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

Greetings, and welcome to the Marriott Vacations Worldwide First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations for Marriott Vacations Worldwide. Thank you. You may begin.

Thank you, Melissa, and welcome to the Marriott Vacations Worldwide First Quarter 2023 Earnings Conference Call. I am joined today by John Geller, President and Chief Executive Officer; and Tony Terry, our Executive Vice President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties 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 as well as our comments on this call are effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release as well as our Investor Relations page of our website at ir.mbwc.com. With that, it's now my pleasure to turn the call over to John Geller.

Thanks, Neal, and good morning, everyone, and thank you for joining our first quarter earnings call. Looking at our year-to-date results, it's clear that consumers are prioritizing travel, which we saw in our occupancy rates and contract sales growth during the first quarter. Spring break travel made headlines this year with record-breaking numbers in March with beach vacations topping the list of preferred destinations. In addition, over 45% of Americans earning over $100,000 a year recently surveyed believe now is a good time to spend on leisure travel and intentions to book leisure travel have been on a clear uptrend. Since becoming CEO earlier this year, I've been on the road visiting a number of our resorts and have had the chance to meet with many of our associates who are responsible for delivering unforgettable vacation experiences for our owners, members and guests. Our unique destinations, trusted brands, excellent service and caring culture are just a few of the reasons we see vacationers coming back to visit us time and time again. Looking forward, despite the uncertainty of the overall economic environment, we expect strong occupancies from our owners, members and guests to continue this year. Consumers want a vacation, and they want to do with brands they trust in spacious, upscale accommodations in highly sought after markets, and we have some of the best brands in the most desirable locations in the industry. Now moving on to our results. 2022 was a great year for Marriott Vacations, and we kept the momentum going as we enter 2023. Occupancy was nearly 90% in the first quarter with our ski, beach and golf markets, all in high demand, while Asia Pacific continued its recovery with resort occupancy more than 30 points higher than last year's first quarter. With these strong occupancies, a robust tour package pipeline and the work of our marketing teams, we grew tours by 18% on a year-over-year basis. As expected, VPG declined year-over-year due to the strength of last year's first quarter, but it increased 7% sequentially and remains 30% above pre-pandemic levels. We grew contract sales by 10% in the first quarter compared to the prior year, illustrating the strong demand for our vacation ownership products and first-time buyers represented more than 30% of our contract sales this quarter, up roughly 200 basis points from the prior year. Abound by Marriott Vacations, which we launched last year, continues to resonate with owners and first-time buyers. As a reminder, the Abound program allows the owners of our Marriott, Westin and Sheraton Vacation Club products to have seamless access across these 3 branded resort systems and is helping us drive tour flow. In our Hyatt Vacation Ownership business, we continue to make great progress integrating the legacy Welk Resorts. In March, we launched a new owner benefit that provides discounted stays for those able to take advantage of near-term resort availability. Later this year, we will rebrand all of the legacy Welk Resorts as Hyatt Vacation Club. We will also add more vacation options as we launch the BEYOND program, allowing owners to exchange for cruises, tours and hotel stays. Moving to our Exchange & Third-Party Management segment. Inventory utilization remained very strong, and we are starting to see higher transaction activity from the accounts we added last year. However, with inventory deposits lagging last year, revenue was down year-over-year and profit excluding VRI Americas, which we sold last April, declined $4 million. Finally, while lower inventory availability negatively impacted our first quarter results, we did see inventory improve as the quarter progressed. In summary, despite concerns about inflation and the broader economy, consumers continue to prioritize vacations, enabling us to grow adjusted EBITDA by 8% on a year-over-year basis and return $134 million to shareholders through a combination of share repurchases and dividends. Looking forward, I remain excited about the trajectory of our business and the opportunities that lie ahead for us. With that, I'll turn it over to Tony.

Thanks, John. I'm also happy with the way we started the year. Today, I'm going to review our first quarter results, the strength of our balance sheet and liquidity and our 2023 outlook. Starting with our Vacation Ownership segment. As John mentioned, with consumer demand for leisure travel remaining strong and global resort occupancies running nearly 90%, we grew towards by 18% in the first quarter on a year-over-year basis. Consistent with our previous guidance, VPG declined compared to last year due to a difficult comp but improved sequentially. The overall result was a 10% increase in year-over-year contract sales, a strong start for the year. We also grew our tour package pipeline ending the first quarter with over 230,000 packages, including a growing pipeline for high vacation ownership and in total, more than 35% of these customers have already booked their vacation for the current year. Adjusted development profit increased 14% year-over-year to $109 million. Adjusted development profit margin increased 90 basis points compared to the prior year to 29%. This was driven by the growth in contract sales and favorable inventory costs. As expected, excluding the Westin Puerto Vallarta hotel that was sold last June, profit in our rental business declined $4 million to $25 million compared to the prior year. Revenue per available key increased 9%, but was more than offset by higher unsold inventory and cleaning costs as well as increased explorer usage. In the stickier parts of our Vacation Ownership business, financing profit increased $2 million as increases in contract sales and financing propensity were partially offset by higher borrowing rates on our newer securitizations. Profit from our resort management business declined $1 million as higher management fees were offset by the timing of club dues revenue. As a result, adjusted EBITDA in our Vacation Ownership segment increased 15% in the first quarter to $229 million and margin remained very strong at more than 31%. Moving to our exchange and third-party management business. Revenue declined 2%, excluding VRI Americas, primarily as a result of lower gateway revenue related to reduced inventory deposits. Adjusted EBITDA was $37 million, a decrease of $4 million from the prior year due to the lower revenue as well as higher wage and benefit costs and operating margin remained strong at 56% for the quarter. Finally, as expected, corporate G&A expense increased $7 million year-over-year as costs related to implementing our vacation mix program and new product development initiatives were partially offset by lower bonus expense. As a result, total company adjusted EBITDA increased to $203 million, 8% higher than last year's first quarter, and adjusted EBITDA margin was 25% in line with last year, demonstrating the strength of our leisure-focused business model. Moving to the balance sheet. We ended the quarter with approximately $1 billion in liquidity, including $306 million of cash, $120 million of gross notes receivable eligible for securitization and $549 million of available capacity under our revolver. With $3.1 billion of corporate debt outstanding at the end of the quarter, our net debt to adjusted EBITDA ratio stood at 3.1x roughly in line with our targeted 2.5x to 3x leverage range with expectations to be within our targeted range by year-end, and we remain well positioned in today's elevated interest rate environment, with 85% of our corporate debt effectively fixed at an average interest rate of 3.2% and no corporate debt maturities until 2025. We also ended the quarter with $1.9 billion of nonrecourse debt related to our securitized note receivables. In April, we completed our first timeshare receivable securitization of the year issuing $380 million of notes at an overall weighted average interest rate of 5.5%, including the $11 million of Class B notes we retained. The transaction was structured with a 98% gross advance rate and the blended interest rate was more than 100 basis points lower than our last securitization. Finally, sales reserve as a percent of contract sales increased year-over-year, largely due to revenue reportability and higher financing propensity. However, despite concerns about the broader economic environment, our notes receivable portfolio continues to perform well with delinquencies and defaults up only 20 basis points compared to pre-pandemic levels excluding legacy Welk, reflecting the strength of our borrowers. We also returned $134 million to shareholders in the first quarter repurchasing $80 million of common stock and paying $54 million in dividends. Moving on to our 2023 guidance. As you saw in last night's earnings release, we affirmed our $950 million to $1 billion adjusted EBITDA guidance for 2023 and continue to target 5% to 9% contract sales growth this year. Despite having another difficult year-over-year VPG comparison in the second quarter, we still expect full year VPG to only decline a few points compared to last year and for tour growth to remain robust, though not as strong as the 18% growth we saw in the first quarter. We continue to optimize our digital technology to drive lower marketing cost per tour and we expect product costs to remain relatively low this year compared to historical levels. As a result, we expect development margin to be around 31% this year. Rental profit in our Vacation Ownership segment is expected to decline year-over-year in the second quarter due to higher preview key usage and increased maintenance fees on our unsold inventory. However, it is still expected to increase more than 10% for the full year due to the timing of explorer costs and an easier second half comparison. We expect financing profit to be up slightly for the year, excluding last year's $19 million alignment benefit as increased contract sales and higher financing propensity are expected to more than offset higher borrowing costs. We also expect profit from our Vacation Ownership resort management business to be up roughly 5% for the year. In our exchange and third-party management segment, while inventory deposits at interval have begun to improve, we're still below the levels we were at this time last year. Though we continue to experience high utilization of the inventory we receive with less inventory deposited for members to exchange into, we expect lower exchange and getaway transactions this year. As a result, we now expect adjusted EBITDA in our exchange and third-party management segment to be flat to down slightly this year. Moving to cash flow. We ended the quarter with roughly $465 million of excess inventory, which we expect to sell in the coming years. We will also look for opportunities to add new resorts where we can establish a new sales center, and we'll look to do this in a capital-efficient manner. Our adjusted free cash flow guidance remains unchanged for the year, expecting to generate between $600 million and $670 million. We continue to look to use our free cash flow for organic growth or strategic acquisitions. In the absence of compelling acquisitions, our best use of excess free cash flow remains returning it to shareholders. In summary, we started the year on a strong note, growing contract sales by 10% in the first quarter and returning $134 million to shareholders. Occupancies were nearly 90%, and we expect them to remain strong throughout the year. Finally, Abound by Marriott Vacations continues to resonate with customers and the integration of the legacy Welk business into Hyatt is progressing well. As always, we appreciate your interest in Marriott Vacations Worldwide. With that, we'll be happy to answer your questions. Melissa?

[Operator Instructions] Our first question comes from the line of Patrick Scholes with Truist Security.

Great. Tony, just a question for you. First off, on the quarter here. One thing that I think surprised us all. Year-over-year, despite your sales and vacation ownership products up quite significantly, actually, your cost of vacation ownership products went down. Can you give us some color on that? And then I'll have another question.

Sure. Yes. The cost of vacation ownership products is going to be driven by the inventory that we load into the trust each year. Right now, especially coming off of COVID, we weren't adding a whole bunch of new inventory to that mix. We did complete the existing obligations that we had and those were sitting on our balance sheet, and that's part of that $465 million worth of excess inventory that we talk about. But we did have a pretty significant amount of repurchased inventory, and that comes in at, let's call it, below market cost -- below replacement cost actually. So with a lot of that inventory in some of the more previous loads, it really drives the cost of vacation ownership products down a lot. And so we expect that to stay fairly low over the next couple of years as we get through all the reacquired inventory that we've been taking.

Okay. And then I had another question for you, Tony. And then just one -- final one after that on just sort of high-level [indiscernible] question. The volume of share repurchases was down quarter-over-quarter. Anything to read into that and thoughts on that going forward? And then lastly, if you folks would be so kind to just sort of touch on expectations for summer leisure travel versus last summer. Just in general, how you think that's shaping up, how that's trending and [indiscernible]?

Yes, I wouldn't read a lot into the volume of share repurchases. Again, we're sticking to our capital allocation strategy that you've heard a million times by now. And anything that we get that's past what we're going to use internally and pass any strategic acquisitions, we do plan to return to shareholders. Last year, we had the benefit of not a lot of cash outflow for inventory or other uses, and we actually generated a decent amount of cash and had some dispositions through some cash at us. So we actually had a pretty robust adjusted EBITDA to adjusted free cash flow conversion last year that was above 80%. This year, it's going back to, I think, in the mid-60s. So then we said that would normalize back down to the mid-50s in the next few years as [indiscernible] obligations come back up. So really, we're just following our capital allocation strategy, returning as much as we can to shareholders in light of those other capital allocation strategies that we look at. So nothing really to read into there. And then you wanted to understand what we're seeing in summer?

Just sort of give us some high-level thoughts about summer. Certainly, as we look, sort of, at different vacation types of products, it really -- it looks like to be a mixed bag. If we look at sort of traditional domestic resort hotel occupancy for the summer house tracking, it's kind of soft, whereas we look at other types of vacations notably take cruise lines, Royal Caribbean reported this morning extremely strong results and looking good for the rest of the year. How do you see vacation ownership demand for the summer sort of fitting into that travel plans?

Yes, Patrick. All our forward bookings are as strong as they've ever been, right, from a historical basis as we look into the summer. I think where you're seeing some uptick to for us is internationally on Asia Pacific, as we talked about. It's a fairly low number last year in the first quarter in terms of occupancy at our Asia Pacific resorts, but we're up about 30 points in occupancy in the first quarter, and I expect those trends to continue. And I think coming into the U.S., you've got more international travel, Hawaii is recovering a little bit with some of [indiscernible], but still has a ways to go to get back to those levels. So we feel good about the summer. I think all the kind of forward-looking channels look very strong for us.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

So I guess the first question would be, have you seen any -- if you drill down into kind of your customer base? And whether we're talking towards or maybe contract sales, whatever the right metric is, any delineation in kind of trends or performance kind of West Coast versus East Coast of the U.S.? And not just specifically asking about the Silicon Valley Bank stuff. But in general, with some of the tech pressure out there. Is there anything you can at all that you see in the data that would indicate a difference in geography?

Yes. Chris, for the first quarter, not really, very strong. Some of the things, notwithstanding our growth in contract sales for us where we've underperformed in the first quarter on the sales side, is really the transitions we've been making, whether it's the Marriott Abound program, right, and started, and we've talked about this in the past, we start to transition to sell the new product from, say, the old Westin or Sheraton Flex product. And that transition, right, can be bumpy at times. So we see it more in that. Same thing on the Hyatt and Welk side because you're aligning business models, compensation, leadership, you have to educate the existing owners who are your big buyers, right, on the new product, get them comfortable and all that. So if we've seen any softness and like I said, with contract sales were up 10%, it's actually around some of those, call them self-inflicted transitions that -- that's opportunity, right? Going forward, we're going to get those back to where they need to be. But as you go through it, as we've always said, you get a little bit of bumpiness. I'd say, as you get -- as we got into April, to your question, not that we can put our finger exactly on it. We did see some softness if you look in the desert out in California. So you talked West, but it wasn't -- it wasn't across all our West, right? Like so the -- there were pockets there, some -- a little bit in Hawaii just in terms of the performance. But nothing pervasive across in the East on a relative basis, yes, continued to perform very well as well as Florida, Caribbean, et cetera. So nothing concerning. But like I said, our bigger things we're working through are things that are within our control, right, not macroeconomic.

Yes. Yes. Understood. Thanks for the detail John. And then as a follow-up, you guys talked about higher propensity to finance. And I know that some of that is because, I guess, prices are higher, and you're also getting a higher mix of first-time buyers. But is there anything further to kind of explain it. And maybe the better question would be, if we look at first-time buyers today versus, say, 2019, are they also -- are those first-time buyers more of them opting to finance or finance at higher levels? Just trying to get a little color on what's driving that given that rates are up, and it's a little bit more expensive to finance?

Yes. Well, if you think about it, Chris, the way we offer our financing, while our average lending rate, I think if you look at the securitization we just did versus the one we did last year was 30, 40 basis points higher. As we've talked about, the financing we provide is really just to help in terms of ease for the consumer that's buying. So we haven't moved our rates on a relative basis, the same as what you've seen in the broader interest rate market, if you will. So -- but you're right, you're seeing slightly higher propensity and some of that's mix, as we talked about, we did have more first-time buyers, historically first-time buyers because they buy a little bit more than owners that are buying more. And it could just be -- it's obviously coming out of COVID with a lot of excess cash out there. Maybe some of the buyers don't have as much excess cash. So they're opting for the convenience of the financing. But we haven't seen any -- I don't know if Tony has anything to add, but I'm not aware of any different trends. We clearly haven't changed our underwriting standards or done anything that is different in the first quarter than we were doing last year.

Yes, you're absolutely right, John, and Chris. John hit it on the mark when you talked about the cost of our financing, it's not that much more right now. We've probably raised rates maybe 25 basis points. We don't go in lockstep with the broader environment -- economic environment. We didn't take rates down point-for-point when interest rates were dropping, we're not taking them up point for point, while they're going up. I mean we did see higher financing propensity in Q1 than the previous year. We're probably at 54% Q1 this year versus 50% last year. However, we're not back to where we were back in 2019. And if you look pre-COVID, we're in that lower 60s. So we hope to be trending back towards that level.

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

I appreciate all the color. So John, I was hoping maybe you could give us a little bit more color on the cadence of tours this year. Just through the lens of repeat owner tours or a little bit more shorter lead time and you guys have to plan for new owners well in advance and build that pipeline up. So I think you guys have pretty good visibility on how you think new orders are going to layer in throughout the year. And just sort of talk about that setup in relation to how you guys manage for optimal VPGs and optimal margins.

Yes. I think you hit the key components: one, our package pipeline, which we talked about is at all-time highs, right? So we've got a strong package, people that are prepaid for their vacation that are going to come and take a tour. And as you look out for the balance of the year, we expect those packages to be higher than last year, right? So that's going to continue to drive tours through the balance of the year. A lot of it is in terms of getting those packages to where they want to go, that's where there can be some lead time because our occupancies are so high. So we continue to try and get, and build the package pipeline at the same time, but we continue to try and get those customers on vacation and on a tour to drive the sales flow. And then on the owner side, same thing. It's -- to your point, we don't have as much visibility, but we've got a lot of history. And as we talked about earlier, with the Abound program and more so with some of the Hyatt stuff that we're going to be launching later this year, you can usually drive your, what we call, our owner tour penetration much higher, and that's what we saw in the first quarter versus last year because owners want to come in and they want to talk about the new program, understand new vacation options and things that come either with Abound or later this year with the Hyatt BEYOND program. So we're always trying to maximize tour flow. You saw a great tour flow growth in the first quarter. And the balance on all that, and this is where we continue to drive some of our digital marketing and getting our marketing costs down per tour because as you drive those stores, you are sometimes opening up some of your higher cost channels, right? So the balance, right, is to continue to drive your VPG at the same time, manage our marketing and sales costs. And as Tony talked about, [indiscernible] the third component is our product costs, which we continue to expect to be very low going forward. But that is going to get us that 30%, 31% development margin similar to what we got last year, if you will, on VPGs that haven't grown that much, but on significant higher costs in total around tours, right? So the more we can drive revenues and leverage some of our fixed marketing and sales costs and get our variable costs down, that's the goal.

Our next question comes from the line of Shaun Kelley with Bank of America.