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

Afternoon, everyone. I'm David Katz, gaming, lodging and leisure analyst from Jefferies. I'm joined by my colleague, Khoa Ngo, as well as the leadership team from Wyndham Destinations. This will be our -- thank you all for joining us in our speed fireside chat this afternoon, rapid fire. We have Michael Brown, the CEO; and Mike Hug, the CFO, with us. We're going to run through some topics and questions that we've prepared, and we will do our best to save a few minutes for Q&A at the end.

With that, what I would like to begin with is just an update on the openings of the resorts, the sales centers and what you're seeing in terms of occupancy. And if you can tack on what we can reasonably expect in terms of trajectory as best as you can tell today.

Great. Well, good afternoon, David. It's good to be back at Nantucket, so to speak, for the conference. We're well into our reopening. We began on May 26 with Florida and South Carolina. And since that time, we've been able to work up to over 50% of our North American resorts. We have about 180. So that gives you an idea of where we are as of today. We expect that by the July 4 weekend, we'll be over 80% of our resorts opening and welcoming our owners and renters back to resorts. Why not 100? Well, we have states like Hawaii that are still in soft quarantining and therefore, not open. California is an interesting study that they're making decisions county by county. So we have a good presence there. And then, obviously, the Northeast has some travel restrictions associated with it. That's on the resort occupancy side. On the sales side, we typically open between 5 and 10 days after the resort opening itself. So at this stage, we've got just over about 40% of our sales locations opening. We are taking tours, making sales. And I would say the ramp-up or the reopening has gone quite well for us in the sense that customers are happy to be back. They're very aware of changes in procedures related to health and safety, and that is a very important point that we're seeing and hearing from customers, whether they're owners with us or exchangers. And I think as we ramp up and move on through the summer season, that will remain top of mind. You asked about occupancies. We continue to see on both sides of our business, I'll start on the exchange side, which has a good purview over the entire industry, bookings continue to accelerate, which to me is a clear reflection that leisure demand is there. And on the Wyndham Vacation Club side, we're also seeing a continued increase in our bookings. I would say they're more in that 60- to 120-day window where you're seeing the majority of your bookings, which candidly makes, I think, a lot of logical sense given that the month of June has fluctuated a lot in headlines and daily infection rates. But from a very broad standpoint, demand is there. It's picking and choosing the locations and the timing of those vacations. But what we're seeing coming into the reopening and now after nearly 30 days is that leisure demand is definitely there. And as the economy and headline pandemic issues get better, so will our demand. And as there's a little bit of negativity out there, we do hear more from customers just trying to make decisions in the short to medium term.

Got it. Look, I want to get to the heart of the matter and make sure that we spend a full amount of time on the notion that there's always a prevailing concern about timeshare and how it will perform. While tragic, is the current crisis providing you an opportunity to demonstrate the durability? And how would you sort of deal with that? How have you been? I know you've been quite patient and available and transparent through all this. How have you dealt with that prevailing concern?

Well, let me just briefly touch on customer, and then I can get to the economics of the matter. On the customer side, we've always said 9/11, 2008, 2009 great financial crisis, customers value timeshare and they value their vacations and their personal time. And we predicted the same after this, and we are seeing that already, is that our owners are returning. So we're not concerned that demand will continue to be there like we've seen in the first 30 days. And I think more importantly, the big question we kept receiving in March, April and May is will people continue to buy? And the metrics that we've seen post-reopening compared to pre-COVID on owners' propensity to buy, their propensity to take a tour don't look very different than they were back in January or December. It's really a question of magnitude of getting your arrivals back to a level of where they were pre-COVID. I mean I think that should be a huge reassurance as to the fundamental customer sentiment about owning timeshare and willing to -- being willing to buy more. I think as it relates to purely economic matters, we've always said, since we became public in June of 2018, that this is a much more resilient business model in a downturn than, let's just say, your hotel business, your crews, your gaming. People will not give up their vacation because the vast majority of our owners, 80% in Wyndham's case, have fully paid for their vacation. So it's not a matter of coming out of pocket to choose to travel again. They're, in effect, utilizing all the value that's already been paid for in their ownership. And so when you see us move through this recession and you look at our EBITDA model, we have about 50% of our EBITDA that's predictable and recurring through both the vacation ownership and exchange business. And it's really a question of when does the vacation ownership sales return, and we're already seeing that happen today. We've put guidance out there that we will be cash flow positive for the full year and for the first half of this year. And we continue to pay our dividend, which I think if you just go through the litany of consumer discretionary stocks, we're one of the few that continued to do that, and we did that because of the strength and the predictability and reliance on that cash flow model. And I think you can't really say that in June. But I think when we get to December and look back to this crisis, we will have proven ourselves to be highly resilient and highly predictable in both our EBITDA and cash flow.

Great. The business model does have to change, right? We all have to be somewhat changed. And likewise, businesses have to be changed in some way. Can you talk about how you come out of this just a little bit differently business-wise?

Yes. Yes. So let me start on the economics side.

Or personally, if you want.

Yes. Yes. Yes. Well, 3 different ways personally, but I'll come through in the economic and simply say that we're using this opportunity to really streamline our business. We've talked about taking out $60 million of cost of our business that will not be coming back. We've talked about adjusting our marketing model to be -- to tighten our marketing standards. And those 2 elements should yield for our business a more efficient delivery of already industry-leading margins. So you should see higher VPGs, better margins. And ultimately, the return to EBITDA will be faster than our return to the top line. And we think that is a stronger, more sustainable and more nimble business model coming out of it. But I think more importantly than the economic side of this is we've used this crisis to really reengineer a lot of our processes. And I can't go through them all with you, but whether it's resort operations and the speed of delivery, whether it's the way we close sales of moving to virtual quality assurance agents, whether it's moving to a mobile-first approach from a digital standpoint or RCI, being able to accelerate the benefits of its ARN acquisition a year ago. We've taken this time to accelerate our business model and to actually accelerate process changes or initiatives that we're already going through as opposed to this being a hiatus for us. I think we will come out economically and initiative-wise a much stronger company than we went into it. And I -- like I said, we already had industry-leading margins, and we're the largest in the industry. So say we're stronger -- we'll be stronger, I think, is a good statement for where we're going to be.

I do need to follow that up because it's Street's focus, and you might argue overly so, has been on the loan loss provision. And I do think the Street is -- well, it's been our personal view, we've written that your stock might value better if it went down and went down a bit more rapidly. Is that something that we can look for coming out of this in a measurable way?

Well, I'll let Mike Hug, our CFO, answer that. And as a precursor, one of the things I mentioned was our change to the marketing approach. But I'll let Mike address how that and some other things will affect our provision going forward.

Yes. When we look into the second half of this year and into 2021, one of the things that we've talked about is when the store sales offices just start to open back up, we will be focused on a great tour quality. So raising the minimum FICO levels, looking at the best quality tours, putting them in front of the best salespeople. So what I would expect in the second half of this year and into 2021 is that we do see a provision that's below 20%. It's not going to immediately drop down to 16% because, as we've talked about, it didn't move up by way. And it's 10-year loss that's slowing those a bit down. But I think the opportunity we have, when we look at our credit underwriting and our marketing standards, is to make that provision start to move down quicker. And I would expect that it will be in the high teens, definitely below 20% in the second half of this year. And we'll start to move that down based on better quality originations, which should lead to better portfolio performance.

Got it. I'm going to let Khoa dive in there on the next one.

I just want to touch on something you said before, which is that you're reopening the sales centers and you're starting to see some early positive indications. Can you comment on a little bit more detail? One of your peers indicated that the conversion rates are actually better in the early innings of this reopening phase. Is that true for you guys? And what are the early indications like?

So let me give you a fuller answer there. First of all, what we're bringing back is as we begin to reopen, because we're not full from day 1 and we don't have our full pipeline activated because all our resorts aren't open, is as you begin to bring back your business, you bring back your best marketing reps, your best sales representatives. And in many cases, you bring back your most efficient marketing channels. We're doing all 3 of those. And very early on, we look at the ability -- the questions we were asking is, will people continue to tour if you're an owner at the same rate as you did pre-COVID? Will you -- will they continue to buy at the same rate in a different sales environment? And to me, it's not about the absolute numbers. It's about early indications of these metrics. And all the early indications of the key metrics are that the behavior of the consumer looks very much the same as it did pre-COVID-19. The impact of that caused that -- because you're more focused on owners, because you have your higher sales reps, you are getting better conversions and VPGs as a result of that. It's early days. It's the first 30 days. We're very encouraged by it. It's -- I'd like to say some very positive green shoots to the things we can control. And if the things we can control are going in the right direction, we will stay focused as well as what we can control, which is the macroeconomy and the pandemic. But yes, we're seeing good indications on people's willingness to tour and buy.

Understood. And along the same lines, Blue Thread has a big initiative for you guys. It's been ramping up pretty healthily. It was very strong pre-COVID. I'm just wondering how you think about that curve as we come out of this and leveraging guests [indiscernible].

Yes. I mean I want to get back to where we were as soon as possible. The Blue Thread tours were so -- were some of the first tours we opened back up on the new owner channel on the reopening. We've had Blue Thread tours both through rentals and packages, and the conversions have been good. But it's day 14 of the Blue Thread return. But that is going to be a bigger weighting within our new owner mix as we go forward. I anticipate no change whatsoever to what we believe is our long-term trajectory of what its potential to be. And I love the fact that we began that 3 years ago because not only will it help us going forward on new owners, it also put into our system going into this recession a lot of new owners that allow us to focus on owner business primarily for the remainder of this year.

Mike, there's -- the landscape has what I would call smaller, let's say, a bit less structured operators. What is your view about whether they are good for you? Are they fodder for larger players to acquire? What happens to them?

Look, I think they can continue to run their businesses and be effective. They -- if -- by virtue of the fact they're in the market today means they did well and prospered through '08 and '09. From our standpoint, no different than pre-COVID-19. We're interested in looking at what's out there. Obviously, our priorities are a little different now. Liquidity and cash flow and demonstration of our ability to generate that cash flow and return it to shareholders is top priority, making sure that our leverage sits in a comfortable range. We want to get to a level of certainty in this economic recovery that gives investors comfort as well as gets us to the point that we have a lot of flexibility when the time is right to look at some of the smaller players if they become sellers. I don't think that's in the immediate future. I think that could be 6 to 12 months away. And we'll see. But in the meantime, I think there's going to be plenty of opportunities on the individual project basis as real estate prices become far more attractive or use types convert from either condos or hotels to timeshare, like they did in '08 and '09. So we're looking at the entire landscape, keeping in mind that -- assuring the markets and our investors that liquidity is very comfortable, which it is today. And wherever possible, we'll return capital in the form of either -- more than likely dividends to shareholders consistently.

I do think it's probably appropriate to make sure we get an update on what you're seeing and what your prospective views on the ABS market could be in the near term.

Can you answer this?

Sure. No, I mean, obviously, we did the private transaction back in April, and we're happy with that execution. And since that time, I would say, the ABS market, especially on the public side, have even improved. You can see some asset classes that weren't issued in the first part of the year that have issued over the course of the last month. So when we think about our normal cadence, normally, we're in the market once in the first half of the year and twice in the second half of the year. So we would look to access the ABS markets again. And I would say indications right now are very favorable in terms of our ability to get a transaction done and get it with terms that we're excited about, which we think, obviously, is just another proof point on the resiliency of the business. I mean that was strong execution on that April transaction, not many other transactions getting done at that time. And once again, I think it's just a proof point that people believe in this business, and there's a lot of different ways for us to generate cash. And when we execute these transactions, it's -- it just puts cash in our pocket and once again, improves the resiliency.

So one last one, and then we'll sort of open the line up for questions. We're closing in on a political process and an election year. There is certainly the realistic possibility that there's a shift in view. The question I'm asked all the time is around whether tightening regulation is something that we should put near the top of our list of issues to focus on and frankly, worry about. Where would you have us put it?

I would put it very low on my concern list. This is a very regulated industry, and we're supportive of that regulation. It's reasonable. It's productive. It's consumer protection-related and I would say, generally supportive. And I actually think that it would -- some greater regulation on the secondary market would actually be a benefit to the industry for consumer protection -- from a consumer protection standpoint. So in the basket of worries that keeps me up at night, that's not high on the list.

Understood. I will just remind anybody listening that we're -- it is possible to submit questions so go ahead and do that. We have a couple of minutes left. One question that has come in is, what about rates revenue? What are you thinking and expecting around rates revenue? And it's not clear to me whether that's interest rate revenue or rental rate revenue. I'm going to have to leave it to you to do with what you will.

Well, I'll answer really quickly on the rental side, is we've seen an early and very positive response on the rental side with good rates. I think that's reflective of a strong leisure demand. We're also hearing a lot that vacation rentals is coming back. So at least if it's rental rates, it's -- there's been a positive initial last 2 to 3 weeks, but my guess is it's probably actually more related to interest rates. Mike?

Yes. And on the interest rate side, I mean, what we've seen -- and we've got a great page in our investor presentation on our website, where you can see we've steadily increased rates since 2009. So we've demonstrated our ability to, even when rates have dropped, to maintain or increase our rates. So when you look at our consumer, normally, they're looking at that monthly payment, is that monthly payment affordable to them. So we really don't see any pressure in terms of us having to reduce the rates we'll be offering on the contracts that we finance.

One more question that came in. The Chairman sold 100,000 shares, and I think one other director recently sold some stock. Is that something that we should be concerned about?

Short answer is absolutely not. If you look at -- the one who -- one of the directors has a very routine selling his shares. It's -- for whatever reasons. He meets all the individual thresholds as a director. It's just very routine. And if you look at that director's track record, it's very consistent. And our Chairman is -- for those of you who know him, very hospitality-based and still very much in business that has his own -- other interest that he's been -- he's using funds for. So we were well aware that, that was going to happen. I would also reiterate that there's one person on the Board, the CEO, that has been continually buying shares this year, and that's me. So I feel very good about our share price and there's nothing to be read in from either of those recent sales.

It's a topic we haven't talked about a ton, but one of the questions here is asking about timeshare exit at the companies. Is that an issue that is really at bay at this point? Is it one that we should still be concerned about? Are you concerned on a scale of 1 to 10? That's my scale putting on top of somebody else's question.

Yes. So there's a few reasons to remain concerned. And the first is that with a little bit of research and a little bit of history on core cases, you could see the damage it's doing to consumers. And whether it's attorneys general who in 3 separate states are pursuing 3 different companies or whether it's our litigation where time and time again we end up on the winning side of that litigation, to me, the far biggest issue of it all is the damage -- inappropriate damage it's doing to consumers. We've never argued that exiting your timeshare is something that shouldn't happen because life changes. And we have a 96% retention rate in our owner base, and we have a 98% retention rate of those who've paid off their ownership already, which represents 80% of our owner base. So the fundamental product, the use of it, the enjoyment of it and the consumers' demand to continue to buy more is absolutely there. But there's a consumer protection component. It obviously does, on occasion, play into our provision and damages our financials. I think we're doing all the right things in our strategy. But in the end, if people are, what we believe, inappropriately downplaying the industry or providing false information, then that's something we will continue to fight for where we see that that's being done inappropriately. And whether it affects our customers or the industry's reputation, we don't think that's good, although it affects us financially, but far less than it did maybe 2 years ago. It's just the right argument to be having because this gets back to your question on regulation. If these companies were required to put their upfront fees into escrow, I would imagine their business model would be very different because that would be consumer protection.

Right. One last one, if we can sneak it in there. In terms of -- and you've touched on this a bit, is what are your top priorities beyond the next 18 months potentially using technology and innovation throughout the rebound?

So I -- just 2 things. First of all, I continue to believe that our vacation exchange business, RCI, has the ability to continue to broaden its lane. So I'm really excited about that, not only in 6 months but in -- for the next 6 years, that it's traditionally been a vacation exchange business that had a very narrow lane. And I think its breadth of membership and its quality of leadership give it a real opportunity to strengthen its -- or broaden its width in the travel and tourism space. I also feel like the industry in general has underinvested in technology for a long time. We've brought in a lot of really talented people, invested very heavily in digital and the ability to transact with us and to broaden your options a lot here in the last 2 years, and I'm excited that some of those investments will start to play out here in the next year. And instead of being, as an industry, a little bit of a lagger, I think we will not only be current but maybe a little bit of a leader, not just in the timeshare space, but again, in the broader travel and tourism space.

With that, I think we should leave it there to keep everyone on schedule. I appreciate your time, your patience, your candor, transparency. And again, thank you so much for doing this. Have a good day, and be safe, be healthy. Thank you.

Thanks. Thanks, David.

Thank you.

Thanks, Khoa.