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

All right, everybody. Welcome back to day 2 of our Travel and Leisure Conference. Next up, we have Marriott International, which I would be remiss if I didn't point out, while it has been a tumultuous 2020 and past 12 months, they were one of the only companies in my broader coverage that I think proved out the resilience of the business model by not really burning any free cash flow during this window, whether you include or exclude things like point sales and the working capital, which I think just has been remarkable, and in our conversations, people would not have anticipated. So it's my pleasure to have Chief Executive Officer, Tony Capuano, with us this morning to talk about what is coming next.

Good morning. Thanks for having us.

Absolutely. So on the recovery, I guess, we'll start there. How are you thinking about the path into the recovery in aggregate across different drivers to demand as we think about business, leisure and then group?

Well, I think broadly, we're quite pleased with the pace of global recovery. Obviously, it varies significantly from geography to geography, from segment to segment. But if you look at May as a proxy for that worldwide, RevPAR was down about 44% compared to May of 2019. In comparison, a month earlier in April, we were down about 50%. So we are -- as you described earlier, we're seeing pretty good and consistent week-over-week, day-over-day, month-over-month improvement in the trends. We also saw global occupancy rise to just under 50%. I'm not sure I thought at any point in my career, I would be celebrating global occupancy at 50%. But to your point, given where we were a year ago, I think we're quite encouraged. In the U.S. and Canada, which, as you know, is our largest market, we continue to see steady increases. We saw 55% occupancy in May, which was up from 52% in April, which was up from 49% in March. So again, maybe not quite the pace we all hoped for, but steady and encouraging growth. In the U.S., the recovery continues to be largely led by leisure. Leisure is very strong, well ahead of where we saw pre-pandemic, but not to the exclusion of recovery in business transient or group. We see and what we hear from our customers is pent-up demand across all 3 of those segments. The recovery trajectories, as I mentioned earlier, they vary not insignificantly from region to region. And as you and I talked about the last time, China is the furthest ahead. Maybe not surprisingly, I suppose it's kind of FIFO recovery curve. The leisure room nights in China have long since eclipsed what we saw back in 2019. But I think we're quite encouraged by what we're seeing from business transient. In fact, you probably heard Stephen on our earnings call, we talked about the fact that in March, business transient room nights were actually 5% ahead of what we saw in March of 2019. So quite encouraging as well. And even group, we saw in mid-March, the government started to release some of the restrictions on big group assembly. And as a result, in April, we actually saw group room nights up 2% over April of 2019. So in many ways, China has recovered to pre-pandemic levels, and they've recovered across all 3 segments. The thing that will be interesting to watch, for many years, China benefited greatly from inbound international. The vast majority of the demand that we're seeing across greater China, as you would expect, is domestic demand. But as the borders open, we'll see inbound, but maybe just as importantly for the recovery of other markets around the world, we'll start to see a resurgence in the outbound Chinese traveler that we saw pre-pandemic.

So maybe following up on that, I think that one of the markets that the China outbound traveler was often going to was Europe. So can you also comment on what you've been seeing recently in Europe, not necessarily just from China inbound, but more broadly, what trends are you seeing in that market?

Well, Europe has been fascinating to watch. Obviously, our two biggest markets, the U.S. and Canada and then China, have been able to rely pretty significantly on deep pools of domestic demand. And I think that's why you've seen those markets lead to recovery. Europe -- many of the markets in Europe, as you know, rely much more heavily on inbound international. So their recovery curve has been a bit flatter. But even there, we're starting to see some encouraging signs. Total bookings in Europe versus 2019 over the last 2 weeks were only down 48%. Now for the first 4 weeks of this year, we were down 79%. So we are seeing some recovery, and it's really around more inbound international traveler certainty about whether the borders are open and what the requirements are in terms of vaccinations or COVID tests. And I'll give you a great example. When Greece came out as one of the first European countries to say, we are open for international inbound travel, in the last 2 weeks, we've seen inbound bookings, up 6% versus the same 2 weeks in 2019. I think the other thing that's been quite interesting, you saw the EU commissioner come out in mid-May and say they were gearing up for quarantine-free travel coming into European destinations. In the 2 weeks after that announcement, we saw the number of U.S. bookings for Europe, picking up about 40% versus the prior 2 weeks. And so one of the great things about our system is as you see negative events, whether they are spikes in infection rates, whether they are dense to consumer confidence related to news around variants. Or more positively, whether they are events related to borders opening, access being restored. We see in real-time the appetite of our guests to go to those destinations. So I think even a month or 2 ago, if we had talked about Europe, I probably would have been a bit more muted in my feelings about recovery. And again, I don't want to get too enthused about a couple of weeks of data. But again, as you see borders opening, the trends are quite encouraging. And I think, Stephen, broadly, there's a couple of factors that are going to continue to drive the recovery. Broad and consistent distribution of vaccinations, opening borders, increases in airlift capacity, office openings. Before we came on live, you were talking a little bit about the experience in your office. I was in our headquarters last week. I think it's certainly not scientific, but I saw more cars in the parking lot than I had seen before the pandemic began. And I think that return to the office is going to be a pretty exciting catalyst for the return of business transient demand as well.

Maybe to piggyback on that. You alluded to some of the strength in some of the segments in the U.S. is there any other color you can give in terms of, I think, especially as we look at market-by-market, are you starting to see anything in the -- on the group side from a forward looking, particularly whether it's in urban markets, where there is a little bit more exposure potentially on the incentive management fees?

Yes. So let me maybe start with business transient and then pivot to group. For the month of May, as we looked across the U.S., special corporate demand is at about 50% of the levels we saw in 2019. But what's interesting, if you look at tertiary markets, we're at about 75% of where we were in 2019 for special corporate. And in fact, if you look across our estate of extended stay brands, we're actually at 80% of 2019 special corporate. So to your point, we're seeing some of the primary markets recover much more slowly. I know you're in New York, and you're seeing it there. But the trends are encouraging. And I think, particularly in those primary markets, a return to the office will be that much needed catalyst for the return of special corporate demand. On the group side, it's a little hard to generalize. Obviously, there's lots of different elements that make up group demand. Interestingly, even through the early days of the recovery, social, weddings, traveling, sports teams, those sorts of things have come back pretty significantly and in a pretty encouraging way. Big citywide, more traditional group has been a bit more slowly -- a bit more slow in terms of its recovery. But if you look at our biggest group hotels, total room revenue, looking at 2022 pace versus where we were in 2019, we're actually up about 4%. So I think the prospects for group even across that estate of big-box group hotels is quite encouraging.

So that's all super helpful color on the recovery and what you're seeing in the business. If we zoom out a bit and think about Marriott's competitive advantages, how do you think about the company's competitive advantages being impacted by the pandemic? And as you reimagine the business model coming out of this, what could that look like as it relates to either owners, development or even as you think about your business and the fees that you can generate?

Well, I think you hit on maybe one of the most compelling advantages. And that is the strength and the proven resiliency of our business model. There were lots of dire forecasts about cash burn rates and the like. But the resiliency with which the model bounced back, I think, is a real advantage. I also think when you look broadly across our portfolio of owners and franchisees, their resiliency as well. They tend to be well capitalized. They've -- for the most part, I think, feel like they've weathered this storm. And that's not to suggest for a moment that they don't still have a long climb ahead of them. They've lost hundreds of millions of dollars of revenue. In some cases, billions of dollars of enterprise value has been lost. But they seem to have weathered the storm and all the statistics that I'm sharing on demand recovery is really the medicine they need to continue to see their businesses' recovery. I think our lower cost direct channels have really proven themselves as we work our way through the recovery. And maybe the other advantage I would talk about a little bit is the Bonvoy loyalty program. That program is really a broad travel platform. It is not simply an app to book and modify hotel reservations. And so among the things that Bonvoy has allowed us to do through the recovery, is really continue to engage with our customers and strengthen that relationship. We've seen them -- our customers continue to use the branded credit cards. We've seen them explore Marriott Homes & Villas. And even through the recovery, we've been really excited. We've launched new branded credit card platforms in markets like South Korea and Mexico. Just a month or so ago, we launched a partnership with Uber that allows our customers to earn points through Bonvoy when they use Uber for rideshare, when they use Uber Eats delivery. And I think all of these things just strengthen that relationship we have with our Bonvoy customers.

Maybe as a follow-up on that specifically in the Bonvoy program. I think one of the concerns that we would hear, typically coming out of any kind of disruptive period was that the hotel owners management would pivot to pushing more of the inventory to the OTAs to pride a spur demand. But in this environment, it seems like leisure has been particularly strong. I guess, how has the distribution channels shifted or even consumer behavior shifted as we think about Bonvoy being leveraged to go direct and how the OTAs are being maybe either used similarly or different than prior periods?

Sure. So maybe not shockingly given that business transient fell by the wayside a bit when we saw in the U.S. recovery led by leisure. We have seen some modest growth in OTA volume, but we've continued to grow share in our direct channels as well, which I think is quite encouraging. And I think that really speaks to the power of Bonvoy. I think that the suite of benefits that our customers receive when they book direct. I think the power of the Bonvoy value proposition has only strengthened as we work our way through the recovery. And I think it bodes quite well for the program as we look forward into '22 and beyond.

Now another topic that was being discussed last year around this window where things were probably going in the wrong direction, to a degree, was really the reimbursed costs and effectively, what equates to charge outs to the owners as people were concerned that maybe there was a working capital headwind for your business. As you've had to maybe reimagine charge-outs and how you manage the properties, how significant of a margin benefit could that be for owners? And then how does that change the pitch to become a Marriott brand versus independent as we come out of the pandemic?

As you might expect, as we've worked our way through the pandemic, top of mind for us has been identifying everything we can to enhance and preserve margins for our owners and franchisees. And I think the teams around the country and around the world are to be applauded. We've made tremendous progress. Now there are continued pressures. There will be wage pressures going forward. But we do think we can preserve margins as a result of many of the efficiencies that we've identified as we work through the pandemic. As it relates to the pitch, I'm not sure our pitch is dramatically different, but I think our pitch is resonating. As you heard on the first quarter earnings call, we had a really strong growth quarter in the first quarter. We opened nearly 24,000 rooms on a gross basis in the quarter, which was quite encouraging. The other thing I found -- and by the way, of those 24,000 roughly rooms, more than 30% were conversions. And I think that might be the statistic, Stephen, that answers your question best. As we're out there pitching and owners and franchisees are voting with their wallets. To see nearly 1/3 of our openings in the quarter be driven through conversions, I think is a pretty powerful tip of the cap to the strength of affiliation with our portfolio of brands. And then in terms of momentum going forward, we signed about 21,000 rooms in the quarter, which was really strong and compelling for us. And the momentum we see is quite encouraging as well moving into the second quarter.

So let's continue down that path. I guess, are you seeing any differences in construction or development as you look around the globe?

Well, I think here in the U.S., as you well know, the availability of construction debt is quite constricted right now. But that's part of the reason we're so enthusiastic about the breadth of brands in our portfolio that are so well suited for conversions. In other parts of the world, in China, we're seeing new construction volume ramping up precisely how we would have expected. Similarly, in markets across the Middle East, we're also seeing good volumes of new construction. But here in the U.S., I think you'll continue to see a heavy emphasis on conversions until we start to see construction debt start to flow a bit more freely.

And what do you think you need to see to -- given your background in development, perhaps you've seen these ebbs and flows, what are you typically looking out for to see that the construction lending comes back to the market? Or what do you think they're looking for?

Well, I think they're doing quite a bit of housekeeping right now. They -- as you've seen through the pandemic, I think the lenders have been very thoughtful and very collaborative with our owners and franchisees. Lots of forbearance, lots of workouts, very little in terms of foreclosures. And I don't think that's a particularly big surprise, when you see the sort of immediate drop in business volume that we saw. If I were a lender, the only thing foreclosure would do is entitle me to fund operating shortfalls. So it's perhaps not a huge surprise. But I think as a lot of these workouts get completed, as the hotels start to cash flow and cover operating costs, as our owners and franchisees do the same things that we did in terms of enhancing their liquidity and strengthening their balance sheets, I think all of those things will contribute to the lenders starting to dip their toe back into lending on new construction.

So if we put that all together, I mean, we know that your in-construction pipeline is in the mid- to high teens as a percentage of the existing base. Your total pipeline is even larger than that, but how does that translate to unit growth over the next few years as we think about the U.S. and globally?

Well, we've guided for this year. We've said we think gross unit growth could be about 6%, netting down to 3% to 3.5%. Obviously, that's with the onetime headwind of the SVC deletions. If you exclude SVC, we'd be guiding to about 4% to 4.5% net unit growth for 2021. On one hand, I think we still think there's some murkiness out there around the pandemic. I talked earlier in my comments about the real-time good and bad data we see, if you see in a given market, a spike in infection rates or a closing of borders. And I think that uncertainty has given us pause in terms of guiding beyond '21. But that shouldn't be read as any sort of pessimism. As you pointed out, we continue to have nearly a half of our global pipeline, which I think is still the largest pipeline in the industry. We continue to have about 220,000 rooms under construction, which, again, I think is the highest volume of under construction rooms in the industry. And I think that bodes really well for our unit growth over the next couple of years. One of the great things that we've seen is once these hotels are under construction, a very high percentage, 95-plus percent of those hotels end up opening. We've seen a little bit of construction delays. But remember, our owners and franchisees are not trying to time these deals by the month or by the quarter. They tend to be -- have a long-term investment horizon. They often hold these assets for years, if not decades. And so we've got a high degree of confidence about those 220,000 under construction rooms coming out at the other end of the assembly line.

That's super helpful. And I realize you don't want to necessarily give guidance beyond this year. But maybe if you can help just frame, especially the international growth opportunity. What do you generally think about as the drivers of any individual region? And I guess, talk to within that, are there any pockets where you feel like you have hit saturation? Or -- and then that might be a barometer for how to think about the growth potential in these markets that potentially are less saturated?

Well, you know I'm a former developer. So saturation is not a word I'm familiar it. But all joking aside, I will tell you that while we continue to be really enthusiastic about our growth prospects here at home, international is probably the area I get most excited. And I think about my tenure leading our growth efforts, probably, Stephen, 5 or 6 years ago, when as I watched our pipeline, I saw this shift, where more than half of our pipeline was outside of North America. And I remember talking to you and others in the investment community and saying, I don't think we'll ever cross back. And in point of fact, now you see roughly 60% of our pipeline in international markets. And it's really exciting for us. I mean, I think today, roughly, our market share outside of North America is plus or minus 3%. But we have 16% of the rooms under construction internationally who will fly one of our flags, and that's really exciting for us. And I think it's a great statistical illustration of the runway we have for growth internationally. In 2019, net unit growth was about 50% higher internationally than it was here at Home. We saw North American unit growth of about 4.2%, while international was 6.1%. And I think you'll continue to see us make great strides internationally. Maybe you ask where I'm most enthusiastic? I think in the coming years, you're going to see a really rapid and really compelling acceleration of our MSB or select service growth outside of the U.S. and Canada. And I think that represents a tremendous opportunity for us. You'll see -- we just yesterday, opened our first Moxy in Greater China, for instance. I think the last time you and I spoke, I talked about a program we have with a partner in Japan that's building a network of 100 fairfields across Japan. So there are lots of those sorts of initiatives that I think you'll continue to see drive strong select service growth across the international markets. And that's a big, big opportunity for us.

Can you just remind us how franchise fees or even management fees are similar or different in these markets? And how they might evolve going forward, I guess, as we think about that net unit growth translating to actual fee growth?

Sure. It varies sometimes significantly from market to market. You think about China, for instance, one of the things that's been great is to see how rapidly incentive fees have recovered. Because as you know, we share in the profit from dollar 1 as opposed to here in the U.S., where there is an owner's priority stand aside before we participate in incentive fees. In franchise fees, we're not quite at the levels that we enjoy here at the U.S. and that's probably not a huge surprise given the relative footprint, but we would expect to see those fees rise as our distribution in international markets grows and the commensurate performance grows. In many ways, it's the markets that dictate what we can charge in franchise fees, and that's really around our distribution and the associated performance premiums that we're able to achieve. But certainly, we'll continue to look for markets where we achieve that distribution. As a result, we achieved performance premiums, and that allows us to gradually increase our franchise fees level -- franchise fee levels across those international markets.

Now you mentioned that the market dictates the fee rate, but are there also contractual agreements to increase those over the life of the -- or the term of the contract itself?

No, we tend to set fees for the life of the contract at the time we sign.

And one other follow-up on international growth and the pipeline itself. You referenced the growth potential in select service. But as we sit here today, as we look at the pipeline, is that skewed dramatically different as we think about the RevPAR dollars that could come out of the ground versus what the existing base is? Or is that fairly similar?

Well, you know that's my favorite question. I have been talking till I'm blue in the face to talk about the very obvious fact that all of these rooms are clearly not created equal. And I just -- I did an NYU verbal panel with my fellow CEOs just yesterday, and we talked a bit about China. And one of the things that's interesting to me, and I may be off a little on these statistics, but round numbers, we've got a little over 400 open hotels in China today. We've got about another 400 in the pipeline behind that. And if you add those 2 and think about what our estate might look like at build-out of the pipeline, roughly 60% of those hotels and those rooms are in the luxury and upper upscale tier. And so when you think about the fee potential, both in terms of the RevPAR that those hotels should command and because the vast majority of the luxury and upper upscale hotels are managed, the IMF potential of those hotels, I think that bodes really well for the fee potential growth we have in our second biggest market, which is China.

And I guess even from an engagement standpoint, are you seeing any difference in how people are leveraging the loyalty program in those markets versus the U.S.? And I guess, for context, I recall, there was a stat, and I might be a little bit off here where you referenced, I think it was something like 4% of the luxury properties in your portfolio represent a much, much, much larger percentage of -- maybe it was 20% or more in terms of loyalty redemptions, is that same kind of level of engagement true in international markets?

Yes. I think particularly, Stephen, because of the really strong growth we're seeing in member acquisition in the international markets. And so I think that same sort of parallel growth is something we expect. I mean, as we've seen in a more mature market like the U.S., we bring in those members. They stay with us across the portfolio. And often, their aspiration is to use those hard-earned points to go into the luxury and upper upscale portfolio. And I don't see any reason we wouldn't see a similar phenomenon as we grow the luxury and upper upscale portfolio international.

And I guess sticking again with the loyalty program. In the beginning, you referenced some of the partnerships with the program, but there's also the fees that you get from your credit card partners, which I think had been a bit of a bright spot relative to the broader RevPAR environment. I guess how is card spending and sign-ups for these cards trended relative to RevPAR during the pandemic? And how might that change in a recovery?

Well, it's a great question, and I think it really illustrates that the relationship we have with our members and particularly with our card holding members extends beyond just hotel stays. Obviously, they use those for things like grocery and gas and wholesale clubs and the like, even through the pandemic. As we shared on the earnings call, global spend in Q1 was down just 5% compared to Q1 in '19. And that compares pretty favorably when we looked at 2020 in aggregate, we were down about 16% versus 2019. So we've seen really encouraging numbers on spend and we expect that to continue as the recovery marches forward.

That's helpful. Jumping to another topic that's been coming up across the conference especially in the labor inflation and shortages. How has that been impacting your business? And what are your expectations for labor inflation at your hotels and as we think about Marriott's G&A going forward?

Well, it's in the markets that are recovering most rapidly. So you and I talked earlier about South Florida. You look at Georgia, you look at Texas, you look at Arizona. The good news is we are seeing demand recover really rapidly. The challenge is, there is real wage pressure. And not only are we competing for labor with other hospitality companies. Maybe more so than in any other recovery, we're competing for labor outside our sector with retail, for instance. So I do think there will continue to be some wage pressure. There are some valves that we think will open to relieve a bit of that pressure. Obviously, I don't recall the precise number, but 25 or 26 states in the U.S. are talking about winding down the extended unemployment benefits. I think that will relieve a bit of wage pressure. I think there is a broad expectation across the country that we'll be back to in-person school across most, if not all, markets, as we get back into the fall. I think that will free up some availability of labor. So I do think there will be some relief. But as the economy heats up, it is perfectly plausible that, that wage pressure will continue into the fall. And it's one of the reasons we're so encouraged that we were able to achieve such strong margin enhancements over the last number of months because we think, at a minimum, that will act as an offset for continued wage pressure. Ideally, it will result net-net in continued margin improvements. But even if the wage pressure continues in a way that's stronger than we expect, we're confident in our ability to maintain margins as a result of all the efficiencies we've identified.

I guess that's a good segue in terms of thinking through technology and the impact on the business as that's one place that I think that there's been the ability to improve efficiencies. So what are some of the other innovative ways that Marriott or the industry has been leveraging technology to not only manage through this time, but are thinking about changing the way that you do business going forward?

A few areas, and as you know, many of these were in place even pre-pandemic. I think instead, what we've seen is broader consumer acceptance and adoption. And we've seen it across not just hospitality, across all segments. I think there's a broad swath out there of the U.S. population that maybe had not shopped online or bought groceries online. But by necessity, they've become more familiar. And I think that's probably behavior that will continue well beyond the pandemic. We've seen the same thing. We had online check in and checkout. We had mobile accessibility. We had mobile key across roughly 2/3 of our hotels in the U.S. We had mobile chat functions, but the consumer acceptance of that technology, I think, will continue to ramp up even as the pandemic recedes. And I think that's great news for us. And it's great news for a couple of reasons. Number one, it obviously enhances efficiency at the hotel, but it also frees up our associates to better engage in person with those customers who really still crave that personal connection. And it's interesting when you think about the breadth of our portfolio and the breadth of trip types. There are some of our guests that for certain trips, they don't want to interact with anybody. That when they're in the shuttle on the way to the hotel, they want to check-in. They want to get to their mobile key and go straight to the elevator. And if they need something, they want to use the mobile chat function to meet their needs. That same guest, however, may take their family on a vacation, and they want to sit face-to-face with the concierge and plan activities and ask for restaurant recommendations. And so I think these technology advancements allow us to meet all of those guests' needs.

That's great. And as we have a couple more minutes left, one that I want to make sure I jump on is just thinking about the capital structure. Obviously, as I mentioned, the business has proven its resilience. So has the pandemic changed at all how you think about the right capital structure? And then also as you get EBITDA coming back, does it change how you view the right allocation of that capital whether that's through dividend, buyback or even thinking about consolidation in the industry, which tends to happen on the back end of these disruptive periods?

I think one of the really welcome things I inherited in my first roughly 100 days in the role is we do have such a proven model. There's no need for any sort of radical departure from that model. The overall philosophy remains really consistent. We'll invest in the business where the returns exceed our cost of capital and then hopefully get back to a place where we're returning excess cash to shareholders, whether that be through buybacks or dividends. Right now, we're committed on trying to get back to the sort of target leverage of 3 to 3.5 that we enjoyed pre-pandemic. And as soon as we do that, obviously, getting back to a place where we're talking about the topics we enjoy so much, which are dividends and share buybacks. But that's really our focus right now.

Do you anticipate though that there could be opportunities? Or how would you think about opportunities for consolidation from here? Is that less part of the Marriott strategy going forward and what we should expect from the industry? Or are there still pockets that you feel like are missing from the portfolio?

Yes. I mean, we've got a pretty broad and comprehensive portfolio right now. But I don't think our posture will be materially different. We always look at the opportunities that are out there. We determine are they compelling financially for our shareholders. And do they meet a need. I don't think we'll look at opportunities just for growth sake. But if you look at the deals we've done over the last 7 or 8 years, there are a lot of threads of commonality. Either they filled a gaping hole in our geographic distribution, deals like Protea or AC, and/or they are deals that we thought could be regional or global growth platforms. And I think AC is maybe a poster child for that. That was a transaction that immediately put us on the map in a meaningful way in a market like Spain and quickly became a really compelling global growth platform.

Well, we're right at the time here, so that might be a good time to wrap it up. But Tony, thank you so much for all the insight as always and all the time. For those on the line, we will have Mark Hoplamazian from Hyatt joining us at 9:15. Tony, thank you again, and hope to see you in person.

Thank you for having us. And I hope this is the last one we've got to do virtually. Look forward to seeing you in person quite soon.

Absolutely.

All right. Thank you all.

Take care.