MARRIOTT VACATIONS WORLDWIDE Corp Q3 FY2025 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Marriott Vacations Worldwide Third Quarter 2025 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Neal Goldner, Vice President, Investor Relations for Marriott. Thank you. You may begin.

Thank you, and welcome to the Marriott Vacations Worldwide Third Quarter Earnings 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 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 in 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 third quarter earnings call. As you saw in our release last night, third quarter contract sales declined 4% year-over-year, a couple of points below our expectations. The shortfall relative to our expectations was driven by weakness in Orlando and Maui, two of our largest markets. Excluding those two markets, system-wide contract sales were approximately flat year-over-year. We're not satisfied with these results and have recently implemented meaningful changes that we believe will drive a return to growth. First, we've adjusted our sales and marketing incentive plans to better align with our long-term objectives. Second, we're working to curb third-party commercial rental activity by a small subset of owners, which has depressed owner arrivals at some of our most attractive destinations in recent years. By curbing this practice, we expect to make more inventory available for occupancy by our owners, which should drive higher owner satisfaction and incremental arrivals at our most productive sales centers, benefiting tours and VPG. Third, we have implemented FICO scoring data for marketing purposes, which should result in higher VPGs and improved credit metrics. With respect to our modernization program, we continue to make strong progress towards the $150 million to $200 million in run rate EBITDA benefit by the end of 2026. One of the most impactful steps we've taken thus far occurred in August when we reorganized a portion of our HR and Finance and Accounting functions and transitioned work to third-party providers. This change will save us $20 million in annual costs that will fall to the bottom line going forward. In addition to these three operational changes I've already outlined, we're rolling out additional initiatives we expect to improve VPG as part of the modernization program. For example, we implemented initiatives to drive owner arrivals, offering owners Bonvoy points to arrive at select resorts within a two-month window. This will help us drive incremental owner tours at and above average VPG. Our new owner experience initiative, which helps reduce rescissions and boost our tour pipeline, is creating excitement at the sales table by giving buyers a preplanned vacation to look forward to after their presentation. And with over 270,000 packages in our pipeline at the end of Q3, the impacts of these changes will be realized over the course of the coming year. In the quarter, we also expanded our presence in Asia Pacific with the opening of a new Marriott Vacation Club Resort in Khao Lak, Thailand. We have other resorts and sales centers in development that we expect to contribute more than $80 million of annual contract sales within a few years after opening. We have updated our full year expectations based on our third quarter results. October VPGs were down less than they were in Q3, and we expect occupancy to remain strong. Keys on the books for the balance of the year are consistent with the same time a year ago, and we expect to drive tour capture rates for owners as we continue to roll out initiatives to drive future owner arrivals. We also have 270,000 packages in our pipeline, which is a good forward indicator, and loan delinquencies are down significantly year-over-year. In conclusion, despite our disappointing results this year, I still believe in the long-term growth potential of this business. With the recent operational changes we've made and our continued modernization work, we have tremendous confidence in future profitability growth. We will be hosting an Investor Day, the morning of December 17 at the New York Stock Exchange, and I hope to see many of you there. There will also be a webcast for those who won't be able to make it in person. With that, I'll turn the call over to Jason to discuss our results in more detail.

Thanks, John. Today, I'm going to review our third quarter results, our balance sheet and liquidity position, as well as our outlook for the year. Contract sales were down 4% year-over-year in the quarter, driven by 5% lower VPG and a 1% decline in tours. First-time buyer sales decreased 2%, while owner sales declined 5%. Delinquencies declined 100 basis points year-over-year and are now slightly below 2023 levels. Financing propensity increased 90 basis points from last year, which is good for long-term growth given the strong margins we achieve from our lending business. Due to the higher-than-expected financing propensity in the quarter, our sales reserve was 13% of contract sales, and we expect it to be between 12.5% and 13% in the fourth quarter. Development profit declined by $33 million compared to the prior year, reflecting lower contract sales and higher marketing and sales expense. Total company rental profit declined $17 million to $21 million, primarily driven by higher unsold maintenance fees and getaways at Interval. Our recurring revenue businesses performed well. Management and exchange profit increased 12% to $96 million, and financing profit increased 5% to $52 million. Finally, corporate G&A decreased by $8 million. As a result, adjusted EBITDA decreased 15% year-over-year to $170 million. Moving to the balance sheet, during the quarter, we issued $575 million of 6.5% senior notes, which we will use to repay our 0% convertible debt when it matures in January. We ended the quarter with leverage of 4.1x and $1.4 billion in liquidity in anticipation of repaying those notes. We also terminated our delayed draw term loan. After January, our next corporate debt maturity isn't until December 2027, so our balance sheet is in good shape from a maturity perspective. Looking forward, we are updating our full year guidance to reflect our results year-to-date and our expectations for the fourth quarter. We now expect contract sales to decline by 2% to 3% this year, with tours flat to up slightly and VPG down. We still expect product costs as a percentage of contract sales to be in line with last year. We now expect rental profit to decline around $30 million this year, which is slightly lower than our previous guidance due to lower RevPAR expectations. We expect management exchange profit to be in the $380 million range and for financing profit to be around $210 million, with corporate G&A to be flat to down slightly this year. We continue to make good progress in our modernization program and still expect to deliver $150 million to $200 million in run rate benefit by the end of next year. For modeling purposes, we still expect to generate an incremental $60 million to $80 million of benefit to flow to the bottom line in 2026, with the full run rate in 2027. As a result, we now expect adjusted EBITDA to be in the $740 million to $755 million range this year. Moving to cash flow, we expect our adjusted free cash flow to be between $235 million and $270 million this year. This lower guidance is driven by lower adjusted EBITDA, higher 2026 unsold maintenance fees due in Q4 and the timing of tax refunds, which we now expect to receive next year. Our guidance also excludes roughly $100 million of one-time cash costs related to our modernization initiatives, which is consistent with our previous thinking. We are making good progress on our non-core asset and excess inventory dispositions and hope to dispose one asset this year and a couple next year. While we don't include proceeds from non-core asset sales in our adjusted free cash flow, any dispositions will provide cash we can use to either reduce debt or buy back shares. We ended the quarter with $1 billion of inventory on the balance sheet. As we discussed last quarter, we plan to restrict our new inventory spending to capital-efficient arrangements where our cash outlay coincides with the start of sales, as well as low-cost reacquired inventory. Our long-term goal remains to get close to 1.5 to 2 years of inventory on the balance sheet over the next few years, which will free up cash over time. With that, we’ll be happy to answer your questions.

Our first question is from Ben Chaiken with Mizuho Securities.

Either John or whoever wants to take this, you kind of threw a lot at us right off the bat in the beginning of the call. Maybe you could talk to us about the strategy to reinvigorate the top line, whether that's on VPG or on tours? And then what level levers are at your disposal? Or is this just kind of like a broader deceleration in the business?

Yes. No, we're obviously focused on growth. I think as I hit on earlier, two of our larger markets, Orlando and Maui, were down significantly year-over-year, about $20 million of contract sales in total. In the case of Orlando, you had owner arrivals down, which we've talked about this year more broadly has been a bit of a headwind, but we've offset a lot of that with higher capture rates on the tour side to kind of offset what we're seeing there. When you think about Orlando, in that market, we've got two Sheraton sales centers. Those sales centers average, relative to our broader Marriott, tend to have a lower income consumer. So we saw some softer VPGs in Orlando. A lot of the changes that I talked about making, as we've looked at, especially in markets like Orlando, involve adjusting compensation for sales and marketing executives to ensure we're competitive to drive not only retaining our top folks but also recruiting and getting high performers as well. So we're focused on that. We did see some higher turnover in Orlando among the sales executives. When you bring in a new sales executive off the bat, they typically have a lower VPG and it takes a while to ramp that up. So retaining the best and bringing in new talent is going to be key there. We talked about the commercial rental activity, as I mentioned earlier this year, and we have seen kind of an uptick in commercial rental activity. It's a small subset of the ownership base, but it does impact owners trying to get to where they want to go, and we want to increase their satisfaction. We've got good owner satisfaction, so it can only help there. More owners at the sites lead to better VPGs and better tours. That's another big initiative. And we've ramped up sales training across the board at all our sites. We're starting to see some benefits there. In fact, in October, our VPGs were flattish. So that’s a good trend to start the fourth quarter, but we still have to do more to continue to drive growth going forward.

Okay. And then stepping back, I guess. Just going back to the beginning of the call when you mentioned a number of new initiatives. Looking out to '26, because I don't know if we've all digested the moving parts that you guys are laying out here, are there any curveballs we need to be aware of in any of the segments that stick out to you? I guess rentals comes to mind just because that's a little bit more of a black box for us typically. So again, I don't know if you have any visibility there or any other areas that some of these initiatives might impact.

Yes. Are you talking rentals next year or just in the fourth quarter?

I'm talking next year. I'm saying that it seems like there's a number of changes you're implementing today to drive top line, and I'm just trying to get ahead and see are there any implications to the P&L in '26 from those changes? The one that jumps out to me because it's somewhat of a black box for us is rentals.

Yes. Obviously, we're still working on our budget and long-range plan, which we'll provide more detail in December. I think specific to rentals, Jason mentioned we do have some higher unsold maintenance fees. We have more inventory we expect on our books going into '26 than we had this year. That's inventory we’ve taken back, as well as Waikiki and some of the purchases we've made. So we will have higher unsold maintenance costs. The key is how we offset that on the rental side and drive RevPAR. Those are the details we're still working through. But on a baseline, we expect to have some higher costs, and the goal is to try and mitigate that as much as possible on the revenue side.

Our next question is from Patrick Scholes with Truist Securities.

I have three questions to start with, and I have some more. I will jump back in the queue later on. First, a very high-level question. When do you consider all strategic alternatives for the company given the consistent underperformance, arguably miss-execution and certainly share price underperformance? Any reason it shouldn't be now?

Sure. Yes. No, we're constantly looking at all options and working with the Board on that. We're going to do everything we can to increase shareholder value.

Okay. Number two, let's just talk about expectations for 4Q. We saw that guidance was really only reduced by the amount of the 3Q miss. What gives you confidence that the issues in 3Q won't persist into 4Q?

Yes. As I mentioned, at least early trends in October, our VPGs, which were the big headwind in the third quarter, are trending more positively. It's still early days, but some of the initiatives I've talked about, things to drive owner arrivals in the near term. We still got to drive tour flow as well as VPG. The guidance we provided is based on what we achieved in October and what we see on the books and the trends for November and December.

Okay. And then thirdly, the comment that was included in the earnings release regarding curbing third-party commercial rental activity to drive higher owner arrivals and satisfaction. Was there an issue with rental bookings that hurt owner arrivals and VPG in 3Q?

Yes. It's a great question. I'm not sure you can quantify it other than we know we've seen some higher owner rentals. Let's be clear, our owners can rent the product; that is an option for the typical owner. However, we have seen a small group of owners that appear to be running commercial businesses. They are going after the better inventory, better weeks, and many of the higher-end markets to try and rent those and make money. That's the commercial rental activity. So, anything we can do to ensure adherence to the rules will help increase overall owner satisfaction and rental VPGs.

Our next question is from Brandt Montour with Barclays.

So on that point, John, I'm sorry. So can you just go over that one more time, the commercial third parties? This is something we haven't really heard about at least on these calls. What sort of percentage of your inventory is being used by that? How long has this been a problem? Is it a bigger problem than in the past? Maybe give us a little more context.

Sure. Yes. As I said, Brandt, owners can rent their time in the normal course. That's not prohibited. What we cannot allow, as per our documents with the Points Trust and all that, is to run a commercial business. If you look at platforms like RedWeek, you see a disproportionate amount of our weeks on there. I'm not saying those are all commercial businesses, but as we really delved into the data over the last year or so, we have seen an increase in what we call guests of owners. We've used technology to track this and are working to enforce these rules. It will take some time to ramp up, but we're focused on it. If we can reduce that, it makes more inventory available for owners to go on vacation.

Okay. All right. Taking a step back but on a similar topic. When we look at some of your peers' reports, it wasn't a surprise that new owner sales have been a bit weaker, and repeat sales have been stronger, which tends to happen when you have a softer leisure macro backdrop. I think we're under the impression that the levers that you can pull to sell to owners are sort of there for you. Are you trying to tell us essentially that you didn't have the inventory available to make that pivot throughout this tougher-than-expected year? And when you talk about what you can do to change, how many of those are super short-term? How many of those take longer?

Yes, a lot in there. I'm not sure I got all of the questions you are looking for. Let me try here. As you know, we run a 90% year-round occupancy at our system-wide resorts. We talked about the commercial rental activity. That's just a swap out of getting more owners versus renters and increasing owner happiness. The near-term levers we began focusing on more in the second quarter, ramping it up in the third quarter, are incentives, like the Marriott Bonvoy program points to encourage owners for short-term bookings in places like Orlando or other bigger markets where we do have some near-term availability to attract owners. Those leads end up being above-average VPGs for owners that were able to tour there. Implementing measures regarding the commercial rental activity will provide assistance over time and will take some time to ramp up.

Our next question is from David Katz with Jefferies.

Pardon the background noise. What I wanted to get at is my understanding is that this is a sales force driven business, right? That's at the heart of it. Can you just talk about how the sales force is being run today? Where was it 6 to 12 months ago? And how should we think about it 6 to 12 months from now? Unless I'm wrong, I invite you to correct me; that seems to be a critical piece of this and where the performance ultimately lands.

Yes. In terms of managing our on-site sales force, I think the bigger changes and some of what we talked about is that we've leaned in on training more recently to focus on especially our newer sales staff. Some of the things I mentioned earlier, in certain competitive timeshare markets, we see more turnover, and that's where, as we talked about, adjusting our comp programs to focus on not only retaining but also getting really good new talent. That's been a larger focus here. While there hasn't been a wholesale change overall, we're really focused on talent. The sales force is vital; you want someone who can drive $6,000 or $7,000 VPG on average versus someone who brings in $4,000. That's a big difference as higher VPGs contribute significantly to the bottom line. Focusing specifically on this area should ultimately help drive higher VPGs going forward.

So if I may follow that up, have there been any departures in leadership or management within the sales force over the recent past or any changes worth noting?

We see normal turnover, David. In certain markets where there’s intense competition for sales talent, there's been some higher turnover recently among our higher-performing sales staff.

And David, when you think about the comments that John made in the script about Maui, some of this is sales-related. As you consider sales executives that had to move 1.5 or 2 hours away because they lost their homes and there was no housing, they commuted for a while but then found other opportunities closer to home. Making that commute day after day is challenging. This did impact us a bit in Maui. That's not something that can be fixed overnight.

Our next question is from Shaun Kelley with Bank of America.

A lot of ground has been covered, but I wanted to go back to the commercial piece you've been discussing. Just to clarify, are people arbitraging the point system to some degree and either renting or re-renting that on third-party websites? Is that what’s happening? What’s your ability today to track and control that? What systems do you use, and how familiar are you with this? It seems like you should be fairly aware of this but again, this is either the first or second time we've heard of it.

Yes. The way you described it is correct; at many of our resorts, owners can rent those weeks for more than their annual maintenance fees. If that's what you're talking about regarding arbitrage, yes, they can profit from their annual fees. As I mentioned, owners are normally allowed to engage in rental activity, but the challenge is with a subset of owners that appear to be running commercial businesses on the side. We're tracking this activity through our systems to identify unusually high bookings by a small number. Our goal is to enforce these rules, and this requires ongoing attention since one shut down can lead to others springing up.

Got it. Just one super high-level question would be going back to the core business on VOI sales. Just big picture, obviously, the trend line is a bit different from what we're hearing from other operators in this space. In your estimation, how much of this is macro and how much of this is idiosyncratic to your portfolio, given some continued headwinds in Maui or the sales force situation? We're struggling a bit with trying to balance what's been a bifurcated consumer environment and the underlying trend line with VAC's business.

Yes. If we start at the macro level, as I mentioned earlier, I think in Orlando and some of our resorts where the mix of income trends towards the lower end compared to our higher-end resorts, we've probably seen some impact on that lower end of household income. However, I think some of the bigger issues we've discussed, which include owner arrivals and the commercial rental activity, are connected to us. We believe we will address these issues effectively. Owner arrivals this year compared to last year have been affected due to last year benefiting from more loyalty program points and promotions. The goal is to continue driving owner arrivals. While this year has seen a decline in owner arrivals, we've performed significantly better in what we trust as capture rates, meaning that we are converting owners who do show up to tours at a higher rate. Additionally, regarding Maui, prior to the fires, it accounted for 10% of our contract sales, and we are the largest player in West Maui. The recovery in Maui has been uneven over the past couple of years. Although we sell a lot of packages into Maui, we stopped selling these packages when the fires hit; it didn’t make sense at that time, and we lost some pipeline. Packages and owner arrivals have begun to improve, but the messaging surrounding events in Maui has made owners cautious returning. This dynamic is likely unique to us. Meanwhile, competitors are at different stages and have initiatives such as acquisitions and new developments that have generally positioned them differently than us.

Our next question is a follow-up from Patrick Scholes with Truist Securities.

I have some questions just specifically for Jason. Jason, are there any costs or expenses for next year that you'd like to highlight for modeling purposes?

Yes, John mentioned a bit about unsold maintenance fees in response to an earlier question. I think the other item we've discussed in the past, and to ensure everyone has clarity, is higher product costs we expect moving forward. You saw an increase from Q2 to Q3 due to our inventory mix, and we estimate that will rise again next year. We've noted the higher product costs coming from Khao Lak inventory in Asia that we plan to sell next year, along with the mix of inventory in the US. These are the two main items I'd highlight. We've also worked hard on modernization efforts related to some costs taken out of August, which will yield about $20 million in annual run rate benefits across the P&L. We’ll furnish more specific guidance later, but those two should be on your radar.

Okay. And Jason, on the rental business, we saw profits drop this year. Earlier in this call, it was noted that costs will be higher next year. Is it expected that profits for the rental business will grow?

Yes, Patrick, we’re still assessing that. As discussed, we anticipate higher unsold maintenance fees. Generally, depending on the markets in which that inventory exists, we don't always cover our unsold maintenance fees. In markets like Orlando and the desert where we have substantial amounts of inventory, the average daily rates don’t always offset that, primarily due to the reserves typical in the timeshare business. Therefore, there may be headwinds connected to unsold maintenance fees, and we’re sorting that out now as we finalize our budget. You witnessed a significant decline in the rental business from Q2 to Q3, much of which is seasonal with lower average daily rates in particular markets. We expect that to rebound in Q4, but I wanted to highlight that.

Okay. I look forward to the Investor Day. If you could, at the Investor Day, provide additional granularity on the expectations for the rental business.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to John Geller for closing remarks.

Thank you, everyone, for joining our call today. As I said at the outset, we acknowledge that this has been a challenging year. We believe recent targeted changes address some of the root causes of our sales softness in recent periods, particularly in Orlando. These changes, combined with continued progress on the $150 million to $200 million in adjusted EBITDA benefit through our modernization program by the end of 2026, will position us for a return to consistent profitable growth. On behalf of all our associates, owners, members, and guests around the world, I want to thank you for your continued interest in our company and hope to see you on vacation soon. Thank you.

This concludes today's conference. You may disconnect your lines at this time.