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

All right. So continuing on, we're happy to have with us Mike Hug, EVP and CFO at T+L. Mike, thanks for being here.

Sure. Happy to be here, and thanks for giving us the opportunity to speak.

To start off, like I want to talk higher level and get a sense of what your strategic priorities are in 2025 and kind of looking past this year?

Sure. So I think if you look over the last several years, we've been pretty clear as far as what we're trying to accomplish, drive mid-single-digit growth on the top and on the bottom, and that's really driven by tour flow in the vacation ownership space. It's all about having marketing arrangements in place to drive tour flow to get the growth in the business. So our goal this year would be to have 5% to our growth. And basically, you get to that number, if you take the guidance range we have out there for our VOI sales and for the VPG and divide the 2, and you can extrapolate kind of what the true growth is. And that true growth will be weighted towards later in the year. First quarter, our guidance, we are not showing through a growth because we removed some marketing channels late in the year, and it's hard to make those up in Q1 because Q1 is our lowest quarter of the year. So the goal would be to continue to grow the top and the bottom line, mid-single digits. Our free cash flow conversion is probably 1 of the greatest parts of our story. We convert about 50% of our EBITDA to free cash flow. And so we would look to continue to do that. And over time, raise at north of 55% and then continue a capital allocation story that's been very consistent since we spun off the Wyndham Hotels Group in June of 2018 where we have a dividend and even during COVID, we were able to pay a dividend, and we grow that dividend every year. We have a history of doing that, and we just increased the dividend 12% at the Board meeting a couple of weeks ago, so 12% up year-over-year and we look at M&A. But absent M&A, our excess cash has gone to share repurchase. And you can look at our history, pretty thoughtful as far as an M&A. We've only really done 1 transaction since COVID, and that was $50 million, so a pretty small transaction for a great brand to core internationally. So just consistency in terms of mid-single-digit growth, great free cash flow generation, capital allocation of returning capital to shareholders through a growing dividend and consistent share repurchases.

Got it. And then I've asked everyone this today, and I'm sorry, I have to but -- how do you think about the state of the health of your consumer?

Yes. So I'll talk about it first as it relates to first quarter and then the full year. So for the first quarter, 2 things. First of all, March is easily the biggest month of the quarter when you look at how our tour flow comes in. So we've still got 3 weekends left in March, 18 days left in March. So we need to continue to see how the consumer performs over the next 18 days as it relates to the first quarter. But I think the other part about the first quarter is it's heavily owner-driven, and we are more confident in our owner VPG just because our owners, when they come down to the sales presentation, they're familiar with the product. They know what they want, so the close rates better. If we do see pressure throughout the year, we believe if it were to occur, it's going to be more on that new owner side, where a consumer is just, for the first time, being presented a timeshare product, and we're asking them to spend $22,000. So you could see some softness in the close rate there, but we'll have to see how that plays out. And obviously, as it relates to the first quarter, we'll learn a lot over the next 18 days, but I think probably a benefit for us as far as the first quarter being very heavy weighted more towards the owner upgrade side of the business. And then the other big piece of it is just our receivable portfolio. We did throughout the first half of 2024 see some deterioration in that portfolio. It kind of stabilized in the second half of the year. But obviously, we'll be watching that very closely as far as how the consumer reacts to the noise that's out there. I don't think anybody would expect portfolio to improve significantly right now. So obviously, we'll be watching to see what happens there. But for us, it's making sure that they booked their vacation because 1 of the great collection tools we have is in order to book that vacation, you have to be current on your own, right, if you chose financing. So as we see people start to book their summer vacations in March and April, that will be very telling as far as a very effective collection tool for us and obviously, collections translate into lower delinquencies if collections are good. So watching the consumer closely. And like I said, have the advantage of kind of being more owner weighted in the first quarter.

Got it. And thinking about kind of your new owner mix, I think you've talked about it being 35% to 37% this year. Where do you envision it going longer term?

Before COVID, our goal was 35% to 40%, and that's kind of where we're sticking, right? We'd like to be in that 35% to 40% range. To your point, we were 35% in 2024. We've talked about that going up a little bit. But one of the great things about our product is when the owner buys it, over their lifetime of ownership with this, they'll upgrade 2.6x. So if they spend $20,000 on that initial purchase, they're going to spend another $50,000 to $60,000. And that upgrade comes with about a 40% margin because your close rate is higher on the owner. So getting that mix up to that 35% to 40% range gives us confidence in that continued upgrade model that we'll have into the future. And the owners, like I said, they love the product and getting them to book, getting them to travel is about 65% of our revenues on the VOI side.

And so when you talk about kind of existing owner upgrades, like what has led to your success there in terms of getting a higher LTV out of the customer?

So I would say a lot of times like anything until you use the product, you don't know how much you like it. And I think that's what we see is once you use our product, you find that it's the best way to source your accommodations when you travel. Your family gets used to it, which is always very important, right? And once you stayed in a 2-bedroom condo, you have great accommodations, it's tough to go down in Orlando with a family of 4 or 5 and say we're going to stay in a couple of hotel rooms when the last 4 vacations you've stayed in, you've basically stayed in a 2-bedroom condo with great amenities and great quality. And so what happens is your family grows, so you need to upgrade. You have more leisure time, so you need to upgrade. And maybe you want to take that trip to Hawaii and Hawaii is going to take more points in Orlando. So that's why you upgrade. So that's why we've got that great upgrade models because you use the product, you get used to it, your family gets used to it and there's no better way to travel. And I think the proof is just in the pudding when you look at how our owners perform and the level at which they buy more.

And then from a competitive perspective, what do you think sets you apart from some of your peers in terms of your ability to get existing owners to upgrade?

Yes. I think -- so when I started the business, I've been with the company for 25 years. We started as an unbranded company. We didn't have the Hilton brand. We didn't have the Marriott brand. So from day 1, we were the best as far as tour generation because we didn't have a loyalty program to market, too, which I think sets us apart in terms of the open marketing that we do is definitely unique in the industry. And then secondly, because we didn't have this loyalty program with 100 million people that we could market to at the time, we had to look to our owners to drive the continued growth of the business, right, because we were out there working hard to get the relationships with the Allegiant Airlines or with the Georgia Aquarium or with the casino here in Las Vegas. And because of that, I think the natural dynamic was also let's make sure that we're maximizing the value of the owner and make sure that when they come to take a vacation, we get the opportunity to reinforce how greater product it is and the great value. And over time, we've just continued to develop that talent as far as demonstrating that value to our consumers.

And with your partnerships like the Allegiant Airlines, how did the economics on partnerships like that work?

Yes. So basically, the way those arrangements usually work is we just pay them X number of dollars per tour. So if somebody calls in at Allegiant, they book a flight to Orlando. We'll talk to that individual and say, "Hey, while you're in Orlando, we'll give you a discount, stay at a hotel for 2 nights. If you come take the sales presentation and then we just pay Allegiant X number of dollars per tour we generate. And the good thing about a program like that is we know exactly where the consumer is going. And we know their leisure travel because Allegiant is primarily leisure travel. So it's just a customer. And if you look at our average income for our customers is about $130,000. So it's a customer that's looking for value, which is what Allegiant provides to consumers. It is nice value as far as their airfare and things like that. But more importantly, it's just access to people that are going to go on vacation. And if you know where they're going, we can offer them a premium in exchange for coming and taking that sales presentation.

Earlier you mentioned you'd expect 5-ish percent tour growth for the year. How do you look at operating expenses in relation to this tour growth? And I guess, more so from like a sales and marketing perspective?

So our sales and marketing costs are almost entirely variable. Obviously, if we have a booth in a theme park here in casino, we're paying rent to the owner of the property, but the majority of our expense is the commission we pay to the marketer, the premium we give to the individual that's touring. And then if the sale occurs, the commission we pay to the salesperson. So our sales and marketing costs pretty consistently match our revenue streams just because so much of it is variable.

And then to that point, I think we talked about in the fourth quarter, looking into the underperforming marketing channels, that is that also highly variable. Can you reaccelerate your push into marketing there as well if you see an opportunity?

Yes. And that's why -- look, we're very focused on quality. Coming out of COVID, we moved our minimum FICO for marketing from 600 up to 640. So on the financing we do in 2024, the average FICO was 744. So good quality consumer. And what we do when we go into new marketing channels as we evaluate in 2 ways, we look -- are we making money at the point of sale based on right, what's the VPG? Is the VPG covering the costs that you incur? And then as you're in that channel, you look at, okay, also if people that came to that channel are financing, are they continuing to pay for it? So as we got into last year, and we've grown our tour flow, especially on the new owner side, pretty significantly in 2023 and 2024. So you start to get that history, both of the VPG and the portfolio performance. So as we got into the second half of 2024, right, having a great year, hitting our numbers, margins are good, VPGs are good. We are always looking at our 2 channels profitable. And I would say in late '24, we probably cut out more than we usually do, but it was just because the growth in the tour flow in '23 and '24 have been so great. But we were able to do it from a position of strength, right? We still hit our numbers in '24, 24% margins. But that allows us to continue to maintain that quality as far as the consumer that we're seeing. And secondly, that's why you'll see our true growth accelerate during the year. We won't have true growth in Q1 because it's our lowest new owner quarter, as I talked about. So if you take a bunch of tours out in Q3 and Q4, you don't have the opportunity to make it up in Q1 just because the way the mix works in Q1. So that's why as we progress through the year, you'll see higher year-over-year true growth each quarter. But for us, it's continuing to focus on quality. The VPGs were running our -- higher than we would have expected. And last year, basically the high end of our guidance was always a net $3,000 range, and we continue to be over $3,000. So we're happy with the quality. We're happy with the 744 FICO on the origination, and we love the 24% margins and the 50% free cash flow generation.

I think if we think about your guidance for the year, there is an assumption in there that you can have tour growth grow as well as VPG growth, kind of what's underlying that assumption or what's giving you confidence that both can grow this year?

So look, our VPG growth is primarily in Q1. It's going to ramp down during the year because new owners run a little over VPG, so as the new owner mix comes up. But I think it's just the history we have over the last 2 years where if you stay focused on quality, it allows you to keep a stable sales force, the more experienced your sales force is, the better they're going to perform, especially if you're putting a good quality tour in front of them. And that's really what's happened over the last 2 years. Every quarter in 2024, we were at the high end of our VPG range or over our VPG range. So I think it's just the consistency of what we're doing and staying true to what we're doing, right? Not just go -- I mean, look, I could generate 200 -- additional 1,000 tours in 2025, but that means you got to get a bunch more salespeople. And those tours are going to be a lower quality then the 640 and above we have, which is going to bring your portfolio quality down and your provision is going to go up and all that good stuff. So for us, I think it's just a story of consistency and being committed to quality.

And close rates, I think you've said this, but close rates have looked good in terms of overall tours like they've gone up.

Well, and I would say once again, in the first quarter, it's really as I mentioned, owner heavy, just because of the way the tour flow mix in the first quarter, and that's where you have the most confidence in your close rate is with those owners, right? If we start to see softness, it's going to be on the new owner side, most likely if it occurs. And once again, that's going to be more impactful in Q2 and Q3.

Got it. Can we talk about the exchange business a little bit? What are you seeing there? I think you've called out headwinds in the recent past. Can you kind of go over what those headwinds are and when you see them potentially abating?

Yes. So the challenge we have with the exchange business is one, you've had consolidation in the industry, right? Hilton's done a couple of acquisitions. Marriott did an acquisition a few years ago of Welk Resorts. And what that means is someone that was a Bluegreen owner that wanted to get to Hilton property 2 years ago, they had to exchange through RCI to get to that Hilton property. As we've had consolidation, more people have the ability to get to more properties through their internal exchange system as opposed to going through RCI. And when we look at all the growth that's coming from in the industry, it's coming from Hilton and Marriott and Club Wyndham and Holiday Inn Club Vacations, who all have clubs and clubs that are growing. So the challenge we have is the need to exchange in order to get to another property is going down among a timeshare owner because as a Club Wyndham owner, I can get to 270,000-plus properties, right? So the only reason I'm going to need to exchange it if I want to go to Europe because we [ want to, thinking ] Europe. If I'm going domestic or I'm going to Australia and New Zealand, Fiji, I'm not going to need exchange, right? So look, that's a headwind we'll continue to face. And it will definitely be pronounced in Q1 because Q1 is our biggest quarter. But what we've done and what we were able to do in 2024 and what we plan to continue in 2025 is still drive some small growth out of that business. And you'll see exchange transactions as we progress through the year, the lower exchange transactions being replaced by Travel Club transactions. And that will allow us to get some growth out of that business. That business is about 25% to 30% of our EBITDA. Even though it's low growth, let's say, 0% to 2%, it's high-margin business, and it's low capital intensity because it's transaction-based, which means it's great free cash flow and then use that free cash flow to drive the vacation ownership machine and return capital to shareholders.

And when we talk about the Travel Club business, what is membership growth trends look like over the past few years?

Yes. So I think we've had really good success. And what that -- where we've seen the most success is -- there's benefit companies and at Travel + Leisure, we've got a benefit to our employees called Perks at Work. And what I'm able to do through Perks at Work is by appliances with Samsung and buy sportswear with Adidas and travel to -- if I'm not using my time share, I have access to 600,000 hotels through our Travel + Leisure GO website. So what we do is we go out to these benefit companies that are providing a benefit program to employers, and we say we want to be the travel solution for the benefit program that you're offering to company ABC. And the great thing about that is, I mean, once a week, I get an e-mail from Perks at Work saying, hey, here's a great opportunity for you to buy some sportswear to take a vacation. So they really do the marketing for you. And that's really where we'll see growth in the businesses through those benefits providers. We don't publish a member count because it would be a huge number, and I'm not really sure it's meaningful. If you think about, well, we just got an employer or someone that's got 19,000 employees. For us, what we'll talk about is the level of growth that you can expect in the transactions. But most importantly, for that business, we're going to continue to work to grow the EBITDA. Last couple of years, we've gone through the changes as far as the org structure in order to make sure that happens because of the propensity decline on the exchange side of the business, but $250 million in high margin EBITDA with a great free cash flow.

Makes sense. Maybe if we could switch to the core. What are underlying trends there? And maybe even further back, what's the overarching strategy in terms of why you made the decision to make the acquisition?

So as I talked about earlier, what really drives this business is tour flow and giving these marketing opportunities, whether it's with a Live Nation or a Wyndham Hotels or Allegiant Air. So coming out of COVID, we all know Australia struggled to reopen, right? They wouldn't reopen their borders, have a few cases of shutdown for another 2 or 3 months. An in the Accor vacation ownership business was primarily based on Australia. Accor hotels, to be honest, wasn't focused on that business a whole lot because it was shut down. And so we basically have presented to Accor the opportunity that every other hotel company has had, where, look, let people that know how to run time share, run time share and we'll pay your royalty, right? Wyndham has done it, Hilton has done it, Marriott has done it, Hyatt's done it. And so that's what they agreed to is look, we'll sell you the existing business with about 30,000 owners. And in exchange for that, we can work with them to get tour flow through their loyalty program through people that are staying at their hotels. And that really gives us confidence in our ability to continue to grow our international business. Our international business, primarily Australia and New Zealand, Fiji represents about 10% of our total EBITDA. We paid including $6 million in inventory. We paid about $50 million for that business in March 2024. They did $6 million in EBITDA, so already great returns, and they're going to be $10 million plus probably in 2025. And if you think about trying to get 5% to 6% growth, if you can get 1% out of that core business of your overall growth, that's just 4% or 5%, you have to get domestically, right? So for us, it's all about a great brand and opportunities to grow tour flow through their loyalty channels and their hotel guests.

And how do you think about the owners that you acquired through the acquisition? Like how do they compare to your current customer base?

I would say they've probably been marketed to less since COVID than our owners have just because there wasn't much going on with their business on the sales and marketing side. So yes, that's definitely an opportunity as well as far as probably more upgrade potential per owner there than we have with our current owner base, just because of how they were kind of not very active, if you will, on the sales and marketing side for several years.

And talk about -- I think you said in the fourth quarter there's areas like Las Vegas where you saw a little bit of softness. Has that continued? Or are there other markets that are maybe incrementally softer or weaker that you're starting to monitor?

No, I think -- so when you look at our business, Vegas is the largest market, just over 10%. Central Florida comes in after that at just under 10%, and there's no other market that's really over 5%. So even though Vegas was a little soft, we were still able to meet our numbers, right? We're able to hit our EBITDA targets, hit our margin targets, hit our free cash flow targets. But we're going to need growth out of all our markets in 2025 in order to get to that 5% growth. And Vegas seems to continue to be strong. We can drive growth here. Orlando, you've got Epic Resorts opening in May 25, I think it is. So a couple of months from now. That gives us confidence. There's still going to be tens of millions of people coming to our second largest market. So with our diverse market, we've got 80 sales offices, right? So the beauty of our model is we aren't relying on 1 market. Also, when a hurricane comes through Florida, we feel a little bit of pain, but we still hit our numbers because we're so diverse. When there's a wildfire out in California, not hugely significant to us because our sales platform is so diverse. So for us, Vegas is an important market, and I wasn't in any of the meetings today where some of the gaming companies spoke with. What I'm hearing from them is, even though there seems to be a lot of noise out there, they're still seeing good performance. So the key for us is if people are coming in the markets, we've got a premium that we can offer to the consumer to come take a sales presentation, and we've demonstrated over time our ability to market in those open channels.

And how do you think about international or maybe even domestically in the U.S. expansion from a geographical perspective for your properties and places you offer?

So probably we've got over 270 resorts, most of those are domestic. So adding dots on the map isn't hugely important to us. And the reason I say that is it's not like somebody comes in and says, "Man, if you had Boston, I would buy, right? Or if you had Miami, I would buy." So -- and the reason we aren't going to have a lot of dots is because we've got 3.5 to 4 years of inventory on our books. And all that inventory was sourced in 2019 or after 2019 based on contracts that were [ set part to COVID ]. So our cost of sales right now is 10% to 11%. And if you look at new construction, you're probably talking costs that are 25% to 30% higher than what they were in 2019. So for us, we've got plenty of dots on our map. When we do put new dots on the map, it will probably be associated with the Sports Illustrated brand that we announced a couple of years ago. And the reason you do that is it gives you additional marketing channels, right? And that's why we're going with Sports Illustrated is you put a property in Tuscaloosa, Alabama. You work with the alumni associations at the University of Alabama to be able to market to everybody that loves to come to Tuscaloosa for basketball games and football games and graduations, parents weekends and all that stuff. So I think the dots on the map that you'll see us add will be related to Sports Illustrated. And it won't be just in college towns, you can imagine going into Boston right, downtown Boston and you theme it around the proteins as opposed to the college teams. And you're able to get people when they're in there for a Celtics game and they're for a Red Sox game, we can take a presentation, and they really want that different type of vibe, the different kind of experiences you will as far as that being branded, more with the sports team and things like that. So that's where our new dots will come from. We primarily -- when we get more active on the Sports Illustrated side.

And I think you touched a little bit on this just now. But if we think about the sales process for Sports Illustrated, how does that look in terms of the process for the team?

Yes. So I think it will be a combination of the traditional marketing that we do. So for example, if we go into, I'm just going to pick a town, Athens, Georgia, and let's say, our partner build a Sports Illustrated themed museum around Georgia Athletics, right? When people are walking through that museum, you get the chance to market to them, right? You probably also take Athens, Georgia and you drive -- draw a circle that's within 4.5 hours or 5 hours of Athens, and Atlanta happens to fall in that circle. So you work with the Alumni Association in Atlanta, the University of Georgia Alumni Association, and you say, hey, we'd love to go in Atlanta. We're going to do a presentation there, bring your mobile sales team in there and talk to those people there that are Georgia Fanatics, University of Georgia Fanatics, about the opportunity to own great accommodations. And if any of you guys go to some of these college towns, we've also seen to happen, whether it's graduation or parents weekend or football weekend, a big basketball weekend, you're paying $350, $400, 2 night minimum for a mid-scale, sometimes an economy hotel, right? And that's what we're able to offer to these consumers. This is how you'll be able to say, this is the type of accommodation you'll be able to have for a maintenance fee that's much lower than what you're going to pay for a mid-scale hotel. We've all experienced it if you go to -- in the college football games and things like that. And the communities are excited to have us, and because right, we're bringing in great development. Obviously, we're adding to the community as far as additional accommodations and things like that. So cooperation so far has been pretty good. And I would say when we first talked about the concept, it was primarily around college towns. And then as the concept got out there, people always struck calling you with different ideas, and that's kind of how we got into the idea of maybe there's some urban projects where you take an apartment in downtown Boston and you convert it to timeshare, right, or whatever it might be or it could be a hotel [indiscernible]. So it's going to be pretty exciting for us, it's all going to be once again designed to drive tour flow to drive the business growth.

Got it. Moving on kind of to -- maybe want to get your view on the current interest rate environment and how you're kind of positioning your ABS market strategy?

So we go to market 3 times a year, as you know, right, March, July and October, we have for a long time. People always ask what's going to happen if the ABS market drives up. Well, we did ABS transactions back in 2009. We did them during COVID. We do them now. We're actually in the market with one right now that we just priced. And basically, it's going to be at terms that are very similar to the one we did in October, about a 5.2% interest rate, an advent rate north of 95%. So we've got a great track record, and that's how our free cash flow is so strong is we've got a great track record of going to the market very consistently. We try to not change the structure of the transaction so that people investing in -- if they invested in for the last 10 years, they can just change the name from Sierra 2024-3 to 2025-1 and get approved by their investment committee, right? So very programmatic. And the interest rate environment, we were hoping that by the end of this year, it might be a slight tailwind for us, kind of last October. Obviously, that's moved a little bit where we're probably flat year-over-year, maybe a slight headwind. But as we continue to do these transactions at 5.2% and hopefully lower in the future, that interest expense on the ABS debt, which is above the line, we do included in our calculation of EBITDA starts to become a tailwind. The most expensive transactions we did since COVID really occurred between July of 2022 and, I would say, the kind of the last deal, the October deal of '23, and they have about a 3.5-year life. And some of those were close to 7%. So if you think about 3.5-year life that when you did in July of '22 is starting to -- obviously, it's going down every month because they pay down every month, and it's going to be extinguished sometime in late '25 and '26. So might not get that tailwind this year, but definitely would expect as we continue on and the interest rate stabilizes and hopefully comes down, that will start to become a tailwind force because it was a $25 million headwind last year for us, the increase in the interest rate on our ABS debt, and we still ran 24% margin. So looking forward to the day where I can talk about an ABS transaction that's at 5% or lower, and we've seen them there. I mean if you kind of go back 2013 through '16, our average rate was probably about 4.5%. During COVID, they were 2%, which was incredible. But it would be nice to get back down below that 5% and be able to do some and get the advantage of basically the difference between 7% and 2% on $1 billion in financings every year.

And then if we think about shareholder return, capital return, you repurchased, I think, $235 million of stock last year. How do you think about repurchasing stock, any other M&A out there, you obviously pay a dividend as well?

So capital allocation, first priority is going to be that dividend. We're part of Wyndham worldwide for a long time. They had a great history of paying dividend and growing it every year. We spun off the Wyndham Hotel Group. We continued with the dividend, growing it every year. COVID hits, we had to take it down, but we kept paying it. Since we've come out of COVID, from 2021 to 2024, our compound dividend growth rate was 17%. We just approved and announced a March dividend this year that's 12% higher than the 2024 dividend. So continuing that double-digit dividend increase. And it's showing not a lot of incremental cash because we bought back 7% of our shares. So you can increase your dividend by 12%. If you buy back 10% of your shares, the incremental cash is like $6 million to $8 million. And so dividend priority number one, look at M&A, absent M&A, excess cash is gone for share repurchases. And [ ROE ], as I mentioned, the only significant M&A we've done has been the $50 million we paid for COVID, which is going to be a great acquisition for us. And so we look at our -- what we believe our excess cash flow is going to be after the dividend at beginning of the year, and we're pretty programmatic. If you look back in 2023 and '24, we've been right at that $70 million to $75 million per quarter except for the first quarter of '24, where we spent $50 million on Accor, so our dividend buybacks -- our share buybacks were only $25 million. So very consistent as far as our capital allocation strategy. And once again, usually look at the anticipated free cash flow for the year and not try to play the market to be very programmatic about our repurchases.

Well, that about does it on time. Thank you very much for being here.

Sure. Thank you, and thank all of you.