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

All right, folks, we're getting into the afternoon. I want to be timely. So we're going to kick off the next with Travel + Leisure. I'm joined by President and CEO, Michael Brown. I'm going to start off with, just given your extensive knowledge of the industry, just walk us through how you see demand in the timeshare space in aggregate, having evolved over the past 5-plus years and whether that's the right framework to think about the industry over the next 5 years?

Yes, sure. Well, good afternoon, everyone on the post lunch hour. Yes, demand, I think we're in a really good place. The entire industry is in a good spot as it relates to overall consumer demand. When you think about what we've seen in the last 3 years, there's a few very clear trends that have come through. And one of those is that people are traveling and want more space when they travel, which is exactly where Vacation Ownership timeshare has been for the last 20 or 30 years. I get the question all the time about Airbnb and Vrbo or their competitors. I think more than anything over the last 5 years, they've been supportive to the overall demand of vacationing with 2 bedrooms, 1 living room. The differentiator for us is the brands associated and the flexibility it brings. And ultimately, the fact that you sort of know what you're getting when you own a Vacation Ownership with a branded company. And that's why the industry has changed. And I think ultimately, with over 80% of timeshare sales being by a hospitality brand, providing where macro trends are going, which is more space. I think demand, if the strategy is right, is only going to increase over the next few years.

And another trend outside of Airbnb, it's obviously an online marketplace, online business, consumers in general, gravitating to online, but selling timeshare still very much an in-person endeavor, does that eventually shift over? And how might the -- I guess, your distribution change in the future?

Yes. I think everything is moving more and more online. And one of the great aspects of timeshare is that when times are down, which is a big misconception in the industry. Being a direct marketing business, the resiliency and ability to weather downturns is very strong. So first of all, I think one of the strengths of the industry is its direct marketing nature. With that said, to increase the reach, we want to be more and more online. Will the marketing and will the sales ever become purely online? My answer would be no to that. But it's moving the needle from very low percentages to double-digit percentages. And if you can just do that, the biggest cost obstacle in the space, even though we're driving 25% margins, our customer acquisition. And if you can lower the customer acquisition cost, you're talking about expanding those margins. So huge benefits of direct marketing, but yes, we could afford to move the needle a bit from where we are today, and I think you will see that in the next few years.

I guess, why is that more prevalent from existing owners?

There's no reason it can't be. We do somewhere between 5% and 8% of our sales to owners on an annual basis. When they're not face-to-face at one of our sales centers. Calling them over the phone, keeping them updated, understanding where they are. So that is, as you can imagine, and sort of the rationale for the whole digital conversation is that's our highest margin business, even beyond an owner who's on vacation and buying with us.

So walk us through some of the major initiatives that you're working on that will influence the business, remainder of 2024, but also as we look out to '25 and '26?

So we made a fundamental in, I think, fairly significant shift back in 2021. We were a Wyndham Vacation Ownership. And our fundamental skill as a business model is our sales and marketing machine, our ability to operate Vacation Ownership resorts and then access to the financing markets, which we have about a $3 billion consumer finance portfolio. Those skills are not brand-specific, even though we're doing over $2 billion of sales with Wyndham alone. Our decision in rebranding and moving to Travel & Leisure was to broaden our reach to other brands, that did not yet have a Vacation Ownership business. And in making that shift, the conversations went from, hey, do our 2 brands fit Wyndham and X brand to Travel + Leisure. Some people can name conferences after them, and plus that versus I think...

Yes, I know.

But the point is -- the point is, is that it's basically a positive to the space. And so our ability -- I'm joking, of course. But our conversation is now with brands like we recently signed with Allegiant. We've launched our Sports Illustrated Vacation Ownership Club. We recently acquired Accor Vacation Club. The shift to being a multi-brand company is really where the centricity of our strategy is going forward. And the implication of that is that, you don't hit a wall when you run out of a mono brand loyalty program. You now are adding extra databases, extra brands and your starting from a point that gives you the potential to grow dramatically. And that's fundamentally how we've begun the shift of our strategy and '25 and '26 you really start to see the fruits of that labor thereof.

A couple of follow-ups there, but let's just start with marketing.

Yes.

Very solid tour growth last quarter. Remind us of what's changed in terms of marketing locations and how that will continue to evolve in 2024?

So if you look at the history of Wyndham over the last 15 years when we went through the great financial crisis, basically, we went from no marketing criteria to sort of a 600 minimum FICO. And by the way, the margins went from 15% to 25% and EBITDA basically was flat. So as we went through COVID, we said, look, you struggle on the lower end, moderate-tier brand, mid-scale brand. Let's take the FICO up even more. So we took the FICO to 640. And what we're seeing is higher conversions on our sales line, stickier customer for our consumer finance portfolio. Now I think that's the right level, plus or minus a little bit. But fundamentally, as it relates to tours, the quality of our consumer, now 742, FICO, some quarters, it's the highest in the industry. But either way, we're right with the other 2 publicly traded companies FICO wise. Our average household income is moving up. It was just below $100,000. Now it's above $100,000. So what we've done is really upgrade the quality of the purchaser that we're seeing on a regular basis. And then we've recommitted very methodically coming out of COVID to not reenter mass marketing arrangements to really shoot with a rifle as opposed to a shotgun. And that really played out. And for those who didn't listen to our first quarter call, we guided towards 10% tour growth for 2025 by 2024. First quarter, we were up 15%.

Right. So I guess you also mentioned, I think, a renewed focus on package sales.

Yes.

So I guess what changed there? And then how should we be thinking about the contribution? You're already running ahead, now you've got this renewed focus. So we're going to see even stronger tour flow going forward? Is that typically a strong leading indicator?

Well, absolutely. And bottom line, there's a lot of channels, but there's 4 primary channels in our industry. There is owner sales, which I think all the companies do great. There is working with your affinity hotel partner. And in our case, we took that from $10 million roughly in 2016 up to about $120 million last year. Still more room to grow there. The third, which I think is our clear competitive advantage in the space is we're really good at non-affinity marketing. Developing a local marketing relationship and turning those into new owners into our industry. And we'll do anywhere from $600 million to $800 million in that business alone. And then the fourth leg to that stool, which we were not really practicing was spending money in call centers to build a package pipeline that will give you, guess 6 months, 9 months, 12 months down the road. Why we weren't doing it? I don't know. Why Wyndham didn't have a loyalty program in 2016? I don't know. The point is, those are both great growth opportunities that weren't being leveraged. We're clearly leveraging the Blue Thread, which is our hotel affinity to over $100 million of sales. And we're starting and started to invest very heavily into our package pipeline going forward, and that is only growth for us in the near future.

On Blue Thread, given you said, you don't want to be beholden to a pool of loyalty members. What are you watching for to see if you start to get closer to saturation of that space, which I think would also be churning too?

Look, the reality is databases over time can only grow so fast and can only be remarketed to a certain number of times. I've always said from a relative basis, we're the earliest in the life cycle of working that database. So it's a great database. We have a relationship with Wyndham Hotels. Great partnership, and they provided a great amount of growth in partnership with us, but you want to control your own destiny. So you don't want to be beholden to any particular channel. You want to continue to grow all of them. And on our third quarter call, I said you are starting to see more marketing investment into this package pipeline. We took some of that cost in the third quarter of last year, but now we're starting to see our package pipeline grow. It's not cannibalistic. It's simply another layer of marketing approach that gives us more opportunities to grow, no matter where the economy is.

And you mentioned these other opportunities to grow Sports Illustrated and Accor being two of those. What are the major advantages from the Accor deal? And is there anything that you can learn from their business?

Of course, I mean Accor is a great international hospitality group that had an existing business that they weren't that committed to, because they have a lot going on, doing a lot of great things on the hospitality side. So we had an expertise in that region of the world and an opportunity to basically do what all the timeshare companies do for their sister hotel companies, which is, drive loyalty back to the hotel group, pay royalty fees and pay incremental spend back into the hotel group. If you're a hotel company and you're not utilizing a particular segment of your business, why wouldn't you just have someone else to do that on your behalf. And that's what we're doing. And there's always a lot to learn. They don't sit in the same space as Wyndham. So again, it's complementary to what we're currently doing. It is small compared to the grand scheme of things, but we'll -- we've guided to $910 million to $930 million EBITDA this year. And even if you can start adding $10 million to $20 million in these Sports Illustrated, Accor or other areas, it makes it a lot easier to get to high single-digit growth than it does, if you've got a singular brand.

And on Sports Illustrated, just remind us of the timing of that, how that property might ramp similar or different versus a traditional Wyndham property?

Yes so...

So Travel & Leisure, I should say. What...

Yes. Yes, well, look, whether you look at Accor or Sports Illustrated or a third or fourth brand that eventually comes, the business model is the same. We will do just-in-time inventory, and we will closely match cash to sales. And we went long on our first resort at the University of Alabama. There'll be hotel, which we don't operate. We're not in the hotel business. There'll be a condo component and then we'll be running the Vacation Club. And basically, the property opened in 2 years' time, and we will begin selling it in 2025. So you'll start to see your first revenue come in next year. And then throughout the course of this, you will be announcing more locations more than likely in college destinations, but you can imagine a beach club or some city centers as well where Sport Illustrated would go up.

Can you do package tours into the hotel that's there that you're not part of? Or is there...

Yes...

How do you think about the marketing that's behind this asset versus others?

There will eventually be people on a Sports weekend that are members of the Vacation Club and who've rented a room at the hotel. Those are the best prospects for us. And it's a different type of loyalty not being an SEC guy, I'm an ACC. But I think it's fair to say that the Alumni and the sports interest around these schools is pretty high. And candidly I like to equate it in a different way to our Margaritaville product. 10 years ago, 12 years ago, no one would say Margaritaville was a hospitality product and look how many hotels they have today? Because people want to live a lifestyle.

You also had strong new owner sales in the first quarter. I guess, how did the composition of this new cohort compared to the existing base as you think about average age? You referenced FICO scores, those are unlikely going up. And then more broadly, do you need net owners to grow?

So there's a lot to unpack there. For those of you who don't know, our first quarter tends to be our lowest new owner sales quarter, and we surpassed that by like 500 basis points. And at the same time, timeshare equivalent to RevPAR is VPG. We exceeded the high end of our guidance. Those two things never happened together. So if you want to look at one highlight from our Q1 beyond our overperformance on EBITDA. Those metrics were extremely strong underlying the business. As it relates to what those clients look like, so to speak, high FICO score in the space in Q1, 742 on new owner originations. Number two is about 2/3 of those were either Gen X, Gen Z or Millennials. Gen Z is by far the lowest, 2%. But the point being is, is there's the perception out there that baby boomers are the only owners of timeshare and the reality is of new purchasers now we're starting to push up against 70%. Why? Because when you hit 38, when you hit 40, when you hit 45, you want a little less variability in your vacation. And number two, you want a brand you can trust in some space, often for the kids that have amenities and the Millennials who we're never going to buy timeshare are now buying it at a very rapid rate because their lifestyles are changing. And we have to do the same way is we have to keep evolving our product. The last 4 projects we've launched are open affinity city centers, Downtown Atlanta, Downtown Austin, Downtown Portland and Downtown Nashville. 4 places that 20 years ago, people would say, it would never be a timeshare location.

So when you get sell to a new owner, that new owner now, I realized more Gen Z, if I look back 5 years ago, the average age now lower?

It is.

Even with a higher FICO score?

Even with a higher FICO score. So industry-wide the average age of new owner is 38 years old. Ours is higher. Ours is in the mid-40s. 45 to 48. 5 years ago, that number was in the 50s. So do I have a deep philosophical explanation for that? No. Other than I think I will say that I think brands and the flexibility around them are making it an easier way to travel. And just to give an example of, if one day, you're the owner of a Club Wyndham timeshare and you want to be, I don't know, if somewhere in Europe, you can change your ownership at Club Wyndham and stay at a Wyndham Hotel in Europe. If you're a Marriott owner, and there's nothing in the Amalfi Coast and they have a hotel there, you can exchange and do that. And that incredible flexibility is now allowing people to make better choices about how they spend their dollar.

And I guess the last part of my multipart question was really around net owner. You need to have owners flat? How would you think about the model, if model is just flat?

Yes, fine, which is a different answer than I would have given you in the first 3 months on the job in 2017. And the reason is because every company is at a different stage of its life cycle. And with Wyndham, Wyndham has been in the business for nearly 50 years. And although we 7, let me give you a few stats and then I'll explain why flat is really good. 7 out of our 8 owners have fully paid for their timeshare. So they're not having to pay off a loan to go on their vacation. They literally have their annual maintenance fee, which is $800, you're going to go on vacation no matter what. Of those people, 98% stay in the product every year, 2% attrition. 7 out of 8, okay? So for us, back to the question is because we've been in the business for so long, we have a lot of owners who are leaving the system in that 2% that's natural due to -- they've been in the product long enough and they're not revenue producing for us. We would rather have them stay in. We'd rather have them pay a maintenance fee. But if we're flat, we're replacing nonrevenue-producing owners with high-revenue-producing owners that when they buy the first time they spend another 2.6x on upgrades and future ownership. So there's no question we want to grow our owner base. But we have a natural cycling that's occurring because we have over 800,000 owners that we're sort of replacing high revenue for -- low revenue for high revenue. But that's also one of the reasons we wanted to expand our brands because the first sale of Sports Illustrated will be a new owner as will the first 3 years, almost 100%. With Wyndham today, 67% of all our transactions -- sorry, 63% of all of our transactions are to owners buying more. So we want to start expanding our brands so that we can bring more new owners into the entire ecosystem of Travel & Leisure.

That makes sense. And then you're marking the market for real estate, which has been paid off, it sounds like even a decade ago.

Yes.

But there isn't a mark-to-market on the HOA because that's been increasing the whole time.

That's right.

Or there are instances where that...

No that's right. That's right. And I think that's one of the advantages and one of the benefits of all the brands in this space is having the scale and the procurement ability to buy on behalf of the owners continues to add to the value proposition.

Have you, I guess, as rates have stayed higher for longer, have you taken any recent action on interest rates that you're extending to the customers when they're buying? And then how quickly would you mark-to-market if we do get a rapid rate cut in the back half of this year and into next year?

So neither. We've consistently stayed in that 14% to 15% interest rate zone over the last 15 years. And that's when rates were 0 and where rates are today. We have not passed along the incremental interest over the last 3 years to the consumer. As a result of that, this year, we have a third part of guidance includes a $30 million headwind on interest income. The flip side of that is if the market plays out like most expect, you're going to have that same amount of tailwind coming through in the future to our benefit without generating one incremental tour. And we have probably 2 to 3 of those tailwinds beyond the strategic effort of expanding our brands, the carrying cost of our inventory because we are not building new projects right now. We have enough inventory to last us a few years. So that tailwind of lower carry cost is going to be a tailwind going forward. The lower interest rates should they come, will be a tailwind probably starting the second half of next year. And then we have the strategic effort of broadening ourselves into new markets, new brands and ultimately, new databases.

So I think that the space tends to ebb and flow around things like rates, but certainly another factor has been headlines and especially around third-party defaults, which kind of come and go. What's going on, I guess, from your consumers, you look at the provision rate, defaults? Is there any third-party default activity that still out there? Or is that effectively been mitigated to some of your initiatives?

Well, there is still third-party default activity out there, companies that are soliciting to return your timeshare. Let me first say, the first thing anyone should do is either contact the industry association or the developer because every single one of the developers have programs to allow you to exit in one way or the another. Not necessarily on the day, but over time or on the day. So for consumer protection, my advice would be first, contact your developer, understand your options. And then if you're not satisfied, then go another way. But as it relates to our overall provision, I think our portfolio is in a really good place. We shared that our provision this year will be under 19%. And 1 month later, I don't have any update to change that, if anything, it's a reaffirmation of it. I think no different than every other commentary here on Bloomberg and CNBC is that the lowering consumer has got a little more pressure than it did maybe 6 months ago. But nothing that is causing us to react. It's just the reality. Just like VPG is being above the high end of our guidance. In Q1, it's your metrics change a little bit, we'll continue to share what they are. Nothing concerning there other than what's, I think, happening in the more broad economy. And we really feel good about where our business is as we closed out May.

So that comment, I can imagine, specific to timeshare, I guess maybe we can pivot to the membership, 10 in the ARN business. Just remind us, what are the major initiatives going on in that segment now as investors think through both the near-term dynamics and then long term what could happen?

Yes. So let me go broad in the second half of your question, then I'll go to the 2 segments within the single segment. That business for us is about the Travel Membership segment, which is an exchange in a travel club business, non-timeshare Travel Club business, is about 28%, 30% of our total EBITDA. Our long-term projections are 0% to 2% growth, very high margins in the 30s and an ability to generate a lot of free cash flow. We like those components. Within it, there are 2 components of the Travel Membership segment. The exchange business itself, basically, ties Hilton to Wyndham to Holiday Inn and says, you're at Hilton, you want to go to Holiday Inn? We will, through -- membership and transaction get you from one location to another. And that's for the thousands of resorts around the world. The headwind to that space and why it's slow growth to no growth is as companies have gotten bigger and as the industry's consolidated and individual platforms, your's at Hilton, your's at Holiday Inn, us at Wyndham have become bigger with more options, there's a lower propensity to move between the companies. So that's the headwind on that space. And then in concert with that, in order to try to counteract that headwind on one side, we launched the Travel Club business, which is not timeshare, but basically get you behind the paywall and allows you to access travel options at a deeply discounted price. The two of those combined have led us to that 0% to 2% projection going forward, and that's where we are at the moment.

Great. Are there any read [ crosses ] from the expansion to Sports Illustrated or the acquisition with Accor that could influence that segment. I guess, on the exchange side or even just incremental scale?

Well, I think it gets back to your very first question is, is this space going to grow? And I think for me, that's a micro -- more of a micro question than a macro. We believe that this space has a lot of ability to grow because there's a lot of people enjoy the macro trends and the Vacation Ownership space. We just, the industry has to bring in more new owners and they will be a direct beneficiary or not, depending on the level of the owner growth. The fact that we're out there trying to grow 2 new brands should help, although immaterially, the T&L space.

And then on capital allocation, just remind us of where you set leverage targets, how aggressive could you be if you wanted to be on buyback?

Yes. So again, just to put it all in context is we're over $900 million of EBITDA with projection guidance of around 50% free cash flow this year. Since then, we bought back over 25% of our float and our dividend yield is approaching 5%. We grew 6% last year. And despite about $30 million to $40 million of EBITDA headwinds this year, we've got more growth associated with our 2024 number. That was my preview to capital allocation. We're very committed to our dividend and growing that with the size of our business. We never cut it. A timeshare company did not cut its dividend to 0 during COVID. We cut it by $0.20 off of 50. So that shows our confidence in our cash flow. We continue to buy aggressively shares as buyback. We think given where our equity is, that's a better investment than paying down debt. At this stage and our toggle is between share buybacks, which we just increased the authorization by $0.5 billion at the last board meeting. And we'll toggle between share buybacks and M&A if the right opportunity comes available to us. And then we would expect with the growth of our EBITDA to get our debt back down to the leverage rate of 2.25x to 3x, which is where our target is. Currently, it's at just around 3.5x.

One last -- actually, I'll go to the floor if anybody has a question. I'm going to throw it out there. Your free cash flow conversion was a little bit below 50%. Now you're targeting [ 50% ]. Why is that? Is that the right through cycle conversion? Why or why not?

Yes. So the reason it went below 50% was because we made some investments. The question is always do you invest back in the business. Well, getting Sports Illustrated and Accor for the prices we got both of them were extremely attractive from our point of view. So we invested back in the business. We will be targeting to get that number over 55% in the near future. And I think if you really won't look at capital allocation on our investor deck Slide 29, it really shows over time the amount of capital we've returned to shareholders had spent. As I was asked in one of my meetings, first time I've ever asked the question, what's your favorite slide? Slide 29.

Well, that's it for us. A little bit over. Please thank me in joining -- join me in thanking, Travel + Leisure and Mike Brown.

Thank you.