Marriott Vacations Worldwide Corporation (VAC) Earnings Call Transcript & Summary

This is Stephen Grambling from Goldman Sachs Global Investment Research and it's my pleasure to introduce the next company at our Travel and Leisure Conference, Marriott Vacations Worldwide. As we heard a bit about yesterday, timeshare should be one of the first areas to see a recovery given drive-to leisure markets. And Marriott stands out with its best-in-class offering and customer base. Here to help us understand how the business is adjusting to the backdrop and preparing for a ramp back up, we have Steve Weisz, President and Chief Executive Officer; John Geller, Executive Vice President, Chief Financial Officer and Chief Administrative Officer; Neal Goldner, VP of Investor Relations. Thanks, everyone, for joining.

Good morning. Thanks for having us.

Absolutely. So I want to start by just understanding the Marriott Vacations business model during the lockdown. Just remind us how the model has changed over the years and what also makes it uniquely positioned to kind of weather the current environment?

Yes. Thank you. And so if you contrast that to kind of where we were pre-2010, there's a lot of things that have changed. Obviously, we've moved from a weeks-based program to a points-based program. We don't sell any longer any fractional product, any residential product we were selling back then. We have more fee-based businesses as a result largely of our acquisition of ILG back in the fall of 2018. And virtually everything we've done from a development standpoint, instead of being on our own balance sheet, we work through third parties to make them more capital-efficient. So in many respects, I think when you think about the liquidity profile of the business, cash flow, et cetera, it's markedly different than where it was, call it, the '08, '09 time frame.

Great. And then I guess there's 3 questions that we're asking all the management teams at the conference. The first is really on the industry demand outlook. Can you just help frame how you're thinking through the potential path of recovery? How that compares and contrasts with how you manage the business? And any signs of recovery that you're already seeing as states start to reopen?

Sure, sure. So here's the cadence that we see. It's going to start on the VO side with the local drive markets, then it will be kind of the domestic short fly markets, then the domestic long-haul markets and then the international markets. And I think it's pretty much going to be -- and that's the way we're seeing it play out. So for example, Hilton Head, where we have 8 resorts, we have occupancy levels in Hilton Head ranging from, currently today, 40% to 60% occupancy. And those have built since, call it, the middle of May. And so anything where people can get in their car and drive to, particularly if it's on water, near a beach, that's obviously popular and where people want to go. There are -- some of the projections, even the ones that have been hedged back, looking at Hilton Head as an example, we think occupancies for the month of June will be north of 80% in those resorts. So as we spin up the occupancy of these resorts, then we start to begin to spin up the sales centers. All of our sales centers were closed from March 23 until literally yesterday. We opened 2 sales centers yesterday and we'll open 2 today and we'll open 2 tomorrow. So as the occupancy of the resorts starts to build and we have enough people on campus, where we believe we can operate a sales center from a cash-efficient standpoint, we will open up the sales gallery. And with that, arguably, we'd like to get sales and the like. I'll give you a -- it's not even a data point, it's kind of a -- it's an anecdote. We had 9 sales tours in Marco Island yesterday, we sold 4. So from a closing rate standpoint, that's great. I wish I could tell you that's the trend. But I think what you'll see is our owners have been anxious to get back on vacation. They are very much invested in their vacation because, obviously, they own it, unlike going to stay in a hotel some place where you make a transactional decision and where you either go or you don't go. Here, they've paid for it, and they've not only paid to buy it, but they've also paid it from a maintenance fee standpoint. And so they want to get back on vacation, and they're heavy travelers. And as I know, you've reported, Stephen, as well as others, clearly, the leisure transient segment of the hospitality industry will come back first, probably followed by business transient, followed lastly by group. And we're -- certainly, because we're a leisure transient business, we certainly see that happening.

Now as a follow-up there, you mentioned Hilton Head as an example of where occupancy rates have moved up. I mean is there any sense for where that compares versus normal? And is that all existing owners? Or do you have some folks who are effectively using it as a vacation rental in there? And maybe as one other follow-up, more broadly, are you seeing that future tour distribution channel open back up a little bit in terms of people booking ahead for taking advantage of teasers or other things?

Yes. Let me answer your last one first. For the second half of 2020, so July through December, we have 40,000 tours on the books, and that contrasts to 43,000 that were on the books same time last year. Now that number is a little stale. It's probably 2 or 3 weeks stale, but directionally, I think you'll find that accurate. In terms of how the mix of customers is going, I mean, we were not taking rental reservations. Obviously, if anybody had a rental reservation on the books for arrival after June 1, that stayed in place. But for -- ever since, call it, the end of March, we have not been taking rental reservations in the system at all. We literally restarted rental reservations for the -- from starting June 1 on yesterday. So I would say, for the most part, what we see, people that are in residence today at our resorts are people that are owners or people that are on preview packages that had been booked before the crisis came into play.

That's good detail there. Changing to the margin outlook. On the heels of COVID-19, there are some puts and takes to think through, cost cuts, safety, cleanliness. Where do you think margins broadly should shake out relative to 2019 levels? And if you weave into that, any other kind of changes you're making as it relates to social distancing related to the business model?

Sure. Stephen, it's John. In terms of a lot of the COVID-19 costs, obviously, those are -- not that we won't have some above property. A lot of that's going to be at the property level, whether those are onetime costs or ongoing costs to do more thorough cleaning of the resorts. So those costs get borne just like any other cost at the resort level by the owners. In terms of the incremental cost, if you think about it, given resorts being shut down, system-wide, cost back to the owners are probably $20-plus million below budget right now, just given the closures we've had. So I can tell you, those costs are going to be nowhere near that, if you think about it that way. They're not insignificant but going to be very manageable, if you will. So -- and then the above property, not so much. I think -- when you think about our margins more broadly as a business, like we've always talked about, about half our revenues are very sticky. That's the management side of the business. I don't see any real impact in the near term on margins there. And then the financing portion of the business, we've taken some higher reserves. But net-net, I think our financing margins will hold up pretty well here. I think the question marks are really more around the sale of vacation ownership. We're going to bring back costs slowly to support sales. But with that, you do have some fixed marketing and sales costs that you'll get to leverage over time as sales come back, but you're going to bring back your variable costs more modestly until you get your top line sales to help improve margins there. And then the rental side of the business, and that's opened back up that, from a GAAP perspective, you have a lot of those costs that are incurred early part of the year when we pay maintenance fees on the inventory that we own for the year. But on a cash basis, you have very little incremental cash cost to rental as we move through the balance of the year. So as those rentals come back, it will be very cash flow accretive to us in the near term. You'll still have the impact on your GAAP margins because of those costs that we paid at the beginning of the year. So -- and then more broadly in the exchange business, the good news there is we're seeing that business come back faster than sales on the vacation ownership side. So we've got members that are starting to transact again. We're not back to where we want to be from a budget perspective, but the trends are actually very favorable as that's really starting to recover. And that's all overlaid, whether it's there or across the business, in the fact that we reduced costs very significantly. And so the ability on less revenues to bring back less cost as it ramps back up and manage the margins, that's our goal here for the balance of the year.

Great. Maybe piggybacking off on some of your comments about the cash puts and takes over the course of the year, can you just remind us some of the CapEx, reopening costs and working capital costs as we reopen. Is there anything to keep in mind there?

Yes. Not really. In terms of CapEx, once again, remember, at the resort level, those are paid out of -- those are pre-funded dollars sitting in FF&E reserves and get paid for out of those reserves, any CapEx at that level. So very minimal impact there, above property. At the inventory level, our corporate CapEx, we've essentially made our payments this year on some of our asset-light deals. So the balance of the year here, and we've stopped repurchasing inventory on the secondary market and done some things until we see cash flows coming back. So we've been able to defer most of our above-property CapEx that is really -- goes to our cash flow. We've got some minimal CapEx around some of the integration projects we're still working on that will drive cash flow savings. So we're in pretty good shape as we look at the balance of the year to add back any projects based on how business recovers.

And keeping with the social distancing impact, what was your mix of sourcing pre-COVID? And how do you think about sourcing and sales strategy evolving in the current environment?

Wait, you're talking about tour flow, Stephen?

I guess you could say tour flow, but also not only where the tourists are coming, but do you start to think about more digital, either outreach or also tours themselves?

Yes. Well, a couple of things. The -- for the past, let's call it, 2 months, we have -- we've throttled back a lot of our digital outreach because, quite frankly, in the environment of uncertainty that we found ourselves, trying to get somebody interested in booking a tour package to go, and they don't know when the resort is going to be open or how fulsome the activity level is going to be at that resort was kind of a fool's errand, we thought. So we -- obviously in the midst of dialing that back up, we spent most of our digital time kind of getting into the reassurance mode to our owners to make sure that they knew that, a, we were doing everything we can to try to make sure that we could get them back on vacation. And when they came back, it was going to be a safe and secure environment where they could have a great dependency on having a terrific vacation. So when you break down how our traditional tour flow looks at, we've got our Encore packages, which you may recall, Encore is where people that have taken a tour and, for whatever reason, have decided that they were not in a position to make a decision to buy, but we sell them a return package. Right now, and these are numbers as of, call it, the 1st of May, but they're, let's call it, directionally accurate. About 56% of our tours on the books for the second half of 2020 were Encore packages. We had another 26%, which were packaged tours that were sold to people for first-time buyers, largely through our -- not only our digital channels, but also through some of our marketing outreach programs. And then there's another, call it, 40%, which are packages -- I'm sorry, that's not correct. Yes, another 20%, excuse me, that are site-based packages where they're sourced in the local market, either through linkage programs or other ways and where we have site-based tour generation. So -- and we don't believe, although there'll probably be a skew, I don't think it's going to be dramatic. But I think you may recall that 60% of our sales last year were to our existing owners. I would expect that to drift up a little bit because when we were dark on transient bookings for a while, then the vast majority, particularly if you think about June, the vast majority of the people that will be on site at our resorts will be probably owners or people that are there on packaged tours. I would think that you would probably see the owner percentage skew up a little bit. I don't think over the long haul, that's going to change materially. And then obviously, as we have now been able to begin to pivot away from kind of the digital safety security encouragement stuff to now start to gen up some more digital tours, I think you'll see that. The one area where we'll probably fall a little further behind that is the work that we have been doing with Marriott on the, call it, digital call transfer or the analog of a call transfer in the digital space. As Marriott put people on furlough, as we put people on furlough, that pretty much got into a suspension mode. And as those people will start to come back, then we'll start to spin that back up again. We had already been through a fairly good test of the process. We were in the process of beginning to scale it up, and then we'll have to get back at that as quickly as possible.

And maybe you can provide a little more color on those tests because I think a big question that we've heard from investors on call transfer, in general, is, is that going down? And are you seeing the same kind of conversion rates and the same success with getting tour flow from digital efforts?

Well, clearly, call transfer because, as you might imagine in the lodging space, the amount of people that are calling to book reservations over the last several months has gone down dramatically. I don't have the numbers, obviously, from Marriott, but I would expect that, that would have had a very material drop. We still have people in our call centers that are taking call transfer, but we certainly see the volume come down. And I don't think it's because our penetration rate is any lower. I think it's just based on the number of calls that are being originated into those lodging call centers. We are still very encouraged by what we have seen in terms of what call transfer and other digital outreach programs through social platforms can produce for us in terms of cost-efficient lead generation that will result in tour packages. And it's, again, circumstantially -- and when you're faced with the fact that fewer people are calling and fewer people are looking for lodging reservations in terms of -- on their device, you're going to have fewer opportunities to create a package and sell it. So as I said, once Marriott gets back at it, we'll certainly be back at it. I would think our cadence will probably be staffed up a little faster than they will. But as soon as that happens, I think we'll be all over it.

Great. Maybe changing gears. John had mentioned the provision stepping up a little bit recently. As we think about the financing business and the process for provisions, how has the -- can you just walk us through how that process typically works? How the portfolio is similar or different than past downturns? And where you are or not seeing changes in payments within the portfolio at this point?

Yes. Sure, Stephen. Just high level, I mean, we put a reserve on the books based on historically how defaults have occurred. So if you look at our historical cume default rates on any type -- any one of our securitizations, they typically are in that 11% to 12% range. We did see coming out of the financial crisis that we had some securitizations in the '06, '07 time frame that reached a cume default rate of, call it, 16%, give or take. So you saw a stress, not surprisingly, on some of the newer vintage loans and securitizations. But overall, what we saw was about a 50% increase in defaults for roughly a 15- to 18-month period, both from a Legacy-Marriott. We also looked at the Legacy-Vistana portfolio performance coming out of the financial crisis. So we used a similar methodology here. There's a lot of things, Stephen, on what's different about our business model early on back in '08 and '09 versus today. A lot of that also had to do with the fact that as part of Marriott, we were looking for incremental EBITDA, not necessarily development margins. So even back then, we were sourcing tours at off-premise contact locations that we turned off and never brought back on. And with that, some of those tour generation and ultimate sales probably drove some of the higher defaults we had back in '08 and '09. So at some level, we've done a much better job, I think, driving our development margins as a public company and focusing on the higher yield channels. And I think that will ultimately play out a little bit in terms of how we see the portfolio perform. Yes. We've always talked about our customer demographic. It's very strong. And to date, we've seen about 1% of our borrowers ask for some relief because they've either lost their job or lost at least 30% of their income, which was a program we put together. So very manageable at this point. And basically, for folks that are part of that program, we don't credit report for 90 days, no payments for 90 days. But the idea is then after that, over the next 9 months, you bring your deferred payments back to current. So early stages, very manageable. And just one final point, just on the reserve we took in the first quarter of roughly $52 million of additional reserve, call it, that's about 2% to 2.5% of our overall portfolio of just over a couple of billion dollars. So once again, we're -- we think the reserve is right in terms of how we think the loans will perform here over the next 12 to 15 months. But clearly, something we'll continue to keep an eye on.

As a couple of quick follow-ups on that. The 1% asking for relief, do you find any consistency in terms of who that customer is? Is it a recent customer? Does it vary by market? And then secondarily, how are you evaluating repurchasing defaulted inventory? And what are typical recovery rates?

Yes. So no direct correlation. We do see that on average, the folks that are part of the deferred payment program, their FICO score on average is slightly lower than the overall FICO score. That's about the only kind of correlation I can give you at high level. And I'm sorry, what was the second part of the question?

Just how you think about buying back inventory.

Buying back inventory.

Yes.

Yes. So on the defaulted notes because we're the residual interest in the securitizations as well as the excess spread, as we've always talked about, it's just more efficient for us to buy back the defaulted notes at par if they default out of a securitization and then foreclose and resell that through our normal sales process. So given the amount of excess spreads, and obviously, we haven't seen any incremental defaults at this point, defaults don't occur until, on average, 150 days. And given the deferred payment program, I wouldn't expect to see any increase of any significance in defaults here in the near term. So yes, we'll continue to buy those out. I can tell you, if you go back to '08 and '09, if you looked at those securitizations, even with increases in defaults that we had in the near term coming out of the financial crisis, the excess spreads were always greater than what you would see in any monthly default scenario. So I don't see any reason why we won't continue on that path.

Got it. And then turning to the ILG integration synergies. You mentioned deferring integration and transformational spending. Can you just remind us what is left? And how the current environment might impact the path to achieving synergies as we see things ramp back up?

Sure. On the synergy front, you have the target of $125 million or more. And we still see all the opportunities. Nothing's changed post all the COVID-19 in terms of getting longer-term synergies, those opportunities. A lot of those that existed or that were still on the outlook did require more system investments to consolidate a lot of our vacation ownership systems and really simplify our applications, et cetera. So those were the ones that had more upfront investment that we said we're going to hold off for now. We'll come back to those. And in the near term, we have stayed focused on things that were either underway around our HR information systems and the consolidations there that are going to get near-term cash flow savings by the end of the year as well as some of our marketing and sales systems. So -- and the opportunity here in the near term, obviously, with the COVID-19 is we are focused on the longer-term org design and structure and what that looks like. So we'll continue to do things here until the business starts to recover. That will focus on near-term savings that don't have a lot of upfront cash flow investment.

Great. And then maybe moving to capital allocation. Can you just walk us through the decision to suspend the dividend and share repurchase program? And then how cash flow will be prioritized in the recovery? And then longer term, does the experience alter your thinking about the right capital structure and liquidity for the business in the future?

Sure. Yes. I mean, for us, with the dividend in May that was -- that we suspended really was just around the fact that we don't have -- and we still don't today, notwithstanding resorts are opening, sales centers are starting to open back up, what that recovery time line looks like. So while we're very optimistic, early stages here and things are opening back up and sales are coming back. Until we have better visibility into the recovery as well as the risk that you have another round of shutdowns and all those things, we thought it was prudent not to pay a dividend here in the near term and manage our cash flow. Now going forward, the priorities as we start to bring -- or get cash back and business starts to return, clearly, we're going to be looking at things, investments and things that we put off that -- integration costs, things like that, that are going to drive longer-term synergies and returns. So we'll start to bring those back. And I think once we get past -- one of the things I should mention we did is amended our corporate credit facility a few weeks back, which basically suspends the one financial covenant we have around leverage ratios for a year. With that, we are restricted while that relief is in place for paying dividends or buying back shares. However, we structured it in such a way that if we ultimately don't need it, we can get out of the relief, and all the restrictions go away and we're back to the original terms in our credit facility. So once again, without the visibility and duration of the impact, we knew the second quarter is going to be impacted pretty significantly from an EBITDA perspective. And depending on what happens in the third quarter, we saw risk there, and so we wanted to take that risk off the table. But like I said, we've got optionality. And so as we kind of work our way through and we get better visibility in our cash flows and the recovery, then we'll make decisions at that point on reinstating the dividend as well as repurchasing shares.

And one last one as a follow-up here on capital allocation. Where do you -- how do you think about ramping back up inventory? Do you have the right inventory supply at this point? And do you anticipate that there could be some opportunities to acquire new inventory on the back end of this or think about consolidation in the industry more broadly?

Yes. I guess there's a couple of ways to think about it. First of all, obviously, when there's no sales, obviously, you have no inventory coming off the books. And so our model has always been to try to get as close to -- I don't mean like these we're just in time because it's never just in time, but matching up your inventory coming on the books versus that going off. So there'll be some normal hesitancy to go out and aggressively bring back more inventory because you simply would have to carry it on your books with the carry cost of doing that. With that said, if the right opportunity came along and made sense in terms of the strategic acquisition, either on a location or a business that was meaningfully accretive to our shareholders, we certainly would give it full consideration. So I think it's more of just a timing thing than anything else.

Well, we're just out of time here, but I want to thank everyone for joining us. And next up, we will have Boyd Gaming at 11:15, but I want to once again thank the entire Marriott Vacations Worldwide team, Steve, John and Neal, thank you so much for the time today.

Thank you very much, Stephen.

Thank you.

Take care. Bye-bye.