MARRIOTT VACATIONS WORLDWIDE Corp Q1 FY2020 Earnings Call

…declined 2% through the end of February, and revenue per member was roughly flat. But with roughly 1,300 of Interval's Exchange resorts either closed or not taking reservations in the short term, due to COVID-19, transaction activity was adversely impacted in March resulting in a decline in average revenue per member. As a result, adjusted EBITDA for the segment was down $13 million in the quarter. After adjusting for one-time costs, including those related to COVID-19 G&A expense declined $10 million in the quarter, reflecting the continued benefit from our synergy initiatives. We realized $17 million of synergies in the first quarter, bringing our total run-rate savings to roughly $70 million. However, as we talked about in March, we've decided to defer most of our investment spending for the time being. As a result, it may take us a little longer to achieve our $125 million goal, but we remain committed to generating at least this amount of synergies by the time we're done.

Hi, good morning gentlemen. So I apologize if you did mention these on your prepared remarks already. You took a large not unsurprisingly charge on the loan loss provision. Going forward for the rest of the year, what would you expect the trends to be in that loan loss provision percentage?

Sure. In the quarter, we looked back at the 2008-2009 financial crisis to use it as a reference point. We examined the performance of both our MVW portfolio and the Legacy Vistana business starting from late 2008 into 2009. During that time, delinquency rates rose by about 50% for approximately 15 to 18 months before returning to more normal levels. We applied the same analysis to our defaults prior to COVID-19 and the current trends, projecting a 50% increase in defaults over the existing portfolio for a similar 15 to 18-month period. This led us to the $52 million charge we recognized in the quarter. While this situation is somewhat different now, our business has changed since then as well; remember, we were focused on sales growth during that prior economic environment. We’ve adopted a more disciplined approach this time around. Our customer base remains strong, targeting individuals with average household incomes of $125,000 or more and generally a net worth exceeding $1 million. Given this, we expect to see higher defaults. However, we believe that our reserve should adequately cover any challenges we face in the future.

Thank you for the detailed information. You just reduced your dividend yesterday, whereas it had been maintained previously. Is this change due to altered assumptions regarding macroeconomic conditions since your update call a month ago, or was it necessary to secure the additional lending you recently acquired?

Yes. First of all Patrick, I think if you go back to the call that we had at the end of March, I don't think we gave any indication that we were going to continue to pay a dividend in the short term. With that said, I'll let John address your question about whether there's an additional covenant or something that requires that which there is not.

Right. No I mean Patrick I think in this environment and you saw we went out not that we expect we're going to need the additional $500 million in liquidity. As management of the business, we're making sure we position the company and manage the risk. There's clearly a lot of uncertainty going forward. And we felt like given all those risks and all the other measures we've taken in terms of reducing workweeks and furloughing folks that, while we could pay the dividend, we didn't think it would be a prudent decision to do that at this point in time until we have a better sense as to when things start to open back up and how the sales start to come back and we have better visibility into that. And then, clearly we'll be able to reassess those decisions going forward.

Okay. Thank you. One last question. Thoughts on if and when you might be doing your next securitization and what are you hearing feeling from the securitization market as far as an appetite for issuance? Thank you.

Sure. Yes. We're working on our normal term securitization right now, still working through some stuff with the rating agencies in terms of default assumptions and things like that. I think for our portfolio time is our friend because we'll be able to see how our portfolio performs. And it'll age a little bit here. And I think for us, I expect our portfolio to perform well. That's going to help. But that being said, as we talked about we increased our warehouse facility. We got a couple hundred million dollars of capacity there. As I said in my prepared remarks, that's roughly $375 million of future sales at a 50% financing propensity. We get an 85% advance rate and our all-in cost of funds on that warehouse which goes through late 2021 is less than 2%.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Brandt Montour.

Good morning.

Good morning Brandt.

Good morning. Thanks for all the details. We appreciate it. So, just I was hoping Steve or John you could flesh out a little bit more about what a reopening might look like sort of more on the phased approach? And then if you are potentially going to be able to open some of the more drive-to heavy markets in let's say early summer, what quarter thereafter do you think you might be seeing tour generation that's comparable?

Okay. Thanks Brandt. First of all, I guess, I feel obliged to remind everyone that only 32% of our resorts are closed. The others remain open although under fairly substantial restrictions from state and local municipalities in terms of what kind of services can be offered, et cetera. So, when we speak of reopening I'll take it in two different phases. Obviously, for those that are currently open we will continue to ramp up activity. We have not taken new reservations for arrival until the end of May. However, we are honoring all existing owner reservations that are arriving in May. We have canceled all rentals and we'll begin to take those back up beginning in June and the same thing on our preview guests which will also begin in June. I think what you're going to see is because there is this patchwork of different regulations that are in place as recently as this morning, I saw that New Jersey for instance has now implemented an additional 30-day restriction on travel, while there are some other parts of the country like South Carolina that seem to be much more open to allowing businesses to get back in place.

Yes that does. Thank you for that. And then wanted to follow-up on your comments on the virtual tours. Maybe you could kind of tell us how this has affected the original rollout plan for those digital capabilities? And do you expect that virtual tour sales will be meaningful over the next couple quarters? Like will that actually move the needle for you?

Let me clarify what we're discussing. We're focusing on telesales. This expands our existing telesales operation within the company. We've trained our top 150 sales executives, who typically conduct tours at our resorts, to sell over the phone instead of in person. While it might not seem like a significant change, it actually is. We're now conducting sales with customers via phone without any virtual tours in place. We anticipate that some individuals who excel at face-to-face tours will also perform well in telesales, though some may not. Historically, our best sales executives have maintained relationships with their existing owner base, engaging in some form of telesales over the years. Typically, this involves a sales executive answering a call or reaching out to an owner who wants to purchase additional points, finalizing the sale on the spot.

Okay. Thanks again, guys. Good luck.

Thank you.

We have a question from the line of Jared Shojaian.

Good morning, Jared.

That question has been withdrawn. We have a question from the line of Brian Dobson.

Hi, Brian.

Hey, good morning. So I wanted a couple of quick questions about owner appetite to return to the resorts following the lift of travel advisories. Could you give us an idea of what your forward bookings look like for the second half of this year in comparison to 2019 levels for existing owners? And in terms of sales to existing owners what percentage of overall sales do you see that comprising in the back half of this year and first half of next year in comparison to 2019?

Yes. So if you look at total room nights or keys depending on the vernacular you want to use, I can tell you that we have 2.018 million keys from July to December 2020. That contrasts to 2.093 million last year, so down about 3.6%. Of the 2.018 million, owner stays are 78% of that total and they were 77% of the total in 2019. So doing the arithmetic for you. Owner occupancy for the second half of the year is down 1.8%. Previews are actually up about 1%. And transients are down 16%. I think the transient thing is the most logical to be fair. I think people will book reservations as they begin to feel more comfortable about travel and the state of our resorts being open with full facilities, et cetera. About 60% to 65% of our sales typically are to owners. I would expect that percentage to actually be a little higher because as you might imagine in our telesales activity, even in the time that we were dark in our sales galleries, there's been a lot of focus on owners and giving them what we think is a very attractive offer to add to their portfolio. So it will not surprise me if the owner sales percentage goes up from where we traditionally have it. But obviously, it's – I can't say that with any degree of assurance it's just logical I think.

And remember Brian I know you're aware of this our resorts run on average at 90% occupancy. So when Steve compares what's on the books to this year last year, right, we would have run a 90% occupancy in the second half of last year. So it's a very high occupancy to begin with and it's only down slightly.

Yes that's right. So those existing owner sales are usually done at higher margins than new-to-timeshare sales. Do you expect those higher margins to hold or are you offering incentives to – which would generate a somewhat lower margin?

Well we're certainly offering incentives. We've rolled back the cost per point. And we're providing some additional purchase incentives for people to make a decision now plus we're incenting cash sales at a little better degree than we are in finance sales, all in an effort to kind of supplement our cash flow. In terms of – yes, I mean, typically an owner purchase carries a lower marketing cost because we've already have a relationship with that owner. And so you would think that all other things being equal that your margin would improve somewhat because of that. With that said, you got to factor in they've got a lower price point than they had before. We've got a little higher incentives. So it's difficult to prognosticate exactly what will happen for the balance of the year but we believe that trying to tap into that owner vein is certainly the most logical and appropriate thing for us to do now and we'll see how the numbers come out at the end.

Excellent. Thank you very much.

Thank you, Brian. Are there any more questions on the line?

Yes. We have a question from the line of Jared. Jared, your line is open.

Hi, Jared.

Hi. Good morning, everyone. Can you hear me okay?

We can, yes.

Okay. I'm sorry. I've been having technical difficulties since before this call started. And I apologize if you've already covered any of this, but I'm just hoping to understand a little bit more of some of the comments you made on liquidity, because you said you have liquidity in a shutdown through at least beyond 2021 I believe. But, I think, you said, you're only burning about $10 million a month through year-end. And at that rate it would seem that you would have a lot longer than through 2021. So are there some inventory costs or other obligations that are coming up next year? Can you just help me think about that?

Sure. Hey, Jared, it's John. Yes, you're correct. When we discussed implementing reductions and furloughs to manage costs, those measures took effect at the end of April. From May through December, our cash burn rate is approximately $10 million, which aligns closely with our expectations from our discussions in March about various initiatives. However, it's important to consider the usual working capital outflows associated with our regular business model. We incur significant maintenance fees for unsold inventory, which we settle at the year's end and early in the following year. This is similar to how owners pay maintenance fees. Typically, these fees amount to about $150 million. Additionally, for our commitments that include the New York asset-light deal, San Francisco, and Bali, along with a smaller commitment in Costa Rica, we're looking at about $140 million due in the first quarter of next year. Combining these two factors, in the first quarter, while operations are halted and there are no rentals or sales, we anticipate a $300 million outflow. This is standard timing, and once we pass the first quarter, we expect to return to our usual burn rate. We currently have no major capital commitments aside from working through the Waikiki project, which we announced earlier, that will be developed with a partner. We aim to build inventory over the next couple of years. Overall, as we discussed earlier in the year, we planned to pursue new development deals and don't have many commitments at this time. Thus, on a full-year basis, if we normalize for the substantial outflow in the first quarter, you can expect a cash burn rate around $30 million.

Okay. That's really helpful. Thank you. And then just switching gears, can you tell me how much gross VOI sales declined in April? And, I guess, the angle here is, I'm just trying to figure out how meaningful the telesales are and you still have many resorts that are still open. So I'm just wondering, if you're selling any time shares at those resorts and just trying to understand that dynamic a little bit better.

Yes, Jared. All of our sales centers, including those in resorts that remain open, have been closed since the end of March. There is still some telesales activity based on our traditional telesales program, but I don’t have that figure at the moment. I can tell you that it’s not significant. We initiated a new telesales program at the beginning of May. Therefore, you can assume nearly a 100% decline in VOI sales in April for the entire business.

Okay. That's helpful. Thank you. And then, just one more quick follow-up from me. Do you know what percentage of your owners are retired and maybe even broken down further between existing owners versus the new owners you're selling to and if there's a meaningful difference for those that have loan balances that are retired? Thank you.

The answer is no. I don't know what percentage are retired. This is one of those situations where we may have sold someone something 15 years ago when they were actively employed, and they made a decision. They own their inventory fully. When they choose to retire, we don't typically ask them whether they're retired or still working. So, it would just be an educated guess, and that's not something I'm involved in. I wish I could provide that information, but I can't.

Okay. Understood. I appreciate it. Just the angle of the question was just the idea that, I think, if you're retired you're not, obviously, dependent on a job and you have just stable income already coming in. And I would think anyway in this industry in particular you would have a lot more retirees and particularly with leisure travel. But all right. Thank you very much for the time.

Hey, Jared, as I mentioned earlier, I find the idea of retirement interesting. However, when looking at household income or net worth alongside other important statistics, our owners typically trend as first-time buyers around 50 years old, give or take. This means these individuals generally have a household income if they're not retired, and typically possess a higher net worth than the average consumer, considering our target demographic. Additionally, as Steve noted, being 65 today doesn't necessarily indicate retirement. While we don't survey people on this, I understand your question, and I think those other metrics provide good insight into our owners.

Okay. Thank you very much.

Thank you.

Thank you.

There are no further questions at this time. Mr. Weisz, do you have any closing remarks?

Thank you, Alicia, and everyone for being on the call today. We apologize for the technical challenges we've faced. This is not our usual way of conducting the call, and we appreciate your understanding. While I can't predict when things will return to normal, I hope we've shown that we have a unique business model with a strong recurring revenue stream and a customer base eager to return to vacationing. We've made tough but necessary decisions to protect our company, and we have the financial strength and resources to get through this and come out in a strong position. I wish you all well and encourage you to prioritize safety and care for one another. I hope we can all look forward to enjoying our next vacation soon. Thank you.

This concludes today's conference call. You may now disconnect.