Start Time: 08:40 End Time: 09:14 March 1, 0000 ET
Bank of America Securities 2022 Gaming & Lodging Conference
September 08, 2022, 08:40 AM ET
Company Participants
Leeny Oberg – CFO and EVP, Business Operations
Conference Call Participants
Shaun Kelley – Bank of America
Operator
Hello, everyone. So our next presentation is with Leeny Oberg from Marriott. So I think everybody knows, but Leeny is the Chief Financial Officer and Executive Vice President, Business Operations for Marriott worldwide. So Leeny, thanks for doing this.
Leeny Oberg
Oh my gosh, great to be here. Nice to see you all.
Shaun Kelley
So excited to be back in person. So it feels very different, a long time coming.
Leeny Oberg
It was a great summer.
Shaun Kelley
Let’s talk about the summer a little bit. So obviously, last update, we now have finally are very close to crossing the threshold to being “fully recovered.” For those of us that just means we can go back to year-on-year and not have to deal with this kind of three-year 2019 comparison anymore. But yes, just in your own words, maybe get us up to speed on the operating environment as you see it today. How things felt across the summer? And just what are we hearing and seeing from the traveling guest right now, and then we’ll dive in from there?
Leeny Oberg
Sure. We continue to be really pleased with the recovery and resilience of the business in the summer. If you remember, we talked on our call, in the Q2 call, about how by the time we got to June, we actually had crossed that threshold and globally, worldwide, system wide, we were at RevPAR up 1%. And for the month of July, we actually ended up 2% compared to 2019. And when you think about where that improvement came from, it was overwhelmingly Asia Pacific. So in the U.S. and Canada for the month of June, it was fairly similar between June and July, roughly 3% RevPAR above 2019 levels, again, with occ a bit below and rate a bit above, similar trend.
Internationally, in the month of June, we were actually down mid single digits from a RevPAR perspective in the month of June and really moved to about flat for the month of July, which overwhelmingly reflected the improvement in Asia Pacific, particularly Greater China. Now, as you know, Greater China has had a kind of a classic pattern during COVID where the second certain markets open up, the larger markets open up, demand really pops. But then you have to really be watching the newspaper because they can close them right back down again. But certainly during the month of July, we saw some markets open up and sure enough RevPAR improved relative to ’19 fairly dramatically, which was a big help.
Shaun Kelley
Can you help us think about just some of the other markets, like so Europe is now I think has gone from a little laggard to kind of off the charts in some of the data that we see. So help us think about that. And then maybe we can talk about segments.
Leeny Oberg
Sure. As you described when you see the strength of the dollar, certainly the U.S. traveler is no dummy. And that’s always been a really great market for us as the travel from the U.S. to Europe. And we have seen that this summer in Spain. So we’ve seen meaningful growth in RevPAR and frankly really great outperformance compared to 2019. Caribbean, Latin America has been one of our strongest performers as we really emerged out of COVID. And that continued into July as well. So I would say they all continued to crank along. And again, as you know, leisure is very strong in the month of July. So the rate performance around the world is notable, as you see this strong demand chasing the places they want to go, which is just a great affirmation of people’s love for travel.
Shaun Kelley
I mean maybe to sort of ask the question that’s on everybody’s mind, obviously, I’m sure you see your data and see one thing and then you read our own newspapers and you see Wall Street, and you hear a very different narrative around recession, inflation and a lot of consumer fears out there in particular. I see a lot of retailers missing, technology companies starting to readjust to a bit of a new normal. So what’s kind of your take on the macro and concerns around the consumer? Have you seen pockets of softness? Is there an area that could concern you looking forward, or are things pacing as you’d expect?
Leeny Oberg
So we have not seen pockets of slippage yet. And certainly, I think we’re watching it really carefully. I’ll never claim that we are not a cyclical business. So I would expect to the extent that there is a real recession that we would feel the impact of it. But I think the more interesting part is that we may not feel it the way that we felt it in the past. And you’ve got a host of factors that I think could potentially mitigate any potential downturn that we see if we really hit a real recession. The fundamental of our product, right, is not that we — compared to a retailer’s inventory, I’m not going out there and trying to buy it. We’ve basically got a stock of rooms that are long-term assets that then we do reprice on a very current basis.
And we obviously — you can tell through the ADRs that we’re really seeing the benefit of that, as with inflation, we’ve been able to basically move our ADRs in a way that helps offset this impact of some of the things like rising wages, et cetera. But you’ve also got from a macroeconomic perspective, you’ve still got a fair amount of pent-up demand for travel. You think about how we really don’t have the full cross border population of travel that we normally would have. I think you’ve still got some pent-up revenge travel, if you will, of people trying to make up. You’ve still got excess savings that have not been worked off. And you’ve also got a really strong labor market.
And when we think about prior recessions, every recession is different, right? And they’re all different; different reasons, different length of time. And when I think about the unemployment ticking up from 3.5 to 3.7 last week that we saw, these are still numbers that show that there are plenty of jobs for people who want to work. And the reality that we’re a good ways away from something that I think would have a meaningful impact on how people feel about their security for future wages. So I think that could also help offset it. Now, of course, you got to contrast that with where you think the Fed may really go, or may really need to go to kind of slow inflation down. But we’re certainly not there yet.
Shaun Kelley
It’s super encouraging. When we start to think about segments, right, one thing we’ve kind of coined is this idea of a kind of a leisure to business handoff, right? So often, when we’re talking to investors, we hear a lot of fears around the consumer. They tend to cover companies that are very focused on the consumer. But we’ve also got that business travel lever, and obviously, in many cases, that’s the majority of your business. And that is not yet fully recovered. So first of all, maybe just help us kind of break down those two components with maybe peeking travel on the leisure side, it doesn’t even feel like we’ve necessarily seen that. But if you were to see that, what do we have left in the tank on the business travel, what’s the ability to start to offset that with just what’s continuing to happen on the business travel side?
Leeny Oberg
So just as a quick reminder, classically big picture pre-COVID, we were roughly 60% business, 40% leisure. Then you saw during COVID really kind of had quite a flip where you went to almost 47%-53% of leisure being bigger. Now we’re back to more like 53% business, 47% leisure that was Q2. But remember, that’s got group in it, right, as a component of business. So let’s first talk about group, because I think one of the things I do think could be helpful as we move into, again, what may be a period of softness related to a recession, I want to make sure it’s clear. I’m not saying for sure we know exactly when or if this recession may happen, and how deep it’ll be. But certainly to the extent that there is one, you can imagine that the Fed keeps going at this that at some point, it has a real impact on the economy.
But when you think about that group, I think could behave differently this time than in prior recessions. Because you definitely seen with this change in how people work and where they work and how companies get their people together, we continue to see really strong in the year for the year group bookings. So if you think about where we were even a month ago, we had talked about for the rest of this year that we were looking at the group pace that being down kind of in whatever, 3%, 4% and 5% down sort of space, we’re better than that. We’re already better than that in one month, just as we continue to see really strong in the year for the year bookings. So you compare the month of the most recent month, for example, the bookings for the rest of this year were up 30% compared to 2019 for group. So I think group could help soften.
On the business transient side, you’ve got kind of two components that are worth remembering. One is the more classic retail business transient traveler. And that level is back to 2019. It makes up roughly half of our business travel. Those numbers of nights are back. It is really the negotiated rate, which remember, that tends to be the lower rated business. That is what is still down notably from 2019 levels. And while we continue to see progress and we expect we will see more progress after Labor Day, that is the area that when you think about the entire recovery from a number of nights perspective, that demand is the slowest to return.
But I also think we’ve got this weird world where what you count as a leisure night versus a business transient night is getting harder and harder to distinguish. When you think about people coming and having a combination of frankly both group and business and leisure all in one trip, where I think it’s going to be helpful for us, but also makes it a little bit harder to do your classic segment work. I also think it’s worth noting, we’re just getting into the corporate rate negotiations for next year. We’ve had two years of holding rates flat on negotiated rates. I would not expect that to continue to be the case in ’23. We’ll see how that rolls out. But that should also be useful as well.
Shaun Kelley
And we were speaking with somebody last night about this a little bit, but some of the policies have changed around how you do corporate negotiated, do you do a flat rate and negotiate hotel by hotel? Or are you starting to move to a more flexible model that works off of more of a best available rate that actually allows you to get closer to if you’re charging a lot on the leisure side, just allows you to get closer to whatever you’re seeing across the rest of the hotel?
Leeny Oberg
It’s a variety. It has been a variety. I think there tends to be a desire to kind of say all those contracts are one kind. But I’ll tell you based on the size and numbers of nights and kind of where people travel for a certain client, it’s really going to vary. But there certainly is a fair amount of flexibility relative to the market moves in the way these rates work.
Shaun Kelley
Maybe to shift gears slightly, like help us think through the rate and occupancy components here because this has just been a bit of a structural surprise in the last cycle? We sat there for five years and couldn’t push $1 rate it felt like, right, and it was really, really challenging. Now all of a sudden, we’ve got 15 points array, but occupancy is now the piece. Where do we stabilize and what’s kind of that optimum mix, both for you but largely this is about your owners, and helping them kind of manage a new normal here. It would seem like many of them are benefiting on the margin side from the higher rates and the slightly lower occupancy, especially in a tough labor market.
Leeny Oberg
And better productivity. Give us a little credit. It’s not only because of rates. It’s also because they’re really great.
Shaun Kelley
And I want to unpack that a little bit too. But yes, just help us think through the mix a little bit and just how you think this kind of cycle or new one [ph] plays out?
Leeny Oberg
So, the devil’s in the details in terms of you really have to get into which markets and which types of hotels. When you look at the luxury side, just to give you a sense, our luxury resorts over most recent times they’re seeing RevPAR up 37% compared to 2019 levels, and even up 9% compared to a year ago. So they are — and it is very strong on the ADR side. It’s really important to recognize how dynamic our marketplace is. And it does get down to the very cities, the actual locations, and what’s going on in those specific markets.
So for example, you’ve seen this summer, you’ve seen the large urban markets really pick up and see some real improvement as you saw momentum both in the business transient side and in group and continued strong leisure. And so sure enough what does that do? That’s a really great thing for rate. The booking windows continue to be short. They are back to similar to 2019 levels, but they’re still short. And so if people are making a decision to go and they’ve still got this pent-up savings and they really want to travel, they’re going to go where they want to go and pay up.
So I do think as we move forward, there is room for both. I think you will continue to see occupancy gains as we move into ’23. But I don’t think the rate gains are necessarily over either. Do I think the rate gains at some of the top luxury markets that that gap overnight team is going to necessarily continue to grow? Probably not, but it’s pretty impressive. Where I think you’re going to continue to see some of these rate gains are in the markets that either have heavy special corporate as we go into 2023 with different negotiated rates, or also just as the strengthening of demand comes into play.
So I think you’ll probably see some of both. But again, not as heavily weighted to the ADR side as it has been, so more evenly balanced and probably not — obviously, this year’s RevPAR over last year is extraordinary and I wouldn’t necessarily expect to see quite the same increase.
Shaun Kelley
It’d be great.
Leeny Oberg
I know.
Shaun Kelley
Let’s talk about a few Marriott specific things. So I wanted to kind of dig in on something you were just referring to. One of my favorite stats coming out of the second quarter was the company operating margins being I believe 300 basis points above the second quarter of ’19, and that was I think company-wide. It’s pretty stunning actually. Can you help us unpack that a little bit? What is driving that? What are you doing on the initiative side? What have you learned and helped owners do because that’s obviously — most of the benefits are trained to owners, it also helps you a lot.
We’ll talk about your drivers in a minute. But yes, just help us think about what are some of the initiatives that got you there, because even when we look across our blended average owners, that’s better than what we’ve seen. We obviously see host numbers, so we know one of your biggest owners. But we also see plenty of other owners that are still not quite back yet, more urban exposed. So how did you do it and what’s kind of driving and how much of that could be sustainable?
Leeny Oberg
So I think some of it is definitely around kind of agility, how quick we were to make dramatic changes. So it’s one of the things I feel like the owners have given us particular credit for is that the company went into really reimagine how we run the hotels at a dramatically lower occupancy rate very quickly. So then when you look at it, you’re basically getting to breakevens at levels of occupancy that we’d never even imagined before. And so then when you start to build back, you are much more careful about what resources you are adding back. Now, of course, to be fair, part of what’s gone on here is that demand has increased so rapidly that in some cases, we almost couldn’t quite keep up with the hiring that we needed to do.
But I will say in Q2 that was not as much an impact on the margins as it was, for example, in the quarter or the quarter before that. We weren’t there yet in a fully staffed way, but closer. So I think you’ve got several things from a true improvement standpoint, one is definitely around kind of the way you work your labor scheduling and your labor planning, which is being much more just in time, for lack of a better phrase, where you’re able to kind of really think about the next week ahead and exactly what you need as compared to thinking one and two and three months ahead, and staffing for it. And when your demand is more volatile, you have to think that way. Because so much of it is transient, you can’t assume that it’s all going to be full. So that’s definitely one part.
And then the other part is all the work that we’ve done on our technology. So when you think about the contactless technology that we’ve put into place, and really accelerated in many respects mobile check in, mobile key, mobile chat, all those things, which I think COVID helped drive for the necessity of it. But that also has been super helpful. And then on top of that, you look at things like direct bookings. I do believe that the power of bond boy and what happened with people’s use of digital technology and digital commerce during COVID definitely accelerated by a few years.
And there’s no doubt that that helped drive more reservations to our digital commerce channel. That is obviously cheaper than if somebody’s going to some of the other places to make a reservation. So that’s also helpful for us when you think about the cost structure of the hotels. So it’s really kind of up and down the chain. You got to then also, of course, look at the breakdown of rooms profit versus F&B, because F&B always is traditionally a bit lower margin. Although, again I will say in Q2, we outperformed on the F&B side relative to our expectations. But I think we are determined to hold on to as much of this margin improvement as we can.
Shaun Kelley
One of the tradeoffs here is I think as a brand, sort of your job to be pretty maniacal about the quality, right, because you can’t let that slip, you can’t risk the reputation of your brands over really any extended period of time. So what have we seen on that front? Because we do hear they’re no longer nightmare stories, they’re maybe just like the story is a little bit about, oh, the outlets still aren’t quite open. I paid X dollars, and the experience wasn’t quite there. Where are we at in that kind of readjustment and where do you want to be?
Leeny Oberg
Right. So we always want to do better. But we’ve really gotten over where you had kind of truly a disconnect between the rapidity of the increase in demand versus the ability to get. So I think in many cases, we are back to where people are finding that the food and beverage outlets are open where they are, certainly in all of the resorts and that you are in some of the urban markets, obviously, it’s been slower to come back. But I think meaningfully better, maybe not all of them. I think in some cases, we have allowed the hotels to not open all of the outlets and to keep that a bit more limited until they see the occupancy fully rebound. But we do see far fewer complaints.
We’re also seeing guest satisfaction improve nicely and getting back to levels that reflect more normal time. But as I said before, I would say, we always want to do better. And that one thing that I think COVID has proven with leisure travel is people really want the experience that you have in a leisure stay that means the hotels really got to get at it to making sure. It’s not like a business traveler who comes in, hooks onto the Internet, does their work and then leaves the next day. We’ve got to really make sure that the experience is terrific. So the operations team is spending a lot of time on that.
And then the last thing that I would say on kind of the guest experience piece is that when we think about the overarching desires of our consumers, I think you really can’t underestimate the importance of technology and what they are expecting. And when they can say ahead of time, this is what I want, this is where I want to go, can I find out about a restaurant, I want to make sure I have this pillow, being able to do all of that on their phone and being able to connect with the hotel and then being able to talk about that during their stay, I think has really helped on the customer satisfaction front.
Shaun Kelley
Let’s play this through the P&L for Marriott for a minute. So the two places I can see this mattering are IMF and the owner leased margins. So help us think through both those —
Leeny Oberg
Basic franchise fees to.
Shaun Kelley
But if we think about like kind of the higher leverage components, right, what does it take to get back to kind of full recovery for those because often we think of those as lagging. But in these cases, again, with margins are back, those things should be really close to back barring some mix differences and whatnot. So is there anything that keeps you from full recovery and beyond on those types of line items?
Leeny Oberg
Yes. No, I don’t think so. Again, I’m glad you pointed out IMF because actually IMF in Q2, if you think about it, we were at in the U.S. and Canada back to similar levels as we were in 2019 but with far fewer hotels earning incentive fees. So, for example, in the U.S., back in Q2 of ’19, we’re at 56% of the U.S. hotels earning — managed hotels earning incentive fees. Q2 this year was more like 20%.
Shaun Kelley
And it was the same dollars.
Leeny Oberg
And the same dollars. And then outside the U.S. just as a reminder, this quarter in Q2, a little bit over 50% of our IMF from U.S. and Canada. Typically, that number is only a third and that is because obviously international RevPAR is recovering later than U.S. and Canada. And those IMF says you know don’t have an owners priority typically in Asia Pacific, which is the slowest area to come back, which again I think should be tremendous help. And I agree with you. I think there is some real upside potential. I suspect you’re going to ask me a little bit about luxury, but I think international luxury is one kind of particularly interesting area when you think about IMF potential ahead of us, because we have more luxury presence outside the U.S. than we have inside the U.S. as a percentage.
Shaun Kelley
Then you beat me to it. I actually want to switch to net unit growth a little bit, because sort of the other critical driver of the model and the outlook. Here, obviously, in the quarter, we took down numbers a little bit just given Russia and Ukraine exposure I think clearly a one-timer. But help us think about the broader kind of development backdrop, because obviously as we do talk about economic slowing, particularly the financing, market slowing, that does have a real kind of pretty real world implication for just getting hotels open and across the finish line. So what’s the outlook there? Can we maintain kind of a 3 to 3.5 type of number? Is this a realistic level? Or do we need to kind of start factoring in delays and macro even from this level?
Leeny Oberg
So, one quick reminder that while you’re right, we lowered as a result of the decision to suspend operations in Russia. We did lower our expectations by roughly half a point for those roughly 25 hotels. But just as a reminder, those hotels produce less than 10 million of fees, so way, way, way under 1% of our rooms, just from a financial impact standpoint. So a couple of things. While you’re right that there’s definitely been a slowdown in construction starts, just as a reminder, we had record signings in Q1 and Q2. We are not seeing fallout from the pipeline.
Clearly, as we’ve talked about from the beginning of the year, this slowdown in construction starts is impacting growth, particularly in the U.S. in ’22 and perhaps a bit beyond. But I think broadly speaking, I think we still feel very positive. The conversion opportunities that we’ve already captured and expect to continue to capture with the soft brands that we have, they were 3% of our signings in Q2 and roughly 20% odd some of our openings in Q2. I think there’s continued tremendous potential there.
And frankly, as we talked about kind of with the deal flow that we’re continuing to see, I think what’s come out of COVID is that investors in our asset class have been really comforted to see such strong demand. And I think these are long-term assets. Folks are thinking about these over the next 20, 30 and 40 years. They’re not thinking about them just over the next year. So while you’re right, there’s clearly been a bit of a temporary jag in that normal ongoing pace of opening rooms. I think the fundamental flow is still really strong. And while you do have to deal with supply chain issues and material increases and financing costs, we aren’t seeing that it’s having a fundamental impact on the flow.
Shaun Kelley
With my little bit of remaining time, I want to talk about balance sheet capital return. We’ve got the Chief Financial Officer, so you’re in charge of this. Let’s like help us think through a little bit of the capital return side of the story, because obviously as we start to exit recovery mode, one of the biggest upside surprises across the entire quarter and lodging was your buyback announcement actually I think more than almost doubling your target to $2 billion for the year.
Leeny Oberg
More than $2 billion.
Shaun Kelley
Actually more than 2 billion, thank you for —
Leeny Oberg
To be exact.
Shaun Kelley
So help me think through that a little bit. Because as we play it out, we still see even a more significant potential into ’23 based on sort of historical kind of leverage parameters for Marriott, so help us with the guidepost of like what is that parameter? And then what could lead you to one end of the range versus the other? Because when you’re up to what’s over 4 billion of adjusted EBITDA, a half a turn is a lot of money.
Leeny Oberg
It is. I think we kind of go back to, if you remember, it used to be that one tenth of a leverage point in the ratio, kind of very broadly speaking, is 300 million to 400 million in cash. So to your point, it gives you a lot of opportunity. And I think the resilience in our business model has been demonstrated so well that it has popped quickly. And I think we got to being in the lower end of our range, our targeted range of 3.0x to 3.5x adjusted debt to adjusted EBITDA quickly. And we feel great about our prospects, and we’re going to continue to run the business to be very efficient with our shareholders capital.
First and foremost, as you know, we want to run the business to drive growth in that adjusted EBITDA, which means we need to invest in our business. But beyond that, we really do expect to continue to generate more cash than we need and to return it to the shareholders in the form of a modest cash dividend and share repurchase. So from the way that we looked at that more than two point due, that did keep us roughly in that range of 3x to 3.5x. I would expect we will continue to do that. We’re very committed to our investment grade rating.
But it does, as you say, depending on where adjusted EBITDA goes to ’23, and I’m not going to confirm or deny your number given that we’re working through the budget process now, but it does, as you describe, give you the potential for really quite notable share repurchases. And you’ll probably notice that we raised a bond yesterday, day before yesterday for $1 billion of five-year paper. And it’s not like the business is not generating tons of cash, because we are. So I think that, again, continues to point to very good long-term management, but a reflection that we are generating a lot of cash and expect to use it wisely.
Shaun Kelley
Would sort of anything in the macro outlook, could that be enough to kind of drive that outcome or do you really look at it as, look, we hold this ratio based on our numbers today. So what I’m really saying is, if we — the conditions are starting to deteriorate a little bit and more along the lines of maybe things that we’re seeing today, is that enough to kind of hold you back or do you kind of look at an opportunity to possibly go on offense a little bit, especially when we see pretty big movements in stock price. I know you’ve never been one to really game the stock. You’ve been pretty algorithmic with the way you’ve purchased. But it could give you or present some interesting opportunities, dislocations to just really prove the power of how you can compound earnings with this program.
Leeny Oberg
So, first and foremost, we want to be in this 3.0x to 3.5x range, and we’re determined to stay there. It frankly does take quite a bit to move you out of that. But I don’t see us in the face of a recession, saying that I want to play at the top end of that range, right. We don’t want to do anything that reflects a lack of commitment to being a really strong credit. And part of that is because the opportunities that that then provides us on an opportunistic basis.
So yes, opportunistically, have we ever gone out and bought something like elegant hotels to really help propel our all inclusive business and grow our caliber business? Yes. Those $200 million doesn’t really move the needle on the leverage target, but we are very careful to be watching what’s going on with that ratio. And if you really were seeing that you thought you were going into what looks like a serious recession, I think we probably would be thoughtful about where we sit in that range, right. I don’t think we’re interested in kind of playing with fire.
Question-and-Answer Session
Shaun Kelley
Perfect. Well, thank you for the time.
Leeny Oberg
Yes, great to see you, Shaun.
Shaun Kelley
Hopefully, there’s no fire to be played with. And thank you, Leeny. I appreciate it.
Leeny Oberg
Yes, likewise.
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