Earnings Call Transcript - TNL Q4 2021

Operator, Operator

Good morning. Welcome to the Fourth Quarter End FY2021 Earnings Conference Call for Travel and Leisure Co., formerly Wyndham Destinations. After the speakers’ remarks, there will be a question-and-answer period. As a reminder, ladies and gentlemen, this conference call is being recorded. Thank you. I would now like to turn the call over to Chris Agnew. Please go ahead.

Christopher Agnew, Head of Investor Relations

Thank you, Ashley. And good morning. Before we begin, we'd like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings and you can find a reconciliation of the non-GAAP financial measures discussed in today's call in the earnings press release available on our website at investor.travelandleisureco.com. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our fourth quarter and full year results. And Mike Hug, our Chief Financial Officer, will then provide greater detail on the quarter, our balance sheet, and liquidity position. Following these remarks, we look forward to responding to your questions. With that, I'm pleased to turn the call over to Michael.

Michael Brown, President and Chief Executive Officer

Thank you, Chris. Good morning and welcome to our fourth-quarter earnings call. This morning, we are pleased to announce another strong quarter to close out 2021. We reported adjusted EBITDA of $228 million and adjusted EPS of $1.19. For the full year, adjusted EBITDA was $778 million and adjusted EPS was $3.65. Adjusted free cash flow finished the year at $223 million, which was ahead of our expectations, and we resumed share repurchases in the fourth quarter. Including dividends, we returned $134 million to shareholders in 2021. At Wyndham Destinations, gross vacation ownership sales were at the high end of expectations, with tours above our guidance range and continued strong VPGs. In the fourth quarter, VPG was 36% higher than the fourth quarter of 2019, and for the year, we finished with a 32% increase from 2019. The strength in VPG is a testament to our best-in-class sales and marketing teams and reflects our focus on higher quality tours. Our receivable portfolio continues to perform, and in the fourth quarter, we released an additional COVID-19 reserve, yielding a net positive adjusted EBITDA impact of $28 million. I would like to highlight a few key metrics from 2021. 28% of total transactions were to new owners, with 65% of these sales to Gen X and Millennials. Blue Thread, which is our term for lead generation through our relationship with Wyndham Hotels and Resorts, also performed well. Blue Thread sales represented 16% of new owner transactions in the fourth quarter and 14% for the full year, both over 200 basis points higher than the prior year. Turning to the Travel and Membership segment, fourth-quarter and full-year transactions increased 30% and 61% respectively over the prior year. This segment recovered steadily in 2021 with year-over-year transaction growth each quarter. Exchange transactions make up the largest component with domestic U.S. demand proving very resilient throughout 2021, helping to offset international cross-border travel, which continues to be challenged by pandemic-related travel restrictions. Now, exchange revenue per transaction increased 44% and 38% in the fourth quarter and full year respectively. Transaction growth has been led by Panorama Travel Solutions. We launched Panorama Travel Solutions in the fall of 2020 with a focus on development of the business model and signing partners. To date, we have closed 18 contracts with a combined total addressable market of 9 million households in North America. Our pipeline of branded and white-label clubs continues to grow. In the fourth quarter, we began moving into the activation phase. As an example, the National Association of Realtors Travel Club went live at an international convention in San Diego in November. And then in under four months, nearly 0.5% of its 1.5-million-member base have been activated. As we approached the busy spring and summer travel periods, we have several marketing programs with NAR designed to activate additional users. More recently, our team was at the Super Bowl to promote the newly launched platform for the NFL Alumni Travel Club. Although insignificant to our financial results, we're seeing tangible progress which reinforces our expectation that this business will be a driver of growth in the coming years. Our overall adjusted EBITDA margin was 26% in the fourth quarter and 25% for the full year. We were able to achieve these margins despite a reduction of net interest income, which is due to the reduction of our consumer finance portfolio. To put in perspective, the strength of our fourth-quarter and full-year margin, if we equalize the 2021 portfolio size to 2019 and exclude the EBITDA benefit from the COVID reserve release, adjusted EBITDA margin would have been 100 basis points higher than the comparative periods in 2019. In 2021, we laid the foundation for the next four years with our stated strategic goals to expand our addressable market, accelerate earnings growth, and increase free cash flow. We acquired the Travel and Leisure brand in January and launched the new subscription-based Travel and Leisure Club. At our Investor Day in September, we laid out a plan to increase our compound annual adjusted EBITDA growth rate to 11% to 14% through 2025, reflecting continued growth of our cornerstone businesses of Wyndham Destinations and RCI, and growing new business extensions into B2B travel clubs and direct-to-consumer travel clubs. Related to recent travel trends, in late December, we started seeing some near-term hesitation in booking behavior given rising Omicron COVID case counts. Net arrivals and forward bookings were impacted in January. However, as with previous COVID spikes, each successive wave has had a lesser impact on our business and the rebounds have come faster and stronger. In January, net bookings at our vacation ownership resorts were 8% below 2019. But in the first three weeks of February, net bookings for 2022 were 5% higher than 2019. Exchange is seeing a similar inflection with North American revenue trends swinging positive in February. Internationally, the news continues to improve. Australia has reopened its borders to international travel and our exchange business in the UK has seen a rebound in demand. We expect international to be slower to rebound with cross-border travel taking longer to get back to 2019 levels. Although the pandemic has presented tremendous challenges, it ultimately has proven the resiliency of our business, our ownership, and member-based model with its recurring fee streams and strong cash-generation during the dislocation in travel over the last two years. These same streams will be our tailwind as travel and the economy recover. With the economic recovery, we recognize rising inflationary pressures, but we do not view it as a meaningful risk. In fact, one of the core value propositions of timeshare is locking in the value of future vacation costs at today's prices. We can more readily demonstrate the value of ownership when travel costs are rising, which should help close rates. Our business model also allows us to focus on the lifetime value of new owners through future additional purchases, consumer finance and management fees, as well as exchange membership and transaction fees. As a reminder, 80% of our owners have no loan outstanding and are enjoying their vacation accommodation for the ongoing relatively low cost of their maintenance fees. Turning to our outlook, we expect first quarter adjusted EBITDA of $160 million to $170 million. We're excited to begin 2022 with optimism about the strength of leisure travel. We're focused on delivering the strategy we laid out in September and believe the path to accelerated growth remains clear. Broadening the strength of our cornerstone brands and creating a depth of products and services to serve the leisure traveler. For more detail on our performance, I would now like to hand the call over to Mike Hug.

Michael Hug, Chief Financial Officer

Thanks, Michael. And good morning to everyone. As well as discussing our fourth quarter results, I will provide more color on our balance sheet, liquidity position, and cash flow. My comments will be primarily focused on our adjusted results. We reported a total company fourth quarter adjusted EBITDA of $228 million and adjusted diluted earnings per share of $1.19, compared to $148 million of adjusted EBITDA and $0.32 of adjusted diluted EPS one year ago. Let me share some operational highlights from our two business segments that led to these great results. Vacation ownership reported segment revenue of $695 million, gross realized sales of $430 million, and adjusted EBITDA of $180 million, increases of 37%, 54%, and 58% respectively over the fourth quarter of 2020. We delivered 129,000 tours and a VPG of $3,222 in the fourth quarter, 52% and 10% increases over the prior year. In the fourth quarter, due to continued strong portfolio performance, we released $44 million from the COVID-specific reserve we established in March 2020, resulting in a $28 million net benefit to adjusted EBITDA. At the end of the quarter, our total reserve as a percentage of gross vacation ownership contract receivables was 18.1% compared to 19.3% at the end of 2019. After considering write-offs and the reserve for remaining forbearance-related defaults associated with loans that were granted payment deferrals, we have no remaining COVID-19 related receivables reserve as of December 31, 2021. Revenue in our travel and membership segment was $125 million in the fourth quarter, compared to $141 million in the prior year. Adjusted EBITDA was $64 million, an increase of 28% compared to last year's $50 million. Non-exchange transactions, largely driven by PTS, continued to grow faster than exchange transactions, and the mix of non-exchange transactions has increased 200 basis points year-over-year to around 40% of total transactions in 2021. Turning to the balance sheet, our corporate net debt at the end of December was $3 billion, and our leverage ratio was 3.99 times. We completed three important transactions in the fourth quarter. We renewed our $1 billion revolving credit facility, extending the maturity to October 2026, and removing restrictions on return of capital to shareholders that were in place during the relief period. We closed a $350 million ABS transaction and we repaid $650 million of senior secured notes due in March 2022 with proceeds from new senior secured notes due in 2029. We remain focused on reducing our leverage ratio and with continued adjusted EBITDA growth, we expect to see this ratio continue to decline throughout 2022. As it relates to return of capital to shareholders, we paid our fourth quarter dividend of $0.35 per share on December 30th, and we will recommend a dividend of $0.40 per share for approval by our Board of Directors at their March meeting. We also resumed share repurchase in the fourth quarter, buying back $26 million of shares, at an average price of $52.94. As of the end of 2021, we had $328 million remaining under our authorized share repurchase program. Adjusted free cash flow for the year was $223 million with free cash flow conversion from adjusted EBITDA at 29%. We expect to move back toward our historic free cash flow conversion range of 55% to 60% in 2022. And over time, we expect to see this rise even higher to 58% to 63% of adjusted EBITDA as we laid out at our Investor Day last fall. Let me provide some more detail about our expectations for the first quarter. We expect gross realized sales to be in the range of $345 million to $355 million, a 46% to 50% increase over the prior year. At Travel and Membership, we are forecasting revenue to increase in the high-single digits over the prior year. And in the first quarter, we expect the provision for loan loss to be around 17%. This will likely mark the low for the provision in 2022 as we look to increase new owner sales and the percent of sales financed. Both these initiatives are designed to accelerate the growth of our portfolio, but they do impact the provision. For the full year, we expect our effective tax rate to be 27% and net interest expense on corporate debt to be around $185 million to $195 million. In closing, 2021 was a great year for Travel and Leisure. Our focus on cost controls and quality growth, strong margins, and EBITDA, started to transition back to historical levels of EBITDA to free cash flow conversion and in the end of the year with increased returns of capital to shareholders. We are excited about the foundation we have laid for future growth and the opportunities we have ahead of us. We look forward to catching up with many of you, hopefully in person over the next couple of months. With that Ashley, can you please open the call to take questions.

Operator, Operator

The operator is giving instructions. We ask that you please limit yourself to one question and one follow-up. We will take our first question from Joe Greff with JPMorgan. Joe, please go ahead.

Joe Greff, Analyst, JPMorgan

Good morning, guys. A question for you that delves with your comment, Mike, on new owner sales and the loan loss provision going up because of that. Are you rethinking the universe of credit quality, target customers, and maybe going back and lowering that FICO band that you had moved from a couple of years ago?

Michael Hug, Chief Financial Officer

Joe, thanks for the question. We want to drive new owner sales. However, we couldn't be happier with the VPGs we're running. That's a result of, as you mentioned, moving that cutoff back up to 640. We'll look at that number. Do we ever drop back down to 600 soon? I wouldn't expect that we will, but we'll look at different factors, not just FICO, but other factors such as payment history for owners and things like that, to try to drive sales and incremental upgrades to get that portfolio growing again. As I mentioned, it does come with a provision increase, but the net impact is obviously a great margin and a great recurring revenue stream. So, we're always looking at credit quality. We'll probably hang around that 640 number from an average standpoint. And as I mentioned, I don't expect we'll drop back down to 600 soon.

Joe Greff, Analyst, JPMorgan

And then just with the capital return in buybacks, can you talk about how you're thinking about buybacks here in 2022, obviously with the net leverage of four times and the expected EBITDA increase in the first quarter you'd be reducing that leverage ratio. So, paying down debt or hoarding cash doesn't really give you any great efficiencies. Can you talk about your buyback activity, maybe quarter-to-date and plans for 2022?

Michael Hug, Chief Financial Officer

A couple points first: we're very excited to be able to remove the restrictions we had during the relief period and that's evident in the share repurchase we did in the fourth quarter. And to your point, when you look at our intent as it relates to lowering our leverage ratio, we've said very clearly, as we exited the covered relief period that we're going to do that through growing EBITDA, not using cash to pay down debt. So, when it comes to capital allocation, we've demonstrated that we'll continue to grow the dividend and we'll return to our pre-COVID capital allocation methodology of looking into M&A and investing in M&A. Excess cash will be used for share repurchases.

Joe Greff, Analyst, JPMorgan

And buyback quarter-to-date?

Michael Hug, Chief Financial Officer

Currently, we're not going to give guidance as it relates to our cadence of 2022 share repurchases. I think what I would point out though is, after the spin-off of the hotel group back in June of 2018, we had a steady and increasing level of share repurchases, absent M&A activities. So, we're very excited about the optionality we have as far as capital allocation, and we'll put excess cash to work to drive shareholder value.

Operator, Operator

And we'll take our next question from Ben Chaiken with Credit Suisse, please go ahead.

Ben Chaiken, Analyst, Credit Suisse

Hey, how's it going? This quarter was maybe tough given Omicron, but if you were to exclude Omicron as consumers come back, are you seeing a relative value tailwind between timeshare and hotels? I'm referring to rising leisure hotel ADRs making the price value and, importantly, the breakeven for timeshare theoretically much more compelling. Is that showing up in the business or is that more theoretical?

Michael Brown, President and Chief Executive Officer

Well, it is certainly theoretical, but it is showing up in our business as well. One of the great components of our business, especially at this point in the cycle, is you can demonstrate very clearly the relative value of vacation ownership compared to a hotel stay or a home rental. Where we see it show up is in our sales dynamics and the question of whether you try to drive incremental price or drive closing percentages at the table. We've seen a steady increase through both tour quality and where we are in the cycle on our close rates, and our close rates are up 200 to 300 basis points from where they were pre-COVID. We think that's a result of the change in quality, the improved performance of our teams, and the value people are seeing in paying for future vacation stays at today's prices. We've pointed out in the prepared remarks that 80% of our owners are fully paid off on their loans. So, if you're traveling in this inflationary environment to a destination and all you've paid for is your annual maintenance fee, it's even clearer the value you get out of ownership.

Ben Chaiken, Analyst, Credit Suisse

That's helpful. And just one quick clarification. Are you taking price and close rate both higher, or are you focusing more on improving close rates? How are you thinking about the trade-off?

Michael Brown, President and Chief Executive Officer

No, we're leaning more toward close rate because the lifetime value of a new owner is not only future purchases, but the portfolio which we're trying to grow through management fees. So, we're not taking out a large price increase, it's just normal price increases, and we're focusing on the benefit coming out of higher close rates. I'd also add — which indirectly leads to a margin question — that our inventory is already paid for, so we don't have rising construction cost pressures that could affect the margin. We feel like we're in a good margin situation and the product that we offer clearly provides demonstrable value to the consumer.

Ben Chaiken, Analyst, Credit Suisse

Thanks. And then one more: given the slowdown from Omicron in December and January, can you give us a view of where you are at the end of January or in February — any data point to bridge between pre-Omicron and where you are now?

Michael Brown, President and Chief Executive Officer

Absolutely. First, our Q1 guidance considers the effects of Omicron. In February, North American revenue is above 2019 levels, whereas in January it was below 2019 levels. In arrivals at our resorts in January, we were roughly 6% below 2019, and we're trending flat if not above for February. And when you look at forward bookings, as we said in our prepared remarks, our forward bookings are above 2019 levels. So, it's been a very quick return to pretty much normal operations in February. One more point: during COVID, over 90% of our resort demand was drive-to versus historically the low 70s. That number is back to 73% drive-to, which shows consumers are returning to their normal leisure travel behavior.

Operator, Operator

Again, as a reminder, that is for your questions. We'll take our next question from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka, Analyst, Deutsche Bank

Hey, good morning, guys. Prior to COVID, you always talked about the target of getting 50% new owners on the VOI side, and you never quite got there. Now that you've had two years to tinker with the business and the strategy, does that 50% still make sense, and do you think you can get there? Or could there be more benefits to being in the 40% range? Can you get the same level of free cash flow or EBITDA if you're at 40%?

Michael Brown, President and Chief Executive Officer

Yes, it's a very important dynamic. The lifetime value of new owners is critical to our long-term growth rates. We had presented pre-COVID a 45% target. I would say that was aggressive because coming out of the great financial crisis we had some catch-up to do and I think we did a great job. We got it up right at 40% pre-COVID, which laid a great foundation for us going into COVID. We're back at around 28% this year, some quarters 30% during COVID. We expect to trend back over time toward the 40% range. If you can sustain transactions somewhere around the upper 30s to low 40s, you're in a very good place that's sustainable. We will get back into that range. As a point of reference, the public peers have different percentages but all are in sustainable ranges for long-term growth, so I feel good about where we are. We will increase the number into the thirties and then into the upper thirties, and I don't think any of that is a concern if we stay on the trajectory to grow back to the upper thirties.

Michael Hug, Chief Financial Officer

To add to Michael's points, we must be disciplined getting there. If you remember, at our Investor Day, we pointed out that our current owner base has $20 billion in spend available to us over the next few years. So going back to the question about FICO, we'll maintain our quality, be smart about growing that new owner number, keep those margins high, and get to the right number over time. But we don't have to do that overnight.

Chris Woronka, Analyst, Deutsche Bank

Okay. Very helpful. And then, as a follow-up, on the subscription business, what are you internally looking at in terms of measuring the efficiency of growing that business? We don't see things like customer acquisition costs. What are the key metrics you look at to grow that business on a bottom-line, not just top-line basis?

Michael Brown, President and Chief Executive Officer

Absolutely. One of the elements we laid out is we want to grow our addressable market. The subscription business allows us both on a B2B and B2C basis to grow our ecosystem and develop capital-light transactions with recurring revenues. On the B2B side with Panorama Travel Solutions, we set out a few key milestones to know we're being successful. First, can we provide a value proposition to white-label clubs? In the first year, we've seen 18 sign-ups in our development pipeline; it's very full and accelerating. The next step is the activation phase, which is turning an addressable market into true memberships. At Investor Day, we expected activation to be 3% to 4%, and in four months we're at 0.5%. We haven't even hit the peak summer season, so we're seeing very good proof points on activation. The last is transaction size. We know that if we get transaction sizes in the $300 to $400 range, the margins will follow. So it's a funnel: acquire brands, activate the brands and their members, and then monitor transaction size. Our Travel and Leisure Club, the D2C business, is about six to nine months behind Panorama, so we'll be looking at similar metrics as we start to see activation on the B2C side.

Michael Hug, Chief Financial Officer

Thank you, Chris.

Operator, Operator

We'll take our next question from Patrick Scholes with Truist Securities. Please go ahead. Your line is open.

Patrick Scholes, Analyst, Truist Securities

Good morning, everyone. From a high level, how do you envision the trajectory of VPG going this year and next, given that you're trying to get more new buyers in there and on the other side of that you have inflationary pressures and naturally rising prices? How should we think about VPG evolution?

Michael Brown, President and Chief Executive Officer

It's a great story. We've seen rises in VPGs from roughly $2,300–$2,400 up to over $3,000, and we'd attribute about half of that to mix (owner vs. new owner) and about 45% to 50% to sales production quality and the performance of our teams along with the quality of our marketing. As we increase new owner mix from the low 30s toward the mid-30s, there will be a very modest headwind to VPGs. But our teams continue to perform and VPGs are holding up well overall. During Omicron, VPG performance met expectations, so maybe a slight pullback as mix changes through the year, but not significant.

Operator, Operator

We will take our final question from David Katz with Jefferies, please go ahead. Your line is open.

David Katz, Analyst, Jefferies

Hi. Good morning, everyone. Thanks for taking my question. I wanted to check in with respect to the securitization market. It was very strong, and recent transactions were very successful back in October. What are you seeing today in terms of what it would be if you went to market today? And what are you contemplating as we move through the rest of the year so far?

Michael Hug, Chief Financial Officer

Thanks, David. We expect to get back to our normal cadence of roughly three transactions per year. Obviously, we're in a rising interest rate environment, so we would expect rates to go up from the under-2% levels we saw in 2021; those levels probably won't be available this year. But keep in mind it's still a very attractive market. We expect an increase in rates but we also expect to remain active in the market three times this year. We're looking for advance rates to stay in the high 90s. Overall, we're very optimistic about the market. Keep in mind that all our term transactions that we've already issued are fixed rates, so any exposure we have is really only on new issuance this year and going forward. That should have a manageable impact on 2022 earnings depending on the cadence and timing of those issuances.

Operator, Operator

Thank you. And that concludes our question-and-answer period. I would now like to turn the call back over to Michael Brown for closing remarks.

Michael Brown, President and Chief Executive Officer

Thank you, Ashley. As we head into 2022, we are focused on a very clear and simple ABC Strategy. We want to accelerate our growth of our global business. We want to broaden strength of our cornerstone brands, and we want to create depth of our products and services. I'd like to recognize our global team of associates for contributing to our success and for serving our owners, members, and guests. Thank you to the shareholders and stakeholders of our company who have put their trust in our ability to put the world on vacation. We're building on a great foundation, and I hope you're as excited as I am about the future of Travel and Leisure. Thanks, everyone, and have a great day.

Operator, Operator

Thank you. And that concludes Travel and Leisure's fourth quarter and full-year 2021 earnings conference call. You may now disconnect your line at this time and have a wonderful day.