Q1 2021 Marriott Vacations Worldwide Corp Earnings Call

May 6, 2021

And 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 and we added to our website. This morning, as well as as well as our comments and this call are effective only onemain and will not be updated as actual events unfold.

Throughout the call we will make references to non-GAAP financial information you can find the reconciliation of non-GAAP financial measures referred to and our remarks and the schedules attached to our press release as well as the Investor Relations page of our website at IR Dot and VW C Dot com.

With that it's now my pleasure to turn the call over to CEO, Steve Wise. Thanks, Neal Good morning, everyone and thank you for joining our first quarter earnings call.

Okay and talk contract sales and exchange transactions grew substantially and a sequential basis during the first quarter exceeding our own expectations and fact six of our sales centers and the quarter actually exceeded their first quarter of 2019 levels, which is very encouraging.

And review of our vacation ownership Occupancies this quarter illustrates just how widespread the recovery has been.

For example.

Occupancy at our Florida Beach resorts average and the high 80% range during the quarter, including nearly 95% for the month of March.

Our Colorado, and Utah Mountain resort average.

Average over 85% for the quarter.

Or South Carolina resort ran almost 80%.

The C. During March as the weather improved and R. U S. Virgin Island resort average nearly 85% for the quarter.

Orlando and Hawaii two of our larger markets that had previously leg also continued to recover nicely.

For example, Orlando, which represents more than 20% of our North American keys average nearly 60% occupancy during the quarter, including over 75% during March and Hawaii, Excluding kawaii, which was operating under quarantine restrictions for the entire first quarter average over 70% occupancy during the quarter with.

March averaging nearly 85%.

The strong occupancies, coupled with the continued execution from our sales teams enabled us to achieve 27% sequential contract sales growth and the quarter with vgs, increasing 21%, even with the first time buyer sales, becoming a larger portion of the overall sales mix.

Adjusted development profit margin was in line with the first quarter of 2019 levels. Despite having two thirds of the contract sales illustrating.

Illustrating the benefits of our business transformation work and synergy initiatives.

Flexible yielding strategies, which we expect will deliver higher overall getaway pricing over time.

Finally.

And our research continues to point to a strong recovery of this year as customers get back to traveling for example.

Owner confidence to travel and the next three months recently hit its highest level since the pandemic began.

Online destination services the searches by owners are more than double that of January 2019.

We're also seeing very high levels of engagement on our social media pages, reflecting the excitement around travel.

Google searches for resorts and hotels and the U S are at their highest levels and nearly 10 years and the TSA is recorded and the most prolonged travel rebound since the pandemic started.

We currently have 13% more owner and preview reservations on the books for the second half of this year than we did at the same time in 2019 and.

And finally Occupancies were strong in April and sales grew sequentially all of which underpins the confidence we have and the recovery and the strength of our leisure focused business model. As a result, we expect contract sales to grow around 45% sequentially in the second quarter at the midpoint of our guidance range.

With that I'll turn the call over to John.

Colors and development profit margin would have more than doubled to 21% as a reminder, since report ability is just timing the revenue and profit from the sales will be reflected and our second quarter earnings.

Rentals also improved nicely and the quarter with excuse me rentals also improve nicely and the quarter with revenues up 29% sequentially, including 14% growth and transient rate.

As a result of our rental business generated of $5 million sequential bottomline improvement as leisure travel and rent of Occupancies continue to recover.

The stickier revenue businesses within our vacation ownership segment also performed well and the quarter resort management profit increased 3% sequentially illustrating the stable nature of this business and financing profit was unchanged compared to the fourth quarter. Despite a declining notes receivable balance.

Reflecting lower interest expense and the benefit of our synergy and cost saving initiatives.

Delinquency rates continue to improve across all of the Mary operands, and we're not only lower than the prior year's first quarter.

We're below 2019 as well.

Adjusted EBITDA and our vacation ownership segment declined $5 million sequentially to $68 million. Despite the $26 million impact from negative revenue reported ability, reflecting the strong recovery and contract sales and rental revenue as well as our business transformation efforts and other cost savings.

Turning to the exchange and third party management segment exchange transactions out of our interval business were up 27% compared to the fourth quarter getaway rentals nearly doubled and average revenue per member was up 29% sequentially as members book their vacations, including what looks like the release of some.

Pent up demand.

As a result of adjusted EBITDA increased 53% sequentially to $41 million and the first quarter benefiting from both the impressive transaction growth and the benefit of our cost saving efforts.

After adjusting for share based compensation expense and certain pandemic related expenses and other costs corporate G&A expense increased $12 million sequentially, primarily related to reinstating are variable compensation plans following 2020.

As a result, we delivered $69 million of adjusted EBITDA and the quarter overcoming $26 million of negative report ability once again, demonstrating the strength of our leisure focus business model.

The pg's to begin to normalize as first time buyers become a higher percentage of the mix. The we expect <unk> to remain well above pre COVID-19 levels.

So with occupancy improving and tours growing contract sales are expected to grow to around $320 million to $340 million and the second quarter of around 45% of the midpoint.

We also expect development profit to increase $40 million to $50 million compared to the first quarter, even after roughly $10 million to $15 million of negative report ability.

And.

And we expect Occupancies and transient rate and a rental business to improve reflecting the continued recovery and leisure travel as a result rental profit could improve by $20 million to $25 million compared to the first quarter.

Moving to the stickier parts of our vacation ownership segment and our resort management business. We expect the recurring we expect the recurring management fees to remain stable and answer all of the margins to improve compared to the first quarter.

And we expect financing profit to be up on the sequential basis due to the inclusion of wealth.

Turning to our exchange and third party management business with the first quarter benefiting from seasonality as well as pent up demand I mentioned earlier adjusted EBITDA could be down slightly on the sequential basis.

We expect G&A, excluding share based compensation could be up roughly $10 million to $15 million sequentially. As we continue to bring our associates back to support the recovery, we incur more normalised spend on it and other corporate initiatives and with the addition of the wealth G&A partially.

Offset by our synergy and cost saving efforts.

While we're not providing free cash flow guidance today with one of $2 billion of completed inventory on the balance sheet or roughly $600 million of excess inventory at of normalized sales pace I would expect our adjusted EBITDA two adjusted free cash flow conversion to be well above are normal 55% range for a number of the.

Here's once contract sales normalize with that we will be happy to answer your questions operator.

Thank you at this time, we will be conducting of question and answer session. If you'd like to ask a question. Please for star one on your telephone keep and a confirmation tone wind and get your line is and the question queue. You may price star too if you'd like to remove your question from the queue for.

For participants using the speaker of equipment and may be necessary to pick up your handset before a press and the star keys, one moment. Please while we pull for question.

Our first question comes from the line of David Cats with Jeffries. Please proceed with your question.

Good morning, David mourn and good morning, everyone.

Thanks for taking my question.

One of the things, we'd love a little more color on his thinking.

Thinking about a a recovered new development margin run right level once we get through all of this and.

And not necessarily John I'm looking for a specific number but if you can help us or guide us to how to get there on our own I think that'd be helpful.

Sure.

Yes, I think of.

And in terms of kind of opportunities as well as potential risk right. As you as you think about the development margin.

Obviously, it's the the two expenses, if you will or your marketing and sales costs and your product costs.

And where our product costs is I would say that.

We don't have a lot of new development of commitments new product. We've got what we've got on our balance sheet. So the mix for over the next couple of years could be slanted more towards some reacquired inventory of which we know comes at at a lower price. So.

I would say if anything there's probably some opportunity right from product costs.

Whether that ends up being of point or two or something but there could be some opportunity on the product costs side I think if you go to the marketing and sales costs of obviously been doing a lot.

In terms of our transformation and synergy initiatives a lot of the.

Say, a lot but of chunk of of the $200 million, we expect to get and run rate savings comes and marketing and sales and some of that is more and the fixed costs and and overhead and things we put in place and.

That's what you're seeing now and and when you look at.

Our development margin and a marketing and sales costs, even though our contract sales and the first quarter.

A third last right then they were and 19, we got back to a very similar development margin and a lot of that's on the the fact that we've been able to leverage some of those marketing and sales cost is we've done some of the synergy savings I'd say on the offset for the other opportunity like I said on the digital side as we sell more packages the ability to.

Quire first time buyers hopefully at better pricing going forward still to to be the determined but it's an opportunity right. That's something that the there and then I think on the negative side David.

And obviously, there's a lot of reports out there the the costs of of some more towards the hourly people, but getting people back to work things like that to be determined right or are we going to see some wage cost inflation things like that my senses, maybe some of that but I think we have I would say when you put it all together I think we have more opportunity than the cost increase.

Around some of that right. So that those those kind of give you the components about where the how to think about it and David is.

And just a little bit more color if I could on a couple of things one of which of the.

Wage cost increases keep in mind the.

And the majority of our associates and the field or associates that are paid for by the condominium owners.

The the time share owners through their maintenance fee. So our exposure there is relatively limited there could be a little bit of the cost creep on the the sales and marketing side of the we don't think thats material.

And then.

Pandemic no pandemic I mean, the name of the game in terms of optimizing your development margin is always around yes, you can try to get a little bit of and improvement and your product costs, but it's all of all about marketing and sales and that is.

Constantly looking at your channel mix optimizing those channels and give you the highest yield and the lowest cost and and stepping away from those that the the converse.

So, but I think John articulated of very well.

Perfect and my follow up thank you for that is.

With the wealth now closed.

There's always some little surprises some maybe good so I may not be.

Maybe less good.

Can you talk about any of that you may have come upon so far.

Yeah.

From the positive side, which I guess makes sense I mean, they're they're recovery that we're seeing and their business is probably a little bit faster than our recovery right. They don't they didn't have the international exposure like we have right not a big part of our business, but we are seeing their sales of similar BTG treads things like that but quite for.

Frankly, a little bit better in terms of how quickly. They are they are starting to come back. So that's been a positive thing.

On the negative side of it.

Not sure we found anything that I would say not saying we won't but.

Of about anything negative that we see like Oh, My gosh, we didn't we didn't realize that so it's been great we feel of and better the more we get into the.

Integration work and working with the wealth management team and kind of forming the new hi business. If you will.

Just gives me more excitement about what this is going to mean for our growth opportunities going forward.

Super Good luck. Thank you.

Thank you David.

Our next question comes from Patrick shows like true of Securities. Please proceed with your question.

Hi, good morning, and everyone. Good morning.

Uhm policies, if I missed the first question and the prepared remarks, and that's $320 million to $340 million and second quarter expect the contract sales and how much do you expect the wealth acquisition to contribute to that.

Yes, I mean within the range call, it plus or minus $25 million and the quarter.

So about 10% of of the 45%, it's about roughly 10% of the the growth is from well if the other organic if you will from our existing legacy MPW.

Okay. Thank you and do you see that percentage similar for the remaining quarters of the year.

That in terms of the.

To be determined obviously, we're not get in the past, but I mean, if anything I would expect if that's what we do and the second quarter of there should be some form of of recovery right at the and the relative scheme of things right not not big numbers for all of our contracts sales, but I would expect that hopefully $25 million should continue to come back I mean, we did disclose I think as of port of.

The reference Patrick that free COVID-19, and 2019 wealth reported I think roughly of 123 million of of contract sale. So that kind of gives you where the business was back pre COVID-19.

Is once again, a little bit of of baseline as to what we're trying to get back to you here in the near term right.

Okay Fair.

Fair enough and then my second question here for only.

Sizable M&A as of.

Of well that's not your for first rodeo and emanate with the <unk>.

Acquisition the interval several years ago, what would you say are the top one or two most important burning for best practices from that type of emanated that.

You see carrying over to the acquisition of well. Thank you.

Thank you this is Steve.

Think first and foremost.

Having a and well thought out plan of integrating.

The the leadership of both the Welk organization and our organization into a seamless team.

So that we can keep focused on of all the right things and I think the.

The next thing and that certainly comes to mind is channel mix looking at each channel to understand where.

By virtue of some of the things we do versus some of the things they do where the where there is some opportunity for improvement.

And then this is kind of sound a little soft, but it's really important it's making sure that the cultures of well aligned.

I'm sure you have heard countless examples of where the companies and made acquisitions and ultimately the cultures don't lineup and these don't turn the other things.

Things don't turn out well I think we did a very fine job at the interval acquisition and I think we're on a great great track and of great pays for the wall acquisition.

Okay. Thank you that's it.

Thank you.

Our next question comes from brand on tour with J P. Morgan. Please proceed with your question.

Good morning, and good morning, everyone, Hey, Hey, Hey, guys. Thanks for all of the details of this morning, just quick question on the sort of the.

The outlook and the tone of of the outlook and your.

And your guidance, obviously implies you are getting most of the way back to 2019 levels even backing out.

And the incremental contract sales from from World. So I guess my question is how should we think about the cadence.

From here.

And I know that you're not going to give guidance, but but my point is that it sounds like you think the international is gonna take a little bit longer. So should we expect a little bit of of plat, telling and those that one piece to just take longer and the core business sort of fully recover maybe even and the in the near the medium term is that the way we should think about it.

I think I think the.

Keep in mind, you know moving gave you the 20 per cent increase over the fourth quarter and Q1 that that included the really.

Below our expectations for both Europe and Asia Pacific.

The the there's lot's been written and I'm sure you're very well aware of some of the channel.

And travel restrictions et cetera that exists and both parts of the world There and I expect that will that will continue so.

And if anything the 27% of I don't have the number of the top of my head, but would of been greater had and not included those two component parts. I think you should think about and certainly our hope is that the rest of the system will continue to grow sequentially.

And they will still be some drag as I said on the.

And the international stuff the the other thing that I would point out.

Everybody would like to CSP back of 2019 numbers at the end of the year. There are there are still a couple of other things and play here.

Encage, which you.

Is where resource customer staying at the Marietta.

Mary and affiliated or now high it affiliated properties.

And coming to take tours with us and they're going to be slow to come back because of the hotel occupancies et cetera.

And and.

So I think there'll be some drag their but generally speaking I think the way for us to characterize our view is that we are very optimistic about what we think the second half of the year holds and.

Starting actually continuing and your ear and the second quarter and then.

But there'll be a few things that we will have to continue to work against to try to offset some of that other stuff.

Okay. That's helpful. Thanks for that and then a question on the P. G. Obviously, a really strong step up quarter over quarter, and you mentioned that with despite.

Unfavorable mix or let's say diluted.

Impacted the P. G from from new owner of sales. So I guess the question is how did that step up right and this was it closed right was it was it location based mix what drove those those numbers just so we can try and get a handle it and how it you normalize from here.

I'll give you a couple of stats for what they're worth.

So our contract sales and Q1.

For owners was 74% and the first time buyers was 26% now.

Now the.

The good news is that first time buyer mix and Q1 was actually for points.

Better for the first time buyers and it was so it was 26% versus 22% and Q1.

Tours, and and similar fashion and if you look at a quarter over quarter basis.

Owner tours actually we're down 3% and first time buyers were up three per cent all of that is a function of resort occupancy and people being and market.

As you get more people and market that are non owners, we have an opportunity to talk to them about trying to make sure that if they're interested in taking a timeshare tour and becoming and owner with US we try to do that as Occupancies continue to improve.

Has previews continue to come into the system.

And where people will who of already bought a package that are not and are they become a first time buyer, that's but that's where the shift will be the.

You may recall that as late as 2019, I think we're roughly 60 40 owners to first time buyers on a percentage basis and I think we're inching our way there it's going to take awhile.

But.

I'm encouraged by what we see and just to close the loop.

Obviously <unk> on the first time buyers are lower because of of lower close right.

And then they are for owners, so that's where you get the the the negative drag on V. P. G for the first time buyers, but ultimately it's the best thing for our system is to get more first time buyers into the system.

Grows the system and allows us to give them. The further upgrades later on and all of the other things that come along with that.

The only of the point I would add is just the mix, Hawaii became a bigger mix and the first quarter versus the.

Fourth quarter and Hawaii.

The generally comes with the higher the PG range. So there was a little bit of a mix in terms of that location fees, but.

Okay. Thanks for that kind of appreciate it thanks.

And.

And as a reminder, if you'd like to ask a question. Please press star and one on your telephone keypad, one moment, please and why we pulled up for questions.

Our next question comes from Chris where Orca with Deutsche Bank. Please proceed with your question.

Good morning, and what.

Any more of the guys.

Thanks for all of the details and taking the questions. So maybe we could drill into a little bit about on on the the spend patterns from.

No not so much on the P G, but on the actual.

Realize and.

And and the question is really just.

Given how healthy the consumer is are you seeing.

For like for like customer, whether it's sort of existing customer I guess it would have to be an existing customer are they spending more than they might have in 2019 or our new our first time buyers spending more than first time buyers did and 2019 when they make emergency.

We're not seeing any particular evidence of that.

And what you have seen as obviously as our hohner mix of sales vis-a-vis 2019 has gone up.

And.

They're they're adding more points to their portfolio.

And then.

Then.

And they may have done in the past however, there and it's smaller slugs. So the actual average sales price and for the first time buyer of of an owner is is still lower than what you're getting of the first time buyer first time buyer average sales price is up but not not materially different from what we saw before.

So and we have not seen really any inflection point in terms of things like FICO scores or anything else is notable.

That we can point to that was the the suggest for you there is something that we.

And we haven't seen the great news is our.

Are owners continuing to elect the by more of our products. We think that's a very good song and.

And the but like I said, nothing we're not seeing bigger checks or something like that as a result of something and the account.

Yeah, I mean, I think where you see it more credit from the closing interest right. If that's people's not necessarily for people spending more on average but for people buying more range in terms of clothes. The more people, whether that's owners for first time buyers right and maybe that some of the pent up demand maybe that is our product form resonating even more of the COVID-19 world and the.

Terms of.

The size of our units and the <unk>.

<unk> and all of the things, we've talked about and the past, but you are seeing their obviously with the higher VP driving it.

Generally higher closing efficiencies.

Okay, Yeah very helpful. And then just the follow up on the.

The progression of of of the revenue recognition you guys expect that to.

Kind of fully normalized by the end of the year or do you think that that obviously could essentially bleed over into the 21, even though it should I guess be less and less of an impact quarter by quarter right.

Yeah, well, the Assam to remember chris's quarter by quarter. It's if your if your contract sales and a recovery are continuing to increase sequentially right on average it just means and.

Until you get the back to more of the the seasonal quarters right and just normal growth you are going to have negative report ability from that recovery right. So what you saw great $50 million increase and sales a lot of that being weighted and the first quarter and marches things progressively got better yes, we just guided.

Even higher sales right in terms of contract sales for the second quarter. So yes via application is yes, and that's why we said notwithstanding that reported ability will get recognize you are going to have hockey of you have the higher contract sales you are still going to have 10 to 15 million and that will get pushed into the third quarter, and then not giving guidance for the third of the fourth of.

But if those continue to grow so if that saying we will if we got back to a more normalized fourth quarter contract sales right. Then I think you'd start to to get back to more of the seasonal report ability like we've always had we're here and on a full annual basis your report ability or negative reported bill.

City would essentially be your growth year over year reign of percentage of that right. So.

And continues to grow.

And we currently have 13% more owner and preview of reservations on the books for the second half of this year and we did at the same time in 2019 illustrating the pent up demand, we think of starting to manifest itself.

As always thank you for your interest and Marriott vacations worldwide take care of yourselves and finally to everyone on the call and your families stay safe and enjoy your next vacation.

Yes.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

[music].

Greetings and welcome to Marriott vacations worldwide first quarter of 2021 earnings conference 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 of this conference call is being recorded I would now like to turn the conference over to your host Neal Goldner. Thank you you may begin.

Thank you, Rob and welcome to the Marriott Vacations worldwide first quarter 2021 earnings Conference call I'm joined today by Steve Weiss, Chief Executive Officer, and John <unk>, Our President and Chief Financial Officer, and need to remind everyone that many of our comments today are not historical facts and are considered forward looking.

And the 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.

With that it's now my pleasure to turn the call over to CEO, Steve Wise. Thanks, Neal Good morning, everyone and thank you for joining our first quarter earnings call and.

It's now been more than a year since COVID-19 came into our lives and that certainly didn't mean people forgot about traveling.

Anything the past year reminded us what is really important and life family experiences and together as all of the things that travel offers.

As a company whose products in the April these unique and memorable occasions, it's been gratifying to see more and more people at our resorts this year.

And as vaccination levels rise and even more people return to travel and we look forward to welcoming them as well.

J W and Marriott senior was fond of saying, if we treat our employees right they'll treat our customers right and if customers are treated right they'll come back.

This past year has been quite difficult for many of our associates. So I'm very happy to say the with Occupancies recovering as they have we've been able to bring back most of our associates to work and they are hard again working to take care of our guests delivering great vacation experiences.

Our results. This quarter are evidence of the continued recovery of Argos and our business at this point nearly all of our sales centers have reopened and talk contract sales and exchange transactions grew substantially on a sequential basis during the first quarter exceeding our own expectations and.

In fact, six of our sales centers and the quarter actually exceeded their first quarter 2019 levels, which is very encouraging.

A review of our vacation ownership Occupancies and this quarter illustrates just how widespread the recovery has been.

For example.

Occupancy at our Florida Beach resorts average and the high 80% range during the quarter, including nearly 95% for the month of March.

Our Colorado, and Utah Mountain resorts average.

Average over 85 per cent for the quarter.

Our South Carolina resort ran almost 80% occupancy during March as the weather improved and our U S. Virgin Island resort average nearly 85% for the quarter.

Orlando and Hawaii two of our larger markets that had previously lagged also continued to recover nicely for.

For example, Orlando, which represents more than 20% of our North American keys average nearly 60% occupancy during the quarter, including over 75% during March and Hawaii, Excluding Hawaii, which was operating under quarantine restrictions for the entire first quarter average over 70% of occupancy during the quarter with.

March averaging nearly 85%.

The strong occupancies, coupled with the continued execution from our sales teams enabled us to achieve 27% sequential contract sales growth and the quarter with <unk>, increasing 21%, even with first time buyer sales, becoming a larger portion of the overall sales mix.

Adjusted development profit margin was in line with the first quarter 2019 levels. Despite having two thirds of the contract sales illustrating the benefits of our business transformation work and synergy initiatives.

The recovery and our interval International business was also evident during the first quarter with interval exchange transactions and revenue per member not only growing year over year, but also increasing compared to the first quarter of 2019.

Reflecting the members' desires to travel and the pent up demand.

During the quarter interval introduced getaway rentals of less than seven nights for the first time, enabling members more opportunities to use their membership and ways that better fit their schedule.

So, let's talk about where I think we go from here.

While we're not providing guidance for the second half of the year, we are very encouraged with the improvement and our business.

So Europe and Asia are lagging the recovery and international travel to the U S continues to be hampered.

We also shut down certain linkage and other marketing channels during the pandemic all of which are remind reminders that of full recovery will still take some time.

We closed the wealth transfer acquisition on April one and have already begun integrating them into our business similar to our vacation ownership business. This year, well because also experienced a strong recovery and occupancies and contract sales and we expect that improvement to continue going forward.

Our urban markets have now reopened with New York and San Francisco reopening last week and all of our coli sales centers have now reopened as well.

As you know we have been investing and our tour pipeline and package a package tour package pipeline engine to support future contract sales growth and we sold nearly 80% more tour packages and the first quarter than we did in the fourth quarter of 2020.

At the end of March we had 184000 tours and our package pipeline a 9% increase from the end of December and more importantly, nearly 74000 customers have already book their vacation and tour for 2021.

And we expect intervals, new short term rental products to lead to more flexible yielding strategies, which we expect will deliver higher overall getaway pricing over time.

Finally, our research continues to point to a strong recovery of this year as customers get back to traveling for example.

Owner confidence to travel and the next three months recently hit its highest level since the pandemic began.

Online destination services searches by owners are more than double that of January 2019.

We're also seeing very high levels of engagement on our social media pages, reflecting the excitement around travel.

Google searches for resorts and hotels and the U S are at their highest levels and nearly 10 years and the TSA has recorded the most prolonged travel rebound since the pandemic started.

We currently have 13% more owner and preview reservations on the books for the second half of this year than we did at the same time in 2019.

With that I'll turn the call over to John.

Thanks, Steve and good morning, everyone.

Today Im going to review, our first quarter results and the continued strong recovery across all of our businesses the strength of our balance sheet liquidity position.

And our second quarter expectations.

As Steve noted, we have very strong occupancies and many of our key markets with our two largest Orlando and Hawaii, improving nicely illustrating the resiliency of our leisure focused business model.

Reviewing the performance of our segments this quarter, starting first with our vacation ownership business when the quarter began our sales centers in both California, and Hawaii, we're still close to the government restrictions.

But with the California restrictions being rolled back by the end of January Occupancies quickly started to improve overall as tours grew sequentially and <unk> improved compared to the fourth quarter contract sales increased 27%, even with first time buyers representing a larger portion of our sales mix.

<unk>.

As I mentioned on our earnings on our last earnings call. We knew revenue reported ability was going to be of headwind in the first quarter.

While contract sales grew nearly $50 million on a sequential basis.

Development profit only increased $6 million as we do not adjust for report ability when calculating revenue or adjusted EBITDA.

Adjusting for the impact of reported ability our development profit would have nearly tripled on a sequential basis to $40 million and development profit margin would have more than doubled to 21%. As a reminder, since report ability is just timing the revenue and profit from these sales will be reflected in our second quarter.

The earnings.

Rentals also improved nicely in the quarter with excuse me. The rentals also improved nicely in the quarter with revenues up 29% sequentially, including 14% growth and transient rate as a result, our rental business generated a $5 million sequential bottom line improvement as leisure travel and rental occupancy.

Please continue to recover.

Reflecting lower interest expense and the benefit of our synergy and cost saving initiatives.

Delinquency rates continue to improve across all of the Marriott brands and we're not only lower than the prior year's first quarter.

And we're below 2019 as well.

Pent up demand.

As a result, adjusted EBITDA increased 53% sequentially to $41 million and the first quarter benefiting from both the impressive transaction growth and the benefit of our cost saving efforts.

As a result, we delivered $69 million of adjusted EBITDA in the quarter overcoming $26 million of negative report ability once again, demonstrating the strength of our leisure focused business model.

Moving to our balance sheet pro forma for the wealth of acquisition, which closed on April one we ended the quarter with $1 $2 billion of completed inventory and total liquidity of nearly $1 4 billion, including unrestricted cash of $432 million and gross notes receivable eligible.

Eligible for securitization of $345 million.

We had $4 $6 billion and print and principal amount of debt outstanding at the end of the quarter comprised of $3 $2 billion of corporate debt and $1 $4 billion of nonrecourse debt related to our securitized notes receivable.

Our corporate debt increased $474 million during the quarter from the issuance of convertible notes and net of the repayment of a portion of our term loan.

We have no corporate debt maturities until September 2022, which is our 2017 convertible note and that's the only $230 million.

Finally, we recently extended our $350 million of warehouse credit facility for another two years and added the ability do include loans originated by wealth as collateral.

We generated an incremental $13 million and run rate synergies this quarter, bringing our total of achieved to of $145 million, taking us closer to at least $200 million of run rate synergies by the end of the year for early next year.

Looking ahead, while still not ready and we're still not ready to start giving guidance for the balance of the year I do want to help you think through the what the second quarter could look like including having a full quarter of wealth and our results.

Our vacation ownership for our vacation ownership business continues to recover nicely and we expect that to continue this quarter.

Occupancy and tours are projected to grow sequentially from the first quarter. We do expect <unk> to begin to normalize as first time buyers become a higher percentage of the mix that we expect <unk> to remain well above pre COVID-19 levels, so with occupancy improving and tours growing contract sales are expect.

To grow to around $320 million to $340 million and the second quarter up around 45% at the midpoint.

We also expect development profit to increase $40 million to $50 million compared to the first quarter EBIT after roughly $10 million to $15 million of negative report ability.

We expect occupancies and transient rate and our rental business to improve reflecting the continued recovery and leisure travel as a result rental profit could improve by 20% to $25 million compared to the first quarter.

Moving to the stickier parts of our vacation ownership segment and our resort management business. We expect the recurring we expect the recurring management fees to remain stable and ancillary margins to improve compared to the first quarter.

And we expect financing profit to be up on a sequential basis due to the inclusion of wealth.

We expect G&A, excluding share based compensation could be up roughly $10 million to $15 million sequentially. As we continue to bring our associates back to support the recovery, we incur more normalized spend on it and other corporate initiatives and with the addition of the wealth G&A partially off.

Set by our synergy and cost saving efforts.

While we're not providing free cash flow guidance today with $1 $2 billion of completed inventory on the balance sheet or roughly $600 million of excess inventory at a normalized sales pace I would expect our adjusted EBITDA to adjusted free cash flow conversion to be well above our normal 55 per cent range for a number of you.

And once contract sales normalize.

With that we will be happy to answer your questions operator.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up of your handset before of press.

And the Star Keys, one moment, please while we poll for questions.

Our first question comes from the line of David Katz with Jefferies. Please proceed with your question.

Good morning, David Good morning, Hi, good morning, everyone.

Thanks for taking my question.

One of the things, we'd love a little more color on us.

And thinking about a recovered new develop and margin run rate level once we get through all of this.

And not necessarily John looking for a specific number but if you can help us guide us to how to get there on our own I think that'd be helpful.

Sure.

Yes, I think I'll do it in terms of kind of opportunities as well as potential risk right. As you as you think about the development margin.

Obviously.

It's the two expenses if you will all of your marketing and sales costs and your product costs.

Given where our product costs is I would say that.

We don't have a lot of new development of our commitments new product, we've got what we've got on our balance sheet.

So the mix for <unk>.

For the next couple of years could be slanted more towards some reacquired inventory, which we know comes in at a lower price. So.

I would say if anything there's probably some opportunity right from product cost.

Whether that ends up being a point or two or something but there could be some opportunity on the product cost side I think if you go to the marketing and sales costs, we've obviously been doing a lot and.

In terms of our transformation and synergy initiatives a lot of the.

<unk> sale, a lot, but a chunk of the $200 million, we expect to get and run rate savings comes and marketing and sales some of thats more and the fixed cost and overhead and things we've put in place and.

And Thats, what Youre seeing now I mean, when you look at our.

Of our development margin and our marketing and sales costs, even though our contract sales and the first quarter.

And we're a third less than they were and 19, we got back to a very similar development margin and a lot of thats on the the fact that we've been able to leverage some of those marketing and sales costs as we've done some of the synergy savings I'd say on the offset for the other opportunity like I said on the digital side as we sell more packages the.

The ability to acquire of first time buyers hopefully at better pricing going forward still to be determined but it is an opportunity right. That's something that is there and then I think on the negative side David.

Obviously theres a lot of reports out there the cost of some more towards hourly people, but getting people back to work things like that to be determined right or are we going to see some wage cost inflation things like that my sense is maybe some of that but I think we have I would say when you put it all together I think we have more opportunity than the cost increase.

And is around some of that right so that the.

And those kind of give you the components about where to how to think about it and David as David and just a little bit more color if I could on a couple of things one of which hope about the.

The wage cost increases keep in mind, the majority of our associates and the field our associates that are paid for by the condominium owners.

And the timeshare owners through their maintenance fee. So our exposure there is relatively limited there could be a little bit of cost creep on the sales and marketing side, but we don't think that's material.

And then.

And the epic no pandemic I mean, the name of the game in terms of optimizing your development margin is always around yes, you can try to get a little bit of an improvement and your product costs, but it's all are all about marketing and sales and.

And that is key.

Constantly looking at your channel mix optimizing those channels that give you the highest yield and the lowest cost and and stepping away from those that are the converse.

But I think John articulated of very well.

Perfect and my follow up thank you for that.

Yes.

And with wealth now closed.

There is always some little surprises some of maybe good so I may not be.

Maybe less good.

Can you talk about any of that you may have come upon so far.

Yes.

From the positive side, which I guess makes sense I mean their recovery that were seeing and their business is probably a little bit faster than our recovery rate. They don't they didn't have the international exposure like we have right and not a big part of our business, but we are seeing their sales of similar <unk> trends things like that but quite for.

Frankly, a little bit better in terms of how quickly they are starting to come back. So that's been a positive thing.

On the negative side.

Not sure we found anything that I would say I'm, not saying we won't but.

And about anything negative that we see like Oh, My gosh, we didn't we didn't realize that so it's been great value, we feel even better of the more we get into the <unk>.

Integration work and working with the wealth management team and kind of forming the new Hyatt business. If you will.

Gives me more excitement about what this is going to mean for our growth opportunities going forward.

Super Good luck. Thank you.

Thank you David.

Our next question comes from Patrick Scholes with true of Securities. Please proceed with your question.

Hi, good morning, everyone. Good morning.

Apologies if I missed the first question and the prepared remarks.

Net.

$320 million to $340 million and second quarter expected contract sales and how much do you expect the <unk> acquisition to contribute to that.

Yes, I mean within the range call, it plus or minus $25 million and the quarter.

And so about 10% of the.

The 45%.

Roughly 10% of the growth is from well the other organic if you will from our existing legacy MPW.

Okay.

Thank you and do you see that percentage similar for the remaining quarters of the year.

That in terms of the.

And to be determined obviously were not good and okay.

Yes.

If anything I would expect if that's what we do and the second quarter, there should be some form of recovery right. It, though and the relative scheme of things right not not big numbers for all of our contract sales, but I would expect that hopefully of $25 million should continue to come back and we did disclose I think as of point of reference Patrick that pre COVID-19 and 2019 well reported.

I think roughly of $123 million of contract sales. So that kind of gives you where the business was back pre COVID-19. This is once again, a little bit of of baseline as to what we're trying to get back to here and the near term right.

Okay.

Fair enough.

And then my second question here certainly.

Sizable M&A as of.

Well that's not your for.

The first rodeo in M&A with the.

The acquisition of interval of several years ago, what would you say are the top one or two most important learnings for best practices from that type of M&A that you.

You see carrying over to the.

Acquisition of well thank you.

And frankly this is Steve I think first and foremost.

Having a well thought out plan of integrating the.

The leadership of both the local organization and our organization into a seamless team.

So that we can keep focus on all of the right things and I think the net.

Next thing and.

And it comes to mind is channel mix.

Looking at each channel to understand where.

By virtue of some of the things we do versus some of the things they do where there is some opportunity for improvement.

And then this is kind of sound a little soft, but it's really important it's making sure that the cultures are well aligned.

I am sure you have heard countless examples of where the companies who made acquisitions and ultimately of the cultures don't lineup and these things.

And things don't turn out well I think we did a very fine job with the integral acquisition and I think we're on a great great track and of great pace for the <unk> acquisition.

Okay. Thank you that's it.

Thank you.

Our next question comes from Brent mature with Jpmorgan. Please proceed with your question.

Good morning, Hey, Brian Good morning, everyone, Hey, Hey, guys. Thanks for all of the details of this morning just.

And just a quick question on the sort of the outlook and the tone of the outlook.

And your guidance, obviously implies youre getting.

Most of the way back for 2019 levels, even backing out the.

And the incremental contract sales from from Wells. So I guess my question is how should we think about the cadence.

From here.

And I know that youre, not going to give guidance, but my point is that it sounds like you think the international is going to take a little bit longer. So should we expect a little bit of a plateauing and those that one piece to just take longer and the core business sort of fully recover maybe even in the in the near to medium term is that the way we should think about it.

I think I think the.

Keep in mind when we can.

Gave you the 20% increase over the fourth quarter and Q1.

That included really.

Sure.

Below our expectations for both Europe, and Asia Pacific and.

The other is what's been written and you I'm sure you're very well aware of some of the.

Travel restrictions et cetera that exist in both parts of the world There and I expect that will that will continue so.

And if anything the 27% I don't have the number of off the top of my head would of been greater had it not included those two component parts. I think you should think about and certainly our hope is that the rest of the system, we will continue to grow sequentially.

And there'll still be some drag as I said on the on.

On the international stuff the.

The other thing that I would point out everybody would like to see us be back in 2019 numbers at the end of the year. There are there are still a couple of other things in play here.

The linkage with <unk>.

As we're resource customers staying at.

Marriott affiliated or now Hyatt affiliated properties.

And coming to take tours with us they're going to be slow to come back because of the hotel occupancies et cetera.

And and.

So I think there'll be some drag there, but generally speaking I think the way for us to characterize our view is that we are very optimistic about what we think the second half of the year holds and.

And starting actually continuing and your ear and the second quarter and then.

But there'll be a few things that we will have to continue to work against to try to offset some of that of other stuff.

Okay. That's helpful. Thanks for that and then a question on <unk>, obviously, a really strong step up quarter over quarter and you mentioned that was despite.

Unfavorable mix or let's say diluted.

The impact of <unk> from from new owner sales. So I guess the question is how does that step up right and it was it was the close rate was it was it location based mix what drove those those numbers just so we can try and get a handle it and how it should normalize from here.

I'll give you a couple of stats for what they're worth.

So our contract sales in Q1.

For owners was 74% and the first time buyers was 26%.

Now the.

The good news is that first time buyer mix in Q1 was actually for points.

Better for first time buyers and it was so it was 26% versus 22% and Q1.

Tours and in a similar fashion, if you look at our quarter over quarter basis.

Owner tours, and actually were down 3% and first time buyers were up 3% all of that is a function of resort occupancy and people being and market.

As you get more people and markets that are non owners, we have an opportunity to.

Talk to them about trying to make sure that if they are interested in taking of timeshare tour and becoming an owner with us we try to do that as Occupancies continue to improve.

As previews continue to come into the system.

Where people will who have already bought of package that are non and are they become of first time buyer.

And that's where the shift will be.

You may recall that as late as 2019 I think we're at roughly 60 40 owners to first time buyers.

On a percentage basis, and I think we're inching our way there is going to take a while.

But.

I'm encouraged by what we see and just to close the loop of.

Obviously, the <unk> on first time buyers are lower because of a lower close rate.

And then they are for owners. So that's where you get the the negative drag on V. P. G for first time buyers, but ultimately it's the best thing for our system is to get more first time buyers into the system.

Gross of the system and allows us to give them. The further upgrades later on and all of the other things that come along with that the only other point I would add is just the mix of Hawaii became a bigger mix in the first quarter versus the fourth quarter and Hawaii.

And generally comes with the higher PPG right. So there was a little bit of mix in terms of that location fees, but.

Sure.

Okay. Thanks for that guys I appreciate it.

Thanks.

And as a reminder, if you'd like to ask the question. Please press star one on your telephone keypad one moment, please while we poll for questions.

Our next question comes from Chris <unk> with Deutsche Bank. Please proceed with your question.

Good morning, Chris.

Hey, good morning, guys.

Thanks for all of the details and taking the questions.

So maybe we could drill into a little bit about <unk>.

And the spend pattern from.

No not so much on BTG, but on the actual.

<unk> realized.

And the question is really just.

Given how healthy the consumer is are you seeing the like for like customer whether it's the existing customer I guess, it would have to be and existing customer are they spending more than they might have in 2019 or our new our first time buyers spending more than first time buyers did in 2019, when they make a purchase.

We're not seeing any particular evidence of that.

You have seen us obviously as our owner mix of sales vis vis 2019 has gone up.

John.

They're they're adding more points to their portfolio.

And then.

They may have done and the past. However, there is smaller slug. So the actual average sales price for the first time buyer of and owner is.

It's still lower than what you are getting the first time buyer first time buyer average sales price is up but not not materially different from what we saw before.

And so and we've not seen really any inflection point in terms of things like FICO scores or anything else is notable.

And that we can point to that with the suggest here theres something that.

And we haven't seen the great news is.

Our owners continuing to like the buy more of our products, we think thats a very good song.

And but like I said, nothing we're not seeing bigger checks or something like that as a result of something and the economy.

Yes, I think where you see it more of Christmas and the closing efficiency and if thats peoples not necessarily people spending more on average but for people buying more rate and terms of closing more whether that's owners of first time buyers right and maybe thats. Some of the pent up demand, maybe thats, our product form resonating even more of the COVID-19 world and.

In terms of.

And the size of our units a day.

<unk> and all of the things we've talked about in the past, but you are seeing there obviously with the higher VP driving it would you.

And generally higher closing efficiencies.

Okay very helpful. And then just the follow up on the.

And the progression of the revenue recognition do you guys expect that to.

Kind of fully normalize by the end of year or do you think that that obviously could potentially bleed over into the into 'twenty, one even though it should I guess be less and less of an impact quarter by quarter right.

Yes, well the Assam to remember Chris is quarter by quarter. It's if you're if your contract sales and a recovery are continuing to increase sequentially right on average it just means.

And until you get to back to more of the seasonal quarters right and just normal growth you are going to have negative report ability from that recovery right. So what you saw 50.

$50 million increase in sales of lot of that being weighted and the first quarter in March as things progressively got better.

Guided even higher sales rate and terms of contract sales for the second quarter. So the application is yes, and Thats why we said notwithstanding that report ability will get recognize you are going to have if you have the higher contract sales youre still going to have $10 million to $15 million that will get pushed into the third quarter, and then not giving guidance for the.

The third of the fourth quarter, but if those continue to grow so.

And if.

And that's saying we will if we got back to a more normalized fourth quarter contract sales right. Then I think you'd start to to get back to more of the seasonal report ability like we've always had where Europe and on a full annual basis, you reported ability or negative report ability would essentially be your growth year over year rate of percentage of that.

And so.

Unfortunately, it's just because of the recovery that's what will kind of continue to get that continued negative reported billings until we get back to more normalized sales and by virtue of timeshare accounting and I'm certainly not the expert John and his butt.

And essentially the lose the last two weeks of the quarter in terms of the contract sales and maybe a little bit more but generally speaking because you have to get through the various hoops to make sure that its revenue to be recognized and the like.

And so youll always have some carryover from the end of the year out of the 'twenty one into 'twenty two.

And our belief is as we have seen in the past is that generally unrepeatable sales that happened and the first part of the year by and large come back through before the end of the year, but you all we still have some of that.

Right Okay understood.

Very helpful. I appreciate that thanks, guys.

Sure. Thank you.

We have reached the end of the question and answer session. At this time I would like to turn the call back over to Steve Wise for closing comments.

Thank you Rob and.

Thank you everyone for joining our call today.

As we've always known whether it's to relax spend time with loved ones, we're seeing new and exciting places at their core people want to vacation and being at a business who sold products enable these experiences is of great business to be and so while the past year has been difficult for all of US and it's also been a reminder of just <unk>.

And how resilient our business model really is.

For a review of our first quarter gives us gives you a sense of that.

We grew contract sales, 27% sequentially, beating our own expectations.

Interval exchange transactions increased 17% year over year.

And our adjusted EBITDA would have grown 47% from the fourth quarter were it not for revenue report ability, which is just timing.

Looking forward and people are flying again owner confidence as a post pandemic high and Occupancies at our resorts are strong and growing.

74000 customers, who had purchased the tour package from us of already book the vacation for this year for our total package.

Pipeline continues to grow.

And we currently have 13% more owner and preview reservations on the books for the second half of this year and we did at the same time in 2019 illustrating the pent up demand, we think of starting to manifest itself.

As always thank you for your interest and Marriott vacations worldwide take care of yourselves and finally to everyone on the call and your families stay safe and enjoy your next vacation.

Yes.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

Q1 2021 Marriott Vacations Worldwide Corp Earnings Call

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