Marriott International

Ladies and gentlemen, thank you for standing by, and welcome to Marriott International's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, 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. If you require any further assistance, press star 0. I would now like to hand the conference over to our speaker today, Arne Sorensen, President and CEO. Thank you. Please go ahead.

Good morning, everyone, and welcome to our third quarter 2020 conference call. Joining me today 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 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 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, year-over-year changes for comparable hotels, and include hotels temporarily 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. Before I talk about the quarter, I want to again thank our incredible team of associates around the world, who continue to work tirelessly and show true resilience during these challenging times. The power of the Marriott culture has never been more evident, and I am incredibly grateful. I hope everyone joining us today is staying safe and well. While COVID-19 is still significantly impacting our business, our third quarter results showed meaningful improvement versus the second quarter. Third quarter worldwide rev par declined 66%. almost 19 percentage points better than last quarter's decline. Globally, 94% of our hotels are now open, with 97% open in North America. Our worldwide occupancy levels improved each month during the quarter and continued to close the gap to last year's. We saw a steady climb in demand through August, and then the rate of improvement began to plateau towards the end of the quarter in most regions. However, we are pleased with the overall progress we have made since the trough in April. In September, our global occupancy reached just over 37%, an improvement of 25 percentage points from April's 12%. Worldwide REVPAR in September declined 64% versus September of last year, over 25 percentage points better than the year-over-year decline in April. The recovery trajectories have differed greatly by region. The recovery in Greater China, especially in mainland China, has been the strongest. Results have improved meaningfully since February, demonstrating the resiliency of travel when the virus is perceived to be firmly under control. Occupancy in mainland China reached 67% in September, a bit ahead of occupancy in September of last year, and an extraordinary improvement from 9% occupancy in February. In 2019, around 75% of room nights in mainland China were sourced from domestic markets, domestic guests, excuse me. Even with strict travel entry requirements limiting visitors from outside the mainland, demand has rebounded strongly across all segments. Leisure transient bookings in the third quarter were over 25% ahead of last year's bookings, helped by domestic travelers taking more trips inside the country. Business transient and group bookings have strengthened each month since February, solely from domestic meetings and events, but are still lagging a bit compared to last year. Hong Kong and Macau, which are reliant on visitors from the mainland, are recovering more slowly as travel restrictions are easing, but cumbersome entry procedures are still inhibiting demand. Demand in the rest of the Asia Pacific has also continued to improve, but generally at a much slower pace. Countries are in various stages of reopening, with many still imposing strict travel restrictions. Japan, Australia, New Zealand, South Korea, and the Philippines continue to drive performance, helped by quarantine business for travelers entering those countries. In North America, where 95% of room nights in 2019 were sourced from domestic travelers, results in the third quarter were also meaningfully better than the second quarter, though the rate of improvement did slow in September. Third quarter REVPAR declined 65% versus the third quarter of last year, with occupancy reaching 37%. During the quarter, all chain scales continued to show improvement versus the second quarter, although there were still large variations among hotels and markets. Drive-to leisure demand continued to lead to recovery, particularly for extended stay in resort hotels and for properties in secondary and tertiary markets. Business transient and group bookings in the quarter picked up modestly versus the second quarter, but still remains significantly lower versus last year. The improvement in demand in Europe, the Middle East, and Africa, and the Caribbean and Latin America, or CAILA, has also been slower than in North America and China. In the last few weeks, rising numbers of cases in many countries in Europe and Kayla have led governments to reimpose or extend lockdowns, travel restrictions, and social distancing regulations. These measures discourage international travelers who made up about 40% of Europe's room nights and about 60% of Kayla's room nights in 2019. Compared to Kayla in Europe, demand trends have been a bit better in the Middle East and Africa. where international guests have historically made up around 50% of room nights. Certain resort properties in Turkey, the UAE, and Qatar were particularly strong in the quarter. Currently, 20% of hotels are closed in Cala, 26% of hotels are closed in Europe, and 9% are closed in the Middle East and Africa. Globally, the plateauing of demand that we saw towards the end of the third quarter has generally continued in the first few weeks of the fourth quarter. Occupancy levels in most regions have remained relatively in line to slightly better versus September levels, which were marginally ahead of occupancy levels in August. Booking windows remain very short and visibility is still limited. Nonetheless, we do expect an easier year-over-year REVPAR comparison in the fourth quarter, given our historical seasonality. We usually see a substantial step down in occupancy around the world in November and December, as compared to September and October, due to the holidays and relatively less business travel. In 2019, global occupancy was around five percentage points lower in November than October, And then December occupancy was another eight percentage points lower than November. This year, with the leisure segment showing the strongest demand, we could see occupancy levels throughout the fourth quarter remain relatively flat in September and October. As a result, year-over-year REVPAR comparisons could look better in the fourth quarter than they did in the third. Of course, as we have seen to date, results vary greatly by region and can change quickly. and the recent virus resurgences in numerous countries could have a dampening effect on demand. We know the road to recovery is going to take some time. However, we have been very pleased with the progress we are making across a number of key operational and financial areas. One of the biggest operational adjustments has been our heightened cleanliness standards. The health and safety of our associates and guests remain a top priority. Throughout the pandemic, we have adjusted our protocols to elevate our cleanliness guidelines and tools, and every property across our portfolio is now required to complete a monthly commitment to clean certification. By increasingly leveraging contactless technologies such as mobile and web check-in, mobile key and mobile chat, we are reimagining the guest stay experience while also amplifying operational efficiencies. We also continue to roll out innovative, targeted, phased-in marketing strategies. Our messaging emphasizes our heightened cleaning guidelines and safety measures while appealing to evolving consumer sentiment and travel intent. Many of our recent creative offerings such as Fall for Travel and our October Week of Wonders have been very successful in sparking leisure demand. And at the end of October, we announced our new Work From Anywhere packages, which are designed to capture additional revenue driven by the remote work trend. Our award-winning loyalty program underpins all of our marketing strategies, and we remain focused on engaging with our 145 million Marriott Bonvoy members, including those who are not yet ready for a hotel stay. We have also been highlighting non-hotel stay experiences such as Eat Around Town and Homes and Villas by Marriott International. And in collaboration with American Express and Chase, we have been offering numerous grocery and retail spending accelerators and limited time offers on our co-branded credit cards. The increased demand amongst our Bonvoy members for our homes and villas, whole home rentals during the pandemic, And a much more modest decline in Chase and Amex Bonvoy card spend compared to the decline in RevPar are great indicators of the value of the Bonvoy program to our customers. Another key constituency is our owner and franchisee community. We have had an unprecedented level of engagement with them this year, including weekly webinars in many regions and more frequent interactions with our owner advisory committees. We are deeply committed to working closely together to manage through these challenging times. We remain focused on reducing their costs as much as possible in this environment, as Leni will discuss during her remarks. On the development front, we now anticipate net rooms growth of 2.5 to 3% in 2020, the high end of our expectation from a quarter ago, reflecting strong openings in the third quarter. This takes into account 1.5 to 2% deletions, which is around 50 basis points higher than we estimated in February, primarily due to certain hotels that were already struggling, entering 2020, deciding to close permanently due to COVID-19. Given the current fluid environment, we have more uncertainty than usual on opening dates for many hotels nearing completion. But the good news is that 46% of our almost 500,000 room pipeline is currently under construction, with rooms under construction up 6.5% from a year ago. Although signings are not as strong as in 2019, they are quite solid considering the extraordinary impact of COVID-19 on our industry. We believe that many of the rooms that do not open in 2020 as a result of COVID-19 will now likely open in 2021. The pace of openings will likely vary depending on the recovery of lodging demand in specific markets. with heightened uncertainties in markets where airlift is key. We are also encouraged by the increasing number of conversations we are having around conversions. We remain keenly focused on conversion opportunities that are accretive from both a brand and a financial value perspective. Assuming progress is made in containing the virus, we would expect our gross room additions to accelerate next year compared to our expectations for 2020. We are in the middle of developing our 2021 budget, so it is too soon to give a definitive outlook for rooms deletions for the coming year. It is worth noting that the potential 2021 exit of the 89 hotels owned by Service Properties Trust, which are almost all limited service properties, would create a short term headwind of roughly 1% in that rooms growth. But we are confident in our ability to replace many of those first generation limited service hotels with brand new updated product. Finally, as Leni will discuss in a moment, we have made significant strides in shoring up our financial position to weather the crisis. While the recovery is going to take longer than anyone would like, we are seeing encouraging signs that demand can be extremely resilient. With the steps we have taken for our customers and owners, the power of Marriott Bonvoy, our strength and liquidity position, and our incredible team of associates around the world, I am confident that we are very well positioned now and for the future. And now, I'll turn the call over to Lene Oberg, our CFO.

Thanks, Arne, very much. I hope all of you on the call are staying safe and well. I'd also like to thank our team of associates for their incredible work this year in making sure Marriott comes through this crisis strong and healthy. In the third quarter, with global rev par down 66%, our gross fee revenues totaled $397 million, a decline of 58% versus the year-ago quarter. Gross fees were comprised of base management fees of $87 million, franchise fees of $279 million, and incentive management fees, or IMFs, of $31 million. Seventy-five percent of IMFs in the quarter were earned at hotels in the Asia Pacific region, where contracts generally have no owner's priority. Over 90 percent of our hotels in Greater China had positive gross operating profit in September, with almost three-quarters generating positive profits for the first nine months of the year. These results are a reflection of the strong rebound in demand and our ability to help our owners control costs. Within franchise fees, our non-REVPAR-related franchise fees were again much more resilient, totaling $119 million in the third quarter, down 18% from the year-ago quarter, with credit card fees down 22%. Third quarter G&A improved by 40% year-over-year, primarily reflecting a full quarter of the difficult but necessary steps we took earlier this year in response to COVID-19. These steps included furloughs, reduced work weeks, and meaningful cuts in executive compensation. As RevCar has improved from the global trough experienced in April, corporate and above-property furloughs and reduced work weeks generally ended by late September. Of course, REVPAR is still well below 2019 levels and expected to take some time to fully recover. With that in mind, we focused on restructuring our organization to reduce costs on a more sustainable basis at the corporate and above property level, as well as at the hotel level, so we can operate more efficiently today and going forward. Our restructuring efforts are anticipated to reduce total corporate and other above property controllable costs by 25% in line with the expectation we noted last quarter. This includes both classic corporate G&A as well as programs and services we provide to the hotels for which we are reimbursed. We are still working through our budget and exact allocations for 2021. But based on our preliminary estimates, we expect total corporate G&A costs in 2021 could be around 20 percent lower than our original 2020 guidance of $950 to $960 million, with expenses for reimbursable programs and services down well over 25 percent. Importantly, we expect the reduction in G&A to be largely sustainable, subject to wage and inflationary increases. We reported third quarter adjusted EBITDA of $327 million, down 64% versus the third quarter of last year, and a significant improvement from adjusted EBITDA in the second quarter of this year. We do have a couple headwinds in the fourth quarter compared to third quarter adjusted EBITDA. As we have mentioned, G&A savings will not be as large as in the third quarter with the return of our workforce to full time. and the fourth quarter is a seasonally slower quarter. At the hotel level, as part of our cost mitigation efforts, we conducted a thorough review of all reimbursable programs and services in order to reduce the associated costs to our hotels. This work went beyond the naturally lower fees charged in this environment, given that the majority are billed based on a percent of hotel revenues. Our work has led to significantly lower expenses for the hotels. While some savings are volume related given fewer associates, transactions and the like, others reflect a real reduction in program rates. For example, after providing a discount this year on certain fixed mandatory fees paid by all of our hotels around the world, we have worked to provide a meaningful discount on these same fees in 2021 as well. Of course, we have also significantly cut our expenses associated with providing programs and services given the lower expected levels of reimbursements from the hotels. As we noted last quarter, we've been able to reduce break-even profitability rates at our managed properties by three to five percentage points of occupancy. As you might imagine, we are applying this same disciplined approach to our owned and leased properties as well. We have also been allowing owners to access FF&E reserves for working capital and have extended the waiver of required funding of these FF&E funds through the end of March 2021 with lender consent where applicable. Additionally, we worked with our U.S.-managed hotels to file for CARES Act tax credits, which led to refunds of $119 million, which should help support our hotels' working capital positions. These measures, combined with our aggressive collection efforts, have been quite effective. The vast majority of our owners and franchisees continue to pay their bills on time or are on short-term payment plans. Despite the current environment, only a small number of hotels have gone into foreclosure this year as lenders have been relatively patient to date. And with only a handful of exceptions, the few hotels that are in foreclosure or receivership are retaining our flag. In North America, Our management and related agreements generally protect us, and historically, we have held on to most franchise agreements as well when properties go into foreclosure. Last quarter, we laid out a cash burn scenario with REVPAR down 70% that indicated a monthly cash burn rate of around $85 million or $255 million a quarter at that REVPAR decline. Our actual cash burn for the third quarter was around flat, much better than the model would have shown, even including severance payments of around $60 million in the quarter that were not included in the model. We were pleased that total fees came in higher than our two to two and a half million of monthly fees per REVPAR point sensitivity would have predicted, with REVPAR for the quarter down 66%, primarily due to higher incentive management fees. The other major drivers of our neutral cash burn were better owned leased results, lower G&A costs, strong working capital management, and robust loyalty program cash flows. The model we provided last quarter should still be useful as we think about potential monthly cash burn in the fourth quarter with a couple updates. We still expect the sensitivity of a one-point change in road power on our fees would be in the two to two and a half million. per month range. As we've seen, the sensitivity is not completely linear given the variability of IMF and does not include the impact of changes in credit card fees. We expect that continued strong collections of receivables should again help minimize our working capital outlays in the fourth quarter. Investment spending for the full year is now expected to be slightly below the low end of our prior expectation of $400 to $450 million, and significantly below our original forecast of $700 to $800 million at the beginning of the year. This is another example of the strong progress we have made in reducing cash outlays in the current environment. The variance versus last quarter's expectation is primarily due to the timing of key money payments, and additional reductions in system spending. There are also two timing-related items to highlight which will impact our cash flow in the fourth quarter. In October, our working capital was impacted by the funding of our 2019 company match to Associates 401 plan contributions, which totaled around $130 million. That payment usually occurs earlier in the year. Also, cash interest payments will be roughly $100 million higher in the fourth quarter than in the third quarter due to the timing of when the payments are due. Through the first three quarters of 2020, with year-over-year REVPAR down an unprecedented 59% through September 30, we have demonstrated our ability to adapt quickly. And we've confirmed the power of our asset-light business model. Our cash from operations less capital expenditures has been positive year-to-date. At the end of the third quarter, our net liquidity was approximately $5.1 billion, representing roughly $1.5 billion in available cash balances plus $3.6 billion undrawn on our revolver. The substantial increase in liquidity from the prior quarter reflects our August $1 billion bond issuance maturing in 2032. Most of those proceeds were used to pay down a portion of our revolver balance. We believe our liquidity position and resilient cash flow from operations comfortably position us to meet our short and long-term obligations. In closing, while the timing of a full recovery is unpredictable, we're confident that COVID-19 will eventually be contained and that travel will come back quickly. We look forward to welcoming new and returning guests to our hotels before too long. Thank you for your time this morning, and we'll now open the line for questions.