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

All right. I think we can go ahead and get started. It's right at 9:15. So good morning, and thank you so much, everyone, for joining us here at this next session at the Goldman Sachs Retail and Consumer Conference. So my name is Lizzie Dove. I cover Gaming, Leisure and Lodging here, and it is my absolute pleasure to welcome Erik Hoag, CFO of Travel + Leisure; and Andrew Burns, Vice President, Investor Relations. So thank you so much for taking the time to be here. We really appreciate it.

Lizzie, thanks for having us.

Yes. So let's start off. Of course, there's always the quarterly puts and takes. But just kind of stepping back for a second, T&L has been very consistent -- been consistently mid-single-digit EBITDA grower, EPS has been in the double digits. You have recently done a couple of acquisitions. And so when we kind of step back for a second and think about the next 12 to 24 months, -- how do you think about the sustainability of that algo? And with these acquisitions, has anything or anything else? Has anything structurally changed at all in that outlook?

Well, thanks for having us, Lizzie. Maybe I'll just zoom out a little bit and talk about our performance to-date. I think that that's maybe just to ground everyone in terms of how we're doing. In the first quarter, we outperformed our sales above the high end of our guide. In EBITDA, we outperformed the high end of our guide. And our second quarter results Revenue grew 4%, EBITDA grew 8%, earnings per share was up 14%. Again, sales above the high end of our guide, EBITDA above the high end of our guide. And then maybe even more interesting in terms of the first 6 months of the year, Lizzie, than the P&L were equally as important as what we've done from a balance sheet and capital allocation perspective. We've increased our dividend by 7% year-over-year. We've increased share buybacks by 25% first half to first half. We've reduced our leverage by 1 quarter turn. And to your point, in the month of July, we added into tuck-in M&A transaction. So we've had a great start to the year. In terms of the algorithm, to your very specific question, we're already living inside the algo. Our Algo is sales growth of 6% to 8%, translating into mid-single-digit EBITDA growth and teens EPS, which in roughly 50% of that EBITDA into free cash flow. So over the next 12 months, we are absolutely focused associated with continuing to execute against the core algo. We want to integrate our M&A transactions. We've got a heavy focus associated with launching our new brands. All of that's under the umbrella of continuing to be thoughtful allocators of capital to our shareholders.

Definitely. And then a lot of interesting points you made there that I certainly want to come back to. But maybe before we go into some of the segments, I'd love to hit we're at the consumer conference. We're going to hear from a lot of different consumer verticals here. I won't to hear from you, from your vantage point -- what do you think about the health of the consumer right now? And as we've kind of progressed over the summer, there's been some puts and takes this year, tax refund is a good guy, higher gas prices, bad guy. What are you seeing? Has there been any kind of divergence between cohorts or anything that you kind of call out as we kind of go into this back-to-school season.

Yes. When I think about travel and leisure, our consumer continues to perform pretty well. So again, zooming out a little bit, whether you go back to Liberation Day during the second quarter of 2025, where again, we sort of outperformed the guide numbers that we that we had in that period. Whether you go back to the first part of this year when things opened up in the Middle East or look at the summer, we continue to perform on top of choppy macro, but our consumer continues to be very durable. And then if you look at some of the KPIs sort of under the hood at travel and leisure, whether it's length of stay, our booking window, the distance traveled to our resorts tour flow. We continue to see positive tour flow. We continue to see guests arrive at our properties to [indiscernible] and purchase our products.

Yes, definitely. And I think one of the kind of selling points also of just time share generally as an industry has been that it's pretty resilient overall. It's kind of prepaid vacations. And so can weather the storm a lot easier usually. Could you maybe talk a little bit about that of just, a, if the macro does worsen how you think about levers and b, now there's a lot of talk about rates and timeshare is an industry that maybe is not totally positive, be correlated with that. And so I would love to hear your kind of thoughts there.

Yes. So in terms of levers and things that we could do, number one, I would come back and say, we continue to perform on top of choppy macro environment I think the value proposition of our product, where it is a prepaid vacation where roughly 2/3 of our transactions go to existing owners versus new owners. We create a value proposition for our consumers that's very attractive. And when things do get a little bit more expensive for them. They get -- they have the fallback to be able to visit our properties, enjoy vacation, very low cost. And again, what that does for us is it gives us the opportunity to get them on to and potentially upsell those customers. In terms of levers that we have, if things were to get much more protracted, again, I would look at whether it's Liberation Day or the GFC or COVID, the travel and leisure businesses continue to perform extraordinarily well. But we've got a number of levers that we could pull. We could certainly look at marketing and demand quality. We could look at timing associated with our development projects. We could look at consumer financing in terms of promotions or pricing. And then obviously, the last thing would be we can look at cost. But those are things that we haven't had to take into our purview because the business has performed so consistently over time.

I was going to say, we're certainly not there yet. And you've been kind of consistently as you said, growing BOI around 6% to 8%. And it's interesting because there's been this debate of what's the right level of tool growth versus VPG growth and the kind of puts and takes there? And obviously, the resort optimization may be slightly complicated things there. But how do you think about that balance longer term going forward?

Yes. I think you used the right word. It's balanced. VPG, tour flow, both super important metrics for us. At the end of the day, we're looking for qualified tours, and we're looking for exceptional sales execution. And in some years, you might see us move new owner transactions up a little bit, which puts a little bit of pressure with PG. And then in other years, you'll see the opposite. But for us, it's really all about having a balanced approach to the business.

Yes. And with that 6% to 8% that you have been doing, it sounds like it's still your target, does toll growth need to accelerate to get there? Or can it be more kind of VPG-driven over time?

I think about the long-term 6% to 8% really is having positive tour flow. Positive tour flow with a mix roughly of 1/3, 2/3 between new owners and existing owners.

Yes. Okay. On that topic of the new owners versus existing owners. So Q2, I believe your new owners, at least as a percentage of the mix, they accelerated again. And so when you're now here, I think, still in the kind of low 30s range. Is that the right place that you want to be? Or is there kind of a drive or a need to kind of move higher to that over time?

Yes. I'll come back and point back to the 2/3 -- 1/3, 2/3. The 1/3, let's say, low to mid-30s allows us continue to sustain the model and feed the top of the funnel with new owners. One of the great things about our business, Lizzie, is that we have found that when we capture a new owner, we will typically upgrade them 2.5x over the first 10 years of their ownership. So 2/3 of our transactions come from existing owners but continuing to feed the top of the funnel and get that healthy upgrade cycle going new owners is also very important.

Makes sense. Makes sense. Has anything changed about that over time? And as you think about getting back to right at that 1/3, like the real 33%, is that something that we should be watching out for as kind of how we think about how that translates in the mix in terms of VPG i suppose.

I would say it hasn't really changed over time. I think the 1/3, 2/3 is the right place to be. Again, it feeds the funnel. Again, when you do see us in periods where new owner mix is a little bit higher, new owner transaction purchase price, average purchase price a little bit lower. So it does put a little bit of pressure on VPG. But again, the word of the day associated with VPG and tour flow is really about ensuring that we have balance.

Yes. Makes sense. Makes sense. Let's switch gears and think about resort optimization. You announced that kind of earlier in the year and by all accounts seems to have been incredibly successful. Before we kind of get into what you've done so far there, I'd love to hear -- are you done post this? Is this -- was this like kind of a one-and-done situation? Or are there other kind of pockets of opportunity of other resorts where you could maybe kind of optimize the portfolio over time?

Yes. So the resort optimization initiative for those may be new to the story, was an opportunity where Travel + Leisure went in, and we took 17 properties off of the -- out of the network. These are properties that are a little bit older. The occupancy was a little bit lower. Customer satisfaction, a little bit lower. And then there was some deferred maintenance that needed to be done, more than just your typical but a little bit heavier deferred maintenance. So we took them out of the network, and it did a couple of things to the P&L. There were some sales centers there, so we expected sales to step back, which it really didn't do? Property management fees went down as we didn't have spent so we had 17 less resorts. And then we had lower carry costs. So these are properties that also had inventory, which meant that inventory on our balance sheet and carry costs that ran through the P&L. So the 17 resorts coming out top graded the portfolio a little bit. And then you mix in 23 properties associated with M&A, and I'm sure we'll get to M&A here later on. But the portfolio at T&L from January to the end of the year has transformed quite a bit. We've taken out the 17 with resort optimization. And then we've done some M&A that's added in 22 resorts. So coming to your question, are we done with it? I think the '17 resorts was a little bit of a catch-up in 2026. I think we'll always be thoughtful around making sure that we've got a very attractive portfolio for our owners top to bottom.

Yes. And where are you in that process with the resort optimization? And has there been anything that's kind of surprised you as you've kind of been going through that over the last 6 or so months.

Yes, it's predominantly done. We've got the cost out in 2026. I think the one thing that has surprised me is the resiliency of the sales organization. So when we guided to the full year back in February, we had talked specifically about there being roughly $100 million sales headwind associated with the sales centers that were taken out of the network. But as I mentioned, in the first quarter, we had sales that were above the top end of the guide. Second quarter sales above the top end of the guide. Our sales organization is operating at a very high level right now and despite those fewer sales centers, we're actually operating inside the long-term outgo for sales?

Yes. So it sounds like productivity higher, maybe redirection of sales even without all of those.

That's right.

Yes. Okay. Well, so -- and then acquisitions. You kind of alluded to it earlier, there's the 2, the yes and the Spinnaker that you announced a couple of months ago. It seems like it's more tuck-in M&A, although it's not small by any means, I think it's increasing your owner base by around 10% or so, if I'm not wrong. And so could you maybe remind us like how to think about or how you thought about the strategic rationale and these 2 assets specifically made sense?

Yes. So it's really the first M&A of consequence since spun out from Wyndham in 2018. There was a couple of things that were important to us as we started to look at M&A. Number one, we were looking for transactions that were going to be immediately accretive, immediately incremental to our financials. Second, we are looking for an owner base -- to your point, pre-acquisition, we had about 800,000 owners. The 2 transactions brought 100,000 new owners with them. So immediately accretive, an owner base that we can upsell and monetize. The third thing was locations, right? One of the transactions brought us Hilton Head Island that we weren't in and the other transaction brought us on the West Coast, Maui, which we weren't in as well. So they were accretive to our BAP. The fourth thing that we looked for was transactions that had low risk of integration or maybe even said a little differently, Lizzie, high confidence in terms of value realization. And I think we found those with these 2 transactions. And then the last thing was transactions that had very little balance sheet intensity. So these 2 transactions, it's about 0.2 of 1 turn of leverage. So these 2 transactions, they passed every one of the criteria, accretive approximately $50 million of incremental EBITDA in the first year, 100,000 owners, resorts that we did not have footprints in, integration complexity very low and roughly 0.2% return of the leverage.

Makes sense. And you mentioned the $50 million of incremental EBITDA in year 1. I'm curious how you think about both just shorter or medium term of kind of the revenue synergies and the cost synergies, but also just longer term, I imagine there's a big kind of owner upsell kind of opportunity there. So could you kind of walk us through how you think about that and how that could be over time.

Yes. I think you framed it really well, Lizzie. I think that there's 3 pieces to it. There's the base case associated with the 2 companies. We're going to continue to sell the arrivals that come. We're going to continue to try to upgrade the existing owners. The second thing would be the operating expense synergies that we believe we can get out. It's really these first 2 things that aggregate to the $50 million. Again, high confidence of delivery, let's call that the base case. And then this third piece over here is the long tail of owner upgrades, which, again, I'll come back and say that Travel + Leisure has got a pretty predictable pattern of being able to operate a new owner, about 2.5x over the first 10 years ownership. We've now got 100,000 owners that we can begin to sell into the network. And that's really the important point is instead of having a fixed unit in Hilton Head or Las Vegas or Maui, they now have the ability to enter network where they can use the entire 300 resort footprint across Travel + Leisure and instead of it being a fixed week, they can travel when they want to and effectively where they want to.

Yes, makes a lot of sense. And as you said, it's been a while since T&L has done kind of M&A like this. And so when you're thinking about that propensity to upgrade and the kind of integration process, like what gives you the confidence of that? And even since you've announced it, I know it's early, but could you give us an update of kind of where you're at in that cycle?

Yes, it's gone well. So it's been about 6 weeks. We are in the process of really ensuring that the employees feel branded under T&L as we move deeper into the budget season, I think that, that third piece around what the incremental upgrade opportunity could look like is going to become more and more in focus. But the reception has been great from an employee perspective. The reception has been great from perspective, and we're certainly excited about it.

Yes. And we see you have this kind of multi-brand strategy. And it's been by all accounts, I think, very successful and what you've been able to do with Margaritaville, for example, and core. And I think it's now a pretty big piece of your overall business, I think it's around 10% or so. Where can that go over time? And how do you kind of think about that?

Yes. So Travel + Leisure, we operate under 6 brands. And if you think about the 6 brands, I might break them up into 3 different categories. We've got 2 legacy brands, which is Club Wyndham and Worldmark. The majority of our sales come here, continues to perform extraordinarily well. We've got 2 growth brands that over the last 3 or 4 years have continued to perform extraordinarily well. This is Margaritaville and a core vacation club. And then we've got 2 emerging brands. This is Sports Illustrated and Eddie Bauer, and I think what makes us feel really comfortable and confident in the longer-term outgo is that we're going to run the same playbook for Sports Illustrated and Eddie Bauer that we ran with a core and Margaritaville. So we introduced percent of revenue for those 4 brands, before being a core Margaritaville, Sports Illustrated and Eddie Bauer. And I think that as we move deeper into 2027, you're going to see that number grow.

Yes. And as you think about the kind of economics or even just the demographics of these different brands, like -- how should we think about that? And is it vastly different, one brand versus another. And when you add a brand, does that kind of really broaden your kind of demographic? And I'm just curious, like the real key difference is and how that kind of shows up in the economics of it all.

Yes. So what we're trying to do is we're trying to widen the -- trying to grow TAM I mean at the end of the day, we're trying to find brands with affinity, consumer affinity that we can widen the top of -- so coming back to some comments early on, roughly 1/3 of our transactions go to new owners. And as we think about Sports Illustrated and Eddie Bauer and Margaritaville, we are trying to attract a new owner, a different demographic, a younger demographic because we do believe it's a differentiated product. And at the end of the day, what we really want is a wider TAM with more owners.

Yes. Makes sense. So maybe we pivot a little bit to provisions for a second because it feels like that was -- it's been a huge topic for the industry and what you said at Q1 got a lot of focus and then things really seems to improve a lot at Q2. And so stepping back of now what you've seen now 9 months into the year, I guess, with Q1 just noise? And how do you kind of feel about where things sit today from a provisioning standpoint.