with a return of revenues, which is both occupancy and rate, of course, back to the levels that we were at before. On the cost side, I'll use 2 obvious examples. I think we will spend more on cleaning between guest stays than we spent before COVID-19. Think about the electrostatic sprayers we're rolling out globally, which will intensify that cleaning. There is a cost to the equipment. There is a cost to the materials that are used with that equipment, and there will be some labor costs associated with that incremental step of housekeeping, but we think it is imperative that we do that in order to deliver to our guests a safe room that can give them the kind of confidence they need to have in order to get back out there. I suspect that will not necessarily be forever, but it will be for a period of time, probably as long as the virus is in any way relevant to decisions we are collectively making about travel. I think on the other hand, even within housekeeping, in the early stages, we will do less housekeeping during a guest stay than we did before COVID-19. I think both the guests and our associates will prefer that. One of the things -- positive things about a hotel is, I think a guest can by and large control the level of interaction that they have with others when they're in a hotel, unlike an airplane, for example. But that means they are probably going to be less eager to have a housekeeper showing up while they're staying there, either while they're in the room or maybe even while they're out. And as a consequence, I think we'll probably save something on housekeeping. And some of that too might be lasting after COVID-19 hopefully leaves us back towards a more normal world. Similarly in the check-in process, I think we will see an accelerated adoption of digital check-in in early stages. And if we can keep that, I think we can find some cost savings associated with that as well. And then I think the last thing that I would say, and this maybe points a finger a little bit too directly at us, but I think in inevitably maybe after 10 or 11 years of a recovering economic market or growing economic market, I think we were probably pushing some initiatives on our hotel owners and pursuing some things on our own that probably weren't as compelling as they should have been. And I think as we come out of this, we will be more focused both on our own behalf and for our owners, which should help as well on the cost side.

And it does feel like we're finally at a point where we are seeing things reopen and we're getting to a point of recovery. What are you seeing in your portfolio? And how would you assess what regions or owner segments appear best versus kind of worse positioned coming out?

Yes. So well, it won't surprise you to hear that China is probably the farthest along here. And in China, where we started the year with about 350 hotels open, we are 100% open. We are seeing occupancies cross the 40% mark from a low point at the end of January and first part of February of 7% or 8%, something like that. And so we've seen steady growth, and that growth is -- again, it's a big enough portfolio, and it's big enough country that you can't have those kind of numbers without seeing it's not just leisure travel growing, but it is business travel. Chinese are flying again. Like the U.S., by the way, China is, by and large, a domestic travel market. And so that business is driven by Chinese travelers. And it's pretty steady, and we're seeing restaurants reopen, and we're seeing really good steady improvement from sort of middle of March until today. When you come to the United States, which is probably the next best big market to assess some recovery, what we're seeing over the last 5 or 6 weeks, I suppose, certainly 4 or 5 weeks, would be 1.5 points or so of incremental occupancy every week. And Stephen, you know this. I suspect many of your participants know this, but maybe not all. One of the oddities at the moment is we are, as an industry, all reporting occupancy that includes closed hotels as well as open hotels in the United States. And sometimes we talk about occupancy only for open hotels. So it makes it a little bit confusing. But I think for open hotels, we have crossed the 20% occupancy threshold. The hotels that are performing strongest are those that are most dependent on drive-to business that can be drive-to leisure for some hotels, which would cause them to be performing better on weekends and holidays than mid-weeks, but for some, that is also drive-to business travel. And that probably shows up in the extended-stay brands where occupancy could be in the mid-30s to mid-40s. So the Residence Inn brand, for example, would be performing better than the Courtyard brand. And again, leisure markets would be performing better than the others. But it is a steady move forward. Now just to state the obvious, crossing over the 20% occupancy for the portfolio as a whole is a meaningful improvement from where we were before, but it is a long way from where we need to get to.

And I guess, turning it to Marriott specifically, can you just talk to some of the ways that Marriott has supported owners in this tough time? And how are you thinking about positioning your hotels to then gain share on the rebound?

So I think the first steps we took, of course, were to simply cut spending, including system spending, as quickly as we can. And one of the things we've talked about in our breakout sessions this morning is the cuts we did, for example, in our headquarters, at essentially furloughing something like 2/3 of our headquarters team would have been incomprehensible before COVID-19. And you look at the prior 3 crises I have experienced associated with Marriott, the only 1 that gets anywhere close would have been '91, where we laid off about 1,000 people in our architecture and construction group. That was at a time though when Marriott was building on balance sheet the full-service portfolio and then turning around and selling those hotels to long-term owners after or as we approached opening. And so we had people really engaged in construction in a way that we don't today. And we ended up, at that point in time, probably laying off something like 1/4 of our headquarter staff. This time about 2/3. And again, layoffs are a more definitive sounding phrase than furloughs. We're hoping we can bring some of those back, but -- many of those back, but we know we won't be able to bring everybody back. And so cutting costs in the first instance was really important. We immediately waived brand standards. We immediately worked with our hotel owners to be able to tap into FF&E reserves and the like to help meet debt service. I personally put an awful lot of time in on lobbying on the Hill to make sure that there were lending facilities available for hotel owners to tap federal dollars to help them get across this bridge towards better time. And we've been doing everything we possibly can do in order to make sure that our owners can survive this thing because we obviously need them to be strong on the other end of this.

That's helpful. And then on the development side, and you alluded to this a little bit, but what are you seeing in construction development around the globe? And how are developer conversations evolving with the pandemic?

Yes. I think the -- it's a big world out there. I started the date this morning with a report from our development team in Asia Pacific. And interestingly, they -- I suspect they're doing better than the industry on averages. But our numbers in terms of incoming new projects are every bit as strong as they were last year, which is sort of a stunningly positive set of statistics. And basically, what it tells you is people are -- our development partners are still looking forward to the long-term trends, which have been driving hotel demand in that part of the world continuing. I think you come to the United States and what you see here is very encouraging in terms of projects that are under construction. What we hear from our partners is essentially that 100% of them will continue. There may be some modest delays in when they ultimately open, sometimes driven by moratoriums that were imposed on construction in some parts of the country, sometimes imposed -- driven by supply chain issues. There will obviously be a little less urgency about getting open, but I think those projects, which were under construction, will open and will open fairly near to when they were forecast to open before. Now by fairly near I don't mean to suggest that they couldn't miss by a few quarters, but they're not going to be, we don't think, generally mothballed and put off by years. I think when you look at the next chunk within the pipeline that we talked about externally, those are hotels which were signed or nearly ready to be signed with a small minority. And if construction hasn't started, I suspect construction generally will not start as quickly as would have been projected before. And they may take incremental quarters before they start or, in some instances, they might take incremental years before they start. Our experience from prior recession is that most of them because land is owned, because they were designed, they may not have been fully financed, but they were projects that had substantial investment put in them by development partners that as business comes back, more and more of those will be started again. And then, of course, the new feature here is that we expect there will be some step-up in the number of conversion opportunities that are available to us. In a weak demand environment, loyalty programs and distribution channels become that much more important. And we suspect that we'll see more of those navigate towards our portfolio in the balance of 2020 and well into 2021 and 2022.

And as one follow-up on that, are the new builds focused on specific brands that are being proposed or types of hotels, for example, seeing more limited versus full service or across different chain scales?

Well, I mean, I think the -- again, it's a big world out there. The U.S. flavor the last few years would have been towards the limited service brands, including some of the new brands like AC and Moxy and Aloft and Element, all of which were, I think, building momentum and are likely to continue to build momentum as we come out of this. And in the full-service space, would have been in the Collection brands and to some extent, some of the newer brands that we had. I think this may be a little bit more of a global comment on Westin. But one of the things we were always surprised by when we were watching Starwood from the outside was why Westin wasn't showing more growth. A great collection of hotels, strong brand attributes, but it didn't really seem to be growing globally. And I think one of the things we've been gratified to see is that the Westin brand has been capturing attention, both the U.S. and abroad, in recent quarters for us. And I think that is likely to continue. But I think we'll see Autograph and Luxury Collection and Tribute also all performing reasonably well in the full-service space. And I think that will obviously be aided by the construct -- by the, excuse me, conversion opportunity I talked about a minute ago.

That's a good segue to maybe turn back to Starwood, which I think that you're effectively 4 years into an acquisition. What have you learned about the business that you may want to change or accelerate coming out of the current environment?

Well, the Starwood acquisition has been fascinating. The -- Stephen, we've talked about this before, but the -- when we signed on to acquire Starwood, I think we knew intellectually that it would be a multiyear job to get these 2 companies integrated, to get the technology integrated, to get the loyalty program integrated, to get the operating teams integrated. And we knew we had a lot of work ahead of us. In fact, one of the messages I was most interested in communicating principally internally at the moment after we got the deal done was to tell our team, don't be too self-congratulatory yet because the work is now just beginning. And it's going to be a long time before it gets done. I think to some extent, the first 1.5 years or so went so swimmingly. Operating steps were taken first and to some extent, can be done faster than things like technology platforms. Market response was good. Customer response was good that I think, in some respects, we got fooled into forgetting the kind of work that had to get done on the tech side and the merging of some of these systems. And by the time we ultimately got to that, we were reminded of what we knew before intellectually, which is this is an awful lot of work to get done. And I think as we got into the second half of 2019, a lot of that hard work was starting to get behind us, and we were starting to see the momentum build with combined loyalty program and really starting to drive market share, which continued into 2020. I think as we look at where we're going with this afterwards, I don't see fundamental changes. I think the larger portfolio will be helpful to us. I think the loyalty program will continue to be the principal focus of our -- defining our relationship with our huge pool of guests. I think we can deliver value to them that way. I think we can know them through the loyalty program. And I think all of us at the legacy Marriott are really grateful to have the Starwood portfolio with us because I think we'll continue to see that leisure business is a more and more important part of our relationship with our customers. And the portfolio of lifestyle and resort hotels that Starwood had, Marriott, of course, had as well, but I think both of those things will pay benefits to us longer term.

And perhaps digging into the loyalty program a little bit. You relaunched it about a year ago. How have consumers engaged with Bonvoy amidst stay-at-home orders?

Yes, that's interesting. I mentioned to one of the groups this morning that even as we were on the calls this morning, I got an e-mail from Marriott Bonvoy as a Bonvoy member, not as Marriott's CEO, but reminding us that we get 6x as many points for our grocery shopping or we get 6 points per dollar spent, I guess is the way of doing it, grocery shopping. And that's something we rolled out initially about a month ago, but essentially a way to remind folks that even when they're not traveling, that loyalty program can deliver pretty significant benefits. And we immediately saw our loyalty members step up their use of our card, for example, for grocery shopping when we first did this a month ago. I think the loyalty program remains really key to our relationships. And we were seeing, before we got into this, increased loyalty contribution to our hotels, meaningful increase in loyalty contribution to our hotels. And longer term, we'll see that continue. And I think as we look at the credit card, as we look at home sharing, as we look at the rollout of the restaurant network, obviously, people are not, by and large, going to restaurants today, but as they get back towards it, those are things that will further feed the strength of the loyalty program.

And perhaps as a follow-up on the credit card, how has card spending and sign-ups trended relative to RevPAR during the pandemic? And how do you think that, that trajectory could change in recovery?

Well, the -- it won't surprise you to know that the sign-up of new Marriott Bonvoy credit cards during the first months of the pandemic were down significantly from what we would have expected before. And obviously, there is a challenge, I suppose, or a new hurdle if people are not traveling to get them to sign up for a travel-related credit card and so that slowed meaningfully. And I suspect it won't come back to the kinds of levels we were experiencing before until we start to see prospective new credit card holders thinking about traveling again and showing up in our hotels again, which is where many of the sign-ups occur or signing up on our website. And if you're not going to the website because you're not booking a hotel reservation, there is just that much less traffic to try and sell a new credit card to. And I think in terms of the spend of the existing cardholders, that too has been down, but things like the grocery incentive and some of those other things will bring those numbers more towards what the credit card issuers have experienced generally. And of course, you can get that data from them as they release it. But I think, generally, what they saw was early spending on groceries and hardware and at-home tech, for example, all were helpful in displacing some of what they lost in restaurant spending and travel spending and the like. But as the dust has settled now in month 3 of this, we see that total spend is probably starting to come back but is down meaningfully from the kind of pace that they were experiencing in the first couple of months of the year and will not probably come back until we all start to step out of our homes and get back towards a bit more of a normal life.

And one of the things that you've done in terms of shoring up some of the liquidity and balance sheet during this period is this point sale into kind of broadly defined. Can you just walk us through the mechanics of the transactions you did with your credit card partners? Where the money exactly comes from? How many years it could impact different parts of the financials and maybe any other decision process around the borrowing on that versus the traditional capital markets?

Yes, yes, yes. So that -- and that should obviously be put in the context of liquidity generally. So the -- as the COVID-19 crisis started to roll out, obviously, the first things we wanted to do were to make sure we had done what we could do on spending. And we batten down the hatches as quickly and powerfully as we possibly could. We wanted to make sure we were working with government authorities around the world, including in the United States, to get the kind of policies in place to protect our people and to provide resources to hotel owners and the like. And so we spend an awful lot of time on that. And then right behind that was to make sure that we were addressing liquidity. When business globally is down 90%, EBITDA is taking a huge hit, obviously, which means no matter how well we were structured from a liquidity perspective before, there would be technical issues like covenant waivers, but there were also questions about, okay, well, what did the debt markets look like in the fall of 2020, for example, when we know we've got debt maturities coming and how do we deal with that. And so we moved quickly to do covenant waivers on our lines. We moved quickly to do debt issuances. The last one we did, obviously, was last week, which in a way was an early refinancing of other maturities that we saw coming due. And generally with the collection of steps that we've taken, we feel very good about our liquidity and our ability to survive COVID-19, essentially no matter what the course of this virus takes. And so we feel good about that. Now as your focus -- your question focuses on the credit card deals, we did about $900 million with Amex and JPMorgan Chase on the 2 credit cards, Bonvoy credit cards, that we've got out there. That was another source of liquidity. Generally, what we've said is that the imputed interest rates that are within those deals are lower than the rates that we found available and paid on the bond deals that we've done. They are essentially a prepaid points sales and are really only receiving that money earlier than we would have received it had we not done those deals in the first place. And that gives us just a further liquidity cushion for the next -- or the early years, if you will, of this, the next couple of years. That gives us that much more confidence that we've got the liquidity we need in order to survive anything. Did we need to do them? Well, only time will tell whether we needed to do them, but in an environment like this, with the kind of uncertainty that is out there, we wanted to make sure that we had as much strength as we possibly could to survive this no matter how dire the conditions were.

Makes sense. And we are running just a little bit over here, but we are going to be doing a quick lunch break for everyone, and then we'll kick things back off at 12:05 with our investment banking and equity capital markets team. But before we go, I just want to thank Arne and the whole Marriott team for joining us today and for all of you joining on the call and webcast. Thanks again, Arne.

Yes, you bet. Good to talk with you. And thank you, everybody, for your time. Hang in there.