Earnings Call Transcript - VAC Q1 2021

Operator, Operator

Greetings and welcome to Marriott Vacations Worldwide First Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Neal Goldner. Thank you. You may begin.

Neal Goldner, Investor Relations

Thank you, Rob, and welcome to the Marriott Vacations Worldwide first quarter 2021 earnings conference call. I am joined today by Steve Weisz, Chief Executive Officer, and John Geller, 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, and a presentation we added to our website this morning, as well as our comments on this call, are effective only once made and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release as well as the investor relations page of our website at ir.mvwc.com.

Steve Weisz, Chief Executive Officer

Thanks, Neal. Good morning, everyone, and thank you for joining our first quarter earnings call. It’s now been more than a year since COVID-19 came into our lives, but that certainly didn’t mean people forgot about traveling. If anything, the past year reminded us what is really important in life: family, experiences, and togetherness — all the things that travel offers. As a company whose products enable these unique and memorable occasions, it’s been gratifying to see more and more people at our resorts this year. As vaccination levels rise and even more people return to travel, we look forward to welcoming them as well. JW Marriott Sr. was fond of saying, if we treat our employees right, they will treat our customers right. And if customers are treated right, they will come back. This past year has been quite difficult for many of our associates. So I am very happy to say that, with occupancies recovering as they have, we’ve been able to bring back most of our associates to work. They are back again, working to take care of our guests and delivering great vacation experiences. Our results this quarter are evidence of the continued recovery in our business. At this point, nearly all of our sales centers have reopened and contract sales and exchange transactions grew substantially on a sequential basis during the first quarter, exceeding our own expectations. In fact, six of our sales centers in the quarter actually exceeded their first quarter 2019 levels, which is very encouraging. A review of our vacation ownership occupancies in this quarter illustrates just how widespread the recovery has been. For example, occupancy at our Florida Beach Resorts averaged in the high 80% range during the quarter, including nearly 95% for the month of March. Our Colorado and Utah Mountain Resorts averaged over 85% for the quarter. Our South Carolina Resorts ran almost 80% occupancy during March as the weather improved, and our U.S. Virgin Island resorts averaged nearly 85% for the quarter. Orlando and Hawaii, two of our larger markets that have previously lagged, also continued to recover nicely. For example, Orlando, which represents more than 20% of our North America keys, averaged nearly 60% occupancy during the quarter, including over 75% during March. And Hawaii, excluding Kauai, which was operating under quarantine restrictions for the entire first quarter, averaged over 70% occupancy during the quarter, with March averaging nearly 85%. These strong occupancies, coupled with the continued execution from our sales teams, enabled us to achieve 27% sequential contract sales growth in the quarter, with VPGs increasing 21%, even with first-time buyer sales becoming a larger portion of the overall sales mix. Adjusted development profit margin was in line with the first quarter 2019 levels despite two-thirds of the contract sales being subject to reportability, illustrating the benefits of our business transformation work and synergy initiatives.

John Geller, President and Chief Financial Officer

Thanks, Steve, and good morning everyone. Today I am going to review our first quarter results, the continued strong recovery across all of our businesses, the strength of our balance sheet and liquidity position, and our second quarter expectations. As Steve noted, we had very strong occupancies in many of our key markets with our two largest, Orlando and Hawaii, improving nicely, illustrating the resiliency of our leisure-focused business model. Reviewing the performance of our segments this quarter, starting first with our vacation ownership business: when the quarter began, our sales centers in both California and Hawaii were still closed due to government restrictions. But with the California restrictions being rolled back by the end of January, occupancies quickly started to improve. Overall, as tours grew sequentially and VPG improved compared to the fourth quarter, contract sales increased 27%, even with first-time buyers representing a larger portion of our sales mix. As I mentioned on our last earnings call, we knew revenue reportability was going to be a headwind in the first quarter. So while contract sales grew nearly $50 million on a sequential basis, development profit only increased $6 million as we do not adjust for reportability when calculating revenue or adjusted EBITDA. Adjusting for the impact of reportability, our development profit would have nearly tripled on a sequential basis to $40 million and development profit margin would have more than doubled to 21%. As a reminder, since reportability is just timing, the revenue and profit from these sales will be reflected in our second quarter earnings. Rentals also improved nicely in the quarter with revenues up 29% sequentially, including 14% growth in transient rate. As a result, our rental business generated a $5 million sequential bottom-line improvement as leisure travel and rental occupancies continue to recover. The stickier revenue businesses within our vacation ownership segment also performed well in the quarter. Resort management profit increased 3% sequentially, illustrating the stable nature of this business. Financing profit was unchanged compared to the fourth quarter despite a declining notes receivable balance, reflecting lower interest expense and the benefit of our synergy and cost-saving initiatives. Delinquency rates continue to improve across all of the Marriott brands, and they are not only lower than the prior year’s first quarter, but they’re below 2019 as well. Adjusted EBITDA on our vacation ownership segment declined $5 million sequentially to $68 million despite the $26 million impact from negative revenue reportability, reflecting the strong recovery in contract sales and rental revenue as well as our business transformation efforts and other cost savings.

Operator, Operator

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

Steve Weisz, Chief Executive Officer

Good morning, David.

John Geller, President and Chief Financial Officer

Good morning.

David Katz, Analyst (Jefferies)

Hi, good morning everyone. Thanks for taking my question. One of the things we would love a little more color on is thinking about a recovered new development margin run-rate level once we get through all of this. I'm not necessarily looking for a specific number, but if you can help us or guide us to how to get there on our own, I think that would be helpful.

John Geller, President and Chief Financial Officer

Sure. I’ll do it in terms of opportunities as well as potential risks as you think about the development margin. Obviously the two expenses, if you will, are your marketing and sales costs and your product costs. Given where our product costs are, I would say we don’t have a lot of new development commitments; we have what we have on our balance sheet. So the mix over the next couple of years could be slanted more toward some required inventory, which we know comes in at a lower price. So I would say if anything, there is probably some opportunity right from product cost — whether that ends up being a point or two or so. There could be some opportunity on the product cost side. If you go to the marketing and sales costs, we have obviously been doing a lot in terms of our transformation and synergy initiatives. A chunk of the $200 million we expect to get in run-rate savings comes in marketing and sales. Some of that is more in fixed costs and overhead and things we have put in place and that’s what you are seeing now. When you look at our development margin and our marketing and sales costs, even though our contract sales in the first quarter were a third less than they were in 2019, we got back to a very similar development margin. A lot of that is because we have been able to leverage some of those marketing and sales costs as we have done some of the synergy savings. On the offset, the other opportunity, like I said on the digital side, is we can sell more packages and acquire more first-time buyers, hopefully at better pricing going forward — still to be determined, but it’s an opportunity. And then on the negative side, there are a lot of reports out there that costs could move higher for hourly people as we get people back to work; we could see some wage cost inflation. My sense is maybe some of that, but I would say when you put it all together, I think we have more opportunity than cost increases. So those are the components to consider about how to think about it.

Steve Weisz, Chief Executive Officer

Hi David, it’s Steve. A couple of additional points on wage cost increases: keep in mind the majority of our field associates are paid by the condominium owners through their maintenance fees, so our exposure there is relatively limited. There could be a little bit of cost creep on the sales and marketing side, but we don’t think that’s material. Pandemic or no pandemic, the name of the game in terms of optimizing your development margin is marketing and sales. Yes, you can try to get a bit of improvement in product cost, but it’s all about continually optimizing your channel mix, focusing on channels that give you the highest yield and the lowest cost and stepping away from those that do not. John articulated it very well.

David Katz, Analyst (Jefferies)

Perfect. And my follow-up — thank you for that — is with Welk now closed, there are always some little surprises; some may be good, some may be less good. Can you talk about any that you may have come upon so far?

John Geller, President and Chief Financial Officer

Yes. From the positive side, which makes sense, their recovery is probably a little faster than our recovery. They didn’t have the international exposure that we have, so we are seeing their sales and VPG trends a bit better in terms of how quickly they are starting to come back. On the negative side, I’m not sure we’ve found anything that I would say is a major surprise — not saying we won’t, but we haven’t found anything negative that makes us say, 'my gosh, we didn’t realize that.' It’s been great. We feel even better the more we get into the integration work and work with our team, and forming the new combined business gives me more excitement about what this will mean for our growth opportunities going forward.

David Katz, Analyst (Jefferies)

Super. Good luck. Thank you.

Operator, Operator

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

Steve Weisz, Chief Executive Officer

Good morning.

Patrick Scholes, Analyst (Truist Securities)

Hi. Good morning everyone. Apologies if I missed this in your prepared remarks on the $320 million to $340 million in second quarter expected contract sales, but how much do you expect the Welk acquisition to contribute to that?

John Geller, President and Chief Financial Officer

Yes. Within that range, call it plus or minus $25 million in the quarter. So roughly 10% of the growth is from Welk; the rest is organic from our existing legacy MVW business. For context, pre-COVID in 2019, Welk reported roughly $123 million of contract sales, so that gives you a baseline for where that business was pre-COVID.

Patrick Scholes, Analyst (Truist Securities)

Okay, thank you. And do you see that percentage being similar for the remaining quarters of the year?

John Geller, President and Chief Financial Officer

To be determined, obviously we are not getting into the specifics for the rest of the year. But yes, if we do what we’re expecting in the second quarter, I would expect there should be some continued contribution from Welk in subsequent quarters. It’s not a large percentage of our total contract sales, but $25 million a quarter is a reasonable expectation as they continue to recover toward pre-COVID levels.

Patrick Scholes, Analyst (Truist Securities)

Okay. Fair enough. And then my second question: certainly a sizable M&A with Welk and this isn't your first experience in M&A given the acquisition of Interval several years ago. What would you say are the top one or two most important learnings or best practices from that type of M&A that you see carrying over to the acquisition of Welk? Thank you.

Steve Weisz, Chief Executive Officer

Patrick, this is Steve. I think first and foremost, have a well thought out plan for integrating the leadership of both organizations into a seamless team so we can stay focused on the right priorities. Second, look closely at channel mix: review each channel to understand where we can improve by combining capabilities. And third, which may sound soft but is very important, make sure the cultures are well aligned. We’ve seen many examples where acquisitions don’t turn out well because the cultures didn’t align. We did a very fine job with the Interval acquisition, and I think we’re on a great track and pace for the Welk acquisition.

Patrick Scholes, Analyst (Truist Securities)

Okay, thank you. That’s it.

Operator, Operator

Our next question comes from Brandt Montour with JPMorgan. Please proceed with your question.

Steve Weisz, Chief Executive Officer

Good morning.

Brandt Montour, Analyst (JPMorgan)

Good morning everyone. Thanks for all the details this morning. Just a quick question on the outlook and the tone of the outlook: your guidance implies you’re getting most of the way back to 2019 levels, even backing out the incremental contract sales from Welk. How should we think about the cadence from here? I know you’re not going to give guidance, but it sounds like you think international is going to take a bit longer. Should we expect a little plateauing and that international will take longer while the core business fully recovers in the near to medium term?

Steve Weisz, Chief Executive Officer

I think when we gave you the 27% increase over the fourth quarter in Q1, that included below-expected performance for both Europe and Asia Pacific because of travel restrictions. I expect that will continue to be a drag. So the 27% would have been greater had it not included those regions. I think the rest of the system should continue to grow sequentially, but there will still be some drag from international. Another factor is linkage — customers staying at Marriott or Hyatt-affiliated hotels and then taking tours with us — and that will be slow to come back because hotel occupancies are still recovering. Generally speaking, we are optimistic about the second half of the year; we expect continued progress in Q2, and we see the second half as healthier, but a few items will continue to act as drags while we recover.

Brandt Montour, Analyst (JPMorgan)

Okay, that’s helpful, thanks. And a question on VPGs: there was a strong step-up quarter over quarter and you mentioned that was despite an unfavorable mix because first-time buyer sales diluted VPG. What drove that step-up — was it closed rate, location-based mix? What drove those numbers so we can understand how it should normalize from here?

Steve Weisz, Chief Executive Officer

I’ll give you a few stats. In Q1, contract sales mix was about 74% owners and 26% first-time buyers. The first-time buyer mix in Q1 was actually four points higher than in the fourth quarter; it was 26% versus 22% in Q4. Tours quarter-over-quarter showed owner tours down 3% and first-time buyer tours up 3%. That’s largely a function of resort occupancy and people being in-market. As occupancies continue to improve, previews and non-owner traffic provide opportunities to convert first-time buyers. Historically, in 2019 we were roughly 60/40 owners to first-time buyers. We’re inching back in that direction, and that will take time. VPG on first-time buyers is lower because of lower close rates relative to owners, which is where you get the negative drag on VPG. But long-term, getting more first-time buyers into the system is good — it grows the system and creates future upgrade and cross-sell opportunities.

John Geller, President and Chief Financial Officer

The only other point I’d add is that Hawaii became a larger part of the mix in the first quarter versus the fourth quarter, and Hawaii generally comes with a higher VPG, so there was some location mix impact.

Brandt Montour, Analyst (JPMorgan)

Okay. Thanks for that, guys. Appreciate it.

Operator, Operator

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

Steve Weisz, Chief Executive Officer

Good morning, Chris.

Chris Woronka, Analyst (Deutsche Bank)

Hey, good morning, guys. Thanks for all the details and taking the questions. Maybe we could drill into spend patterns — not so much VPG but actual dollars realized. Given how healthy the consumer is, are you seeing a like-for-like customer, whether an existing owner or a first-time buyer, spending more than they might have in 2019 when they make a purchase?

Steve Weisz, Chief Executive Officer

We’re not seeing particular evidence that customers are spending materially more per transaction. What you have seen is our owner mix of sales versus 2019 has increased, and our owners are adding more points to their portfolios than they may have done in the past, but they are often in smaller increments. So the actual average sales price of a first-time buyer or owner is not meaningfully higher than before. We haven’t seen any notable inflection in things like FICO scores or other credit metrics. The good news is owners continue to like to buy more of our product, which is a positive sign, but we are not seeing substantially larger checks overall.

John Geller, President and Chief Financial Officer

Where you see it more is in closing: more people buying more, and higher closing efficiencies driven by higher VPGs. That’s likely due to pent-up demand and our product resonating in a COVID world given unit sizes and amenities, which is driving the higher VPG and better close rates.

Chris Woronka, Analyst (Deutsche Bank)

Okay. Very helpful. And then just to follow up on the progression of revenue recognition: do you expect that to fully normalize by the end of the year, or could it bleed into 2022 even though it should be less of an impact quarter by quarter?

John Geller, President and Chief Financial Officer

Remember Chris, as contract sales recover and increase sequentially, on average you will continue to have some negative reportability because of the timing of recognition. What you saw was roughly a $50 million increase in sales in Q1, much of it weighted to March as things improved, and we guided higher for the second quarter. Some of that reportability will get recognized in Q2, but you will still have $10 to $15 million that pushes into the third quarter. If sales continue to grow and seasonality returns to more normalized patterns, then reportability will revert to a more normalized seasonal level, where negative reportability on an annual basis is roughly the growth rate year-over-year as a percentage. So the recovery means you will see reportability effects until sales fully normalize.

Steve Weisz, Chief Executive Officer

By virtue of timeshare accounting, you typically lose the last two weeks of the quarter in terms of revenue recognition because of the steps required to recognize revenue. So you will always have some carryover from the end of a quarter into the next. Our historic pattern is that unreportable sales occurring earlier in the year generally come back through before year-end, but there will always be some residual timing effects.

Chris Woronka, Analyst (Deutsche Bank)

Right. Okay. Understood. Very helpful. Appreciate that. Thanks, guys.

Steve Weisz, Chief Executive Officer

Sure. Thank you.

John Geller, President and Chief Financial Officer

Thank you.

Operator, Operator

We have reached the end of the question-and-answer session. At this time, I’d like to turn the call back over to Steve Weisz for closing comments.

Steve Weisz, Chief Executive Officer

Thank you, Rob. Thank you everyone for joining our call today. As we’ve always known, whether it’s to relax, spend time with loved ones or see new and exciting places, at their core people want to vacation, and being in a business whose products enable these experiences is a great business to be in. While the past year has been difficult for all of us, it’s also been a reminder of just how resilient our business model really is. The review of our first quarter gives you a sense of that. We grew contract sales 27% sequentially, beating our own expectations. Interval exchange transactions increased 17% year-over-year. Our adjusted EBITDA would have grown 47% from the fourth quarter, if it were not for revenue reportability, which is just timing. Looking forward, people are flying again, owner confidence is at a post-pandemic high, and occupancies at our resorts are strong and growing. Seventy-four thousand customers who purchased tour packages from us have already booked a vacation for this year. Our total package pipeline continues to grow, and we currently have 13% more owner and preview reservations on the books for the second half of this year than we did at the same time in 2019, illustrating the pent-up demand we think is starting to manifest itself. As always, thank you for your interest in Marriott Vacations Worldwide. Take care of yourselves, and to everyone on the call and your families, stay safe and enjoy your next vacation.

Operator, Operator

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.