Q2 2021 Travel + Leisure Co Earnings Call
So checking and participants for today's program and your program will begin and approximately 2 minutes.
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Yeah.
Good morning, and welcome to the second quarter 2021 earnings conference call for travel and leisure co formerly Wyndham destinations. After the Speakers' remarks, there will be a question and answer period. If he would like to ask a question during that time simply press the start and then the number 1 on your telephone keypad and see.
The weather.
For all of your question. Please press the pound key on your telephone keypad as a reminder, ladies and gentlemen. This conference is being recorded if you do not agree with these terms. Please disconnect at this time.
Thank you I would now like to turn the call over to Chris Agnew. Please go ahead.
Thank you Britney good morning, and.
And welcome before we.
To begin we'd like to remind you that our discussion. This morning will include forward looking statements actual results could differ materially from those indicated and the forward looking statements and the forward looking statements made today are effective only as of today and we undertake no obligation to.
Publicly update or revise these statements the.
Factors that could cause actual results to differ discussed and our SEC filings and you can find a reconciliation of the non-GAAP financial measures discussed in today's call and our earnings press release available on our website at Investor Day.
The travel and leisure Cove Dot com.
This morning, Michael Brown, our President and Chief Executive Officer, who will provide an overview of our second quarter results.
And Mike Hug, our Chief Financial Officer will then provide greater detail on the quarter, our balance sheet and liquidity position.
Following these remarks will be available to respond to your questions.
With that and I'm pleased to turn the call over to Michael Brown.
Thank you Chris Good morning, everyone and thank you for joining us today.
As you saw from our release this morning leisure travel returns significantly last quarter.
Which led to a very strong second quarter results.
We reported second quarter, adjusted EBITDA of $193 million and adjusted diluted EPS from continuing operations of <unk> 88.
As the vaccination rates climb and domestic travel restrictions are lifted.
Leisure travel demand is increasing and we are fully participating and the recovery.
Adjusted EBITDA margin and the quarter was 24, 2% 30 basis points below the second quarter of 2019.
We were able to achieve this margin despite a $26 million net interest income of headwind.
And due to a reduction and our consumer finance portfolio.
To put in perspective, the strength of our second quarter recovery, if we equalize the 2021 portfolio size to 2019 and exclude the Covid reserve release, adjusted EBITDA margin would have been approximately 25, 3%.
80 basis points higher than the $24.5 and the second quarter of 2019.
Changes, we made during 2020, including the upgrading of tour quality and the structural cost reductions are 2 key factors driving the underlying improvement of margins.
The strength and resiliency.
And of our business from consumer demand to cash flow generation 2 of fortified balance sheet has been on full display over the past year.
And 2020, our adjusted free cash flow remained positive and allowed us to maintain a meaningful dividend throughout the crisis.
As performance continues to improve we look.
Forward to returning to a regular cadence of capital returned to shareholders Spa.
Specifically on consumer demand owner of booking trends continued to be above 2019, and the average owner booking window is now of 126 days out and encouraging sign as it is now above 2019 levels.
<unk> net vacation ownership reservations for the second half of 2021, and the first of 2022 or 6% and 5% respectively ahead of 2019 cash.
California, Florida, and Hawaii are seeing some of the strongest growth and book as.
We are optimistic about the remainder.
<unk> of the year, but we are keeping a careful eye on the spread of the Delta variant price.
<unk> and the variance spread and the reintroduction of domestic travel restrictions could impact our outlook.
During the second quarter, both vacation ownership as well as travel and membership exceeded our internal expectations.
Although we observed the initial signs of the leisure travel rebound at the end of the first quarter the rebound of emerged earlier and faster than we projected.
And the second quarter, we benefited from trends, we expected to materialize and the second half of 2021.
Gross VOI sales were $383 million.
Net of our $355 million to $365 million guidance range.
This was an increase of 62% from the first quarter driven by improved close rates and <unk> that were 30% higher than 2019.
As well, our <unk> increase reflected a 30% and mix of new owner.
And had actions about 400 basis points above our new owner mix expectation.
Wyndham destinations our vacation ownership division is the core of our enterprise and we are fully committed to growing our vacation ownership business at or above historical levels.
How can we do this we are of a large untapped.
The <unk> pipeline of future upgrade sales and we will continue to leverage our partnership with Wyndham hotels and resorts and its loyalty program Wyndham rewards. Additionally.
Additionally, with the acquisition and rebranding to travel and leisure. We also have the opportunity to launch new vacation club brands and the vacation ownership space.
Travel and membership, which includes RCI and Panorama travel solutions or Pts also exceeded expectations with revenue just 6% lower than Q2, 2000, 2019, when normalized for acquisitions and divestitures.
Adjusted EBITDA margin was 37% compared.
And to 32% and 2019.
RCI remains the core business and primary driver of EBITDA in this segment and we are squarely focused on elevating rci's growth by offering a broader array of travel services to its $3.6 million members.
Pts is our newly launched.
<unk> <unk> offering that specializes in designing and operating travel membership programs.
<unk> made progress and the quarter announcing an agreement with the National Association of Realtors America's largest trade Association with 1.4 million members we.
We expect deals like this to fuel transaction velocity.
As we continue to focus on increasing premium memberships through revenue sharing agreements by actively marketing our travel solutions under partner brands.
Last but certainly not least we continue to work towards the full launch of our travel and leisure club in September the.
The club launch was 1 of the primary reasons, we purchased travel.
And leisure the combination of the macro demand per subscription products, the absence of product and the leisure travel space and our ability to offer curated exclusive travel offerings inside of the club makes us excited for the upcoming launch.
Before turning the call over to Mike I want to share our expectation for the rest of.
Of this year as we return to providing full year guidance.
We expect tours of 440 to 450000.
<unk> around $3000 and gross VOI sales of approximately 1.4 to $1.5 billion.
Based on the sales we would expect net interest in.
Come to be between 315 and $320 million of.
Overall, we anticipate adjusted EBITDA in the range of $720 million to $735 million for the full year and adjusting adjusted earnings per share of $3 and 22.
The $3.30.
And the third quarter, we anticipate VOI sales will be and a range of $450 million to $470 million and.
I'd like to point out that our full year guidance reflects an average expected portfolio size of $2.8 to $2.9 billion over the last 6 months of this year with net interest income our most noted.
Notable headwind to retracing, the pre COVID-19 EBITDA level levels.
Projected third quarter VOI sales would represent an 18% to 23% sequential increase from the second quarter and as a result, we believe third quarter adjusted EBITDA will range between $200 million to $210 million with that.
I'd like to hand, the call over to our Chief Financial Officer, Mike Hug.
Mike.
Yeah.
Thanks, Michael Good morning to everyone and thank you for joining us today.
I will discuss our second quarter results and provide you with more color on our balance sheet liquidity position and cash flow my comments will be primarily focused on our adjusted results.
And when we reported total company second quarter, adjusted EBITDA of $193 million and adjusted diluted earnings per share of 88.
Compared to $16 million and loss of $1 of 11, 1 year ago, respectively.
And the second quarter, the vacation ownership segment reported revenue of $599 million.
Gross VOI sales of $383 million and adjusted EBITDA of $133 million.
<unk> of $3151 was 30% higher up and the pre pandemic second quarter of 2019 benefiting.
Benefiting from owner of mix and improved true quality.
Tours were 53%.
And in 2019 as a result of our very deliberate decision to focus our new owner marketing efforts on higher quality tours.
These efforts resulted in new owner of <unk> increase and the second quarter of 2021 compared to 2019 and were contributing factors to our strong second quarter margin.
We expect the focus on quality.
Laura to also benefit us over the long term and this should continue to yield of stronger portfolio.
And the second quarter, we released $26 million of the Covid specific reserve we recorded in March 2020, due to continued strong performance of the portfolio, resulting in a $16 million benefit to adjusted EBITDA.
Thank you on the Covid related reserve, we originally reported a provision of $225 million.
Including the reversal in the second quarter, we reversed a total of $46 million and since the reserve of established we have charged off $85 million of default against it.
At the end of the quarter, our total reserve as a percentage.
<unk> gross vacation ownership contract receivables was 19, 8% compared to 25% at the end of the first quarter of 2008, when we put the Covid related reserve in place and compared to 19, 3% at the end of 2019.
Revenue and our travel and membership.
<unk> was 200.
Application and the second quarter compared to $106 million and the prior year.
Travel and membership second quarter, adjusted EBITDA was $75 million and increase of 114% compared to last year's $35 million.
Travel and membership net transaction and the second quarter were 524000.
4.5 times higher than the same period last year with growth and all geographies the.
The largest improvements where north America, and exchanges and our non exchange business funds, which were fueled by the strong domestic travel recovery, we're seeing and the U S.
We continue to be pleased with the growth of travel memberships non exchange business, which accounts for 40% of toll of transaction.
<unk> <unk> and the quarter.
Turning to our balance sheet, our corporate net debt at the end of June was $3.1 million and our leverage rate was 4.7 times.
We continue to remain focused on reducing our leverage and with continued EBITDA growth, we expect to see the leverage rate declined to below 4.5 times by.
The end of the year.
Throughout the pandemic, we of demonstrate our commitment to return capital to our shareholders.
And our second quarter dividend of <unk> <unk> per share on June 30, and will recommend of third quarter dividend of 30% per share for approval of our board of directors and August.
Now, let me add some color to a couple of items and our model.
Transact drove our 2021 outlet that was discussed by Michael and how those factors will impact us in 2022.
Based on our view for <unk> sales for the second half of the year. We can now estimate both headwinds and we will face next year from lower net interest income and our vacation ownership business and lower membership fees at our exchange business.
All of that as we enter 2022 both of these resilient parts of our business. We will have been impacted by sales running well below historic levels for nearly 2 years.
And this has a compounding impact of worth highlighting to better understand what our baseline adjusted EBITDA should be.
With our portfolio down to $3 billion from $4 billion at the end of.
2019, net interest income will be up to 100 point moving lower in 2022 than in 2019.
And RCI with our member base down from lower new enrolment adjusted EBITDA could be impacted up to $50 million when compared to 2019.
It is important to understand these headwinds as.
Of 2022.
Finally on free cash flow, we expect 2021, adjusted free cash flow conversion to be 25% to 30% of adjusted EBITDA.
The reduction from our historical conversion rates of 55% to 60% is expected to be temporary.
Due to reduced net interest income from consumer financing.
We think of them power of corporate interest expense as a percentage of adjusted EBITDA and the timing of working capital.
We expect 2022 free cash flow conversion to move closer to our historical target range.
In summary, we are very pleased with our performance as we emerge from the pandemic and look forward to seeing many of you in person at our Investor Day in September.
And thanks, Brittany can you. Please open up the call to take questions.
And Sir and.
As a reminder of that as star and 1 of your telephone keypad. If you would like to ask a question.
And we will take our first question from Chris <unk> with Deutsche Bank. Your line is now open.
Hey, good morning, guys.
And I appreciate all the of the.
The data points.
So the first question was kind of as you talk about reaffirming the commitment to kind of growing the VOI segment in line with historical ranges.
And I guess at the same time you are.
Pruning the tour flow base, a little bit to folks on the <unk>.
With that how do we square those 2 is it is it just going to be a function of higher close rates and <unk> going forward is that all of there is or is there something else we should think about.
Chris That's that's a good summary, but let me let me just come back to the host of historical rates.
Comment.
And that focus is really around EBITDA.
We want to get back to where we've historically been and we believe we can.
Grow our RVO business at and it's not above historical rates.
As we come out of the pandemic, we've we've laid out our clear strategy on how we plan to do that it is.
As to focus on and more efficient way of growing our bottom line through.
Changing the tour quality focusing of more holistic quality earnings component, which which has which has seen we've already seen play out of <unk> are 50% higher as we mentioned.
Not chasing tour flow.
Flow and the net effect of that is and the first full quarter coming out of Covid being the second quarter. Our margins are already back where they were pre COVID-19 and.
I'd point out those are already industry, leading margin so our plan going forward.
Is to get back to pre Covid.
But of the levels.
And preference to or ahead of a desire to get back to a.
And a tour level, we just where our focus is to get back and more to.
2 of more efficient to EBITDA.
Margin and ultimately bottom line.
Okay very helpful. And then and then the second part I was hoping we could talk a little bit about the.
And the Pts the.
The B to B book, Yes.
Is there any way to I know thats a longer term.
And business, but is there any way to kind of define the the Tam the way.
Youre looking at it and I'm not looking for really a specific number but just directionally what is the cadence of growth within that kind of going to look like.
So and just for everyone the quality of our Pts as our beat of B.
Subscription business, where are we in effect partner with great brands out there or.
The <unk> like we've done with the Realtors Association providing.
Providing them travel services, and then transition that too.
And economic model that looks a lot like the RCI model upfront subscription fees ongoing transaction fees really driving that recurring and.
Associated revenue component when we look at Tam.
On the Pts side, the number of companies associations out there our enlist.
So.
I think that's the actual perspective, we have on Pts is that as we sign companies our associates.
Associations like the National Realtors, and we have a few other really strong names and our pipeline that we hope to announce very soon.
And we think that there will be a huge attraction for people who want to provide that benefit without having the scale that internally if I could just transition and your question to the travel and leisure club that we.
We will eventually launch in September.
The U S household market Tam is 90 million households, and we believe those that would fit in that space is probably about half of that about 40% to $50 million.
And we will speak a bit more depth of about that at Investor day.
And and that fits into a sizing of the timeshare industry today, which is.
About 10 million households, and you've got 10 million ton share $40 million to $50 million around the subscription side and and overall leisure market and the U S of about $90 million.
Okay very helpful. Thanks, Michael.
Thanks, Chris.
And we will take our next question from Patrick Scholes with Truest. Your line is now open.
Hi, great. Thank you and good morning, everyone.
A couple of questions here per.
First on the.
The release on the loan.
Loan loss provision.
What metrics are triggered that and related to that you know assuming favorable demand and lending trends continue can we expect more releases from the provision going forward.
Good morning, Patrick and thanks for the question.
Basically when we look.
At the portfolio of every metric that we have is positive because the look of delinquencies for the second quarter Theyre down below second.
Second quarter of 2016 levels deferrals are now less than 5% of the portfolio.
Second quarter of defaults were down $33 million year over year. So the portfolio of really performing well and I would say, it's all of those factors.
<unk> come into play when looking at the relief that we took and then obviously, we've talked about unemployment trends and what those trends look like through the end of the share and the first quarter of next year, so couldn't be happier with the weight of the portfolio of performance. Obviously it drives great interest income, but just as importantly drives great cash flow and we will sit down at the end of every quarter like we always do and if the trends remain positive.
And there might be opportunity there, but right now we think we're appropriately reserved and I think we would all agree when you look at the new <unk>.
Variant that's out there and when you look at.
Government support and waiting to hear and the Cup.
Coming months. So we just think it's prudent to make sure we're appropriately reserved as we really work through the next.
6 to 9 months of this.
Pandemic, we're dealing with and how it impacts of the consumer.
And related to that should we expect another securitization sometime later this year.
We would expect to do another 1 later this year and normally as you know we do 3 with the volume being down it's been reduced down to 2 but we would expect another ABS transaction, which is 1.
The reasons were.
Generate that cash and cash flow that we've talked about it's going to be and that 25% to 30% range and then obviously next year, we would see it come up and did.
Of that 55% to 60% range so of temporary dip, but yes. The ABS market remains strong very competent and our execution and we will do and other transaction later this year.
Okay and then just.
My last question here.
Mike You had mentioned in your prepared remarks about RCI I believe being down $50 million versus 2019 is that because of.
Membership loss over the past year that would drive that number down and you're.
You're exactly right.
In essence as we all know.
Across the entire time of industry sales of been down and we will have been down for close to 2 years and so it's just no new members.
And our minimal new members coming in and compared to historical levels. So operationally the business is performing very well you can see the great quarter, we had at Pts strong transactions, driven by North America, primarily and and great margins that that control.
So very happy with the way the RCI business is performing and that Unfortunately, just have some headwinds as it relates to new members coming in.
Okay understood. Thank you very much and Sir Thank you Patrick.
And so we will take our next question from Joe Greff with Jpmorgan. Your line is now open.
Good morning, everybody.
Hi, Joe.
Michael and Mike.
The guidance for the second half of the year 3 weeks ago.
And before the Delta variant the spike.
Spikes.
And that guidance be different than what you're providing this morning.
It.
All of the cost would not Joe.
Needless to say as we have for the last 18 months, we're keeping a very watchful eye over what's going on with the most recent search I think it's a little too early to say, if it's going to have an impact to our second half results but.
Here, we are on July the 28, so we have.
We have pretty good visibility on the first third of this quarter and.
And.
The results, we're seeing especially on the vacation ownership side of the business reflect a consumer theres still wants to travel and.
<unk> for us that are.
And 40% to 45% above.
Where we were in 2019 for that same July period, So again, and we will keep a watchful eye.
I think it's a little too early to say that there will be any meaningful impact and July results say that.
We're not seeing it yet and.
So I would say no.
We did the same call 3 weeks ago, our guidance would have been the same.
Got it thank you.
Obviously, the pega was up nicely and I think your prepared comments you talked about it being a little bit maybe close rate related and that's a function of the raising the quality standards and can you just talk about I think maybe more directionally of probably want to talk about.
And at close rate and transaction size changes between new owner and existing and as it.
Directionally similar between those 2 buckets of customers.
Absolutely and it's a great question because as you know as you dig deeper and Theres a lot of detail and the information that comes out in that detail.
For me I mean.
We had an incredibly encouraging first half of the year, but there is a few things that are especially encouraging first of all we said earlier and the year that our new owner mix would be about 25%.
Here, we are and it's already close to 30% and July is even better than that.
No.
And the new owner of recovery is good and Thats. Despite show that we've been very methodical.
And the way, we bring back our new owner tours.
Blue thread tours that we're bringing back already.
Much better growth.
Recover.
Coverage than the than our open market channels and that is a deliberate decision we made.
<unk> reopening those open market channels will bring lower <unk> and <unk>.
And lower margin so as we look to the second half of this year and as we've already seen and the first half of the year the <unk>.
The score, especially blue thread and our open market channels are much higher than they were pre pandemic and we think that those are sustainable for the long haul and we're using that as the foundation of how we want to finish this year and moving into 2022 in order to drive maximum margins out of the VA business.
Great and then 1 final 1.
Your second half the EBITDA guidance.
And does that include any benefit from some of these $94 million of debt.
Reserved from last year being reversed and how much of Thats the case.
Hey, Joe This is micah.
No the guidance that we have does not assume that we take in.
And additional benefit from the Covid reserve that we put in place.
And so are we kind of looking at sort of 18% of the loan loss provision as a percentage of gross VOI sales is that what's embedded for what is embedded in the guidance for that book, Yes, we're assuming it's going to be under under 19%.
Historically, you're right or at least not spoke of but this first half of this.
Here, we've been actually a little bit of clustered <unk>. So the guidance assumes between 18 and 19% provision exclusive of any reserve benefit.
The reserve release.
Thank you guys.
Thank you Joe.
And once again and that Istar and 1 of you would like to ask the question.
And we will take our next question from David Katz with Jefferies. Your line is now open.
Hi, Good morning, everyone. Thanks for taking my questions I wanted to just go back and focus on the reserve for a minute and I did Mike just hear your answer about it the.
The long term.
And our target was always to get.
Below that right and if we can maybe just focus on the long term opportunities for a minute.
Is there still opportunity to get it down to somewhere in the mid teens over time.
And how is that still a realistic outcome post COVID-19.
I think over time, we could get to that 16% to 17% range I think the big challenge, we have and you guys have seen it over the years, we use 10 year loss curves when <unk> and our allowance so the.
Allowance didn't go from 16 to 20 overnight.
And up over time as those loss curve smoothed over time. So the challenge. We have now is every quarter when we had a.
The provision at around 18%. It just takes time for those loss curves and start to move down and hopefully we continue to focus on quality and net provision comes down over time, so and the longer term I think its possible, but when we think about next year I wouldn't expect it to be and the 16 and 17% range next year.
And does that necessarily.
Have to correspond with tour flow growth moderating.
Or can we have and and rather than on the floor.
No. It doesn't I mean, it's all based on several factors first of all would be true of quality and and secondly, the level of Downpayments that we look forward from the consumer.
The.
The things that we're looking at every day is the benefit of lower down payment is you get net interest income and the future, but you sacrifice.
On the current earnings because of the higher provision. So that's the things that we look at when we run the business. When we think about 2022 and what level of downpayment do we want and what type of pure do want to see but no I think.
We can continue to grow our tour flow and keep of provision. That's that's below 19% starts to overtime approached 16 to 17.
A lot of different levers, we can pull but.
And just just keeping everything in mind as it relates to cash flow and current earnings.
David and if I, if I could give guidance.
When when we started this conversation and June of 18 week.
Became our own it and the company.
We're much higher than that and the way of provision and over the last 3 years, we've taken a very holistic point of view on how we want to improve the quality of the tour flow.
The older experience the accessibility to the inventory.
And the efforts we've made around third parties and I think all of that combined with the latest move we've made during COVID-19.
Have put us in the position we are today, which I think what Mike has laid out both with the reserve release.
And the ongoing provision is a very strong position for us to continue all of those efforts into the next 2 to 3 years. So I fully agree with Mike that it's not dependent and it's not directly correlated to the tour flow and I think it's more correlated to the holistic actions were taken as an enterprise.
And David.
Not the continuing on but just 1 other thing I mean, obviously we.
A lot of questions out there when we run the business and the provision that was north of 20% 1 of the quality of the portfolio look like.
Is that going to impact your margin tried our margins were still industry, leading we ran at 20% provision and I think we've proven through the pandemic, we had a very strong portfolio.
Folio I mean, we've only had $85 million and additional default on a 4 billion of our portfolio of since the pandemic hit so I know everybody gets focused on that provision but.
We also like that net interest income and the recurring revenue stream. It brings so I think it's important to understand that that provision is not just an indicator of necessarily the the <unk>.
Quality.
The of the tours that we're seeing but if we do.
Look for lower down payments that grow the portfolio quicker and brings and net interest income and the future. So just a lot of factors that drive that and I think once again of the pandemic gave us the opportunity to prove that there were a lot of questions of our portfolio of strengthen the portfolio has performed incredibly well.
Perfect and if I can just cash.
Just 1 follow up Mike.
And Michael at the risk of.
And are taking some thunder that youll probably plan for the analyst day, you laid out.
Tam for the P&L side of things.
That seems quite large.
If we took a long term view of how the company evolves.
<unk>.
And how would you have us think about kind of the mix of.
Your current core timeshare business with all of the other new things that you've laid out overtime.
Is it possible that it.
It could be closer to a 50.50 mix over the much longer term.
So let me let me come back and just re ground everyone on how we're thinking of our core business, our core baby business vacation ownership and RCI. Those are the those are the fuel of our engine for the next few years simply because on an absolute basis.
The pre pandemic nearly $1 billion of EBITDA and we've laid out our guidance here so the.
Sort of of the law of big numbers dictates that they will be the preponderance of EBITDA and the next few years and it's why I reiterate not only on this call but.
And my other public.
We went to that.
We are committed to growing at or above historical rates and our core business with that said.
It is our clear intention to start growing the mix of our business toward toward recurring predictable revenue streams that don't work.
Require heavy capital investment.
The mirror, what you see on the RCI business model.
50, 50, if you just do the math would require a pretty dramatic shift and I know I don't think we will be there and the next few years, but I do think and we will talk about it and more detail in September we.
The comps are to show that we are beginning our shift and to that recurring revenue stream and.
That's it's not going to happen as fast may be as everyone expects because.
Our core business is continuing to grow at a healthy rate and the rate that we know that we can.
The continued to achieve what we're focused more on that side is reducing our capital commitments and.
And we could talk about that and the separate question, but that's our overall perspective on how we want to grow the business, we want to grow at or above.
Historical rates, obviously, these new lines of business much above.
And.
We'll stay committed to whats got us to the party, which is the vacation ownership and vacation exchange business.
Understood perfect. Thank you very much thank you David.
Thank you that concludes our question and answer period I would now like to turn the call back over to Michael Brown for closing.
Remarks.
Absolutely. Thank you Brittany appreciate.
All of the questions and answers today, and just like to conclude bites and we're very excited about our future and travel and leisure and look forward to sharing more details about the outlook of our core business and our growth plan for our new businesses at our Investor.
And then on September 10th in New York City.
I have our team to thank for their service to our owners members and guests as we embark of what is turning out to be a very busy summer season. Thank you, everyone and have a great day.
Thank you that concludes travel and leisure second quarter 2021.
<unk> Conference call you May now disconnect. Your line at this time and have a wonderful day.
Okay.
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