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

Hi. Good morning, everyone, and thank you for joining us this early morning for the Wyndham Destinations Virtual Fireside Chat at our Third Annual Stifel Cross Sector Conference. My name is Simon Yarmak, and I'm the senior analyst at Stifel. From Wyndham Destinations, we have CEO and President, Mike Brown; CFO, Mike Hug. Wyndham is the largest timeshare and exchange company in the world. The business generates strong free cash flow that's returned to shareholders in the form of dividend and share buybacks. Despite the current challenging environment, the company has about $1 billion of cash as at 3/31, which is about 2 years of liquidity. With that, I'll turn it over to Mike Brown for some introductory comments.

Thanks, Simon, and good morning, everyone. Thanks for getting up early and joining the virtual conference here. Being that we're in the travel and tourism business, usually, the questions that we've been fielding these days are all around reopening and leisure demand traffic. So let me spend a few minutes just introducing where we are in that and maybe give you a little bit of profile on our results financially through the downturn. We have 230 resorts around the world, primarily based in North America. As Simon mentioned, we're the world's largest vacation ownership and vacation exchange business. And we have begun to reopen our resorts on the vacation ownership side with Wyndham Vacation Clubs, again, primarily based in North America. On May 26, we began to open Central and North Florida as well as South Carolina. And we're on a rolling reopening throughout the month of June. Since that point, we've reopened Tennessee, Missouri, Texas, most recently Las Vegas, Arizona, Wisconsin, Colorado and many more. We expect by the end of June to have 85% of our resorts reopened with some level of occupancy. And I say some level of occupancy because there are many states that have no restrictions. And then there are some states, many in the Northeast, that will have some form of -- at least we think it will be into the month of July, some form of quarantine for out-of-state arrivals. When I say 85%, the states we're not anticipating to be reopened are Hawaii, and we're looking at California as their regulations regarding leisure travel seem to be changing on a weekly, if not daily basis. So we should be more or less reopened by the end of June from a resort standpoint, which means we are welcoming guests back. From the sales perspective, we're typically opening about 5 to 10 days after the resort begins its reopening process. And as of today, we have about 1/3 of our sales locations opening. So what are we seeing so far? As I mentioned, Central and North Florida, South Carolina, those are pretty much all beach destinations: Clearwater, Daytona and Gulf Coast of Florida, Myrtle Beach. But in there, Central Florida being Orlando, we have 7 resorts there. And what we've noticed are a few early trends. Number one is, if you're going to a beach, you're very likely to take your reservation or your booking and go on your vacation. Our arrivals have been pretty much as we've expected. And Central Florida, Orlando, we've had more no-shows or lower arrivals than we anticipated. I don't think that should -- well, it was a little bit of a surprise to us, but with Disney not reopening until July, the theme parks not reopening until really the first, second week of June, the amenities are what attract people to Orlando. So probably trend-wise, you saw a little lower than expected there but at expectation in the other locations. And the other trend that's extremely noticeable is that drive-to destinations, easy to get to, don't need to get on the plane. And with our resort portfolio in North America, we've done a little stat that says 95% of our owners can get to a resort within 300 miles. I think if we probably did the stat for 80%, it would probably be under 200 miles. So our -- the breadth of our portfolio is Atlantic to Pacific, lots of resorts and easy to get to by car, which we believe is going to be a trend here in the second half of this year. So with that -- that's really where we are. We're in a transition month of June. We think we start to see a lot more normalcy in the month of July. And then depending on how the pandemic unfolds for the remainder of this year, we'll determine really how the year plays out economically for us. So with that, Simon, let me hand it back to you.

Thank you, Mike, for that introduction, at least on a positive note that the world is starting to reopen, that you're seeing some signs of life back in your business. But what are the more recurring parts of your business? Obviously, certain things are more variable if the consumer shows up, they purchase the points. But how much -- even if things remain in this somewhat okay state, what's the sources and uses in terms of those recurring businesses?

Sure. And I'll answer that, but I do want to let everyone know Mike Hug's on the phone. I'll just start it off and then hand it to him. But we have about 50% of our EBITDA that's recurring. And that really comes from 3 primary sources, which is our portfolio of net interest income. We have our hospitality and management business. We manage all our resorts and take a management fee on the running of our own resorts. And then in our exchange business, in order to be part of our exchange RCI business, people pay a subscription fee, which they've already paid. So those 3 components represent about 50% of our EBITDA. And the part that is not in that, which will be a big part of the second half of this year, is we don't count owner sales, VOI business or timeshare business as part of that. But that's a pretty predictable model that we have. And now that we've restarted sales, we will start to see that very predictable owner sales business come back into our business. But Mike, I'm sorry, I just wanted to get you introduced and lay that out, but please go ahead.

Yes. No, that's fine. Good morning, everyone. So the great thing about having kind of those revenue streams, 50% to 55% of our revenue that's recurring, is it really gives us a solid foundation from a cash flow standpoint so that when we do see the resorts start to reopen, occupancy start to build up and then sales start to occur, we would project that for the full year we'll be free cash flow positive. So in our current projections, you know we're showing numbers north of $100 million as far as free cash flow for the full year, once again, primarily, in large part driven by the recurring revenue streams. But once again, as the sales start to take place and we take those receivables and take them to the ABS market, which are opening up again, we're able to turn them into cash, which gives us confidence in terms of our business model and our wonderful liquidity position and the fact that, once again, the goal would be to be free cash flow positive for the full year.

Thank you, Mike. You touched on that a large number of your resorts will be open over the next couple of weeks. What are some of the safety protocols you put in place at some of those resorts? If you've heard from a number of hotel companies, they're putting in some protocols. So maybe just give some color on what you're doing at your resorts.

It's really around the 2 fundamental areas of social distancing and enhanced cleaning. So let's take enhanced cleaning. We work with our suppliers, Ecolab and HD Supply, primarily to really go through enhanced cleaning protocols along with having an epidemiologist go through our cleaning plan to make sure that they were comfortable with it. But along with enhanced cleaning in common areas, which is -- seems to be the larger transmission zones, in the units themselves, we've added additional cleaning steps, primarily electrostatic cleaning in the units between stays, which really touches into all the soft goods. As well, we've added a lot more sanitation stations around our resorts. Social distancing is where a lot of efforts we put into. We've completely changed our check-in process. We've moved from a lobby desk check-in to a curbside check-in where guests literally don't even need to get out of their car. They can pre-call, let us know all the details of their arrival. They drive under the porte cochère. And typically, the check-in now is under 3 minutes, which is less than 50% of the former check-in time. So not only is it better for social distancing, it's better for customer experience. And then we are doing some additional work in the lobbies, elevators and pools to make sure that crowds don't accumulate in those areas. Although the customer reaction has been varied as to their perspective on distancing and cleaning, I can say, almost without exception, everyone has been extremely appreciative that we've taken the time and effort to elevate the health and safety protocols.

Okay. That's great. And the more you can do to get guests back in your properties, it's always...

Well, that's the theme, Simon, is almost every consumer survey you will read say people absolutely want to travel, but there is this caveat around comfort of health and safety. And that's -- we're seeing that play out in people's anecdotal response to us when they arrive at the resort. They see the curbside check-in. They see the enhanced cleaning. It's been a real positive.

Sure. Mike, in your opening remarks, you said about 30 of your sales centers are open or will be open soon. What's the determining factor whether you really want to open a sales center in this environment?

Well, it's really around whether there are guests at the resort. That is the determining factor. Although resort operations were the -- is what everyone's focusing on, whether it's hotels, cruises, casinos or timeshare of the common areas and the guest experience, we've spent just as much time on the health and safety component in our sales galleries. We've reengineered our processes in many respects. So we -- really, for us, there's no reason not to be open in our sales locations. We've got social distancing in our galleries, which does reduce capacity in the short term. But given the way we will ramp up, that's not an inhibiting factor for us. And therefore, as soon as we're opening resorts within, as I mentioned, 5 to 10 days, we're looking to reopen the sales locations associated with that resort.

How do you build back tour flow in this environment? People obviously stopped traveling the last couple of months. Your sales centers were closed. So how do you incentivize people to come back and take those tours?

There's 2 primary buckets of our business. There's the owner business, and there's the new owner business. With the owner business, those have always been tour generations from people that are staying on site. So to the extent that we grow occupancy, early indications are that people are still willing to take a tour and also continue to buy. So last year, 55% of our transaction, 63% of our volume was the result of owner business. So to the extent that we have owners returning with similar behaviors as willingness to tour, that tour pipeline is very secure. The new owner business is a little different. We are not a big package seller, meaning we don't have this 6- to 12-month pipeline of business that we have to reactivate. We primarily rely on tour generation that's developed when people are in market. So the keys to our new owner generation is as places like Vegas and Orlando begin seeing tourist traffic again, that will help our new owner business. Our perspective for the remainder of this year is we will lean much more heavily on the owner side of our business, not because of anything other than that's where the customers will be. The customers will be at our resorts. We're driving owner occupancy because they've not been able to travel for 60 days. So we need to get everyone who's got ownership back into our resorts and getting full use of their ownership. So therefore, the people we will be exposed to for the remainder of this year would be primarily the owners. And therefore, I would expect higher-margin owner sales to be what we would be looking at for the remainder of this year until things normalize, hopefully back in 2021.

You -- at the Investor Day about 2 years ago, you put a big focus on new owner growth. And last year, you had a lot of time and effort spent on your current owners, and you saw a lot of good progress there. You just mentioned in your commentary that this year between now and the end of the year could probably a heavier focus on your existing owners. Going forward, as the cycle evolves, what do you think the proper mix is between new versus existing?

As we get back to a more normalized state, we would expect to go back to where we were in 2019, that directional mix, because the work we've done over the last 3 years to increase our new owner base, the investment in new owners, the investment back into our business is one of the reasons we feel very good about in the short term having more owner sales is because if you did that for 10 years, then you find yourself in a day like today and your new owner business is going to be less reliable because you've relied on it too much for a decade. That's why the strategy that we laid out even before we came public focused around increasing our new owner business is -- will pay dividends for us this year. Keep in mind of the 3 public companies, we are a mix of owner versus new owner business, really sits in the middle of the 3, meaning somehow one has more new owner business, one has less, which says that we're sort of in this -- we were in the sweet spot, and we were in the right zone, but we'll return to it once business inventory normalizes.

Sure. You have different channels to which you source new owner tours. Are there some of those channels that you feel are more inefficient and that going forward, this cycle -- that you think about phasing out?

Absolutely. There are a number of marketing programs that were, let's just say, sub-5% margin. They drove new owners at a slightly profitable rate. So we kept them. But in these economic times with less foot traffic and maybe -- and we don't know the shape but maybe slightly lower conversions, those slightly profitable marketing channels, we will defer or eliminate permanently. We will put them back probably any time in 2020 because it is our intention to grow our bottom line back to where we were faster than the top line, which is an efficiency play. So as you look at some of those channels, which might be individual marketing relationships in a city that whether it's -- or someone end up doing marketing that just doesn't make money, those are the type of channels we won't bring back at least this year, and we'll consider for next year, but it just depends how this sort of plays out. So it's the lower-margin marketing that didn't provide much sale to us.

In terms of -- you just touched on more efficient marketing channels drop more to the bottom line. What are some of the costs that you think you can change coming out of this going forward to permanently reduce from the business to be more efficient and have higher margins?

Mike, do you want to take that?

Sure. Yes, definitely. So when we kind of look at the business going forward, we expect to take approximately $60 million in permanent cost savings out of the business. And those are driven by a number of things. First of all, with the reduction in tour flow that we expect that allows us to obviously eliminate the lower portion of our sales force, which saves on training, recruiting costs, in addition, as we prioritize our CapEx spending. And we've reduced our inventory and CapEx spending in 2020 by $100 million and would expect additional reductions in '21 and '22, primarily as it relates to the inventory spending that we historically would have as we've had some inventory buildup as a result of the offices being closed. But as we've gone and prioritized that CapEx, it allows us to also look at the people that are working on projects. You can take your project management team. You can reduce the number of employees you have associated with that as you reduce your CapEx. And then you take a look at the other things that were potentially nice to have in a different environment and everybody just sat down and said, here's the things that are essential as it relates to the business over the next 12 to 24 months. And so by staying down and taking a hard look at the business, we do have about $60 million that on an annual run rate basis we expect to be permanent savings. And what you'll see when we get into the second half of this year and 2021 is, to your point, improved margins, which means we'll get to that bottom line of $1 billion in EBITDA quicker than we'll get to the top line. We'll be smart about the marketing side. We'll increase our marketing standards in the second half of this year, raise the FICO up to -- minimum up to somewhere around 640. So what you'll see is an improvement in the provision below the 20% that we've been running for the last couple of years, which will also improve the margins. But basically just took the opportunity to make sure we create as healthy an organization as possible and once again drive better margins so we can get to that $1 billion of EBITDA quicker than we otherwise would.

Thank you, Mike. You just touched on the provision dropping below 20%. Obviously, the provision has been a big part of your story in the last couple of years. What do you do in 2019 with the existing owners to sort of hold that in check, have that dropped down slightly? And how do you think about the momentum that you started last year when things normalize at some point this year or next year going forward?

Well, I think we continue along with the things that we've been doing that we've talked to everyone about when you think about owner engagement, right, being out there, one, providing more attractive exit programs for them. So if they are at that point in their ownership where they need to exit, we have the vehicle for them to do that in a graceful way and to be happy about the period of time that they were able to travel with Wyndham Destinations and also happy with the way they left when that point came. But I would say, more importantly, for those owners that are able to stay with us -- and you guys know that we have a retention rate of 94% or 96% of our overall owner base. And for those that are able to stay with us, making sure we're providing them the opportunities to get on vacation. So investing in technology to improve our search engine on the web, doing more outbound marketing to them to let them know when inventory is available. And we saw that, to your point earlier, in 2019 when by doing the right things from an inventory standpoint and from investments in technology so that they could see the inventory when they do searches, we were able to increase significantly the number of owner arrivals in 2019 versus 2018. And while we've had the resorts closed, that doesn't mean we'd be set still. We've continued to invest in technology, make that search experience better. But just as importantly, when they're showing up at the resorts as well at our larger resorts, we now have curbside check-in, where if you're not comfortable going into that lobby, now you can drive up. One of our check-in agents wearing a mask will walk out to your car, check you in, give you your keys and you can go straight to your unit without even having to go to a lobby where others might be -- might not be comfortable doing that. So it's really doing all those things to make the customer experience better to keep them engaged. And obviously, when they're engaged, they continue to love their ownership and pay and buy more.

Thank you, Mike. The other approach that's helped the loan loss has been going after some of those timeshare exit firms. So maybe just touch on some of the progress that's been made there over the last 12 months and how it's been a positive impact on the overall business.

Sure. We laid out a 5-point plan that we pursue, and let's just start with the one that's the most impactful, which is getting our owners on vacation. We continue to see more owners of our owner base, which -- the 880,000 going vacation every year. As Mike mentioned, we have a 96% retention rate amongst our owner base annually. And for those who had fully paid off, it's 98%. So for us, it's all about getting people on vacation, and that's our best offense, is to fight challenges. However, there are a number of other elements to the whole equation. Number one is we continually press companies whose behavior is clearly, we believe, against both advertising and ethical rules. And so far, there's a list of companies who have chosen either bankruptcy or an agreement with us instead of facing a judge, and we will continue to do that. And others are public. And I won't go through the long list of them, but it's -- there's a very clear pattern of what happens as they fight us until they realize that they're about not -- they're going to have to answer for themselves in court. And then secondly is something we're not part of, but there are now 3 different attorneys general in 3 different states with cases against 3 different exit companies. And I think that pattern of public action, governmental action against, they're not connected, they're 3 separate states, AGs and exit companies where this behavior -- where it really started to pick up in '16 -- '15, '16 and 2017. It takes time for the complaints to mount and for agents to see that the inbox is getting bigger and bigger, and they've started to take action against them. And we'll watch and see how those play out, but so far, you're starting to, for the first time, see states take action here in the last 12 months.

And you've seen that progress there on your end that the provision is held that they -- obviously, in this current environment, it's a little different, but for the most part, you had some progress last year.

Well, that's right. And I remember September of 2018, we just become public, and there was a paper issue that said that this is a never-ending challenge and new provision is going to get whatever it was and it's going to just keep climbing. And literally, next day, one of the companies that they listed as having a hold on it declared bankruptcy because we have been in the battle with them for about a year. And I think the owner of that company -- well, I don't think they can find them anymore. But just the law enforcement, I think he's just glad, which is indicative of the type of people that are running some of these companies. But yes, nowadays the provision has flattened and it was starting to come down. So yes, there's absolutely progress made, and we're proud of that. But again, the key to this for us is really getting on in some locations. If we do that, we believe the exit companies can have a -- they do have an impact, but it's much more muted at that point.

Great. Just to finish up, let's touch on capital being returned to shareholders. It's been a big part of your story, pre the spin-off. And since you've been there the last couple of years, you've been pretty strong about returning that. Can you touch on your decision to maintain that very attractive dividend? Even today, it's -- the yields are north of 5% and most of, not all your peers have suspended or cut the dividends pretty dramatically.

Well, absolutely, and we were definitely one of the only -- one of the few consumer discretionaries to pay dividend and -- in the last quarter. And we did it for a few reasons. Number one, as I mentioned in one of your earlier questions, 50% of our EBITDA is recurring. We looked at our cash flow, as Mike mentioned earlier, and saw that we have between $100 million and $150 million of projected cash flow for the year, free cash flow. And we did all of the corporate actions you would expect. We suspended our buybacks. We fortified our balance sheet through the revolver. We cut CapEx. As Mike laid out, we made very quick operating reductions that get coincided with our resort closings. And when we looked at it, we were at a point that we could pay that dividend looking out and not feel that we were putting our business at risk. Liquidity is the #1 issue. We're not putting the dividend ahead of liquidity or liquidity concerns. And in that point, we felt the dividend was the right thing to do to return to shareholders as opposed to keeping it on the balance sheet. And now it's 30 days later, we're reopening and feel good about that decision. Obviously, we have to continue to evaluate it every single quarter, and we will. And liquidity will be our #1 priority. And both -- we're committed to returning capital to shareholders whenever possible, and we felt that we were able to do that. So that's why the reopening for us is an exciting point. And the sooner we're back getting closer to normalcy, the stronger our balance sheet and our cash flow becomes. And it increases the likelihood we maintain our dividend and eventually get back to more for some return of capital to shareholders.

And just lastly on the buyback, what would it take to reinstate that program?

Really, in a world of uncertainty, we're 2 weeks into our business. And we -- the late first quarter, second quarter has obviously impacted cash. There's no guarantees there won't be a relapse in the fall. And as Mike and I evaluate our balance sheet position, our leverage position, we want to make sure that all of those elements have been checked off as free and clear and nothing that we have to address. We do have a maturity next year of about $250 million. So it's really making sure all of those elements are taken care of, first and foremost, that our cash flow returns to a level that warrant it and there's some level of uncertainty that's dissipated related to the economic recovery. And being that we opened May 26 and now it's June 10, it's still way too early, but that's what we're working toward, and we'll do our piece. And hopefully, the macro economy and the overall health and safety issues will work with us.

Thank you for all that color. We're winding down here. Mike and Mike, thank you for your time this morning. Thank you for all your thoughtful and thorough answers on the company. We still like your story, [ your folks ], your peers. You made a lot of progress in your 2, 2.5 years at the helm here. And we wish you guys a lot of luck. Hopefully, everybody stays safe in the summer and looking forward to catching up with you guys in the near future.

Thanks, Simon, and we look forward to seeing you again. Thanks.