MARRIOTT VACATIONS WORLDWIDE Corp Q3 FY2021 Earnings Call

Greetings. Welcome to Marriott Vacations Worldwide Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. At this time, I'll turn the conference over to Neal Goldner with Investor Relations. Neal, you may now begin.

Thank you, Rob, and welcome to the Marriott Vacations Worldwide 2021 third quarter earnings conference call. I am joined today by Steve Weisz, Chief Executive Officer; our President, John Geller; and Tony Terry, our newly announced Executive Vice President and Chief Financial Officer. We need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued this morning, as well as the presentation we added to our website and our comments on this call are effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks to the schedules attached to our press release as well as on the Investor Relations page of our website at ir.mbwc.com. With that, it's now my pleasure to turn the call over to CEO, Steve Weisz.

Thanks, Neal. Good morning, everyone, and thank you for joining our third quarter earnings call. Before we start, I want to welcome Tony Terry, our newly announced Chief Financial Officer with 25 years of experience with MVW to our earnings call. While most of the time we are joining you from sunny Florida, today is particularly exciting because we're at the New York Stock Exchange to celebrate an important milestone for Marriott Vacations Worldwide, our 10th year anniversary as an independent publicly traded company. Ten years ago we were a pure-play vacation ownership company with three brands, 64 resorts and approximately 420,000 owners. Today we’re about vacation experiences, with seven brands, 120 resorts and 700,000 loyal owners in our vacation ownership business, and we also have 3,200 resorts and 1.3 million members in our exchange business and more than 150 other resorts and lodging properties in our third-party management business. Our large portfolio of offerings allows our owners and members to access virtually any kind of vacation experience they could ever want. We've built a business characterized by strong organic growth and recurring cash flow, driven in part by our capital-efficient inventory approach. This has provided fuel to enable us to expand our resort footprint and pursue M&A activities, including the acquisitions of ILG and Welk Resorts, while simultaneously returning excess cash to shareholders. We've built an incredible team of talented associates throughout the world; I’m sincerely appreciative of their dedication and contributions to our success. I'm equally grateful for the millions of loyal owners, members and guests who have put their trust in us to deliver remarkable vacation experiences time and time again to help fuel this growth. And there's much more to come, including new products and new digital tools to delight our existing customers while also attracting new ones. I've been with Marriott Vacations for 25 years. I can honestly say that our best days are still ahead of us. Before I turn the call over to John, I'd like to share what I think are some of the highlights of the quarter. Starting with our vacation ownership business. Occupancies in our North American resorts were very strong during the quarter, despite softness in a few markets due to the Delta variant and the fires in the Lake Tahoe Basin. For example, we ran nearly 95% occupancy in Hawaii for the quarter, so when the government asked travelers to stay away for a few months, we did see occupancy soften a few points late in the quarter. In Orlando, another large market for us, occupancy dipped during August and September due to the variant, while occupancies at our Florida beach resorts were well above 2019 levels, illustrating travelers' desire to get back on vacation. Our urban locations continued to improve nicely during the quarter, with San Diego running over 85% occupancy and Boston running nearly 95%. Encouragingly, we saw a nice sequential improvement in our European locations as the quarter progressed. With the strong domestic occupancy, we delivered $380 million in contract sales which was within 3% of 2019 levels. First-time buyers represented more than 30% of contract sales, improving sequentially from the second quarter. This is important for the health of the system as first-time buyers have historically doubled their revenue contribution within the first five years of ownership. With the products we sell resonating with customers now more than ever, VPG excluding Welk was almost $4,500, nearing 30% higher than the third quarter of 2019 with both first-time buyer and owner VPG up double digits. Moving to our exchange and third-party management business. Interval signed a contract with El Cid Resorts, a leading all-inclusive developer in Mexico. This resort group will transition its members to Interval on January 1, leveraging our technology to ensure a seamless customer experience. And with the acquisition of Welk Resorts earlier this year, we are now working to transition Welk owners to Interval effective January 1, one year earlier than originally planned. This will not only add new members to the Interval network, but also highly desirable inventory in key leisure destinations such as San Diego, Los Cabos, Breckenridge and Lake Tahoe. In total these agreements will bring nearly 50,000 new members through the Interval system beginning on January 1. Company-wide, we also continue to make good progress on our technology initiatives to drive growth and expand margins. For example, our Vacation Ownership business recently launched new digital reservation technology which we expect to increase our marketing efficiency and improve customer service. Interval is continuing to work to significantly expand its addressable market beyond timeshare and we look forward to sharing our progress on this initiative next year. We're making good progress linking our Marriott, Westin and Sheraton brands into a single point-based product, greatly improving owner access across our Marriott-branded portfolio products in the first half of next year. So let's talk about the balance of the year. We continue to be very encouraged with the improvement of our business. Occupancies remain very strong in October, with particularly strong performance in beach and resort properties. The integration of Welk into our vacation ownership business continues to go well and we're working diligently to transition Welk owners to Interval, a year earlier than originally planned. We sold more tour packages in the third quarter than we did in the second, ending September with more than 214,000 tours in our package pipeline. With the strong ramp-up of package sales this year, we ended the quarter roughly in line with 2019 despite curtailing most marketing activities for much of last year. Owner and preview reservations for the first half of next year are up 10% compared to the same time in 2019. In a recent survey, 71% of our owners stated that they are likely to travel within the next three months with 90% likely to travel in the next 12 months. With the change in government restrictions, our Cancun and Cabo resorts are once again allowed to operate at full capacity and Hawaii's Governor is once again welcoming vacationers to the islands. We're looking forward to welcoming our international guests back to our U.S. resorts now that the restrictions have been relaxed. All of this puts us in a position to close the year on a high note and sets us up for a strong 2022. With that I'll turn the call over to John.

Thanks Steve and good morning everyone. But before I start, I want to congratulate Tony for his recent promotion. I've had the pleasure of working closely with Tony since I joined Marriott Vacations nearly 13 years ago and I couldn't be happier for him. Today, I'm going to review our third quarter results, highlight the continued strong recovery across our businesses and discuss the strength of our balance sheet and liquidity position, as well as our expectations for the fourth quarter. Starting with our Vacation Ownership business. The value of our leisure-focused business model was evident again this quarter. Despite the Delta variant, occupancies continued to hold strong in the quarter with owner occupancies above 2019 levels, though this was partially offset by some softness in transient and preview bookings. As a result, we grew contract sales by 5% sequentially in the third quarter to $380 million which was almost back to 2019 levels. VPG was largely unchanged compared to the second quarter and remained well above pre-pandemic levels, illustrating how well our product continues to resonate with customers as well as the benefits of our channel optimization initiatives. Adjusted development profit increased 19% sequentially to $98 million. Adjusted development profit margin expanded sequentially by 335 basis points to 30%, the highest margin in our 10 years since becoming a public company, highlighting the benefits of more efficient marketing and sales spending, lower inventory costs and synergy savings. Turning to our rental business, as I mentioned last quarter, in order to get more of our owners back on vacation, we decided early in the pandemic to allocate more of our rental keys to owners as demand recovered. This did impact our transient keys rented during the third quarter, but with average revenue per key increasing 9% sequentially, rental revenues increased 11% and profit grew 73%. The stickier revenue businesses within our vacation ownership segment also performed well in the quarter. Resort management revenue increased 2% compared to the second quarter and margin was approximately 56%, and financing profit increased 16% from the prior year due to the inclusion of Welk. With our contract sales growing 5% sequentially in the third quarter, and financing propensity improving to 60%, our notes receivable balance increased sequentially. Based on these trends and the acquisition of Welk, we expect our 2022 financing profit to be well above 2019 levels. Our portfolio also continues to perform well with delinquency and default activity in line with or even below pre-pandemic levels for each of our brands, and we expect to complete our next securitization this quarter with terms remaining very favorable. Turning to the acquisition of Welk, while we're not providing detailed results for the Welk business given its relative size, our vacation ownership results did include $30 million of contract sales and $18 million of adjusted EBITDA better than we anticipated. As a result, total adjusted EBITDA in our vacation ownership segment increased 18% sequentially to $215 million. The quarter benefited from strong growth in development and rental profit and the impact of our business transformation initiatives, enabling us to deliver margins that were nearly 360 basis points higher than two years ago. Turning to the exchange and third-party management segment, active members at Interval declined slightly on a sequential basis, and average revenue per member declined 7% due to lower exchange volumes, which I mentioned last quarter. As a result, adjusted EBITDA at our exchange and third-party management segment declined $2 million sequentially. However, margins expanded by 70 basis points on cost-saving initiatives. I'm also very excited about all the new resort affiliations Steve talked about, which will bring nearly 50,000 new Interval members to the system by early next year. Finally, corporate G&A expense declined 20% sequentially in the third quarter, primarily related to lower bonus expense. As a result, total company adjusted EBITDA increased 25% in the quarter on a sequential basis to $205 million and margin improved to over 27%, more than 300 basis points above the third quarter of 2019, demonstrating the strength of our leisure-focused business model and the benefits of our synergy and transformation initiatives. Moving to our balance sheet, as I mentioned last quarter, we've been preparing to return to a balanced capital allocation approach. So with the recovery in the business, we felt that now was the right time to reduce our corporate debt by the $500 million we borrowed last May at the onset of the pandemic and begin to return cash to shareholders again. In September, we paid off the remaining $250 million of our 6.5% notes due 2026. We followed that in October by repaying $250 million of the 6% and 8% notes we issued last May. With our current corporate debt at $2.5 billion and the strong recovery in the business, we are on track to get back to debt to adjusted EBITDA of three times or less. More importantly, by taking advantage of the favorable rate environment and healthy capital markets, we expect our cash interest expense next year to be around $20 million lower than our 2019 cash interest expense. We ended the quarter with $448 million of cash, gross notes receivable eligible for securitization of $278 million and almost $600 million of available capacity under our revolver. Pro forma for the debt repayment in October, we had $4.1 billion of debt outstanding including $1.6 billion of non-recourse debt related to our securitized notes receivable as well as total liquidity of more than $1 billion. Finally our Board of Directors reinstated our quarterly dividend and authorized the $250 million share repurchase program effective September 10, enabling us to repurchase $4.5 million of our own shares in the last couple of weeks in September. We also paid a dividend in October, our first since before the pandemic. Looking ahead, while we're not giving guidance, I do want to help you think through what the balance of the year could look like. The fourth quarter has started off well with contract sales above 2019 levels, with occupancies at pre-pandemic levels in most of our North American resorts and international travelers now able to visit the United States again. We expect tours to grow sequentially in the fourth quarter while VPGs will remain well above pre-pandemic levels. As a result, we expect contract sales to grow to between $385 million and $405 million in the fourth quarter—just above the fourth quarter 2019 at the midpoint. Similar to prior years, we expect reportability to be positive in the fourth quarter. For those trying to compare our fourth quarter results to the fourth quarter of 2019, remember that reportability that year positively impacted our adjusted EBITDA by $22 million. This year, we only expect the benefit to be in the $10 million to $12 million range. Finally, while we're not providing free cash flow guidance today, with more than $640 million of excess inventory, I would expect our adjusted EBITDA to adjusted free cash flow conversion to be well above our normal 55% range for a number of years enabling us to return to our historic capital allocation strategy. With that we'll be happy to answer your questions. Rob?

Thank you. We will now be conducting a question-and-answer session. Our first question is from the line of Patrick Scholes with Truist. Please proceed with your question.

Good morning, Pat.

Hi, good morning, everyone.

Hey Pat.

Good morning. Speaking of international guests, I'm wondering if you can give us an update on your thoughts on the return of Japanese guests to Hawaii. And also just an update now that you've purchased Welk, what your Hawaii exposure is for your overall company? Thank you. And then I have a follow-up question.

Sure. As the world reopens and travel resumes, that's going to be positive for virtually everywhere. The interesting thing we find in Hawaii is when we're at 95% occupancy, at least in the short-term, there's not a lot of room to be had. So it will take a while for that to adjust, but we're very encouraged by the demand. Regarding Welk, Welk does not have any presence in Hawaii. To be honest, I don't know the exact percentage of Japanese buyers in the Welk system, but I would think it's relatively small, so I don't think that's materially significant.

Okay. I was wondering with the acquisition of Welk having few if any Japanese exposure, what does your Hawaii exposure drop down to now roughly?

Pre-pandemic it was roughly 25% of our total contract sales, Patrick. So it will drop down a couple of percentage points but not meaningfully.

Okay. Thank you. And then Steve, last quarter in the press release, you had noted being able to turn your focus back towards digitally enabled growth initiatives to transform your business, drive long-term growth and improve margins. I wonder if you could just give us a little bit more color on that and how that is progressing. Thank you.

Sure. It's both external and internal. Externally, we've launched a new marketing initiative which allows prospects to not only book a preview vacation package but also book it at a specific location simultaneously. Normally this was a two-step process where we booked the package and then reached out through a call center to find availability. Now people can do both at once based on the availability of where they want to go. We've amped up our paid social media efforts for customer acquisition; these were paused in 2020 because we didn't think they would be money well spent in that environment. On call transfers, we are back on the call transfer program with Marriott and we hope to begin call transfers with Hyatt. Internally, we've implemented a range of initiatives including artificial intelligence, data mining and chatbots across internal systems and customer-facing channels, all aimed at moving to more self-service for our owners and associates so they don't need intermediaries to get information or perform activities. We're very encouraged by where we are and we are back on the plan we were on before the pandemic hit.

Okay. Thank you for the update.

Thank you.

Thanks, Patrick.

Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Hi, good morning everyone.

Good morning.

Good to talk to you. Can we just talk about the capital allocation initiatives that you discussed here. Number one, the share repurchase is a very positive gesture; if you could shed any light around sort of the size of it and the degree to which we might expect that it would be kind of an ongoing part of it? And just put all that in the context that there might be other acquisitions that we should sort of keep our thoughts on that would be in the mix as well?

Sure. At a high level we're always focused on getting our leverage back into that less than three times range—two and a half to three times. That's where we were when we acquired ILG, and that gives us flexibility if we wanted to do an acquisition. David, there aren't a lot of large upper-upscale acquisition opportunities out there in terms of dollar amount, but it's something we'll continue to look at given the success we've had with ILG, Vistana and recently Welk. We would first look at unbranded acquisitions that we can rebrand and leverage across our platforms to drive synergies. After that, the Board's initial repurchase authorization was $250 million. We're going to look to return excess capital through a balance of dividends and repurchasing shares. Given our cash flow setup and the inventory on our balance sheet, we expect to have a disproportionate amount of excess cash flow, so there's a lot of opportunity to return capital to shareholders unless we find acquisition opportunities that make sense.

David, I would just add that once we get to the point where we've worked through the near-term priorities, I would assume our Board would consider further authorization to continue repurchasing shares. All within the context of balancing paying the dividend, repurchasing shares and getting our debt-to-EBITDA ratio to three and below.

Understood. And John you touched on the follow-up that I had in mind, which is I think you mentioned that the cash conversion from EBITDA would be well above the 55% normal. Any further perspective on how high is high, and how long is a 'number of years'? Would that be more than two? Is this more in the three-to-four year timeframe?

Historically, we've bought back inventory on the secondary market at about $100 million a year when doing roughly $1.5 billion to $1.6 billion in sales at about a 20% product cost. The delta between the product costs coming off our books and the roughly $100 million we're buying back is the opportunity. We're always going to look to add new flags and do so capital-efficiently, which means some of the deals will be structured so we build with a third party and take inventory down three to four years out when we need it. So it's not a straight line. I would say over a three-to-four year period you could see $600 million plus, but it won't necessarily be $150 million every single year—some years will be better, some years a little less.

Awesome, awesome. Thank you very much.

Thank you.

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey, good morning guys, and congratulations to Tony. I was hoping you could talk a little bit about international inbound to the U.S. in terms of their level of profitability or how much of a contribution they make to contract sales. Just get a little bit of color on the profile of that international visitor? Thanks.

Pre-COVID, international contract sales were about 12% of our total. The breakdown was roughly five percentage points from inbound travel to North America—from Asia, Latin America and some of Europe—and about seven percentage points were contract sales that originated in-region through our sales centers in Asia Pacific and Europe. I would expect the recovery to be somewhat uneven: Latin America may come back faster than Europe, and Europe faster than Asia Pacific excluding Japan. Japan, once open, typically travels a lot, so you could see more from Japan over time, but the recovery will be a bit herky-jerky. Also keep in mind our North American occupancies are strong, so available inventory to absorb inbound travel is limited in the short term.

Okay. Thanks, very helpful. And follow-up on labor: we're hearing a lot across the hospitality space about rising labor costs and availability. Are you seeing any challenges on the labor front—availability or cost pressure—outside of the commission structure?

We are not insulated from industry challenges. Hospitality had about 1.6 million open jobs at last count. We see this particularly in our resort operations where filling positions can be a struggle at times and to a slightly lesser degree in sales and marketing. We're about 85% of our typical pre-COVID sales executive staffing. Tour parties are down because we've moved away from OPC activities and linkage, so next year linkage could be roughly half of what it was in 2019. Wage rates are up and there are cost pressures. In resort operations, those costs are passed to owners through maintenance fees. Some resorts have excess capacity from lower-cost operating periods in 2020, which helps absorb the impact for a while. On the sales and marketing side, we work to cover costs dollar for dollar and find efficiencies to offset wage increases. It's not an ideal situation, but we're working through it. The good news is our owner satisfaction levels are high and have been improving month over month.

Okay. Super helpful. Appreciate all the details. Thanks guys.

Thank you.

Thanks.

The next question is from the line of Brandt Montour with JPMorgan. Please proceed with your question.

Hey, good morning everybody. Thanks for taking my questions.

Good morning.

Good morning.

So just quickly—and I apologize if you said this—but would you have been above 3Q 2019 EBITDA this quarter excluding Welk? Was Welk included in the reported results?

Yes. If you exclude the $18 million from Welk, we would have been maybe $2 million to $3 million below 2019. Essentially, just a couple of million below.

Got it. And then, Steve or John, any updated thoughts on VPG into next year? I know you're not going to give guidance, but qualitatively, how do you see the drivers of VPG evolving and whether it will settle longer term above 2019 levels?

I actually think VPG will remain above 2019 levels, particularly in 2022. That said, holding a 30% increase compared to 2019 may be difficult to sustain. As the percentage of first-time buyers increases—which we expect in 2022—average VPG can come down because first-time buyers typically purchase at a lower VPG than repeat owners. Also, we've strategically stepped away from OPC tours (except in Hawaii), and lengthy tours, which tend to have lower VPGs, will probably be about 50% of 2019 levels. So I would expect VPG to moderate somewhat next year and over the next several years, but remain very strong versus pre-pandemic levels. I don't expect us to return to 2019 VPG levels in the foreseeable future.

Excellent. Thanks again.

Thank you.

We've reached the end of the question-and-answer session. I'll turn the call over to Steve Weisz for closing remarks.

Thank you, Rob and thank you everyone for joining our call today. Despite the Delta variant, we delivered another strong quarter validating the resiliency of our leisure-focused business model. Contract sales in the third quarter were nearly back to pre-pandemic levels. New owners are coming into the system and VPG is holding well above 2019 levels, enabling us to deliver our highest adjusted EBITDA margin since we became a stand-alone public company. Our exchange and third-party management segment, Interval, signed a number of new customers including El Cid Resorts that in total will add nearly 50,000 new members in 2022. We're investing in technology initiatives to drive growth and expand margins, while also deleveraging the balance sheet in the past few months. Our Board of Directors authorized a new share repurchase program and reinstated our quarterly dividend, enabling us to again return excess cash to shareholders. It's been an amazing ten years with new businesses, brands, customers and associates all contributing to today's milestone, and yet I believe our best days are still in front of us. In fact, if the past 18 months have proven anything, it's that people always want to go on vacation and that's the only business we're in. As always, thank you for your interest. Take care of yourselves, and to everyone on the call and your families, stay safe and enjoy your next vacation. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.