Travel + Leisure Co. (TNL) Earnings Call Transcript & Summary

Good morning. This is Stephen Grambling from Goldman Sachs for those who just joined our travel and leisure conference. Next in the agenda, we shift our focus to timeshare, which arguably should be among the first to see a recovery following lockdown as a prepaid predominantly drive-to vacation provider. And who better to discuss the industry than the management of Wyndham Destinations, the world's largest timeshare and exchange business, which includes Mike Brown, President and CEO; and Mike Hug, EVP and CFO. Thanks, gentlemen, for joining us today.

Good to be here. Thanks for having us.

To start, let's take my comment on being drive-to but zoom out a bit. Can you walk us through the longer-term drivers of the timeshare industry and Wyndham Destinations, in particular? And what does historical context tell you about how these drivers may or may not be impacted with that longer view in mind in the current situation?

Well, it's -- the longer-term outlook really for our business is predominantly around Vacation Ownership sales. But if we even step beyond that for a moment, you look at the makeup of our business. As you mentioned, we're Vacation Ownership and Vacation Exchange. 70% of our EBITDA last year came from Vacation Ownership side, 30% from our Vacation Exchange side. Within that, roughly 50% of our EBITDA will come from recurring and predictable EBITDA sources, being our management fees, our exchange fees on the Vacation Exchange side -- sorry, exchange memberships and then net interest income, which really leaves, as you head into the next year or 2, the variable component being Vacation Ownership sales. And as you look at the key drivers to that, you're primarily looking at your ability to generate revenue through incremental tour flow as well as the VPG, sort of the timeshare equivalent to RevPAR, ability to drive revenue per guest coming out of those tours that you generate. So as we look forward, the real question for us becomes are we able to continue to generate a tour flow from 2 main sources versus our owner base. And I think our early signs on that look really good, is that being a prepaid vacation provider, you're going to continue to have people who've fully paid off their business or their ownership, which is 80% of our owner base, choosing to go on vacation as states reopen. We're already seeing that in our first week. So we think that is a highly predictable source of future revenue. And then the question, ultimately, becomes about our ability to generate new owners, which we can talk about more, but I do think the landscape that we will be looking at going forward on new owners will look slightly different than our pre-COVID environment. But that's really as we manage the business going forward, is that tour generation because the vast majority of the remainder of our business is highly predictable and recurring.

So on that front, maybe to continue down the path, you do have a lot of good information in the investor deck. Can you just remind us of how the business model works during a lockdown, how it has changed over the years and you kind of started to go into this, but how it's uniquely positioned to weather the current environment?

So Mike Hug, why don't you take the EBITDA component and then I can discuss, coming out of the recession, how I think that looks and how I think it will weather the storm quite nicely.

Sure. I'll be glad to take that. So obviously in a great place from a liquidity position with over $1 billion in unrestricted cash sitting on the balance sheet. When we think about the EBITDA, really, Mike focused on the fact that we do have about 50% of our revenues that are recurring when you look at the hospitality fees, the exchange membership fees and the consumer finance side of the business. So what we've talked about from an EBITDA standpoint is that we'll be at a loss in the second quarter, but expect to be positive in the second half of the year. And we expect that the return of owners to our resorts, the start-up of sales and marketing operations will allow us to be cash flow positive on a full year basis. We expect in the first half of the year to be cash flow positive of $50 million to $80 million and I would expect for the full year to be in the range of $100 million to $150 million. So I feel like we're in a really good position from a liquidity standpoint and the ability to generate cash flow even in today's difficult environment.

So I think there's 4 significant trends that are heading our way, and I'll just list them off quite quickly. And then we can talk about how I see us progressing out of this downturn. First of all, we see drive-to destinations as a key component coming out of this recession. Typically, about 72% of our arrivals are on a drive-to basis. We see that trend very much continuing into the latter half of this year and into next year, upwards of 90% of our arrivals do -- I believe, will be drive-to. I also think that you're going to see much more reliance on branded hospitality companies. We have a long history with our owners, and we have -- there's a trust level that's there, and there's the confidence that branded companies, not just Wyndham, but the other ones in our space, will have that hospitality DNA in them. And therefore, the health and safety protocols are going to be elevated, and there'll be a level of certainty and trust that will come with traveling with a branded company. You take timeshare, in general, the macro trend of going to a resort and being able to stay in your 1,000, 1,200 square foot villa or suite during your vacation, it's going to be more appealing now than even before instead of going out to dinners, and your vacation is always interacting with a lot of people. There's going to be an increased comfort level of being in your own space, a second home away from home that I think was already accelerating with the advent of Airbnb that will continue to accelerate. And then lastly is simply the fact that we are leisure travel. And it is -- I don't believe leisure travel demand ever went away, it just became more and more pent up. And we're seeing that play out in the second half of this year in our bookings. And I think the way we begin to come out of this recession is how we did in '08 and '09, is we will focus on quality of earnings growth, which means we will continue to tighten our marketing qualifications. We will drive toward improved margins, improved VPGs and ultimately, a lower provision, which will drive a faster return to the bottom line as opposed to a top line chase.

That's all great color. Maybe digging into this a little bit. Can you just remind us then -- as you've seen some states open back up, looking at both existing customers, but also engagement with potential new customers, what has maybe surprised you in the form of consumer engagement and what you're seeing?

So we reopened Central Florida, North Florida and South Carolina last Tuesday, the day after Memorial Day. We will reopen resorts in Tennessee, Missouri, Texas and Nevada this week. Most of them were reopened today. And then about 5 to 10 days afterwards, we'll begin sales. So the resort operations team can really get up and running and make sure there are protocols in place. I have been pleasantly surprised at the amount of changes we've made on the resort operations side of the equation to change our check-in procedures, our cleaning procedures, our reservation of the pool procedures. And so far, the owners who've arrived have been extremely cognizant of the changes we've made. And whether they've chosen to wear a mask or not, whether they're coming for -- to go to a theme park or to go to the beach, they've shown a great amount of appreciation for the fact that there are -- the changes we've made are visible. And they've reaffirmed sort of this comfort feeling of traveling with a company they've traveled with for quite some time. It's really hard to say, it's too early on the sales side. But what I will say is we implemented a few changes that would allow elements of the sales process to shorten and to become virtual and so far have received a lot of positive feedback. I got -- I received a video last night from one of the owners who went through a virtual closing process or contracting process, and they talked about how much time it saved them and how much better the experience was. And it's just one of the changes we made during the lockdown to try to elevate the customer experience on both operations and sales.

That's super interesting. And as you reopen, are there any kind of CapEx or reopening costs or working capital cost to think through with the reopening?

Not so -- go ahead, Mike.

No, I just want to say, as Mike was going to say, right, not really. When you think about the reopening of the resorts, the HOAs are responsible for the operation of the resort. So any additional reopening cost, cleaning cost will be absorbed by the HOAs. Keep in mind that they have been closed for anywhere from 30 to 45 days. So they have been -- built up a little bit of a cushion in the budget, if you will. So we don't expect that to significantly impact maintenance fees. The other thing, too, I'd point out, as Mike talked about improvements we've made, curbside check-in and things like that. So during this downturn, we've also implemented procedures and technology that we think will provide savings down the road for the HOAs. So at this time, don't expect any significant impact to the maintenance fees or Wyndham Destinations as it relates to the reopening of the resorts.

That's great. And Mike Brown, you had referenced some of the ways that you're changing the sales process. One of the initiatives over the years has been Blue Thread. How do you envision leveraging Blue Thread to help with ramping back up? And in general, how do you anticipate that initiative evolving?

Well, it's been one of our successes here in the last 3 years, taking that program from virtually 0 to, our anticipation was, over $100 million of sales this year. I don't anticipate any changes to our efforts related to Blue Thread. We've seen that it's a great new owner-generation approach marketing channel for us, both from the call transfer program. And as we've seen through this downturn, Wyndham Hotels has done a really nice job on their occupancy. I don't know if they're industry leading, but I think they're probably as far as occupancy is concerned. So I think that call transfer program will continue to remain strong. And we also do quite well on providing a resort portfolio for the Wyndham brand and through rentals. And although we will be prioritizing our owner stays first, which we do, but we're actually creating more inventory availability for them for the latter half of this year even to our own developer inventory. I do expect that the rental marketing channel through Wyndham Hotels will remain a strong element of the Blue Thread for us. So once we get properly going, again, this is going to be a key component of our new owner generation going forward.

That's great. And you went through a little bit of this already, but as we think about the sensitivity of the business model across sales, EBITDA and cash flow, can you perhaps compare and contrast different scenarios and a ramp back up and how you're managing staffing the sales centers and managing through the marketing costs and how the business model is positioned in different scenarios?

Right. Well, we -- as resilient as this business is, we didn't quite have in our plan an absolute national shutdown, 42 states, stay-at-home orders for 60 days. But we've been extremely proactive in rightsizing our business to be prepared for this. As Mike talked about on the resort operations side, that's primarily an HOA. We've been -- we've really went through skeleton crews and build those -- we'll build those back up. And that will correlate very heavily with resort reopenings. On the sales and marketing side, it's exactly the same. We looked across what our expectation is for the remainder of this year and took the decision that our effort will be not to try to get back to tour flow generation like we had pre-COVID in the short term. Our feeling was it's better to focus on less and get better margins and ultimately get back to a higher bottom line quicker. And therefore, the way we've restructured our sales and marketing is that as we bring back on resorts, we will bring the variable components back on with those. And given the fact that we're going to be focusing on higher generating owner volume for the remainder of this year, we'll probably be bringing back less than we went into the downturn with. I would say whether it's corporate G&A, sales and marketing or resort operations, our philosophy coming out of this recession is to remain highly -- have the highest degree of optionality depending on where this pandemic goes in the second half of the year. And that -- whether that's CapEx, whether it's sales and marketing, staffing, whether it's G&A, we have optionality. If the economy moves up, we'll continue to bring back people. If it goes south, we still have options to make choices to protect cash flow.

Helpful color. And as you're thinking about inventory, can you just remind us how much you currently are having to sell, what's in process to be developed and how important maybe new markets inventory is to the system?

Yes. In the...

Sure, we -- you can talk about markets, Mike, and then I'll talk about the process.

Yes, sure. So we've had our focus over the last 2 years around getting into new markets that generated new owners. We will continue to have that approach, trying to use our development dollars and develop a pipeline to improve: A, the reach of our resorts; but B, our reach of our new owner acquisition. So I think you'll see, as we continue to announce resorts, that to be the case and definitely in the short term. And we've made a number of adjustments to our CapEx in 2020 and '21. But I'll let Mike talk about that in our perspective on acquiring new resorts as we move into '21.

Yes. And currently, on the balance sheet, we have over 2 years of inventory. Obviously, we were focusing on over $2.4 billion in sales and growing that at net 6% to 7%. With the slowdown, what you'll see is a significant reduction in that $250 million in annual inventory spend that we have. Obviously, this year, a large portion of that was committed, but between the CapEx and the inventory, we have pulled out $100 million in cash flow savings this year. And then when we get into '21 and '22, where we had less firm commitments on inventory purchases, you'll see that $250 million be reduced significantly in both of those years. In terms of the way the process will work, we will -- would expect that similar to what we saw back in 2009, 2010. Potential opportunities as it relates to either broken, whole condo or timeshare deals that come our way, potentially hotel conversions, if a hotel isn't able to survive the downturn. So when those opportunities come our way, we will look at where that makes sense to do an asset-light model, like we've done in the past, which is a great fee-for-service model or whether we just go ahead and acquire the inventory at a great price and take advantage of the cost of sales benefit. Now that benefit won't come through in the next 6 months at the earliest because we haven't closed on any of those transactions. But what we saw in 2008 was our first asset-light deal, really started sales in 2010. So when you think about the cost of sales and potential opportunities that we might have, that would be, I would say, potentially 12 months away, but that would be something that we would consider taking advantage of just like we did back in 2009, 2010.

That's helpful. And turning to the financing business. Last quarter, you did have a large step-up in the provision. Can you just remind us how the provision is determined? And how the levels may trend under different scenarios?

Sure. So we took a $225 million charge in the first quarter for the $3.8 billion portfolio. The methodology there was basically to look at how unemployment trended during 2008, 2009, how that impacted our portfolio at that time, take that algorithm and apply it to the portfolio as of the end of March and unemployment projections through the end of 2021, so kind of an 18-month period as it related to unemployment. When you look at the charge, it's definitely on the higher end of the range that companies took, whether it was in the timeshare space or other consumer finance portfolios, but we wanted to make sure that we took a good hard look at the number. Didn't want to come back in and take another charge in the second quarter. Really felt like it was important that we put an appropriate number in place. And we'll see. Time will tell whether or not that number was too high or not. But most importantly, what it allows us to do is going forward, when we get into the second half of this year and when we get into 2021, we will have a provision that's below 20% because we will be focusing on a better quality tour and with having put this charge on the books as of the end of March, we're able to then provide a reserve or a provision going forward in the second half of this year and once again in 2021. That's associated with the quality of the loans that we're originating. So we'd expect a lower provision in the left -- second half of this year and then once again into 2021 as we raise the marketing standards.

[Audio Gap]

Stephen?

As we think about -- yes, I'm here. Sorry, the -- on the third part, if we -- can you hear me?

Yes, yes.

Yes, we can now.

Cut out there, sorry. So as it relates to the provision, there had been a step-up previously with third-party defaults impacting that. And it feels a little bit like we're starting to see some of the exit commentary pop back up amidst a downturn. What are you seeing and expecting in the business as it relates to third-party defaults? And can you just remind us of the impact that you had seen and how that has been trending?

Yes, absolutely. So just to put it all into context, when you look at our owner base, we have around 4% attrition every year. That's an expected number -- natural number. People's situations change. People have enjoyed lifetime ownership and it's time for them to transition out of their ownership. That's very normal. And it's one of the reasons we launched our exit program called Ovation many years ago. It's important to remind everyone consistently that we support that attrition by working with the owner. We have more exit options than really anyone out there. And we don't charge a fee. What the exit companies are simply trying to do is step in and take that natural attrition and earn a fee off of it when those owners could call us directly for no fee because all they're trying to do is access our exit owners or they're trying to create demands -- create their own demand, and in effect, elevate what would be natural attrition to more than what it should be. So that's -- the order of magnitude, 80% of our owners are fully paid off with their loans. And in those cases, there's 98% retention on an annual basis. So it does have an economic impact. It's relatively small in the grand scheme of things, but it's meaningful and more important than that. What is troublesome is either the methods or their representations are asking people, especially in a crisis like this, to pay money for something they could get from whether it's us or another developer for free. And we will continue to try to deliver that message. And in cases where there's an appropriate, either marketing or predatory marketing, we'll try to hold them accountable through either a legal method or regulation. But that's really the state of it. And as you can imagine, in the downturn, whether it's timeshare exit or a number of other industries, people have stepped up to try to take hold of an opportunity when others are in -- whether it's a financial concern or not. We would just encourage people to call us, and if there's a possibility to address either an exit or a deferment of their loan or maintenance fees, they can do that with us for free as opposed to paying someone to do exactly the same thing.

And going back to the provision and any potential defaults that you might see, how are you evaluating how much inventory to repurchase in the current environment? And what's the typical recovery rate?

Yes. So of the $250 million in inventory spending that we normally have, about $50 million of that normally goes to inventory repurchases. I would suspect that we would continue to leave that in place for the most part for 2 reasons. First of all, it's a nice -- one of our nice exit programs that we have for the owners is to give them some cash for their ownership, and secondly, it comes with a nice cost of sales force. So when we look at our inventory spending, I would assume that, that stays in place for those reasons.

Great. And now changing to capital allocation. Can you just remind us of the key building blocks of your cash flow build and corresponding capital allocation priorities? And you were one of the only companies across broader travel and leisure to reaffirm the dividend policy. What feedback did you get from the Board as you weighed bolstering liquidity versus sustaining the dividend?

So why don't I start on the dividend and then hand it to Mike for the cash build. When you look at our underlying business model, we have consistently said that we have a resilient business model with highly recurring and predictable revenue and EBITDA streams. That's the case, both in good times and recessions. And although none of us predicted a recession like this, that resiliency still holds up. Add to the fact, as Mike has laid out, our base case is cash flow positive in the first half of the year, the second half of this year and obviously for the full year, going into the recession, we said we need to do all the necessary elements that we should take. We should suspend our share buybacks. We should draw down $1 billion as a precautionary measure from the revolver, reduce capital expenditures, reduce operating expenditures and then look at our situation. And that's exactly what we did. And when we did it, we felt that our outlook clearly reflected a cash flow position that wasn't requiring us to amend our debt covenants. And after suspending share buybacks and ability to return capital to shareholders, even though, as you have done, Steve, and looked across the consumer discretionary landscape and said, the playbooks had cut them, we felt that it was important to express confidence, both in our cash flow and the resiliency of our business model, that we've been talking about for 2 years since becoming public, that this was a clear demonstration of it. Now every quarter will be the same evaluation, but I think it's safe to say that 30 days past making that decision, the economy has strengthened, the reopening has started. And in hindsight, we were happy to return that capital to shareholders. And I think it is a clear indication that in a relatively small industry that's often characterized as highly -- high beta in a recession, this is a small but clear proof point from Wyndham's standpoint that this is a resilient model that will generate cash flow. And although I think we're all expecting a short and shallow recession, we were able to maintain our full dividend in this downturn. And then we'll evaluate exactly the same dynamic as we head into the third quarter, to determine whether it is right to return that $40 million of capital to shareholders at that point of time, and we'll do it every single quarter. But that was our rationale in Q2. And Mike, maybe talk about the cash build and the stream of cash.

And as Mike mentioned, we did, as a precautionary measure, draw on our $1 billion revolver in late March. We also executed on a $325 million private ABS transaction in April, which gave us $1.1 billion in cash as of the end of that month, as of the end of April. We have plenty of capacity available to us in our ABS warehouse line where we had $342 million available to us. So we do have the ability to continue to turn the receivables we generate into cash. Also, we would expect that the ABS markets will be available to us in the second half of this year. They were available to us all during 2009, 2010. And we've actually seen, in some asset classes similar to ours, where -- the public ABS markets are starting to open back up. So we're optimistic as it relates to the ABS markets. As of the end of March, we were at 2.9x levered for covenant purposes. Our first lien coverage ratio is 4.25x, which is our most restrictive covenant. So plenty of room between that 2.9 that we were seeing out in March and the 4.25 with no really significant maturities on the debt side until March of 2021, where we had $250 million that's due. And we'll look at, obviously, talking to our bankers on a regular basis and looking at the corporate debt markets. And as they continue to improve, which they have been doing, we will evaluate whether -- or when the right opportunity and the time is to go ahead and do a transaction to take out that $250 million in March maturities of next year and probably even upsize a little bit about that to give us some additional liquidity.

Great. And just a follow-up on Mike Brown's comments on potentially short recession or shutdown, underscoring the dividend or just however you thought about that trajectory. Are the current trends you're seeing, as you think about close rates, tour flow upon the reopening generally trending in line with that expectation?

Well, our expectation was probably a little bit slower of the reopening. I did not expect that we would be in a -- I'd say a -- 50 states have a reopening plan. 48 really allow us to say that we think we'll be opening in those states in the month of June. The 2 exceptions to that are Hawaii, which is clearly not a June reopening, and California seems to be at the very end of June. The leisure travel environment, the way our consumers are behaving from an arrival standpoint for their resorts day, and again, 2 days of sales are not any kind of a trend, but I've been extremely, pleasantly surprised with the speed with which our organization has innovated and changed and the response from the consumers associated with it. The part that keeps me up at night is what happens in September, October, November, as the colder weather comes back and moving into that unknown component. I think that's -- I think it's already clear that leisure travel demand is there and that people want to take advantage of the summer holidays and the vacation opportunity. What is really hard to predict and what we can't provide certainty around today is what happens in the fall with the relapse, if it occurs at all. But that's the part that's, for me, the -- provides the greatest uncertainty at this stage.

Fair enough. We have lots more questions, but we are just out of time. Next up, we will have Marriott International. But thanks, everyone, for joining us today, and thanks especially to the Wyndham Destinations team, Mike Brown and Mike Hug. Thank you so much.

Thank you.

Thank you, Stephen.