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

This webcast presentation is for Bank of America clients only. If you're a member or representative of the press or media, please disconnect now. This meeting is hosted on a third-party platform and affiliated with Bank of America Securities. And now I would like to turn the call over to Shaun Kelley, Bank of America Securities, U.S. gaming and lodging analyst.

Great. I'm Shaun Kelley, the U.S. gaming and lodging research analyst at Bank of America, and thank you for joining us. Let me just start off with a quick additional disclosure. Conflict disclosures relating to the individual companies or securities discussed on this call today can be found on the call invitation. Before I start, I just want to mention that this call is really a preview heading into our full gaming, lodging and global real estate conferences that are all taking place next week. We have an excellent lineup of CEOs next Thursday, September 17, ranging from most of the large-cap lodging companies to DraftKings, Penn National, Caesars and more. So if you have not registered for that, please reach out to me or your BofA sales rep to get signed up. So without further ado, it's my pleasure to welcome Arne Sorenson, the President and Chief Executive Officer of Marriott International. So good morning, and welcome, Arne. Thanks for joining us.

Thanks, Shaun. Great to be with you.

So as likely everyone knows, Arne has been in his current role since 2012, having joined Marriott back in 1996, and he is the first person to hold the CEO post without the Marriott family name. He also serves in a variety of Board roles, including sitting on the Board of Microsoft, the Business Roundtable, the Brookings Institution, and the Special Olympics. But on a much more personal note, not only has this been an incredibly challenging time for Marriott in the lodging industry, but Arne, you also have been in an intensely personal fight with cancer. So if you don't mind me asking, I'd love to just start with kind of how are you holding up and feeling right now?

Well, thank you, Shaun. I feel good. I feel strong enough to be fighting the disease that we're all fighting, which is COVID-19, as opposed to fighting the disease that I've sort of privately been fighting for the last 1.5 years or so. I was diagnosed last -- basically 1st of May with pancreatic cancer. And the team at Brookings and the medical team at Hopkins in Baltimore has been taking great care of me since. I've been through chemo and radiation and surgery and more chemo, and I'm getting to the end of that process and hoping against hope that we slip into monitoring at this point. But to be almost 1.5 years into it and to be still here fighting and working full time, I'm incredibly grateful for the progress that we've made.

Well, this is super great to hear. And I know we're all pulling for you and wish you a speedy recovery with everything there.

Thank you.

So let's just start with maybe the obvious but basic business climate question, if you don't mind, Arne. As it relates to kind of what's going on out there, industry health post-COVID and kind of the RevPAR environment. We have continued to see sequential RevPAR improvements through the end of August, both in the U.S. and globally. But maybe you can give us an update on current trends in your view on the trajectory of the recovery thus far?

Yes. So your question, I think, captures it quite well. Each week is better than the week before. And I won't necessarily say that, that will be the case without exception for the weeks going forward. But I think what we're seeing generally is that, in part because of the resilience of human nature, people are stepping out a little bit more each week than they stepped out the prior week. It varies a little bit from part to part of the world. Obviously, we're just pulling our August numbers together. But when we look across the globe, what we see is RevPAR down about 65%, maybe 1 point better than that when the dust settles, 64%. And while that is a powerfully negative number, it's a meaningfully better number than the minus 90 or minus 90-plus that we experienced in -- starting in late January in China and then across the globe as the virus moved to February and March. And there are interesting little nuggets underneath that global average. I think in the United States, we saw occupancy in the month of August at nearly 40%, 39%, which, given our mix of big group boxes and luxury and urban boxes, is again a good strong improvement from the depths of the crisis. You look at China and we saw RevPAR in August decline versus last year just 22%. And what that tells you, that's still a big year-over-year decline. And in normal times, we would be bemoaning a minus 22% number. But to think about that being simply 7 months or 8 months after the virus essentially shutdown business in China, you see that they are coming back, not just with leisure travel, but they're coming back with business transient and, to some extent, group as well.

This kind of debate around what we're seeing in the business and business versus leisure side is probably the primary question I get. And you kind of already alluded to a part of this is what you're seeing in China. But can you talk about maybe some of the -- any green shoots you're seeing here on the U.S. side? I mean, again, you've got multiple hats out there, including a lot of probably higher-level corporate interactions and probably discussions with the government as well. So kind of how are you thinking about the reopening on the business side, especially as we head into the fall post Labor Day?

So it's obviously a big world and a big country. Maybe I'll just talk about the U.S. for a second as it relates to business travel. What I think we're seeing is that across the United States, folks are a bit more likely to be back to work, the less they are in our coastal capital cities. Many of the participants in this call, I suspect, are New York or Boston-based, maybe San Francisco-based. Those are cities which are disproportionately dependent on mass transportation. They are disproportionately places where our biggest companies are headquartered. They are places where urban density is probably at its most extreme. So think about high buildings and elevators and the like. But you go to the rest of the country and you find cities which are a bit more dependent on car and transportation to get to work even, where the office buildings are less dense and less vertical, if you will. And I think in some of those places that we are already seeing businesses reopen, including offices reopen, and I think we are seeing some business travel start to take place. Business travel has not come back as much as leisure. But if you look at the business transient reservations we made in the month of August, for example, I think they were roughly twice what we did in the month of June. And so percentage growth is -- those are big numbers. It's still big numbers from June to July to August, et cetera. But when you look at -- compared to where they would have been in 2019, we're down much more significantly than our average RevPAR would be. I think as -- Shaun, we were talking about this a little bit before we opened up the call, but one of the things that I think is important for companies across the country to start to do now is sensibly welcome people back to the office, maybe not require it. And it's going to vary a little bit by city to city. But the listening I've done of CEOs, not just in our industry, but particularly CEOs of other industries, I think we're starting to see that productivity gets harder to maintain with each passing month. I think we are realizing that building a culture, training, starting new people and maybe even more importantly, being focused on issues a little bit different from the urgency of the crisis in front of us, which is what we were all focused in March, April and May, but instead on the issues that we've got to be ready for next year or the year after that, the collaboration that's got to be done. And more and more of that, I think, depends on people coming together. And so for -- I think, for the U.S. economy generally, obviously, for our industry, this will be a help, too. But if you look at all of the small businesses that are set up around the places where we go to work, whether that be the sandwich shops or the coffee bars or the florists or the dry cleaners, these are places that still are frustrated and are too often closed. And if we start to get back to work, again, with a welcome, not a mandate in the first instance, and with masks and with reduced density and with other things that make sure we're protecting people, I think we'll start to see that -- we'll continue to see that business travel and business activity continues to improve.

Arne, maybe just get to the heart of -- if I was going to summarize the one question I've gotten routinely in my -- all of my investor conversations over the last 4 months as it relates to lodging, after we sort of got past the initial kind of cash burn piece of the equation, it really comes back to this long-term impact on business travel. And I'd love to get your view on that. It's funny as I was preparing for this and I hadn't realized you were actually on the Board of Microsoft, which is such a -- which actually is fascinating comparison to where we are. So I'm curious on your view on sort of the long-term impact on business travel. And specifically, any thoughts around changing behaviors and technological change, right? We're all using some things today. I mean it's the Zoom conference call, maybe Microsoft Teams, but there's new things out here that we're not really able to envision 10 years ago when we talked about even the upstart with videoconferencing, and then we compare and contrast that with certain areas, business profitability. Things are actually okay, especially for some of the bigger tech companies that have been driving the economy for the last decade. So I'd love to get your kind of thoughts on what is this longer-term structural impact on both behavior and then specifically on business travel and the lodging industry.

Yes. So maybe just to remind us all of the kind of dialogue we had as recently as a year ago and think about the big tech companies because they've obviously benefited by this pandemic because we've had to rely on their tools to live our lives. But a year ago, those tech companies were basically saying, we want -- we're building campuses. We want people to be here. We're providing free food. We're providing games. The cynic might have said that's because they wanted to people to come to work and work not just 40 hour work weeks, but work all the time. But I think more fundamentally than that, what they said was, we believe, to collaborate, to solve issues that sometimes people haven't even identified needed to be solved, to be creative, to grow into new spaces, requires us to be together and to collaborate. Now we hear many of those companies and other companies say, we don't know that we'll ever go back to the office. Remote work is going to be something that is here to stay. We're going to communicate some flexibility to our workforce all the way through this academic year into the summer of 2021, et cetera. And I take sort of both of those as sort of extreme comments. I think the likelihood is that we will go back to the office. Even tech companies will go back to the office. Why? Because we can accomplish more when we're looking at each other. Now we may not go back 5 days a week. We might go back 3 days a week or we might go back some weeks where it's every day and some weeks where it's no days or we might stage things a little bit. But I think we will generally be back to a physical presence when the dust settles. Now when you think about long-term travel impact, technology is the thing that has continued to change. My introduction to Marriott was from the outside practicing law when Marriott split in 2 in 1992. And of course, that was done after the first Gulf War and the first recession that really impacted our business profoundly. And then, of course, we had the tech bubble burst in early 2001 and 9/11 after that. And in the context of 2001, there was a conversation about whether videoconferencing would displace travel and we never get back to it. And then, of course, we had a great recession in 2008 and '09 and '10, and the same conversation took place there. And while technology has changed, the conversation hasn't changed. In every one of those 3 prior times, people said, we're never going to go back to travel the way they did. After the recovery from each one of those, they went back to travel the way they did before. And our guess is that we'll see the same thing here. It may take us 2 or 3 years to get back to same level revenue that had in 2019 on a per property basis, but I think people will go back. And I think to some extent, we will continue to see the shifts we've already seen over the last 20 years or so. And that is there will be a bit more, which is leisure, than there has been in the past than business transient, for example. There will be further blending of trips. So I think one of the things that we're likely to see if there is remote work is it allows us to travel while we work for personal reasons as well. So if I've got a remote week that's happening or if I've got a week that's got a remote few days, I might well go to the beach and work from there for a few days but also have a few days of vacation in a way that has opened up that week in a sense that it wasn't open before. And I think you roll all that together and the gating issue here, for me at least, is probably less about technology, less about remote work and more simply about what's the economic hangover from this pandemic, and how long does it take us to work through that economic hangover.

That's sort of a much bigger political and economic question, obviously, as we start to think about it. And I think we've started to try and put our arms around maybe quantifying that or at least comparing it relative to what we saw back in the global financial crisis. And obviously, there's some elements where the job side is worse, the -- some of the profit side and indicators are actually not nearly being impacted the same way. Anything that actually sticks out to you when you think about the economic side of the recovery that might either be a hindrance to lodging or might just play out differently this cycle? Because, I mean, we're trying to think in cycles when it comes to hotels, and this is obviously the beginning of a new one.

Yes. I mean, I think the jobs picture is the main thing to look at. And the data is a bit confused, I suppose. You look at new jobs being posted or you look at new hirings being done. You look at the unemployment rate, and some of those stats are not as bad as I think we would have anticipated. At the same time, it seems reasonably clear that we have lost millions of jobs across the United States and even more than that across the globe. And it's hard to believe that the loss of those jobs won't have some kind of lasting consequence. Now the more those jobs are lost in small business, in restaurants, in that kind of space, I think, the more the impact is likely to be on leisure travel, ironically. That's the stronger part of the recovery today, but leisure travel is probably more threatened by that kind of economic crisis than business travel. And if business travel is disproportionately driven by larger companies, by white collar workers, we're seeing relatively greater strength in that space today than we're seeing in the small company land. But I think it's what we got to watch. And my own expectation is that the economic hangover will take us a few years to work our way through, that when the dust settles and the stimulus money is gone and we're back to sort of figuring out who's gainfully employed and not and what kind of business starts we have and those sorts of things, that it's going to take a little while for us to get back to where we were before.

It also implies a bit of a sort of a possible different pattern of how things might play out kind of pre and post vaccine, right? There's a piece of business travel that doesn't seem like it may well be allowed or, especially when you think about the urban density piece, may be able to return. And especially when we think about groups coming together, some of those areas are sort of kind of may need a vaccine or may need at least broader therapy is to deal with this. So I just want to ask directly, right, as we've come back post Labor Day and there's a lot more discussion in the broader market about a potential vaccine. How do you think a vaccine plays out? And I'm not -- I'm going to give you the scenario, which is if we were to get one by the end of the year, what do you think that means for corporate travelers? When can they really start to come back? How do you think your largest corporate customers are positioning or starting to plan for maybe that post vaccine world?

Yes. So let me not pretend to be an expert on the vaccine. But maybe just talk even more -- in a more limited way about how RevPAR moves for the industry over the course of the next year or 1.5 years. I -- Obviously, Shaun, you talked about this question you get frequently from folks on this webcast and investors, which is, okay, how far can leisure take us? What's happening with business transient? What does it mean when we get into the fall, where it's a little bit more of a business travel season than the leisure travel season? And we were quite deliberate in our second quarter results in putting out statistics about how -- yes, there is more business transient in the typical fall than there is in the summer, but it's only a few points difference in mix. And leisure continues to be relevant through the fall. And to some extent, this blending of leisure and work because of remote work expands the leisure season in a way. And so for us -- and again, there's nothing we can look at to prove that we're right on this. And I'll confess, we have some internal debate about it. But for us, I would guess that human nature being what it is, we will see a general, modest, continuing positive recovery over the balance of 2020 at the pace similar to what we've seen over the last couple of months. I'm not talking about a step function up but a modest bit of greater comfort about traveling, both for leisure and for business transient. I think at some point in 2021 -- and the precise timing of this depends on both the vaccine, which you talked about. It also depends a little bit on how does the virus move itself. When we get through the fall where we could obviously see an increase in cases because of seasonality, what happens in the spring? Do we get to a place where the virus starts to recede of its own accord, even independently from a vaccine, by midyear next year? I don't know the answer to that, but I think the likelihood is because of either a vaccine or because of the virus's own course that sometime in 2021, we will see a step-up in travel. We'll see a step-up in the RevPAR progression, if you will, largely in the first instance, driven by business transient travelers, who have not only been welcomed back to work, but probably said, you know what, time for you to now start coming back to work. Time for us to start calling on our partners or our customers and getting out there and doing what we do. I think at the same time, as that occurs, we'll start to see group bookings stick, and the group will not show up immediately in the hotels because the booking window tends to be longer. And so that will take a bit more time for it to show up in actual RevPAR numbers. But nevertheless that there will be a step function, which over a relatively short period of time, a few months, maybe a quarter or 2, gets us to a place which is commensurate with where the economy is at the time. I would guess that, that is still meaningfully below 2019 hotel level revenue, but it's a whole lot closer to that than where we're trading today. And from that point on then over the next couple of years maybe, we will modestly, with economy, grow back towards the kind of revenue levels we had before.

I think it's a really helpful kind of outlook of exactly how you sort of expect this progression to occur. And it makes a whole lot of sense. I mean, maybe my last question before we kind of move over to the unit growth and development side of the business is, is there anything that's really behaved surprisingly or differently to you when you think about, let's call it, the RevPAR component of behavior here, whether it's the pricing side of either how well it's held in, in certain areas? Or how much it's dropped off, right? We've tested some of our cycle rules, if you will, Arne, because like we've seen patterns before, but then this sort of broke all those rules. And I'm just kind of curious, when you look back at -- when we all look back at it, what will we have seen that just really behaved a little differently than perhaps we thought?

So there's not a lot that is surprising to me. I'm not -- by the way, Shaun, doesn't mean I would have predicted it could go this way. But having seen the way it's evolved, I think there's a lot of logic to it. I think the thing that was most gratifying to me and to some extent, though not surprising in retrospect, was not something I predicted, has to do with human nature in the way it responded to the research of the virus in early July. And when that took place, I thought we would see a more significant retrenchment back to quarantine basically that folks would say, "Oh my goodness, all bets are off. Risk is back in the world. And therefore, that vacation I was thinking about taking, I'm no longer going to take." And actually, when you look at the July numbers, yes, July 4 was better than the weekend which followed. But in a sense that was less about the virus in retrospect than it was about the seasonality of the holiday weekend. And what we saw as the month went along is actually people were amazingly resilient. And so travel increased over the course of July, and it increased into August. And again, in retrospect, I'm not surprised by it because it proves something about human nature, which I think is reasonably well known. I think the other thing, you talked about rate versus occupancy. And this is only going to play out, obviously, over time. We do compete in a highly diversified industry where pricing is done by -- not by Marriott for all Marriott Hotels or Hilton for all Hilton Hotels, but a mix of Marriott and our franchisees for our portfolio and similar for the other portfolios. And so there is plenty of price competition in our industry. Having said that, the rate impact that we've seen so far is less about price discounting and it is about the disappearance of the higher-rated business, the business transient business. And because that business is gone, it leaves the average rate actually achieved much more dependent on leisure business, which has never been quite as high as the business transient segment.

But also quite encouraging actually for, if that return comes, the ability to possibly regain that on sort of the positive mix shift side of the equation it would seem?

I think that's right. Yes.

So let's transition over a little bit, right? I mean, the other side, obviously, of Marriott's business and obviously, the RevPAR piece and the demand piece has been critical throughout this environment. But we've still got the unit growth and development activity side. So you've been pretty clear on some of these statistics coming out of Q2. I think one of the bigger surprises was actually that signings were up meaningfully year-over-year in Asia during Q2. So I want to start kind of there. Has that momentum continued? And then give us a sense of how some of your U.S. conversations are progressing as we move across the summer.

Yes. Yes. So the good news coming out of Asia Pacific continues. I think year-to-date, our signings are up about 30% compared to last year, which is absolutely stunning. And I'm not sure I can tell you exactly why the numbers are that good. I mean we know that our RevPAR index numbers in China are spectacular. We've got a distribution of hotels in the luxury and premium space that is clearly second to none. And when we look at RevPAR index against the competitive landscape there, we are performing extraordinarily well. And I suspect that's a piece of it. I think we're probably taking share in those markets from the rest of the industry. I think secondly, obviously, the recovery in China means that the abject fear about the impact of the pandemic on the development side receded much faster than it did in the rest of the world. And that's particularly the case for China, but that is less the case for the rest of Asia Pacific, which is also better than the United States or Europe would be. But all things considered, it's cultural, too, which is a longer-term focus to some extent in some of those markets where folks look at it and say, this is something that's going to be behind us, and we're going to look through it, and we're going to just keep going with our plans. I think if you get to the United States and Europe and see something which is still a little bit too early to have good granularity in terms of our ability to guide. We talked at the end of the second quarter about maybe 2% to 3% unit growth for the company in 2020, there is a considerable guesswork in that. But really, that is sort of assuming that projects that are not close to opening in some of these markets get delayed. I think what we've seen on the positive side is that the projects, which were well under construction and nearing opening, are back under construction and will open this year or next. I think we're seeing, not surprisingly, that there are fewer brand-new construction starts, even sometimes for deals that were fully signed and baked in our pipeline. And I suspect that is a mix of financing, but probably more fundamentally, it is the owners of those projects wanting to get smarter about how this pandemic gets behind us and what their expectations will be for the performance of that asset. We've obviously talked about conversions as well. I think that the conversion activity is likely to step up and, at least to some extent, offset projects that get delayed and elongated. Conversion activity, if you look at prior cycles, is most likely to take place as assets change hands. And assets, some assets are beginning to change hands, but not many yet. And I think we'll see that assets increasingly change hands as we get into the latter part of this year and next year. And as that occurs, new owners will often assess what's the brand affiliation I've got on this asset, what's the right brand affiliation for me to have. And obviously, in a weaker environment, we can compete even that much stronger.

You covered a lot of ground in there and that's sort of like 3 or 4 of my questions in one.

Yes, sorry about that.

No, no, it's perfect. But I do want to circle back. So starting with Asia Pacific then. I mean, this has been a big pipeline driver and a big balance of your kind of incremental growth for a number of years. So if we just think about just that component of the business overall, maybe you can help us understand how much can -- let's say at the trough of U.S. activity, and let's exclude conversions for a minute, how much can just Asia Pacific alone help power your net unit growth story? How much can that contribute to Marriott overall?

Well, I think Asia Pacific, particularly China, contribute a disproportionate share of growth, both on RevPAR as we're seeing today for existing hotels and new unit growth. And I can't give you a percentage of what that means for the company as a whole, but I suspect we're going to see that continue. I mean if we've got 65% or so occupancy in China in the month of August, you can see that same-store RevPAR growth is going to be -- and therefore, fee growth to Marriott is going to be moving faster up -- maybe not in percentage terms but certainly in dollar terms, faster up than the rest of the world, which is going to take slower to get back kind of occupancy levels that we're already experiencing in China. And I think similarly, we'll see both openings in the near term but openings in the medium term, with new projects being signed, grow more robustly than we're seeing in the rest of the world.

If we then kind of dig into the under construction kind of part of the equation, I'm just kind of -- it sounds like some of that activity is resumed. And again, I think we saw this very early period, where you just weren't allowed to do anything, and everybody went kind of pencils down. But obviously, most of these projects, it's pretty hard once you've started to do a lot outlets other than kind of push forward to completion. So can you help us think about what this means for the pipeline broadly? I mean obviously, you've got, I think, close to half of the overall pipeline already under construction, but, like, what does this mean for the other half as investors trying to kind of dig into like what's committed and then what happens? Maybe what happens to that other half of the pipeline? And is that going to happen but it could be materially delayed? Or how do you kind of think about that other component?