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

Okay, great. Great. Thanks for everybody for coming here after lunch. Hopefully, you had enough of the food to get yourself ready for a long afternoon. I'm here with Travel + Leisure Group. They -- Mike Brown and Mike Hug from T+L are both here. Mike Brown is the CEO; and Michael Hug, is the CFO. Chris Agnew, corp Investor Relations, is in the crowd as well, who can also help answer any questions that you may have. Gentlemen, thanks for being here.

I'm going to kick things off and we'll open it up for questions in a little while. But maybe just to start, specifically focusing on the most important timeshare drivers, but speaking more broadly, you can -- help us understand your view of the macro from for demand perspective and what you're sort of seeing out there in light of all of the noise.

Well, first of all, good afternoon, and thanks for having us here at the conference. I had already a full set of great meetings already and look forward to a good afternoon. Leisure travel continues to be strong. We are a 100% leisure travel company. Everything we do sits in that segment. And as you look in the first 3 quarters and continuing into Q4, there really just doesn't seem to be any cracks in that leisure travel demand. When you look at where people are traveling, how they're traveling, the consistent demand that we're seeing. And there's a number of different elements that we will look at to determine how real that demand is. We're sitting 2/3 of the way through the fourth quarter, and we're continuing to see strength into the end of the year, primarily through 2 key drivers we look at most closely, which is volume per guest, the amount of revenue we see for every guest that walks through the front door. We've had a record year, all-time highs for the first 3 quarters. And that's really shown no signs of weakening into Q4. And then we look at, obviously, arrivals to our resorts because when you're in the leisure business, you want people at your resorts, enjoy leisure time. And that has consistently been above our '19 levels and shows really no sign of weakening as we come to the end of the year.

Okay. Great. And focusing on Timeshare specifically again, but you guys have multiple rooms in each unit, right, which is unique to Timeshare. You have a counter inflationary or inflation hedge built into the product as well. So 2 things, the former being a work-from-anywhere type of tailwind and the latter being an inflationary tailwind. That's how we think about it is like structural tailwinds for your product versus other products we cover. How much of what you're seeing in terms of demand and VPG lift are coming from those specific tailwinds? Is it discernible? Can you quantify it? Or is it hard to tell?

Well, it's not hard to tell because there are specific elements that we can measure. And maybe if I can just take a step back and we heard this question this morning, and we tended to hear it over the last 4 to 5 years as how do you compete with a company like an Airbnb or a VRBO? And what are your consumers -- do you view that as a competitive threat? And the answer to that is very clear is now that each has been in the market for 6 to 8 years. The conversation is no longer would you like to vacation in something other than a hotel room. I think everyone who goes on a ski trip, a beach trip that has a family and gets home after a full day at Disney World, Universal, skiing in the mountains, wants more space. So the macro trend pre-COVID was clearly driving toward the type of accommodation that we offer, bigger units, more space, more downtime, not that necessity to get out and go to a restaurant for every single meal and pay $100, $150 in a family. Now that we've gone through COVID and there is this work-from-home environment, we're clearly seeing length of stay extend. People are going away for a longer period of time. Maybe they're going away on a Thursday night instead of a Friday night. So we've seen that extend to room night length of stay up about 8%. And I think for those new to the space, adding to that length of stay is one of the misperceptions about Timeshare has always been, I'm going to go to the same place, the same week in the same unit every single year. With the branded companies now in the space and really having about 70% to 80% of the market, it's all about flexibility. So I live in Orlando, maybe I want to go for the weekend over to Clearwater with the family. I can do that for 4 days or maybe want to get away with the guys for March madness in Vegas and get 3 studios. You can go anywhere, you can use your points for a fungible amount of time. And ultimately, you can use it as well to move into your sister hotel brand. So I know that was a really long answer, but we are absolutely seeing a change of trend macro to bigger space, micro post-COVID to longer length of stays, which is great for our business because when owners are on vacation, they're committed to the product and they have more free time walking into a sales gallery and buying more is a lot easier from our standpoint, and we're seeing it in our results.

And do you think the work-from-anywhere trend is alive and well? I mean we have seen people return to the office, our building included. How do you view that trend specifically?

Well, you can look at it from a number of different ways. We saw very early post-COVID that length of stay extends from sort of 8% to 10% longer than historical levels. We've seen it come back to sort of 5% to 6% longer. So I would say there's a little bit of regression back to the norm, but not to the norm. So I mean we could -- we still survey. No one is probably in the office 5 days a week anymore, our company's 3 days.

My boss here.

And we know it's here to stay. So the reality is that ability for someone to leave on a Thursday or come back on a Monday night is no longer an inconvenience or out of the norm for the work environment and therefore, you're getting a longer drive to length of stay.

Got it. Okay. On tour flow, so you made large changes to your mixed channels, your tour flow is still about 40% off of 2019 levels. You've got margin lift off that, you've gotten VPG lift off of that. What does the ultimate goal look like in terms of this mix? And are you looking to cherry pick or dip back into certain channels as you're building back that will be margin accretive, but maybe VPG [indiscernible]?

So it's a great question and really core to how we fundamentally changed our business to the positive during COVID. There was -- the 40% you referenced is basically, if you look at our marketing mix pre-COVID to where we are today. We made the conscious decision in COVID to elevate our marketing minimum standards. So we took a minimum standard of 600 to 640. We'll talk about the implications for that in just a second. But when you equalize for that credit profile, we're down 5% to 10% on tour flow. And that is very normal. But our VPG is up to 3,300, 3,400 from 2,300. So we've become far more efficient and positive on the revenue generation while raising our credit standards. And if you want to look at the why behind that is that 640 and below FICO score, credit quality-wise, really came with minimal to no margin, lots of work. So we've in effect traded tours for improvement in our portfolio. Our provision is down around 18%, whereas 21% before. So if you take loss tour flow and the profit that created and trade it for a better quality portfolio, what we're now left with is a business that has a very strong credit foundation and ability to grow off of that as opposed to chasing tours that may not have been profitable. And what you're left with is a credit profile, a consumer profile that really looks very close to our competitive set.

Okay. And as you make that shift, talk about new owner versus repeat guests and your goals there. Just remembering back to the last cycle, maybe it wasn't you, you weren't in this seat, but there would be goals by Timeshare operators in terms of new owner mix, and they would never hit that -- never hit the target. And the question is, do they have to? And do you have to? And by when do you have to?

Right. So in timeshare, your future recurring revenue comes from the generation of new owners today. So every time we make $1 worth of sales today, we have 30 years of history to say that they will spend another $2.68 on incremental timeshare. So you know that every time you get a new owner today, you're all but guaranteed your future revenue streams, which is why maintaining a healthy level of new owner sales today is very important for your future success. What we know in this space, there's 3 public companies, they range from 30% to roughly 40%. 30% being the lower, which we tend to stick in the middle of that from 37% to 40%. Last year, coming out of COVID -- sorry, not last year, this year, already focused on '23.

'23, that's next year.

Yes. We will be low 30s. And as I've always said, as long as you're in the 30s, you've got a very sustainable business going forward. So we're already where we need to be. As we move forward into next year, we will look to get up in that 33% to 36% range more than likely. So continue to, in effect, invest in our future. And I just -- I do want to come back to your last question with just one clarification. When you credit equalize from '19 to '22, our owner tours are basically -- I think, they're 1% or 2% down. Our Blue Thread, which is our tie-in to the hotel group, is 5% to 6% down. Where we are most down in tours is open market or non-affinity tours. And we've said very explicitly that we will build that over time as the market improves. And this summer was the first time we aggressively reinvested in that non-affinity. And that's the percentage one that we're most down, but you can see us as we get into '23, really start to attack that new owner mix.

Okay. And on '23, since we're already there a little bit, maybe you can give us thoughts on your ability to grow in '23, where you have easier comparisons that maybe aren't very obvious for us to see across the business as we think about how to -- we all are modeling some sort of slowdown or let's say, we're thinking about a slowdown. How do you think about '23?

So I'm really excited about '23 for a lot of different reasons. But let's start with Vacation Ownership business, the core of what we do. That business is performing extremely well. We made a strategic shift, the strategic shift is playing out exactly as we planned, if not better. And therefore, as we move into 2023, we've got our core Wyndham Timeshare business running as good as it ever had, has with a portfolio that's never been as strong as it has in the last 5 to 7 years. What's incrementally exciting about our Wyndham Destinations business, our Wyndham Timeshare businesses, our volume per guest is running that 3,300, 3,400 range. That's going to come back a little bit because of our new owner mix. That's what we expect. When we laid out our Investor Day in September of '21, we said that from '21 until 2025, our volume per guest was going to be between 2,700 and 3,000. We never said that we would be at 3,300, 3,400 for an entire year. So even if a recession comes, we'll get the tours because people will still vacation. Our close rate might come back a little bit or VPG is due to mix. [Audio Gap]

We're going to get another $2.68 in future Timeshare upgrades. We're going to get interest on that portfolio. We're going to get the property management fees and we're going to get those RCI membership and exchange fees. And those are all the recurring revenues that came through loud and clear during COVID when in 2020, we were cash flow positive and continue to pay a dividend.

Okay. Great. Shifting gears to the Travel and Membership segment. You guys did a great job in your Investor Day explaining the B2C business, the B2B business, and we did need that education. Starting with B2B, is it right that our distribution -- you've seen more momentum than you thought in terms of sign-ups, but then more delays in terms of getting it going and getting the channels launched. Is that sort of dichotomy that's happening right now? And has it affected your -- the way you look at your long-term targets for that business?

Well, let's start with I think probably what everyone thinks is the most important, hasn't changed at all our long-term outlook for 2025. We are -- I'm as confident, if not more, in 2025 than I was the day of Investor Day because as we all know, you set a plan out there and then you go execute the plan and things are going to exceed your expectations and things are going to fall behind. And as long as you have a diversified way to grow, you'll get to your end objective, and that's still where we are today and are very pleased with a number of different elements of it. So specifically on travel and membership, let's start with what I said earlier that, that segment of our business was clearly defined as 0% to 2% growth, no capital investment, low capital investment and tons of cash generation. We launched 2 brand-new businesses, travel subscription businesses that although looked a lot like RCI and its revenue and profitability profile, upfront membership ongoing transaction fees. That model, we replicated into 2 travel subscription clubs, B2B and B2C. And what we've seen from that is the vast majority of the expectations that we have been met, if not exceeded, and 1 or 2 that are lagging behind. With all that said, this is a brand new part of our business that is fundamentally incremental to our growth strategy. We, as a company, have been 4% to 6% for the last 2 decades. Now we're saying until 2025, we're going to double our growth rate. And you've heard me say at the very beginning, we're still on plan to do exactly that. Now specifically to Travel and Membership, we have seen great success in signing up affiliates better than we ever thought as we came out of the gate. Secondly, those who are transacting are transacting at exactly the level that we expected them, the rate, the revenue per transaction. And thirdly is once you become a paid member because there's different level of membership. There's the standard, which is complementary and then there's the paid. Once you get to that paid level, your rate of -- your transaction propensity hits exactly what we expected, if not slightly higher. The area that we are lagging is getting the standard memberships up to premium. So when you lay out that you're going to be able to run a core business, run your exchange business, add to new businesses, which will allow you to double your growth rate. Given where we are 1 year on, I love the set of circumstances we are. We've gone through a lot of new learnings in launching these 2 businesses, and most of them have been absolutely reaffirming. And if you have -- we've had learnings, the best type of marketing to do, the right type of offers, the way to engage digitally. In 12 months, I'll take that all day long. And with that said is we now are in a position as we move into '23 to accelerate that side of the business. Which, on the grand scheme of things, is an extremely small part of our growth engine because we've got our core timeshare, we've got our RCI and then we have these subscription businesses. It's gotten a lot of commentary. It's a relatively small amount. It's going really well. And there's just the transaction piece that will be our focus as we hit into 2023.

Okay. And the B2B business versus the B2C business, it feels to me at least that the B2B business is a bigger opportunity.

It is.

Okay. And 12 months later, is that the way it's been playing out in terms of versus your own internal expectations on those individuals -- not to make you choose between your children but...

They're both beautiful.

Is the B2B sort of living up to that internal excitement for you?

Exactly. And the reason is -- and I would say more so than even we anticipated in September of 2021. When you've got a blank slate in front of you, you don't know how it's going to play out. We've seen a real excitement and adoption on the B2B side, people willing to put it under their brand to run their travel club. That's been an exciting component. So when that's the case, you tend to allocate your internal resources accordingly, especially as they relate to technology. We've got a great technology team who's really working on customizing now these travel platforms. But yes, the B2B side has taken off extremely strongly. And the B2C side, the membership base is growing. But when you look at ROI you can get there a lot quicker on the B2B side.

Okay. That's helpful. Maybe I'll pause here and see if there's any questions in the room before we move to free cash flow, one of your favorite topics. Most timeshare investors understand, even if it's hard for us to model it out, these are really great free cash flow businesses. This is just my -- this is the chance for you to remind us how good of a free cash flow this business is. How can you get the point across in terms of your overall capital allocation plan as it is today? What do...

So maybe we hit it in a few different spots and, Mike, just definitely jump in as you see fit, but let's talk about predictability, then let's talk about magnitude and then we can talk about just the level of EBITDA to free cash flow. But I think it's important to look back at during COVID. I think people perceive the beta to be a lot higher in this industry than it really has been. Keep in mind that the 3 timeshare companies have not been public during a garden-variety recession. So the market doesn't know. We do because we went through one, we went through the great financial crisis and we went through COVID as companies even if we were private and we know how resilient and that it's not a high beta cash flow generation industry. It's predictable and it's so predictable that in -- during COVID, we never stopped paying our dividend. And that's like pause, pause everyone understand -- we cut it from $0.50 a share to $0.30 per share, and we were one of the only companies, if not 1 of 3, maybe in the whole consumer discretionary that maintained it. And we didn't maintain it to go at risk. We maintained it because that's how solid our cash flows were. So let's pause there. Now let's talk about magnitude. If you look at our predicted return -- our generation of cash at our leverage rates between now and the end of 2025, it's basically an equal signs to our current market cap. Add to that sort of teen levels, free cash flow yield, dividend rates that we've continually raised, it's about 3.5%. There's a lot around our predictable cash flow generation and then return of capital to shareholders either through dividends or share buybacks that is very transparent and very predictable based on our past track record. Now there's always possibilities for M&A, we will continue to look at those opportunities. But when it relates to cash generation, which tends to be in that 55% to 60% range, our dividend consistency, our share buyback consistency and I'll sort of end with this on cash flow generation and see if Mike has anything. We've said also very publicly that we have sufficient inventory on our balance sheet to support VOI sales growth for at least 3.5 to 4 years before we take back any inventory. Given the fact that, that will automatically release at minimum $100 million of cash back to us for the foreseeable future, 3.5 to 4 years. It's just reaffirming of the incremental cash generation that we're going to have available to us going forward.

And I think the reason we're so confident in our cash flow generation going into the future is really threefold. First of all, think about the ABS markets. We've proven how resilient they are back in 2009, during the pandemic. We see them available to us today. So that's a big piece of our free cash flow generation. Michael touched a little bit on our inventory spend. We would have planned to a pre-COVID spend about $250 million a year on inventory. With the inventory we have on our balance sheet because sales were down during COVID, we now will spend $100 million to $150 million over the next several years on inventory. So $100 million favorability in terms of the inventory spend when getting net EBITDA to that free cash flow conversion. And then the last piece is for tax purposes and not to get too technical here, but for tax purposes, for the portfolio, we pay taxes on an installment basis. So when we collect the principal, that's when we pay the income taxes. So what that means is as our portfolio grows, our income tax cash out the door actually goes down because of that deferred treatment for the installment sales. So when you look at the walk across that we have in our investor deck, you could see those 3 major components. And that's what gives us confidence in that 55% to 60% free cash flow generation into the future.

And your leverage profile right now, is that conducive to maintaining the sort of level of buyback activity that we've seen? And would you potentially take it higher if the macro slowed down, would you feel comfortable with any higher levels of leverage from where you are now?

So right now, our target leverage is 2.25 to 3x. We're about it at 3.6x, and that's just because our EBITDA is down compared to 2019 when we were operating right at 2.9% range. So we're delevering through growing EBITDA. It's not our intent to use cash to pay down debt. And we'll see where we settle at. Right now it's, 2.25, 3x. We're going to grow the EBITDA, keep that moving down towards that 3x target, and we'll see what happens with the environment in terms of where that long-term range ends at. But right now, we've talked about 2.25 to 3x delevering through EBITDA growth, not through using cash, which allows us, to your point, to use that cash for dividend, share buybacks and look at M&A.

Well, I don't want to misquote, but I think we've taken out 6% to 7% of our share count out this year.

Yes, at the end of September, 6% of our opening share count had been bought back.

For Q3.

So you can take out the market cap as well as deleverage with your current free cash flow profile, which is sustainable?

Yes.

Okay. Any other questions?

[indiscernible]

Given that the vast majority...

Can you repeat the question?

Yes. So the question was when we look at on a go-forward basis, what are the metrics that we use to really plan out on the VO business, it's really around our volume per guest, our forward bookings and the performance of our portfolio. Those are not only leading indicators for how the consumer is doing, but it's also just reflective on how our business is performing. So it's why I get back to this 3,300, 3,400 VPG level as that's consistently played through. It's a really positive element. And then on the other side of the business, the RCI business, which is the vast majority of the Travel and Membership EBITDA, we just watch how the overall industry does because they are the indirect beneficiary of the generation of new owners. So as the entire industry comes back and generates more new owners, not just at Wyndham but at our affiliate brands, which they seem to be doing, what we will do at that point that helps to predict how RCI is going to do build going forward.

Michael and Mike, thanks so much for being here today. Thanks, everybody else.

Thank you.