Q2 2020 Marriott Vacations Worldwide Corp Earnings Call
[music].
Greetings and welcome to the Marriott vacations worldwide second quarter 2020 earnings call.
Hi, all participants are they listen only mode.
First question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded and it's now my pleasure to introduce your host Mr. Neal Goldman Vice President Investor Relations. Thank you you may begin.
Thank you Michelle and welcome to Marriott Vacations worldwide second quarter earnings Conference call I'm joined today by steep wise, President and Chief Executive Officer, Joan Killer, Executive Vice President and Chief financial and administrative officer.
I do 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 RCC filings, which could cause material.
Could cause future results could differ materially from those expressed and implied by our comments.
Forward looking statements in the press release that we issued last night along with her comments in this call our effective only at the time issues 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 and the schedules attached to our press release.
Well as the Investor Relations page and the financial information page on our website. It's now my pleasure to turn the call over to Steve Wise, President and Chief Executive Officer, Marriott vacations worldwide.
Thanks, Neil good morning, everyone.
Like many other companies the covert 19 pandemic has greatly impacted our business.
Our second quarter started into position that most of us have never had to deal with before but slowly began to recover.
As you might remember in March we closed our vacation ownership resorts to transient renters and other gas and alerted to our owners about the limited amenities. They would find if they decided to take their scheduled vacation.
As a result occupancy at our resorts in April and May was in the single digits.
Thats only the beginning of the story.
In late May with leisure travel, leading the recovery, we started to reopen some of our resorts for renters and guest arrivals.
At the beginning resort occupancy was fairly low but steadily improved as we move through June led by our drive to locations.
For example, our Florida Beach Resorts ran only 17% occupancy on memorial day, but we're running at 65% by the end of June and remain in the mid 60% range today.
Our South Carolina resorts ran 30% occupancy on memorial day, but were north of 70% by the end of June there and roughly the same place now.
We also saw occupancy in our mountain resorts climb throughout June reaching as high as 75% by July 4th and are currently in the high Seventys.
And while clearly not drive to markets occupancy at our Saint Thomas in Saint John Resorts climb to 60% by the end of the June and Theyre now at around 70%.
However, two of our larger markets have not recovered as quickly.
Orlando, which represents almost 20% of our keys ran low single digit occupancy at the end of May.
Well with the theme parks reopening we saw steady rebound in occupancy, reaching roughly 35% by July 4th.
However, due to the press reports regarding higher cobot cases in Florida, they have sense weakened to around 25%.
And finally, Hawaii with more than 15% of our keys remains effectively closed today, except for revenue residents of the state or those willing to sell quarantine for 14 days after arrival due to state regulations.
We are hoping this rule gets lifted at the end of August as currently planned, but I suspect it will depend on what happens with the virus in the key feeder markets.
So while we are excited about how quickly occupancy improved in June and July occupancy in some markets have plateaued and we are watching the rise of cobot cases closely as it can further dampened the recovery.
In may we rolled out our enhanced telesales program, which has performed very well delivering the majority of our $30 million of contract sales in the quarter.
As occupancy at our resorts began to build in June we reopened eight sales centers predominantly in South Carolina and Florida.
Based on the performance of those first eight sales centers, we reopened in additional 34 sales centers in July and by the end of September we expect nearly all of our sales centers to be reopened as long as Hawaii loosens their current restrictions.
With occupancy building propensity to assure has been encouraging with most customers choosing to meet in person versus virtually.
While tour flow is not close to pre coated levels vpgs have been very strong with tours skews more to owners than usual.
Meanwhile, the resort management and finance businesses in our vacation ownership segment, we reinforce the strength of our business model this quarter generating more than $135 million are very high margin revenue.
Not surprisingly, though with the occupancy is in the single digits in April and May and all of our sales centers closed until June this wasn't enough to completely offset the softness in our development and rental businesses.
The story it interval international during the quarter was similar to what we saw an indication ownership business.
Early on with nearly 1300 resorts closed or not taking new reservations exchange and rental volumes declined substantially on a year over year basis.
By the end of June the number of close resorts was around 600, and we're now down to less than 240 resorts that are yet to reopen.
As you would expect with resorts reopening exchange transactions began to improve with volume and June growing year over year assisted by some pent up demand.
As you May remember many of intervals members renew their membership when they transact so with year over year exchanges down 12% in the quarter, it's not surprising to see membership being 4% lower than March.
Looking forward owners confidence in travel remains relatively strong, but with Covance cases rising as it is somewhat soft.
Owners came back strong during late May and June but at plateaued in certain markets exchange transaction growth has also soften somewhat from the June highs.
Understandably consumers are concerned about a potential separate and second virus wave, which appears to be affecting their near term willingness to travel.
At the same time, according to arda more than 50% of those surveyed are more likely to travel if they could cook in their unit, while nearly 70% would be willing to travel in the next six months of they could drive to their destination.
With a larger square footage in our units compared to the average hotel from Intel ROE the majority of which have full kitchens and more than 80% of our U.S keys on the mainland I believe we are well positioned vis-a-vis other companies in the hospitality industry.
So where do we go from here.
As of now excluding Hawaii owner and exchanger reservations are roughly 90% of those on the books at the same time last year with a fourth quarter numbers improving sequentially from the third.
We currently have nearly 30000 tour is scheduled for the second half of 2020, excluding Hawaii about the same number we had at the end of April.
And with very few customers opting to cancel their preview packages. Our total tour pipeline is roughly the same as it was at this time last year.
With the churn and business from April lows, we've been able to bring back more than 4000 associates from furlough, primarily in our resort operations group.
But given the uncertain peso the recovery we have also extended furloughs for around 40% of our team too early October.
As we talked about last quarter, we have loader lowered our inventory and other spending by roughly $300 million for this year reduced our operating costs improve our liquidity and as John will discuss close to $375 million securitization transaction with very attractive terms just last week.
We continue to actively pursue business transformation through the redesign and implementation of a more effective and efficient operating model.
Since we closed on our merger with Iotg nearly two years ago, we've made significant progress combining and integrating the best of both businesses, while gaining new perspectives on the key success factors that will most effectively position us to lead our industry no matter what the future brings.
We anticipate these operating model changes along with other cost reduction measures will help propel our organization forward as we can continue on the path towards recovery.
To summarize.
With leisure travel leading the recovery, we're seeing much improved occupancy is in many of our drive to markets. We've already reopened more than half of our sales centers and we're seeing a solid customer propensity to toured our results by the end of this quarter, we expect nearly all of the remaining sales centers to reopen.
Our high margin stickier revenue businesses performed as expected in the quarter delivering more than $150 million of revenue.
We continue to actively pursue business transformational opportunities across our business.
Through the redesign and implementation of a more effective and efficient operating model and.
We have gone above and beyond to help keep our associates and customers safe, while making smart decisions for our shareholders to ensure that we remain in a strong financial position for the future.
With that I'll turn the call over to John.
Thanks, Steve and good morning, everyone I'd like to take a few minutes to speak about our second quarter results. The actions, we take into lower costs and manage our cash flow in the overall strength of our balance sheet that liquidity position.
Our second quarter results reflect the impact to our vacation ownership business very low resort occupancy and closed sales centers in April and May as well as lower transaction revenues and resort closures in our exchanged in third party management businesses.
As a result, our adjusted EBITDA for the quarter reflected a loss of $10 million.
Looking first at our vacation ownership business, while our stickier resort management and financing businesses. Each provided a strong contribution to our results. This quarter. It was more than offset by losses in our development in rental businesses as a result, our vacation ownership business loss $19 million of adjusted EBITDA in the case.
Order.
Contract sales in the second quarter were $30 million the majority of which came from the enhance phone sales program that we launched in early may with our physical sales centers closed.
As resort occupancy is began to steadily improve starting in late may as stage started to relax. The restrictions we began reopening sales centers in the first week of June primarily in South Carolina in Florida, and we had eight sales centers back in operation by the end of the quarter.
Our immediate focus at our sales centers was on in house marketing and channels and we've been encouraged by owners propensity to tour.
We've also seen strong VPG is driven by higher discounting and promotional activity as well as a larger percentage of owner sales, however, with lower occupancy and limited preview packages tour flow was substantially below normal levels.
Given the limited contract sales in the quarter, we were unable to fully leverage our fixed marketing and sales costs, resulting in a $19 million development margin loss in the quarter.
These results included $21 million of favorable report revenue Reportability in the quarter as we benefited from Q1 contract sales that were not recognized as revenue until Q2.
Given the limited contract sales in Q2, we had a much smaller deferral of revenue into Q3, all of which will impact our third quarter results, which I'll discuss in a moment.
Development margin in the second quarter was also negatively impacted by roughly $5 million of unfavorable product costs true up activity and $4 million of higher sales reserves in the quarter.
We continue to see higher default activity across the portfolio, particularly in our acquired share to it in Weston brands as I mentioned during our year end call. Some of this performance relates to loans that were originated under sales in underwriting standards used by I LG prior to our acquisition, which we have said.
Since optimized these include reduced down payment requirements for buyers with sub 600, FICO scores and less qualified off premise for OPGC marketing channels with little or no income qualifications for potential buyers.
For our owners, who have temporarily loss or income or a substantial portion of their income due to the virus. We continue to work closely with them differing loan payments, where we can as we work with our owners to help them transition through this difficult time.
Today, we're very encouraged that only roughly 1.3% of our borrowers have taken advantage of this program speaking to the credit worthiness of our owner base.
Our resort management business generated $51 million of profit in the quarter $19 million lower than the prior year as expected. The stickier management fees were the primary contributor in the quarter with revenue growing 4% year over year.
However, this was offset by $24 million of lower ancillary results due to the closure of these operations for most of the quarter as occupancy started to improve we have started to reopen some of these outlets.
Turning to our rental business with transient keys rented down, 93% and transient rate down 15%, our rental business generated a $75 million loss in the quarter.
As we have mentioned in the past the majority of our rental expenses are relatively fixed in nature, including maintenance fees on our unsold inventory and costs related to owners, who exchange for hotel loyalty program points or vacations through our explorer program.
So with revenue down so much in the quarter. It had a substantial impact on our profitability. As reminder, we paid for most of these costs earlier in the year, but for EBITDA purposes. They are expensed over the course of the year, including roughly 75% of the rental expense in the second quarter.
We expect our rental business to continue to generate losses through the end of the year, but with most of the 2020 rental expenses already paid for we expect cash flow to improve considerably as revenue grows.
Lastly, our stickier financing business continues to perform extremely well with revenues and profit relatively flat year over year. Despite lower note originations due to reduced contract sales.
Turning to the exchange in third Party management segment exchange transactions at our interval business started the quarter soft as nearly 1300 resorts that members can normally exchange into where either closed or not taking reservations, but as the quarter progressed in more and more resorts reopened exchange transactions began to improve.
The 50% decline in exchange revenue for the quarter was mitigated by the stickier membership revenue, which was down around 10%.
Revenues that are onquest of hospitality business, which generates most of its revenue in Hawaii were negatively impacted by the same visitor restrictions that Steve mentioned.
We were able to offset some of these lower revenues through cost savings, but as John adjusted EBITDA for the segment declined 59% to $19 million.
DNA expense declined $45 million from the prior year quarter. This decline related to roughly $14 million of lower costs associated with furlough and reduced work week programs as well as synergy savings $10 million of bonus related cost savings given the updated financial projections for the year. So.
$6 million due to a tax credit under the cares act and $15 million from lower overall spending across the business on technology projects travel trading and other different discretionary spending given the impact of the virus.
Moving to the balance sheet and liquidity position, we ended the quarter with $566 million of unrestricted cash $47 million of gross notes receivable that were eligible for securitization and nearly all of our $600 million of revolver capacity available to us.
We had 4.6 billion in net debt outstanding at the end of the second quarter, including $2.7 billion of corporate debt and 1.9 billion of non recourse debt related to our securitized notes receivable.
We have no corporate debt maturities until September 2022, which is our convertible notes and thats only $230 million as we discussed on our last call. We raised an additional $500 million of senior notes in May and we also amended our credit agreement to suspend our first lien covenant through.
Through the first quarter of next year.
We also completed a $375 million nodes securitization last week the blended interest rate was 2.5% in the advance rate was 98%, making it one of our most successful ABS transactions ever.
The operating was substantially over scrap oversubscribed, including many new investors, who haven't participated in our Securitizations before we expect this transaction to generate approximately $53 million of net cash.
Now before we moved the Q and I would like to talk about our expectations for the third quarter.
Given the current rising cobot 19 cases, we have limited visibility on whether the recent recovery will be sustained sustainable in the near term.
Assuming we don't see key markets shutting back down we expect occupancy is for the quarter could be flat to up slightly versus what we saw in July Hawaii remains the biggest question mark on whether or not it reopens is currently scheduled on September onest.
As a result of occupancy is being roughly half of normal levels and our decision to not reopened most of our linkage and off premise marketing channels in the near term, we expect tour flow could run 60% to 70% lower than last year's third quarter.
We are pleased with the response from our owners in gas who have been very willing to attend in person sales presentations and with discounting and incentives. We are offering VPG has been higher than pre pandemic levels.
To the extent tours and VPG remain in line with July levels, and we don't experience any further delays for Reopenings in Hawaii, Zohr shutdowns contract sales in the third quarter could be between 120 and $155 million.
Typically I wouldn't expect revenue reportability to have much of an impact on our third quarter adjusted EBITDA, but with a limited number of contract sales from the second quarter being recognized in the third quarter, we could see revenue reportability negatively impact our third quarter, adjusted EBITDA by $10 million to $20 million.
So notwithstanding the strong sales improvement we expected in the third quarter, the sequential quarter to quarter EBITDA growth in the underlying business could be potentially offset by up to $40 million of reportability differences given the positive reportability.
I discussed in Q2.
As we've discussed in the past affordability is only timing, but given the negative reportability in the third quarter. We currently expect our reported development margin to be slightly negative.
In our resort management business, we expect the higher margin management fees to increase in the third quarter on a year over year basis, while we continue to maximize our ancillary revenue as occupancy has improved we expect results will still be down on a year over year basis as I mentioned, even though we have already paid for roughly seven.
85% of our annual rental costs, approximately 140 million of these costs will be recognized as expenses in the second half of the year, while transient rental revenue is returning we do expect to continue to incur rental losses do the balance of the year. The good news is that we have limited variable rental costs yet to be incur.
Third against the rental revenue so as revenue grows it will improve our cash flow outlook over the course of the year.
In our exchange in third party management business, while transactions that are interval business improved substantially through June they have moderated a bit and Aqua Aston results will continue to be impacted until Hawaii changes this restrictions on visitors.
Finally, with the cost actions, we've implemented gionee costs could be down in the 40% to 55% range in the third quarter.
Turning to our cash flow outlook in May I provided a cash burn rate of roughly $10 million per month for the remainder of the year that projection assume contract sales would be limited rentals were not resume at all in 2020. The exchange business would be can would continue to be down substantially and we were.
Not be able to completed terms securitization this year.
As we've already begun to reopen sales centers and have completed a securitization transaction and assuming occupancy remained at least in the levels. We saw in July we now expect to generate positive cash flow for the second half of the year. This is an obvious improvement from what we anticipated just a few months ago.
As Steve mentioned, we brought back more than 4000 associates and still have roughly 40% of our people on furlough with another 16% on reduced work week or reduce pay we also continue to defer a substantial amount of inventory and capital spending across the business to preserve cash these are very hard choices, but we.
I think we can manage at this level until business further returns.
Finally, we are focused on the integration and transformation of our business, including the technology and organizational changes necessary to position us best through the recovery as well as growth opportunities that may present themselves.
With that Stephen I will be happy to answer your questions Michelle.
Thank you we will now be conducting a question and answer session.
I'd like to ask your question. Please press star one.
Hey, confirmation Tony will indicate your line is in the question Q.
Sorry.
Thank you and your question from the Q.
Hi, Justin Sequera Morgan you may be necessary to pick up your handset before passing the sir.
One moment please.
Question.
Our first question comes from the line of Jared So Jason with Wolfe Research. Please proceed with your question.
Hi, good morning, everyone.
I wanted warning.
Good morning, so persist.
Point of clarification nine and appreciate all the data you provided here.
Third quarter the contract sales. The 120 to 155 are you assuming that Hawaii is open for the full month in September is that the assumption.
Yes, yes, although as you might imagine.
You can't just flip a switch and all of a sudden Europe at full volume, but we would think it will it will it will build through September yes.
Got it thank you and he said tour flow.
I think you said in July or maybe for the third quarter down 60% to 70% that's about what you're guiding on contract sales for the quarter as well are you not getting an outsized BTG offset right now he is talking about that a little bit.
Actually tour flow is down through through yesterday in July closer to 75% VPG is in fact.
Up about 40% on a year over year basis for the month of July.
So and keep in mind, there's there's there's not a straight line you can't take the midpoint of 120 to 155, and and then divided by three and Thats. What you run per month end of July and is stronger than August as you have some people returning to school et cetera.
The end of August in the beginning of September then it picks back up so yes, we are seeing VPG growth rather substantially meaningfully it stands to reason where the vast majority of the tours that we are taking our from owners.
And and they're running a very nice VPG and I wish I could say its four bodes what the future holes on an ongoing basis, but I think over time as more first time buyers come back you'll start to see that come down.
Okay. Thank you that's that that's very helpful.
And then I guess prior to co bid one of the industry's talking points. So is that in a recession you don't have to lower price the way hotels gain because your inventory is non perishable.
It sounds like there maybe some discounting going on just based on some of the commentary you gave so can you maybe elaborate a little bit on that and maybe just some of the pricing that you're you're getting right now how does that compare.
Significantly obviously, maybe thats close rate driven in large existing owner mix effect, but how does some of the pricing compare that you're getting right now versus a year ago.
Yes, Jared I am not I'm not sure.
I don't think we were one of the folks has said that we will never discount I mean, I'll I'll harken back to the kind of the great recession and one of the things that we did was we went back to our existing ownership group and we offered.
Some meaningful discounts to our product back then to stimulate some demand.
So.
And we had said even at the end of the first quarter call that one of the options that we have was to do some discounting. So yes, we did do some discounting on our points.
We did roll back those points plus we have provided an additional incentive for people that were paying and cash.
The good news is that obviously that helped fuel some of that 30 million that we gotten roughly a month.
And 60% of the sales that we got.
We're in cash with that said now as we enter August.
We are going to begin to dial back some of those incentives and for instance, cash and finance sales will be priced in the same fashion.
And I would think that.
We will continue to look at ways to.
Got to stimulate volume, but good point to make is the right one which is while your average contract price maybe lower because at some of the discounting you're going to do the closing rates are substantially higher which gives you. The effect that you are looking for is that people that are interested in buying say hey, this is a pretty good deal, particularly for those that are.
Our existing owners and they say I'd like to put some more points in my portfolio and they do it in an attractive price.
Great. Thank you very much.
Thank you.
Thank you next question comes from the line of Patrick Hill with Suntrust. Please proceed with your question.
Hi, good morning.
Good morning warning.
You talked to you talked about.
Your pre sold package tours bleeping roughly in line with this store cold or last years levels for the rest of the year.
Obviously.
Matt Hawaii, obviously is a big concern about reopening in those people towards what percentage does the Hawaii represent.
Well.
Hi, So we can get that we don't have that I looked at our fingertips, but what we're seeing on that on the tour side Patrick the pipeline remains strong it's relatively flat to where we were at this time last year Roe.
Yes, we went through a period of time, where we weren't selling new packages here in the second quarter. However, obviously with resorts clothes people aren't taking the tours I think the positive point is that.
Yes that package pipeline remains strong in the nearer term what we've seen is some of those folks pushing their vacations outright not surprisingly they want to travel, but maybe there are a little bit more concerned. So when it gets closer we have seen folks not can't solar asked for their money back, but pushed the timing of that that path.
Package or their vacation out and so that's where it's kind of hard to gauge I mean, we could tell you what's on the books, but theres a good chance that some of that will get pushed out.
The nice thing out of the one point I do want to make about Hawaii too as you think about fly to.
Resorts that we have.
The few that we've opened have come back really strong relative to even our drive to reach absorbed so take say Thomas in Saint John where our yes, we're already running 60 70 plus percent occupancy.
At those two resorts.
The Aruba really just opened here a few weeks ago for us folks and we're already up to 40, 50% occupancy in Aruba, So that all bodes well for when Hawaii Lipsitz restrictions I think when you think about our owners and their propensity to fly so.
Yes, we're seeing a good rebound on some of those markets.
Okay.
Thank you and then just one question on clarification, when you talk about cash flow.
In the second half the year to be positive is that in is that.
Assuming additional securitization in the backup.
For the rest of the year.
No what we what we would assume is that we have our warehouse Patrick and so obviously.
Yes, we can securitize those notes, but just given our volumes, we just cleared out all our sellable notes in the deal. We just did and given the sales numbers I gave you.
We wouldn't necessarily have generated things got really well, maybe we'd have enough notes to potentially do a deal later in the year, but most like we were looking at our next deal in.
First quarter sometime next year.
But like I said it would include the ability for us to monetize that paper at call. It roughly an 85% advance rate in our warehouse facility.
Okay very good. Thank you that's it for me.
Yep, Thanks banker.
Thank you. Our next question comes in the line of Noncore with JP Morgan. Please proceed with your question.
Good morning, Hi, Good morning, everyone. Good morning, everyone. Thanks for thanks for taking my question. Thanks for all these details.
You guys gave some great color on the total pipeline packages you talked about occupancy.
He said that the propensity for owners to tour was with strong I was wondering if you could just flesh that out a little bit in terms of maybe how that's trended sequentially and any other color. You can talk a you can give us on the health of the consumer and how they're sort of behaving I think thats the missing link for us to understand.
The full the full channel there.
Sure so.
As as occupancy starting to build.
Led predominantly by owners.
Turning to the resorts.
We offer them two different options and obviously, we already started the the tele sales activity that was started towards the end of May and that was continuing so those are not people that were at the resorts, but people there were at the resorts, we gave them two options.
Either they could go through a traditional tour and our sales center, obviously with all the proper protections plexiglass et cetera, et cetera, et cetera, or we could do with virtually full with them in their villa where we would be on the phone and.
And they can see us and that kind of thing and do it that way we thought.
There might be some reticence for people to come into our sales centers that has not materialized. In fact, the vast majority of the people that are staying at our resorts are more than happy to come to our sale centers. The good news is that through our pre arrival communication. We've made them aware of all of protections that we put in place and everything else I think that gives them.
Hi, a greater sense of security, knowing that they're not going to have undue exposure and alike and obviously, we're scheduling tours, so that theres not a large groups of people at any one point in time.
So that's really the message here.
The feedback we have gotten from our owners.
Based on their experience not only in the sales center, but in the course of staying at our resort while they're on vacation has been very positive and been very comforting to us because we work very hard to try to figure out how we can do this in a way that people would feel as though that they were not putting their health at risk by coming on vacation.
Or via talking to us about becoming an owner or increasing their ownership percentage.
Understood. Thank you for that Thats helpful and then on the related topic.
On the package sales programs.
I think one concern some people have is that that those and might not be you might be peers or maybe the industry.
On the whole, but that that forward package sale programs have been slow down or the engines has slowed down and thats created maybe.
An air pocket in new owner tours.
Next year and potentially into 2022, and so I guess the question is if you have you have you slowed those engines down have you turn them back on and how long or how long could you go with a reduced sort of forward new owner packaged tour sales program.
Sure Let me, let me see if I can walk you through the arithmetic.
You have a certain number of tours kind of the beginning of the cobot crisis.
And you had tours that were scheduled to arrive in the second quarter that never came.
They have deferred their arrival to a later point in time as I mentioned in my remarks, only 4% of the people.
Have actually cancel their package. So think of it is there the package pipeline as aged a bit in that same second quarter. We turned off the engines to drive new package bookings because quite frankly, it didn't make a lot of sense to us.
To go out and talk to people and say Hey, why in Chicago and take a preview package on this when they were concerned about travelling in general and everything else. We have begun to very selectively a very slowly dialed back up predominantly in the digital space as well as some marketing through the lit the.
Loyalty programs, which we've gotten some good response due to start to reactivate and bring back more packages into the pipeline. So.
Bottom line is the same number of packages that didn't arrive in the second quarter also didnt get replaced in the second quarter. So that same total.
That is about the same I think thats, probably the easiest way to think about it yes, I'd just add I mean, so if you think about it to for next year given.
The pipeline still remains very strong.
Yes, you're not going to see much of an impact I don't think next year.
The risks may be that you're talking about is it if we don't ramp it back up here. Since these packages just generally take 12 to 18 months before they are activated it it could be more of a 2022 I think if we do it right to Steve's point, well, we'll continue to ramp up the packaged tours, we got visibility in that depending on what the market.
It's doing to replace those that are happening and continue to keep that strip that strong pipeline as we go into 2022.
Great all right. Thanks, guys appreciate it.
Yes. Thanks.
Thank you. Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.
Hi, Chris Hey.
Hey, good morning, guys.
Wanted to ask you as you think about reopening sales centers or keeping them open if the virus numbers fluctuate a little bit what what's the decision what makes sales center profitable enough to keep an open versus having to shut it down or maybe it's just more more issue of reduced staff.
I think levels, how do you guys look at sales center level profitability.
Yes so.
I mean, clearly the first and foremost thing we wanted to focus on.
When we opened those first eight was to make sure that at least they were.
Cash flow accretive and so we didnt bring back to a full staff we've brought back the top of our line.
So we had our very best salespeople in any given sales center. There are some that are better salespeople that are stronger than others. So we wanted to make sure we had the best folks there.
Same thing on the marketing and administrative support personnel.
So we were able to modulate those numbers.
And and if tour flow work to meaningfully fluctuate.
South of where we are today, we can take additional actions and.
We can continue to downsize the line et cetera, if we need to.
Hopefully.
It will never come to a point, where we'd have to re close a sales center that we had reopened but that's always one of the tools that we have available to us should that be the case again. The most important thing is trying to make sure that in their cash flow accretive.
And and we go from there.
Okay. That's helpful. And then wanted to ask how you think about inventory costs a couple of years.
Now because you you may have the opportunity to take back a small leveled inventory maybe that's the Sheraton West and then other opportunities might come up right to acquire inventory it.
Stress levels. So I mean is it fair to think that two three years from now your cost of inventory is lower than it was in say 2019.
Yes, I mean.
It's too early to tell you are right I think there could be some opportunity there.
Depending on the length of the economic impact that Cove. It has.
And whether there's an opportunity to potentially buy more on the secondary market or not at lower costs as a mix percentage.
The other one as you pointed out to a higher level is.
If this does have a bigger impact on the lodging industry, maybe there's some opportunities.
We're a year or two out where there could be some distressed new new product opportunities that type of stuff. So.
Clearly probably an opportunity at some level, but like I said little bit too early to tell yet how thats going to play out.
Okay fair enough very good thanks, guys.
Thank you thanks.
Thank you. Our next question comes from the line of Cowen New though with Jefferies. Please proceed with your question.
Hi, good morning, gentlemen, thanks for taking the question.
Good morning, a lot of.
A lot of the questions have been answered maybe jump into some clarification points.
The ABS securitization that you just announced the terms are really good.
And I'm just wondering what drove that you mentioned some.
First time buyers were involved in there just just wondering if the size of the loan pool had anything do with what really drove shrink.
Yes, I mean.
Part of it is we.
Always do very well on the securitization market we've got.
Not only was there a big chunk of new investors, but we've got the normal investors that like our paper they know how it performs.
I mean, we were generally call. It 20 times oversubscribed on orders meeting for $375 million a paper, we had initial orders of book for over $6 billion. So.
When you have that type of interest in your paper. It allows you to drive.
Better pricing and that that's kind of what we saw so I think it just goes back to.
Our program and how well, we typically execute in that market.
Understood and just a follow up for me regarding the deal why.
Guidance for the third quarter of 1.1 fit the that you said that includes Hawaii ramping up through September are you able provide a number excluding hawaii should the governor push out a few more days.
No I mean, it's yes, I mean, it would be one month of Hawaii remember not ramping up through the quarter wise not open today.
And obviously as we get closer it will depend on occupancy and everything else you got to remember right now our focus is on in house owner sales et cetera, as we as we reopened these sales centers. So theres a lot of variables there what I can say is yes.
If we're going to get to the higher end of our range, we need Hawaii kind of opened up in and ramping in September but.
It's hard to kind of break it down at that level of detail at this point and just just to add to that.
The governor's behavior.
It has been he does things on a month by month basis.
The unlikely for him to say well instead of September Onest. Since September 15, I would suspect if he were to come off of the September Onest number, which we hope we won't.
That he would say its October November or whatever it is.
Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Tyler before.
Give me Tyler inventory with Janney capital markets. Please proceed with your question.
Hi, Tyler.
Hi, good morning, Thanks for taking my question.
My first question just in terms of default activity and can you give a little more detail on what you're seeing there and I know you're offering a program for borrowers to deferred payments. So what's the criteria for that program. How many customers are using that option currently.
Sure.
Right now we've seen caught about 1.3% of our borrowers ops or beat or qualify I should say.
For the deferred payment program, which essentially is either you lost your job or at least 30% of your household income because of the cobot 19, so very manageable in terms of the percent of people not surprisingly you saw that.
Shoot up fairly high in April in early May and then has since kind of really come down to a small amount of people at this point that are calling and asking about the program. So.
And another just a little bit of color I mean, we've seen.
Of the people that have gone on the program because of deferral was a essentially we stop credit reporting.
We gave you a 90 day to for all know payments and then in the fourth month.
Your first start making your normal monthly payment and caught one night of the three month deferral. So that at the end of a full year right you're back to correct.
We've seen of about half the folks that had their first payment due already I'd there in their fourth month of the deferral program.
Got a third have started making their payments already so.
Now that's fairly positive relative to the 1.3 present, we are seeing people's going back to making their payments and all that still early stages, but we feel pretty good about where we're at there.
Okay, and just a follow up can you talk a little bit more about the membership decline in the interval international business, how much of that was due to lower inventory available lower transaction versus potentially some other factors that might be out there.
Yes, I Todd I don't have a number to share with you there because it's not exactly why attract let me let me just see if I can help you understand how it works typically speaking when one of interval member calls to say, Hey, I'd like to exchange. My my ownership, we can resort X for going someplace else.
Yes, that's when the interval agent will remind that member that their membership is due for renewal and at that point in time, Oh, Yes, I forgot. Okay. We'll go ahead charge my credit card for the renewal and off it go so as the request for exchange went down it is law.
Jekyll to think that.
The number of people that would be calling in where we would remind them of the renewal.
Has gone down we think this is a temporary pause.
Because people will in fact as we saw in June start to re energize about wanting to do exchanges and we'll see membership revenue continue to drive to go up again, so I don't want to overreact to that that that decline.
Hearings have to say that I think it's more.
Just a.
Away in which the transactions have flown through obviously, we are doing other ways to remind people that their memberships are are are coming due but to be honest with you can you can send them an E mail you can drop a piece of mail in the mail to them.
Until they are they know that they can't exchange without renewing their membership they may not be as inclined to.
React as quickly as we'd like.
Okay, Great. That's all for me. Thank you.
Thank you.
Thank you we reached the end of our question and answer session I'd like to turn the call back over to Mr. wide for any closing remarks.
Thank you very much.
Thanks, everybody for joining today's call as we've always said people, especially timeshare owners want to take vacations and the recovery we've seen across both our vacation ownership and exchange businesses in just a short amount of time is proving that to be true.
Customers are returning and occupancy is have improved considerably, particularly at our drive to locations.
Approximately 70% of our sales centers have already reopened and we've been very encouraged as sales begin to return.
Exchange transactions and interval have improved considerably.
And our high margin stickier revenue businesses performed as expected delivering more than $150 million in revenue in the quarter and we executed one of the best securitization deals in our history.
Still with co the cases, continuing to rise the near term trajectory of recovery is uncertain.
That's why we're continuing to aggressively pursue transformational opportunities across our business to create a more effective and efficient operating model and we are doing everything in our power to make smart decisions for our associates guests and shareholders.
As always thank you for your interest to Marriott vacations worldwide take care of yourselves and finally to everyone on the call and your families enjoy your next vacation hopefully soon.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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