Greetings and welcome to Marriott Vacations Worldwide Second Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Neal Goldner. Thank you, you may begin.

Thank you, Rob and welcome to the Marriott Vacations Worldwide 2021 Second Quarter Earnings Conference Call. I am joined today by Steve Weisz, Chief Executive Officer and John Geller, President and Chief Financial Officer.

Thanks, Neal. Good morning, everyone and thank you for joining our second quarter earnings call. As a reminder, this is the first quarter with Welk in our results and we couldn't be more excited about the opportunity it provides us as we look to significantly expand our Hyatt Vacation ownership business. Today more than ever people want to vacation to see new places, reunite with family and friends or just to relax and the products we offer most with extra square footage in a resort setting are resonating with them. You only need to look at our occupancies during the quarter to see the high demand for our resorts. And this is translating not only into higher occupancies, but also into new owners with first-time buyer sales growing faster than existing owners this quarter. With occupancies and contract sales in many of our North America locations ending the quarter at or above 2019 levels, we've been able to return our focus back to the transformational initiatives that will help drive long-term growth and improve margins, many of which are digitally enabled. Before I get too deep into those efforts, let me quickly review our second quarter. Starting with our vacation ownership business. Occupancies continued to improve in a number of key markets during the quarter. As we've discussed in the past, our two largest markets, Hawaii and Orlando, which combined represent more than 40% of our North American keys were slower to recover in the first quarter, but both of these markets showed substantial improvement this quarter with Hawaii running over 90% occupancy and Orlando running more than 85% with both locations either in line with or exceeding June 2019 levels. Our Florida beach and U.S. Virgin Island resorts averaged 95% for the quarter, each above 2019, and our mountain and desert resorts were nearly 90% during the quarter, well above 2019 levels. Even our urban locations saw substantial improvement as the quarter progressed with San Diego and Boston exceeding 85% occupancy for the month of June. With a strong improvement in occupancies, we grew contract sales by 60% on a sequential basis and we were only 6% below pre-pandemic levels.

Thanks. Excuse me. Thanks, Steve and good morning everyone. Today, I'm going to review our second quarter results, the continued strong recovery across our businesses, the strength of our balance sheet and liquidity position and our third quarter expectations. As Steve mentioned, this is the first time we have Welk in our results and their performance exceeded our expectations this quarter. Given the relative size of Welk, we won't be providing pro forma results, but we will talk about certain items where Welk significantly impacted the quarter. Moving to our second quarter results, I'm very happy with our performance with most of our business approaching 2019 profit levels. Looking first at our vacation ownership business, we're seeing more people vacationing at our resorts. As Steve noted, our two largest markets, Orlando and Hawaii finished the quarter at or above 2019 occupancy levels, illustrating the resilience of our leisure-focused business model. And with the majority of our contract sales coming from people staying at our properties, we drove increased tours and contract sales in the quarter. We grew contract sales by 60% compared to the first quarter to $362 million, including $31 million from Welk. We're seeing more new faces at the sales table, which is good for the long-term health of our business, while owner tours also continued to grow nicely. VPG was well above pre-pandemic levels in the second quarter, illustrating how well our product is resonating with customers, though with the mix of first-time buyers beginning to normalize, as well as the addition of Welk, it was down slightly on a sequential basis as we expected. Development profit was $65 million in the quarter and margin was 22%, despite $13 million of negative reportability, which we don't adjust when reporting results. Excluding revenue reportability, adjusted development profit more than doubled on a sequential basis to $81 million and more importantly margin was 26%, approximately 240 basis points above 2019. This was despite lower contract sales and highlights the benefits of more efficient marketing and sales spending, lower inventory costs and synergy savings. Our rental business also improved nicely in the quarter, revenues increased 43% sequentially with growth coming from both higher transient keys rented and revenue per available key. As a result, we reported $15 million of rental profit in the quarter. The stickier revenue businesses within our vacation ownership segment also performed well in the quarter. Resort management profit increased $18 million sequentially, driven primarily by the substantial improvement in our ancillary business which was nearly back to 2019 levels and the inclusion of Welk this quarter.

Thanks, John. Our first question comes from David Katz with Jefferies. Please proceed with your question.

Good morning, David.

David?

David, are you muted? If you're muted, please unmute.

We must answer all his questions.

Okay. David, if you're muted, please unmute your telephone. Going to the next question. Our next question comes from Patrick Scholes with Truist Securities. Please proceed with your question.

All right. Good morning, everyone. I am here. Thank you. Question, couple of questions here, sort of a little bit long-term modeling related questions. How should we think about next year's net interest income versus 2019 levels? And I guess at a high level thinking about what that loan portfolio balances versus 2019—certainly you had lower sales this year and lower loan balances, but you've had the Welk acquisition. From a sort of high level modeling perspective, how to think about next year's net interest income versus again '19?

Sure, Patrick, good morning. Yes, as we did in the quarter, financing profit in the second quarter obviously with the addition of Welk was basically flat to the second quarter of 2019. The good news, as I mentioned, given our recovery in contract sales in the second quarter all the way, almost all the way back to pre-pandemic levels and the guidance we just gave, we do expect contract sales to be running at or above '19. And in June, as I mentioned, our legacy MVW notes balance kind of hit the equilibrium and originations exceeded normal loan repayments. So, the balance should grow going forward on the legacy MVW, even if we hadn't done the Welk acquisition. My back-of-the-envelope—obviously a lot of different assumptions go into this on continued contract sales growth and where we're at today—but I would expect that legacy MVW on its own would have been back to close to 2019 levels from a financing profit perspective in 2022, and Welk is going to be growth on top of that. We acquired about $240 million of gross notes receivable in the Welk acquisition. So hopefully that gives you some detail around what you're looking for.

Okay, that's very helpful. Just want to make sure modeling that correctly. And then related, somewhat related for '22, how should we think about the ongoing earnings hit from— you lost a corporate client in the RCI membership. How should we think about that earnings hit? And then also from member loss over the past year and a half, I guess again as compared to what it was in 2019.

Yes. Patrick, this is Steve. I think you're referring to the Diamond transition from Interval to RCI, correct?

Yes, that—yes, correct that and if you lost members over the past year and a half, what is sort of the run rate so we can sort of match it up for '22 expectations versus your 2019, again, thank you.

Let me speak to the Diamond thing specifically and then I'm sure John can chime in a little bit on the EBITDA side of things. So Diamond was 165,000 members, roughly 10% of the Interval membership at the time that they left. We were able to retain 29,000 members from that 165,000 in Interval, who continue to want to keep their membership with us. I should also point out that of the 165,000 only 15% of those were actually active exchanges. Now with the 165,000 members you do get the annual corporate membership fee, which is not the lion's share of what you get from membership, but it certainly is important revenue. But the real revenue in the exchange business is on a transaction basis when people go to exchange. So we believe that at the end of the day by retaining the 29,000 members, who were obviously active users because they wanted to stay with Interval, it's really going to be relatively de minimis in terms of the financial impact from Diamond. Now with that said, there were others and you have normal attrition in the exchange business that happens every year. Typically speaking, what happens is as new developer sales happen, you have new memberships that are gained and under ideal circumstances the new members outweigh the normal attrition. Obviously, in 2020 there were very few new member additions being made across the affiliate network and you still had continued attrition. So there will be some leakage at the EBITDA side, and I think John may be able to chime in a bit with some additional numbers.

Yes, I mean Steve walked through obviously a lot of moving parts and assumptions there about the average revenue per member of the members that left and all those things. But if you take a step back up to 30,000 feet and you look at the EBITDA that that segment delivered in 2019 and kind of what we expect to deliver this year, I would say the loss of members from an EBITDA perspective is probably roughly $25 million of EBITDA give or take as a back-of-the-envelope as we look at it, but like I said there are a lot of assumptions that potentially could go into that number. So, I try to keep it a bit high level.

Okay, very good. I really appreciate the color. Just last quickly here, when you had made the Welk announcement early this year you had at a high level targeted doubling the $29 million EBITDA over three to four years. Would you say at this point you're ahead of that, in line, or behind? I probably don't think you are behind, but would you think you're ahead of that original expectation or in line with it at this moment?

Yes. In terms of how we underwrote at least for the first year here, obviously, we didn't expect the recovery and that's really what you're seeing right now, we're outperforming our expectations, but it's just how strong the recovery is. Welk is all North America, so they don't have some of the international exposure that we have. Our North America businesses essentially recovered in terms of contract sales back to pre-pandemic levels too. So, they're outperforming there. In terms of the integration and a lot of the synergies, the upside to that is all still to come. Our goal is to get the resorts and the points club at Welk rebranded to Hyatt early next year and so a lot of work on that front. That's going to unlock a lot of the development margin improvement we've talked about and our ability to leverage the more cost-effective branded channels we get through the Hyatt system. That's a lot of the opportunities and then the overall—there are some other synergy and integration savings we'll get over time, but the upside, if you will, is really yet to come. The outperformance is just that the overall business is recovering quicker and performing quite frankly better than they were seeing back in 2019 at this point.

Patrick, certainly nothing that we have seen would cause us to be any less optimistic about what we called out when we did the acquisition four months ago.

Okay, good to hear. Thank you very much. I'm all set.

Thanks.

Our next question comes from Ben Chakan with Credit Suisse. Please proceed with your question.

Hi, Ben.

How is it going? You mentioned some digital initiatives on the sales process, I think this is different than digital call transfer. Can we just dig into this for a second—how exactly what Welk is, is this like serving a Facebook or Instagram ad and then allowing a consumer to book or purchase a MiniVac or is this the actual timeshare sales process, meaning someone could buy a $25,000 timeshare if they wanted on their phone?

No, it's the former, not the latter and you have it very well characterized. The great news about Facebook, Instagram and there are some other platforms out there that we're experimenting with is that you do have the ability to selectively target who we want to put an offering in front of and as well as what offer you want that to be. And as a result, it is to generate preview packages, which in turn as they come through the house and do their tour, et cetera, hopefully generate a good sale. It's a cost-effective way to sell preview packages; it gives you broader distribution than some of the traditional methods the timeshare operators have used in the past and we're very encouraged by what we see.

It seems like kind of an exciting and maybe obvious channel. Was there a hurdle that maybe prevented you historically from using it or just evolution of the business? Can we talk about that?

No, it's more about evolution of the business. I think if you remember back in October of 2019 we talked about some early experimentation we had done. To be honest both of those platforms in particular, they've advanced their technologies and their ability to target customers a lot better than they used to. Obviously in 2020 we stood down from a lot of that because people weren't interested in thinking about booking a preview package to buy timeshare when they were in the midst of the pandemic and all the concerns about jobs and everything else. But we've started to dial it back up late last fall and are well engaged in it now and we're very pleased with what we're seeing so far.

Got you. Appreciate it. One more, if I may. You also mentioned the single platform kind of bringing all the brands under one umbrella, it seems like another very interesting tailwind as well. Is it too early to talk about some of the top line benefits? It seems like this could benefit close rate, price and just the consumer value proposition overall. I don't want to steer the conversation, but it seems like this could benefit close rate, price and consumer value proposition. Could you give your perspective there?

You've touched on several that are not only logical but somewhat obvious and this is three of the four brands; it would not include Hyatt by virtue of our license agreement, but the Sheraton, Westin and Marriott brands into a single platform and we believe that it does increase the customer value proposition. We believe that it should help improve close rates and likely have a positive impact on VPG. We're talking about rollout early next year, and we are very pleased with the progress we're making on the bits and pieces behind the scenes that we have to put in place in order to get this thing together. Between what we would think logically, as well as some customer research we've done, we think this will resonate very well with not only our existing owners, but new owners as well.

Okay, cool. I appreciate it. Thank you.

Thank you.

Our next question comes from Brandt Montour with JP Morgan. Please proceed with your question.

Hey, good morning everyone.

Hi, Brandt.

Good morning, thanks for taking my questions. Obviously, strong results in contract sales and VPG especially given the new owner mix shift, positive mix shift that you called out. What would you say, where would you say 2Q VPG would have shaken out ballpark if you would have normalized completely to historical mix levels knowing what you know about consumer demand and their propensity to buy and close right now?

That's a great question. Without—

So you're looking for, if we were back at more of a 60/40 or 55/45 mix owners to first-time buyers sales, how would that blend out in terms of how much lower VPG we go all else being equal?

I'm trying to isolate a lift to VPG from the elevated close rates in today's consumer environment.

But yes, that's all we started to try to figure out how much of the close rate is the environment. So I don't know, it's an interesting question Brandt, I'm not sure we have a good answer off top of our heads.

Fair enough. Don't worry, I have another one. When you think about '22 and building back to a full slate of tour flow as you see it as your new normal, let's say, so international and Asia are all the way back to where you want it. But hypothetically you would have called some of the lower yielding channels. Can you give us a sense, order of magnitude, how much of that channel cooling would lower tours on an absolute basis next year versus '19 and then you said contract sales should be running ahead of '19, so clearly whatever it is, it's going to be offset by higher VPG. Is that the way we should think about it and then maybe you could help us quantify that delta?

Yes, without getting into the numerics, at a 20,000 foot level on concepts, we have shut down virtually everything in OPC with the exception of Hawaii, which is a relatively high cost, low yield channel, and we don't envision turning that stuff back on for the foreseeable future. I think we've learned a valuable lesson from 2020 that we can operate in an environment with fewer low-yield tours and put our focus more on higher-yield channels that we really benefit from. The second is linkage is not a foreign concept: the hotel environment continues to struggle with its rebound and depending on who you listen to there are estimates that it's '23 or '24 before hotels get back to some sense of normalcy. So, we have been very judicious about turning back on linkage channels which in 2019 produced about $100 million with the sales force. We won't turn on a new linkage channel in a given market unless we can convince ourselves that there is enough good traffic and volume in the hotels to warrant being open on a cost-effective basis. The flip side is on-core, which is one of the most vibrant channels for us in terms of producing high-yielding tours; that on-core channel has continued to actually grow. In fact, in the second quarter we actually booked more on-core tours when people came through the house, so we're adding that. On-core has a very high VPG. So, if you put all those together, again I haven't given you any numbers because we've just gone through the process of planning from the second half of this year and haven't really begun the budgeting and channel optimization for 2022. But I think this gives you some sense of where we're going to continue to put our focus.

Yes, Brandt, your question—while we could give you how many tours in a vacuum we might not get back from OPC and some of the less linkage. To Steve's point, we're doing all this stuff to more than offset the losses. That's where we'll get more visibility—selling packages is a big one. Our goal always was to get rid of OPC over time. Then COVID hit and we turned that stuff off. But we always said as we got rid of OPC, we were ramping up other channels, so the digital marketing channels, the on-core packages and all that. We'll update you as we get later in the year on the outlook for getting back to 2019 tours, which I think is your question. We have a lot of moving parts and we expect to hopefully get closer back to the 2019 tours, but once again VPG being 30% above 2019 at least right now and it will continue to normalize—those are the two moving parts that we're continuing to work through as we think about 2022.

Great. Thanks for all the color.

Thank you.

Our next question is from David Katz with Jefferies. Please proceed with your question.

Hi, good morning everyone. I wanted to maybe put this on John: you do securitization deals that are at ever improving terms, and I think it's hard to argue that they aren't super compelling terms and yet at the same time the equity response has been inconsistent. I'd love for you to just talk about what that investor base asks about, what are their likes and dislikes and concerns, what are those discussions like compared to the discussions that we have on the equity side because you're right there has always been and there now seems to be a growing divide in how those are priced.

Sure. Right now, we have seen a lot better terms—the deal we just did at 1.5% and a 98% advance rate on the notes was by far the best deal we ever had. Some of that's the interest rate environment we find ourselves in right now. When you look at the investors we meet with, we've been doing securitizations now 20 plus years and what's helped improve the economics over time is we have more and more investor interest. We've got folks that have been in our program for the entire time and continue to be in the program. I'm not aware of anyone ever losing a dollar on a timeshare securitization deal; that's a fact. You've had a lot of ups and downs and you've seen how the notes have performed through some turbulent times, whether it was the financial crisis and more recently COVID, and I'm not just talking about our notes but notes in general from the industry. So when you have that performance over time, it draws more and more interest. Notwithstanding how good our terms are on a risk-adjusted basis, investors can get a little bit better yield elsewhere. When we talk to them, they know our program; most of them know how well the business performs and they know that while we don't have to buy out defaulted notes given our inventory model and our need for inventory to fuel future sales, it's just an efficient program. That gives you a little bit of the color in terms of what we hear and see.

And apologies if I missed earlier, have you indicated when there could be a next securitization deal forthcoming, how far out that might be?

We haven't formally indicated timing, but from a historical basis pre-COVID, we tended to do a deal about every two years. We did one earlier this year. Given the contract sales guidance we gave and that we're originating notes now back to where we were pre-pandemic, I think we're back on the cadence for a two-year cycle, so the goal would be to do another one here, call it in the fourth quarter.

Excellent. Appreciate it. Thank you very much.

All right. Thank you.

Thank you.

We've reached the end of the question and answer session. At this time, I'd like to turn the call back over to Steve Weisz for closing comments.

Thanks, Rob and thank you everyone for joining our call today. Whether to relax or just be with family and friends, people make time for vacation and coming off last year it's never been more true or more important. For some people the way their vacation has changed and we're finding that the products we offer are resonating with customers more than ever before; it's evidenced in our occupancies, our sequential growth and our VPGs. A quick review of our second quarter gives you a sense of that. We grew contract sales by 60% sequentially and we're within 6% of the second quarter 2019 contract sales, while VPG was more than $1,000 above two years ago. We're also seeing strong growth from both existing owners and first-time buyers, which is good for the long-term health of the system. Interval Exchange transactions were within 1% of 2019 levels, while average revenue per member was up 7% over the same time period. Adjusted EBITDA more than doubled compared to the first quarter with margin nearly back to 2019 levels and the third quarter has started off strong. With this strong recovery, we've turned our focus back to the digitally enabled transformational opportunities we still have in front of us to drive long-term growth and improve margins. We're also laying the groundwork to return to a more balanced capital allocation strategy including evaluating options to repay some of the debt we issued during the pandemic, exit our covenant waiver early and begin returning cash to shareholders. It's a great time to be in the vacation business and we think it's a great time to be a shareholder of Marriott Vacations Worldwide. As always, thank you for your interest, take care of yourselves. And finally, to everyone on the call and your families, stay safe and enjoy your next vacation.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.