Earnings Call Transcript - VAC Q2 2025

Neal H. Goldner, Vice President, Investor Relations

Thanks, Alicia, and welcome to the Marriott Vacations Worldwide Second 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.

John E. Geller, President and CEO

Thanks, Neal. Good morning, everyone, and thank you for joining our second quarter earnings call. We delivered $203 million in adjusted EBITDA in the quarter and reiterated our full year guidance, reflecting the continued demand for leisure travel, the resilience of our business model and the hard work of our associates around the world. The first half of the year was certainly interesting, yet despite all the external noise, leisure customers continue to prioritize vacation and our team focused on what it could control, providing great experiences for our owners, members and guests while executing on our modernization program. Exiting the first half of the year, our business is well positioned. We're the only vacation ownership company focused solely on the upper upscale part of the market, our owners have a median annual income of $150,000 and more than 80% of them do not have a loan on their timeshare. So we are confident they will be vacationing with us. And our exchange business includes most of the top-tier names in the timeshare industry. Quickly reviewing the quarter, we delivered nearly 90% resort occupancy with strength seen in Maui, Coastal Florida and the Caribbean, while Vegas was relatively weak. We made further progress on our modernization initiative and remain on track to deliver $150 million to $200 million in run rate benefits by the end of 2026, with half coming from revenue initiatives and the other half coming from cost savings and efficiencies. As we've talked about, the second quarter started off soft, but trends improved as we progressed through the quarter. As a result, contract sales were down less than 1% for the quarter, an improvement compared to Q1. First-time buyer sales were up year-over-year, our fourth consecutive quarter of higher year-over-year first-time buyer sales, and I'm particularly excited about this trend as new owners tend to buy additional points over time. First-time buyers represented one-third of total contract sales in the quarter, up 200 basis points from a year ago, reflecting the success of our new owner strategies. Owner sales were down year-over-year due to lower VPGs, while owner tours were flat. As you know, late last year, we announced a modernization program that we believe can deliver an incremental $150 million to $200 million in adjusted EBITDA benefits on a run rate basis by the end of next year. The reason for pursuing this initiative is to speed decision-making across the two organizations, rightsize our cost structure, optimize our IT platforms and provide the foundation to drive growth in our leisure-focused business. We expect half of the benefit to come from cost savings and efficiencies, while the other half will come from revenue initiatives. And while most of the expected benefit is still ahead of us, we are making great progress. For example, during the second quarter, we launched and expanded a number of revenue initiatives, including expanding our enhanced call transfer program across the Marriott system, resulting in our best package sales quarter since the pandemic. This should help drive future sales. We also increased our use of nontraditional channels through a combination of roadshows, virtual tours and other events, accounting for over 13% of our total contract sales in the quarter. We expanded our new owner experiences campaign, which contributed to higher first-time buyer VPGs. We also implemented a campaign to drive additional near-term owner stays driving incremental tours. And soon, we plan to start using FICO score data for marketing purposes, which should result in higher VPGs and improved credit metrics. With our data and analytics and marketing and sales teams working together, we built and deployed an AI-based propensity model, focusing on renters most likely to become owners, which we believe will help drive higher sales. We are also using internally developed advanced analytic predictive models to better support our sales executives, and we are also rolling out new sales training. And we introduced a refundable getaway pricing option at Interval International, which we believe will drive higher rentals and profitability over time. In total, we expect these and other revenue-enhancing initiatives will help us deliver $75 million to $100 million in incremental EBITDA by the end of next year on a run rate basis. We also expect to deliver another $75 million to $100 million from cost savings and efficiencies. We expect significant savings to come from retiring legacy technology debt, which will lead to efficiencies in how we run the business, eliminating manual processes and reducing costs that are currently required to maintain these legacy systems. We also expect to deliver substantial benefits from increasing automation, lowering procurement costs, reducing overhead costs, including corporate G&A and optimizing our organizational structure. And while not part of our expected $150 million to $200 million EBITDA benefit, early indications suggest maintenance fees on our points-based products may be flattish next year, partially due to our modernization initiatives, which enhances the overall value proposition for our owners as well as our first-time buyers. But just as important, as the momentum we've built in our early successes, we're changing how things get done, increasing the speed of decision-making and driving accountability, and I'm pleased with the way our associates have embraced the new ways of working. Looking forward, occupancy is expected to remain high. Tour capture rates are increasing and owner keys on the books for the second half of the year looks strong. A majority of owner villa reservations are now being done online, and we expect that to grow further. Loan delinquencies continue to trend down. Guest satisfaction scores remain strong, and we ended the quarter with nearly 270,000 packages in our pipeline with almost 30% scheduled to take a tour in the second half of the year, providing us good tour visibility. Contract sales increased slightly in July compared to June on higher tours and stable VPGs, and the team is focused on ramping up a number of new sales initiatives scheduled to launch in August as well as increasing investment in sales training. Looking out longer term, despite the noisy environment, leisure consumers continue to prioritize travel and timeshare remains a great value for many of them. As the only upper upscale player in the industry with the best collection of brands, we believe our company is uniquely positioned for long-term growth, offering a product that resonates with today's consumer that is looking for space and experiences combined with brands they trust. Despite some ups and downs, our long-term financial model hasn't changed. We think we can grow tours and VPG in the low single digits, leverage our fixed costs to improve margins and use our free cash flow to reduce leverage and buy back shares. Over time, that should result in high single-digit to low double-digit EPS growth. And with the bulk of our modernization benefits still ahead of us, we should be able to do better than that for the next few years. With that, I'll turn the call over to Jason to discuss our results in more detail.

Jason P. Marino, Executive Vice President and CFO

Thanks, John. Today, I'm going to review our second quarter results, our balance sheet and liquidity position and our outlook for the year. Contract sales were down less than 1%, with 2% higher tours offset by lower VPG. First-time buyer sales increased 6%, driven by higher tours and higher VPG, while owner sales declined 4% on lower VPG. As you know, first-time buyers typically carry a lower VPG than owners, so the growth in first-time buyer sales negatively impacted VPG in the quarter. Our sales reserve was 13% of contract sales in the quarter, with delinquencies declining 50 basis points sequentially and 110 basis points year-over-year to the lowest levels in two years. For the full year, we expect our sales reserve to be in the 12.5% range. Development profit more than doubled compared to the prior year, reflecting last year's $57 million net sales reserve adjustment. Excluding that, development profit declined 11% year-over-year due to lower VPGs and higher marketing and sales costs, partially offset by lower product costs as a percent of revenue. Total company rental profit declined $7 million or 16% to $35 million, driven by increased unsold maintenance fees and marketing expense, partially offset by higher ADRs. Management and exchange profit increased 3% to $98 million, with increased revenue in our Vacation Ownership segment, partially offset by lower exchange revenue at Interval. Financing profit increased 7% to $53 million. Corporate G&A was flat, excluding the $7 million of lower variable compensation related to the sales reserve adjustment last year. And adjusted EBITDA increased 29% to $203 million, with margins improving 360 basis points as we lap last year's sales reserve adjustment. Moving to the balance sheet. We ended the quarter with leverage of 3.9x and $800 million in liquidity. Our 0% convert matures in January next year, and we've already backstopped the majority of it with a delayed draw term loan facility, providing us optionality as we look to refinance it later this year. We were precluded from buying shares during most of the quarter, but you should expect us to be opportunistic buyers of our own shares in the future as benefits from the modernization are realized. Looking forward, we are maintaining our full year contract sales and adjusted EBITDA guidance. We expect product costs this year to be flat as a percent of contract sales, reflecting our first half results. We now expect rental profit to decline around $20 million to $25 million due to the higher cost of rental inventory, and we also expect corporate G&A to be flat to down slightly this year. Our modernization program is progressing well, and we 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 $35 million in P&L benefit this year with an additional $60 million to $80 million coming next year and the full run rate in 2027. Moving to cash flow. We still expect our adjusted free cash flow to be $270 million to $330 million this year, excluding roughly $100 million of one-time cash costs related to our modernization initiatives. We acquired 52 completed timeshare units in Khao Lak, Thailand for $43 million during the quarter. We still have a number of non-core assets we plan to dispose of over the next few years, which we estimate could be worth $150 million to $200 million, and our team has been working hard to monetize them. With $200 million of spending already designated to the modernization program through the end of next year, we plan to use proceeds from any asset dispositions to repurchase shares and reduce leverage. We ended the quarter with $1 billion of inventory on the balance sheet. Looking ahead, we have $310 million of inventory commitments due over the next few years, including payments for Waikiki, our second phase of Khao Lak, additional units in Bali and a new Nashville resort, which is scheduled to open in 2027. Beyond that, we plan to restrict our inventory spending to low-cost reacquired inventory as well as capital-efficient arrangements where we don't pay for the inventory until we start sales and where we can add a new sales gallery, which helps drive future sales. Our goal is to get closer to the 1.5 to 2 years of inventory on the balance sheet. So to summarize, we ended the quarter strong. And while the environment is still somewhat fluid, we remain focused on what we can control, including ensuring our owners, members and guests have great vacation experiences while also executing on our modernization program. With that, we'll be happy to answer your questions.

Operator, Operator

Our first question comes from Ben Chaiken with Mizuho.

Benjamin Nicolas Chaiken, Analyst

I would like to delve into contract sales for a moment. Based on the comments you made last quarter and throughout the quarter, it appears that June contract sales were positive, likely in the low single-digit range. Is that accurate? Was there a sequential acceleration compared to May, or was it more related to the comparison? Also, did you mention that July was better than June? Did I understand that correctly?

John E. Geller, President and CEO

Yes. July contract sales were up slightly from June. Going back to your other question, yes, June was up about 3% year-over-year. And sequentially, it clearly improved because as we had talked about, we were down 4% in April. We said that on our last call, and we were down 3% in May, which we didn't say how much, but we had said we had gotten a little bit better. So there was some acceleration. June was a bit of an easier comp year-over-year. I would say that. If you remember last year, that's where we saw some of the first-time buyer headwinds. But net-net, good acceleration as we came through the quarter and down a little bit less than 1%.

Benjamin Nicolas Chaiken, Analyst

Got it. Understood. In the prepared remarks, you mentioned that the expectation for the year is a 12.5% loan loss provision. Can you remind us how this compares to your previous expectations? Additionally, you mentioned that maintenance fees should remain relatively flat in 2026, partly due to some modernization initiatives. Do you think this could lead to an improvement in the loan loss provision?

Jason P. Marino, Executive Vice President and CFO

Yes, Ben. So the 12.5% is about 0.5 points higher than our previous guidance, which was about 12% for the full year. The modernization and the lower maintenance fees, we certainly, if you go back a couple of years, I think some of the delinquencies that we had were attributable to the higher-than-normal inflationary increases or the higher inflation. So we do think that will help going forward. But the loan book is in good shape, as we talked about, with delinquencies down to really the lowest levels in two years, both on a sequential and a year-over-year basis being down pretty materially 110 basis points year-over-year on the delinquencies. So we feel good about where the loan book is.

John E. Geller, President and CEO

Yes. Maintaining the maintenance fees at a relatively stable level certainly enhances our value proposition. The maintenance fee is part of the long-term cost of either prepaying or purchasing a timeshare. Therefore, any efforts we make to improve our value proposition should positively influence sales, increase owner satisfaction, and potentially have a favorable impact on our loan loss. This will continue to be a key area of focus for us.

Operator, Operator

Our next question comes from the line of Patrick Scholes with Truist Securities.

Charles Patrick Scholes, Analyst

Certainly, flat maintenance fees are encouraging news after experiencing mid-teens increases a couple of years ago, which certainly reflects the value proposition. I have a couple of questions. I've seen headlines about an expanded owner benefit, specifically the ability to use Club points to directly book stays at thousands of hotels globally. Is this expected to impact your earnings? Will it lead to EBITDA growth? How should we consider this?

John E. Geller, President and CEO

Yes, it's really more optionality for our owners, Patrick. Previously, we had a limited number of Marriott hotels available for booking with ownership points, which required a manual process to call. Now, this has been automated and it opens up access to most of the Marriott system or resorts, expanding our offerings. Exchange options provide additional vacation opportunities, but they are not going to offer the best value for owners. The best value will always come from staying within our approximately 120 resorts worldwide because owners need to use their weeks, pay for the vacation, and we have to rent it out to offset the cost. This results in some value loss for owners. However, it does give them more options if they choose to stay outside the vacation ownership system.

Charles Patrick Scholes, Analyst

Okay. So sort of add that into the value proposition of the product. A follow-up question, and then I'll hop back in the queue. I think I heard you mention you were precluded from buying shares in the most recent quarter. Can you provide any color on why that was?

John E. Geller, President and CEO

Yes. There can be blackout periods for various reasons. In the past, we haven't publicly discussed when we are in the market or when we're not. Early in the quarter, the stock price was relatively low, and we were in a blackout at that time. Moving forward, we will continue to be strategic in buying back shares as we identify suitable opportunities.

Operator, Operator

Our next question comes from the line of Brandt Montour with Barclays.

Brandt Antoine Montour, Analyst

I wanted to follow up on the contract sales commentary from earlier in the guidance, specifically regarding June and July. I believe what you mentioned, John, about that period was quite clear. However, it seemed like trends improved. The contract sales growth guidance you provided remained the same. I'm just wondering if you feel more optimistic about that guidance range, or if the improvements were already anticipated in your previous estimates.

John E. Geller, President and CEO

Yes. At the midpoint, we are down 1.5%, which reflects that halfway through the year, we are still in a decline, particularly from the second quarter. We hope to improve as the year progresses, but there is still some broader macro uncertainty. The jobs report from last week indicates factors that may keep us cautious as we continue through the year and work on the contract sales.

Brandt Antoine Montour, Analyst

Okay. For Jason, I think you mentioned that the loan loss provision guidance increased by 50 basis points from 12% to 12.5%. I'm trying to reconcile that with your earlier commentary about delinquencies being at a 2-year low and improving. Can you explain why the loan loss provision increased for the year?

Jason P. Marino, Executive Vice President and CFO

Yes. What we're observing are positive long-term trends, which is encouraging, and we've put in a lot of effort over the past couple of years to achieve this. In the second quarter, we were around the 13% mark, with approximately half of that attributed to increased propensity. There was some seasonality involved, and we also experienced a slight rise in defaults within our Asia business, totaling about $2.5 million for the quarter. While $2.5 million isn't significant, it represents around 60 basis points based on our contract sales. For context, as we grow our loan portfolio, our Asia operation currently has a loan book of about $150 million compared to gross notes of about $3 billion, making it a relatively minor part of the overall portfolio. This situation in the second quarter contributes to our guidance moving forward to 12.5%.

John E. Geller, President and CEO

And we continue to focus, as Jason mentioned, delinquencies are down. They're at a 2-year low, which is all positive. But they're still not kind of back to where we'd like them to be. So hopefully, the trends continue. And if we can continue to get the delinquencies back down to more '22 level before we started seeing some of the issues, that will give us more confidence to take a look at the overall reserve going forward.

Operator, Operator

Our next question comes from the line of Stephen Grambling with Morgan Stanley.

Stephen White Grambling, Analyst

I just want to clarify, you made this comment about being more efficient around inventory and taking down the amount years on hand. What are the implications to cost of VOI not just this year, but as we look maybe further out? Should we be assuming that, that cost of VOI actually as a percentage of contract sales will come down? Or what are some of the puts and takes to think through?

Jason P. Marino, Executive Vice President and CFO

Yes. I believe you’re referring to the cash flow guidance that was reduced by about $10 million due to inventory spending. We've maintained that we aim to reduce our inventory levels to approximately 1.5 to 2 years on hand. This aligns with our ongoing discussions about inventory management and our future approach. Additionally, we anticipate a slight increase in our inventory costs over the next few years as our inventory mix evolves, particularly with new acquisitions like Waikiki and projects in Asia. Looking ahead, while we don't expect a rapid rise, we do foresee a modest increase in our product costs over the next 3 to 5 years, which has been consistent with our previous statements.

Stephen White Grambling, Analyst

Got it. Okay. I thought there was maybe something new on the efficiency there. One other unrelated question. Harley-Davidson just signed a partnership with KKR and PIMCO to basically sell a portion of its financing receivables for 1.75x book and also rather than securitize, actually sell to them at a premium. I guess I'm curious, how do you think about the value of your financing receivables relative to book value and maybe the rise of private credit markets and maybe potential other opportunities to maybe be more efficient on the securitization front?

John E. Geller, President and CEO

Yes, I'll begin and Jason can add anything if needed. We're always looking for ways to maximize long-term value for our shareholders, whether it’s in our financing business or elsewhere. We've explored various options within the financing sector and will continue to do so. Generally speaking, I believe our securitizations are more efficient than what Harley-Davidson is doing. We achieve a 98% advance rate. The key consideration here is the cost of capital when involving a third party. We need to weigh that against how it impacts our profits on our balance sheet. We'll keep assessing all opportunities, and if it aligns with enhancing shareholder value, we'll be sure to investigate it further.

Operator, Operator

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

David Brian Katz, Analyst

I know this was mentioned earlier, but I want to delve deeper into the recent 50 basis point increase in the loan loss provisions. Some of the external data we’ve been observing seems to be trending positively. Earlier, it was suggested there might be a greater willingness to take risks. Are you being more cautious now compared to our last discussion? Could we explore this topic in more detail?

John E. Geller, President and CEO

Yes. David, if you say conservative, I think there is a bit of unknown. Like I was saying earlier, while delinquencies continue to trend better, and we're seeing them as low as they've been in two years, they're still higher, right, than they were back in '22. We want to see continued improvement. And then I think if we get that continued improvement, then we'll look at our reserve going forward. So I don't know if you want to say that conservative. It's not really being conservative per se as much as reacting to what we're seeing and getting our delinquencies back down to where we've seen them historically.

Operator, Operator

Our next question comes from the line of Ben Chaiken with Mizuho.

Benjamin Nicolas Chaiken, Analyst

You had some positive commentary on Maui in the prepared remarks. I guess what are you seeing from a sales perspective? We haven't talked about this in a while because I don't think there's been much to share, but is there any maybe quantitative way to frame where we are versus maybe pre-fire or where we are in the recovery process? Just some way to gauge.

John E. Geller, President and CEO

Sure. Sure. Well, I'll start overall with Hawaii. Hawaii had a strong quarter year-over-year with contract sales were up VPG tours. So it is one of our brighter spots in the quarter. So that's good. I'd say on Maui, a couple of things. I think on the transient side, occupancies were up year-over-year, which was good, and rate was up 8%, 9%. So that was all positive on the rental side. Sales in Maui were kind of flat versus last year. And some of the lingering stuff we have talked about, which is our owners coming in back into Maui, are getting better, but still kind of below where they were, as well as some of the packages. And then also, we've got that repiping project at the Maui Ocean Club, which is taking units out. That will get wrapped up, call it, first half of next year. So a bit of noise out there. And I'm happy to say there was a wildfire that occurred yesterday in Maui that was put out fairly quickly, but that risk is still out there, happy everybody is safe out there, but did impact us. We had to close sales for the day, and there were some power outages and stuff. So something we continue to pray for the best out there. But overall, Hawaii was pretty strong in the quarter on a relative basis. All right. I think that does it for the questions. So thank you, everyone, for joining our call today. We delivered another solid quarter with strong occupancies and increased first-time buyer sales. Our modernization initiatives are taking root, and we have a lot of new plans scheduled for the second half of the year. So we are well positioned to deliver on our guidance this year. We're also making good progress on our modernization program and remain on track to deliver $150 million to $200 million in incremental run rate adjusted EBITDA by the end of next year. On behalf of all of 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.

Operator, Operator

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