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

Hi, good afternoon. My name is Christopher Agnew. I'm the SVP of Investor Relations at Travel & Leisure Co., formerly Wyndham Destinations. I'm very pleased to be joined at the share conference today by Michael Brown, our President and CEO of Travel & Leisure Co. We will get into Q&A in a moment. But Michael, for those that are a little less familiar with Travel and Leisure Co, can you provide a brief overview of the company?

First of all, good afternoon, everyone, based here in Florida and glad to be part of the conference today. As you just mentioned, Chris, our predecessor company was Wyndham Worldwide. And in June of 2018, we separated and became Wyndham Destinations. And for the last 3 years, we operated under Wyndham Destinations until January of 2021, where we acquired Travel + Leisure Co., and rebranded the entire company and launched several new businesses. To size our business, we're a $5 billion market cap with over $3 billion of revenues in 2021 and an adjusted EBITDA of $778 million last year. We're a company that's 100% focused on leisure travel with over 90% of our business based in North America. One of the key characteristics of our business is, we transition about 55% to 60% of our EBITDA to cash and create a very attractive free cash flow yield for investors. Operationally, we're really divided into 3 lines of business. We have Wyndham Destinations, which is timeshare brand, the world's largest ownership -- vacation ownership company with over 245 resorts, been in business for over 40 years, very proud of our positioning and relationship with the current Wyndham Hotels and Resorts. Secondly, we have a division called Panorama, and Panorama holds within its 2 primary businesses, the first of which is the world's largest and foremost membership travel business that includes about 3.6 million members with highly recurring revenue streams. And most recently, we launched into a B2B Travel Club business, both the RCI Exchange business and our B2B Travel Club sit under Panorama. And then lastly, our newest business is the Travel + Leisure Group, which has launched a travel and leisure travel-based club. And together, these 3 business units have 4 business lines underneath them and again, generate that $787 million of EBITDA that we generated in 2021.

And Michael, you've been in the industry now, I think over 30 years, first with Marriott and then Hilton. What changes have you seen in the industry over that period?

Well, when you think about the vacation ownership industry, it's gone through a tremendous transformation. The timeshare industry, pretty great financial crisis was characterized by a lot of independent operators with either single sites or very few sites, that characterized about 2/3 of all industry sales. Post great financial crisis we've seen in the last decade, a very dramatic consolidation of the industry and the consolidators have typically been hospitality companies. So when we look at 2022, although the year has a long way to run, companies like Wyndham, Marriott, Hilton, Disney, Holiday Inn, those 5 companies alone will probably represent 75% to 80% of the industry sales whereas just a decade ago, it represented 30% to 35% of the industry sales. And with that hospitality brand entry and really increase in market share, what you're seeing are stronger balance sheets, a heavy focus on flexibility of product. And fundamentally, the industry has transformed itself from independent real estate development to a highly capital-efficient or capital-light industry where the brands and their balance sheets have consolidated the industry to where we are today.

And can you -- for those new to our business. Can you lay out what the general economics of the business are? And also maybe discuss the goals that you recently laid out at your Investor Day that you held last September.

Absolutely. So when you think of what we've been in business with for a long time, it's the Vacation Ownership and Vacation Exchange. And those 2 businesses really made up the 780 -- 787,000 -- $778 million of EBITDA that we had last year. And when you look at the characteristics of that business, it really comes down to a few key components. First of all, our core business of Wyndham Destinations and RCI is characterized by mid-single digits growth plus mid-20s development or total margin as a business. So even during the downturn during COVID, not only were we -- were able to generate margins in the 20s but we were able to continue to generate lots of cash flow, and ultimately, we never stopped paying a dividend even throughout COVID. As you look at the key components of our business, we run a vacation ownership, a timeshare development model. In addition to that model, that will generate a consumer finance, and we have today about a $2.8 billion consumer finance, which ultimately creates net interest income. So we have vacation ownership development, net interest income. And then not too dissimilar from a hotel, you'll see management fees being taken in because we run those resorts, those nearly 250 resorts for a management fee, and that's typically 10% of operating cost. So those are 3 components. And in addition to that, as I mentioned, our Vacation Exchange business has approximately a 40% to 45% margin and roughly 30% of the company's EBITDA, and that's a subscription-based business with recurring transaction fees. And when you roll it all together, what you get is a very stable, as I mentioned, mid-20s development -- or total margin with mid-single digits growth. Now that strong foundation has allowed us to begin to move outside of the timeshare industry. We'll stay committed to that Wyndham Destinations and RCI business. But with those capabilities in leisure travel, the marketing and sales distribution and our deep experience in the exchange business, we've decided to launch 2 new business extensions. I've already mentioned them in the previous slide is that we're doing a B2B travel club and a B2C Travel Club. Both of these subscription-based clubs do not -- are outside of timeshare and allow you to join a discounted travel club for an upfront membership fee, and we take a percentage of all the transactions. Think of a Netflix, think of a Peloton, Think of a HelloFresh. It's a similar type of subscription business, but for travel. First, again, on the B2B side, where we will white label a travel club for another association outside of our brand. And then secondly, with the Travel & Leisure name, we've launched a travel and leisure subscription club direct-to-consumer. Between those 2 businesses, our strong foundation and our new business extensions, we want to take that mid-single digits growth and incrementally add on to it. so that we can present a growth profile in the high single digits, somewhere between 8% and 10% going forward. We laid that out in our September 2021 Investor Day and that's the trajectory that we're on is to take that mid-single digits, double our growth pattern and get up to that 8% to 10%.

And in January of last year, you acquired the brand, Travel + Leisure and then renamed the company. Can you talk a little bit about what the transaction was about and why you decided to rename the company?

Absolutely. So the transaction was basically we bought the Travel + Leisure name, all of its IP and its existing businesses, which were -- was an existing direct-to-consumer, Travel & Leisure Club. We are not experts in media. So although we may own the magazine, we license that back at the time to the Meredith Corporation, and they continue to run the magazine at Meredith, independent from us. They have editorial independence. And what this transaction allowed us to do was to reposition ourselves globally to be more of a holistic leisure travel providers since our mission is to put the world on vacation. It really allows us to talk not only about being timeshare centric but to be more broadly leisure centric. We are deeply committed to the Wyndham name and our royalty agreement with Wyndham Hotels. And we will continue to grow that as we have historically done. However, there are audiences that are mutually exclusive or partially overlap with the Wyndham name and plenty of other leisure segments. And our core competency is sales and marketing, it's management, it's hospitality. And if we can take those skills and continue to support the growth of Wyndham, we will also use that to support the growth of other brands and therefore, grow our own business. So we want to move from mono-branded to multi-branded. And as a result of that, we take a timeshare market that's typically 10 million households in the United States, and we expand that. The leisure travel TAM in the United States is close to $95 million. And we think there's easily a targetable market between 40 million and 50 million households. We want to start to consider as we look at doubling our growth rate.

And you talked about strong free cash flow characteristics of the business. So can you also then discuss what is your approach to capital allocation?

Yes. So if I can just reiterate, we have a long history of converting about 55% to 60% of our EBITDA to free cash flow. If you look at our Investor Day presentation from last year, that number should float up and have an upper end of the range, about 63%, 64%. And that is because of our ability to continue to grow our business and preserve project spend on future inventory because our balance sheet is sufficiently funded. So we should be looking at a very strong capital return strategy as we move over the next 3 to 5 years. And Chris, if you can put up that one slide, what you'll see is really a 3-pronged approach to what we do on capital allocation. We've been very consistent, as I mentioned earlier, with our dividend. We would expect to generate close to $2.4 billion to $2.6 billion through cumulative adjusted free cash flow and then an additional $500 million to $700 million on sort of net debt, some other factors, ultimately yielding us to $2.9 billion to $3.3 billion over the next 3 years ending in 2025. Now the way we've always looked at it is we've been very consistent with our dividend paid to consumers, which now sits at a yield of about nearly 3% which is a strong dividend. I think more importantly, speaking to our -- the strength and predictability of our free cash flow, we continue to pay a dividend of $0.30 per share during COVID. It had peaked at $0.50. But I think in the gaming lodging leisure sector, we were one of the very few companies that continue to pay our dividend throughout COVID. And our expectation is we would be able to pay somewhere between $670 million, $700 million over the next few years in relation to dividends. Then beyond that, it's an evaluation process where we will look at opportunities to deploy capital primarily through M&A or share buybacks. But as you can see, the opportunity to generate $2.3 billion to $2.6 billion of free cash flow for deployment of share buybacks or potentially M&A is very, very powerful, especially as you look at the stock market today, our market cap is right around $5 billion. So we're talking about cash deployable that's roughly 50% of our current market cap, which is a pretty strong statement as to our ability to return capital to shareholders. I think the other thing I would just like to point out is this cash flow generation model is after we've taken into account what needs to be deployed to grow our business either operationally or through incremental projects. So there's not another leg to this that we haven't considered. And it really presents for us a really strong profile going forward as to how we can allocate capital to maximize shareholder value.

We've received a couple of questions by e-mail. So if I could turn to those. First one is how does Airbnb impact the timeshare business and maybe I can actually broaden that. How does -- think the growth in vacation rentals, Vrbo, et cetera, and Airbnb impact your timeshare business in your view?

Right. Well, that's, Chris, been a question for probably the last 4 to 5 years, especially with Airbnb's growth and Vrbo's and plenty of others that have come into the space. And what I would say is, and similar to your question about how the industry has changed, back in 2005 to 2010, the conversation was always, hey, do you -- would you like to vacation in a 300 square foot room, use the hotels food and beverage facilities and all the rest, whereas now with the rise of Airbnb and Vrbo and our continued strength. There's really no question that most people enjoy their vacation a lot more when they've got -- they have more space. And what do I mean by that when your children get to sleep in a separate room, and you or when you spend a day skiing, and you want to put your boots down when you get back is you can just walk into your avail put them down and the kids go and you go and you've got your own space or when everyone just needs a little bit of separation time as someone can be in the kitchen preparing dinner or breakfast while others are enjoying themselves in a different space. And I think everyone on the call when you think about your own vacation is there's something special about waking up in the morning and just being in your own space as opposed to having to get up. And I was just in New York City and had room service with a family member this weekend, and it was a $110 charge for something very, very basic. And that's real value, that's real convenience and it's really how your -- whether it's Airbnb, Vrbo or a timeshare product has really taken advantage of the macro trend. As it relates to differentiation, I would just say the clientele is different when you're talking about a timeshare resort, we're talking about people that tend to want the consistency and clarity that brands offer. There's no surprises when you check in and you show up and look behind your front door. And I think also the amenities that come with it, whether it's a feature pool or a workout facility or some food and beverage on site, people do really enjoy what a timeshare brings -- and Airbnb and Vrbo is good. It's just a slightly different market. A few characteristics, and I -- this is sort of jumping off from the Airbnb question, but has surprised a lot of people is that about 70% of our total new purchasers are either Gen-X or Millennials. When you think about who was a purchaser 5 years ago, maybe 7% or 8% were Millennials and now that number is 25% to 30%. It just sort of shows that as people get into the next stage of their personal travel preferences, vacation ownership really provides a sweet spot for people that are beginning families and then have grown families throughout. Also, there's a common misconception about the attrition rate in timeshare. So of our 833,000 owners, 80% of them, 80% of them fully own their timeshare and when they choose to go on vacation, all they're paying against their annual maintenance fee. And as a result of that, the attrition rate every year on that 80% of people is only 2% because think about it in a time where gas prices are rising, and you're spending more and more to get your airfare, get your rumor until get your car rental, get your gas, et cetera, our owners have fully paid for their ownership and their only choice that they have on going on vacation, maybe spending $70 on gas instead of $55. And that is a very small incremental cost that you've already paid for your ownership 10 years ago, and you see tremendous value in what you own.

I see that's a good segue into the second question. How does inflation impact your business?

Yes. So oddly enough, I think we're one of the few industries where inflation is a net benefit to us because as I just mentioned, when someone sitting there at a sales presentation and you're saying that you can lock in your future vacation costs at today's prices, you see the value because had you purchased your timeshare 5 years ago and you're not having to make that decision this year, you see massive value in your ownership and it's easy for us to demonstrate with where inflation is going, not only the price of hotel rooms or rentals, but the fact that you may not even be able to get them to somewhere at a beach location. So from a revenue standpoint, locking in future vacations at today's prices are extremely attractive and are very helpful in an inflationary environment for us because we can more easily demonstrate value. What I would say on the corporate debt side is our debt is fixed, so primarily fixed. So rising interest rates do not have a significant impact to us. We do, do about 3 securitizations per year. So all previous securitizations rates are locked in. And although we may fluctuate from the low 2s or mid-2s up into the 3s on the securitization of $300 million, 1 percentage point increase, you guys can do the math. And that impact happens during the life of the loan. So it really is a minimal impact to us, if not a net positive.

So with your focus on leisure travel, can you talk about travel trends year-to-date and what's your outlook for this summer?

Absolutely. I would say ours is really clear and supported by the data we're seeing internally is that the Omicron variant definitely created a very short and dramatic -- not dramatic. The surge was short and dramatic, but the impact to our business was very minimal. And as fast as Omicron came upon us, it left as a business impact on -- almost as quickly, if not more quickly. We've seen as we entered February and now March, the booking trends are noticeably ahead of 2019 and keeping in mind that being in the leisure travel business, 90% North America this sort of March spring break until the October fall break is really the peak time, especially from Memorial Day to Labor Day. So the fact that the surge has diminished and inflation doesn't really impact the pent-up demand that is clearly out there from 2 years of COVID. We'd expect an extremely robust recovery into the second quarter and throughout the entire summer. And let's face it, people just -- people are ready to get back on the road and spend time with their loved ones that they've not been able to spend the time they want to over the last 2 years. And as much as in maybe May of 2020, we were not in the right place, being travel focused and being leisure travel focused really is a tailwind for what our business should be all about, and we'll make it a lot more straightforward to keep our free cash flow story solid and -- to shareholders.

And I think we've got about 3 minutes left, so maybe I'll squeeze in this last question that I've got. What is your relationship with Wyndham Hotels?

And so when we were the RemainCo with the 2 companies separated in 2018, similar to others in the space, Marriott separated, I believe, in 2011 with Hilton, 2016, their timeshare from their hotel groups. We developed and maintained a really good relationship with the Wyndham Hotel Group. We've continued to grow the brand at -- well, pre-COVID mid-single digit, 6% to 8%. And as I mentioned in my opening remarks, we see that brand continuing to grow. One of the real benefits that we've been able to employ the last 4 to 5 years. Was this program called the Blue Thread, which was leveraging affinity customers through in the rewards to the sale of timeshare, which the hotel group gets a higher royalty on. And we believe that what was a sub-$10 million revenue opportunity back in 2016, '17 can get up to $200 million to $300 million over the next few years. So that was one of the attractive elements of the separation is you could still have a much more clear line of sight to grow and develop the good relationship we have with the Wyndham rewards program in the hotel [ group ].

Excellent. Well, Michael, thank you for your time today, and thank you very much to the Share Conference for hosting us today. Thank you.

Thank you.