Marriott International

Ladies and gentlemen, thank you for standing by, and welcome to today's Marriott International's Second Quarter 2020 Earnings Conference Call. At this time, all participant lines have been placed in a listen-only mode, and later we will open the floor for your questions. If you wish to ask a question at that time, simply press star, then the number 1 on your telephone keypad. If at any point your question has been answered and you wish to remove yourself from the queue, press the pound key. Lastly, if you should require operator assistance, press star zero. It is now my pleasure to turn the call over to Mr. Arne Sorensen to begin. Please go ahead, sir.

Good morning, everyone, and welcome to our second quarter 2020 conference call. I hope everyone is safe and healthy during these difficult times. Joining me this morning are Leni Oberg, Executive Vice President and Chief Financial Officer, Jackie Burka-McDonough, our Senior Vice President, Investment Relations, and and Betsy Dahm, Vice President, Investor Relations. 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 FCC filings, which could cause future results to differ materially from those expressed in or implied by our comments. statements in our comments and 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 rev par and occupancy comments reflect system wide constant currency year over year changes and include hotels temporary closed due to COVID-19. You can find our earnings release and reconciliations of all non gap financial measures referred to in our remarks today on our investor relations website. The lodging industry continues to be profoundly impacted by the COVID-19 global pandemic, and the current operating environment remains quite challenging. Second quarter worldwide rev par was down 84%. While April rev par fell 90%, the toughest year-over-year comparison on record, demand has risen steadily since then. RevPAR declined 85% in May, 78% in June, and 70% in July. Many of our hotels that were temporary closed due to COVID-19 have now reopened. Today, 9% of our global properties remain closed compared to more than 25% in April. Since April, occupancy levels have increased each month in every region around the world, albeit at varying rates. Global occupancy in July hit 31% for all hotels, increasing 19 percentage points from April. And occupancy in July for the hotels that were open for each of the last four months reached 39%, growing 23 percentage points over that period. There is still no visibility around when Revpar could return to 2019 levels. However, the global industry trends experienced over the last couple of months give us confidence that people will continue to increase their travel. We are optimistic that the second quarter will mark the bottom and that the worst is now behind us. Greater China, which represents 9% of our rooms, over 90% of which are managed, is leading the recovery and has seen rapid improvements in occupancy and new bookings. With the virus mostly contained at this point, many domestic travel restrictions have been lifted and the number of daily passenger domestic flights is now around 80% of pre-COVID levels. While leisure and drive-to destinations led the initial recovery, it is encouraging to see business transient as well as group also picking up nicely. Occupancy levels in Greater China have reached 60%, up significantly from the single-digit levels in mid-February and much closer to the 70% we saw at the same time last year. Revpar has followed a similar trajectory. After declining 85% year-over-year in February, Revpar in Greater China improved to down 34% in July, averaging over 10 percentage points of improvement per month. At the current rate of recovery and assuming no wide resurgence of COVID-19, the Greater China market could approach 2019 occupancy and Revpar levels as early as next year. even assuming limited international guests. In 2019, nearly 80% of its room nights were sourced from guests within China. Trends in the rest of Asia Pacific are improving at a slower pace as countries are in various phases of reopening and as certain borders remain closed. But the recovery of travel in greater China demonstrates the resiliency of demand once there is a sense that the virus is better under control. and restrictions can be safely lifted. In North America, 96% of our hotels are now open. We are experiencing a steady recovery across all chain scales, although the rate of recovery within markets and by hotel type has varied tremendously. In 2019, domestic travelers accounted for 95% of North American room nights, a benefit in the current environment. Leisure demand has been strong in resort areas as well as in secondary and tertiary drive-to markets. Not surprisingly, our extended stay hotels have experienced the fastest pace of recovery. New bookings in North America have been building nicely, led by near-term leisure transient reservations. Despite the recent surge in cases in some states, consumers are increasing their travel. While US airline passenger traffic is still well below last year's levels, The number of air travelers the last two weeks of July was more than tripled over the first two weeks of May. And system-wide, North America RevPAR continued to improve in July to a year-over-year decline of 69%, which is seven percentage points better than June. Historically, leisure has made up roughly one-third of our total room nights in North America. The more interesting part of this statistic is that the monthly variance in that percentage is actually quite small. In 2019, the estimated proportion from leisure was around 36% during the summer and only declined to 32% in September and October. We expect that solid leisure demand will continue through Labor Day in North America and could continue into the fall as employers and schools alike operate remotely. Business transient and group demand in North America, while lagging, are showing very early signs of improvement. For now, the group bookings outside of those associated with our caregiver and first responder programs tend to be mostly smaller ones, such as weddings or travel sports teams. Our Europe, Middle East, and Africa region, or EMEA, and our Caribbean and Latin America region, or CAILA, posted the lowest occupancy levels and steepest rev par declines in the second quarter. Severe restrictions following rising rates of COVID cases in many countries, combined with a much higher dependence on international travelers in these regions, have suppressed demand in these regions. In 2019, the percentage of room nights from international travelers was around 40% in Europe, 50% in the Middle East and Africa, and 60% in Kela. 75% of our hotels in EMEA and 70% in Kela were closed for most of the second quarter. Trends in both regions have started to improve recently, as the prevalence of cases drops and border restrictions ease. Many of our hotels in these regions are welcoming guests again, with under 30% remaining temporarily closed. On the development front, owners are showing great interest in our brands, with Greater China again out in front. Greater China contributed nearly one-third of deal signings in the first half of the year, with the entire Asia Pacific region accounting for roughly half of all signings. Owners in the region are taking a long-term view on the market. Year to date, we have signed 30% more deals in Asia Pacific than we did in the first half of 2019. The pace of signings is not as robust in other regions around the world, largely due to the lackluster lending environment and owner uncertainty. We canceled one of our monthly deal approval meetings in the spring, which reduced our signings here to date. But we are having productive conversations with owners and franchisees who want to move forward. Some are hoping to see lower construction costs in the weaker economic environment for new builds, while others are interested in conversions to our brands. Our pipeline totaled approximately 510,000 rooms at the end of the second quarter. with over 230,000 rooms under construction or around 45%. The pipeline is 1% lower than at the end of the first quarter with the slowed signings and a few more projects than usual put on hold. While construction activity has resumed in most parts of the world, we still expect some openings will be delayed due to slower construction timelines and supply chain issues related to COVID-19. There is uncertainty surrounding future worldwide rooms growth. But given current trends, we could see net rooms growth between 2% and 3% in 2020. The final result will depend a great deal on the way the pandemic plays out around the world in the remainder of the year. Over the last several months, we have enhanced our liquidity position and materially reduced our cost structures at both the corporate and property level. We are in constant dialogue with our owners and franchisees and are working together to navigate these extremely challenging times. As demand returns, we are adjusting our operating protocols and ramping up our business in a thoughtful way. First and foremost, we are focused on the health and safety of our associates and guests and on communicating these important efforts. We continue to enhance our cleanliness guidelines to meet the health and safety challenges presented by COVID-19. We have mandated that all hotels have electrostatic sprayers to help quickly disinfect public areas and all properties must submit a monthly commitment to clean certification. And we are increasingly leveraging technologies like mobile check-in, mobile key, and mobile chat between guests and hotel associates to reduce face-to-face interactions while amplifying operational efficiencies. Additionally, we've announced that guests are required to wear face coverings in the public spaces of our hotels in the Americas, a policy that is also currently in place for associates globally. We are stepping up our marketing efforts around the globe as demand improves. Each region is carefully monitoring social, economic, and travel trends and implementing a phased-in approach based on local consumer sentiment and travel intent. With over 143 million members globally, Marriott Bonvoy, our award-winning global loyalty program, underpins all our marketing strategies. We remain focused on engaging our members with targeted email campaigns and various promotions, such as points accelerators on our co-brand credit cards for gas, dining, and groceries, gift card discounts, and our current Bonvoy boutiques sweepstakes for items like bedding and robes. For Elite members, we have extended their status through early 2022 and in June credited their accounts with a one-time deposit of Elite Night credits, allowing them to reach the next tier faster. Before I turn the call over to Leni, I must take a moment to say how proud I am of our incredible team of associates around the world. This has been a time of tremendous stress and uncertainty, yet our teams continue to impress and inspire me. I also want to comment on the current social justice movements. As we said in our recent statement, we stand against racism. We believe that racism must be eradicated. Our company believes in equality, justice, and putting people first no matter what they look like, where they come from, what their abilities are, or who they love. My management team and I are deeply committed to building on our historic commitment to diversity and to do more to champion diversity, equality, and inclusion, both within our company and within the broader community. In closing, while this was by far the most challenging quarter in the history of our company, I am pleased with our progress. I believe we can look forward to a brighter future for travel and for Marriott. With our unparalleled portfolio of 30 global brands, superior loyalty programs, strong liquidity position, and the best team in the business, I am optimistic about the trajectory of our business in the months and years ahead. And now, Leni, who has ably led our finance team to buttress our liquidity and to set Marriott up with the strength it needs to survive this crisis, will talk more about our financials. Leni?

Thank you, Arnie. And I hope all of you and your families are staying well. I also want to express my appreciation to all our associates around the globe for their dedication during these unprecedented times. This morning I will review our second quarter results and current trends. There's still too much uncertainty around the timing and trajectory of the recovery to give P&L guidance for the rest of the year, but I will provide an update on the monthly cash burn model that I shared with you on our first quarter call. As Arne noted, second quarter global REVPAR was down 84%. Second quarter gross fee revenues totaled $234 million, comprised of $40 million from base management fees, $182 million from franchise fees, and $12 million from incentive management fees, or IMFs. In the first quarter, we did not record any IMFs given the significant uncertainty regarding hotel-level full-year performance. In the second quarter, We had more information and could better predict where hotel performance will warrant IMF recognition for the full year, and as such, we recorded IMF fees. The majority of IMFs recognized in the second quarter were at hotels in Asia Pacific, where there is generally no owner's priority, with Greater China particularly strong. Almost 65% of Greater China's hotels had positive gross operating profit in the second quarter, due to increasing demand and our ability to control costs. In 2019, over one-third of our incentive fees were from Asia Pacific. Within franchise fees, unsurprisingly, our non-REVPAR-related fees were the most resilient, totaling $107 million in the second quarter, down 27% from a year ago. Credit card fees declined to the lower card spend versus last year, while total fees from timeshare and residential branding were relatively flat. Second quarter G&A improved by 22% year over year and by 35%, excluding bad debt. Bad debt expense is primarily based on our estimate of future credit losses and is not a reflection of current cash losses. The significant reduction in net administrative expenses demonstrates the many steps we've had to take to reduce our cost structure to align with the decline in revenues in this low RevPAR environment. These steps have included furloughs, reductions in executive pay, and reduced work weeks throughout the organization. We reported positive adjusted EBITDA of $61 million, which includes $36 million of bad debt expense. We were pleased with our lack of cash burned during the second quarter, especially in light of the 84% decline in RevPAR. The additional monthly fees we earned moving from our 90% rev par decline cash burn model to the actual 84% rev par decline were better than the $2 million per point per month estimate we gave a quarter ago as a result of incentive management fees and a bit better credit card fees. Favorable timing of investment spending and cash taxes during the quarter was also helpful. Lastly, strong working capital management and loyalty cash inflows contributed to our overall positive cash position. Given that many of our programs and services are funded by revenue-based charges, we are billing the hotels vastly less than a year ago. We have had to dramatically cut our costs to match this decline in revenues while still providing the required services. We've been able to reduce current break-even profitability rates at our hotels around the world by three to five percentage points of occupancy to help our owners preserve cash. From a working capital perspective, owners and franchisees are largely finding enough liquidity to pay these lower bills, albeit more slowly than usual. We continue to work with those owners and franchisees that are challenged to pay on time, and for many have set up short-term payment plans. So far this year, we have had only a few hotels go into foreclosure, but our management and related agreements protect us, and historically we have held on to most franchise agreements in that situation as well. The cash burn scenario that I'll outline today is just one scenario and not an estimate of actual results. Please remember that assumptions for certain line items are not paid out evenly throughout the year, so our averages over a number of months this year. Our overall cash flow is comprised of those at the corporate level and those associated with our net cost reimbursements. The model I walked you through a quarter ago assumed a year-over-year global rev par decline of 90% as we experienced in April. It included monthly averages for several categories of spending like taxes and investment spending, and yielded total net cash outflows of around 145 to 150 million per month. We've updated this analysis assuming a worldwide RevPAR decline of 70% as we experienced in July. The revised model results in monthly cash outflows of about 85 million, a significant improvement of around 65 million a month, 45% better than the prior scenario. Roughly three-quarters of the improvement is at the corporate cash flow level, largely as a result of additional fees due to higher REVPAR. In today's scenario, total monthly fees could be about $110 million per month versus the $60 to $65 million in fees assuming REVPAR down 90%. The impact of a one-point change in REVPAR in our revised model would be roughly $2 to $2.5 million of fees a month. though the sensitivity is not completely linear given IMS. Improving REVPAR is likely to coincide with higher credit card fees as well. The monthly cash outflows at the corporate level include cash G&A costs, investment spending, cash interest, cash tax payments, and cash outflows for our owned and leased hotels. Despite the revised REVPAR assumption, the total outflow from these items has not changed meaningfully from the $155 million we described a quarter ago, although there are some key timing differences to point out. Cash taxes in 2020 will primarily be paid in the third quarter, while cash interest will be higher in the fourth quarter, given the schedule of interest payments for our senior notes. Total investment spending for the full year is expected to be roughly $400 to $450 million, with higher outlays in the second half of the year versus the first half. The lumpiness of these cash flows will naturally impact our cash balances in the third and fourth quarters. All in all, this 70% rev per decline scenario yields an average total corporate cash burn of roughly $45 million per month. about half of the 90 to 95 million presented in the scenario a quarter ago. While the absolute cash burn numbers in this model still reflect a tough operating environment, the sizable improvement demonstrates the strong cash flow characteristics inherent in our asset light business model. The remaining one-third of the cash burn improvement comes from our net cost reimbursement. Today's scenario yields cash outflows of about 40 million a month for this category, versus outflows of $55 million in the original scenario. The improvement is primarily due to better match timing of our cash outlays and reimbursements, as well as continued collections of receivables. This is partially offset by slightly lower cash contributions from loyalty, given redemptions are expected to pick up as occupancy improves. Note that this model does not currently include any severance and other payments associated with our global restructuring initiatives. It's extremely difficult to have to undertake these efforts, which include a voluntary transition program announced in the second quarter, as well as additional job eliminations. The extent of the decline in our business and our expectation that it will take time for demand to return fully require these measures. We currently expect the total cash charges related to our above-property restructuring activities around 125 to 145 million. In the second quarter, we recognized 26 million of costs related to these efforts, of which 6 million was in restructuring and merger-related charges on our P&L, and 20 million was included in reimbursed expenses. We're still working through the details, but currently expect these restructuring efforts will reduce total above-property controllable costs, which includes both corporate G&A and program and services costs, by roughly 25%. We'll know more about the specific impact on G&A as we work through the 2021 budget process. We're also developing restructuring plans to achieve cost savings specific to each of our company-operated properties, including our owned leased hotels. We expect to implement these plans over the next couple of quarters. In addition to focusing on preserving cash, we've substantially boosted our liquidity and extended our average debt maturities. During the quarter, we raised $2.6 billion of long-term debt and $920 million of cash through amendments to our credit card deals. As part of our liability management, the $1 billion raised in June was largely used to tender and retire a portion of our near-term debt maturities. At quarter end, our cash and cash equivalents on hand was around $2.3 billion. Adding that cash to the undrawn capacity of our revolver of approximately $2.9 billion and deducting around $800 million of commercial paper outstanding, our net liquidity was approximately $4.4 billion at the end of the second quarter. We believe our strong liquidity position, cash flow from operations, and access to capital markets comfortably position us to meet our short and long-term obligations. While there is still a lot of uncertainty and there are many factors impacting our business outside of our control, we are very pleased with the progress we have made in the areas we can control. Many of the steps we have taken have been painful, but the company is in a solid position to navigate through these challenging times. The global recovery may take longer than any of us would like, but the strong recovery in Greater China and trends in the rest of the world show the resilience of lodging demand and make us hopeful about the future. We all look forward to traveling again and to welcoming all of you at our hotels. Thank you for your time this morning, and we'll now open the line for questions.