Marriott International

Ladies and gentlemen, thank you for standing by, and welcome to the Marriott International's first quarter 2020 earnings call. At this time, all participants' lines are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the comments over to your speaker today, Mr. Arne Sorensen. Please go ahead, sir.

Good morning, everyone, and welcome to our first quarter 2020 conference call. I hope everyone and their families are safe and healthy during these unprecedented and challenging times. And I would like to send my deepest condolences to those of you who have lost friends or family because of COVID-19. Please know that our thoughts are with you. Joining me today from their respective homes are Leni Oberg, Executive Vice President and Chief Financial Officer, Jackie Burka-McConough, our Senior Vice President, Investor Relations, and Betsy Dahm, Vice President, Investor Relations. I believe this is the first time the Marriott team has not been together in the same room to host this call, and that includes an earnings call from China in 2018 and one during a blizzard in 2010. I want to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Statements in our comments and in the press release we issued earlier today are effective only today and will not be updated as actual events unfold. Please also note that unless otherwise stated, our REVPAR and occupancy comments reflect system-wide constant currency and year-over-year changes and include hotels temporary closed due to COVID-19. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our investor relations website. Let me begin with what is clearly top of mind for all of you, how Marriott is navigating through the extraordinary and continually evolving worldwide impact of COVID-19. This is by far the most significant crisis ever to impact our business. For a company that is 92 years old and has weathered the Great Depression, World War II, and numerous natural disasters around the world, that is saying something. Well, the year generally got off to a great start. We saw sudden, sharp declines in occupancy associated with COVID-19, beginning in Greater China in January and then extending around the world. Occupancy continued to deteriorate in March and then stabilized in April. albeit at very low levels, everywhere except for greater China, where trends are improving. RevFar in April fell 90% worldwide and in North America as well. April system-wide occupancy was 12%, both worldwide and in North America. For the week ending May 2nd, worldwide occupancy was 15%, and 20% when just looking at comparable hotels that were actually open. About 25% of our hotels worldwide are temporarily closed, with 16% of our North American portfolio temporarily closed. Europe is mostly shut down with just over three-quarters of our hotels closed right now. To state the obvious, we are operating in a very challenging environment. However, the glimmer of good news is that overall, negative trends appear to have bottomed in most regions around the world. The resiliency of demand is evident in the improving trends in Greater China. New bookings continue to pick up, with demand driven primarily by domestic travelers. Occupancy levels in Greater China are currently just over 30%, up from the lows of under 10% in mid-February. Brevpar has followed a similar trajectory, currently down around 67% year-over-year, compared to an 85% decline in February. Throughout mainland China, leisure demand was strong for the Chinese Labor Day holiday weekend in early May. Occupancy for that weekend was over 45%, with resort markets close to 70%. We have seen examples of demand starting to come back in other areas around the world as well. Last weekend, as some beaches reopened, the Ritz-Carlton Bacara in Santa Barbara and our hotels in Hilton Head, South Carolina, for example, were expected to reach approximately 50% occupancy based on reservations on the books. Limited service occupancy in the US has increased a bit each week over the past few weeks, showing the most meaningful improvements in drive-to destinations. Local, state, and national governments are trying to manage the tightrope between containing COVID-19 and restarting their economies. There are likely to be some areas that start slower, some faster, and some that open in fits and starts. but our business should improve as restrictions are relaxed. On the development front, our pipeline increased slightly to a very healthy 516,000 rooms at the end of the first quarter. We opened over 14,000 rooms in the first quarter and at quarter end, over 230,000 rooms in our pipeline or around 45% were under construction. We do expect some hotel openings will be delayed due to COVID-19. related supply chain issues or local restrictions on construction activity, but at this point we have not seen more deals than usual dropping out of the pipeline. The pace of new deal signings overall has slowed a bit as a result of the crisis, but we are encouraged by our current conversations with owners. Many continue to have a clear preference for our portfolio of brands, which posted worldwide REVPAR index gains of 330 basis points in the first two months of the year. Like us, many owners are taking a longer-term view on the market opportunity. In the first quarter, our Asia-Pacific region saw meaningful development activity with over 9,000 rooms signed, roughly 45% more than in the year-ago quarter. And we continue to see strong interest from owners in North America, even though they are not feeling a sense of urgency to get deals across the finish line. We canceled our North America monthly development deal approval meeting in March, for the first time in more than a decade to pause and take stock of the environment given the dramatic pace at which COVID-19 was impacting the industry, but have now returned to our usual meeting cadence. We continue to do what we can do across all areas of our business to respond to the current environment. We have issued several updates on the numerous actions we have taken, which have focused on helping our associates, our guests, our hotel owners and franchisees, and the company itself managed through this situation. While no one can know exactly when and how demand will start to return in each part of the world, Marriott is ready. We have swiftly made significant short-term changes to our business and enhanced our liquidity position while remaining focused on how to best position ourselves for the recovery and for growth over the longer term. As global trends have started to stabilize, teams across the company have been diligently monitoring various data points and developing a cross-discipline recovery plan. In addition to tracking the booking and cancellation information and macroeconomic indicators, we are also looking at data around COVID-19 testing and cases and government regulations, all with an eye towards ramping up our business in a thoughtful way as restrictions are lifted and market conditions improve. We are consulting with our owners to analyze potential market demand and hotel-level cash flow to help inform when and how to reopen their hotels. Region-specific marketing strategies are being developed that we plan to roll out in phases as different customer segments and levels of demand return. A key component of our marketing plans will be leveraging our powerful Marriott Bonvoy loyalty program and focusing on reaching our highly engaged member base in our many Marriott Bonvoy credit card holders. Throughout this crisis, we have continued to communicate with our loyalty members, including with special promotions on our co-brand credit cards in the U.S., such as our offer for six times points on groceries. We have also extended elite benefits, and today, to help spark demand, we will announce a new promotion to buy gift cards for future hotel stays at a 20% discount. In Greater China, our joint venture with Alibaba has been very helpful in rebuilding demand. A recent spring sale run by Alibaba's Fliggy travel site was very successful and generated terrific near-term bookings. Bookings from Ctrip have also grown significantly over the last few weeks and are up over 15% for the first week of May versus the same time last year. Another key component of our recovery plan is communicating with our guests and associates. about our focus on health and safety and giving them the confidence they need to travel and stay with us. We recently announced enhanced global cleanliness guidelines focused on elevating cleanliness levels and hospitality norms to meet the health and safety challenges presented by the new environment. We are also working to reduce the frequency of contact between associates and guests by continuing to roll out programs such as mobile check-in, mobile key, and no contact room service. I want to take a moment to express my appreciation to our team of associates around the world. Amidst furloughs, reduced work weeks, temporary hotel closures, new cleaning requirements, and very lean operations staffing, they continue to inspire me every day. Their constant messages to me of hope and belief in Marriott remind me over and over that we are so fortunate to have the best team in the business. The recovery is not going to happen uniformly across all regions and it is not going to occur overnight. It may take longer than any of us would like and we will likely operate a bit differently going forward. But we have taken the steps necessary to position the company to manage through this crisis successfully and travel will rebound. Our people, our solid financial footing, our 30 industry-leading brands, And our number one Marriott Bonvoy loyalty program continue to point toward a brighter future. Before I turn the call over to Leni, I want to share some organizational news. Dave Grisson, our current head of the Americas, has decided to step down from his position as group president of the Americas in the first quarter of 2021 after a 36-year career with Marriott. Dave and I started talking about his potential retirement last year, but neither he nor I felt the time was right to finalize any retirement. As we moved into 2020 and increasingly turned toward questions around how we will rebuild our business and our company on the other side of COVID-19, it became obvious that we needed our new leaders to be fully engaged in this process. Dave will be with us through Q1, allowing for a smooth and thoughtful transition, but he will be missed by all of us, and we wish him all the best as he ventures into the next phase of his life. Dave, thank you for your extraordinary contributions to Marriott. Starting in 2021, we will remain organized in a continent structure, but our global lodging business will be consolidated under two fantastic veteran leaders. Liam Brown, the current head of EMEA, will oversee North America, and Craig Smith, our current head of Asia Pacific, will oversee all international regions outside of North America. Liam and Craig are excellent executives and bring tremendous leadership skills to their new posts. They have been key members of our leadership team for many years and will continue to be in the years ahead. My congratulations to both of them. My last organizational update is a particularly important one to me. Although we will take the next two years to implement and appropriately celebrate the leadership of Bill Marriott, we wanted to share with you that Mr. Marriott has informed our Board of Directors that he plans to transition to the role of Chair Emeritus in 2022. Bill has been fully engaged in Marriott's work for as long as I have been alive, and he remains a daily source of contact and inspiration to me. In the midst of COVID-19, I talk to him every day. While our conversations today are focused on a crisis we are fighting, they are of a piece with the ongoing conversations that we have had day in and day out, ever since the summer of 1992 when we first met, at the tail end of another crisis, the first Gulf War and the recession that followed. To state the obvious, we will celebrate Bill Marriott for his contributions to this company, to its associates, and to the industry between now and his transition to Chair Emeritus in two years. For now, Bill, let me say thank you. To me, you are a boss, a mentor, a friend, and truly family. I cannot imagine a time without your partnership and friendship, and I pray that there are many more years ahead for us. In anticipation of Bill's transition to the Chair Emeritus role, we expect that David Marriott will join our Board of Directors next year. David is well suited to serve on our board, and I know he will bring not only his operations and sales experience, but also his deep understanding of Marriott's culture to board level conversations and decision making. One other quick point, and I know we are giving you a peek into our forward looking plans. When David joins the Marriott board, we expect that he would step down at that time as an executive of Marriott. I look forward to working with David as a director and then chair for many years to come. And now I will turn the call over to Lene for more details on our finances. Lene.

Thank you, Arnie. I hope all of you and your families are staying healthy and safe. I also want to thank our teams around the globe for their dedication and tireless efforts during these unprecedented times. Worldwide RevPAR was down 22.5% for the quarter, driven by the sharp 60% global decline in March. First quarter gross fee revenues totaled $629 million, comprised of $214 million of base management fees and $415 million of franchise fees. Under the terms of our contracts, our portfolio of managed hotels earned $64 million of incentive management fees, or IMFs, in the first quarter. However, under accounting rules, we can only recognize IMFs to the extent that the full year forecast supports that these fees will not be reversed later in the year. At this point, there is significant uncertainty around full-year performance, so we did not recognize any IMFs in the quarter. Within franchise fees, other non-REVPAR-related fees totaled approximately $140 million, up 5% from a year ago, primarily driven by stable year-over-year credit card and timeshare branding fees, as well as higher year-over-year residential branding fees. Adjusted EBITDA of $442 million included $79 million of bad debt expense and guarantee reserves related to COVID-19. Given the uncertainty around the timing and trajectory of a recovery, we're unable to provide our normal quarterly and full-year P&L guidance. Instead, I thought it would be helpful to talk through a modeling scenario for our monthly run rate of major sources and uses of cash in the current environment, with worldwide rev par down roughly 90%, and also provide you with a few modeling sensitivities. Note that this is just one scenario and not an estimate of actual results. Marriott's overall cash flow is easiest to describe in two broad categories, The first category is classic cash flow at the corporate level, which is basically EBITDA, less cash interest expense, cash taxes, and investment spending. The second category relates to our cost reimbursement revenues and reimbursed expenses, which represent the cost that we charge out to our owners and franchisees to cover the programs and services we provide to them. Starting with corporate cash, At these extraordinarily low levels of REVPAR, we assume net cash outflows of roughly 90 to 95 million per month. That's assuming cash sources of around 60 to 65 million and cash uses of about 155 million per month. The cash inflows are base management and franchise fees and other non-REVPAR related franchise fees. Given we are not currently recognizing any incentive fees due to the uncertainty around full-year results, it's easiest to model REVPAR-related base management and franchise fees based on 2019 actuals. If you adjust those for unit growth and a 90% decline in REVPAR, the result is roughly 20 to 25 million of fees a month per point of REVPAR. Also, as a sensitivity for you, the impact of a one-point change in REVPAR would be roughly $2 million of fees per month. As REVPAR climbs back closer to prior year levels, obviously the improvement in fees per point of REVPAR grows significantly. In this scenario, the remaining $40 million per month of fees is expected to come primarily from other non-REVPAR-related franchise fees, mainly credit card branding fees, residential branding fees, and timeshare royalty fees. all of which are much more stable. Assuming RevPAR is down 90%, we expect that corporate cash outflows could total approximately $155 million per month. Compared to our 2020 budget, we've reduced our cash run rate for corporate GNA by 30%, excluding bad debt, to about $40 million per month. And we've eliminated or deferred around 45% of our original investment spending forecast of $700 to $800 million for the full year, bringing our investment spending to roughly $35 million per month. The remaining $80 million per month includes cash interest expense, cash tax payments, and the monthly cash outflows for our owned leased hotel portfolio in this exceedingly low rev par environment. The second category of cash flows relates to the revenues and expenses for the programs and services that we provide to our hotels, for which we're entitled to reimbursement. As you know, Our spend and reimbursement for hotel-level programs and services are meant to net to zero over time, yet there can be timing differences between dollars we spend and dollars we collect. I'll break this second category of cash flows into two buckets. The first is the cash flow related to the Marriott Bonvoy program, and the second is the timing of all our other programs and services. Cash flows into the loyalty program from hotels and our co-brand credit card issuers as members earn points. The cash outflows for Bonvoy are the payments made to hotels when members redeem points, as well as the costs of running the program, including marketing. This year, we expect to have much lower redemption expenses in terms of both volume of nights and the rate paid for those stays, given lower occupancies. At the current low occupancy rates, we estimate that we will generate several hundred million dollars of cash from the loyalty program this year or 45 million of cash benefit a month. This does not include the cash we recently received from our co-brand credit card issuers. That leaves the remainder of our cost reimbursement revenues and reimbursed expenses. The largest bucket is the direct pass-through of payroll and other operational costs at our hotels, primarily for our North American managed hotels. In 2019, these costs were around 75% of the more than $16 billion of GAAP reimbursed expenses. So far this year, we have reduced these pass-through costs by around two-thirds. These expenses are generally repaid to us within days. And in 2019, managed owners reimbursed us with very little exception or delay. At this point, a very small fraction of these managed hotels are delayed in paying us. Apart from these hotel level costs and loyalty, the remaining reimbursed expenses in 2019 supported mandatory programs and services we provide to our hotels. They cover brand sales and marketing funds, our reservation system, property management systems, and the like. About two-thirds of the amounts charged to hotels to cover these costs, which are also included in cost reimbursement revenues, vary based on hotel-level revenues or program usage, with the remaining being a fixed charge per hotel or per key. That lines up well with our cost to provide these services, which are also about two-thirds variable and one-third fixed. With the significant cost cuts and changes we've implemented in this low REVPAR environment, we believe that the cost reimbursement revenues due would cover our reimbursed expenses. But there could be some cash timing mismatch given the system fee discount and payment deferral We provided for April and May, as well as owners and franchisees extending their payables a bit. In this very low demand scenario, we could see roughly $100 million a month of higher working capital usage before considering the loyalty cash inflows. The net cash outflow for all programs and services, including the positive cash flow from loyalty, could be around $55 million a month. which brings the total company cash use to roughly $145 to $150 million a month. It's worth noting that in April, despite the 90% decline in REVPAR, the company's cash burn rate was significantly better than that estimate. And of course, as trends improve, the cash burn rate should improve as well. I want to remind you that when you look on that P&L for cost reimbursement revenue and reimbursed expenses, it will look a bit different than the cash flows I've just described. It's primarily due to the accounting for the loyalty program, which requires that as cash is received, it goes onto our balance sheet as deferred revenue with no immediate impact on the P&L. We've been focused on preserving liquidity and shoring up our cash position. In mid-April, we issued $1.6 billion of five-year senior notes, and last week we raised another $920 million through amendments to our co-brand credit card deals. We also eliminated dividends and share repurchases until further notice. Our current cash and cash equivalent amount on hand is around $3.9 billion. If you add to that cash the undrawn capacity on our revolver of $1.3 billion, which we paid back on May 1st, and deduct around $900 million of commercial paper currently outstanding. Our net liquidity today is roughly $4.3 billion. We know the recovery could take a while, but we're confident we have the liquidity we need to manage through this situation, including paying back near-term debt maturities. We've made solid progress in mitigating the impact of COVID-19 on our business and are prepared for the wide range of scenarios that could play out. We feel confident that we will come through this successfully and look forward to traveling and welcoming all of you at our hotels. Thank you for your time this morning, and we will now open the line for questions.