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

Good morning, everyone, and I'd like to welcome to JPMorgan's 2021 Gaming, Lodging, Restaurant & Leisure Management Access Forum. Mouthful there. I'd like to welcome Michael Brown, CEO of Travel + Leisure; and Mike Hug, CFO of Travel + Leisure to this morning's fireside chat session. Welcome, guys, and thank you again for your attendance. I know you're veterans of this conference. More so in the past when we were in person. Good news, though, is I think we're going to have this next conference in September in person. So look forward to seeing everybody in person. Last night, you guys posted in an 8-K filing an updated investor slide deck, and I thought what we thought was incremental and new, I guess, is sort of the bookings update your Slide 7, maybe that's a good starting point for us to kind of lead this discussion of your updated priorities and strategic imperatives. But can we just talk about sort of the bookings update, which is incredibly encouraging, but please discuss.

Yes. Absolutely. And Joe we'll be there in September if we get the invite. I always enjoy being here for the conference. But yes, Slide 7 of the deck, it's really around gross bookings. And as we've had conversations with the investor communities -- community, it's around what do we have to look forward to. And we had our earnings call a few weeks ago, and we shared that several weeks before the earnings call, the year-on-year bookings were down 4% compared to 2020 on -- for that 7 day period. Another week went by in the middle of February, and we were able to get on the earnings call and say we're flat year-on-year compared to our 2020 forward bookings. Another week goes by and now we're plus 4 on a year-on-year basis. And yes, it's great to say we're ahead of where we were at the same time last year. But for me, the more important component of that is the acceleration of those bookings and the momentum that's behind them. I mean that's a 3-week period in the month of February, where we've gone from negative year-on-year to positive year-on-year. And so obviously, every week that passes by, vaccinations [indiscernible] in arms in the daily count, although it seems to have stalled, is at a much better place than it was on January, the ninth at over $200,000. So it really bodes well for the second half of this year. I would say that, that booking acceleration is happening faster than we thought. We thought it might come in March or maybe early April. So we've tried to be very much in front of the market as far as sharing information, and this is sort of real time, and that's why we included this slide. You'll see that both on our Panorama business, RCI and Wyndham destinations, the vacation ownership side, we're ahead of where we are -- were last year. And when we started the year, we were minus 35%. So really positive news, I think, if you're in the leisure space and looking at forward bookings.

Now that's certainly is positive. How does California, Las Vegas, Hawaii? How does some of -- maybe some of the geographies that haven't been performing as well as the overall portfolio, how do those geographies -- how are those bookings looking in there?

So keep in mind, for those of you who will ultimately be thinking about Q1 is we started the year in California was completely closed until the end of January, which has a knock-on effect to Hawaii and has a knock-on effect to Las Vegas. Since it's reopened in February, we're also getting positive news about Disneyland. And if you're looking just to pivot a little bit here, Joe, if you're looking at Orlando for next week, Disney is completely full. Their bookings are full in Orlando, which means we expect the same to happen in California as they have limited capacities. So we're extremely encouraged by California. We have seen a significant uptick in bookings, both to California and Hawaii for the summer season. And maybe most importantly for this industry is that has a really positive impact on Las Vegas going forward for the first time this year and maybe a year, we're starting to hear midweek foot traffic up. I guess your casino companies will give you more insight there. But anecdotally, we're starting to see more positivity for Las Vegas as well.

Got it. And if the bookings is accelerating at a pace faster than you thought, how does that make you think about contract sales either to existing owners or potentially new owners? And then how do you think about sort of managing the mix of those 2, buckets of customers on the vacation ownership side.

Right. Well, it's really 2 -- it's 2 completely separate work streams that we'll deal with, and they're not -- they are mutually exclusive in most cases. For our owners, let's face it, we've had less owner arrivals for the last 18 months than at any point in the last decade. And we want to get people on vacation, first and foremost, because that's what they own. We want them to get usage out of their product. And that obviously turns into owner sales. So that is going to happen as a pure output of gross arrivals. And that's why when we look at forward bookings, it's very important that, that trend that I've mentioned earlier. I will just caveat that with one important point as it relates to health and safety. This is directly correlated to spikes in COVID. So if we have a relapse or what you'll see as cancellations come back up and the net bookings will go down. But right now, all the trends are in the right direction. New owners is a completely different animal. We've absolutely relaunched the Blue Thread. It's doing fantastically. VPGs are at all-time highs in that category. So we continue to believe in that story and our ability to ultimately get to several hundred million of volume. The question we have, Joe, is really around the summer, and we're still not resolved, but the next 30 to 45 days is critical as to how aggressive we pursue our new owner strategy for the summer because that requires upfront marketing investment. I would say we're more inclined to pursue it than we were 30 days ago. But we won't get back to last -- not last year, to '19 levels. There's just not enough time and candidly foot traffic in markets, will not be across the board as positive as it was in '19. But I would say we'll be pursuing the new owner strategy, probably a little more than we would have thought in January.

And when you say you don't see it as realistic or possible to get back to 2019 levels. Are you talking just solely on the new owner side of things? Or are you talking about VO in the aggregate?

Well, VO in the aggregate for 2 reasons. Number one is we will, this year, be in a recovery phase. I think we're the most bullish on the owner arrivals. But I also just also want to reinforce one of the key changes we made during the COVID pandemic of 2020 is we changed our marketing standards. We raised them from a minimum FICO of 600 to 6 40 and therefore, we have made a conscious decision to trade quantity for quality as it relates to the bottom line. And I think where you see that play through is you'll see a softer VOI top line, all things being equal, but you should benefit from that as the results of that higher FICOs play through to the portfolio in the form of provision and ultimately default. So it's a calculated business decision we made. We feel very good about it, and we feel like early signs in our portfolio have shown that that's been a good decision for us so far.

And the elevated target FICO score would knock out like $100 million to $200 million of 2019 gross VOI sales. It's not a massive number though.

That's right. The portfolio right now, if you look at the sub 6 40 is around 5, is represented by sub 6 40. So on $2.4 billion revenue, your math's right. Yes.

Do you think as you're exiting this year, you're kind of run rating 2019 VOI sales? I know there's a seasonality aspect to it. I guess you have to seasonally adjust whatever the run rate would be out of the fourth quarter. Is that possible? Or is that -- is there -- besides the FICO strategic change. Are there any other constraints or impediments for that other than just recognizing we're still trying to figure out demand levels.

Yes. So really, the key factors are net arrivals and the FICO qualification. So assuming we get back to the net arrivals and assuming we equalize for that FICO adjustment, which affects owners and new owners, that -- there's -- we've been very proud to say and very relieved in a lot of ways that when we started to see our owners return last year, the metrics associated with will they tour, will they buy and when they buy, will they buy at similar levels as pre-COVID, all of those metrics have played out. And I not only credit the product that our owners owned, but the team that we have that executes that strategy. So yes, those are the 2 big factors, net bookings and the FICO level.

Okay. And would there be consideration to reverse the higher FICO score? I mean you kind of look at the world and savings rates are higher. You have stimulus checks. The consumer is in relatively good shape. Is that something that potentially could happen? And what would be the drivers of maybe making that change?

Well, I think the consumer is going to tell us that. Ultimately, FICO score has been a really clear indicator of performance on our lending. So would we consider it? Yes. Did we make this move as a temporary basis? No. Our intention was we thought that the 640 was the right place to be. And therefore, that we would ultimately be here. Are we open to adjust? Absolutely. But we think was the right move for were we wanted to go for the long haul. And ultimately, I think strategically, it puts us in a better place. Keep in mind, Joe, I mean, I think your conference and many others pre-COVID, the 2 questions that we constantly faced and were the criticisms of our company was, #1 was how will you do in a downturn? Will people continue to buy timeshare, will your business be resilient? I think our positive free cash flow, the way we performed in Q3, Q4 has really proven the resiliency of our business. We worked really hard on our loan loss provision. We're seeing it absolutely go in the right direction. And we think it's important to maintain a good provision in a strong portfolio. So we're going to be really thoughtful before we loosen anything that may bring questions that we've been -- we've sort of dealt with since we became public in '18. And now I think people can see the results of our hard work. So we'd be very hesitant to trade that back.

Okay. Can you talk a little bit about maybe off premises channels. You're obviously the leader in non hotel, non loyalty link guest tour channels within the timeshare industry. Can you talk more about the process of [ culling ] maybe the lower margin, less efficient channels within your portfolio and how you see that play out as you build towards back to 2019 levels?

Yes. And I appreciate you recognizing that. It's -- we did over $750 million of non affinity new owner sales in 2019, which is bigger than most timeshare companies.

Let's say that's a company. Right.

Right. Right. So we're very proud about that. This company has built that muscle memory and skill set over decades. And there's no one that does even close to how Wyndham destinations does it. However, it's a type of business that requires scale. And when COVID hit, we were very aggressive in reducing fixed cost expenses, lease expenses and dealing with contracts that required that scale. So we've pulled back dramatically on that. We're still doing a lot of new owner business. I've been extremely proud of the team. About 1/4 of our sales have been new owner business that is not Blue Thread. So we still got that muscle memory, still got the capabilities. That's what I was mentioning earlier as we get to the summer. We will start making some decisions in the bigger markets like Orlando, Myrtle Beach, Gatlinburg, Las Vegas. We will not go back to '19 levels this summer, but we will start to dabble back into that. I'm not at all concerned about our execution, but we want to do it. And I think we will do it with better terms with our partners to allow us to get back to the margins without having to get to that level of scale. After 10-year positive run, it's -- prices were starting to get really hard to make work.

Got it. Would you be disappointed if in 2022, the number of tours doesn't come close to where 2019 levels were adjusting for the FICO differential, the FICO score differential?

Yes. I think that's what we're aiming for is we want to get back to the business. I think the bigger question, Joe, really sits around the new owner side is the ability to scale that. But we've seen the consumer react on a purchasing basis, the same, if not better, VPG, as we've mentioned, are up 30%, a lot of -- 2/3 of that is mix roughly. But we know the consumer is behaving the right way. So really, the decision -- the owner business is the same. If they're going to be there, we should be able to generate those tour flows equalizing for FICO. On the new owner side, it's just a matter of making sure that we go back in the markets with deal terms that allow us to sustain that for 5, 7, 10 years and not be paying peak market prices. And I think given the environment that we're all in at the moment, we should be able to negotiate those type of deals.

Can you -- you talk about your shift to digital? I mean, even before the pandemic, you're working on optimizing call transfer, moving towards digital marketing. Can you talk about that evolution from here? Where did COVID accelerate that? Or did it slow it down?

It didn't slow it down. I think in many respects, COVID in an odd way, helped us to accelerate a lot of our initiatives. And digital is one. I think it's easy to get on in everyone to say we're advancing our digital platform. We're getting better and all that's sort of true for companies. The reality of where we are is 5 years ago, we were a laggard. We chose to invest quite heavily in a lot of our technology, both in our CRM platform and digital, about 3 to 4 years ago. I think the team has done a phenomenal job advancing it in our capabilities. And I think we are -- we've got to a level playing field, and we're starting to experiment in some new areas. So I think the digital is progressing at or better than I had expected. But the digital world is moving so fast. We've still got a ways to go, and we're going to continue to invest heavily in both the CRM and digital. I would say a component of that, which is an all shoot, Joe, is we also began launching virtual sales last year, and we believe that, that -- we have over 50 resorts where we don't have sales locations today. And COVID has given us the opportunity to look at those and say, we still have owner arrivals there, and this is an opportunity for us to make sales to them. And we've launched an early initiative to try to launch those virtual sales. And that probably wouldn't have happened without COVID, at least it wouldn't have happened this fast.

Great. Maybe switching over. I know we talked about it a little bit about loan loss provision delinquencies to a big reserve last year in front of the third -- second, third, fourth quarters. And obviously, based on fourth quarter trends, you took -- or you reserved -- reversed some of those home loss and release some of those loan loss reserves. It seems to us from where we sit, a lot of consumer financing metrics continue to move in the right direction. So maybe the question to ask is this way, like under what scenarios would you not be in the position to release more reserves throughout this year?

Yes. Well, I think as we've talked about, right, we'll just continue to look at how the consumer performs. To your point, we're very happy with how the portfolio performed, not only does it [indiscernible] 19% in both Q3 and Q4, but it also helps on the ABS side as far as being able to execute on those ABS transactions. So very pleased with that. The key drivers is going to be actual performance. In our first quarter guidance, we have not assumed any reduction in that -- or benefit, if you will, from taking that reserve down. But it's really going to be how does the portfolio perform and what does the consumer look like? And obviously, the consumer appears to remain healthy. Savings rates are up and there's more stimulus coming. And that's the big difference between, right, this pandemic and the potential recovery in the last downturn was the level of economic stimulus has just been unbelievable both to businesses and to consumers. And so we'll track it every month like we do. And the 2 big drivers will be what do unemployment forecast look like and what does actual portfolio performance look like.

Great. All right. Maybe we could switch topics to the Travel + Leisure brand IP and clubs acquisition. I mean, to us, it's something that could open up a lot of new doors. Obviously, that's part of the strategic rationale is sort of moving away from businesses and opportunities that maybe not -- might not be present for you. But can you just talk about the potential opportunity and how you're thinking about that acquisition, particularly with respect to a relatively low-priced vacation subscription service? And what is that overlap maybe with some of your existing customer base?

So I think you said it well, as opposed to an individual company that brought in an individual business line, this opportunity for us, we feel places a lot of doors in front of us, and many of them are already open. And this is a positioning acquisition for us that also comes with some very clear opportunities. So let me just try to frame that up. First of all, the acquisition of the name and the [ renaming of ] other company is more than anything an indication to the overall market that were open for business in the entire leisure space, which in the United States represents about 90 million qualified households over $75,000 household income. We believe more than ever in the timeshare space. We've been very successful as a single brand in a single space with mid- single-digit growth. None of that's changed. We continue to believe that the Wyndham name will continue to grow. But we have had over time, both in hospitality and outside the idea to service other brands in the vacation ownership space and bring conflict of confusion has always been a question mark. We think that door is now open to us to talk to other travel brands to potentially run vacation clubs on their behalf. On the Panorama side, formerly RCI, believe more than ever in the vacation exchange business, but it's always been a low growth business. And our ability to begin providing B2B services outside travel benefits B2B outside of simply timeshare exchange is another door open to us. And lastly, where you discussed, Joe, is the travel subscription business, we believe sits adjacent to the vacation ownership business, lower price of entry, lower duration of commitment. There's 90 million travelers in the U.S. that are looking to travel with the name they trust and get a lot of value out of their travel, we think we can offer both of those exclusive content, name you can trust and with value with our expertise, both in vacation ownership and exchange through the subscription clubs that we will be launching in July.

Got it. The one thing I maybe think is maybe more interesting than the existing 60,000 people in the vacation clubs and putting more attention and investment in that business is really the 35 million people on the Travel + Leisure platform and mining that to sell them travel stuff. What's wrong, I guess, with this math? If you could mine the 35 million on these different T&L platforms, 1% a year, spending $500 a year. And let's assume it's a 25% margin business on selling them $500 of stuff a year, that's like $175 million of incremental EBITDA. And if I give that, I don't know, a low multiple, like $10 for that kind of business, that's another $1.75 billion of enterprise value, equity value. What's wrong with that sort of scenario or math in 3 or 5 years down the road? Anything?

So not to be mistaken with validating that as forward projections. But there's nothing wrong with that math. There is -- the potential that you see is the potential we saw, which is the leisure travel market in the United States is enormous. And the timeshare market is 10 million households. And there is nothing wrong with getting more eyeballs into your organization and leveraging your existing strengths, which is membership services and the RCI world and a great sales and marketing organization and vacation ownership, take all of that legacy and say, how can I translate that to a new business model, which is subscription. So I'm not going to say we did the same math, but we did similar math to say 36 million eyeballs, candidly, usually half to 3/4 of them aren't active in the sense of heavily engaged. We want to engage more. We want to market more. And keep in mind, timeshare is a direct sales and marketing business. The subscription business is going to be indirect. It's going to be -- start giving us access to this digital world and be able to acquire customers at a different cost basis. So I think if I'm going to criticize anything about your numbers, it's just that no one's gone out improved it. So we've got a lot of hard work to do. We think doing it with the Travel + Leisure name, doing it with our core competencies, we're going to be the best to do it. But you always have to have the idea and then you have to go execute it. And now we're in the execution phase.

Some of the things you talked about in the most recent earnings call, it kind of describes sort of like an OTA business, and you said kind of no, it's not our intention to be in the OTA business, but why would that be such a bad business model to get into? Are there conflicts that you're mindful of? Or is there some other I don't know hesitancy on that front?

Well, I think more than anything is self awareness is you need to know what you're great at, and you need to know where you're -- where you can fit best in the world. And look, I have tremendous respect for what Expedia and Booking.com do. I think they're behemoths, and they're great at it. And it's not our strategic intent to go compete with them. That takes tens of millions of dollars. And the reason I said it the way I said it is I don't want investors to think that, that's our intention. Look, we will now have an incredible online booking platform under the Travel + Leisure name that will be a way to attract low-cost leads into our broader ecosystem. With that intention, it's -- our intention is not to one day compete with the Expedias or Bookings of the world. But it is a great tool for our ecosystem, and we're going to leverage it. But we're not going to leverage it for the ultimate goal of competing in the OTA world, but competing in the commitment space related to vacation travel, whether it's subscription or ultimately vacation ownership.

Great. Yesterday, the timeshare industry had an interesting announcement with the HGV buying Diamond Resorts. Can you talk about, one, what do you think that does to you from a competitive perspective? Obviously, you have a branded timeshare operator buying independent. Does that have a direct impact on the level of competition, maybe where there might be more direct regional overlap or sort of a targeted segment overlap? And maybe just from your perspective, since you worked, you haven't worked at Diamond Resorts, but you worked at Marriott and you worked at HGV. Maybe from your perspective, any views on sort of the strategic rationale there.

Yes. Well, let me go a little broader, and then I'll get to that. But if you listen to the first interview I gave when we became public in June of 2018. Maybe the first question I was asked, I commented how I believe this industry has fundamentally changed on the back of major hospitality brands, Hilton, Marriott, Wyndham, Holiday and Disney. And I think that has fundamentally changed the industry for the better, for reputation reasons, for capital commitment reasons, for the ability to link in the hotel organizations. And it's to no discredit to independents because I think they've done a phenomenal job, and the ones that are still in the industry continue to do a great job. But I do think the hospitality-led consolidation of the industry is a net positive for everyone. The fact that now Hilton has purchased the largest independent timeshare operator in Diamond, I think is positive and now gives the public markets 3 really large companies backed by Marriott, Wyndham and now Travel + Leisure and Hilton. And if you listened to the announcement, I couldn't agree more with the strategic rationale. I heard scale. I heard generation of free cash flow. I heard the complementary benefits of [ drive thru ] markets and a points-based system. For me, that strategy sounds familiar. It's the one we believe in, and it's the one we absolutely believe is why we've been so successful and why we came out of COVID extremely strong in Q3. So I think the overall acquisition is a net positive to the industry, and I'm happy for Hilton, obviously. And I think the strategic rationale that they laid out made a lot of sense. And not only do we agree with it, we live it. So no, we were pleased with the announcement. We don't think it creates any competitive disadvantage for us. I think every CEO in the timeshare industry says that the market's big. We tend to fish in our own ponds. I think Mark has said that many times, and I agree with him. I think he's absolutely right. So I think it's, like I said, good for the industry, and I'm happy for the Hilton acquisition of Diamond.

Great. I know we have 5 minutes left. Maybe you can just talk a little bit about one of the, I guess, maybe sort of positive effects from COVID is, you and others having built up of timeshare inventory on your balance sheet. How do you think about the next couple of years of reinvestment relative to history? Then how does that maybe impact the conversion of your EBITDA into -- to free cash flow?

Yes. I'll take that one. Thanks, Joe. When we look at our spending over the next several years, if you look pre-COVID, we were in the $240 million range for inventory and for the next several years, we'll average less than $200 million. To your point, with the slowdown sales, we've had inventory build up on the balance sheet. So plenty of inventory, and that's going to be one of the key drivers to us getting back to that 50%, 60% EBITDA to free cash flow conversion, which is really what we're starting to target when we think about the next couple of years. This year will be a recovery year. But as we get into '22 and forward, we're really going to start to target those conversion numbers again and not only on the inventory side with the spending below $200 million. But historically, for our capital investments in sales offices and technology, that number has normally run into $110 million to $120 million range. And for the next couple of years, you'll see that be over -- or be less than $100 million. So very focused on free cash flow, get our labor's rate back down, which obviously then gives us free rein as it relates to capital allocation of our free cash flow.

Okay. And once you're at your targeted leverage ratio levels and you are in a position to accelerate capital return, you are paying a dividend now. So you are returning capital even in a really tough period of time. What's priority? Is it raising that dividend or is it at that point deploying that free cash flow into buybacks?

Well, I think pre-COVID we had a pretty consistent record of increasing our dividend each year and we like returning capital to shareholders in that method. So we'll obviously look at and evaluate that. As we -- relates to share buybacks, that's something we're going to have to make a decision on at that point in time. Obviously, we've been very pleased with the recent run up we've had on our stock price, and when we get to that point, we hope those stock prices will be even higher that it is now. So we'll have to evaluate that back on -- based on a stock price at that time. And then obviously, we like doing some M&A when it's the right transaction for us. The ARN transaction we did back in 2019, the Travel + Leisure transaction. So we definitely think there's other avenues to drive shareholder value and increased shareholder value other than just share buybacks. But it's a decision we'll make as of the point in time, and you take all the factors and consideration at that point, and much of the stock price keeps going up, we'll just have to evaluate at that time.

All right. I see that we're at the end of our allotted time. I want to thank you to both Michael, and Mike, and Chris for your time today. I have written down 7 places here on my desk. Travel + Leisure, not Wyndham destinations. I don't know if I say Wyndham destinations at all, but I try not to. But thank you very much for your time. Great job today.

Joe, thank you.

Thank you.

See you on September.

See you soon.

All right. Bye-bye.