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

All right. Good morning, everybody. We're very excited to have with us a long-time attendee at the forum here, Michael Brown, Chief Executive Officer of TNL. Thank you for your attendance.

Maybe if we could start off and just talk about sort of the -- maybe in relation to the Investor Day a couple of Septembers ago, what the strategic priorities are, maybe how they've differed or have been enhanced since that time frame? And then maybe how you're tracking in the aggregate relative to some of those longer-term financial targets that you set out then?

Yes, absolutely. So a few years ago now. And we really laid out a 2-pronged approach to how we wanted to grow the business. Our Vacation Ownership business represents about 70% of the company's EBITDA. And our Travel and Membership is about 30% of our company's EBITDA. And our objective at the time was in the short term to really grow our Travel Club or Travel and Membership business. and then long term to transition our Wyndham Vacation Ownership business into a multi-brand vacation ownership business. The last 2 years, 2 things have primarily been headwinds, and then we've had one pretty big tailwind that I'll share with you. When we had our Investor Day, the rising interest rates that caught all of us have really impacted our ability to drive interest income in the last 2 years that have created about $30 million headwind last year, $30 million headwind for us this year. And our Travel and Membership business, which we expected to grow really dramatically has not performed as well as we wanted it to, and we've recently reset those expectations. On the Vacation Ownership side, when we went from Wyndham Destinations to Travel and Leisure, our goal was to become a multi-brand vacation ownership company, and in doing so, we've been able to launch a Sports Illustrated Vacation Club in the fall of last year. And most recently in Q1, we were able to acquire and close an acquisition of Accor Vacation Club, allowing us to really start to expand beyond Wyndham and Margaritaville and add Sports Illustrated and Accor. It's safe to say that the rebranding has allowed us to execute on that multi-brand strategy, which will really start to play out in 2025 and 2026.

Great. The bulk of your EBITDA, as you said, 70%, the bulk of your equity valuation is related to the Vacation Ownership segment. How do you look at the -- sort of the longer-term growth algorithm there? Particularly the conversations we have with folks, isn't necessarily a nit or criticism, but just trying to understand longer-term volume per guest, just given anticipated mix changes as you're trying to build up more new owners, reduce the mix related to sales to existing owners.

Yes, it's a great question. And just to level set what we believe is the right place to be in the long term for how we look at the 2 major components of VOI growth tours and volume per guest. Coming out of COVID, the owner business represented 70% to 75% of our sales. We know that for the long-term success of the business, you need about 35% of your sales to be to new owners, because very simple stat is if someone buys $1 of time share today, they're going to buy $2.60 in the future. And the way the math works is 35% creates a very stable algorithm going forward on future sales of those new owners who are -- will eventually be owner upgrades. This year, we are projecting to be at 35% new owners, which means that we now set the new base for our go-forward that our VPGs should be stable and our 35% new owner growth allows us to sort of stick at that rate and grow VPG going forward.

So VPG in that $2,900 to $3,000 is kind of plus or minus the next few years?

That's the expectation is this year is an interesting year for us because our VPGs are 30% higher than they were pre-COVID. And the $2,900 VPG to $3,000, if that's where we end up this year, which is our guidance range, and we're at 35%, that really are the anchoring 2 numbers on a go-forward basis. And we'll see how the first quarter plays out, but consumer demand remains strong. And our plan this year puts us at those VPG levels and the 35%, like I said, is where we want to be for the long haul.

Great. And when you've worked at all the major timeshare vacation ownership companies, where were and where are your peers relative to that 35%?

I believe HGV is higher and VAC is lower. We've always -- at least for the last 2 years, I can't say the last quarter or 2, there's been a lot of noise. But we've tended to be in the middle. There's no magic to 35%. It's just a good anchoring point for us. Some years we might be 36%, 34%. It's just a good run rate to be at. And people always ask, how are you investing back in your business? no greater asset for our business than satisfied customers. Our satisfaction rates have never been higher. 7 out of 8 of our owners have fully paid off their timeshare, which means they don't have a loan. They're going on vacation for the price of their maintenance fee every year. So the fact that we've got -- we've invested back to get to the 35% from roughly 25% in the first year after COVID, shows that we were able to generate new owners. And this year, we expect our new owner tour growth to be about 10% more than it was last year.

Great. How are you thinking about things from like a geographic perspective? And one of the things that we had written about during, I guess, the earlier part of pandemic or coming out of the pandemic and the recovery was that you were sort of this drive to timeshare operator and maybe had a benefit there. Are you seeing the sort of drive to, flight to mix change now that we've sort of gotten past that? And how are you thinking about things geographically?

Well, our drive to pre-COVID was 75%. And right now, our percentage is 75%. What was interesting is during COVID, when there was so much uncertainty, 2 things massively changed. Drive to went to about 90%. And booking window went from 120 days back to 90 days. People wanted to create their own certainty, and they did it in a car and the comfort of their own sanitary environment. And as well, they left decisions to later. 120 days is pretty much the same as it was pre-COVID and 75% drive to is pretty much the same as it was pre-COVID. What that says to me is not only are people comfortable in this current leisure travel environment is those are good indicators for us on the margin of is consumer sentiment changing materially or even immaterially. And the behavior out there says that the consumer for our leisure product is strong.

Great. You and many others offer a points-based timeshare sales system as opposed to a time-duration type of sales system. Can you talk about 2 things? One, the value of a point or the cost of a point for consumer today versus 2019? Maybe how that compares to sort of, broadly, the average room rate of hotels in the U.S. over that same time frame? I think there's probably still a pretty good value proposition there. And then sort of part 2 of a points-related question is that are consumers today buying more points versus, say, 2019, adjusted for the new and the existing [ sales system ]?

Yes. So let me start with the value equation. First of all, we never lowered price during COVID. And we also, by the way, did not eliminate our dividend. We were one of the few hospitality companies that didn't do that. That's the confidence we have in our cash flow. But when you look at what we did on the pricing standpoint, we moved our pricing somewhere between 3% and 6% up on an annual basis. And you said, well, hotel rates increased by 33% or 25%, why didn't you increase yours the same way? The value in our business model is value for the consumer and a person, who will spend $1 on timeshare today, we know that they will spend another $2.60 in the future. So to get an extra $500 on the sales price today is de minimis, compared to the lifetime value of getting that incremental buyer. So what we saw is close rates dramatically move up as hotel rates increased dramatically. And we were locking in embedded value for the long term. Okay, we might have lost $500 or $750 at the initial point, but we were getting close rates that were 20%, 30% higher than they were pre-COVID. Those have come back, those close rates have come back, but they've still come back noticeably higher than pre-COVID. So we were -- we never discounted. We increased our prices 3% to 6%. And we were able to grow our new owner base, which is our future embedded high-margin sales at a close rate that was significantly higher than it was pre-COVID and remains much higher than it was pre-COVID.

Great. Can you talk about the demographics, you've talked about how the average timeshare consumer in your portfolio is younger today than pre-pandemic. Can you talk about what has driven that? How much of it is your efforts? How much of it is it just sort of what's going on in sort of the travel environment?

Well, just to put it in perspective, we have, I think, 63% that are Gen X, millennials and yes, we have some Gen Zs. We had our first Gen Z percentage in 2022. The reality of our demographic is we want vacationers and vacationers want us, who want a branded experience, want amenities and want flexibility along with value. So you tend to find those consumers as they enter family, the family dynamic, which tends to be in the late 30s, early 40s, average across the industry average purchase -- new purchaser to timeshare is 38 years old. Ours is a bit higher. But yes, by being focused on new purchasers, we're naturally bringing back the -- down the age of our first-time buyer into the upper 40s. And given that you're looking for lifetime value for the consumer as well as embedded value for our future top line growth, that's where we want to be. People used to say, why don't you market to the millennials back when the millennials were 22 to 25, because that's not who we -- that's not our consumer. Our consumer is for the branded experience, amenities, certainty in their vacation with a lot of flexibility. And I think that's true for all the brands. And that's why the industry is now, probably, 80% of sales are to branded hospitality companies.

Well, it's a disadvantage if you're not a branded vacation ownership product, right?

Well, it is because a few things. I think people still view timeshare back what it was in the 1990s, which was 80% to 85% single-site developers that had 1 destination, and you went March for the second week of March in your 2 bedroom that looked northeast, because it was the same unit on the seventh floor. Now if you buy Wyndham or any of the hospitality companies, you get to avail yourself of, in our case, 250 resorts around the world. you get to value yourself, exchange your points to the hotel company, Wyndham Hotels. So flexibility and brand reputation has fundamentally changed the industry since the great financial crisis of '08.

Sure. And not only the connectivity with a brand in terms of all the things you just highlighted, but it's also the connectivity of a brand with respect to using the brand's hotel database as a sales tool to -- particularly for the new owners. Can you talk about where Blue Thread is? I mean it's something that seems to be talked about less and less, I think only because it's been working and not necessarily something that's emerging, but we'd love to hear an update on that.

Yes. Well, absolutely. Just one of the initial misnomers as the timeshare -- the branded timeshare companies became public was it was only a benefit to the timeshare companies. The reality is, as the Wyndhams of the world grow, it inures to the benefit as well back to the hotel company, because you're growing their loyalty program, you're putting room nights back into the hotels. And I've worked for all 3 brands. You find that your timeshare customers, because they're owners, are the most loyal back to the hotel, because they're staying more nights than say, your typical rewards member. For us, Wyndham used to not be a branded timeshare company. We now have 106 million loyalty members in the Wyndham Rewards. I say we because we have such a tight relationship with the hotel group. And that's gone from $10 million of annual revenue to last year, we were over $100 million of sales. And I believe that number will continue to grow into the future at a pretty significant rate. The hotel group is doing a great job up in Parsippany and we're the beneficiary of that. And we have a mutual sort of a 2-way street of loyalty going back and forth between the 2 companies.

Great. Maybe this is a question for Mr. Hug, but if interest rates come down later in the year or starting in June or whatever the latest set of broad investor expectations are, how does that influence the timing of accessing the ABS market?

Well, we were sort of typical accessers of the ABS market about 3 times a year. Marriott just went out and they reported yesterday, a very good execution. Ours hasn't closed, but we're in the market as well. The market is good for ABS at the moment. And we will typically access it 3 times a year, somewhere in the range of $300 million to $450 million of issuance.

I guess for you, it's more of a capacity issue versus trying to exactly time it, typically?

We won't try to overly time the market. What I would say for the forward projection on interest rates is that in 2023, we took about a $30 million headwind against our EBITDA, which we grew 6% last year despite the headwind for the rising interest expense. We expect another $30 million this year, and that's included in our guidance of $910 million to $930 million. But as interest rates begin to fall, it is a very clear natural tailwind to our business, because the duration of our loans is about 3.5 years. So as the higher issuances roll off in '25 and '26, without doing -- changing anything, we get interest income tailwinds that are -- as long as the Fed does remotely what is anticipated is a nice tailwind for us that we've been fighting against the last 2 years and overcoming.

Can you -- loan loss provision used to be maybe Topic #4 years ago for investors with respect to the TNL investment story. Can you talk about trends that you're seeing on that front? And maybe how you look at something as a -- what is a normalized loan loss provision? Because it's been pretty steady, really even throughout the pandemic.

It's been very steady in that we've guided this year, 18% to 19%. We're continually focused on growing our portfolio, because when you look at our results, we're back above 19% in all respects, except for really our portfolio is about 80%, 75% the size it was, which means we've lost all that interest income. So we're focused on growing our portfolio. I don't even want to call it provision, but there was the whole issue around exit companies back in '15 through '19 and even into '21, '22, and it was sort of this great unknown. And I think the truth has been found out about many of the exit companies situations, you only need to go through court cases to see what's happened to many of them, which has meant that what was always the underlying nature of our portfolio is just playing out and you're seeing it in a very consistent loan loss provision and delinquency rates and portfolio performance. Ultimately, and we've said this for many, many years, is, to the extent that we put our customers on vacation, our owners on vacation, satisfaction is up, VPGs are up and delinquencies are down, because we have 98% retention on that -- those people that have paid off their timeshare. So if we do our job of getting people on vacation, the rest of the business, including our portfolio usually takes care of itself, it is very stable.

Great. Maybe we could switch over to the Exchange and the Travel Clubs business for a second. I think you guided to flat to 2% EBITDA growth for the Exchange business, low single digits growth in the Exchange business. It's been sort of flattish, but a relatively high EBITDA margin business and a pretty good source of free cash flow generation. How do you think about that growth? What are the building blocks there? And then how do you think about that in the next couple of years?

Yes. That's sort of low single -- the profile being low single digits growth, higher margins than the Vacation Ownership business and high free cash flow generation is the model that we plan to pursue with Travel and Membership. The growth portion of our business will be more on the Vacation Ownership side. But I think back to your original question, your first question is the structural nature of the exchange business has changed dramatically with the consolidation of the industry. And we've launched new businesses that are supporting that growth element. We think our Travel Club business is going to grow this year, our transactions. And so instead of sort of betting on the com of growing a business at a certain rate, this year, we've just laid out a growth at 0% to 2%. That's around our current book of business, what we can see going forward. And we really want to have stability in that business in 2024, and it's been the vast majority of our commentary and our EBITDA focus on the Vacation Ownership side.

So the 2% growth would be more on price versus Exchange members, I'm guessing?

Yes. Exchange members is going up very slightly. However, because the nature, they're more inside of bigger clubs, their propensity to transact is lower. So yes, we're -- there's some ups, there are some minuses. All in all, it's more on the revenue side than it is on actual transactions.

Great. Maybe kind of going back to your earlier comments about becoming a multi-brand vacation ownership travel company. Obviously started with the name change and buying the IP of Travel + Leisure from Meredith back then. Can you talk about Sports Illustrated in the Accor and exactly what you plan to do with each? I know it's not a 2024 growth driver, but can you talk about sort of the time lines and maybe the economics associated and the overall contribution longer term?

Yes. It's a fundamental shift that was a concept. Now it's a reality, and then economics come next. But as a single branded timeshare company, as Wyndham, our ability to work with more brands was limited, not because of the Wyndham name, but because no matter your name, you have to figure out if a counterparty will partner with you. When you change your name to Travel + Leisure, Travel + Leisure is considered basically a brand or a hospitality PR company. People view it as generally positive. So by changing that name, it opened our ability to even have conversations with Accor, Sports Illustrated, because they knew that we were coming to them to grow their brand, not another hospitality brand. So when we went out to do Sports Illustrated, we fundamentally believe that lifestyle is a growing component of hospitality. You look at our Margaritaville brand, not a traditional hotel company, right? But Margaritaville's has been very successful. We view Sports Illustrated as a niche component that we're going to be able to grow from ground up very well, very, very, very similar business model to the Wyndham business model. Secondly is Accor. Accor has tons of potential, but with all of their focus on their hotel hospitality components, this car was sort of left in the garage. And we said you can entrust us with that, with the keys. And we will not only help grow that business, but we will help to grow your hotel business with all those components of loyalty we talked about earlier in the session. So we're going to take an existing business, Accor with 30,000 members, 24 resorts and grow it on all aspects. By starting the car and running it and then Sports Illustrated, it's going to be our first resort will be in Tuscaloosa next to the University of Alabama. And we've got a very robust pipeline for other college destinations.

Great. You mentioned this earlier, and you should be proud of it. You were one of the finite number of companies that maintained the dividend throughout COVID. You recently increased it for current quarter that we're in. How do you look at buybacks, share buybacks, given stock has had a nice move here? It's still relatively cheap on any evaluation metric that anybody could point to, but I'd love to get your views on share buybacks.

I would agree with that.

Shocking a CEO saying his stock is cheap. It's not been thought of here today.

No, no. I -- our methodology is pretty straightforward. We very much believe in our dividend, to grow that with the growth of our business. We just increased our dividend back to its pre-COVID level of $0.50 a quarter, $2 a year. We increased it 11%, which is over a 4% dividend yield. We view that as our first stop on the capital allocation journey. And then from there, we really look at 2 fundamental components, buying back stocks. We bought back 10% of our shares last year, more than that the year prior. I won't get the exact -- I don't want to give a number, but we've bought back a significant number of shares since we went public in '18, while paying the dividend. So between share buybacks at 10% and a dividend yield of over 4% on top of a EBITDA growth of 6% last year, we had a really good year. As we allocate, we're not myopic. We will constantly look at ways to grow our underlying business, because we're in the business of growing our VO business. But we've done that for the last 3 or 4 years. And our history of transactions is really we were aggressive buyers of stock. We remain very keen on buying back our stock. But when something like Sports Illustrator or Accor comes up, we know that's good for the long-term growth of the company, and we won't be afraid to reallocate the capital.

Is there anything else that's out there that makes sense from an M&A perspective? And is the -- if there is sort of similar in terms of cost to Accor?

The industry is consolidated massively since '08. Do I think it's done, no. But there's just very few opportunities that remain out there and they vary in size. So they can be smaller than Accor, the size of Accor and bigger. With all M&A, you just evaluate the opportunities that are the right time and the right strategy. That's what we've done for the last 5 years.

Yes. Great. Well, we're exactly at the end of our 30 minutes. Thank you so much. As always, I appreciate your time.

Thank you.