Q3 2020 Marriott Vacations Worldwide Corp Earnings Call

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Always next year reading welcome to marry applications worldwide third clutter Twenty-twenty earnings call. At this time, all participants are done listen only mode. A question and answer session will follow the formal presentation. If anyone's require operator assistance during the conference. Please press star zero on your telephone keypad. Please note.

This conference is being recorded I will now turn the conference over to kneel Goldner, Vice President Man, that's really anxious they could maybe get.

Thank you Sherri and welcome to the Maryanne vacations worldwide third quarter of 2020 earnings Conference call.

I am joined today by Steve Wise, President and Chief Executive Officer, and John Geller, 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 can 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 of different materially from notes expressed in or implied but our comments.

We're looking statements in the press waste that we you should last night, along with our comments on this call are effective only at the time issued and will not be updated as actual events unfold.

Throughout the call, we will make references to non-GAAP financial information you.

You can find a reconciliation of non-GAAP financial measures referred to in our remarks, and the schedules attached to our press choice as well as the Investor Oasis page and the financial information page on our website.

It's now my pleasure to turn the call over to Steve Wise, President and C E O of Marriott vacations worldwide.

Thanks, nail and good morning, everyone [laughter] excuse me for some time now we've been telling investors that we have a resilient business model looking at the performance of our stickier resort management financing and exchange membership revenues this quarter, coupled with the recovery and contract sales rentals and exchange transactions.

I believe we took a significant step forward improving our point.

Following the challenging second quarter, when Covid was still new to many of US are third quartersaw significant improvements in both on vacation ownership and exchange businesses with revenues and margins delivering meaningful improvement compared to the second quarter.

While we still have a long way to go before fully we fully recover the third quarter was a major next step in that journey.

So let me start with our vacation ownership business.

Ever since the start of the pandemic, we believe that typical timeshare unit with much larger square footage than the average hotel room and more amenities such as for kitchen, and laundry facilities, coupled with a prepaid nature of are offering positioned us to leave the recovery and the lodging sector.

Order with October occupancy is running in the 40% range.

In Hawaii occupancy is we're in the single digits during the third quarter as non resident visitors were required to self quarantine for 14 days upon arrival.

Hawaii did reopen new stores to visitors on October 15th and we've seen a gradual build since then with occupancy is averaging in the high 30% range over the last couple of days of the month with our resort on Oahu already exceeding 65% occupancy this past weekend.

With occupancy is beginning to improve in June and continuing across the third quarter. We reopened 36 sales centers in July adding another four between August and September followed by the reopening of seven Hawaii sales centers in mid October this.

This leaves only a handful of our smaller and some urban sales centers yet to reopen.

Vpgs were again very strong during the quarter, increasing 13% year over year, and North America VPG was up nearly 30%, excluding Hawaii benefiting from the higher mix of existing owners higher promotions and our decision to bring back our highest performing sales associates first.

Tours improved substantially from the second quarter, and we had nine sales centers generate at least 75% of their prior sales this quarter, including two that actually exceeded last year's sales driven by strong occupancy at those resorts.

As a result contract sales were $140 million in the quarter, representing a meaningful recurring recovery from the second quarter.

Within the other parts of our vacation ownership business are stickier management fees delivered 4% revenue growth in the quarter.

Our financing revenue declined 9% in the quarter, a sharp contrast to the decline in contract sales, reflecting the recurring nature of this high margin revenue stream.

Our interval international business also experienced a notable recovery during the third quarter.

Interval exchange transactions were up 1% on a year over year basis, including a 20% improvement during the month of September this.

This reflected members' desires to travel as well as some pent up demand now that more than 90% of intervals affiliated resource have reopened.

Active members were down 2% from the June quarter, while member retention improved compared to the prior year normal attrition was not offset by new members coming from the developer sales channel due to resort closures or their decision to close sales during the pandemic.

Average revenue per member increased 22% sequentially from the second quarter, reflecting the recovery in member transactions and getaway rentals, but.

But even more encouraging is the fact that adjusted EBITDA margin for this segment improved 180 basis points year over year this quarter.

View that as an impressive accomplishment in the midst of a global pandemic.

Before turning the call over to John I want to talk about our synergies and our incremental cost savings opportunities, which we announced yesterday.

The pandemic has caused us to operate very differently and has caused us to think about what doing business and a postcode world might look like.

We also sharpened our pencils during this time and uncovered additional synergy and cost saving opportunities as a result, we increased our synergy and cost savings target to at least $200 million $75 million above our previous goal.

We expect these to be permanent cost savings that will not return with volume and we and will help us drive substantial margin improvement going forward.

I'll, let John discuss this in more detail in a moment.

So now that Weve reopened most of our sales centers, let's talk about where we go from here.

We still have a few sales centers that haven't reopen I suspect some of those won't reopen until next year, but with most of our major locations up and running I expect us to continue to grow contract sales going forward.

We expect tours to increase substantially compared to the third quarter driven by a combination of higher packaged tours and increased occupancy.

And overall exchange transactions were up double digits for the months of September and October which is encouraging.

Owner and exchanger reservations for the fourth quarter, our roughly 93% of those on the books at the same time last year.

Hawaii, which represented more than 20% of last year's contract sales reopened on October 15th with encouraging occupancy trends, thus far while Orlando continues to improve.

$35 million of adjusted EBITDA for the third quarter once again, demonstrating the strength of our leisure focused business model look.

Looking first at our vacation ownership business are stickier resort management and financing businesses. Once again provided a strong contribution to our results this quarter, enabling our vacation ownership segment to deliver $28 million of adjusted EBITDA.

Difficultly better.

Then the decline in contract sales due to the stickier nature of these revenue streams and financing profit was $40 million.

As I mentioned in the past the majority of the financing revenue we generate in any given year comes from prior year note originations, so even with a 64% contract sales decline this quarter are financing business held up well.

Meanwhile, excuse me. Meanwhile, we continue to work closely with owners, who have temporarily lost their income due to the virus differing loan payments, where we can by the end of the quarter roughly 1.4% of our borrowers had taken advantage of this program speaking to the credit worthiness of our owners.

In addition, nearly 40% of these borrowers who had a payment due by the end of the quarter had made it which is also a good sign.

Finally in a rental business transit keys rented were down 61% during the quarter due to the pandemic, but we're up substantially on a sequential basis, reflecting the recovery, we're seeing in a rental business.

Transient rate was down 10% year over year, but here too we saw an improvement from the second quarter for the third quarter, a rental business generated a 40 million dollar loss, a $35 million improvement from the second quarter and I expect the loss to narrow further in the fourth quarter.

Billion dollars in debt outstanding at the end of the third quarter, including $2.7 billion, a corporate debt and 1.8 billion of non recourse that related to our securitize notes receivable.

We had no corporate debt maturities until September of 2022, which is R convertible notes and that's the only $230 million.

From a leveraged perspective are secured debt to adjusted EBITDA was two four times, which is below are three times covenant requirement. As a reminder, we also amended our credit agreement in May to suspend our firstly covenant through the first quarter of next year.

As we've discussed in the past the acquisition of Iowa resulted in our combined vacation ownership business, having 160 to 220 million of excess assets.

By the end of last year, we had already generated more than $60 million of disposal proceeds and we made further progress during the quarter disposing of several parts level up several parcels of land for $15 million of proceeds at values that were in line with our pre covid expectations.

We expect the disposal of the remaining assets to generate around $90 million to $140 million over the next couple of years.

When the pandemic hit we were well on our way to delivering over $125 million of run rates synergy savings by the end of 2021.

But the pandemic caused us to temporarily stop some of the work on these initiatives, providing us an opportunity to further challenge how work could get done more efficiently.

Analogy and the revenue drag from coated replacement certificates I mentioned earlier EBITDA could be down slightly on a sequential basis in the fourth quarter.

Finally, with all the cost reductions we have implemented DNA could be down in the 50% range in the fourth quarter compared to last year.

Turning to our cash flow outlook with most of our sales centers now opened we now expect to generate at least $130 million of total cash flow for the second half of the year.

With that Steve and I will have we will be happy to answer your questions Sherry.

Thank you if you would like to ask a question. Please press star one on your telephone keypad a confirmation till indicate your line is in the queue. You May press star two if he would like to remove your line. Thank you.

Last year, but obviously there is a lot of work that we need to get done.

Got Ya I appreciate it and then I guess in the in the slide deck, you mentioned three buckets of marketing technology I T infrastructure.

Is there any more color on any of those buckets that.

Be able to provide at this point.

No I mean, you look at at high level I mean, we were back at the beginning of the year go at with the 125 or more obviously, the or more we were working on a lot of things internally and we saw path forward even back then for probably another.

$25 million to $30 million of synergies around.

Some of the same things that were in the 125 right. So a lot of it the common theme is where can you leverage technology.

October exceeded our internal forecast by a not insignificant amount.

Which gives us some level of confidence I mean that the obviously the one thing that none of US has any visibility into is if there is a huge spike in cases, if theres a.

Meaningful cut back in.

Travel or local government regulations et cetera, I think all bets are off and I would say that for not only our business, but lots of businesses.

But.

What we've what we've done is we've taken the October results.

We have then looked at future bookings in terms of not only occupancy, but also tour arrivals for November and December.

Advantage of that so it isn't a normal quarter, which also makes it very hard Steve walked you through how we kind of pulled it together but.

Yes, it is going to obviously depend on people continuing to travel and go on vacation.

Great. Thank you for that and then I want to ask a question just on Hawaii and I. Appreciate all that helpful commentary and stats that that you've provided and it does seem like Hawaii is slowly starting to improve nicely here sequentially.

Is it your expectation that maybe by the first quarter, Hawaii looks a lot more like some of your other beach front on mountain kind of resorts, where your lot closer to.

Prior peak volume levels on occupancy.

And then I guess also on Hawaii and the rental segment in particular rentals were pretty good story here in the quarter sequentially.

Sequentially.

As Hawaii have an outsized impact on rentals or should I assume that the contract sales mix for Hawaii is pretty similar on the rental side.

Yes.

The broad answer to your questions, we sure hope so.

Keep in mind, even when Hawaii reopens their doors on October 15th you had to have a negative cove and test within three days prior to arrival so.

So that does put some dampening effect on people, even going going there as we speak.

We hope that the that restriction will be further relaxed I mean, Hawaii is always been a very very popular vacation destination amongst our over group as well as exchangers.

So.

And it runs a very high annual occupancy I mean, the good news about Hawaii is there is very little seasonality impact.

So.

To become a member with us so in a sense, we have a short term product availability, we don't marketed quite that way, but we clearly think that there is something and when you say shorter term I think the other thing is we saw a lifetime product and I think what you're referring to if somebody says well I only want to buy it for <unk>.

Kind of forward thinking sales forecast, except to say the following.

We believe that Hawaii will meet.

Meaningfully outperform Q3, I think that kind of goes without saying given the fact that there was.

Virtually no volume in Q3 out of Hawaii.

But I'm not going to give you a specific number.

Yeah. That's why that's why I said it could be a qualitative answer me I think some some of your peers has.

Had said that contribution from Hawaii would be low even though it's open just because of how slow the ramp would be so I was curious as with you guys or Pennsylvania, and a fair amount of of ramping there, but that that's that's a pineapple.

Yeah, I've separately, let me get noon.

Yes, I'll answer the second part of your question first we're not seeing any material impact from short term cancellations big.

Because of the because of the virus.

I wont say there aren't any but they are not significant in nature.

The number I gave you the 93% number was looking at the fourth quarter number for owners and exchangers.

Versus where we found ourselves at the same time last year looking at the same two categories.

We have not disclosed what we think the first half of the year is going to look like.

The efforts, we are putting forward and the and the Vistana business to try and improve our operations there and we were clearly making very good progress in that before the pandemic hit obviously, when we shut everything down.

End of April and then starting to dial back up to summer. We you know, we we didnt have the full benefit of being able to do the rest of that but that work continues on but.

I wouldn't.

And less and less we can get to a point.

Where.

And this is all hung up and.

State licensing regulations and everything else, so unless you get to a point where existing buyers can.

Conveniently.

<unk> are you looking for to buy enough points for a larger unit or a different location closer to home further away from home as it is too early to tell if there's any big you know seismic shifts on on buyer behavior.

Yeah, we haven't seen anything in terms of a major shift in by her behavior keep in mind that Ah, particularly over the summer Ah the bulk of the people we've been talking to her as I said, our existing owners that are back at our resorts. They typically have a lower purchase annual you know for the for the contract because there simply adding.

Wants to a portfolio, but for the first time buyers the numbers are not anyway and materially different in any way shape or form from what we've seen prior to the virus.

Typically you know I I think you know this that over a period of the first five years you know the average average sale going is about $30000 and over the next five years typically the somebody will generally by another $20000 worth of the product and so we haven't seen any chain.

And that probably too soon to see anything of a significant nature, but we wouldn't anticipated.

Okay very helpful. Thanks, guys.

Thank you.

Our next question is from Patrick childhood friend just please proceed.

Hi, Patrick Alright, good morning, everyone.

It looks like you're you're generating some significant or not insignificant cashflow in the back after the year year. How are you thinking about allocation of that cashwell going forward. Thank you.

Hey, Patrick Yeah, I mean, nothing's changed in our thinking I think of anything just the the recovery the resiliency.

Yeah, we still feel good about our long term leverage targets and all that obviously, we have a restriction on returning capital here while the the.

Covenant relief, we have on a revolver is in place.

We can opt out early depending on the recovery, but that's at least do the first quarter.

But.

I think as cashflow continues to come back we obviously have excess liquidity now we expect.

Assuming there isn't another shut down here that we will generate.

Think the recovery we delivered this quarter is evidence of that.

In the midst of a global pandemic, our vacation ownership business delivered sequentially higher occupancy increased revenues and $140 million of contract sales this quarter.

While our interval International exchange business improved as EBITDA margin by 180 basis points on a year over year basis.

And maybe the Best example is our expectation to deliver at least $130 million of cash flow in the second half of this year.