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

All right, everybody. Welcome back. We will keep going this morning with -- it's my pleasure to welcome Tony Capuano, President and Chief Executive Officer of Marriott International. Tony?

Thanks for having me. Good to be back.

Thanks for doing this. We've actually got to spend some time together this year, right?

Yes.

I participated a couple of Marriott events. I was with your Global Growth Summit in Las Vegas. So that's -- so last time we did this together on stage. It was at the [ O theater ] at the [ Bellagio ].

That's right.

Which no one tells you is -- you're on top of water.

Water. That's right.

So how many hours were you up there in a day?

Quite a bit, but amazing venue.

And the key, though, is that they can't drop the temperature a certain that's right degree right, because the performers can recognize like a 1 degree temperature difference in the water. So it's got to always be a [ demerger ] so not always designed for speakers.

But beautiful venue and the team loved having you. So thanks for attending.

It was a great experience.

So Tony, speaking of great experiences, it's been a heck of a ride, but a year ago, we were sitting here questioning all the things about the hotel industry and why demand wasn't doing what it was supposed to be doing. And here we are a year later, and it's probably one of the best demand environment we've been in, in close to a decade. So let's just start there. [ 1,000-foot ] level view, talk to us for a moment about what you're seeing on the demand side and how it feels out there.

Yes. It's really interesting to me. We've -- every time we're together, we talk about all the way back to the early days of the recovery from the pandemic [Audio Gap] suggested it was just going to be this little sort of fleeting moment in time. And I think I and many in the industry had a point of view that there was a more foundational shift. And that has proven to be the case. And we see it in the credit card spending data. We see it in the performance of our business that consumers are across demographics, prioritizing travel and experiences over consumption of hard goods. And we're many years removed from that recovery, and we're still seeing it across every age group, and that reveals itself in the business. In Q2, we were at 3.4% global RevPAR growth ahead of our expectations. And you look at the July numbers that I was just going through, we see a continuation. We saw 7% RevPAR growth in July. We saw 8% RevPAR growth in the U.S. and Canada. And one of the things that's really encouraging to me, even if you back out the impact in U.S. and Canada, this extraordinary FIFA World Cup, we were still up 5% in July. And then you even go to what has been for the last quarter or 2, the most challenging geography, which is the Middle East. You might recall in Q2, we were down 43%, I think, in RevPAR. We were down just 12% in July, again, ahead of expectations. And then maybe the last comment I would make about demand broadly, the most encouraging thing to me it's across geographies, it's across chain scales and it's across demand segments. Typically, I would sit with you and I would say this geography is weak or the strength we're seeing is principally in the luxury tier, or it's principally in leisure but we're seeing really solid sustained strength across each of those 3 sets of categories.

So as we think about that dynamic, in particular, it sounds like as we get into the setup for the fall, I think there's some questions we're starting to receive about how much of this is just the easy comparison for last year. There were a lot of things going on, right? It's hard to rewind, but we go back through. It was the trade war and the tariffs that kind of started a year ago, a big hit to government travel, a lot of corporate uncertainty. Once we start to lap some of these things, and I think the last thing will be the government shutdown kind of around October, how does it feel as we start to kind of look out there? What do you think that baseline level of maybe demand feels like as we start to look out a little further?

Yes. And again, we've talked in the past about the fact that particularly the transient booking window is short just a couple of weeks. So I'll caveat my perspective with that fact because things can shift but it does not feel simply like the benefit of some easy comparisons. When you look at the numbers we saw in July, when you look at the strength across segments, when you look at the strength across chain scales, to me, that tells me it's a bit more sustained, and that's really driving our enthusiasm about demand patterns going into the back half of the year. We are clearly seeing a lot of the RevPAR growth come out of [ ADR ] which is terrific for our owner community because so much of that drives margin and returns. But we're seeing occupancy growth as well. And so you're seeing both components of RevPAR in a really compelling trajectory.

Let's sit on the consumer for starting point, we'll go through a few of those different areas. Last year, I mean, you probably couldn't escape a conversation where we weren't talking about the K-shape economy, right? We were seeing this continued strength, the high-end consumer was traveling, but there were -- there was that softness in those lower end price points. It seems like -- and I'm a big data [ Hawk ] as a lot of people are in here, we're starting to see some signs that post-World Cup, those 2 pieces are starting to narrow a little bit. How would you frame that dynamic? And also just talk about what you did see over the summer [indiscernible] because you do well in parts of that K just given sort of the natural brand mix that you have?

It's part of the story that gives me so much enthusiasm about what the back half of the year sets up like, it's not just even in the few weeks since the World Cup. We were talking about it in Q1 and in Q2. And again, while I don't want to pick a singular month as defining a trend, I thought this was really interesting. If you look at our business in July on a global basis, luxury, which, in many ways, has been a bright shining star, RevPAR was up 5%. If you look at premium and Select brand, was up 4%. And if you look at mid-scale, we're still in some ways in our infancy, although between open and pipeline, we've got about 500 mid-scale hotels now. They were up 5%. And so this notion that the RevPAR trends are almost singularly led by luxury is just inaccurate. And that's why I say, looking at the strength kind of uniformly across chain scales is a really encouraging set of data.

We started to talk to people kind of during Q2 and after the other area that was really resilient felt like just business travel, right? That was a segment that, again, I think last year, you might have seen that, that freeze or that pause from people after some of the uncertainty kind of leading out of April. And they may have just changed decision-making patterns, but it feels like that's come roaring back. You have that unique vantage point, you're talking to corporate customers you're talking to large industry leaders, how are those conversations going right now? What are they saying out there?

So we continue to see good strength and growth in business transient tends to be more rate driven than occupancy driven. But again, I think when you think about some of the areas that our owner community is navigating, that strength in ADR is a real positive for them. I think the big multinationals are being a bit more targeted. They are to be sure traveling, but they're really looking at travel that they think is high impact. we're seeing much stronger growth trends in the small and medium-sized component of our business transient world. And then obviously, we are back to a world where we're seeing positive growth in government demand as well.

And then group is sort of a key area -- for area. You've got a lot of large-format hotels upper upscale being a lot of where the DNA traces back to. And so that also gives us that -- a little bit of that lead in terms of what we're seeing out there. How does that feel? That segment has benefited a lot from low supply growth for a long period of time, especially in the U.S. But where do we sit right now? And are people still comfortable booking for those kind of larger pattern groups?

Yes. It's a critically important segment for us, as you point out, particularly here in the U.S. by a pretty wide margin. We've got the largest convention and group hotel network. A lot of the big boxes, whether that's the partnership we have with [ Ryman ] on [ Gaylord ] the MGM partnership, which gives us some big box capacity as well. We're seeing -- you have more visibility than we have in transient because the booking window is longer. But even there, and one of the things that's so interesting to me, Jackie and I were talking this morning, and we were saying, maybe we shouldn't guide as much as we do on group. When you look over the last number of years, by the midpoint of the year, only 40%, 45% of group room nights are on the books for the following year, right? And so we still have months of run time to tell the story of what group is going to look like in '27. We talked in Q2 about group demand for '27 being flattish. In July, we saw a turn upwards in a really encouraging way. But I think when you and I are talking towards the end of the year, we'll have much better visibility into '27, but we're feeling pretty good about it. I was in Indianapolis maybe 2 months ago, we hold an event called the Exchange. And we bring in about 600 corporate and association meeting planners. And this is not a statistical view. This is an anecdotal view. But they all were talking about booking patterns that would suggest more group meeting bookings in '27, '28 and '29, than they saw in '25 and '26.

I want to swing to hear for a second on demand topic, but this environment has been 1 where we can also start to see a positive dynamic for your owners, right? So finally, some RevPAR growth and more importantly, RevPAR growth that outpaces unit level or line level inflation, which owner has been dealing with for years. I'd like to kind of just start maybe with the high level of where do you feel like that owner health dynamic sits? And kind of what's some of the message back from franchisees? Because it's been -- I mean, I think in all fairness, it's been a tough go, right, 8, 9 years, first, very low single-digit RevPAR growth, 2017 and 2019, then COVID where it was just a game of survival right? And then you got your [ event ] travel for a period, but then we have the inflation on the back end. So it's been a tough go. So just -- how are those conversations going? Let's start kind of at the highest level and then we'll dig a layer deeper on some merit level initiatives.

So to state the obvious, if you have an asset-light model, the relative health of your owner and franchisee community is critical. Our success and their success is inextrably linked. And so every day, we are engaged both internally and with the owner community talking about what we can do to drive enhanced top line performance, what we can do to drive margins. We're looking at every variable in the equation that drives hotel level margins and returns. That served us well for decades, and that will always be the case. There is a broad recognition that our business models are fundamentally different, right? But 1 of the most powerful levers of our model is net unit growth. That's on the shoulders and balance sheets of our partners. And so we've got to be driving performance that encourages them to continue to invest in our portfolio of brands. I would say they are encouraged. I mean we all know in any business, you can drive bottom line 2 ways, right? You can cut costs or you can drive revenue. To your point, I think there is a level of encouragement about what we're seeing in RevPAR trends across sectors, across chain scales. But they expect us appropriately to leverage our industry-leading scale and attack every one of those variables in the equation. And we do that every day in a proactive way. Most recently, there's been a fair amount of coverage about some reactive work we're doing. I said it on the Q2 call. I'm appreciative that the owners care enough about their relationship with Marriott and the recognition of how linked our performance is, our respective performance to engage us the way they have. And I think we're making good progress. But that's going to happen every day for as long as Marriott's in business and has an asset-light model.

So you did outline on the second quarter some new initiatives, though for the rate. So one of the biggest costs when we think about the unit economics that they bear is the overall full franchise fee plus the programs and service some of the common charges that are necessary that Marriott provides for those owners on their behalf, right? These are going to be marketing, loyalty reservations as some of the big categories. So what are you doing just maybe lay it out for us a little bit more specifically, what are some of those initiatives that you've now started to lay out? And what kind of -- what are the owners starting to react to what's been the initial response?

I think there is a broad recognition both in the owner camp and the brand camp despite looking really hard, there's not a single silver bullet, right? And so the way I've characterized it in the discussions with many of our owners and franchisees, we've got to find lots of nickels and dimes. But if you find enough of them and stack them up, we ought to be able to drive pretty significant improved performance. So what are we doing? We are leveraging some of the efficiencies we created a year ago when we went through our exercise that resulted us in reducing almost $100 million in net admin. Last year, we reduced the loyalty charge-out rate for the Bonvoy program by 5%. We're doing a lot of work in the procurement space to, again, leverage our economies of scale and pass on those efficiencies to our owners. We're looking at emerging technologies like AI and the benefits we think will emerge from our technology transformation and how those can drive margins. Just last month, we announced an intent to recommend incentive that can drive about a 50 basis point reduction in affiliation costs. So we're looking at, again, every variable in saying where are there opportunities to try and drive performance. And I want to go back to the technology transformation for a minute. I think rightly, when people hear about the scope of this technology transformation, they say there should be real operating margin efficiencies that will emerge. And we agree. But I think what gets talked about less is the revenue enhancement opportunities. And that's 1 of the pieces that we're all really excited about, both on the Marriott side and on the owner side. If you think about the suite of products and services that I would like to sell you in the booking path the old central reservation system was suboptimal in terms of its efficiency. The new system will allow you to book food and beverage reservations. Spa appointments, golf times, all of these sort of things during the booking path, which we think represents really significant revenue upside. And even in the rooms business, I was just in London, I was touring one of our Autograph hotels, beautiful old historic building, but it probably at 100 different room types and the ability to merchandise those 100 different room types and price those commensurate with the unique attributes of those rooms, I think represents real revenue upside as well.

If we look at analogies out there strategically, and it's going to get to the tech transformation let's go ahead and hit on it now. On -- the airline industry has done a lot, right, in terms of resegmenting the cabin figuring out different ways. I think cruise line industry as well, right? They find different ways I've got a view. I don't have a view. If you think about that, can you just -- I think this could be actually quite a big deal for Marriott. So why like -- why was this not available or customizable before? Just what is that feature set? Because I think these are -- you think about this ancillary business and this ability to upsell even just to enable if it's not a hard sell, the ability to enable that capability to your associates working at the front desk. It seems like it's a big opportunity.

Yes, no question. And it is a massive undertaking, right? Because redoing our central reservation system for a portfolio of 10,000 hotels would be a significant undertaking. The fact that simultaneously, we're changing out the PMS system and the loyalty platform. It was really making sure we had done the research, we had found the right partners and we have thought about the right sequencing so that it would be incrementally positive rather than terribly disruptive to the business is why you might look from the outside and say, "Oh, you should have done this 5 years ago." we were working on it 5 years ago, but in a way to ensure that we did it as efficiently and as impactful as possible.

And just maybe to wrap up on the owner and franchisee side. One thing that did come out a little bit was that some of the costs of what you're going to be returning to owners are actually going to be borne by Marriott as opposed to just agencies that it sounds like both variables are -- we're going to get more efficient. They're going to be doing things there, but we're also going to bear some of these costs directly. And it wasn't a huge number, but it was a bit of a commitment there. Why was that the right approach from there?

Yes. And for those of you that didn't read it, on the list of things I mentioned that we're working on to try and drive owner performance, the one that we pointed out that we'll be paying for on our own P&L was this ITR incentive. And...

Intend to recommend.

Intent to recommend incentives. That's right. And we looked at it and we said, what an ideal place for us to invest in the business. And the reason I say that, we always talk about the constituents that we serve every day. It is a clear and powerful message to the owner and franchisee community about our commitment to them and where they are in the recovery cycle. And then when you think about our associates and guests, they want to be in the best hotels in every market where we operate. What a terrific way to incent and provide benefits to that guest community because our owners are saying, okay, maybe we've been holding off on a renovation or a reconcepting of a food and beverage outlet. Here's an opportunity to make that investment. And the benefit of that will be to the guests. The associates will be energized in it. And we think and ultimately, what we're doing is we're investing in the equity in our portfolio of brands. That was the rationale.