Greetings and welcome to the Marriott Vacations Worldwide Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations from Marriott Vacations Worldwide. Thank you. You may begin.

Thank you, and welcome to the Marriott Vacations Worldwide fourth quarter 2023 earnings call. I'm joined today by John Geller, President and Chief Executive Officer, and Jason Marino, our Executive Vice President and Chief Financial Officer. I 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 last night, as well as 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 reference to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures in the schedules attached to our press release, as well as on the Investor Relations page of our website. Before I turn the call over to John, I want to highlight that our four vacation ownership resorts in West Maui experienced the negative impact of the wildfires on our results in the third and fourth quarter, despite having no physical damage to our properties. We added a table to our earnings release to illustrate the impact the wildfires have had on our business. In addition, during last year's third quarter, with the launch of Abound by Marriott Vacations, we aligned the contract terms of vacation ownership sales across our Marriott, Westin, and Sheraton brands. We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands. These changes, which we refer to as the alignment, resulted in a non-recurring benefit of $7 million to last year's fourth quarter adjusted EBITDA. The schedules we provided in last night illustrate what our results would have been in the prior year without this benefit. With that, it's now my pleasure to turn the call over to our CEO, John Geller.

Thanks, Neal, and good morning, everyone, and thank you for joining our fourth quarter earnings call. As you saw in our press release last night, we ended the year on a positive note, with contract sales increasing 4% year-over-year when adjusting for the estimated impact of Maui. We're also very encouraged by how fast travelers have returned to Maui, with occupancy during the month of December approaching the prior year. Housing in Maui continues to be a challenge for residents, including many of our associates. Fortunately, our operations team was close to fully staffed as we entered the New Year, though only approximately 75% of our sales organization was back to pre-fire levels. Throughout last year, we worked with owners to educate them about the benefits of the Abound by Marriott Vacations program, while at the same time, our sales executives gained experience selling under Abound. Today, more legacy Sheraton and Westin owners are using the Abound program, enabling them to experience its many benefits. VPG, excluding the estimated impact of the Maui fires, was in line with the prior year, which is a meaningful improvement compared to where we were just a few quarters ago. At this point, the impact of the Abound transition is behind us. 2023 was also an exciting year for our Hyatt business. We brought our 22 Hyatt resorts together under the Hyatt Vacation Club brand, unified our customer touchpoints, and introduced the BEYOND program, which provides owners with more vacation options. We also expanded our highly successful preview booking engine and will continue to replace inefficient off-premise marketing channels with more efficient branded channels. This will enable us to grow towards increasing VPG in our Hyatt Vacation Ownership business this year, allowing us to better leverage our marketing and sales spending. First-time buyers represented roughly half of our tours last year and nearly one-third of our contract sales, as we continued to focus on driving new owner growth. We also ended the year with more than 250,000 packages in our pipeline, which is a crucial driver of future sales. We saw strong growth in our international business last year, with contract sales growing more than 50%, and we expect strong growth in Asia Pacific again this year as the market continues to recover. On the development front, we announced two new domestic Westin Vacation Club projects, Charleston and Savannah, each of which will bring a new sales center when they open in a few years. We'll also be opening our first Marriott Vacation Club Resort in Waikiki during the second half of this year, which comes with a new sales center as well. On the international front, I'm happy to announce that we recently signed an agreement for a 58-unit expansion at one of our existing Marriott Vacation Clubs in Bali, bringing our presence in that destination to nearly 200 units. Our team is actively working on other new development opportunities to grow our resort portfolio. In our Exchange and Third-Party Management segment, Interval ended the year with approximately 1.6 million active members, in line with the prior year, while average revenue per member increased year-over-year for the third quarter in a row. On the inventory front, we've been working closely with our developer partners to stimulate supply earlier in the year, which we hope will drive higher inventory utilization and exchange transactions. Despite the growth in leisure travel over the past few years, 92% of Americans recently surveyed said they plan to travel as much or more this year as they did last year, and the demand for international travel continues to be strong. While demand for domestic travel has normalized, it does appear that travel will benefit from a more lasting shift in spending, with consumers prioritizing experiences. As a company whose sole focus is providing memorable vacations for our owners and guests, that puts us in a great position to grow. At the same time, GDP is growing, consumer confidence remains positive, wealth indicators such as the stock market and home values are robust, and inflation is normalizing, all of which is good for us. Looking ahead, we've got a great business with the exclusive rights to use the Marriott, Sheraton, Westin, and Hyatt brands in our Vacation Ownership business, with products that resonate with customers and opportunities to continue to evolve our core offerings to meet the needs of today's consumer. We also made significant changes in our business last year that are the right strategic decisions to help position us for growth. We took actions to realign our organization to best deliver long-term results, including hiring a new CIO to drive our IT transformation efforts while revamping our organizational structure to create efficiencies. We also welcomed our first Global Head of Data Analytics to help us find new ways to unlock the power of data while also providing more self-service options for our owners. Our Marriott Vacation Club brand will celebrate its 40th anniversary this year and continues the bold vision to change the way people vacation. I've had the opportunity to meet many of our associates around the world in my first year as CEO, and the energy and passion our teams bring to delivering consistently exceptional vacation experiences is apparent in each of them. As we enter 2024, we're watching our summer bookings closely given the change in travel patterns we saw last year. Right now, our keys on the books for the summer months, both in North America and internationally, are up a few points, which is encouraging, but it's still early days. With that, I'll turn the call over to Jason to discuss our results.

Thanks, John. Today, I'm going to review our fourth quarter results, the strength of our balance sheet and liquidity, and our 2024 outlook. Starting with our Vacation Ownership segment, contract sales in the fourth quarter declined 2% year-over-year, but increased 4% excluding Maui. VPG was down 2% year-over-year but was unchanged when adjusting for the estimated Maui impact, illustrating the substantial improvement we've made since the second quarter. Adjusted development margin increased 160 basis points year-over-year to 33%, driven by lower product costs. As we've mentioned in the past, one of the benefits of the alignment is that we do not expect to have the kind of quarter-to-quarter reportability impacts that we used to have. While we reported a $20 million net reportability benefit in our development profit in last year's fourth quarter, it was only a $1 million adjustment this quarter. As expected, sales reserve as a percent of contract sales increased due to the higher financing propensity and slightly higher reserve on originations as a result of the default trends we've been experiencing over the last several quarters. Delinquency and defaults were each up around 60 basis points on a year-over-year basis, largely consistent with what we saw in the third quarter, and we believe our reserve is currently at appropriate levels. Reviewing the rest of our vacation ownership segment, rental profit was largely unchanged compared to the prior year, with more keys rented being partially offset by increased unsold inventory expense. Financing profit was largely unchanged, with higher interest income offset by higher interest expense, and resort management profit increased driven by higher management fees. Adjusting for the Maui impact and last year's alignment benefit, adjusted EBITDA in our vacation ownership segment would have increased 3% year-over-year. Moving to our exchange and third-party management business, higher revenue per member was offset by fewer member exchanges and lower getaway volume. As a result, adjusted EBITDA was $31 million in the quarter, while adjusted EBITDA margin was again strong at 52%. Corporate G&A costs increased $22 million year-over-year due to higher wages from inflation, costs of transitioning IT service providers, and incremental IT project spending to drive our digital and data initiatives. Finally, total company adjusted EBITDA would have declined 10% year-over-year in the fourth quarter, adjusting for Maui and the prior year alignment benefit, largely driven by those higher G&A costs. Moving to the balance sheet, we ended the quarter with more than $900 million in liquidity. We repurchased $38 million of common stock in the quarter and $286 million for the year, or 6% of our shares outstanding. We also paid $106 million in dividends last year, bringing our total cash return to shareholders to nearly $400 million. We ended the year with net debt to adjusted EBITDA of 3.7 times, above our long-term target of 2.5 to 3 times. Given our current leverage, we think it is prudent to repay corporate debt while also returning cash to shareholders in the form of dividends and buybacks. We are targeting to get back to three times debt to adjusted EBITDA by the end of 2025. Moving on to our 2024 guidance, as you saw in our release last night, we expect our adjusted EBITDA to be between $760 million and $800 million this year. With the Abound transition behind us, growth in international contract sales, and a strong package pipeline, we expect both VPG and tours to grow year-over-year. While Maui occupancy has recovered nicely, rebuilding our sales force is going to take more time, and we only expect to recoup a small portion of Maui's lost sales this year, making 2024 a rebuilding year for the Maui market. Because of the timing of the wildfires last year, we will have a more difficult comparison in the first half this year, though we will have an easier comparison in the second half. Even before Maui, we had a difficult VPG comp in the first quarter due to last year's strong start of the year. So I would expect sales to be flattish in Q1 but to grow 6% to 9% for the year. We also expect development profit to increase driven by the higher contract sales. We expect development margin to be down a couple of hundred basis points in the first quarter due to the Maui impact and higher costs, including the higher sales reserve on new note originations, which I mentioned on our last call. As a result, we expect development margin to be down slightly for the year. Financing revenue is expected to increase this year, but financing profit is expected to be down due to the continued resetting of borrowing costs in the ABS market. Rental profit will be impacted by higher inventory expense, both of which we mentioned on our last call. In our exchange and third-party management business, we expect Interval members to remain relatively flat and for average revenue per member to increase slightly. Finally, we expect G&A expense to increase year-over-year due primarily to the return of variable compensation expense. Moving to cash flow, we expect our adjusted free cash flow conversion to be in the 55% range this year and adjusted free cash flow to be $400 million to $450 million. This is after our plans to spend $65 million to $85 million in non-inventory capital expenditures for IT investments and upgrades to existing sales centers, with roughly $65 million related to our new Waikiki project, which we expect to open later this year. We also ended the year with roughly $1 billion of inventory on the balance sheet, enough to support around $4 billion of future sales. Looking back, we delivered nearly $1.8 billion in contract sales in 2023, and although things didn't go quite as well as expected, we ended the year on a positive note. Looking forward, we have a great business model with attractive margins and global growth opportunities. We also generate substantial free cash flow. As always, we appreciate your interest in Marriott Vacations Worldwide, and we'll be happy to answer your questions now.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Brandt Montour with Barclays. Please proceed with your question.

Hey everybody. Thanks for taking my question.

Hey Brandt.

Hey. So starting out on Abound, it's good to hear that you guys think you're through that. Maybe you could just help us understand the sort of outlook for Abound in the nature of the rollout you have from here, because I think we were under the impression that there were still sales centers that hadn't started selling Abound based on the residual supply of Sheraton Flex product. Just I guess the idea.

Yeah. Great question Brandt. From the standpoint of the Abound transition, really, other than the Sheraton sales centers here in Orlando, everybody has transitioned to it. We still have inventory left in the Sheraton Flex product that we need to continue to sell out so we can get to our one trust concept going forward. But keep in mind, all of our legacy products never go away. To the extent we take back some Westin or Sheraton, we'll continue to recycle that, and we'll have that inventory available for people that might not be interested in the Abound program for various reasons, such as they bought the legacy Westin Flex and they want more of that. So I think we've got the right balance. For the Sheraton sales centers, that have transitioned, they didn't really show a lot of impact. We did see that a little bit more in some of the Westin sales centers that transitioned. But the good news is, we've got the VPGs. As you can tell in the year-over-year numbers, we were essentially flat in terms of the VPG. So that gives you a sense from just the whole system. We're seeing good stability and positioning ourselves for some growth here on VPG going forward.

Thank you for that, John. Regarding the rental business, it seems you’re indicating that profitability will decline this year. Could you provide some insight? When we examine the rental business from 2019 to 2022, there was a solid recovery in profitability. However, 2023 appears to have regressed significantly, even falling below 2021 in terms of profitability recovery. It seems that 2024 may be even worse. Can you clarify what is happening in that business from a long-term perspective?

We expect rental profits for 2024 to be slightly lower than what we experienced in 2023. We're working hard to achieve growth this year, but that will largely depend on occupancy demand in North America. From 2022 to 2023, we observed that our higher-end markets, including places like Hawaii and Florida Beach, did not perform as we had anticipated. Many of our premium customers chose to travel to Europe last year, which impacted rental rates and resulted in lower occupancies in those areas. Our performance was consistent with industry reports, indicating a similar trend among other resorts. This year, we face higher maintenance fees on our unsold inventory, and as we look at 2024, we see that total bookings both in North America and internationally are slightly better than this time last year. While this is a positive sign, the results will depend on the performance of these higher-end markets and whether summer demand continues to improve. Additionally, we are focusing on increasing our contract sales and packages; we currently have over 250,000 packages booked. As we promote these packages, we use rental inventory to support their growth. We've successfully utilized various marketing channels for package sales, resulting in a strategic shift in recent years toward using our rental keys to enhance contract sales, which we believe is beneficial for the company's long-term growth.

Great. Thank you.

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

Hey, good morning, guys. Can you talk a little bit about finance propensity and whether you're seeing any changes there in response to where rates are or just the fact that maybe folks have a little less cash in the bank or in their pockets? Any change there that you're picking up on?

Yeah, Chris, we're not seeing a whole lot in terms of the propensity that we saw throughout the course of last year. It's a little bit higher than it was in 2022, but we've been running in that call it mid-50s, high-50s propensity here for a few quarters. We don't really see too many changes coming due to the environment out there as of now.

Thanks, Jason. As a follow-up, John, you mentioned that maintenance fees are somewhat of a challenge with the unsold inventory. Do you have any insights on that moving forward? I understand that property insurance and taxes, particularly in Florida, can play a role. Is there any visibility you can share? Also, is there any concern that those maintenance fees might become a tipping point for customers, particularly regarding the owned inventory?

To start with your last question, I guess it could. Let me give you a little perspective. If you're a first-time buyer, you come in and buy our product, the average first-time buyer buys about $30,000 worth of product. Their maintenance fee this year would be $1,350. While the percentage increase is big, Chris, we're working to get it back down to the mid- to low single digits like we've seen. Even with the higher increases we've seen, if you look from 2019 to 2024, the compounded annual average increase is in that 4% or 5%, right? You hit on some of the things like property taxes and higher insurance. Labor is your biggest cost, and it's a little different than some of our competitors. If you look at the markets we're in, we've got 12 resorts in Hawaii, right? We've got eight in Hilton Head. In those markets coming out of COVID, we saw wage increases. We've seen that stabilize, so that's a good factor going forward. While inflation is not back to where the Fed wants it, there is moderation. We're already looking at maintenance fees for next year or looking for ways to offset increases we've seen and get that back to what we've seen on a more historic level in terms of inflationary increases in maintenance fees.

Okay. Very helpful. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Hi. Good morning, everyone.

Good morning.

A couple of questions here. Can you quantify what you think the lingering EBITDA hit in Hawaii is for this year? That's my first question.

Sure. That's a complex question. We've noted that occupancies in Maui are nearly back to our target; historically, we were operating at around 95% to 96% year-round, and in January, we reached 92%. The outlook is promising as we're close to our goal. It's essential to consider Maui's recovery in terms of contract sales and our progress in that area. Regarding EBITDA, our business is dynamic; increased unsold maintenance fees will affect rentals in Hawaii this year, which wasn't an issue last year. Currently, our rental occupancy is still slightly below last year, so we need to focus on boosting transient rental occupancy in Maui. As Jason pointed out, we face more challenging comparison figures, but we expect to see growth in contract sales as we have in previous periods.

Okay. Thank you. And just two more questions here. When you think about potential for stock buybacks given your guidance for free cash flow, you also brought out some $65 million to $80 million of CapEx paid a dividend. Ballpark $50 million a quarter barring any surprises or additional CapEx. Is that a fair way to think about it?

As Jason mentioned, due to our lower EBITDA, our leverage has increased slightly. We aim to maintain a leverage ratio between 2.5x and 3x, but we are currently over 3x. I won't commit to returning all of that capital today. Instead, we will assess our options, which may include reducing some debt while also returning capital to shareholders. Our objective is to reach that 3x leverage through a mix of EBITDA growth and debt repayment. The positive aspect is that we anticipate growth in free cash flow next year, allowing us to pay down debt while also continuing to return capital to shareholders, which we believe is the right approach.

Okay. Thank you for that information.

Yes. In our prepared remarks, we talked a little about what drove the $20 million increase year-over-year. We had some more onetime transition costs moving our IT service providers. We had some timing with incremental project expenses, and we did see some wage increases year-over-year. That was really the bulk of it. Some of that is not a good run rate number going forward, so I would look more toward the guidance in terms of G&A. We're going to see a little bit higher G&A next year due to the return of variable compensation, and that's the way I would think about it. I wouldn't look to Q4 as a run rate.

Okay. Thank you.

Thank you. Our next question comes from the line of Ryan Lambert with JPMorgan. Please proceed with your question.

Hi. Thanks for taking my question. Just going back to the IT spend real quick. You talked about how some of that was related to transitioning providers, and some was more investment related. Can you talk about what kind of enhancements that spend is driving? And then after that I have a follow-up. Thanks.

Yes. As we've been talking about modernizing our operating platforms, that's a lot of the continuation that you see in terms of the spending that we did in Q4. A fair amount of this is still foundational, but it's all in an effort to really enhance the self-service and our data analytic capabilities. So self-service for both the associates and the owners in terms of bookings and searching and things like that. That's really where the bulk of our spending was in Q4 from a project standpoint.

Thanks. Last quarter, you called out a bit of a difference between the higher-end and lower-end customer spending patterns. Has this gap kind of changed at all while they are contracted in any meaningful way?

No. I don't think we're seeing changes in our FICO scores and where the loans are coming from. Our marketing targets customer demographics in terms of household income and people that can afford our price points. When people show up at our sales centers, they are usually well-qualified, which is why we've always had a 720, 730 FICO score. I am not aware of any shifts; things have been pretty consistent over the years.

When you look at our average transaction size across the board, they increased slightly over the years mostly due to the pricing increases that we've implemented fairly consistently. So the average transaction size doesn't really change too much for us as we look forward.

Thanks.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Hi, good morning, everyone. Thank you for taking my questions. I wanted to revisit the main factors driving the contract sales. I apologize for missing part of this during the prepared remarks, but you mentioned the expected breakdown between tour flow and VPG to reach the 6% to 9%. Could you elaborate on that? Specifically, there seem to be some challenging comparisons in Q1, which I believe you touched on, and possibly in the first half, indicating that we should anticipate significant acceleration in the second half. Should we expect more of this in tour flow, especially around Maui in the latter half? How should VPG factor into this as well? Are we likely to see some positive impact from Hawaii reemerging in the second half?

Yes. You didn't miss anything. We didn't guide any around VPG and tour growth. I will say high level, we expect to get growth in both, right? That's the plan. Generally, we should get some higher tour growth than VPG if you think about it that way. As you hit on and Jason mentioned, you have a tougher comp in the beginning of the year due to the Maui impact. Looking back, the first quarter last year our contract sales were up 10% over 2022. A lot of moving parts there; international contract sales grew 50% last year, though that's only 10% of our business. Asia is still recovering as COVID comes to an end. We expect stronger growth that will be driven by tour flow. As we mentioned, there will be a mix benefits as Maui continues to recover; second half growth should be easier due to last year's comparisons.

And my second question would just be, are there any constraints on the tour flow side that are company-specific? The reason I ask is we see peers growing tour flow at a low double-digit rate. VAC has been in the low single digits; so to accelerate that, are there constraints or challenges?

Our tours mainly come from our owners who stay at our resorts. To encourage these owners to purchase more, we need new developments to discuss, appealing offerings like Abound, and chances for them to explore new resorts. Rentals also play a vital role in our business, as those renting our products can be prospective tour participants. We are continually examining our capture rate and enhancing our in-house efforts by utilizing packages to boost our tour flow and maximizing our marketing channels. Our strategy is centered on securing the appropriate tours to ultimately drive our VPG. Although our tour growth isn't reaching double digits, our VPG has remained relatively stable. Enhancing our technology and sales team will lead to better efficiencies.

Thank you very much.

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

Hi, good morning everyone. Thanks for taking my question. I wanted to revisit the details you've provided about the outlook. Specifically, I would like to explore more about the statement regarding the Abound conversion being behind us. Are there particular data points or specifics that support this?

Sure. VPG is always the best data point, David. When you look at what VPG was down in the second quarter, as we were transitioning to Abound leading up to it, there was a clear impact on sales as our teams adjusted and learned the program. Fast forward to today, VPGs are essentially flat compared to the prior year, which showcases that the transition impact is indeed behind us. All our sales centers now operate under Abound, driving strong year-over-year sales.

Perfect. The VPG is the focus. With respect to the IT and analytics investments, can you just color that in a bit more as to sort of what you're getting and why now? And is that something that continues beyond 2024 as well? Or is this more of a onetime focused investment?

Sure. Let's take a step back; we're going to continue to enhance our IT capabilities, not just data and analytics. We've been in business for 40 years with many legacy systems. The goal is to modernize our technology platforms, enhancing efficiencies and leveraging data, which is a huge opportunity to drive growth. We’re focused on enhancing self-service capabilities for owners. Investments in technology will continue over the coming years as we modernize our operations; it’s an ongoing journey.

Got it. Thank you very much.

Thank you everyone for joining our call today. After last year's challenges, it was great to end the year on a strong note. Contract sales grew 4% year-over-year, excluding the impact of the Maui wildfires. International contract sales grew 36%, year-over-year, with strong growth seen in both Europe and Asia Pacific, and resort occupancy was nearly 90%, even with the Maui impact illustrating our owners and customers' demand to get on vacation. As we move into a new year, the transition to Abound is behind us, and we look forward to growing contract sales this year, driven by a mix of higher tours and improved VPG. We made significant changes in our Hyatt business that will enable us to drive tours, grow contract sales, and leverage our marketing effectively. Economic indicators remain positive, and our reservations on the books for the summer months are up both domestically and internationally. We have realigned our organization to improve our long-term results, and we are looking forward to opening our first Waikiki resort later this year. On behalf of all our associates, owners, members, and customers around the world, I want to thank you for your continued interest in the company and hope to see you on vacation soon. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.