Q1 2020 Earnings Call

Declined 2% through the end of February and revenue per member was roughly flat.

But with roughly 1300 of intervals exchange resorts, either closed or not taking reservations in the short term due to covert 19 transaction activity was adversely impacted in March resulting in a decline.

In average revenue per member as a result, adjusted EBITDA for the segment was down $13 million in the quarter.

After adjusting for onetime costs, including those related to covert 19, Gionee expense declined $10 million in the quarter, reflecting the continued benefit from our synergy initiatives.

We realized 17 million of $70 million of synergies in the first quarter, bringing our total run rate savings to roughly $70 million.

However, as we talked about in March we have decided to defer most of our investment spending for the time being as a result, it may take us a little longer to achieve a 125 million dollar goal, but we rate remained committed to generating at least this amount of synergies by the time we're done.

So with the first quarter behind us I want to spend the rest of my time talking about the actions we've taken to manage through the current environment.

As I mentioned earlier, our resort management and financing businesses generate a substantial amount of high margin recurring revenue.

These two businesses represent nearly 45% of our annual adjusted EBITDA contribution.

I think in a little deeper about 36% of our adjusted EBITDA contribution comes from our management in exchange businesses with about 80% of this revenue coming from stickier recurring sources, including the revenue we generate for managing the resorts.

And our financing business represents nearly 20% of our adjusted EBITDA contribution nearly 85% of which comes from notes we originated in prior years.

The remaining 55% of our adjusted EBITDA contribution comes from more transactional and economically sensitive businesses.

In order to manage through the current environment and come through the other end in a strong competitive position we've had to make some very tough decisions. For example, we furloughed, 65% of our associates and reduced work weeks for the remainder by 25% on average.

We have deferred merit increases instituted a hiring freeze for all the critical positions and deferred our 2019 for one K. match contributions. We've also eliminated all travel and Offsite meetings and curtailed all discretionary spending.

These were hard choices, but we think we can manage at this level until business starts to return.

On top of these cost reduction actions. We're also minimizing all capex inventory and integration project spending that will allow us to FERC to defer up to $260 million of investments this year.

And we are spending all share repurchase activity and dividend payments for the foreseeable future.

As a result of these actions combined with the revenue and cash flow generated from our management financing businesses. We believe our monthly cash burn will be roughly $10 million per month for made through December.

Even if sales in rentals don't resumed this year.

Moving to our balance sheet and liquidity. We ended the quarter was $650 million of unrestricted cash and $98 million of gross notes receivable that are eligible for securitization.

We increased our warehouse facility to $531 million at the beginning of April to make sure. We have enough capacity in case, the securitization market isn't available on reasonable terms at the end of April we.

Not only used about half the total amount. So we have enough warehouse capacity to support another $375 million of new sales, assuming 50% financing propensity.

We have no corporate debt maturities until September 2022, which is our convertible note and thats only $230 million with the credit markets open and rates relatively attractive given the environment, we decided to raise an additional $500 million of senior secured notes, which will take.

Our available liquidity through at least 2021, if occupancy is remain at current levels and our sales centers remain close for an extended period of time.

Our leverage for covenant purposes stood at only 1.3 times our merger our March 31st.

Number compared to the three times first lien leverage ratio limit in our credit agreement.

Depending on the length of the shutdown, we could be above the three times by the end of the third quarter. As a result, we are pursuing an amendment to our credit facility to suspend this covenant through the first quarter of 2021.

So as difficult as the current situation is we believe we have positioned the business to weather the storm and emerge in a strong position when business starts to rebound.

That Stephen I'll be happy to answer your questions operator.

Operator.

Melissa I use Eric.

Can you hear me now.

Yes, we can thank you okay. Thank you.

At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again that star and the number one.

We have a question from the line of Patrick Shoals.

Hi, good morning, gentlemen.

Good morning, Pat.

Good morning to I apologize if if you did mention needs on the.

In your prepared remarks.

Already.

You you took a large not.

Surprisingly.

George on the loan loss provision going forward.

For the rest of the year, what would you expect.

The trends to be in that loan loss provision percentage.

Sure. So what we did in the quarter.

And then we fit we thought this was a good point of reference we went back to the Oh, eight Onein financial crisis, and we looked at for both our and BW per portfolio as well as the legacy Vistana business, we looked at how those portfolios performed solid starting in.

Right, Okay wait onein.

And what we saw there was we saw.

Caught delinquency rates on average go up roughly 50% from where they were at at the time.

For call. It 15 to 18 month period, and then they started to come back down to more normalized levels. So.

We did the same thing we went to our defaults prior to covert 19 in the current trends and then we.

Took those default levels up on the existing portfolio, assuming a 50 ish percent increase for a 15 to 18 month period and that's how we came up with the $52 million charge that we took in the quarter.

Time will tell Patrick it obviously this is a little bit different but our business was different back then to in terms of.

If you remember we were we're chasing sales a little bit at the time to grow the top line. It was a good economic environment and we've been a lot more discipline. This time so.

We've got a strong customer.

We've always talked about with average household incomes in terms of where we target of 125000 or more in generally net worth of in excess of $1 million. So.

With that said, we will see higher defaults, but for now we think that reserve hopefully, we'll we'll cover what comes what comes at US down the road.

Okay.

Thank you for the detail on that.

Your next question your dividend.

Just yesterday were previously obviously was maintained.

Is that due to changes in your assumptions for macro conditions since you had your.

Update call a month ago or was that.

A requirement to receive the additional lending that you just.

Taken.

Yes first of all Patrick I think if you go back to call that we had at the end of March I don't think we gave any station that we will continue going to continue to pay a dividend in the short term with that said I'll, let John address your question about whether there's an additional covenant or something and require that which there is not right now I mean.

I think in this environment and you saw we went out.

Not that we expect we're going to need the additional 500 million and liquidity.

As as management of the business, we're making sure we've positioned the company at and manage the risk Theres clearly.

Unless you've got a good crystal ball, there's clearly a lot of uncertainty going forward.

And we felt like given all those risks and all the other measures we've taken in terms of.

Reducing work weeks Furloughing folks that while sure we've got the cash and we can pay the dividend we didn't think it would be a prudent decision.

To do that at this point in time and until we have better sense as to when things start to open back up and how the physician and how the sales starts to come back.

And we have better visibility into that and then clearly.

We'll be able to re address those decisions going forward.

Okay. Thank thank you one last question.

Thoughts I mean, if and when you might be doing your next securitization in what what are you hearing feeling from the securitization market.

As an appetite for an issuance.

Thank you sure yes, yes, we're we're working on our normal term securitization right now.

Still working through some stuff with the rating agencies in terms of.

Default assumptions things like that I think for our portfolio.

Time is our friend because we'll be able to see how our portfolio performs.

And.

Age a little bit here, and I think that thing for us.

I expect our portfolio to perform well that's going to help but that being said as we talked about we increased our warehouse facility. We got a couple of hundred million dollars that capacity there as I said in my prepared remarks, that's roughly 375 million a future sales at a 50% financing propensity.

Yeah.

We get an 85% advance rate in our all in cost of funds on that warehouse, which goes through late 2021.

It is less than 2% what I can tell you right now and the term market, we could get slightly better advance rates, but given the market right now not much better than what we're getting under our warehouse.

And the rates are higher so given our liquidity position and the reason we always put the warehouse in places that gives us optionality and we don't need to go to the term market into a securitization until that market.

Has has the right.

Borrowing costs and advance rates that we'd be looking for so.

We'll continue to be ready.

Just like we work to go to the.

The the bond market here and take advantage of that but at this point.

We're going to see how things play out here over the next month or two and we'll we'll go to the market if it if it comes back a little bit.

Okay. Thank you very much.

Thank you.

Uh huh.

Question comes from the line of Brandt Montour.

Okay.

Good morning, good morning, Thanks, a lot for good morning, Thanks for all the details.

Appreciate it so just was hoping Steve John you could flesh out a little bit more about what the reopening might look like.

Sort of in more on the phased approach and then if you are potentially going to be able to open some of them more drive to heavy markets and let's say early summer.

What what quarter thereafter, do you think you might be seeing tour tour generation Thats comparable.

Okay. Thanks, Brent first of all.

Hi, good I guess I feel obliged to remind everyone that only 32% of our resorts are closed.

The others are remain open.

Although under.

Fairly substantial restrictions from state and local municipalities in terms of what kind of services can be offered et cetera.

So.

When you speak of reopening I'll take it in two different phases, obviously for those that are currently opening are currently open.

We will continue to ramp up.

Activity now we have not not taking new reservations for arrival.

Until called the end of May However, we are honoring all existing owner reservations.

That are arriving in may.

We have we have cancelled all rentals and though we'll we'll begin to take those back up beginning of June and the same thing on our preview gas.

Which will also begin in June.

I think what you're going to see is.

Because there is this patchwork of different regulations that are in place.

As recently as this morning, I saw that New Jersey for instance is now implemented an additional 30 day restriction on on on travel.

And while there are some other parts of the country call at South Carolina that seem to be.

Much more open to two allowing business is to get back in place. So in each particular case, what we will do is as as as we see demand continue to pick up we will obviously increase our staffing level as resorts as you might imagine with low single digit Hodgkin's disease, we've got.

Largely set skeleton staff and those required to keep the facility.

Maintained and looking good.

But we'll we'll begin to bring people back into the into the business.

And then following that as occupancy levels at resorts.

Continued to build.

When we believe we can operate a sales operation, which is generally speaking.

No resident on the property with our resort.

When we can operate that at least a cash flow neutral basis, we'll begin to ramp up those sales activities. So.

Well I'd like to sit here and tell you that on this month of this day that the system wide is going to look like this I think this is really going to be a wait and see approach.

I mean I can give you.

Even here in just looking in Florida.

I can tell you that to some of our beach locations in Florida, the advance bookings for those even into the middle of the end of May are looking stronger than say central Florida, I would say in central Florida here in Orlando a lot of it will be contingent upon when the various parks and attractions reopened.

So.

I don't know if thats helpful to you.

I can certainly get into more particulars, but I hopefully gives you a sense of what we're doing.

Yes, Thats that does thank you for that and then wanted to follow up on your comments on the virtual tours.

Maybe you could kind of tell us.

How this has affected the original.

Rollout plan for those digital.

Capabilities and use spec that virtual tour sales will be meaningful over the next couple of quarters until they actually and move the needle for you.

Let me, let me be clear about what we're talking about we're talking about telesales. This is.

Expanding the number we've always had to tell sell off telesales operation.

Within our company however, what we've done as we've taken the call that top 150 of our.

Line sales executives that people than normally take tours at our resorts, we've trained them how to how to sell over the phone versus selling and person.

May not sound like a.

Huge difference, but in fact it is.

And we are in fact, the conducting sales.

With people over the phone.

Theres no virtual tour per se.

Place today, and I think what we'll see as the learning that comes out of this.

That.

We'll see people that.

Our good face to face to where some of which will be.

Very good telesales.

Honestly there'll be some that are very good face to face that aren't very good at telesales.

I will say this.

Our best sales executives have always had a book of business that with their existing owner base.

That they have consistently been in touch with over the years and so they've always had some form of telesales in many cases as the sales executive fielding a call or talking to and owner says hey, I'd like to buy some more points that right. The contract and this all said and done so I think we'll wait and see just how successful. It is it's very early in the telesales earn.

Tina I can tell you that we are.

Cautiously optimistic about the results that were getting but it's certainly too soon to declare victory or not.

But we think it's certainly another piece of if you try to find any downside in this horrific is kind of set of circumstances that were in I think it's kind of causing us to be a little more innovative even more so than we had originally anticipated and then telesales may be and even.

Bigger prong of what we think going forward, but it's impossible to predict.

How big it might be.

Okay. Thanks again, guys. Good luck.

Thank you.

We have a question from the line of generate should giant.

Good morning Jarrett.

That question has been withdrawn we have a question from the line of Brian Dopson.

Hi, Brian.

Hey, good morning so.

Good.

Couple of quick questions about owner appetite to return the resorts following the lift.

Travel advisories.

Could you give us an idea of what your forward bookings look like for the second half of this year in comparison to 2019 levels for existing owners and in terms of sales to existing owners what percentage of overall sales do you see that comprising call in the back half this year.

First half of next year.

In comparison to that.

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Yes.

So.

If you look at total room nights or keys, depending on the not color you want to use.

I can tell you that we have 2 million in 18000.

He's from July to December of 2020 that contrasts to 2 million in 93000.

Last year, so down about 3.6%.

Of the 2 million in 18 owner stays are 78% of that total and they were 77% of the total in 2019, so doing the arithmetic for you owner occupancy for the second half the year is down 1.8%.

Previous are actually up call at 1% and transients are down 16%. That's I think the transient thing is the most logical to beef to be fair.

I think people will book reservations as they begin to feel more comfortable travel and and the state of our resorts being open with a full facilities et cetera.

You know about call it 660% to 65% of our sales typically are to owners.

I would expect that percentage to actually be a little higher because as you might imagine in our telesales activity even in the and the time that we are dark in our sales galleries.

There's been a lot of focus on owners and giving them. What we think is a very attractive offer to add to their portfolio. So it will not surprise me if the owner sales percentage goes up from where we traditionally habit.

But obviously it's.

I can't say that when a degree of assurance is just logical I think.

And I remember, Brian I know Youre, where this art our resorts run on average and 90% occupancy was so when Steve compares what's on the books to this year last year right, we would or in a 90 ish percent occupancy in the second half of last year. So it's a very high occupancy to begin with it it's only down slightly.

Yes, thats right. So those existing owners sales are usually done higher margin do you to timeshare sales do you expect those higher margins to hold.

Or you are you offering.

Incentives.

Which would generate somewhat lower margin.

Well, we're certainly offering incentives we've we've rolled back the cost per point and we're providing some additional purchase incentives for people to make and make a decision now plus we're incenting cash sales at a little.

Better degree than we are in finance sales all in an effort to kind of supplement our cash flow.

In terms of yes, I mean, typically an owner.

Purchase carries a lower marketing cost because we've already.

Have a relationship with that owner and.

So you would think that all other things being equal that your margin would improve somewhat because of that with that said.

You got to factor in they've got a lower price point than they had before we've got a little higher incentives. So I, it's difficult to prognosticate exactly what will happen for the balance of the year.

But we believe that the trying to tap into that owner vein is certainly the most logical and appropriate thing for us to do now and we'll see how the numbers come out at the end.

Excellent. Thank you very much.

Thank you Brian Thanks.

We're sorry, there any more questions on the on the line.

Yes, we have a question from the line of Gerry generate your line is open.

Hi, Good morning, everyone can you hear me okay great.

Again, yes, okay, I'm, sorry, but having technical difficulties since before this call started.

And I apologize if you've already covered this but I'm, just hoping to understand a little bit more of.

Some of the comments you made on liquidity because.

You said you have liquidity in a shutdown through at least.

Lease beyond 2021, I believe but I think you said, you're only burning about 10 million a month through year end and at that rate. It would seem that you would have a lot longer than through 2021. So are there some inventory costs or other obligations that are coming up next year, just help me think about that.

Sure Hey, Jared it's John.

Yeah, you're right on when we talked about getting it with all the reductions in.

Furloughs and all that to get it to close to is possible those went into effect here at pretty much at the end of April So when you look at.

Call. It may through the ended the year December our cash burn rates that roughly $10 million or pretty close to what we thought we could get to when we when we talked about it back at the end of March when we start first started doing all the different initiatives.

But if you think about our our time to our normal business model working capital outflows.

You have significant.

Maintenance fees for the inventory that we own that we havent sold yet.

That we pay.

A lot at the end of the year beginning early part of the year I'd, just like owners pay their maintenance fees right. So thats all the inventory.

That that Generalise call about 150 million or so of.

Maintenance fees typically we'd have to pay and then the others, which these are new if you go and look at our commitments. We've got the New York asset light deal San Francisco.

As well as BOLI and to a lesser degree Costa Rica, that's about 140 million in the first quarter next year. So when you put those two two items together.

First quarter next year, all else being equal with everything shutdown no rentals no sales.

About 300 million dollar outflow right, but that that's just the kind of typical timing once you get through the first quarter, you're kind of back to the run rate that we're talking about here.

And we have no other significant.

Capital commitments.

Got to work through Waikiki, which we did announced earlier as an asset light deal.

And we're working with a partner that that would get built later and develop that would be hopefully inventory, we would need to develop and take down for a couple of years here given where we're at but that did we don't we don't have we've as we talked about.

Coming into the year, we needed to get out there and find new development deals.

So we don't have a lot of other commitments at this point.

And so if you think about it on a full year basis, you're probably.

Looking at call. It a 30 million dollar burn rate based on the numbers I just talked about if you. If you normalize for the full year given that big outflow in the first quarter.

Okay. That's really helpful. Thank you.

It may just switching gears can you tell me how much gross VOI sales declined in April and I get the the angle here is I'm just trying to figure out how meaningful that telesales are and you still have.

Let me resorts that are still open so I'm just wondering if you're selling anytime shares at those resorts and just trying to understand that dynamic a little bit better.

Yes, Jared now all of our sales centers, even in those resorts that are still open have been closed since the end of March so.

Yes, theres still some telesales activity.

On a normalized basis under the kind of.

The call our our traditional telesales program I don't have that number here in front me I will tell you that it's all that material.

And we just splitting up the new Telesales program here in the beginning of May so for all intents and purposes, I think you would probably assume that.

Close to 100% decline in VI and VII sales in April.

For the business and thats across the entire business.

Okay. That's helpful. Thank you and it just one more quick follow up for me.

Do you know what percentage of your owners are retired and maybe even broken down further between existing owners versus the new owners, you're selling two and if there's a meaningful difference.

For those that have loan balances that are retired thank you.

The answer is no [laughter] I don't I don't know what percentage or retire I mean this is one of those things that.

We might have sold somebody.

Something 15 years ago, when they were gainfully employed and everything else and.

They make a decision they have they are they own their their inventory a 100% they make a decision to retire we certainly don't inquire of them.

Whether they are retired or still working.

And so I hide it would be nothing more than a swagger and I'm not kind of in that business. So.

Wish I could tell you, but I can't.

Okay understood I appreciate I just the angle of the question was just the idea that I think if you retired you're not obviously dependent on a job and you have just stable income already coming in and I would think anyway in this industry in particular, you would have a.

A lot more retirees and particularly with leisure travel that down.

Alright, Thank you very much for that.

Hey, Gerry I mean that as I talked about earlier I mean, I I think we're tired interesting right, but household income or net worth some of the other key statistics.

Our owners tend to trend first time buyers 50 years old plus or minus so you're talking about people that are our got the household income. If they are retired but generally have more network than your average consumer given where we target. So once again, just some other data points.

Like Steve said, it knowing whether.

Just because somebody 65 and now nowadays doesn't mean you're retired so yes, we don't will pull people on that but I understand your question, but I think some of those other metrics are pretty good in terms of thinking about our owners.

Okay. Thank you very much.

Thank you. Thank you.

There are no further questions at this time.

Mr. Wise do you have any closing remarks.

I do thank you Alicia.

Thank you everybody for joining our call today, we do apologize we know there have been a few technical challenges along the way.

And we this is not traditionally how we conduct the call that.

We appreciate your patience.

While I, obviously don't know when this all will end I hope we've illustrated today that we have a unique business model with substantial recurring revenue and an owner base that has proven in the past his desire to get back to vacationing as quickly as possible, we've taken difficult when necessary steps to protect our great company and as the balance sheet.

And liquidity to see this through an emerging a strong position when we do.

Finally, I wish all of you well and encourage you to be safe take care of each other take care of yourself and hopefully in the not too distant future. We all will be able to enjoy our next vacation. Thank you.

This concludes today's conference call you may now disconnect.