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

Good morning, everybody. This is Brandt Montour from JPMorgan. I'm really excited to be up here with Marriott Vacations. We have Steve Weisz, the CEO; as well as John Geller, the CFO, and I will give a quick rundown of the release this morning. The company -- I give a business update where they updated 3Q contract sales to the -- toward the lower end of the guidance range, commented on adjusted EBITDA that would approach the levels of 2019 and then gave several updates on capital allocation. They reimplemented the dividend. They announced $500 million of debt paydown and a share repurchase authorization of $250 million. 100%. 8 plus.

Right.

On the rundown. So maybe we'll just start off with those major points, and we'll take them in order. The contract sales guidance. I guess let's start out with the only negative thing, which is, again, probably pretty minor. But you called out Delta, you said that there were certain markets that were seeing some impact, shouldn't come as a surprise to anyone in this room. But maybe you could talk a little bit more about which markets? And did it come through in bookings, stays or close rates? Any other color would be helpful.

Sure. The -- it's predominantly California and Florida. And it's a function of tour arrivals, which are, in some cases, being postponed because of people's concern about COVID. We're also -- not a significant point, but we also had a closure of South Lake Tahoe, that was a mandatory evacuation started at the beginning of September and when we open until the 17th. So you lose 3 weeks or so of sales there because of the fires. And we're just trying to be sensitive to what we think. I mean if you think about occupancies, in August, as an example, for our North American properties, we ran an 86% occupancy. That's contrasted to an 89% occupancy in August of 2019. So marginal decline, but people are still coming to be honest with you. I do get calls periodically from people saying, "hey, I want to go someplace, but there's no availability." And we work our darndest to try to make it available. We've certainly pulled back on some inventory we normally would have put out in the rental markets to accommodate those owners. But in some cases, it's just not enough room at the end.

Okay. That's interesting. And then -- you didn't comment on Hawaii, is there nothing really to say there?

Yes. Occupancies in Hawaii are still very good. I assume some of you are aware of the fact that governor came out several weeks ago and advising people not to come to the islands. They've also stopped some inter-island travel between them. With that said, there are still -- our owners are still going there. And we anticipate there will be some softening of tour flow in those markets. I don't think it's all that material, but it is -- it will be impacted.

Okay. Great. And then on the comment in the release about the adjusted EBITDA approaching levels and 2019, And I apologize for mincing words, but I think that on the 2Q '21 call, you had said -- maybe you sounded a little bit more pessimistic about reaching those levels. I took it as a net incremental positive in the tone in the release today versus 2 months ago. But -- so I guess the question is top line a little softer, margins a little better. Is that the right way to read it? And what is driving that?

VPGs. The volume per guest that we're seeing is outperforming what we thought was going to be in our forecast for Q3. We think that will continue into Q4, as we thought about more first-time buyer tours coming into the system as well as a return of some additional sales executives to some of our sites that may not have performing at the same exact levels as our top sales executives. We thought that we'd see some decline in the VPGs, but they've held up very strong. And as a result, you get a better flow through to the bottom line.

Yes. And I think VPG has been one of the brightest spots of the industry and really helping the recovery for you guys as well as your peers. There is a question, though, is there a permanent shift here in VPGs, post-COVID? And would that be more on the pricing side? Or would that be more on the propensity to purchase or i.e. close rates from the consumers?

It's probably going to be a little of both, would be my perspective. And we think the VPG performance vis-a-vis prior years is going to continue on for quite some time. Part of it, don't forget, when we purchased ILG in 2018, we said at the time, and we've been executing against eliminating some kind of high-cost, low-yield tours that were in that business, and that gives you a higher VPG. Plus, as we continue to see owner occupancy exceeding on a percentage basis, what we typically would see at our resorts because of pent-up demand, they typically have a higher VPG as well. So I think that part of it will be close rate. Part of it will be based on the average purchase price. And again, we believe that this is going to continue well into '23 and possibly beyond.

Okay. And I want to come back to some of these fundamental questions. But before I do, I do want to talk about the capital allocation release in the information today. So the dividend reimplementation is at a level that was -- correct me if I'm wrong, basically, just above what you're paying towards the end of '19, but what you would announce for 1Q '20, which was a 20% increase quarter-over-quarter? Is that correct?

It was the same dividend that the last dividend we paid of $0.54. We stated it at the same amount.

Got it. Okay. And then you obviously have the debt pay down and then the share repurchase. Maybe you could just talk about, John or Steve, but the specific multipronged capital allocation decisions. Like how did you come about this? What was the decision process?

Obviously, we learned a lot during COVID. We went out like a lot of companies in May of last year, we borrowed $500 million because we didn't know how long COVID was going to last, what the impact was, and that was obviously in May of '20, the world was shut down. The great thing about our business was the resiliency and how quickly it came back. And we, not to say, if you go back and look at our contract sales and our numbers for the second half of last year, we were back to net-net positive cash flow on greatly reduced sales. And a lot of that's the resiliency of our management fee, our club dues, our Exchange business, which is nice recurring cash flows, and we were able to do things on the cost side to get back to that. So with that recovery and with our numbers getting backed, as we said, approaching Q3 '19 EBITDA, no near-term inventory commitments of any dollar -- of any significant dollar amount. We've got like $30 million or $40 million. And we've got $600 million of excess inventory on our balance sheet, which means from a GAAP perspective, right, to get to your adjusted EBITDA, you're deducting a noncash product cost, which on a more normalized, call it, 2019 sales, is $300-plus million of noncash deduction from your EBITDA. We don't -- we can monetize that going forward here with no near-term commitments. We will continue to recycle inventory on the secondary market. We can get it back at very low product cost, but that's roughly $100 million a year or so. So between the EBITDA recovery, the resiliency we saw and the fact that even with some of the COVID variant impacting some of our markets here. Margins remain great. We're very bullish about the recovery going forward, owing that in certain markets, there could be some bumps here or there. But -- and I should remind everyone, we never use that $500 million we borrow. We've been sitting with excess cash on our balance sheet. So the $500 million we're going to pay down is essentially excess liquidity that we have now, right? We just -- we didn't do that -- or didn't use that coming out of COVID. So it feels great where we're at, and we like the trajectory going forward.

Okay. And the $250 million share repurchase authorization, is that -- when you think about that number and that authorization, is it contingent upon any type of leverage targets or anything that you want to get done on the balance sheet over the next 12 to 16 months?

Yes. I mean if you think about our leverage, which is a great question, we were just kind of at the high end of our debt-to-EBITDA leverage ratio, call it 3x. We've always said we'd like to be in that 2.5 to 3x. With the delevering we'll do here of the $500 million and assuming, the EBITDA continues to recover here next year. I think there's an opportunity that without paying down any more debt, right, that you're at that 3x, depending on how EBITDA continues to recover next year. So pretty close one way or the other. So still optionality with the cash we're going to generate, but we're kind of back to -- if we go forward, we're kind of back to where we thought we were going to be on a leverage basis before COVID hit.

Okay. Great. And then just sort of level setting us with the '19 benchmark on EBITDA, right, which is -- this is contingent upon that. But if you're approaching 3Q '19 levels in 3Q '21 and you're looking to '22, which parts of the business are sort of lagging behind and which parts of the business are moving ahead to get you to that sort of '19 level?

Yes. you going to...

Yes. So on the vacation ownership side -- I mean, keep in mind, we've got the vacation ownership and Exchange and third-party management are the 2 big parts of the company. On the VO side, generally speaking, we're performing at a level that is very similar to what we saw back in '19. Where you see some things working, I mean, if you go to, not only contract sales, which are right now today through the quarter were very similar to what we saw in '19. If you think about the resort management and services side of the business, you get normal inflationary increases as a result of all that. So that obviously gives you a little bit of room. By the way, on the contract sales side, keep in mind that we did acquire Welk at the beginning of the second quarter. So that factors into the equation. And if you think about financing, financing is pretty much back to where it was, again, including the Welk piece of the business. The rentals, there is some headwind, largely because we took inventory that we normally would make available in the rental market. And we deliberately held it back so that our owners that had not had an opportunity to use their weeks or their points in 2020 could, in fact, use them, and so we had more available to them this year. So that you get a little bit of headwind there. On the Exchange business, that's where you get a little more headwind because we have lost some members. We've previously communicated to that, that some people -- 1 particular group decided to go outside, not have an Exchange partner at all. And so you do get a nick and all that. But I think when you put it all the way through and you put on top of that the fact that we're running because we've got less rental inventory, we're actually running higher average rates. You get some help there. I think you put it all together, and that's why we seem to think that it's going to look a lot like '19.

Okay. That's helpful. You've mentioned earlier the sort of tour channel optimization initiative, right, in COVID. And that's a story across the space, and some of your peers have talked about that, too, specifically OPC business. And so I guess, help us think about how that process has gone over the last 18 months, calling the channels you wanted to call. But also, has there been any situations where you've had a lot of strong pent-up demand or you turned them back on just because you wanted to soak up the demand?

Yes. OPC and off-premise contact for if you're not familiar with the term, is where you have a booth at a location and you source tours, people go buy and for some sort of an incentive, they really take a timeshare tour. Industry-wide, they're generally speaking, high-cost, low-yield tours. The exception of that is in Hawaii, where we still have OPC tours, but we've virtually turned it off everywhere else. And it is our belief that it would be something exceptional where we would reverse, of course, on a selective basis to turn some OPC back on because we've been able to find other sources of tours that give you a better cost profile and a better VPG performance. So that's one. Encore tours, which -- that's our term for a person that's taken a timeshare tour for whatever reason, decided not to buy, but they want to buy a package to come back. Those tours have been performing exceedingly well in terms of VPG. And those Encore tours have continued to grow as we've turned sales back on. So we're very encouraged by all that. The other piece of this is typically when you find local market stuff, where you find linkage our term where a local Marriott Westin Sheraton hotel, whatever, where you might have a presence in that hotel lobby and make contact with somebody staying there and encourage them to come to take a tour. As you might imagine, as the hotel business suffered greatly through '20 and into '21, we turned off a lot of that linkage stuff. I think selectively, we will turn some linkage back on, but that will be consistent with how those hotels start to ramp back up and perform at a better rate.

Okay. That's great. Maybe a couple of big picture questions. Longer term, just thinking about the business and the growth opportunity that -- and the way you view your business, I mean, what do you think that -- what do you think this business could actually grow at in a sustainable way over the longer-term, topline and/or bottom line and then tie in the digital initiatives you have with that for growth?

Yes. I mean, internally, when you think about EBITDA growth from the organic business, we're talking -- we think typically high single digits, low double digits, kind of growth. That will be a function of obviously trying to drive some topline revenues plus some of the synergy and transformation savings that we have been about since the acquisition of ILG in 2018, which will obviously get you better flow through to the bottom line. And that's keeping in mind the fact that part of the business, while very attractive from a cash flow standpoint, is the Exchange business, which on an organic basis is probably a mid-single-digits growth business. And the reason for that is that, many companies like ourselves have put captive Exchange companies into their structure. So people don't have to go outside to Exchange. And so -- and the only people -- the way people become members of an Exchange company is a developer who's affiliated with that Exchange company signs people up when they make their first purchase. So now, we think there's some opportunity to try to torque that and leverage that through some other things that we are doing in the Exchange business. But that's -- that will take a while to come to fruition. So I think those are the major elements if you stop -- I think, John, you can add to that.

Yes. No, I think, I mean, you got to remember the Exchange business and for us is even pre-COVID, was, call it, roughly 15% of our EBITDA, right? So our core growth is coming from our vacation ownership business. And with the tailwinds on the Hyatt side with Welk acquisition and the ability to really leverage Hyatt growth on top of our normal VO growth. Like Steve said, we're -- we've all -- if you go back to our November '19 Investor Day, the target for VO growth is, call it, high single-digit contract sales, right? Some coming from tours, some coming from price, right? And new sales centers over time as we add new flags. You drive the topline, the whole pie grows, that's a great thing about VO, right? Your financing profits go up, your management fee goes up. And depending on the margin, some of those parts of the business have much better margins like your management fees and financing. And then at the end of the day, you have your G&A. Steve talked about our synergy savings, but the ability to leverage some of your overhead. Remember, our licensing fees with Marriott and Hyatt, though there's a variable piece, call it, 2% on average of contract sales are more fixed than variable, right? They go up over time with the inflation. So the ability to leverage not only your licensing fees, but also, more broadly, your G&A, your -- some of your corporate costs that are going to go up less than you're growing your topline, that gets you back to at least set a target, right? When you put it all together, of, call it, plus or minus 8% to 10% EBITDA growth over time, right? Some years would be up or down from that, but that's how we think about the business. And remember, you do all that, it's self-funding, right? That's still -- to get that growth that's getting self-funded through your investment in your new product, which is your deduct, right, from EBITDA. So it generates significant cash flow. Historically, call it, about 55% of our EBITDA is converting into free cash flow, right? We've talked about the excess inventory. That's going to give us the ability to convert more here over the next 3 to 4 years, as we burn down our balance sheet. So as I said earlier, the setup is great.

That excess inventory burn off and the higher than normal free cash flow conversion from EBITDA is, I feel like an underappreciated ask that even though you have talked about it, I know you had. I guess, maybe just to put some numbers on it, right, we're talking about $600 million in an absolute value in terms of run rate. And sort of what -- over what period is that something that you'd realize. And I guess that starts later this year, right? I guess you have some commitments next year, but then it really ramps up in the '23?

Right. Yes. We've got, like I mentioned, some near-term commitments left for next year, call it, between the new units in Bali. We're going to get early next year and then another payment on our San Francisco Marriott Vacation Club property, call it, $50 million next year. And then our repurchases right, as we mentioned, about $100 million a year. So if you're doing $300 to $350 million of product costs noncash, coming off your books, the delta rate is what your inventory, give or take, will come down each year. As those commitments burn off, you'll have the ability maybe to do a little bit better, right? We're always -- notwithstanding we've been very successful doing our new inventory deals on a capital-efficient basis, working with partners. If you look at all the new flags we've added over the last 5, 6 years, generally, they've all been pretty capital efficient, that's always the plan so that we can get more inventory and -- but don't pay for it until we need it, which gets us new sale centers and that type of growth. So with very limited commitments right now. We are going to start looking out a couple of years. The first opportunity, we announced prior COVID, was Waikiki. We're hoping to do that on the capital efficient. That's going to be new construction and gets us into that market, which was a market we really wanted to get into. If we do it capital efficient, I don't need to pay for that inventory probably for 2, 3 years after construction has started. So that's when we're going to start to need inventory, right, because you'll burn through that excess inventory you have.

Okay. That's great. Maybe this is a good chance to see if we have any questions from the audience.

Question on holding back inventory for rentals. How long do you expect it, having to go on?

So I got to note, it's helpful to repeat the questions for the audience before answering since they don't have a mic. The question was how long will the hold back on rental inventory be in place, referencing making inventory available to owners? Clearly, through the balance of this year and through the first part, potentially, even into the third quarter of next year. As you might imagine, there are -- as I say, I get calls, people saying, "hey, I want to get into some place." And we don't have the availability. So we try to be as accommodating as possible to help them. In fact, bank their points for another year. At some point in time, we're going to have to stop to say, "Okay, fine, you had your chance and now you can't do that." But we're going to -- I mean for us, when a very meaningful amount of our top line vacation ownership sales comes from our existing owners, we want to buy more. We want to make sure that they stay happy with what they purchased. I've never apologized for selling more to our existing owners because that's, I think, a very good indication of how they feel about their ownership and being part of our company. But I would say it'd be -- it will linger on into '22. Yes.

Can you talk a little bit about how you differentiate between the brands to make sure that you capture in the maximum brands. And about the clients, for instance, you have a client who is interested in Ritz products, Ritz club, that they don't ask for the same information we have on the Ritz product categories.

Yes. Question is how do we differentiate brands to make sure that you don't have competition where -- and so the simple answer is, for instance, the example you raised with Ritz-Carlton. Ritz Carlton, a, we're not in sales with Ritz-Carlton any longer when the 2008, 2009 financial crisis came. The fractional market, which that is a product, fractional being buying a bundle of weeks, 3- and 4-week tranche is sometimes up to 5. We stepped away from that as best we could. So that's really not as much of an issue. But if you think about the Sheraton and the Westin and the Marriott brands, you have to think about how people view the brand, how they look at it. So I'll just give you a little example. So if you look at a typical Westin customer, they have a tendency to be more into wellness. They also have a slightly higher average household income than a Marriott Vacation Club customer. If you look at the Sheraton customer, they have a lower average household income than the Marriott customer, and they're more about togetherness and family and all of that. Not to say that each of those brands don't have some of those pieces. But -- and so one of the things we did when we bought ILG was we tried to spend a lot of time understanding how customers perceive the brand. Then you get a positioning statement about what the brand is and what its aspiration is and how you communicate that to owners. And then you develop, we call them swim lanes so that the brands don't bump into one another. I mean there are people that want to believe that brands are pure, that there's never any overlap. Well, the reality is there is overlap. But it's more kind of like this than it is like that -- excuse me, like that. So as a result, we spent the time to do that, and we will continue to be very focused on that. But you'll see it in our messaging, you'll see it in the way in which we conduct business in the brands, the offerings at the individual resort level will differ even the fit and finish of the units will be different from one brand to another.

Okay. Great. So question on the consumer. Maybe just talk about what you're seeing from your consumer in general, big picture? In years past, you've said that it's -- sometimes stock market correlated. I would think maybe the housing market, but all of those things are obviously up and to the right. So is it fair to say all those things are positive for what you're seeing in your bread and butter consumer?

Yes. I mean we've seen and we studied it, periodically, back and forth. There is a correlation between consumer confidence and closing rates in the room. Closing rates being if you talk to 100 people today, what percentage of them buy. So you've seen consumer confidence numbers that were at one point in time in 2020, not very vibrant, have come back fairly strong. You see month-to-month, you see some variability depending on the headlines in the news and everything else. But generally speaking, they're fine. The other thing is there's a lot of, not only is there pent-up demand for people on vacation, there's pent-up wealth that people have accumulated largely because they didn't have things to spend it on in 2020. So we think those are very strong indicators in what has continued to propel us forward and recover quite frankly, faster than we originally thought. We were going to recover from all this. And we don't see any indication in that, and we not only do proprietary research, but we also look at secondary research in the marketplace to understand how people feel about vacationing and travel. I will tell you that in the last 30 days, there has been some deceleration about the positiveness about travel, and that's largely a function of the COVID variant, that's to be expected. But again, when you ask the question, particularly of our owners, and ask them, do you intend to take a vacation in the next either 90 days or 6 months, 70% of them say, yes, which is a very positive thing. I mean our owners, they like the vacation. They like what they own, they want to use it, and they're disappointed when they can't.

Aren't we all?

Yes.

So on the competitive landscape, and you touched on RCI, your Exchange business -- sorry, interval.

Interval.

Sorry. You see what I did there. But that's...

It's okay. That's subliminal.

Now you hear my question. One of your larger peers had an Investor Day last week, they talked a lot about your strategy around Exchange. And you talked about very -- you talked about a strategy you have on Exchange. Can you maybe compare and contrast those? And what they're -- what you're doing that might be different than their?

Yes. So let's go back. Exchange business, in general. Relatively, on an organic basis, it's dependent upon new owners coming into the timeshare space, whether you're talking about our company, whether you're talking about other companies, they're most new interests. I mean, 66% of our sales in August, as an example, were to our existing owners. So the other 34% were the first-time buyer. So 34% become members of Interval because that's one of the things that people get when they buy an interest with us. They get an Interval membership. But when you -- that's not really where the money is made in the Exchange business. The Exchange business makes money on transactions. So one of the things that we're facing, to be honest with you, in the balance of this year and we'll cascade in the next year is, there's less availability for people to exchange into. And so when you don't have the availability, then you don't have the transaction revenue that's coming forth. So one of the things, and some of you may recall that we did an Investor Day back in October of 2018, which seems like a long time ago -- no, '19, 2019, I apologize. It seems like a long time ago. And we talked about what our intentions were in the Exchange business, which was to start to go out and take some of the assets that we have in that business, which is a travel platform, accommodations and how we can expand that beyond to non-time shareowners, to close end user groups. I will say that much of what T&L talked about last week, and I applaud their presentation and approach, is certainly takes that and embellishes that, and we certainly agree, and that's what we are continue to be about. I will also say to you in 2020, we pulled back from some of that because, for obvious reasons, we had to make sure that we were focusing our resources where they needed to be. But -- so we think there's that. There are also elements of the T&L presentation talking about a subscription service. I think we'll wait and see how all that plays out and go from there. But clearly, we are not content, as I'm sure Mike is not content in the T&L business, to think about the Exchange business as being a mid-single digits kind of growth business.

Okay. And then maybe just taking this to the next competitive big question that you always get asked with HGV purchasing Diamond Resorts moving downstream. How does that affect you, if at all?

Well, we're standing on the sidelines, waiting to applaud their success. Because if a publicly traded timeshare company does well, I think that benefits all of us. And the -- it will be interesting to see how those 2 cultures match up, to be frank. I'm not sure that -- probably not a secret that Diamond was out there and it was available and we made a conscious decision that we didn't want to pursue that. But Mark Wang decided that it was a good thing for his business. And like I said, we're hoping they're very successful.

And your deal announced earlier this year. Welk was a smaller, higher end, and I think most people would agree, it was a very smart transaction. Maybe you could just talk about the M&A landscape for you from here if there's opportunities, if it would be bigger or smaller than Welk? Or is it something you're actively looking at?

Okay. So standard response is, we don't talk about future M&A, okay? But philosophically, if there were another Welk-like opportunity out there, and you've heard John describe where we are from a liquidity and cash position, we certainly would give it serious thought. But I don't -- my personal opinion is these are largely driven by -- they're usually family-owned businesses where somebody reaches a point where -- the inflection point where they want to have liquidity. And when the liquidity event comes along, then you have to make sure that you match up, and we've always thought about it in a lot of different ways, is it add to our geographic footprint, culturally is there an alignment, is it accretive to our shareholders. Those are the 3 main pieces. If you found one of those and the timing was right and everything else, as it was in the case with Welk, that was a company that we had a very high regard for, for a number of years. We would certainly give it serious thought.

Any other questions?

Just one question on the earlier comment about Hilton Grand. How does that -- next year you start to sell it as 1 program. How does that change the selling approach?

So the question is next year, as we think about taking the 3 Marriott brands and selling them as one, how does that all work? Well, I'll take a little exception with the selling it as one. What we're going to do is we are going to put on an optional basis for existing owners, the ability for people to opt in to say, okay, instead of -- today, if you're a Marriott Vacation Club owner and you want to get to a Westin property, you can get there, you have to go through Interval. You have a preferred access to the inventory before it gets into the general population, but you have to go to it that way. This program will allow you to get from Marriott to Westin, Westin to Sheraton, Sheraton to Marriott, et cetera, without having to go through Interval to get there. It will also increase the number of options. But the resorts themselves will continue to have the same distinctiveness that they have today, and they will still be branded, Marriott, Westin and Sheraton. So think of it more as a transportation vehicle versus a blending of the brands where you put them all in a blender and press high.

And do you expect that, that would lower the friction -- not maybe friction cost, but the consumer experience would be more seamless.

The consumer experience will be more seamless. It will all be digitally enabled. And quite frankly, today, I mean, if you don't make your election within your proprietary window and you're now competing with -- in the case of Interval, 1.3 million members for this inventory, it's tougher to get at. Here, it's going to be easier to get on.

Okay. Anything else from the audience? Steve, John, thanks so much for being here with us today. Best of luck.

Thank you.

Thanks.

Appreciate it.