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

All right. Let's kick things off. So we have Michael Brown, President and CEO of Travel + Leisure, the world's largest vacation ownership company with over 270 resorts and 800-plus owners. He is joined by their recently announced new CFO, Erik Hoag, who takes the reins from Michael Hug, who I see in the audience over here. He is going to be asking very difficult questions. So excited to hear from him as well. Thank you both for taking things off this morning.

It's a great lineup. So thanks for letting us get started with you.

Yes, absolutely. So we were talking about was it -- on the demand side, was it an April showers brings May flowers, was maybe a debate around a title for our note yesterday, but we felt like flowers was maybe too strong of a word for the tone. But curious to hear how you would characterize the demand environment as you see it and maybe what you're thinking about longer term as well?

Well, let me answer the question and then we can figure out the deadline here. But April, we reported on the 23rd of April, our Q1 results. And what we shared at that time was we had a really strong consumer first quarter, and that demand had not abated in the month of April. So let's say, we would not use the word showers. In fact, it was fairly sunny out in the month of April. And so we're 5 weeks on from that. And we've continued to see consistent strong growth from our consumer demand. We've been listening very closely to what others have had to say. And obviously, there's been some crosswinds out there. But I would say from our standpoint, really consistent performance on the top line as it relates to VPGs and tours. So April flowers maybe brings May flowers as well.

That seems better.

It's better than showers.

That's great. And I know that we've got our typical questions that we ask for everybody. But because we've got a new colleague here is on stage, would love to just hear, Erik, maybe what attracted you to the company? And maybe what from your background, would you say could be particularly impactful to the business?

So first, thanks for having me today. I think that there was 3 predominant points that really attracted me to the P&L. First, the durability of the business. I think that there's an under appreciation for the durability of the business. T&L has got a high concentration of recurring revenue, a lot of visibility to future growth, stable margins and a capital -- a very investor-friendly capital allocation approach. So I think that the financial profile of the company is very, very interesting. And then maybe items number 2 and number 3, the more I got to meet the leadership team and the management team that Mike had put together and the culture that, that team had put together, it just became a very attractive opportunity.

Great. Well, maybe on your first point about the durability of the model, it's obviously been a window even though we've had flowers and flowers, a little bit more anxiety from other folks in the broader industry. So maybe you can help set the stage for how you think about Travel + Leisure's business model in different economic environments. Why is it so resilient?

Well, I think if there's any misperception out there, it's exactly that it's sort of a high beta business as soon as the economy goes down, a high discretionary item is going to really suffer. And the reality is of our business is that we see the durability and the movement in our top line is to be very minimal. Why is the question? So we have 800...

Maybe set the stage in terms of what's the average price point for a new...

For a new timeshare. So let's start with that the idea that you're going to make a high discretionary purchase, which is somewhere around $20,000 to $25,000 is the average transaction. You don't pay that on a day. You're going to put 10% to 20% down and then take a note on for 10 years. So if you think about the decision that a consumer is making on the day, can I -- does $400 a month fit into my 2025 vacation budget? And I think if you look at hotel rates and all the rest, that's well within people's budget. And then you get into the whole value equation and how you like the vacation. That's on the day for a new purchaser. It's not a lump sum upfront. It's a stream of payments that you're going to be making anyways. If you're going to rent a hotel room or an Airbnb, you're going to be swiping a credit card for multiple thousands of dollars at a single point in time as opposed to $400 a month continually for your loan duration. Now the other reason that our durability and really consumer continues to remain strong is of our 800,000-plus owners, 80% of them have paid off that loan. So when they're making a decision in April, do I want a vacation this summer, they're not thinking, do I want to add to my credit card bill because it's already paid for. So the cost of not going on vacation is the cost of going on vacation is basically -- it's a no-brainer. There's no opportunity cost. So that's the big driver of why we're going to see high arrivals. We saw them in May above last year arrivals and then June and July is really shaping up to be a good summer. So when you say to someone, you've already paid for your vacation. And by the way, you probably paid for it in 2018, 2019 prices, the value is super strong for our consumers.

But then there's also the operating leverage of the business. Maybe if you can touch on -- talked about some recurring revenue streams, but also how do we think about the operating expenses of the business and how that might ebb and flow?

Well, we've got a pretty variable model. So the 3 revenue streams, 3 profit streams are the sale of Vacation Ownership, the management of it and the loans. We have $3.1 billion of consumer notes. It's been securitized to the ABS market, so there's no variability there. You come across the management, which is a cost-plus basis, and we take 10% above the cost, 10% to 15%. So that is not -- that's not going to hurt us. And then really, when you get to the sale and the ultimate development of our resorts, the volume per guest, which is the hotel equivalent is RevPAR, every single dollar of revenue we get per guest we see, has remained consistently high post COVID, and we've seen that able to allow us to drive 22% to 25% margins consistently, coming out of COVID and even before COVID. So it's been a very consistent model. And as we got through Q1, our margins were, again, in that similar range, and we expect them to remain there for the remainder of the year.

Right. And I think the other area of pushback that we often hear from investors is that timeshare is really for a different generation than the next generation coming up, which maybe is a perennial question mark about a lot of things. But how do you think about addressing and assessing the next generation of owners? And what KPIs can you share that would bolster your ability to capture whether it's Gen Z or whoever else is that.

Sure. So in the past 10 years, you've seen us have very few Gen X and mostly baby boomers to where we are today, which is about 65% of our new owners are Gen Xers or millennials. And we're seeing the Gen Zers show up for the first time in the last 2 years, small percentages. And the reason is the average new purchaser for us is in their 40s, which is where we want to sit for our type of product, which is when people are more dedicated to brand consistency, amenitized resorts and a network of resorts that you can access. One rhetorical comment I'll make in the room is a lot of people still think of our industry as when you think of timeshare, I'm going to go to Clearwater Beach, the third week of March, I'm going to stay in my same 2-bedroom, and I'm going to have the same Northeast view or Northwest view to the golf. That industry went away in 2008. Today, it's 80% of sales in the industry are done by a branded hospitality company. Hilton, Disney, Marriott, Holiday Inn, Wyndham, Margaritaville. And therefore, beyond it being a branded industry, flexibility has skyrocketed because you can not only use the 280 resorts we have, but you'll have the CEO of Wyndham Hotels here later on today. You can exchange your ownership to go to any one of the hotels there. And the same is true for Hilton and the same is true for Marriott. And therefore, the balance sheet, the reputation, the flexibility is all there because in the end, whereas you might have in 2007, gone to Clearwater every year and enjoyed your vacation in that same unit because that was timeshare then. Now you can go from March Madness in Vegas and go stay in a studio for 2 nights and then take your family down to Orlando and stay in a 2-bedroom for 5 nights or for 8 nights depending on what you own. So that's probably the other big misperception is how dramatically this industry has evolved.

Now with that flexibility, I think the consumer also then wanted a much more diverse set of options to where they can vacation, but then also led to consolidation in the industry. So are we -- one, are we done with consolidation? Two, how do you think about the scale benefits from consolidation when you have this variable model embedded?

So a few things. We've gone from an industry that's over 50 developers, individual developers that have 1 site, 2 sites, 3 sites and not really a club system to a consolidated industry today that is probably 10 developers of size if that. And most of them are the branded hospitality companies I mentioned. So there might be more consolidation, but it's not at the pace or the scale that we've seen in the past. I think there will be more, but there's just simply by the law of viewer numbers that there can only be so much. How has it helped? I sort of referenced it in my last question or last answer is the consumer has been the big beneficiary because as long as if I have vacation with my ownership for the next 30 years, I won't get to 280 resorts, and I surely won't get to all the hotels that I can exchange into or cruises or events that you can also use your ownership with. So it's really broad-based flexibility backed by the quality and consistency that brands offer that has been the major beneficiary. From our standpoint, operating-wise, the scale really comes in sales and marketing is you can do large-scale partnerships, which we've been able to exercise over the last 5 years to sort of ramp up our marketing as opposed to being a small single site player.

And so I guess, maybe if you can dig into that a little bit, how has been sourcing changed for customers? Or how does that marketing evolve?

So the 3 primary sources of marketing in this industry are owners who buy more, which is the most consistent, predictable to the durability of the business. We know when someone buys today, they're going to buy 2.6x more in the future over 10 years. It's locked in high-margin business because they're satisfied. The second is general marketing, which is people who are not familiar with our brand. What you're referring to these partnerships is finding complementary companies that you can tie our hospitality experience with their lifestyle experience. And let me give you a real life example. We're partnered with Live Nation. And so if you go visit our resort in Vino Bello in Napa Valley, we might be able to tie that to the BottleRock festival that's there and have an experience that's outside the resort and then come back to your resort where you lay your head and enjoy your vacation. We're partnering with different companies as well with Sports Illustrated. We just announced Sports Illustrated Resorts recently. And we've just hosted the Sports Illustrated Club at the Kentucky Derby, where our owners can get access to the paddock, nice buffet, all the stars coming through and their nice outfit and then sneak out to the track and watch the race firsthand. To me, that's where hospitality is going is not just the bricks and mortar, but also the experiences that come with it.

So I guess on Sports Illustrated, how quickly can sales ramp as that deal finalizes and how you might be approaching Sports Illustrated similar or different to the other brands?

So the brands we have today are Wyndham, Margaritaville, Sports Illustrated and Accor. And the way we're thinking about our business is each of those businesses we can leverage our core competencies of sales and marketing management and accessing the financial markets to grow each of those at their own pace without being in conflict with one another. Our core Wyndham brand, which is $2.4 billion of sales is owners, partnerships and open marketing. We view these new brands as primarily owners and affinity marketing, Accor Vacation Club using the Accor database, marketing in Accor hotels, growing their brand through owners. So we think that the Sports Illustrated, Margaritaville, Accor, maybe Accor has more in it, is probably $200 million to $500 million versus Wyndham, which we've been developing for 40 years, which is now $2.4 billion. But given that each of these brands is more or less starting at 0, it is a very clear runway to exercise in a new brand, what we already do very successfully. So we're not trying to reinvent the wheel. We're trying to take our core skill set and apply it to brands that have great loyalty bases, a lifestyle affinity and hospitality.

Is there a natural cadence to how close rates evolve? I imagine there's some kind of change in how people are selling the product?

So today, in our Wyndham product, 2/3 of our sales roughly are to existing owners, and they close at nearly double the same rates as a new owner, someone buying for the first time. So as we launch Sports Illustrated, because we have new owners, everyone we sell will be a new owner. So close rates will start lower. We'll invest capital in those businesses. And then from there, it will start to move to the cadence that's eventually where we are with Wyndham. So your margins, your close rates and your owner mix will change as you grow each of those brands.

So another area that we get kind of pushback or feedback on is really around the receivables portfolio and provisions in particular. And it always seems that delinquencies tend to lead the provision and sometimes maybe it goes the other direction. But how should investors reconcile that you had an improvement in FICO score seemingly improved the borrowing base. But at the same time, the provision still feels a little bit elevated versus history.

Why don't we let Erik talk about the provision and then I can sort of tie it into the consumer demand.

Yes. So we did see delinquencies. As we talked about in the first quarter call, we did see elevated delinquencies in the first quarter. We also mentioned during the call that during the month of April in the run-up to our first quarter call, we did see some moderation associated with delinquencies. And in the 30 or 40 days since that time, we've seen that moderation persist. So the provision for 2025, as we talked about, is 21%. And while I think that there's some seasonality that we may experience here in the second quarter and the third quarter that may tick it over 21%, we feel good about the full year 21% number.

Yes. And if you think about the buying pattern versus the provision, the provision is, as I mentioned, $3.1 billion portfolio where we borrow at roughly 4% and we lend at roughly 14%. So that's great business for us. But it does represent $3.1 billion of consumers who are already in it. And things -- when the market is uncertain, when there's maybe the April showers in the more broader macro economy, not necessarily with our performance, that does affect the provision. And every quarter, we update our provision, and it's based on 40 quarters, right? So we're just 140th updating and it reflects recent reality of what's happening in the market. It's not -- we're not concerned about waking up one day and saying, oh my goodness, our provision is way off, we need a big adjustment. And given recent history, I think it's very important people understand is we're seeing what you would normally see in business is slight modulation to the provision, a little bit up, a little bit down. Buying performance, people are still going on vacation. I know that we've seen some news out of the airlines. But what we're seeing is if 80% of our owners have already paid for their ownership and they're going to go, they're like, I don't know if I want to swipe the credit card for $2,000 for flights for my family. They might just fill up the tank of gas, drive down to Myrtle Beach or drive down to Tennessee or go to Nashville and enjoy a vacation and be a little more cautious that way, but they're not going to give up their vacation. And if they're not giving up their vacation, they're talking to us at a point in this environment where they've chosen to go on vacation. And that -- our sales team and our marketing team continues to deliver really strong VPGs. And we're very pleased with not only the April performance, but how that's continued in May.

Great. I've got a couple of follow-ups on the financing receivables book. I guess first on the provision. If I take a step back and think 10 years ago, which may be stating myself, but the provision stepped up when there were some third-party default activity, this was before the pandemic. And as I said, your FICO scores have improved seems like that third-party default activity has subsided. We just don't hear about it as much. Maybe some people hear about some of the couple of commercials here or there, but it seems like it's kind of gone away. Is there an opportunity to further reduce the provision as a percentage of the receivables going forward as you've effectively upgraded the owner base?

Yes. We saw last year the provision moving down. It was -- it started to move down from sort of the peak of the third-party activity. As you mentioned, our minimum FICO is 640. Our average FICO is between 730 and 740, the highest in the industry. And we would expect that as sort of uncertainty abates, and increasing confidence comes back to the market. While our topline performance stays, we see 2 things as a potential tailwind in our provision. Number one is that it does float back down below 20% eventually. And then secondly is that depending on if rate cuts come, our lending doesn't really change, but our borrowing will. And that we've endured, I think the number was something like $30 million of headwind last year because of interest rates that we had used in the ABS market. As those begin to come down, it's a very natural tailwind that drops 100% to the bottom line in the next few years if they cut rates.

Right. So maybe on the securitization market and liquidity side, that's another area that I think sometimes people get concerned about that in a tighter macro, that might dry up. So what are some of the steps you've taken to bolster the balance sheet and have sources of liquidity in those different environments?

So liquidity is not something that keeps us up at night. And I'll point back to COVID, where in the second quarter of 2020, when basically every hospitality company got rid of their dividend and pulled down their revolver and loaded up the balance sheet. We cut our dividend from $0.50 to $0.30 and never really sweated it. We turn our EBITDA into over 50% cash flow, and we'll do so again this year. We -- that's our guidance, and that's it. We're not changing that. And ultimately, as you look going forward, as it relates to our ability to generate cash flow and our bolstering of our balance sheet, our free cash flow generation, the fact that we really time our capital spend to revenue, which is a huge change from where this industry used to be, we feel very confident that not only is our balance sheet strong, it allows us to do, and I'll let Erik speak about this, a capital allocation strategy that's in a nutshell, 4% to 5% dividend. Every year, we've been buying back 7% to 10% of our shares, and we're growing at mid-single digits, all while having a leverage that's right around 3% or 3x levered. We're right now at 3.3x. But our capital allocation -- well, let me let you talk about it. I appreciate it.

I get excited when I talk about our capital allocation strategy. What is exciting, and it comes back a little bit to the durability of the business model that I mentioned at the top of the meeting. From a capital allocation perspective, first, we want to invest to grow. And to Mike's point, very capital-light. CapEx as a function of revenue, it's roughly 3%, we'll be opportunistic associated with inorganic growth if there's something that can expand our reach or enhance our products. From a dividend perspective, very committed. So since 2021, our dividend has grown roughly 16% on a CAGR basis. We increased to 12% earlier this year. And to Mike's point, the dividend yield right now is roughly 4.6%, 460 basis points. And then beyond that, we use our available cash for share repurchase. So over that same time period, 2021, we have retired roughly 7% of our [ VOI ] on a CAGR basis. So a large concentration of our available free cash flow is going back to our investors, again, coming back to that really attractive financial profile.

I want to make sure I get this 100% right, but I think our market cap right now is $3.2 billion and we've returned $2.6 billion since '18.

Yes. Well, as of the end of last quarter.

As of the end of last quarter.

You are not updating that right now.

We're not updating. I think what Erik said is exactly right, is we've been a very consistent returner to shareholders. And absent a clear opportunity, which we've seen them. We used it to change our name to Travel + Leisure. We bought Accor Vacation Club last year. So we're always looking, but we know our investors love that dividend and share repurchase along with the growth.

And you talked about that steady capital spend and matching it to revenue. Help frame where inventory levels are. Why is that the right amount of inventory? Why we wouldn't maybe see it go up or go down in the future?

So we don't think we have the right amount of inventory today. And the reason is coming out of COVID, a few things happened. We were committed to finishing resorts that were already under construction or we have contractual commitments to. We fulfilled those, and that delivered resorts up until about '22. At the same time, 2020, our sales declined, obviously. So we built up inventory on our balance sheet that we are carrying today roughly 4 years, maybe 4.5 years' worth of inventory. The ideal scenario is 1.5 years. So that's where I talked about interest income being a tailwind for us going forward if rates drop. This is another area where we have very natural positivity coming in the future because we're not -- we don't need to go out and build new resorts today. We have 280, plenty for family to vacation with. And therefore, our ability to conserve cash and not deploy it for resorts that we don't necessarily need today. We will opportunistically, but we have tons of optionality of not deploying cash and returning it to shareholders over the next 2 to 3 years until that inventory balance gets back to around 1.5 years to 2 years.

Right. Now a related question on that then is if you bought inventory back or built it, before a lot of that inflation, it seems like that could be a good thing for margins. So maybe talk about the puts and takes to margins.

Well, that's a great place that we are at the moment because we know what's on the balance sheet from a cost of goods sold standpoint. And we take back a lot of inventory on an annual basis, either through defaults. Life situations cause people, you lose a job, the wars, death. It's -- there are reasons that we take back inventory. And when we do, we're taking it back at a relatively low cost that we built years and years ago, we take it back at a very reasonable cost and then we're selling it at today's prices. So we have a really good situation where when we look at our cost of product going forward, it's one of the areas that we feel we have our hands firmly on the wheel, and we're not concerned about supply chain, tariffs, new build, new construction costs, which is very expensive at the moment because we have our inventory situation absolutely locked in for the next few years on our core Wyndham brand, our core Margaritaville brand. And then as we do Sports Illustrated and build more core, that will be incremental. But it is not a risk factor that's going to materially change as it relates to cost of product.

So when you think about your margins from here, not just this year, but maybe looking further out, do we generally think that they're going to have opportunity to expand, hold steady? Are there any pressures to think about or investment in the near term behind some of these new brands that are being folded in?

I would describe it as holding steady because I think we continue to see opportunities, as I mentioned on potentially our portfolio and inventory, which will drive positivity on our core Wyndham margins. However, any time you invest in incremental business, do a conversion or a new build for a new brand, you're going to have only new owners, which come with a lower margin and you're going to have new build construction. So the immateriality of the new brands laid against the materiality of our core predictable brand. I think in the end, when you weigh it all, you should see -- you should be able to retain those over 20% margins going up to 25%.

Great. One of the other questions we've been asking all the companies at the conference has been really around AI and how to think about is that an opportunity from a top line standpoint, margin, other and where are you maybe looking to deploy it currently?

Yes. So whether it's AI or digital, our core mission is to get people to utilize in the maximum way their ownership. And we're deploying both digital opportunities and AI to get people booking more. The more people go to our resorts, the more they buy. It's just absolutely proven. So we -- our first biggest focus is to utilize AI and digital marketing to get our existing owners back to resorts. We have room in our utilization to get that up even higher, and that has huge visibility going forward for us. And then I think a lot of companies would say we're going to use it to help code in our IT department and build your IT systems both faster and more efficiently. But I think the more interesting part for us is consumer-facing.

Great. We've got a couple of minutes if folks have questions in the audience, we can take one there. Otherwise, I can keep going.

Well, I appreciate everyone showing up.

People haven't had their coffee yet.

Their breakfast or coffee.

Well, so one of the areas we didn't touch on was travel and membership that segment. So perhaps talk about the expectation for acceleration of the Travel Club in particular, I think, following the first quarter. And any other kind of puts and takes that folks should think about in that segment?

Yes. So as we've really spent the 40 minutes or 30 minutes talking about vacation ownership, which, as I said, let me just recap that as we -- really strong VPGs, really good tour growth and a consistent consumer demand on the vacation ownership side. As we move to travel and membership, we mentioned on the first quarter call, that same consolidation that's helping the entire industry, which we think is great for the industry, puts headwinds around our exchange business because the exchange business was all about connecting single-site developer to single-site developer and giving them a worldwide network. As the industry has consolidated, the exchange business, which represents $200 -- most of our $250 million of EBITDA in the Travel and Membership segment has definitely a headwind against it, and we continue to see pressure on the exchange business. With all that said, our team is doing a great job, and we're sort of holding serve in that front. On the Travel Club business, that is our first foray outside of timeshare, closed user group behind the paywall, discounted travel. We do see continued growth in that space. We are excited about not only travel clubs, but experimenting with more non-timeshare-based products. The reality, again, sort of although immaterial, it's not enough to sort of offset the exchange headwinds. So we're really leaning into vacation ownership that's performing very well. It's more than making up for our Travel and Membership pressure, and then we're trying to really spark some innovation on the Travel Club side to see growth.

On the exchange side, I mean, do we hit a plateau at some point? Or what are the different things that you're trying to think about to stem that deterioration in the value proposition there?

It will hit a plateau at some point. I can't sit here today and say, I thought we would have this time last year, and we haven't. That's okay because although we know that, that is an issue that we're having to address. And we sort of talked about this check-in to checkout concept, which is the exchange business. Our opportunity is to expand that beyond and get a broader travel share of wallet. We aren't there yet, but we're not sort of just waiting for this plateau to occur and hope the Travel Club take off. As management, we're there to be proactive and we're being very proactive to find other opportunities. Keep in mind, 1% growth on that level of EBITDA is $2.5 million. I mean there are plenty of opportunities out there. We just need to find the right ones, maybe partner with some other companies to really start grabbing a bigger share of wallet.

Well, we're a little over time. Next up, we will have Marriott joining us, but please join me in thanking Michael and Erik for all their insights today. Thank you.

Thank you.