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

Welcome, everyone. This is Brandt Montour from JPMorgan. We are excited to have with us here the team from Marriott Vacations Worldwide. CEO, Steve Weisz; CFO, John Geller; as well as Neal Goldner, Head of Investor Relations. Steve is going to kick this discussion off with some general comments as well as the 8-K that they released yesterday. Steve, go ahead and then we'll dive right in.

Thanks, Brandt. Appreciate it. Thank you, everyone, for being with us this morning. I'd like to spend a few minutes kind of giving you some highlights about where we stand in relation to the resilience of our of our business model. And so let me start on the vacation ownership business side. Occupancies have remained relatively strong relative to certainly what it was in the second quarter. Across our mainland drive-to resorts throughout the summer and over Labor Day. Let me give a couple of examples. So Colorado Mountains, we ran for July and August. These are all July and August numbers. Around 80% occupancy, Marco Island, Florida, 80%. Palm Beach, with Sanger Island for us is 65%. South Carolina, 70%, Southern California, 65%. And with that said, there continues to be softness in Orlando and which running around the 40% level. And in Hawaii, New York and San Francisco due to the travel restrictions and mandated closures, things are very soft. Hawaii, for example, is about 7% occupancy. New York and San Francisco remain close. Historically, I would remind you that both Hawaii and Orlando, our sales centers there deliver about 40% of our annual contract sales. So we do need these markets to recover, to help drive overall sales. But we're somewhat encouraged by what we've seen in our other drive markets and believe that once people are willing to enable to fly to places like Hawaii, once the government withdraws the 14-day mandatory quarantine rule, we believe that we'll start to see some pickup. Give you a couple of examples. In Aruba, again, a fly market, we ran about 50% occupancy for the month of August. And in St. John and St. Thomas, we were running over 70% occupancy until the government-mandated a 30-day shutdown of all combinations on the island. The -- as far as metrics are concerned, VPGs have remained very strong this summer. As a reminder, for those that haven't been following closely, we did institute some sales incentives and to help drive some of that volume. And tours remain somewhat muted based on lower occupancies at our resorts. We would expect that our vacation ownership contract sales in the third quarter to be in the range of $130 million to $140 million. And on the more resilient management, financing business side of things, we continue to perform very well. On the exchange and third-party management business in the side of the resorts about our results. Only about 140 of the interval international resorts are expected to remain closed at the end of September. And we would expect that transaction volumes in the third quarter to be about 90% of what they were at the same time last year. I think this goes a long way to illustrate that timeshare owners do desire to travel. Now with that said, exchange revenues will be down, call it, a little more than 30% due to the fact that we issued a number of COVID certificates that when they are redeemed, they carry no revenue with them. So that's just from a modeling standpoint, you might want to keep that in mind. And of course, we expect the very resilient exchange membership revenues to continue to be strong, down about 10% from last year's third quarter, or call it, 90% of what we ran in the third quarter last year. We currently have more than 2.5 million owner and exchanger nights booked for the second half of the year. And excluding Hawaii, obviously, because they've been closed, we're only down about 11% compared to this time last year. We do expect business to gradually improve as we move into the fourth quarter, especially if Hawaii reopened. However, the pace of improvement certainly depends on our recovery of occupancies at our resorts. And we do expect it will probably take a vaccine to get us back to more historical occupancy levels over the near to midterm. As a result of all this, we did issue an 8-K yesterday. That announced that we were in an effort to reduce our cost structure that we were laying off 3,300 of our associates. That's about 16% of our workforce. I would tell you, the proponents of which are our resort operations people, which, as you might imagine, is a function of occupancy levels et-cetera. I would also say to you is one of the toughest decisions we've ever had to make as a company. But we believe that it is important from a long-term perspective, for the health of the business. So with that, Brandt, I won't take too much more of your time, but thought I give the, at least, some headlines.

No, that was actually all of my questions, and we're going to wrap up here. Thanks, guys.

Good.

So look that was a really great rundown and a lot of helpful details. We're going to dig into some of that hopefully. But just on booking space, and I think you gave a number in terms of sort of total bookings for the back half of the year for exchange and owner bookings? And can you help us draw a line between that and maybe arrivals? Back in the summer, we saw other people, I don't think you guys saw it as badly, but we did see an uptick in cancellations. And so what have you -- what have you seen in terms of cancellations trending? And how is that sort of linked to inflection rates by market?

Yes. Let me talk a little more in generalities, but I think I'll get to where you try to go to. You may recall that as we were in the second quarter, I mean our -- the vast majority of our resorts were open, although because of governmental restrictions about things that people could do while they were there, et cetera, we communicated to all of our owners and exchangers that were coming to our resorts, this is the kind of experience that they would look forward to having. And as a result, many people decided, "hey, this doesn't sound like much of a vacation to me. So I'm just going to stay home.” So there were numerous cancellations in the second quarter. When we started to reopen things as things started to look better in June, we had a lot of pickup particularly on the external owner and exchanger side. We had closed down transient reservations, call it, the end of March, we stopped taking them. And we didn't start taking them again until, call it, the middle of June. But -- and then things were looking pretty positive in July. You may recall that in certain pockets, such as Florida, where the incidence of the virus started to spike a little bit. There was some falloff in that. We are starting to see that go the other direction again, where people are starting to get more inclined to book going forward. So I think the -- and by the way, obviously, with Hawaii, Hawaii has been very herky jerky in terms of what they said they were going to do. At one point in time, they said that they were going to open August 1, and they said they were going to open September 1. And now they said, "Well, we think October 1, but it could be later." As you might imagine, we've got, call it, 20% of our inventory is in Hawaii. So people that -- and as you might imagine, it's a very popular destination. So every time the government delays another month, there's another slug of our owners that can't go there. So obviously, they have to reschedule their vacations, et cetera. So -- but again, I think what we see and what you see in terms of some of the incidents of the virus and everything else, Florida seems to be turning back the other direction again, which is fortunate, same thing in California. So we believe that all things considered, the fourth quarter will be certainly stronger than the third quarter in terms of occupancies. With that, we would hope that because, obviously, we generate a fair amount of sales from people that are staying in our resorts, that we'll see some additional recovery in the fourth quarter. But with that said, I happen to put the caveat on it, we're only as strong as tomorrow's news. You saw what happened yesterday with the announcement about there could be a vaccine as early as the end of October, and everybody was euphoric. But you also saw what happened last week when I think it was AstraZeneca that said that, "oh, well, we had one bad reaction", therefore, the market went the other direction. So I put all that in the context of we are cautiously optimistic, but we certainly don't have the kind of visibility that we would traditionally have looking for.

Okay. Great. And you mentioned sort of the fourth quarter, and I know this is sort of a cautiously optimistic type of thing. But historically, there's been some seasonality, right? In sales of VOI. How has that sort of changed in the current environment?

Well, that's another great question. If you -- on a normal year, just look at the month of September. The normal year, the first 2 weeks in September are stronger than the last 2 weeks of September, and it all stands to reason. Kids go back-to-school. People are kind of coming off of the vacation cycle and everything else. We've seen anecdotally. So I can't say it's a trend here. We've seen in some locations where occupancies, in a place like Hilton Head, for example, occupancy in the second half of September looks to be as good or maybe even a little bit better than we would typically expect to see. And some of that, we believe, is because people are telling us, "hey, listen, my kids are attending school virtually. I'm not in my office. So I can go to a place like Hilton Head. I can work from my unit, my kid can go to school for my unit and the rest of the time, we can go out and be on the beach." So again, I can't say that, that is emphatically what's happening everywhere. But I'm hopeful that, that could be indicative of some maybe imply additional strength into the beginning of the fourth quarter. As you said, I mean, obviously, the first half of the year and the timeshare business in general, certainly were no exception to that. It's always stronger than the second half. And that's just a function of where these resorts are located, at vacation destinations, which are highly desired and everything, whether it be beach, whether it be ski, you name it. As you get into the fourth quarter, things modulate a little bit. So -- but again, we're measuring year-over-year, quarter-over-quarter, I would expect four to be better than three, both of which will be below what we experienced last year.

Great. And maybe you guys could -- maybe you could give us a sense of what you're seeing in terms of consumer behavior, how does it feel like in terms of their confidence, their propensity to purchase if they are taking the tour, if they are traveling?

Yes. So implied in what I said earlier, and certainly, I mean, we've obviously pivoted to focus more on our existing owners who are vacationing and using their vacation experience that they've already bought and paid for, in terms of talking to them about adding additional points to their portfolio. And here's a really good news, 95% of our owners that are staying in our resorts. We give them the option. They can either come talk to one of our sales executives in one of our sales centers with obviously the appropriate personal protective equipment and plastic glass and everything else, or we can do it virtually. They can be in their villa. We can talk to them electronically much as we're doing here. 95% of our folks want to do in person, which I think, says something about their level of confidence. We also survey our owners before they arrive and ask about what their level of confidence about our ability to maintain cleanliness standards, sanitation and all the other stuff. And then we survey them after they've departed. And to date of those surveys, we always average very high on the front end going in, and we're about 10 points higher on the way out. So that tells us that they believe that they're getting a good experience. I had an opportunity to take my family to Hilton Head in August. And I can tell you, the resorts, I went around all of our properties there, the resorts are doing everything they can in order to not only have a sanitation level that is visible, but also making sure that we're helping our owners if they happen to slip and don't have their mask on or something that we remind them that they need to. So with that said, because we've gone to owners, typically speaking, you have a higher VPG with owners, which are essentially adding more inventory to what they already own. We've got less first-time buyers because our occupancies are lower. Obviously, you source a lot of first-time buyers out of people that are either renting in to a location or they're on package sales. So our VPGs are higher. The other good news is because of the profile of our existing ownership base, which has an average age of, call it, 60, and an average household income of north of $130,000, a net worth of greater than $1.5 million. That's all self-reported but we believe it to be fairly true. I'm not sure they've been as impacted as some others have had because of the pandemic. So we feel as though the strength of our ownership group is good as we will continue to try to dial up occupancies and get back into more first-time buyers, I would expect the VPG number to come down. That's just arithmetic because the VPG of first-time buyer is lower than the existing owner. But we are very encouraged by the performance of what we've seen thus far. We just wish we had more occupancy than we had thought to.

And are you seeing any shifts in demographics? I mean, you noted the average age. Is there any sort of shift's going on into the surface in terms of your owner base or who's more likely to buy?

Yes. Because of what I just mentioned, since we're talking to more owners than first-time buyers, the average age SKU is higher. First-time buyer average age is, call it, low 50s. And -- so by definition, that means that, yes, we're talking to a slightly older group. Other than that, in terms of -- I mean, we don't have any visibility into first -- into advanced bookings other than we know what owners are booking. We know what exchangers are booking. Because we turned off transient arrivals for a number of months, and they have been slow to come back. Although somewhat better. I mean, in terms of -- I got a number here, let's see, transient reservations increased 21% during the month of August, which is good. That's better than the last fall numbers because it's off a relatively low base, but it does say there's some acceleration there. But -- so yes, if you said given the demo of your current on-the-books pipeline, it would skew a little older because it's more owners and exchangers and less first-time buyer.

Is that 21% transient reservation lift, is that a -- is that for all future periods? Or was that just for the month of August? And is that a year-over-year number? Or how should I look at that?

That's just for the second half of 2020.

What we had in the books at the end of July versus what we had in the books at the end of August. So it's just an indication that there were more transient book reservations on the books in the back half, at the end of August, then we had in July.

Okay. Yes, it's off a low base, but that's probably a higher number than you had June going into July.

That's absolutely correct.

Okay. Great. And then the points based sales model, which obviously is highly efficient for you guys. I just want to ask about how that sort of played out in the pandemic just because everyone wants to go to the same place as either beach communities or mountain communities. So how has that system sort of performed in terms of customer satisfaction, in terms of availability? Any comments there?

Well, as I mentioned, in the second quarter, there was a lot of people that have wanted to go someplace. And because of the local restrictions, and we wanted to be very forthcoming with those owners and say, and I know you want to go to Palm Dessert in April. But Riverside County and Palm Desert says that all pools must be closed. If you're going to go to Palm Desert, if you don't want to be at the pool, you probably want to be playing golf, and that would be the only other thing you could do. So there was some people that said, no, I'd rather take my points and use them at another time. So we work with them to do that or to give them the interval international certificate so that they could use it at a later date. I will tell you that there will be -- I mean, there's a general misconception about timeshare inventory. And whether you're talking about points, whether you're talking about weeks. There is a finite supply in any given resort. The example I often use is if you and 50 of your closest friends went to buy a second home at the beach. And because of a hurricane or whatever it is, you couldn't use your week you might say, well, okay, give me 2 weeks next year. The problem is to come up with that second week next year, one of your co-investors would have to say, well, I'm not going to use my week. So my point is, whether it be us or whether it be others in the space. There will be an inflection point where not everybody can be at the same place at the same time they want to be at. And this is a difficult concept for people to grasp. But we'll do our very best. I mean, what we have done, we've deliberately said for next year that some of the traditional inventory that we would make available on a rental basis. We are not going to make available, so we have more inventory available to our existing owner. This would be inventory that we would either own, developer inventory that has been sold or inventory that would be given to us because somebody wants to make another kind of vacation. They want to go on a cruise, they want to do whatever, which in case we get the inventory back and we pay for that experience in other places. So our rents then will [ nick ] on our rental revenues for next year. Again, we think it's the right thing because at the end of the day, having satisfied owners, which represented 60% of our sales last year, buying more of our product is clearly in our best interest and the best interest of the company and our shareholders. So I'm not sure I answered your question, but...

No. But you made a good point. Even if you were selling a fixed deal at a fixed resort for a fixed week like back in the day, that -- and it was in Hawaii, in summer of 2020, they're not getting that week back, right? I mean, that's gone?

That's exactly right.

Okay. Great. So then I want to talk about Vistana a little bit. So far in this recession, which parts of that portfolio has outperformed, underperformed? Just to get a sense of the difference in the footprints. And talk a little bit about how their consumer loan portfolio has performed here?