Marriott Vacations Worldwide Corp

NYSE:VAC

Earnings Call Transcript 2022-Q1

[Operator]

Greetings and welcome to the Marriott Vacations Worldwide first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tony Terry, Executive Vice President and Chief Financial Officer for Marriott Vacations Worldwide. Thank you, you may begin.

[Tony Terry]

Thank you and welcome to the Marriott Vacations Worldwide first quarter 2022 earnings conference call. I am joined today by Steve Weisz, Chief Executive Officer and our President, John Geller.

I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued last night and the presentation we added to our website this morning, as well as our comments on this call, are effective only when made and will not be updated as actual events unfold.

Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release, as well as the Investor Relations page of our website at ir.mvwc.com.

It is now my pleasure to turn the call over to our CEO, Steve Weisz.

[Stephen Weisz, Chief Executive Officer]

Thanks Tony. Good morning everyone and thank you for joining our first quarter earnings call.

Before we share our financial results, I want to recognize the continued uncertainty in the world today. From significant geopolitical issues, supply chain disruptions and inflationary pressures impacting our day-to-day lives to adjusting to a new normal as the pandemic wanes, the world definitely continues to be a complex place; however, despite these uncertainties, I couldn’t be more proud of our associates and their continued dedication to our owners, members, guests and each other. I want to take a moment to acknowledge every one of them at our destinations across the world, our corporate and regional offices, and our sales centers. Their continued dedication is the driving force behind our success.

While we are operating in a challenging landscape, there is something that remains true: people want to spend time and create memories together and one of the best ways to do this is through a vacation, and we are perfectly positioned to make that happen.

As I look at some of the compelling statistics about the state of leisure travel right now, I see that despite some of the inflationary headwinds, Americans continue to spend on travel. In fact, in one survey 61% of Americans said that travel will be a high budget priority over the next three months, reflecting strong leisure demand. Specific to our owners, over 108,000 destination searches were completed on our owner website in March, a 20% increase versus March of last year, so that tells me that demand for leisure travel continues to be robust.

Consumer sentiment around international travel is also showing some green shoots, and for us that means international travelers are starting to come back to key domestic markets like Florida and Hawaii. In fact, though not returning to pre-pandemic levels yet, according to the U.S. Travel Association international travel to the U.S. is forecasted to be significantly higher in 2022 than it was in 2021.

Let’s transition to our results for the quarter.

Adjusted EBITDA for the quarter totaled $188 million and contract sales totaled $394 million, both representing significant improvements over the prior year and exceeding pre-pandemic levels. In fact, even excluding Welk and despite some headwinds from the omicron variant in January, this was the highest first quarter contract sales result we’ve had as a public company, showing the strength in our business.

We continued to see strong occupancies in the first quarter in our vacation ownership business even inflation persisted and gas prices rose towards the end of the quarter. Our total occupancy levels were 88%, in line with pre COVID-19 results despite a lag in the recovery in certain urban and international markets. DPGs once again far outpaced our expectations, reaching over $4,700 in the quarter, showing the continued demand for leisure travel experiences and the relevancy of our product offering.

At the end of March, we began pre-marketing our new combined product offering at our Marriott, Westin and Sheraton sales centers and we expect to complete the development of the related technology and officially launch the product later this summer. The combined product offering will bring our Marriott, Westin and Sheraton-branded vacation ownership products together, allowing owners of each product more flexibility across our Marriott-branded portfolio. Early feedback from owners has been quite positive to the offer of more destinations and flexible usage options.

Before we move onto the exchange and third party management, I want to touch on the integration of the Welk and Hyatt vacation ownership businesses. You may recall that we completed the acquisition of Welk Resorts just over a year ago and I am pleased with the significant progress we continue to make integrating the businesses under the Hyatt vacation ownership umbrella. This past April, we introduced Hyatt Vacation Club and re-branded Welk’s vacation ownership program as the Hyatt Vacation Club Platinum program, converting former Welk sales centers to now sell a Hyatt-branded vacation ownership product. The Platinum program includes expanded vacation benefits and access to a collection of upscale resorts in highly desirable vacation destinations.

Most of these former Welk resorts are now available for rental stays on hyatt.com, and beginning later this year owners will be able to exchange their annual usage for World Hyatt Loyalty Club points. We look forward to sharing a more in-depth overview of our new Marriott combined product offering, as well as the Hyatt vacation ownership initiatives with you at our investor day on Thursday, June 16 at the New York Stock Exchange.

Moving on to exchange and third party management and specifically to Interval International, we experienced 9% year-over-year member growth as a result of the new agreements and affiliations that I discussed last quarter. In addition to these new affiliations, we just renewed our agreement with Westgate Resorts, one of the largest privately-branded time share companies, thereby extending one of our most tenured affiliations for another five years.

From an exchange perspective, inventory availability at Interval International continues to be challenging primarily due to lower member direct deposits. As you might imagine, lower owner travel during the pandemic has led to higher than historical average owner usage as travel restrictions eased. That higher owner usage directly impacts member inventory deposits international; however, despite the lower deposits, Interval has done a fantastic job managing the inventory they do have with inventory utilization about pre-pandemic levels.

On the third party management front, I’m pleased to announce that we closed on the sale of our VRI Americas business last week for approximately $60 million of net proceeds or 15 times 2022 full year adjusted EBITDA. As a reminder, VRI Americas is an independent manager of unbranded vacation ownership resorts which we acquired as part of the ILG acquisition in 2018. In 2021 after evaluating the growth prospects of VRI relative to our other businesses, we entered into the process to find VRI a home with an operator that could better unlock its growth potential and provide enhanced value to its managed homeowner boards and associations.

Given VRI’s limited contribution to the company’s overall adjusted EBITDA, this sale does not impact our guidance for the year. I’d like to thank the VRI associates for their dedication to MVW and their customers.

Overall, I am very pleased with the strong start we’ve had to 2022 and excited about the innovations we have planned for the months and years ahead.

With that, I’ll turn the call over to John to provide a deeper overview of our first quarter performance.

[John Geller, President]

Thanks Steve and good morning everyone. Today I’m going to review our first quarter results and discuss the continued strong recovery we’ve seen across our businesses. After that, I’ll turn the call over to Tony to discuss the strength of our balance sheet and liquidity position as well as provide color around our 2022 expectations.

Starting with our vacation ownership business, while we did see some impact from the omicron variant in the early part of the first quarter, we still saw significant year-over-year improvement in all parts of the business as our operations continued to recover and ramped back up to and, in most areas, exceed pre-pandemic levels.

Our product continues to resonate very well with customers and our tour channel optimization work once again has generated strong results. Tours were up 71% from the prior year. Contract sales in the quarter grew 75% to $394 million and contract sales for all of North America, even after excluding Welk, were over 7% higher than Q1 2019. Our VPGs remain strong, reaching $4,706, up 9% sequentially.

First time buyers represented 29% of contract sales, a 300 basis point improvement from last year’s first quarter and in line with the fourth quarter of 2021. As I’ve mentioned in the past, growing first time buyers is a key part of our overall strategy as they historically double their revenue contribution within the first five years of ownership. As we progress throughout 2022, we expect continued recovery of first time buyer tours to pre-pandemic levels and higher demand from direct marketing offers has also produced strong package growth. As of the end of the first quarter, our package pipeline remains strong at nearly 200,000 tours with 40% of those packages already activated for future arrivals.

We saw significant year-over-year improvement in development profit, which increased to $68 million in the quarter. Adjusting for the impact of approximately $24 million of negative reportability, our adjusted development profit margin expanded by 780 basis points over the first quarter of 2021 to 28.3%, highlighting the benefits of more efficient marketing and sales spend, lower inventory costs, and our business transformation savings. As a reminder, since reportability is just a timing issue, the revenue and profit from these sales will be reflected in our second quarter earnings.

Turning to our vacation ownership rental business, total rental profit remained in line with the fourth quarter of 2021 and continues to recover; however, while domestic occupancies have averaged 90% for the quarter, given reduced rental inventory availability due to higher owner usage, this part of our business still has room to improve to return to pre-pandemic levels.

The stickier revenue portions of our vacation ownership business also performed well I the quarter. Resort management revenue increased 34% year-over-year and profit increased 22% to $72 million, driven primarily by continued recovery in our ancillary businesses. Financing profit increased 31% in total from prior year given the acquisition of Welk, as well as our strong sales volumes. Excluding Welk, financing profit grew 7% organically. I’m also pleased to say that our portfolio continues to perform very well with delinquency and default levels at or even below levels experienced in 2019.

Bringing it all together for the vacation ownership segment, adjusted EBITDA delivered $199 million in the first quarter. With strong contribution from all parts of the business, we were able to deliver adjusted EBITDA margin of approximately 32%, nearly 360 basis points higher than Q1 2019. The quarter also benefited from the addition of Welk, which contributed $24 million of contract sales and $13 million of segment adjusted EBITDA.

Turning to the exchange and third party management segment, active members at Interval increased 9% year-over-year as a result of the new affiliations we highlighted last quarter, while average revenue per member declined 6%. As Steve mentioned, not unlike what we are seeing in vacation ownership, increased owner usage is putting pressure on the volume of member deposits as people have increased vacation activity post pandemic. In addition, while our member base has grown from the new affiliations, it will take time to ramp revenues from those members as many have already booked near term travel plans.

Our Aqua-Aston business showed year-over-year improvement as well as Hawaii continues to recover from the pandemic. As a result, segment adjusted EBITDA at our exchange and third party management segment increased roughly $2 million or 4% to $43 million from the prior year quarter, with adjusted EBITDA margin remaining strong at 57%.

Finally, similar to what we saw towards the end of 2021, our corporate G&A expense increased $15 million in the first quarter year-over-year as a result of higher salary costs due to reduced work week programs in the prior year, higher bonus expense, and a decrease in credits related to incentives under the CARES Act; however, given our synergy efforts, corporate G&A remains well below pre-pandemic levels.

For the total company, our adjusted EBITDA was $188 million, 13% higher than Q1 2019, and margin improved over 300 basis points to nearly 25%, demonstrating the ongoing strength of our leisure focused business model, continued recovery in the business, and the benefits of our transformation initiatives.

With that, I’ll turn the call over to Tony to discuss our balance sheet, cash flow, and 2022 guidance. Tony?

[Tony Terry]

Thanks John. I too am very happy with our strong results this quarter.

Starting with our balance sheet and liquidity position, you may have seen that we amended our revolving credit facility at the end of the first quarter, increasing the capacity by $150 million to $750 million and extending the term to March 31, 2027. With that increased capacity, we ended the quarter with $1.2 billion in liquidity, including $354 million of cash, $120 million of gross notes receivable eligible for securitization, and $748 million of available capacity under our revolver.

At the end of the first quarter of 2022, we also had $2.7 billion of net corporate debt outstanding and $1.8 billion of non-recourse debt related to our securitized notes receivable. In our financing business with our notes balance currently approaching the average balance for 2019, a full year of Welk results included and contract sales expected to grow double digits this year, we expect financing profit to also increase double digits compared to last year. We also expect to complete a securitization in the second quarter, but with rising interest rates we anticipate a higher cost of funds for this transaction than what we’ve seen in rent years, but still comparatively low on a historical basis. We had already factored these increases into our guidance for the year.

As it relates to our net corporate debt, we believe we are well positioned with only $230 million of near term debt maturities and 90% of our net corporate debt effectively fixed.

Given our continued strong performance in the first quarter, we returned approximately $168 million of cash to shareholders, including repurchasing $119 million of our common stock at an average price per share of $156.50 and paying two quarterly dividends totaling $49 million. As of March 31, 2022, we have approximately $350 million of remaining capacity under our share repurchase authorization.

Now let’s turn to our 2022 guidance.

We had a solid performance in Q1 and we are optimistic about the remainder of the year; in fact, based on where we are today, if trends continue we expect to be closer to the upper end of our ranges for contract sales and adjusted EBITDA. However, given some of the uncertainties Steve mentioned earlier, we are maintaining our previously stated full year guidance at this time.

We continue to carry excess inventory on our balance sheet, ending the quarter with nearly $630 million of excess inventory. Given our recent purchase of 88 units in Bali, Indonesia, we have no further new inventory commitments besides the normal purchase of low cost re-acquired inventory.

With adjusted EBITDA continuing to meet our expectations, we should generate substantial free cash flow and as a result, we reaffirm our previous guidance of between $560 million and $640 million of free cash flow, resulting in a 65% to 70% adjusted EBITDA to free cash flow conversion ratio. We still have roughly between $95 million and $120 million of potential cash proceeds from non-strategic real estate assets that we are working to dispose of over the next couple of years. This range excludes the net proceeds from the sale of VRI Americas.

Consistent with our past approach, we will seek to use free cash flow to invest in growing the business organically or through strategic acquisitions. In the absence of compelling acquisitions, our best use of excess free cash flow remains returning capital to shareholders through dividends and share repurchases.

In summary, we started the year off strong and we expect that performance to continue throughout the remainder of 2022. As always, we appreciate your interest in Marriott Vacations Worldwide.

With that, we will be happy to answer your questions. Melissa?

[Operator]

[Operator instructions]

Our first question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

[Patrick Scholes, Truist Securities]

Good morning everyone. A couple questions here, and I apologize if you did say this in the prepared remarks. Do you have any statistics on how your prepaid packages are tracking for the rest of the year versus, say, 2019, and then any initial indications on that versus--I’m sorry, for 2023, how packages are tracking? Thank you.

[Stephen Weisz, Chief Executive Officer]

I can give you some numbers, and it’s a combination of owner and preview package bookings, Patrick, compared to ’19. For the first half of the year, it’s 9% over 2019; for the second half of the year, it’s 14% over 2019, so you put the two together arithmetically, it’s 11%. I don’t have in front of me the 2023 numbers; however, I would surmise that it continues to be strong. Obviously you again get to the point from a comparison standpoint that obviously working off of a base, the percentage numbers may be a little bit smaller, but I still think it’s very positive.

[John Geller, President]

The only other color I would add is just on the package offerings. We are seeing a substantially higher uptake on those offerings versus 2019, to the point where in some cases we’ve actually pushed the price of the vacation package. In certain areas, as we’ve talked about, we’ve had very high owner occupancy, which will continue here as we move through this year. It will start to abate, I think, as we go into next year, but that--you know, once again same thing on the rentals, but same thing on the packages, it does limit some of the availability, but the overall demand for the packages is the best I’ve ever seen it.

[Patrick Scholes, Truist Securities]

Okay, very good. My follow-up question is on the unchanged EBITDA guidance for the rest of the year. From the tone of the call, it certainly sounded like 1Q was above your expectations, it was above street expectations. I understand and I appreciate conservatism certainly in this world, but is it fair to think that without--barring any black swan events, that rest of the year is--the implied guidance is in fact conservative unless, again, something we can’t forecast happens? Again, I don’t mean to put words in your mouth there.

[Stephen Weisz, Chief Executive Officer]

No, I think it’s a fair question, and I think you heard Tony said clearly we’re--at least our dialog is about guiding towards a higher end of our guidance. As you will recall, in about a month we’ve got an investor day and I would expect us to be more declarative about where we think things are going to go.

I mean, depending on the news of the day and the macro environment, we have a tendency to always want to not only meet but exceed the expectations of our investors and the street. You could get out a little further over your skis and all of a sudden have something run amok in the economy, which would cause that to be probably too aggressive, so that’s the reason why we typically have been a little bit more conservative, but we’ll have a lot more to share in a little over a month.

[Patrick Scholes, Truist Securities]

Great, I appreciate it, and I’m looking forward to the investor day. Thank you.

[Stephen Weisz, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Our next question comes from the line Ben Chaiken with Credit Suisse. Please proceed with your question.

[Ben Chaiken, Credit Suisse]

Hey, how’s it going? There’s been a nice mix shift down in your cost of product on the VLI side--I guess your inventory cost, rather, presumably as you collected inventory the last two years through defaults and repurchases, etc. of other low cost channels, which is visible today in the quarter. If you look at your balance sheet today, you have several years of unsold inventory. Does the benefit that we’re currently seeing apply to the rest of that inventory, or is this just kind of a one or two quarter tailwind? How do you think about it?

[Tony Terry]

Yes, I could tell you that we expect these inventory product cost levels to continue for the next few years. We are continuing repurchase activity right now. We do get low cost inventory back from our owners routinely and we have agreements with our associations to take their inventory back, so that’s ongoing year-over-year. We do have some new developer inventory we’ve gotten from asset-like transactions or self developed inventory - on the balance sheet, that could be a little bit higher product cost, but you have that lower inventory, the lower product cost inventory coming in for our normal repurchase activity, so when you blend those two together, we believe that going forward we can maintain those lower inventory product cost levels for a while.

[Ben Chaiken, Credit Suisse]

That’s really helpful, thank you.

Then I think you mentioned on the call reportability, I believe was a touch higher than we were expecting. Can you just remind us, I know that’s just a timing issue and it will come back later, but can you remind how that occurs? Is that a function of sales accelerating towards the end of the quarter thus creating a timing issue when there’s a decision period? Thanks.

[John Geller, President]

Yes, you’re exactly right, Ben. If you go back even to Q1 of 2021, it had a similar--you know, notwithstanding lower contract sales, but it had a similar deferred revenue impact, if you will. So yes, what’s basically happening is because of how we recognize for GAAP revenue those contract sales based on closing, it just means that your contract sales accelerated at the end of the first quarter much higher than what you finished the year at, right, so just the natural result is that that revenue’s coming and the associated EBITDA that I mentioned, the $24 million, and that will happen in the second quarter.

The cadence throughout the year generally is you have your biggest higher deferred impact for the first quarter, you have some in the second quarter because usually you end the second quarter stronger, right, in June than you end the first quarter, and then as you start to move through the third, most of that ultimately comes back in the fourth quarter. That’s kind of been the cadence.

It wasn’t necessarily that much higher than we were expecting. It was somewhat in line and not really unusual from a historical perspective.

[Ben Chaiken, Credit Suisse]

Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, as a reminder, if you’d like to join the question queue, please press star, one on your telephone keypad.

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

[Chris Woronka, Deutsche Bank]

Hey, good morning guys. I think you mentioned the mix of first time buyers was 29% and that was up 300 basis points year-over-year. I know longer term you guys want to get it as high as possible. What do you think it takes to kind of get there, and is there anything--you know, how much more can you do to juice things to get it there, and how much of it has to happen naturally?

[Stephen Weisz, Chief Executive Officer]

Yes, I think historically--you know, kind of pre spin-off, it was kind of a heyday, we were like a 50/50 mix. Keep in mind, we had a much lower owner base at the time, so again you apply the arithmetic and that gets in the way a little bit.

I think if you think about 40% to 45% first time buyers as kind of the optimal point that you’re trying to get to, you’re trying to bring more people into the system for a variety of reasons. Number one, obviously, you expand your ability to sell more financing to these folks, the upgrade program after the typical results are in the first five years after their purchase, they have a tendency to buy as much as they did the first time out. You get more maintenance fees, more club fees, etc., plus you get referrals from those owners that you haven’t been able to enjoy otherwise. Typically how that will happen is as you open up new source channels to bring people in, then you’ll start to see increased first time buyers.

The one thing that--you know, there have been some things that we’ve stepped away from. I think you’ve heard us talk about the OPC channel, which while it can be a source of first time buyers, it’s a relatively inefficient allocation of your cost to do so; in other words, it’s a high cost, low yield channel. Aside from Hawaii where we still maintain some OPC locations, and in the Welk business right now who they’ve done reasonably well with OPC, and that will change over time as we switch to more Hyatt-sourced channels, you’ll see some of that.

The other place that you typically get first time buyers is through linkage locations, and as you might imagine over the last couple years, we’ve stepped away from a lot of those linkage locations because the hotels were empty. We are now starting to turn those back on selectively and you’ll see that start to come.

We’ll see that number continue to rise. I’m not the least bit embarrassed to tell you that our owners want to buy more of our product. We’re happy to have that, so we can walk and chew gum at the same time, but if we can get up in that 40%, 45% range, I think that would be pretty optimal for us.

[Chris Woronka, Deutsche Bank]

Okay, thanks Steve.

Then a follow-up question was on labor, but more in the sense of in the sales centers, I’m thinking your top producers, they do pretty well, they’re on commission, but is there any issue attracting younger folks or entry level sales people because maybe they can get a much higher wage at a retail operation of some kind, versus taking a chance on a commission? Are you seeing any challenges there?

[Stephen Weisz, Chief Executive Officer]

Well, let me break it down into the two components parts, which is both the marketing side and the sales side. On the sales side, yes, I think we’ve made great progress on the sales side, we’re pretty well staffed on the sales front, not to say that we won’t add more sales people between now and the end of the year. But we’ve had to do that with some sign-on incentives, etc., but that’s all manageable because, as you mentioned, it is largely a commission-based sales force.

On the marketing side, we’ve had more of a challenge. Again, marketing folks do make a commission, although it’s a different scale, etc., and we’ve had some difficulties getting marketing people. Again, that’s starting to improve, but I would not want to mislead you by saying we’ve got--we’ve solved the Gordian knot here, we haven’t. You’ve seen the statistics about the number of people that continue to leave the hospitality industry, etc., and we will continue to be very vigilant about how we go out and try to recruit and find talent and add them to the organization.

The good news is once people join us, as you have mentioned, you can make a pretty good living by being part of this organization, and they’re generally pretty satisfied; but because of the pandemic, obviously, we had to scale back, and when we did so, we shed some jobs which we are now in the process of trying to recoup and add back to the system.

[Chris Woronka, Deutsche Bank]

Okay, very helpful. Thanks Steve.

[Stephen Weisz, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Mr. Weisz for any final comments.

[Stephen Weisz, Chief Executive Officer]

Thanks Melissa.

As we close today’s call, I want to touch on the idea that vacations today are infinitely more meaningful than they were over 10 years ago when we first became a publicly traded company. Over that same time frame, the pace of life has significantly accelerated and life overall has become more complex, particularly during the past two years. While digital innovations have helped many stay more connected, the pressure of doing so has taken away from something special that we at Marriott Vacations Worldwide can provide: togetherness. Vacations let you disconnect and reignite the relationships and interactions that do not always occur during the normal pace of life today, and definitely not through video call or Facetime.

As a business, we are 100% focused on leisure activities and providing the power of vacations. Our business is vibrant, resilient and well positioned not only today but for the future.

I’ll be excited to see many of you next month at our investor day in New York City and as always, thank you for your interest. We wish you continued health and treasured time with your family and friends, and finally to everyone on the call and your families, stay safe and enjoy your next vacation.

[Operator]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.