Marriott International, Inc. (NASDAQ:MAR) Q4 2022 Earnings Call Transcript

Marriott International, Inc. (NASDAQ:MAR) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Good day, everyone and welcome to today’s Q4 2022 Earnings. It is now my pleasure to turn the conference over to Ms. Jackie Burka.

Jackie Burka: Thank you. Good morning, everyone and welcome to Marriott’s fourth quarter 2022 earnings call. On the call with me today are Tony Capuano, our President and Chief Executive Officer; Leeny Oberg, our Chief Financial Officer and Executive Vice President, Business Operations; and Betsy Dahm, our Vice President of Investor Relations. I will 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 occupancy and average daily rate comments reflect system-wide constant currency results for comparable hotels and include hotels temporarily closed due to COVID-19. RevPAR occupancy and ADR comparisons between 2022 and 2019 reflect properties that are defined as comparable as of December 31, 2022, even if they were not open and operating for the full year 2019 or they did not meet all the other criteria for comparable in 2019. Additionally, unless otherwise stated, all comparisons to pre-pandemic for 2019 are comparing the same time period in each year. 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.

And now, I will turn the call over to Tony.

Tony Capuano: Thanks, Jackie and good morning, everyone. 2022 was a very strong year for Marriott. After achieving global RevPAR recovery in June, we finished the year on a real high note, with RevPAR versus 2019, up 7% in December and up 5% in the fourth quarter. Each quarter saw sequential improvement in global occupancy and ADR compared to 2019. We ended the year with fourth quarter occupancy down just 5 percentage points and ADR up 13%. With Asia-Pacific, excluding China, or APAC surpassing pre-pandemic levels in the fourth quarter, all regions, except Greater China, have now more than fully recovered. It is abundantly clear that people love to travel. Globally, leisure demand has remained robust. In the fourth quarter, leisure transient room nights increased 7% versus 2019.

And we continued driving leisure ADR, which rose 22%. Our group business experienced the most meaningful improvement in 2022. In the U.S. and Canada, fourth quarter group revenues increased 10% above the same quarter in 2019. Group revenue for 2023 is already pacing up 20% year-over-year, with room night and rate gains each quarter. Given strong lead generation and increased rate quotes, especially for in-the-year, for-the-year bookings, we expect group revenues this year to strengthen further. In 2022, around half of group room nights were booked in the year compared to just one-third in 2019. U.S. and Canada business transient demand remained steady from the third to the fourth quarter at around 90% recovery. For 2023, we are pleased to have negotiated special corporate rate growth in the high single-digits after holding these rates steady the last 2 years.

Our day-of-the-week trends in the U.S. and Canada continue to point to the blending of business and leisure trips. In the fourth quarter, midweek occupancy was still down mid single-digit percentage points versus 2019, while occupancy on shoulder and weekend nights was down the low single-digits. Additionally, the average length of a business transient trip in the U.S. has risen by more than 20% versus 2019. Rising cross-border travel also helped spur overall demand growth during the quarter, though we believe there is still further upside in 2023, especially now that China’s borders have reopened. Guests traveling outside their home country accounted for 16% of transient room nights globally in the 2022 fourth quarter, 1 percentage point higher than the prior quarter, yet still 3 percentage points lower than 2019.

With more than 177 million members, our powerful Marriott Bonvoy program has also been a key driver of demand for our hotels and other lodging offerings and for adjacent products like our Bonvoy co-branded credit cards. Our growing portfolio of credit cards, now in 9 countries following our November card launch in Saudi Arabia, had record global card member acquisitions and card spend last year. Product innovation and engagement with our members remain key focus areas, especially through investments in our Marriott Bonvoy app and other digital products. We have made great gains in contributions from our digital platforms, which are highly profitable channels for our owners and anticipate many additional enhancements over the next couple of years.

In 2022, our mobile app users were up 32% year-over-year, digital room nights rose 27%, and digital revenues climbed 41%. The financing environment for new projects and hotel sales remains challenging, especially here in the U.S. given higher interest rates and uncertainties surrounding a potential economic downturn. However, other industry headwinds like supply chain disruptions, construction costs and availability of labor have improved. Given strong local operating trends, overall developer sentiment improved in 2022 and we had another year of strong signing activity. Our global development team signed franchise and management agreements for nearly 108,000 rooms last year. In addition, upon the anticipated closing of the transaction, the City Express portfolio should add around 17,000 rooms in the moderately priced mid-scale space.

We are excited about the opportunity to expand in this segment in the Caribbean and Latin America or CALA region as well as in other locations around the world. We also recently announced Apartments by Marriott Bonvoy, a new 1 to 3-bedroom serviced apartment brand that we plan to launch in the upper-upscale and luxury segments. We have already received a great deal of initial interests from owners and developers. Momentum in conversions continues, including in multi-property opportunities, thanks to the breadth of our roster of convergent-friendly brands across the chain scales. The meaningful top and bottom line benefits associated with being part of our portfolio make these brands very attractive to owners. Conversions represented nearly 20% of room signings and 27% of room additions in 2022.

We added a total of 394 properties last year, representing more than 65,000 rooms and grew our industry leading system 4.4% on a gross basis or 3.1% net year-over-year. Excluding the impact from our exit of Russia, our net rooms growth was 3.6%. For 2023, we are forecasting gross rooms growth of around 5.5%, including around 1 percentage point from the anticipated addition of the City Express rooms to our franchise system. Assuming deletions of 1% to 1.5%, net rooms could grow 4% to 4.5%. I’d like to pivot now and share a few highlights of our recent ESG efforts. ESG is an integral part of our company’s culture and strategy, and our company is dedicated to making a positive and sustainable impact wherever we do business. In June, we committed $50 million to support historically underrepresented groups in the journey to hotel ownership through our new program here in North America called Marriott’s Bridging The Gap.

This program should help us reach our goal of having at least 3,000 diverse and women-owned hotels in our system by 2025. In December, we announced that over 1 million Marriott associates have taken our human trafficking training, which we have also donated to the wider hospitality industries. In terms of workforce diversity and inclusion, our aim is to achieve global gender parity in the company’s leadership by 2023 and have people of color hold 25% of U.S. executive positions by 2025. We also continue our work to set science-based emissions reduction targets, with more details expected to come later this year. I am proud of these accomplishments and all that we have achieved in 2022. As we look ahead to full year 2023, there is meaningful uncertainty about global economic growth.

Lodging is a cyclical business and it’s not immune to downturns in the macroeconomic environment. To-date, however, we have not seen signs of demand softening. Certainly, trends could change relatively quickly given our average transient booking window is around 3 weeks. But 1.5 months into 2023, booking demand and pricing remains strong. As Leeny will discuss in her remarks, we are optimistic that global RevPAR will grow year-over-year even if the global economy softens in the back half of this year. Before I turn the call over to Leeny, I’d like to thank our associates around the world for their hard work and commitment in navigating the last few challenging years and in helping the company achieve these record financial results. I also want to make a couple of statements regarding two of my senior team members.

I am sure you saw the news in December that Stephanie Linnartz has been appointed Under Armour’s new President and CEO, a role that she will assume at the end of this month. Also, after a 35-year career with Marriott that has spanned the globe, Craig Smith, our Group President, International, has informed me of his decision to retire from the company later this month. Craig has developed and mentored hundreds of hotel general managers and above property leaders around the world and has helped us meaningfully accelerate the growth of our international business. I want to thank both Stephanie and Craig for their decades of dedication and countless contributions to Marriott. While I will personally miss these two excellent senior executives, I am proud that we have such an incredibly deep management bench.

I look forward to sharing more details about new leadership appointments soon. Now, let me turn the call over to Leeny. Leeny?

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Leeny Oberg: Thank you, Tony. With sustained momentum in global RevPAR growth, we reported an outstanding quarter. Gross fees rose 16% and adjusted EBITDA climbed 21% over the 2019 fourth quarter. For the full year, we posted record fees, adjusted EBITDA and adjusted EPS, despite the Omicron variant causing a slow start to the year. In the fourth quarter, RevPAR versus 2019 accelerated nicely from the third quarter in every region, except Greater China. Compared to pre-pandemic levels, fourth quarter U.S. and Canada RevPAR increased 5%, aided by 11% growth in ADR. RevPAR in the region versus 2019 improved sequentially from the third to the fourth quarter across all market types, from primary to tertiary and all brand tiers, from luxury to select service.

International RevPAR rose 3% above pre-pandemic levels in the fourth quarter, driven by improvements in the comparison to 2019 for both rate and occupancy. In the Middle East and Africa, or MEA, RevPAR grew 44%, boosted by the World Cup in Qatar. RevPAR increased 28% in CALA, 7% in Europe and 6% in Asia-Pacific, except for China. While results in Greater China were, again, impacted by lockdowns in the fourth quarter, the region reached a major milestone with the new open border policy and the lifting of quarantine requirements in January. It could take time to increase airline capacity and work-through passport and visa requests, but we are optimistic about meaningful RevPAR recovery in the region as these issues abate. We saw a huge demand surge in January during the Chinese New Year holiday, with RevPAR for the holiday period nearly in line with 2019.

Other regions are also anticipated to benefit from an increase in outbound China travel, especially APAC, where over 40% of room nights in 2019 came from Chinese travelers. In the fourth quarter, total gross fee revenues totaled $1.1 billion, reflecting higher RevPAR, room additions and another quarter of significant growth in our non-RevPAR-related franchise fees. Those fees rose 16% year-over-year to $215 million, driven largely by our co-brand credit card fees. Incentive management fees, or IMFs, rose impressively in the quarter, reaching $186 million. IMF surpassed the fourth quarter of 2019 with IMF in the U.S. and Canada, up nearly 30%. At the hotel level, we remain focused on working closely with our owners and franchisees to deliver superior customer service, while containing operating costs.

Profit margins at our U.S. managed hotels in the quarter were again higher for the same period of €˜19 despite meaningful wage and benefit inflation. Importantly, our guest surveys indicate that customer satisfaction continues to rise. In December, our intent to recommend scores in the U.S. improved for the tenth consecutive month and are now generally in line with 2019 scores. Hiring challenges have moderated and the number of open positions in the U.S. is now below 2019 levels. Our asset-light business model once again generated significant cash during 2022, with net cash provided by operating activities totaling $2.4 billion, double the amount in 2021. Our loyalty program, with a modest source of cash before factoring in the reduced payments, received from the credit card companies.

In 2023, we expect the loyalty to again be modestly cash positive before the impact of the final year of reduced payments. Now, let’s talk about our 2023 outlook, the full details of which are in our press release. Note that all RevPAR comparisons will be to 2022. More than 1 in 4 hotels that are currently comparable in both €˜22 and €˜23 or opened for the full year were not open in 2019, making comparisons to that year not really meaningful. I will start with the first quarter, which we anticipate will benefit from continued strong underlying trends. There is also a meaningfully easier comparison to the year ago quarter when the Omicron variant depressed lodging demand. Halfway through the quarter, bookings across customer segments and geographies are excellent.

Momentum is being driven by rising cross-border travel and strong group revenues due to demand and ADR gains. Additionally, business transient revenues are benefiting from higher volumes and our successful special corporate rate negotiations. January global RevPAR rose 52%, with the U.S. and Canada up 43%. We anticipate that first quarter RevPAR could increase 25% to 27% in the U.S. and Canada, 47% to 49% in international markets and 30% to 32% worldwide. Given short-term booking windows and a significant level of macroeconomic uncertainty, there is less visibility in forecasting the company’s financial performance for full year 2023. As a result, we are providing a broad range for full year RevPAR and other key metrics. The high end of the range reflects a relatively steady global economic picture throughout 2023.

With continued resilience of travel demand across customer segments and markets, the low end of the range reflects a meaningful softening of the global economy, beginning in the second quarter with worldwide RevPAR roughly flat compared to 22% in the second half of the year. So for the full year, RevPAR in the U.S. and Canada could increase 5% to 9% and international RevPAR could rise 12% to 18%, leading to a global RevPAR gain of 6% to 11%. The sensitivity of a 1% change in full year 2023 RevPAR versus 2022 could be around $40 million to $45 million of RevPAR-related fees. Total fees for the full year could rise between 6% and 12%, with the non-RevPAR-related component anticipated to rise 4% to 7%. Non-RevPAR fee growth is expected to benefit from higher credit card fees resulting from growth in average spend and in the number of cardholders.

We expect 2023 G&A expenses of $915 million to $935 million, an annual increase of 3% to 5%, but still below 2019 levels. Full year adjusted EBITDA could increase between 5% and 12% and adjusted EPS could rise 8% to 18% above 2022. After 3 years of meaningfully reduced investment spending, we anticipate 2023 investment spending of $850 million to $1 billion. This includes $100 million for the expected acquisition of the City Express brand portfolio and around $160 million of renovation spending on our own W Union Square Hotel in New York and the elegant hotel portfolio in Barbados. These hotels will be terrific representations of our W and all-inclusive brands when completed. We expect to recycle our capital investment in these hotels by selling them with long-term agreements.

Spending in 2023 also incorporates higher than typical investment in our customer-facing technology, which is overwhelmingly expected to be reimbursed over time. Our capital allocation philosophy remains the same. We’re committed to our investment-grade rating, investing in growth that is accretive to shareholder value and then returning excess capital to shareholders through a combination of a modest cash dividend and share repurchases. In 2022, we returned $2.9 billion to shareholders. At the end of the fourth quarter, our leverage was at the low end of investment grade targets. For 2023, capital returns to shareholders could be between $2.7 billion and $3.6 billion. Before we open the line, I too would like to express my gratitude to our incredible team of global associates around the world for their resilience and dedication.

Tony and I are now happy to take your questions. Operator?

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Q&A Session

Operator: We will take our first question from Stephen Grambling with Morgan Stanley.

Stephen Grambling: Hey, good morning. Thanks for taking the questions.

Tony Capuano: Good morning.

Leeny Oberg: Good morning.

Stephen Grambling: I wanted to start off on capital allocation actually. I guess given the moving parts within the rate environment, how are you thinking about the right leverage ratio? And how rate may actually dictate the outcome in terms of that capital allocation that you were referencing or returning cash to shareholders?

Leeny Oberg: Sure. So overall, Stephen, as I stated in my comments, we are committed to a strong investment-grade credit rating. And we ended the year in terrific shape. I think you can tell from the range that we gave on RevPAR that we see ourselves being in really good shape this year from a cash flow perspective and earnings perspective that does give us great flexibility in how we think about our investing and our capital return. But from an interest rate environment, I think it’s more about the overall macroeconomic activity and global growth picture than it is about a specific interest rate. Obviously, we need to see how it plays out. But being at the very low end of our credit ratio metrics, I think, gives us plenty of flexibility to deal with whatever may come.

Stephen Grambling: Great. And then maybe a little bit of a different follow-up. We’ve been seeing some volatility in the corporate booking data on our end. And I guess I’m wondering if you could discuss what you’re seeing across large corporate demand versus small and medium-sized business, perhaps tie this into how it might influence the strong IMF that we’ve been seeing?

Tony Capuano: Sure. So as I mentioned in my prepared remarks, the recovery for business transient broadly is still at about 90%. Interestingly for small and medium-sized companies, which represent about 60% ish of our total business transient, they were actually up 6% quarter-over-quarter in the fourth quarter. So that continues to be strong. We’ve seen slower albeit steady recovery from larger companies, but they have got a bit of a ways to go to get back to pre-pandemic levels.

Leeny Oberg: Stephen, the other thing I’ll add is I hesitate to call that a trend yet, but it’s just worth mentioning that in January, we saw our top special corporate accounts improve another 9 points relative to €˜19. So in the classic areas of accounting and consulting or defense or healthcare, we are continuing to see good progress there. but we are only a month into €˜23 so far.

Tony Capuano: And maybe the last point I would make, Stephen, is just reiterating what I said earlier in the call, and that is, for the last couple of years, we’ve rolled over our special corporate rates. And so as we went into the negotiating season this year, we felt like we were in a pretty good place. And that really materialized as we saw negotiated special corporate rates in the high single digits.

Stephen Grambling: Makes sense. Thank you.

Tony Capuano: Thank you.

Operator: And we will take our next question from Shaun Kelley with Bank of America.

Shaun Kelley: Hi, good morning, everyone.

Tony Capuano: Good morning.

Leeny Oberg: Good morning.

Shaun Kelley: Tony, when you €“ good morning. I wanted to talk a little bit more about sort of the demand side. So obviously, we know the visibility is a little short in the industry from time to time. But obviously, it looks like everything you’re seeing coincidentally is pretty strong. So could you help us just unpack a little bit? Your January trends look well above STR averages, even in North America. And then €“ so what’s kind of powering that? And then specifically, as we kind of work our way through the year, could you just talk about €“ a little bit more about what you’re seeing on maybe the lead generation side group and how you’re underwriting China, just to help us kind of bridge the full year outlook?

Tony Capuano: Yes. Of course, Shaun, maybe I’ll start with the group just because that’s such a terrific story. You heard the numbers about where we were in the quarter with group revenue for group in the U.S. and Canada, about 10% ahead of where we were pre-pandemic. When we look into 2023, there is two things I would point to that are really compelling. Number one, we’re currently pacing up about 20% year-over-year. And interestingly, that’s not just a quarter one phenomenon, given the favorable comparisons. We’re seeing pretty steady pacing across all quarters in 2023. Secondly, I would remind you that the shorter booking window is not specific to transient. We’re seeing a little more compressed booking window in group as well. And so we think there is still meaningful upside to group as we launch in the year for the year bookings materialize during the balance of 2023.

Leeny Oberg: And I’ll jump in on China, Shaun, and that is €“ well, two things. One, to your point about January being particularly strong, if you remember, Omicron was particularly pronounced, right, as we got into January. And obviously, there is a significantly water degree of comfort this year as we moved into Q1. So I think you saw the momentum that was building in Q4 and really all throughout €˜22 continue into January as we saw all parts of the business firing on all cylinders. And then when you think about China, we saw tremendous leisure demand associated with the Chinese New Year, but we are really pleased with the overall pace of demand that we’re seeing there. And just to give you a rough sense, we could see €“ in Greater China, we could see that RevPAR for the year €˜23 over €˜22 is over 30% increase. And obviously, the biggest increase will be in the first quarter.

Shaun Kelley: Thank you very much.

Tony Capuano: Thanks, Shaun.

Operator: We will take our next question from Joe Greff with JPMorgan.