MARRIOTT VACATIONS WORLDWIDE Corp Q3 FY2020 Earnings Call

Greetings. Welcome to Marriott Vacations Worldwide Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Neal Goldner, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Sherry, and welcome to the Marriott Vacations Worldwide Third Quarter 2020 Earnings Conference Call. I am joined today by Steve Weisz, President and Chief Executive Officer; and John Geller, Executive Vice President and Chief Financial and Administrative Officer.

Thanks, Neal. And good morning, everyone. For some time now, we've been telling investors that we have a resilient business model. Looking at the performance of our stickier resort management, financing, and exchange membership revenues this quarter, coupled with the recovery in contract sales, rentals and exchange transactions, I believe we took a significant step forward in improving our position. Following the challenging second quarter, when COVID was still new to many of us, our third quarter saw significant improvements in both our vacation ownership and exchange businesses with revenues and margins delivering meaningful improvements compared to the second quarter. While we still have a long way to go before we fully recover, the third quarter was a major next step in that journey. So let me start with our vacation ownership business. Ever since the start of the pandemic, we have believed a typical timeshare unit with much larger square footage than the average hotel room and more amenities such as full kitchens and laundry facilities, coupled with the prepaid nature of our offering, positioned us to lead the recovery in the lodging sector. I think our third quarter resort occupancies are proof of that. In fact, not only did we see strong occupancies across many of our drive-to resorts, we also saw occupancies at a number of short-haul fly-to locations as well. To give you a few examples, occupancy at our Florida Beach resorts averaged in the mid-60% range in July and improved to around 70% for September.

Thanks, Steve, and good morning, everyone. Today, I'm going to review our third quarter results, the recovery we've continued to see across our business, our expanded cost-saving initiatives, and the overall strength of our balance sheet and our liquidity position. Our third quarter results reflect a strong sequential improvement from the second quarter, illustrating the resiliency of our business with resort occupancies, contract sales, and exchange revenue all improving from the second quarter. As a result, we reported $35 million of adjusted EBITDA for the third quarter, once again demonstrating the strength of our leisure-focused business model. Looking first at our vacation ownership business, our stickier resort management and financing businesses provided a strong contribution to our results this quarter, enabling our Vacation Ownership segment to deliver $28 million of adjusted EBITDA. As we mentioned on our last call, we reopened eight sales centers in June, followed by an additional 40 sales centers over the course of the third quarter. As Steve discussed, occupancies were strong in many of our drive-to and fly-to resorts during the quarter. However, with Hawaii practically closed to non-resident visitors throughout the quarter, occupancy at Orlando was much lower than normal, declining nearly 70%, with owners representing 75% of the total tours this quarter, compared to just under 50% at the same time last year. VPG was up 13% despite a tougher comparison because of the Hawaii closures. Excluding Hawaii, North America VPG was up nearly 30% year-over-year. We delivered total contract sales of $140 million, down 64% year-over-year, but up substantially from the second quarter. Even with the lower contract sales, we were still able to deliver a 5% adjusted development margin through our aggressive cost management efforts. Our Resort Management business generated $55 million of profit in the quarter, 12% lower than the prior year as the 4% increase in our stickier, high-margin management fee revenues was offset by a decline in ancillary profit as a result of lower occupancies and limited operations at many outlets.

Our first question is from Ben Chaiken with Crédit Suisse. Please proceed.

Good morning, Ben.

Hey. How is it going? Thanks for taking my question. I guess on the cost savings side of things, you mentioned these costs will not come back with volume. So, I think, just to confirm, does that imply that you don't need 2019 levels of demand either to attain these? And then, on timing, I think you were saying completion by the end of 2021; were you saying all in or run-rate by the end of 2021? Thanks.

Sure. Yes. You're right. We are looking at it, if you go back to, yes, 2019 volumes, they would be linked to those cost reductions. So permanent in nature, we can get back to the volumes that we had in 2019 with permanent cost savings, leveraging technology, and doing things more efficiently. There are a lot of initiatives involved. In terms of timing, we obviously took a pause on many of these initiatives to preserve cash flow, and with people being out on furlough and reduced workweeks, we are starting to ramp those up. We see a path forward. Our goal is still to try and hit, as a run-rate, the full $200 million or more by the end of next year, but we'll continue to update you. The good news is we see a path forward to $200 million-plus, and we're still aiming to get there by next year. But obviously, there's a lot of work that we need to accomplish.

Got you. I appreciate it. And then, I guess, in the slide that you mentioned three buckets: marketing, technology, and IT infrastructure. Is there any more color on any of those buckets that you're able to provide at this point?

No. I mean, if you look at it at a high level, we were back at the beginning of the year with the $125 million or more in savings. We were working on a lot of things internally and we saw a path forward even back then for probably another $25 million to $30 million in synergies around some of the same things that were in the $125 million. A lot of it, the common theme is, where can you leverage technology and drive more efficiencies? That's really across the board, whether it's on the back of the house, some of the financial and accounting areas, clearly, in our IT area, and how we support the business going forward. But even on the operations side within marketing and sales, we are really challenging ourselves not only to review our marketing approach and how we can leverage technology to be more efficient but also organizational design and things like that. So it's probably a list of over 40 projects, many in the couple of million dollar range here and there. But, like I said, there is a way to get there, and we are going to move as quickly as we can.

Got you. I appreciate it.Thanks a lot.

Thank you.

Our next question is from Jared Shojaian with Wolfe Research. Please proceed.

Hi, Jared.

Hi. Good morning, everyone. Good morning.

Hi.

Can you give us the contract sales change by month in the quarter and for October? Is it your expectation based on what you're seeing, what's on the books, that November and December will look better than October? And I realize there is some seasonality there. So I am referring more to the year-over-year change.

Yes. I don't have a sequencing here in front of us, Jared. We could certainly get that to you. So, I think the essence of your question is, what causes the $140 million we ran in Q3 to become between $160 million and $185 million in Q4, right?

That's fair. Yes, I think the genesis of the question was, was that as well as just trying to understand with rising COVID cases here too, if you have seen that sequential improvement continue throughout October into November and December as well, just based on what you're seeing on the books?

October exceeded our internal forecast by not an insignificant amount, which gives us some level of confidence. I mean, obviously, the one thing that none of us has any visibility into is if there is a huge spike in cases, or if there is a meaningful cutback in travel or local government regulations, et cetera. I think all bets are off and I would say that for not only our business, but for lots of businesses. But what we've done is, we've taken the October results. We have then looked at future bookings in terms of not only occupancies but also tour arrivals for November and December. We have tried to factor in what we think penetration rate would be on occupancy for in-house tours, as well as those package tours. We've applied a VPG number to them and we've come up with what we believe is – while it's not an insignificant 15% to almost 30% improvement in contract sales in the fourth quarter. Keep in mind, in October we only had two weeks of Hawaii being open, and even that, it took them a while to ramp up. So, I would think there is some strength in Hawaii that we should see come through to help that number. In addition, as I reported, as you look at the back-end of the year here in Orlando, we see some numbers improving here as well. So, you put all those things together, throw them in the sausage grinder and that's what comes out of the other end in terms of our forecast.

Yes. And just on the seasonality, it's typically in the fourth quarter, we would have a little bit of seasonality. Typically, November is a little bit softer, and we obviously have the holidays around Thanksgiving and year-end. But it's not a normal fourth quarter, right? We are in a recovery period. To Steve's point, we are looking at occupancies, which generally in some resorts could be increasing sequentially, specifically as we talked about Hawaii and Orlando versus a normal fourth quarter. And the other phenomenon, and it's more anecdotal, but I've heard of people in the Northeast, where kids are doing school remotely; they're working remotely. People are coming down to Orlando, doing things remotely and then going to the parks and taking advantage of that. So, it isn't a normal quarter, which also makes it very hard. Steve walked you through how we kind of pulled it together. But it's going to obviously depend on people continuing to travel and go on vacation.

Great. Thank you for that. And then, I want to ask a question just on Hawaii and I appreciate all the helpful commentary and stats that you've provided. It does seem like Hawaii is slowly starting to improve nicely here sequentially. Is it your expectation that maybe by the first quarter, Hawaii looks a lot more like some of your other beachfront mountain resorts where you are a lot closer to prior peak volume levels on occupancy? And then, I guess, also on Hawaii and the Rental segment in particular, Rentals were a pretty good story here in the quarter sequentially. Does Hawaii have an outsized impact on rentals? Or should I assume that the contract sales mix for Hawaii is pretty similar on the Rental side?

Yes. The broad answer to your question is we sure hope so. Keep in mind, even when Hawaii reopened its doors on October 15, you had to have a negative COVID test within three days prior to arrival. So that does put some dampening effect on people even going there as we speak. We hope that that restriction will be further relaxed. I mean, Hawaii has always been a very popular vacation destination amongst our owner groups as well as exchangers. It runs a very high annual occupancy, which means the good news about Hawaii is there is very little seasonality impact. So, I have every reason to expect that as soon as people get comfortable about getting on an airplane – and as I reported in my remarks, we've already seen some of that, particularly in the short-haul stuff, that Hawaii will come back in full force that should benefit not only contract sales, obviously, all of our ancillary businesses at the resorts, and clearly, on the rental business, although as owners occupy more inventory in Hawaii, the amount of rental inventory we have available is somewhat limited. When we do have it, it comes at a very nice average daily rate.

Okay. Thank you very much.

Thanks, Jared.

Our next question is from Brian Dobson with Jefferies. Please proceed.

Hi, Brian.

Hey. Good morning.

Hey, Brian.

So, I think the industry has learned a lot from this downturn. As you are looking out over the next few years, how do you see the business evolving and changing? Do you think there is room for a shorter duration product? And what kind of role can digital marketing play? How will that expand over the next couple of years when you're thinking about it?

Yes, I've always believed and I've been on record with this at conferences that a shorter-term product is something that is in the future on a more prevalent basis across the business. Keep in mind, with us, because we have a points-based product, if someone wants to go spend one night at one of our resorts, they can do that without having to buy a full week equivalent of a number of points to become a member with us. So, in essence, we have a short-term product availability. We don’t market it quite that way, but clearly, we think there is something there. When you say shorter term, I think the other thing is, we saw a lifetime product and I think what you are referring to is somebody saying they only want to buy it for five years or seven years, or ten years. There are certain accounting rule things that need to be overcome. But I do believe eventually that that's in the future for the industry. As the industry continues to evolve, just as it did from when I used to sell fixed-week, fixed-unit kinds of products to where we find ourselves today, I think the industry will keep moving in a direction where a short-term product could serve as an entry point for people. Once people get to like it, as our evidence has shown, they tend to buy it and eventually transition to more of a lifetime product. I am sorry, the second half of your question was what?

Just on digital marketing.

On digital, yes, I think one of the advantages, kind of in a perverse way, that we saw with being able to better utilize some of our digital tools was in something as simple as having real-time notification aspects for our owners about changes in local municipality rules and regulations regarding what people had to do when they came to one of our resorts. If you had to rely on the more traditional approaches that the industry has used, whether it's telephone calls or printed materials, it would have taken forever to get to our ownership group with these changes. Here, we are able to do it rather instantaneously and very broadly in a very inexpensive way. One of the things we saw, and you may recall, we mentioned on our second quarter call that we dialed up an enhanced phone outreach program to owners, which proved to be relatively successful for us. I think that's another meaningful tool in our toolbox to use going forward. Marketing costs in this business are not insignificant, and I think as we can continue down the path of generating interest and tour flow through digital channels, it will be much more cost-effective than some of the traditional ways we've approached it. I am very encouraged by what I see there. While the pandemic may have caused us to address some things earlier than we had anticipated, I think that's ultimately a good step forward.

Great. Thanks very much.

Thank you.

Our next question is from Brandt Montour with JPMorgan. Please proceed.

Good morning, Brandt.

Good morning everyone. Hey, good morning. Thanks for taking my questions. Just going back to one of Jared's questions and maybe asking another way, what is embedded in the $160 million to $185 million for Hawaii, at least qualitatively?

We don't – well, I appreciate your question and why you're asking it, we don't disclose market-by-market forward-thinking sales forecast, except to say the following: we believe that Hawaii will meaningfully outperform Q3. I think that kind of goes without saying, given the fact that there was virtually no volume in Q3 out of Hawaii. But I am not going to provide you with a specific number.

Yes. No, that's why I said it could be a qualitative answer. I mean I think some of your peers have said that the contribution from Hawaii would be low, even though it's open just because of how slow the ramp would be. I was curious if you guys were penciling in a fair amount of ramp in there. But that's a fine answer.

Yes, let me just add that if you look at our representation of our product and what it means to us in terms of sales, we probably have a higher concentration of product and sales volume out of Hawaii than some others do, except maybe Hilton Grand Vacations. I think it will be meaningful. Will it be equivalent to what we traditionally run in Hawaii in the fourth quarter? Absolutely not, for all the reasons we talked about before. But I think – I mean, we are hoping for the range of $160 million to $185 million, is a little larger than we would typically put out there, and some of it is due to the unknown factor of how quickly some of this will come back. But we think it's going to be material and helpful.

Got it. That's helpful. I appreciate that. And then, second question would be on just a clarification and a follow-up. So the bookings, I think you gave a booking stat at 93% of usual business would be on the books. I guess the real question I have is, for the next three quarters, how much bookings do you have on the books versus a year ago? And then, the second part of that question is, I think I know the answer, but just can you touch on cancellations in the very near term? If you're seeing anything that may be related to the virus prevalence? Others have said they haven't seen the same uptick in cancellations like early summer. But I want to make sure if you have anything.

Yes. I'll answer the second part of your question first. We're not seeing any material impact from short-term cancellations because of the virus. I won't say there aren't any, but they are not significant in nature. The number I gave you, the 93% number was looking at the fourth quarter numbers for owners and exchangers versus where we found ourselves at the same time last year looking at the same two categories. We have not disclosed what we think the first half of the year is going to look like. And I think as we get closer to the end of the year, we'll have better visibility on that. I will tell you, just anecdotally, that bookings are up, but I am not going to give you a specific number.

Okay. Thanks very much, guys. Good luck. I appreciate.

Thank you.

Our next question is from Chris Woronka with Deutsche Bank. Please proceed.

Hi, Chris.

Hey. Good morning, guys. I don't know how much color you can or want to give us on this. But as we think about kind of going forward on sales center efficiency and productivity, is there any way to gauge – do you think you are going to have fewer salespeople per sales center? Is there any way to gauge volume per salesperson or any other kind of metric?

Yes. The way in which we staff our sales centers is based on what we project to be our tour volume on any day, week, or month. What you hope for is that you can continue to improve our closing efficiency, which obviously makes you get better efficiency out of the total tour volume that comes to you, which would equate to maybe fewer salespeople. But I think, you may recall that we talked about some of the efforts we were putting forward in the Vistana business to try and improve our operations there, and we were clearly making very good progress in that before the pandemic hit. Obviously, when we shut everything down at the end of April and then started to dial back up this summer, we didn't have the full benefit of being able to continue with that, but that work continues on. However, I wouldn't – unless we can reach a point where existing buyers can conveniently buy a product digitally without having to talk to a salesperson, and there are broker laws that really get in the way of all this, I don't see any meaningful impact on the number of salespeople. We continue our quest to try to attract more first-time buyers. First-time buyers, by definition, want to experience the resort, kick the tires, and so you need people there to have that dialogue as well. In October, even when the bulk of the occupancy we had was to our existing owners, first-time buyers were almost 28% of our tours and about 21% of our volume. So, I hope I’ve answered your question. But I don’t see a sea change regarding sales executives and the need for them in our sales centers.

Okay. Yes. No, I appreciate all that detail. And then, follow-up is, are you seeing any big changes in terms of what people are looking to buy when they come? Are they looking for – to buy enough points for a larger unit or a different location closer to home? Further away from home? Is it too early to tell if there are any big seismic shifts in buyer behavior?

No, we haven't seen anything in terms of a major shift in buyer behavior. Keep in mind that, particularly over the summer, most of the people we’ve been talking to are our existing owners returning to our resorts. They typically have a lower purchase amount for their contract because they are simply adding points to a portfolio. For first-time buyers, the numbers are not materially different than what we saw prior to the virus. I believe that over the period of the first five years, the average sale going in is about $30,000, and typically that someone will generally buy another $20,000 worth of the product over the next five years. We haven't seen any changes in that. It’s probably too soon for anything of significant nature, but we wouldn't anticipate it.

Okay. Very helpful. Thanks guys.

Thank you.

Our next question is from Patrick Scholes with SunTrust. Please proceed.

Hi, Patrick.

Good morning everyone. It looks like you're generating some significant, or rather it’s not insignificant cash flow in the back half of the year here. How are you thinking about the allocation of that cash flow going forward? Thank you.

Hey, Patrick, yes. I mean, nothing has changed in our thinking. If anything, just the recovery and resiliency, we still feel good about our long-term leverage targets and all that. Obviously, we have a restriction on returning capital while the covenant relief we have on our revolver is in place, which we can opt out of early depending on the recovery. But that's at least through the first quarter. As cash flow continues to come back, we obviously have excess liquidity now. We expect, assuming there isn't another shutdown, that we will generate cash flow going forward here at these levels. So, we are in a great spot, and when the time is right, we'll continue to look to reinvest money to grow the business. If there are acquisition opportunities that have the right returns and the right strategic fit, that is something we’ll examine. Short of that, I would expect we'll get back to dividends and share buybacks.

Okay. Thank you.

Alright.

And our next question is from David Katz with Jefferies. Please proceed.

Hey, David.

Hi. Good morning, everyone. I think our questions have been asked and answered, particularly the prior one about capital allocation. So I'll give someone else a chance. Thanks very much.

Okay. Thank you. Have a good day.

That is all the questions we do have for today. I would like to turn the conference back over to management for closing remarks.

Thank you very much, Sherry, and thank you to everyone for joining today's call. As I've said in the past, people like to vacation, especially timeshare owners, and that's what our business is all about. I think the recovery we delivered this quarter is evidence of that. In the midst of a global pandemic, our vacation ownership business delivered sequentially higher occupancies, increased revenues, and $140 million of contract sales this quarter, while our Interval International Exchange business improved its EBITDA margin by 180 basis points on a year-over-year basis. And maybe the best example is our expectation to deliver at least $130 million of cash flow in the second half of this year. We've also increased our synergy and cost-saving goal to $200 million, a $75 million increase from our previous goal. Looking towards the fourth quarter, Orlando continues to gradually improve, Hawaii has reopened its shores to travelers, and we expect system-wide occupancies to continue to improve. As a result, we expect contract sales to grow by roughly 15% to 30% in the fourth quarter compared to the third. As always, thank you for your interest in Marriott Vacations Worldwide. Take care of yourselves. And finally, to everyone on the call and to your families, stay safe and enjoy your next vacation.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.