Greetings, and welcome to the Marriott Vacations Worldwide Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Neal Goldner, Vice President, Investor Relations. Thank you, Neal. You may begin.

Thank you, Paul, and welcome to the Marriott Vacations Worldwide Second Quarter Earnings Conference Call. I am joined today by John Geller, our 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, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release as well as comments on this call are effective only when made. They 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 and the schedules attached to our press release and on our website. With that, it's now my pleasure to turn the call over to John Geller.

Thanks, Neal. Good morning, everyone, and thank you for joining our second-quarter earnings call. We had a mixed second quarter, with rentals exceeding our expectations and lower VPGs negatively impacting our contract sales. In addition, we have not seen the necessary improvement in our loan delinquencies, so we increased our sales reserve to reflect higher expected defaults, which Jason will provide more color on later in the call. So let's start with contract sales. As we look back at the cadence of the quarter, April VPG was soft, but May was in line with the prior year, which gave us confidence for the rest of the quarter. However, June VPG declined on a year-over-year basis, and contract sales declined 1% for the quarter as we were successful in growing tours, offset by a decline in VPG. VPGs for owners were flat in the second quarter compared to last year, reflecting the value owners put on their vacations. We were able to grow first-time buyer tours by 9%, reflecting our strategy to grow new owners, but did see a 12% decline in first-time buyer VPGs. We were able to grow contract sales 3% in the quarter, excluding Maui. This illustrates the quality and location of our upper upscale vacation ownership product, the high premium people put on their vacations or tour growth, and the fact that our owners continue to see long-term value in investing in their future vacations. Given the higher-cost environment consumers have been dealing with over the last few years and the uncertain broader macro picture, we have adjusted certain sales promotions recently to combat the softening in VPGs. Meanwhile, our resort occupancies in the quarter were up more than a point year-over-year, driven by a 4-point improvement in rental occupancies as consumers continue to prioritize spending on experiences. Our rental results also had a very strong quarter, driving higher revenue from more keys rented and lower costs, primarily from higher preview packages to drive contract sales. As a result, rental profit in our VO segment increased more than 60% compared to last year, with margin improving to more than 20%. In our Exchange & Third-Party Management business, Interval International ended the quarter with more than 1.5 million active members, while inventory utilization was in the low 90% range, consistent with last year. As we look forward, we adjusted full year contract sales guidance to reflect our expectations for lower VPGs for the second half of the year. While July VPGs improved from the softness we saw in June, the midpoint of our guidance for the second half of the year reflects VPGs to be down around 7% compared to down 6% in the first half and tours to grow around 12% as we lap Maui, implying a 5% contract sales growth in the second half. Maui continues to recover, though we now expect contract sales to be down roughly $10 million for the full year as the recovery is turning out to be slower than our original expectations. This should still provide us with a 2-point tailwind in contract sales growth in the second half of the year as our sales centers were closed from mid-August until the end of September last year. We also expect to generate higher first-time buyer tours, which carry a lower VPG. We ended the quarter with nearly 270,000 packages, with roughly 30% of those customers having already confirmed to take their vacation in the second half of the year. While we're disappointed with the additional sales reserve we took, we continue to manage the business through the broader macro uncertainty. On one side, consumers appear cautious after two years of inflation, while on the other side, they are still spending on travel and experiences. We're seeing that play out in our resorts, where we ran over 90% occupancy in the second quarter. If we exclude the impacts of the additional sales reserve, the improvement in our rental performance and our other cost management initiatives would have offset most of the impact from the lower contract sales guidance compared to our original full year adjusted EBITDA guidance. We have also been working through our 2025 maintenance fee budgets and expect the average maintenance fee will increase less than 5% for our Points products after two years of significantly higher increases. We believe this will help restore confidence for both recent first-time buyers as well as long-term owners. With that, I'll turn it over to Jason to discuss our results in more detail.

Thanks, John. Today, I'm going to review our second quarter results, our balance sheet and liquidity position, and our outlook for the rest of the year. Starting with our Vacation Ownership segment. Contract sales declined 1% in the quarter on a year-over-year basis with a 5% increase in tourists being offset by VPG, and sales grew 3% year-over-year, excluding Maui. As I mentioned during our last call, we needed the improvements in delinquencies that we saw in March and April to continue, which did not happen. While delinquencies were flat to the first quarter, they were 120 basis points above 2023 levels, driving the need to increase the reserve on the balance sheet by $70 million. Under timeshare accounting rules, we booked a $13 million offset in cost of vacation ownership products, so the net impact to adjusted EBITDA was $57 million. We also expect our sales reserve to be 11% to 12% of contract sales for the balance of the year, several hundred basis points above our historical norms, where I expect we will remain until we see loan performance improve. As John mentioned, we believe lower inflation and a more normalized maintenance fee increase for 2025 will improve our portfolio performance in the future. Development margin declined year-over-year, excluding the increased reserve, due primarily to lower VPGs and higher marketing and sales costs, partially offset by lower product cost. Excluding the increase in our sales reserve, our development margin would have been 27% in the quarter. Rental profit in our Vacation Ownership segment increased $11 million year-over-year, driven by higher rental revenue and $8 million of incremental costs allocated to marketing and sales expenses. Finally, as expected, financing profit declined 10% year-over-year, driven by higher interest expense, partially offset by increased financing revenue, while resort management profit increased 9%. As a result, adjusted EBITDA in our Vacation Ownership segment declined 26% year-over-year. Moving to our Exchange & Third-Party Management segment. Adjusted EBITDA declined $7 million compared to the prior year, driven by lower exchanges in Interval and decreased profit at Aqua Aston due to softness in Maui. As a result, total company adjusted EBITDA declined 29% year-over-year and would have been roughly in line with our expectations and consensus EBITDA for the quarter, excluding the increase in our sales reserve. Moving to the balance sheet. We ended the quarter with net debt to adjusted EBITDA of 4.4 times and $820 million in liquidity. We also have nearly $1 billion of inventory on our balance sheet, including inventory reported in property and equipment, enough to support more than two years of future sales. Moving to guidance. With the first half behind us, we are lowering our full year adjusted EBITDA guidance range to between $685 million and $715 million. We now expect contract sales to grow 1% to 3% for the year, reflecting second quarter results and our updated second half forecast of 3% to 7% growth. We expect second half tours to grow 12% year-over-year at the midpoint, with VPG declining 7%, with 3 points of tour growth expected to come from lapping Maui this month. Asia Pacific, which will benefit from the reopening of our second Bali sales center, is expected to drive another four points of the growth. Our packaged pipeline is expected to drive another 2 to 3 points of tour growth in the second half of the year, while the opening of Waikiki will drive another point. Excluding Maui, we expect year-over-year contract sales growth in the second half of the year to be approximately 3% at the midpoint of our revised guidance range, consistent with our first half performance. We now expect development margin to be around 22% for the year, including a 3-point impact from the additional reserve. Our VO rental business had a very strong first half, and transient keys on the books for the second half are up 4% compared to last year. As a result, we now think rental profit could increase by more than $30 million for the year. We also think resort management profit growth in the second half of the year will be consistent with the first half. In our Exchange & Third-Party Management business, we expect Interval members to be down a few points for the year and average revenue per member to be largely unchanged. As a result, we expect adjusted EBITDA to decline in the $11 million to $13 million range in the second half of the year, with roughly half of that coming from Aqua Aston due to Maui. Finally, G&A is expected to be down $8 million to $10 million year-over-year in the second half driven by our cost savings initiatives. Moving to cash flow. We now estimate that our adjusted free cash flow will be in the $300 million to $340 million range this year, reflecting our updated adjusted EBITDA guidance. Included in this guidance is $10 million of lower inventory spending. Our plan is to deploy our free cash to repay some of our corporate debt as well as return cash to shareholders through dividends and buybacks while our goal remains to get our leverage back to 3 times by the end of 2025. With that, we'll be happy to answer your questions.

Our first question is from Ben Chaiken with Mizuho. Please go ahead with your question.

Hey, good morning, thanks for taking my questions.

Good morning.

You gave us a lot of information on the call, which is super helpful. But stepping back and just simplifying when you updated the guide in June, it implied plus 7% growth excluding Maui in 2Q, and then excluding Maui accelerated to plus 10% in the back half of the year. I think from the guide today, based on our math, and I think you confirmed it, Jason, it implies in the back half plus 3% excluding Maui. So can we just like simply walk through a few of the buckets? What are the biggest factors that help you bridge from the plus 10% that was previously implied in the back half, again, excluding Maui, to the plus 3%, which I think is correct? Thanks.

Yes, Ben. Most of it is just going to be our assumptions around VPG. We, as we talked about on the call, did see some softening in VPG, particularly for first-time buyers. As I mentioned, we are adjusting promotions for owners, but also more importantly, for some of the first-time buyers to try and drive that VPG up in the second half of the year. But until we see improvement, we guided a little bit more conservatively, I'd say, on what we think VPGs are going to do versus our original expectations. So a lot of work is being done. The team is focused on it. But, like many consumer businesses, there are some cautious folks out there on the spending side. The good news for us is that people are prioritizing vacations. We're seeing that in our resort occupancies at over 90%. People are renting, and we're seeing that in our rental business. So that bodes well to offset some of that uncertainty, but we need to get our VPGs going back the right way.

Got you. And I guess that inflection you saw was just in the last couple of weeks of June and then has it continued to get worse...

We had a great May. VPGs were in line with last year on a total basis. And as we talked about, VPG for owners were flat year-over-year, which was great. Owners love the product and prioritize that spend for vacation, where we saw the softness from May to June was more in that first-time buyer segment. At the same time, our strategy is to grow first-time buyers. Tours were up 9% for first-time buyers, but we saw that softening in VPG. Given the broader macro environment, I'm not sure it's a big surprise. The good news is, as of yesterday, we closed July. We don't have all the details, but at a high level, we saw those VPGs improve sequentially. They are still down a bit year-over-year, but not what we saw in June. We already made a few adjustments in the middle of July in some of our owner programs and upgrades, sales, and other initiatives. So that helped in July. As I mentioned, we're rolling out other promotions here more broadly for both owners and first-time buyers. We expect to gain traction with that as we move forward.

Got it. I appreciate it. That’s all for me. Thank you.

Alright. Thanks, Ben.

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

Hi, good morning everyone. Thanks for all the information. If we could maybe go one more layer, could we break down the inbound new buyer target customers? Is there any segmenting we could do where we could point to specific categories or groups or geographies or any further insight on where there's more weakness rather than less?

Sure. Yes. At a high level, David, to your question, locations like Orlando and Myrtle Beach probably have a different customer profile compared to those going to Hawaii or some of our California locations. You're likely seeing a disproportionate impact on first-time buyers coming from consumers in those locations compared to last year. But yes, it's a bit about the consumer mix. We talked about Maui being softer and recovering slower. You are seeing that in terms of visitors. Occupancies for us are back but still softer than pre-wildfire levels. The visitors due to discounting is slightly different and leads to a different type of customer in terms of buying vacation ownership, which we have seen as the recovery continues in Maui. But, yes, location and the consumers traveling to those locations do play a role.

Perfect. Very helpful. And if I could just follow up and ask about the trajectory through the quarter, whether June was worse than May and whether May was worse than April, etcetera, whether there's some acceleration or not?

Yes. April started off a little bit softer than our expectations. Then we saw May doing very well, with flat VPGs as we talked about, and we drove owner and first-time buyer tours. So when we put that outlook for the second quarter at the beginning of June, the trajectory looked good. Then, all of a sudden, we observed some of that softness more on the first-time buyer side, but a little bit even on the owner side, with VPGs declining slightly. As I said earlier, moving into July, we've seen those VPGs recover from where we were in June, still down year-over-year. We have opportunities there. But that’s how we are building into the forecast; we expect them to be a little softer than the first half. As mentioned, we are rolling out some programs and initiatives to drive VPGs higher as we go through the second half.

And so July is slightly better, right?

Yes. July was on an absolute basis. VPGs in July were kind of what we saw overall for the second quarter, maybe a little bit better. There's always some seasonality in things, so you would expect a slight increase. But directionally, it was good to see some of the programs that we rolled out in mid-July. Some of these programs were just getting implemented now, so they might not be fully reflected in what we're seeing in July.

Okay. Sorry for the third question. Appreciate it. Thank you.

Thanks, David.

Our next question is from Patrick Scholes with Truist Securities. Please proceed with your question.

Good morning, everyone. I really want to talk about the charge that you took regarding the bottom line. How can your financial control process rationalize huge loan loss reserve charges in just a few short months? In contrast, we saw $42 million charges during COVID, but the current charge is much higher. How do you rationalize that? Thank you.

Yes. When we took the charge last year, as we discussed, we were experiencing higher delinquencies, which consequently leads to higher defaults. However, we didn’t have as much visibility, which meant we had to make assumptions. Higher delinquencies were coming from sales to people in 2022 and even 2023, who bought when overall costs were lower. In terms of the stress on the consumer, you did see over those couple of years interest rates rise, along with other economic pressures like credit card debt. The expectation was that based on how our notes typically perform, those delinquencies would trend down. We did see that happen in the first quarter. The delinquencies came down and were trending down in April. But as Jason mentioned in his remarks, they have since flattened out. So now, based on higher delinquencies and the lack of improvement we had anticipated when we previously took the charge, we opted to mitigate some of the risks associated with defaults.

Okay. Could I get a little more color on which aspects of the loan loss are specifically driving the charge, particularly what vintage? And more importantly, what vintages are we're talking about - is it Vistana, is it Welk, or is it Legacy Marriott Vacations?

Yes, Patrick, this is Jason. Over the last couple of quarters, it's really across the board in terms of brands as well as FICO. The materiality and the amount depend on brand context as well as varying FICO bands. Our above 700 FICO scores continue to perform well but have seen some minor degradation. As you go down the FICO bands, you can definitely see more stress in the below 700s, and even more pressure in the below 600s. Our current performance relative to our expectations is quite consistent with what we observe in the wider finance sector. The lower the FICO scores, the worse their performance tends to be. The commentary largely revolves around whether it's targeting lower-end consumers. Our performance is relatively in line with what is happening more broadly in the economy.

Okay. Thank you. I’ll hop back in the queue.

Our next question is from Brandt Montour with Barclays. Please proceed with your question.

Good morning, everybody. Thanks for taking my question. So I have a question about the demand side. I'm trying to square John's comments about demand for travel being strong, but it's clear that VPGs for new buyers and close rates are softening. The obvious reason seems to be the consumer rejection or move away from large ticket purchases. Can you clarify if this is more cyclical or is it a post-COVID normalization? Where do we see new buyer close rates now compared to the average throughout the cycle or during its trough? That would probably be helpful just roughly directionally.

Yes. I'm not sure I have the kind of historical close rates to walk you through. We can certainly pull some analysis on it. However, they are clearly lower than what we saw when coming out of COVID in 2022. At the high level, I'd expect they are probably more in line with what we've seen historically. It could be a little lower. But yes, what's happening is some softness with first-time buyers stems from the broader macro environment. People are traveling, but timeshare is a bigger commitment. They haven't had the benefit of product ownership first. The good news is, notwithstanding the pressure on the consumer, owners are continuing to buy, and those closing rates while lower than 2022 have been fairly steady. We'll continue to work through it. That’s where incentives and efforts to improve value propositions to first-time buyers come into play. We're dedicated to that.

Okay. And regarding the consumer loan aspect, we are slightly confused as we observe a secondary charge occurring over three quarters. One of your peers, assumed to have slightly worse consumer profiling hasn’t recorded any charges yet. I know that they reserve a lot higher than you guys do on a run-rate basis. But I want to ensure that I understand if there has been a shift in your lending strategy that has changed the quality of your consumer over time versus prior expectations. Can you provide the percentage of the book that is below $700?

In terms of our targeted consumer and FICO scores, nothing has changed significantly. Looking back historically, we noticed a trend with the acquisitions we made, notably first with ILG and Vistana, with the Sheraton customer who generally holds a lower quality credit profile than customers we have come to expect historically with legacy Marriott. This pattern continued with the acquisition of Welk, whose legacy customers also demonstrate lower credit quality. Although the mix has changed due to the acquisitions, the strategy regarding targeting and underwriting has not shifted in the past few years. It is more about the last couple of years, particularly due to the macroeconomic conditions. As Jason mentioned, credit card delinquencies have peaked in the last 12 to 13 years. Depending on the consumer, we are observing more stress on some segments versus others.

It's also important to remember that the performance being evaluated is relative to our expectations. Our loan reserves remain among the lowest in the industry, and to your last question, 28% of our loan book is below 700 right now, consistent over the last couple of years. So we haven't observed significant changes in that stratification.

Okay. Thanks a lot.

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

Hey, good morning, guys. Thanks for taking the questions. So I have a follow-up question regarding loan loss, but we can put that on hold for now. My primary question revolves around Maui. You guys aren't alone in stating that it's recovering slowly. Some hospitality industry peers hinted that marketing efforts by the government could use a boost. Would you deem that to be a valid assessment? Are you actively collaborating with them to encourage a more substantial effort? It's not a position that historically they've needed to assume, but do you see any signs that they might ramp up their efforts to bring visitors back?

Yes. I would agree that's a fair observation. We continue to work with local governments and would love to see that. However, it’s a balancing act between the returning Maui residents and visitor influx. We plan to keep working on this. We aim to establish Maui as a premier destination again, and we'll continue our collaboration with the local governments.

Okay. Fair enough. Thanks, John. Regarding the follow-up on loan losses, how much data are you collecting from customers? While you capture FICO and other data on the application, are you soliciting any feedback on why they're defaulting? Is it purely financial, maintenance fees, or something else? Are there any considerations prompting you to change the information you collect from applicants? Furthermore, are these individuals simply walking away, or are they utilizing third-party services? Any color on those details would be appreciated. Thanks.

So first off, we haven't seen any evidence that indicates third-party defaults are specifically impacting us at all, which has been consistent over our entire history. It’s important to point out that we do not currently have issues occurring on that front. When it comes to customer feedback regarding defaults, most typically don’t share their reasons. We do ask, and we capture that feedback, and the number one answer we receive is that it’s too expensive. Given the inflation and overall living cost increases over the last two years, that certainly makes sense. The overall cost of living has risen significantly, which may be placing more pressure on consumers in general. However, it's often challenging to make pinpointed assumptions as most defaults do not clearly indicate their reasons.

Okay, fair enough. Thanks, guys. Best of luck.

Thanks, Chris.

Thank you. Our next question is from Shaun Kelley with Bank of America. Please proceed with your questions.

Hi, good morning, everyone. Thanks for taking my questions. I wanted to discuss margins for a moment. Looking back, we noted the shift in focus towards first time and new owners, which we understand is partly causing VPGs to suffer. John, you’ve mentioned several times that incentives are in play to drive tour flow and boost contract sales. Can you clarify the potential impacts of that mix in terms of development margin outlook or broader VOI margin? Should we expect resulting negative impacts there?

You're absolutely right about the first-time buyer mix. As we indicated in the second quarter, our strategy is focused on expanding our first-time buyer base through packaged tours, which are primarily targeting first-time buyers. If that mix increases, it mathematically results in slower or lower VPGs overall. Yes, we have factored this into our guidance for the second half of the year. If the incentives work, there may be some increased costs associated with that, which will negatively impact margins. However, if VPGs increase, some of these costs could become offsetting. As we've discussed, we constantly tweak promotions based on market intricacies we observe. This means the adjustments are often dictated by current trends, especially regarding first-time buyers. We will make the necessary adjustments accordingly, as executing on the VPG side should hopefully counter the margin impacts from higher incentives.

Did I calculate correctly when you said development margin for the quarter would be 26% if adjusted for the sales reserve? Is that correct, and do we expect to see a similar magnitude for the back half, blending all the excess notes together? Is it possible that the figure could end up better or worse than that? I’m trying to grasp the underlying assumptions in the guidance.

Yes. It was 27% for the second quarter, if you add back that charge. We did mention in our prepared remarks that we are expecting about 22% for the year, including a 3-point impact from the additional reserve. So you could say about 25% for the full year.

Okay. 25% for the full year. And just a last one for me, could you compare that to where we were previously?

Yes. Excluding sales reserves, we would average about 25% as a percentage of contract sales going forward, which is slightly higher. We should also note that product costs are coming in lower this year than we had initially anticipated. Hence, we see an uptick on that front in our guidance as well.

Thank you very much.

Thanks.

Thank you. Our next question is from Patrick Scholes with Truist Securities.

I have a number of follow-up questions here. Have you altered anything in your new sales underwriting criteria in the last couple of years? If so, what specifically has changed? Additionally, how does your sales underwriting criteria in your legacy Marriott Vacations product compare to that of Welk? I am trying to really drill down on Welk here. Thank you.

Just to clarify, when you mention sales, are you referring to credit underwriting?

Yes. Yes, credit underwriting for your sales.

Nothing significant has changed in our overall approach. We always review down payment requirements, which might have been tweaked upward in certain locations. Still, there hasn’t been any pervasive changes regarding how we approach underwriting and financing requirements.

Alright, let’s talk a little bit about Welk. How is that deal performing in relation to your acquisition expectations? What trends are you seeing among Welk customers specifically regarding default rates compared to your legacy customers? Thank you.

Yes. From a default rate perspective, we anticipated this when we acquired Welk; their customers had a higher historical default rate. This is reflected in our overall mix in light of the increased defaults across the portfolio. Yet, we still see long-term value in that transaction. There has been great momentum this year in terms of sales performance, but there is still ample opportunity for improvement. We are not fully satisfied with our current position regarding VPGs compared to Hyatt portfolio products. However, there has indeed been substantial progress, and we are committed to gaining even greater traction moving forward.

There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

Great. Thank you, everyone, for joining our call today. As you heard on our call, second quarter results were mixed, with double-digit rental profit growth being offset by lower contract sales. In addition, while Maui is recovering, it's not recovering at the pace we expected. Our new Waikiki resort is slated to open in early October. This will be our first new U.S. resort opening since the pandemic, adding more exciting vacation destinations for our owners and other guests. We also have a number of new resorts planned to open over the next few years, including our new Westin Resorts in Savannah and Charleston, a new Marriott Resort in Thailand, and additional units in Bali. While we're not satisfied with our results, we fundamentally have a strong business that generates free cash flow, with a high percentage of owner sales that reflect the quality of our product offering and a team of dedicated associates who work hard to provide memorable experiences for our owners and guests. On behalf of all our associates, owners, members, and customers around the world, I want to thank you for your continued interest in our company, and I hope to see you on vacation soon.

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