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

All right. Well, good afternoon to those in the audience, and good afternoon to those who are dialed-in virtually. We're excited to have with us from the team at Travel + Leisure, Mike Brown, President and CEO; and then to his left is Mike Hug, Chief Financial Officer, and also in the audience here is Chris Agnew from Investor Relations. For those that might not have -- thank you for coming in-person. Great to see you. For those who might have potentially missed it or didn't go through with a fine tooth comb, TNL had a -- we thought, a very productive Investor Day just this past Friday in New York in-person. So I haven't seen you in 18 months. I've seen you twice in 5 days, which is great.

Twice.

The -- we thought the Investor Day was great, and we've got to drill down on some of the topics, but it talked about their core business, and I think, more importantly, their vision for the future, which we've been waiting to hear, particularly as it relates to some of these new emerging businesses, utilizing the Travel + Leisure brands. So maybe we can kind of start with the strategy and then we can kind of go in reverse order and then talk about the core business. So the question that we've been getting on you post the investor presentation is sort of the building blocks for Travel + Leisure and emerging into this travel subscription business that complements the existing travel exchange and complements the core timeshare business. Clearly, before you had roughly a single brand, now you have a brand that's more encompassing that gives you the wherewithal and the ability to tackle a much bigger travel market, addressable market. But maybe you can go through and just talk about Travel + Leisure GO, Travel + Leisure Club as well as PTS? I know you talked about going to both B2C and B2B, but can you just talk broadly? Because I think people are sort of taking these separate circles and kind of thinking they're kind of co-centric circles or intersecting circles?

Right. So good afternoon. It is good to see you in 2 cities, 2 time zones and twice in the course of a few days. But happy to do it. Let's just start on the Travel + Leisure name. We rebranded our company at the beginning of this year to be Travel + Leisure Co. And as you mentioned, we'll separately discuss our timeshare business, which is still the cornerstone of our business. But we saw an opportunity to launch into broader leisure travel outside of timeshare. Our core competencies have definitely said you've got the capabilities to do it, so why not add incremental growth opportunities? And the way we plan to do it and the reason we -- 1 of the 3 reasons we bought Travel + Leisure is we saw this subscription trend really growing, call it, Netflix, Disney+, Amazon, Peloton, you name the companies, I can name quite a few more and realized there was a very fragmented similar space within travel. And what we wanted to do is our core new business extension under the Travel + Leisure name was do a travel subscription business. So we launched last week, Travel + Leisure Club. And although you mentioned a few names, that is really the one, I would say, to watch as a new business extension. So let's think of Netflix $10 a month. You get great content that's both unique and also available across other platforms, travels the same way. We're going to have uniquely curated content within the Travel + Leisure Club, the website is live. [ Editor ], rider goes and takes a trip, and we follow with that actual inspiration turning into travel. We can get into that more. But then there's the Travel + Leisure GO, which is in effect an online booking platform. Some have said OTA. That is simply a means to the in for us. I would not view that as anything that we plan to be core to our growth strategy, but helps to get people into our subscription-based business. So you've got the parent company, you've got a subscription club and then you have a feeder in the form of an online travel platform, which is Travel + Leisure GO.

Great. And so this was a source of questions for us and others at the Investor Days, whose -- who you -- will you be competing against? Who does things similarly to what you're planning to do here?

Well, I think it's a -- no one in some people is the answer. The -- some people is the space is starting to have entrants, which I think is a great sign. Great sign for us. It's a great sign that there's a demand out there. You've seen TripAdvisor have launched a subscription club. You've had companies that have been in the business for a [indiscernible] as an example, which is a more niche market. [indiscernible] recently back public. We feel like our differentiator is the fact that we're bringing for the first time a media powerhouse together with a travel company to create not just value in our offerings, but unique content, which we believe is the key differentiator, most trusted influential name in travel, curated and unique content provided at a preferred pricing or better value than you can get on the retail.

So people really should look at their website because you see significant discounts and the discount more than pays for the membership fee. So it seems to us as a consumer sort of an easy leap to go from usage to sort of this membership, which the financial benefit for a few is sort of recurring, very stable...

Very much like our RCI business.

Totally.

Yes.

The question is you have a great brand, obviously, to lead with Travel + Leisure. How do you sort of populate the funnel? How do you then go from degrees of awareness to actually then action? And then maybe you can talk about sort of who you have now running the businesses as well? Because I think that's -- that was showcased at the Investor Day. I think that's an important part of it as well.

So when you say funnel, I mean travel options?

Travel options and just -- not just awareness of the brand itself as sort of this conceptual [ IEP ], but sort of now that [ IEP ] with this service and benefit?

Yes. So first of all, we purchased a company really below the radar about 2 years ago called ARN, Alliance Reservation Network. And that is really -- you won't hear us discuss that very much, but that is the engine behind this travel club. When we purchased ARN, they have been aggregating and distributing product -- hotel inventory for nearly 20 years. So we have on that platform already nearly 600,000 hotels providing travel opportunities at a discount rate, but you must be behind a paywall to get access to it. Now what we're taking is that repository of great quantity of travel options, and we're layering on top of it editorial content, trusted travel riders who, as I mentioned earlier, you can now just take that inspiration and click a button, book now and straight to the travel. And the gentleman running the business -- or several people, but the gentleman at the top Noah Brodsky joined us from Starwood previously and WeWork, a new way of thinking and then subsequent to that Wyndham hotels. He's launching that business independent from the timeshare group so that we grow it organically. And then we have some people working underneath him from really the Expedia world and understanding and direct marketing and SEO search and all of that. So we're really bringing in not timeshare talent, we're bringing in industry knowledge. And then we can talk about the PTS team separately.

Sure. So the one question we also got following the Investor Day is why did you pick this sort of $10 per month membership? Why not higher? Because it seems like you're getting a lot for $10 a month?

The short answer is you are. And you said you scan the site and I ran into someone here at the conferences and who had the membership and he said, it paid for itself 8 to 10x over on his first booking this weekend. So we want to attract members. We want -- our focus is to get the club up and running and then have financial levers later on if we see that we can push pricing, which, yes, we think we can and also see where the value is for the individual consumer. We see the biggest effort and opportunity here from the outset is to grow and build excitement around what should be a tremendous clouding and gain on member growth.

And you identified sort of your addressable market as 40 million households here in the U.S. with a penetration rate of 1% to 3%.

Correct.

Why is 1% to 3% sort of the right target for you? Why isn't it higher? Or how do you assess what would be a successful penetration rate?

Well, to be candid, we wanted to try to benchmark against like companies, and we'd all love to be Netflix, Amazon and Disney on day one. But we saw more comparable penetration history and one that we felt the market would understand when we comped ourselves against Birchbox, HelloFresh, Peloton, smaller companies, but well known. I think that mirrors Travel + Leisure. And we were clear that I think a lot of people like to just say the addressable market is infinite. And we wanted to say that...

1% to 3% of infinity is a pretty big number.

It's a big number and investable number. But we saw in North America, a travel market of 7 days of vacation a year or more, combined with ones that are already have an affinity for subscriptions. That was where we were going to go first. That group, combined with the people that are lower followers of the Travel + Leisure media company -- or Media Group, are the ones that we really wanted to target initially. And remember, our time horizon in our Investor Day was 4 years.

Right, right. So another sort of topic that we've been getting on you is how can you provide a more value-oriented price point or discount for this product versus others?

Well, I think the key is that -- and it comes back to the ARM component of being behind a paywall. You need a log-in, you need to be part of a membership and ownership or a subscription to get access. And it's ultimately the travel suppliers decision to participate or not. But in a world where cost of acquisition is more and more critical and with a partnership that we have with Travel + Leisure Magazine which is editorially independent and will remain so. Along with the fact that if you're a travel provider, you can get yourself part of that funnel. We believe that safe box that travel providers sit in, will continue to attract the best in the business and also provide the travel supplier with a good form of distribution that's not fully capable to them today -- are available to them today.

Got it. And then maybe you can just talk a little bit and segue into Panorama?

Absolutely.

And your B2B effort.

Yes. So Travel + Leisure subscription club is B2C acquiring one member at a time. And Panorama Travel Solution, think of it very, very similarly powered by that same ARN platform with access to travel. But in this respect, we are, in effect, white labeling that platform to associations, companies, sporting groups that are interested in having a travel benefit to their organization without the ability to create a travel platform of scale. We have it. We will white label it under a company's name as we've already done with the National Association of Realtors, the NFL Alumni Association. We've recently signed Mastercard in Southeast Europe. And that brings with it millions of people into the ecosystem on day 1, whereas our B2C is acquisition one at a time, this is B2B where the business model is all about activation and you want them to transact. But it is -- Basically, if you're a member of the National Association of Realtors, you'll get a discount of 20% to 30% without any upfront fee. Once you get using it and activating it, and you want better discounts, you will pay an upfront subscription fee like RCI. And then as time goes by, we will also get the upfront subscription and a piece of the transaction. So it's B2B, white label versus B2C under the travel + leisure name, both powered by the ARN technology platform.

Great.

And those are were the 2 business extensions we rolled out at Investor Day.

Got it. Great. Excellent. I'll pause there and see if there are any questions from the audience.

[indiscernible]

So 2 parts to that answer. On the Vacation Ownership side, we annually do a sustainability report, and you'll see that we've been very proactive and made some great inroads on water intensity. I mentioned that yesterday we reduced our water intensity by 25%, and it's 6 years ahead of what we anticipated. We're now raising that goal to 35%. We've got partnerships around the -- planted nearly 2 million trees part of our orbit initiative, and we're pretty aggressive in our solar outreach. So on the existing business, which is 70% of our EBIT today, we've made great inroads there. Interestingly enough, and I'll take your green question and turn it a bit broader on the Travel + Leisure Club is, we see a Travel + Leisure Club that's very broad, but we also see in the subscription business an ability to be more targeted into niche travel and reach audiences that we may not have reached before in the vacation ownership space, whether it's demographically, age-wise, economically, types of travel, you name it, and we think we can start narrowing that on the subscription side.

How much overlap do you think there will be between Travel + Leisure Club and your RCI membership?

Well, RCI is primarily dedicated to Vacation Exchange, although they've done phenomenal work and starting to balance where their revenue streams come from there. This, again, sort of, as it was laid out, was we've always been about check-in to check-out, and now we're going broader from door to door and capturing more share of wallet. So I don't think there's going to be a ton of overlap. But what I would say about everything we're doing is we're trying to create a better ecosystem so that we can find travel no matter where it is on the travel spectrum with a product that we have the core competencies to deliver in a world-class way. So there's always overlap, but I think it's more about broadening our continuum.

So for -- maybe this is kind of a 2-parter. For those that are vacation ownership members and owners rather and then for those that are in RCI that are non-Wyndham branded timeshare owners. Have you tried to measure how much they travel beyond the usage of a Wyndham Destination timeshare product or a Hilton and RCI? Or -- and you mentioned that there's a certain level of spend from your existing owners that you think you could penetrate. And so how much work can be done behind the scenes to try to assess what that opportunity is?

Well, the team at RCI has done quite a bit of work in doing so. And I think for quite some time, our ability to deliver that was really limited by our technology, and we had outsourced that capability and that capability was to provide more variety. So by bringing it in-house, we not only think we're going to provide through RCI better service to Wyndham Destinations, our timeshare group. But we are talking to any timeshare company that's interested in broadening their offering as well. And it's one of the first deals that we did was with the Posadas Group, a Mexican timeshare club company. And they've used it because they want to broaden their reach to their members. And the fact that we're willing to do it under their name, but powered through our platform is giving our RCI team more to offer to their consumers as well. So again, I said I wouldn't mention ARN again, but it is sort of the tie that binds a lot of this, and...

It's sort of a different blue thread of sorts.

It's different. And maybe to preempt the question is, we've spent the money to have the platform. The only real additional capital to grow it is human capital, which is code and development and all the rest.

Okay. Great. Any other questions on Travel + Leisure Club? Great. And so you laid out a 4-year sort of expectation and what you'd be happy with and executing on this. What are the things in the near term that you're looking at? I mean what should be -- how should membership grow? It should grow faster in year 4 versus year 3 growth rate, year 3 growth should be faster than year 2, year 2 faster than year 1, is that sort of how you're thinking about?

On the -- in total or...

On -- in total. I'll leave it as broad, yes.

Yes. So we're excited about the recovery on our core -- our cornerstone Wyndham Destinations brand. It's been a tough 18 months, but we are in full recovery now, and we're excited about what we're seeing, where we're seeing over 30% new owner growth on the timeshare side of the equation. We said it would be 25% this year, and we've been very encouraged by the Blue Thread. The reopening of marketing channels that we see that growth as coming back relatively quickly. As it relates to RCI, RCI is an indirect beneficiary or not of new owner sales in the entire industry. They've had to step backwards. And once that step backwards is over, you will see growth come back into that business. I think we're -- we said 3.5 million members at the end of this year. And at the end of our 4-year horizon 3.7 million. And then on the -- obviously, the Travel + Leisure Club, we -- there's going to be nothing but growth there. We've started with 0, and we'll -- we've said penetration that will put us, as you said, [ 400,000 to 1.2 million ]. And we've already signed up 10 B2B partnerships. So I would expect those to continue to grow.

In your core business, I mean what we're hearing the last couple of days, for leisure not necessarily for group convention-related travel is sort of a resiliency in the face of mask mandates, degrees of social distancing. I mean as long as there's not a travel mobility impediment, it seems like the consumer is getting used to things like masks and being a little bit further away from other people. Are you also seeing that with respect to not just the usage of existing timeshare but also proclivity to buy exist -- to buy from both new and existing? Or is it more on the sort of repeat business? Or how do you view that?

Yes. So I'm going to give you maybe a slightly longer answer because there's a lot in there that I think is very important is that we are seeing a tremendous resiliency to the business. We look at -- for those of you who haven't researched, we did not only reaffirm our guidance on Friday for the full year, but we actually tightened it. And we did that last Friday because a lot is happening right now in this space. And people pick individual components and then we'll apply it to the overall. Bottom line is, if we see ourselves delivering the bottom line, the moving pieces between now and then, to me, are a little less important. But we're seeing incredible VPGs, all-time highs over 3,000 since coming -- starting this recovery. Occupancies are within a point or 2 of where they were in 2019 are on the books. Bookings from September to the end of this year are still about 5% above where they were in 2019. Those are all hugely positive signs. I think on the other side of the equation, and you heard it yesterday, is on the top line. We see North America modestly affected by the delta surge. So consumer sentiment is modestly down, but far less pronounced than every other surge. So North America is holding up similar to what you heard from our competitors yesterday, almost identical. And then I think the one thing where we're unique is we've got very modest exposure to Southeast Asia and the South Pacific where I think everyone is aware that there's massive travel restriction. So we're excited. We really want to get beyond the South Pacific travel restrictions to get that business going again, but North America is pretty much the same as you heard yesterday from the competitive side?

The loan loss provision has been coming in nicely in that 18% to 19% range this year. It seems like the consumer financing part has been fairly resilient as well. How much of that has been a function of recutting the target FICO score consumer to a much higher level? And given maybe sort of this overall resiliency, would you see yourself stepping back and broadening by lowering that FICO range? Or is that something that at this point you're very comfortable with?

So let me start that and then let me hand it over to Mike here. We saw an opportunity to start transforming our business during COVID that when we came out, we wanted to really chase quality earnings and make sure that we had more holistic return. And that included not only on the VOI side and changing marketing but also how it flowed through on the portfolio. I'm not going to say it was arbitrary because we had a lot of science behind it, but we knew where we changed it to was roughly the right area, which is not an absolute. We're going to continue to refine how we evaluate customer credit quality. So it might go up, it might go down. But with over 3,000 VPGs and loan loss going where we're going, we know we've come out at the right place as a starting point to run the business as effective as possible going forward. So the short answer is we like what we did, but we might change it a little bit here and there depending on what we see out of savings rates and our loss curves going forward, but we're really pleased with that. Mike, maybe hit on the portfolio a little.

I mean I think we couldn't be happier with the way the portfolio has performed since COVID hit us. I don't think any of us would have believed that our incremental default would only be $85 million through the second quarter of this year on a portfolio that's almost $4 billion at the end of March of 2020. So the portfolio has performed extremely well. Great credit to our team, especially on the hospitality side, getting people on vacation, making sure that has a safe environment to travel to as we start to open resorts in the middle of last year. And to your point on the provision, I've been very happy to with the way that's been [ 18.5 ] or less over the last 4 quarters. But I want to make sure we maintain the flexibility to be able to test some programs, right? As we talked about a little bit on Friday, doing some testing with more extensive underwriting. So maybe we dropped down a little bit below that [ 640 ] and to have some different underwriting programs to try to drive more volume, but at the same time, make sure we generate a good portfolio of quality. So overall, just trying to make sure we manage the business in the best way we can to maximize the bottom line. And overall, it's paid off very well so far when you look at the portfolio quality. And obviously, you know, Joe, how important that is from an ABS market and the ABS markets have been incredibly strong. Through the pandemic, we've had access to that market, which has led to that great free cash flow generation we've had.

Great. So you mentioned, and this has been going on for a while, that new owners are important because over the course of their lifetime, they tend to buy more. And then sometimes you kind of -- would you -- I don't think I was talking to you because I think it was some of the folks on your team that new owners, you don't necessarily prefer them to buy $85,000 worth of points right away because you have a higher chance of they're not being able to service the financing on that. It's like your first car shouldn't be a $200,000 SUV, it should be maybe a crappy Dogani or something I think. So over time, has the proclivity for new guys to buy, has that increased? So over the last 5 years versus 15 years ago, I mean you've been involved in this business for...

Thank you. Thank you.

What has been sort of the trend line there? Has it been pretty consistent? Or has it -- as sort of travel has grown and people want experiences, has that sort of repeat business accelerated from where it was historically?

Well, the ultimate value that a first-time buyer creates over time has been consistent since I've been at Wyndham. We've seen it both pre- and post-COVID as far as propensity to buy. The new owner transaction size and the desire to bring new owners in is very critical in just creating that long-term sustainable model. I think we shared that our current pipeline of owners is worth $13 billion of future revenue over time. So although that's the high-margin business, you need to be very concentrated to keep bringing new owners into the equation, which is why we've been very hard at work, working with our brethren at the Wyndham Hotel Group to grow that channel like the other brands in this space have done very successfully. And then in addition to that, because we've got a -- we have scale and a history of marketing to nonaffinity guest, a lot of that was pulled back during COVID just because it's lower margin business, and we are slowly but definitely steadily growing that back into the equation. And everyone sort of argues about the number, but candidly, if you're in the 30%, up to 50% -- in that 30% to 50% consistently over time, your business is going to be very healthy, and that's where we want to be.

Where are margins today for new owners? Given that you have Blue Thread today, you didn't have Blue Thread prior to your time at Wyndham?

Yes. So on the new owner side, it's really margins are driven by VPG more than they are the cost of acquisition. Because candidly, the cost of acquiring a Blue Thread tour and the cost of acquiring an open market channel through one of our partners is roughly the same. But the VPGs, there's been 2 impacts post-COVID or not post-COVID because we're still in it but in the recovery. First is that our affinity tours are traditionally worth 20% to 25% more on VPG than an open market channel. However, both of those have risen dramatically in the recovery phase. So we're getting a margin expansion on the VOI sales on new owners across the board and Blue Thread is continuing to remain at this stage, 20% to 25% ahead of the other channels. So -- but that's a function of VPG. And that's why when I say that we're getting about -- we were 2,300, 2,400 last year when we're now over 3,000, that's meaningful to the efficiency at which we're running the business.

Great. We have 4 minutes and 11 seconds left. Mike Hug, maybe you can talk a little bit about plans to augment your existing capital return policies, balance sheet management? We've talked about that a lot of sort of strategic stuff, maybe M&A or buying distressed inventory on the timeshare side. And how are you viewing some of those things?

Yes, sure. And I'll start with the inventory piece that we've said from day 1 as we entered COVID that buying additional inventory isn't a priority for us. Our priority has been preserving cash, getting our leverage rate back down to below 4.25% and then have a clear line of sight to 3x levered, which is our target range 2.25 to 3x. But -- so -- and we talked about the fact that we'll save about $100 million in cash per year because of the inventory that's built up on our balance sheet with reduced sales due to COVID. So the priority for us is to preserve cash as it relates to how we operate the business, CapEx and inventory spend, get below 4.25x leverage, which we've mentioned we expect to do before the end of the year. And then we have full optionality as far as return of cash to shareholders. And I think as we pointed out last Friday, since our spin, we had returned over $1 billion in cash to shareholders through dividends, share repurchase program that in the first 2 years had reduced our share count by 13%. And so as we get back to 60% EBITDA to free cash flow conversion, we'll be very consistent in terms of return of capital being our priority where we'll grow the dividend as we grow the business, look for M&A. And I think we've been very happy with the M&A so far in the platform and the foundation that it lays for our future growth. And then beyond that, share repurchase which pre-COVID a very consistent and share repurchase program had been in place.

Got it. You mentioned Friday that from 2022 through 2025, you could see cumulative free cash flow in the $2.5 billion range, which is not insignificant. When you think of that and you think of sort of what's available to invest in the business, what's available to augment external growth, where do you -- so how do you sort of think how you allocate that $2.5 billion?

Well, we've got -- and I should have pointed out, too, I mean, we also continued to pay a dividend during COVID which once again shows...

Well, you should have said that, yes.

The fact that we view that as a priority. But I think we'll -- first of all, we'll continue to grow the dividends grow the business and then always look at strategic M&A. And if the right opportunity presents itself, take advantage of that. But we don't feel like we have to do M&A to hit the growth targets that we talked about. And as you know, we moved our growth targets up from mid-single digits to high single digits as a result of the new business lines that we put in place. So we'll look at the opportunities, but we're not going to go do an M&A activity just to say we did it. I think if there's not the right acquisition out there for us, there's nothing wrong at all with driving additional value through shareholder repurchases.

So let's dream the dream a little bit and assume that, that $200 million in 2024 for these new businesses at some point in the future is a $400 million, $500 million EBITDA business. Does that business long term have to be within the same company that has vacation ownership in RCI? Obviously, you have ARN as sort of the backbone that's powering all the stuff, I guess. But does it have to be in the same corporate structure?

Yes. So if that's ever optionality, then it's a pretty standard answer, which is if it's best for shareholders, we'd consider it. But there's nothing infrastructure-wise, the way we're building the business that would require them to be linked, so to speak. But when I joined, we had a hotel group. We had North American rental...

A history of sort of Wyndham Worldwide, right? And beyond, right, before that, right?

And interestingly enough on that topic is, and it sort of links into what Mike said is we purchased these 2 businesses, T&L, ARN. And we sold a business. And when all 3 of these transactions are put together, we've done it on a cash-neutral basis, and we think we're far better prepared for...

Cash outlay usual basis, right? Not cash EPS, but just...

Yes. Yes. Yes. And so -- let's hope we have that optionality in the future.

Sure. Well, at the JPMorgan Gaming, Lodging Restaurant Leisure Management Access Forum in 2029, that could be a topic point for us.

Fantastic. We'll be here in-person.

Great. Thank you very much on that positive note, great job. Thanks, guys. Have a great day.

Thank you.

Thank you.