Q4 2021 Marriott Vacations Worldwide Corp Earnings Call

February 24, 2022

Greetings and welcome to Marriott vacations worldwide fourth quarter 2021 earnings call.

At this time, all participants will be in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll turn the conference over to Neal Goldner, Vice President of Investor Relations Neal you May now begin.

Thank you, Rob and welcome to Marriott Vacations worldwide fourth quarter 2021 earnings Conference call I'm joined today by Steve Weiss, Chief Executive Officer, Our President John Geller, and Toni Terry Our executive Vice President and Chief Financial Officer.

I 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, we'll use it to our website. This morning as well as our comments on this call are effective only one made and will not be updated as actual events unfold.

Throughout the call we will make references to non-GAAP financial information you can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release as well as the Investor Relations page of our website at IR Dot M V. WC Dot com. It's now my pleasure to turn the call over to <unk> CEO .

Steve life. Thanks Neal.

Good morning, everyone and thank you for joining our fourth quarter earnings call.

At the start of 2020, I Couldnt have imagined we still be navigating the landscape we have over the past two years, but despite the continued challenges of the Covid pandemic. The past two years prove people still enjoy going on vacation arguably now more than ever.

It also shows we have a resilient business model this leisure focused and that our owners members and guests value of the time they spend with us.

I couldnt be more proud of our associates continued dedication to our owners guests and each other and how our organization performed this past year, culminating with our highest quarterly adjusted EBITDA since being spun off more than 10 years ago.

As you know we have a long history of supporting philanthropic efforts such as children's Miracle network hospitals claimed the world and our harvest for hunger campaign.

With that in mind I'm very happy to say, we are making exciting commitment with mega wish to offer unique villa stays in the other memorable vacation experiences for deserving children and their families.

We all know how vacations are restorative and invigorating and we are honored to share our vacation destinations and experiences with those who need them most.

With a strong recovery in our business, we were able to restart our long standing history of returning excess cash to shareholders, returning nearly $100 million in the fourth quarter, including repurchasing nearly $74 million of our common stock and reinstating our dividend at pre pandemic levels and last.

Week, our board approved a 15% increase to our quarterly dividend to <unk> 62 per share and increased our share repurchase authorization, bringing our remaining capacity to approximately $445 million looking.

Looking ahead, we see continued strength in our business and our products, which we expect will enable us to drive strong growth and free cash flow this year and for years to come.

Before I turn the call over to John and Tony I'd like to share what I think are some of the highlights of the quarter and I'll start with our vacation ownership business.

Occupancies were again very strong despite the emergence of the omicron variant late in the quarter illustrating People's desire to go on vacation in fact, many of our North American resorts had occupancy is in line with or better than 2019.

For example, we ran over 95% occupancy in Hawaii at our Florida Beach resorts for the quarter.

Occupancy at our desert resorts, which include Phoenix, Scottsdale, and Palm desert exceeded 90%.

Orlando another large market for us ran over 85% and a couple of our urban locations have also come back nicely with San Diego running 85% occupancy and Boston running nearly 95%.

With domestic occupancy averaging nearly 90% in the quarter strong sequential tour growth and V. P G, 23% higher than two years ago.

We delivered $406 million in contract sales exceeding 2019 levels for the first time since the pandemic began.

First time buyers represented 28% of contract sales, which was a 600 basis point improvement from last year's fourth quarter.

As I've mentioned in the past growing first time buyers as a key part of our overall strategy as they historically double their revenue contribution within the first five years of ownership. So I'm excited to see the progress we're making in this area. In addition, our digital booking tool that enables guests to buy preview packages online and in many.

<unk> book their vacation dates is now alive and positively impacting our package sales growth.

We're also making good progress integrating well into our Hyatt vacation ownership business.

Interval International successfully welcomed Walt garners as members effective January one.

Our plan to rebrand <unk> points program to Hyatt in the second quarter is progressing this will enable our former wealth sales centers to start selling a hyatt branded vacation ownership product.

In the second quarter. The resorts are also expected to be added to the Hyatt reservation system, giving us the ability to list our rental inventory on Hyatt Dot com.

We also plan to implement new owner benefits, including enabling wealth owners the ability to trade their points for world of Hyatt points.

And later this year, we will begin rebranding the individual resorts, which we expect to complete next year.

So 2022 is looking to be very busy, but exciting and exciting year for our Hyatt business.

Moving to our exchange <unk> third party management business in December we announced an exciting new agreement affiliating Denver Disney vacation club with interval.

It's nearly 270000 members Disney vacation club was one of the largest brands names in the vacation ownership business and this agreement further solidifies intervals position as the Premier Exchange company in the industry.

Presenting some of the highest quality and most sought after resorts in the business.

Interval also welcomed more than 38000, new wealth members in January as well as nearly 12000, new members from <unk> resorts.

And it will also entered into a long term agreement with RCD hotels to affiliates of our newest project Nobu residences, Los Cabos, which is expected to open later this year.

So let's talk about the coming year.

Our marketing team continues to do a great job growing our tour package pipeline.

We ended the year with nearly 224000 tours in our pipeline, which was 5% higher than where we stood at the end of the third quarter and roughly in line with year end 2019. This puts us in a great position to drive tours and sales this year.

In a recent CNBC survey, 70% of leisure travelers said they plan to spend more money on travel in 2022 than they have in any of the past five years.

And a separate Expedia survey, 81% of people said they plan to take at least one vacation with family members. This year.

Two thirds of our owners surveyed said they were likely to travel in the next three months.

Over the past two years has proven anything is that people appreciate their time with family and friends and want to go on vacation.

As a company, whose sole purpose is providing travelers great vacation experiences, we couldnt be in a better position.

We also have a lot of new things, we've been working on to grow our business long term, which we will discuss in more detail during our June 17th Investor Day.

From launching a new unified product, combining our western Marriott and Sheraton branded products into one new offering to investing to provide more personalized experiences for our customer to using data analytics and new and exciting ways to further enhance our business. We are in a great position to grow our company this year and form.

Many years to come.

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

Thanks, excuse me, thanks, Steve and good morning, everyone today I'm going to review our fourth quarter results and highlight the continued strong recovery, we've seen across our businesses. After that I will turn the call over to Tony to discuss the strength of our balance sheet and liquidity position and discuss.

Our 2020 to expectations.

Starting with our vacation ownership business. Despite the emergence of <unk> of the omicron variant in the fourth quarter.

Occupancies remained very strong averaging nearly 90% for the quarter, despite lower occupancies at our European and Asian resorts and tourist grew sequentially.

With our product continuing to resonate very well with customers and our tour channel optimization work.

<unk> increased slightly on a sequential basis and remained well above pre pandemic levels. As a result, we ended the year on a strong note growing contract sales by 7% sequentially in the fourth quarter to $406 million exceeding our 2019 levels for the first time since the <unk>.

<unk> started.

We grew adjusted development profit by 13% sequentially to $111 million adjusted development profit margin expanded sequentially by 160 basis points to 31% the highest margin in our 10 years since becoming a public company highly.

Highlighting the benefits of more efficient marketing and sales spending lower inventory costs and our synergy savings.

Turning to our vacation ownership rental business as I've mentioned previously as the pandemic progressed and leisure travel began to return we chose to allocate more of our rental keys to owners and make sure they had ample opportunity to get on vacation, but despite that we grew rental profit by 26% to <unk>.

$32 million in the quarter with average revenue per key increasing 14% sequentially.

The stickier revenue businesses within our vacation ownership segment also performed well in the quarter.

Resort management revenue increased 1% compared to the third quarter. However profit declined $8 million as we wrote off $7 million of management fee receivables related to our capital efficient arrangement in San Francisco one of our few locations that has not fully recovered from COVID-19 .

Excluding that resort management profit would have been relatively flat compared to the third quarter and margin would've been roughly 56%.

And the financing and financing profit increased 26% from the prior year, primarily due to the inclusion of wealth.

As a result total adjusted EBITDA in our vacation ownership segment increased 8% sequentially to $234 million the quarter benefited from strong contract sales growth and adjusted development margin higher rental profit and the impact of our business transformation initiatives.

Enabling us to deliver margins that were 130 basis points higher than two years ago.

Quarter also benefited from the additional wells, which contributed $27 million of contract sales and $14 million of adjusted EBITDA in the fourth quarter.

Turning to the exchange <unk> third party management segment active members at interval declined slightly on a sequential basis and average revenue per member was largely unchanged.

As a result, adjusted EBITDA at <unk> at.

At our exchange <unk> third party management segment declined roughly $4 million sequentially.

Looking forward with the addition of Disney well and El Cid members that joined interval in January we expect to see solid growth in our exchange <unk> Third Party management segment this year.

Finally, our corporate G&A expense remained relatively in line with the third quarter as we continue to closely manage our expenses for.

For the total company adjusted EBITDA increased 6% in the quarter on a sequential basis to $219 million and margin improved nearly 250 basis points compared to the fourth quarter of 2019, demonstrating the strength of our leisure focused business model and the benefits of our synergy and transferred.

Asian initiatives.

With that I'll turn the call over to Tony to discuss our balance sheet cash flow in 2022 guidance Tony.

Thanks, John and good morning to everyone.

I'm very happy with our strong results this quarter.

With our balance sheet, we ended the year with nearly $1 1 billion in liquidity, including $342 million of cash gross notes receivable eligible for securitization.

$13 million and almost $600 million of available capacity under our revolver.

Also had $4 5 billion of debt outstanding.

Including $1 $9 billion of nonrecourse debt related to our securitized notes receivable.

Given our strong performance in October we repaid $250 million of our 690% notes due in 2025. We also returned nearly $100 million in cash to shareholders in the fourth quarter, including the repurchase of $74 million of our shares and paying our first.

Dividends since the pandemic started.

In addition, we used $59 million of cash to acquire the remaining San Francisco units fulfilling our.

Our commitment for this capital efficient arrangements.

Now, let's turn to our 2022 guidance.

As you saw in our press release last night, despite the softness we experienced in January and early February due to omicron, we expect full year contract sales to grow 22% to 29% this year compared to 2021 with growth coming from a combination of higher tours and continued strong GPT.

With that growth, our channel optimization work and our ability to leverage fixed marketing and sales costs I would expect our adjusted development margin to remain well above 2019 levels. This year.

Moving to our rental business given the strong leisure travel demand environment, we expect transient keys rented and average revenue per key to be up compared to last year.

This should drive a year over year increase in our rental profit. However, similar to last year, we do expect to allocate a portion of our rental inventory for owner use to provide them with increased opportunity to book their vacation.

In our financing business.

With our notes balanced currently approaching our average note balance for 2019 and contract sales expected to grow double digits. This year financing profit should increase by more than 15% compared to last year.

In our exchange <unk> Third Party management segment. The addition of Disney Vacation club wealth and <unk> brought us over 300000, new interval members at the beginning of this year, a more than 20% increase compared to where we ended in 2021.

With average revenue per member are expected to remain relatively flat compared to last year, We expect our exchange and third party management segment to post mid teens adjusted EBITDA growth this year.

In total we expect to generate $860 to $920 million of adjusted EBITDA, this year or more than 35% year over year growth at the midpoint and just as importantly, 17% higher than 2019.

With that we expect adjusted EBITDA margins to improve roughly 250 basis points compared to last year at the midpoint of the range with the biggest increases expected to come from our rental and development businesses.

Our adjusted EBITDA guidance also includes roughly $25 million to $30 million of incremental in the year synergy savings as we work to achieve our totaled $200 million run rate savings.

Inflation is obviously in the news today, So let me spend a few minutes talking about the impact of inflation on our business.

Generally speaking higher inflation is not good for the consumer or the economy as a whole since it can decrease purchasing power. However, our business has some natural mitigates against inflation.

For example, our.

Our target customer has a median annual income of around $130000 and a self reported net worth of around $1 $5 million. So their disposable income is typically less impacted.

We do some benefit on some wages and other expenses at the property level are borne by the homeowners associations, while many of our marketing and sales positions our commission and incentive oriented based on production.

We have the ability to drive price per point as well as higher pricing in our ancillary and rental businesses, allowing us to offset the potential impact to our margins and a higher cost environment.

In addition, higher pricing in the rental business often translates to a better value proposition to our customer given the increased cost of alternative products.

Have ample inventory on the balance sheet, the ability to reacquire low cost inventory and no material construction underway. So our exposure to inflation on the development side of the business is limited over the next few years.

And from an interest expense perspective, roughly 90% of our funded corporate debt is fixed and increases in ABS cost would only impact future issuances.

So while we're not completely immune from higher inflation, our exposure is manageable.

While we are not providing quarterly guidance, we do expect the softness we saw towards the beginning of the quarter due to omicron to impact our first quarter results.

It's also important to remember that given the normal seasonality in contract sales growth. Our first and second quarters are typically negatively impacted by revenue reported ability for example in first quarter 2019, our adjusted EBITDA was negatively impacted by $21 million of reported ability and.

This year's first quarter I would expect it to be in the similar range.

As a reminder, this is only timing as the revenue and profit will get reported as we go through the year with most of the deferral being being recovered in the fourth quarter.

I would also like to point out that our guidance includes the adoption of the new accounting standard regarding convertible debt requiring us to change our accounting for our convertible notes and impacting the calculation of diluted earnings per share.

As a result diluted earnings per share and no longer includes imputed interest on the convertible notes and assumes the $805 million notes were converted into shares of common stock on January one 2022.

This results in the addition of approximately 5 million shares of common stock to the diluted earnings per share calculation and in excess of $30 million and lower interest expense.

With the strong adjusted EBITDA growth were expecting this year, we should generate substantial free cash flow.

We ended 2021 with nearly $600 million infectious inventory and we expect to spend more than $100 million on reacquired low cost inventory this year.

In addition, given our previously reported Paydown of outstanding debt, we expect our 2022 cash interest expense to be around $20 million lower than 2019.

As a result, we expect our free cash flow conversion to be into 65% to 70% range. This year and we expect to generate adjusted free cash flow of between $560 million and $640 million highlighting the continued benefits of our capital efficient development model and the bench.

Of our excess inventory.

Outside of our normal free cash flow, we still have roughly $100 million to $125 million of potential cash proceeds from non strategic real estate assets that we are working to dispose of over the next couple of years.

Consistent with our past approach, we will look to use free cash flow to invest in growing the business organically or through strategic acquisitions and the absence of compelling acquisitions, our best use of excess free cash flow remains returning capital to shareholders through dividends and share repurchases.

In summary, we.

We finished the year strong and we expect 2020 to be a strong growth year for the company as always we appreciate your interest in Marriott vacations worldwide.

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

Thank you we will now be conducting a question and answer session. If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Okay.

Thank you and our first question will be coming from the line of Patrick <unk> with <unk> Securities. Please proceed with your question.

Hi, Patrick Hi.

Good morning, everyone.

Several questions here I know you folks have talked about.

In the past the trajectory.

BTG.

Boeing down.

Is that is that.

Still the case here going forward, how should we think about that.

Trajectory over the next several years. Thank you.

Arris Arithmetically, one would assume that as you increase the number of first time buyers, which traditionally have a lower <unk> existing.

The existing owners that when you mix that all together you get a reduction in V. P. G. I will say to you that we have been expecting that turn.

To materialize, even as early as the second half of last year and into the first your first part of this year and it has not happened I mean, even though our first time buyer sales have grown very nicely.

We still maintain a very robust <unk> with our existing owners and Oh by the way. The first time buyer <unk> has actually grown so between those two things. It is not dropped I would expect however that as we get through more first time buyers and a higher percentage of the mix as we go further.

That youll see some decline however, we fully expect that.

<unk> for the full year.

We'll still materially outpace what we did in say 2019.

Okay. Thank you and then just.

A question regarding the share count as it relates to the convertibles.

The implied share count for this year backing into it is about $48 6 million.

What.

You do have some convertible debt expire roll off this year the 2020 twos.

What would that imply if we're going to be.

Modeling say 23, or 24, EPS, what would the implied share count be once those 20 two's expire because you still have the I think it's a 2026 is left in there.

Yes, the impact of the.

The 'twenty twos I think is about $1 7 million shares. So in total there is about $5 million due to the change in the accounting rules of shares that go into our diluted the remainder to get you up to $5 million is the $575 million notes right.

So.

Just a little bit of history right the existing accounting through the end of 'twenty one.

We always take a discount rate and notwithstanding interest on the 230 was one 5% on the $575 million zero interest expense right is imputed up to the 5% right. So thats what hits gap and then the dilution impact was only if the convert.

<unk> was in the money right and it was only I think the.

$230 million at times had been in the money, but it was about a couple of hundred thousand shares of dilution impact under the new rules the accounting changes the whole discount for GAAP goes away et cetera. So it's essentially cash runs through your GAAP net income that you're getting the benefit if you will right of higher net income however, the rules.

You have to assume that you converted the debt as of the first of that year right and it was outstanding that's why we put the 5 million shares in that right so but.

But you also think about it from a capital perspective, if youre, assuming that rate higher share count.

I've got $805 million of less debt right in my capital stack because so R.

Our corporate debt wouldn't be to six it would be 800000 less rate or $800 million less for the convertible debt. So just a little bit different accounting, but that's the that's kind of where the accounting rules take everybody for convertible debt on January one.

Understood I appreciate it I'll go back and adjust our models accordingly.

I'm all set thank you.

Yes, Thanks Patrick.

Thank you. Our next question is from the line of Chris <unk> with Deutsche Bank. Please proceed with your question.

Good morning, Hey, good morning, guys.

Good morning.

So you guys talk a little bit in the prepared comments about.

The increase the attractiveness of timeshare with hotel rates, especially resorts skull, where they are.

Have you formally changed kind of the marketing I know you like to run through the math with people. If you have you been able to kind of.

Formally changed those formula is yet to come.

Make that argument even more convincing.

Okay.

When you say marketing I assume youre talking about when you are talking to a prospect about becoming an owner is that right.

Yes, that's where I kind of that yes, the formal process, where you walk through the math sure I mean, typically I mean.

There is no.

Every conversation we have with that owner is very much based on kind of a separate discovery process, we use with that honor and things that we accentuates or not do so no. One no two presentations are identical but <unk>.

Generally speaking one of the things we talk about is the relative value of owning timeshare.

Over time versus.

<unk> spending time.

Hotel rooms.

On a similar type vacation so exam.

Examples we've used in the past or if you were here in Orlando and staying at the J W. Marion Harris Grande Lakes and.

You and your family had occupy a couple of rooms, and it was 30 or $350 a night, which now maybe $400 90 based on some of the inflationary trends and everything else.

At the end of the so youre spending $800 a night on just your accommodations arguably with less square footage than we have in one of our units.

Then contrast, a week stay there which.

Just doing the arithmetic.

It says that you guys spent $5000.

And at the end of the day, you're going to walk away with a copy of our receipt and maybe some points earned on your credit card, but thats all you have.

Well, if you bought call it 2500 points from us.

Currently that would cost you about $32000 plus or minus.

So you do the cricket quicker with Mitek and say in six or seven year timeframe. When you include the maintenance fee that youre going to pay every year you are paid off and then.

Your cost of staying in the system not just here in Orlando, but just cost of staying in the system is really limited to.

What goes on with your with your annual maintenance fee.

No.

To be honest I mean, some people are far more sensitive to that discussion are going through the mental gymnastics of looking for how many year payback and I got to get other people are not as we've talked about obviously our demo for our customers has a tendency to skew towards the higher end so.

There is no question when the cost of alternative stays are our priority.

Ways to vacation someplace continue to go up I think it makes the argument about buying a timeshare interest more compelling.

Okay.

Steve.

I guess as a follow up you mentioned in the comments do you think PPG for.

22 will still be above 19, as Youre building back tour flow.

The question is it based on what you've seen maybe past three to six months as the recoveries gain some steam.

Are you seeing higher <unk> from first relative to kind of pre COVID-19 .

The first time buyers spending more or the.

Returning value to existing owners spending more relative to what maybe they spend I know it's.

Tough question that compare apples to apples, but I actually think it's a very good question Chris.

Very good question, because I got a statistic in front of me, but I can point to.

Yes.

So let me just give you a contrast of what's happened with <unk> and I'll contrast, what's happened in the fourth quarter of 2021 versus the fourth quarter of 2019.

Our <unk> for first time buyers are up $500 over what they were in 2019 and.

<unk> for owners are up $800.

Compared to where they were in the fourth quarter of 2019. So we are seeing improvement in APG on both owners and first time buyers.

Which I am part of that is.

We've gone through continued to go through looking at channel optimization and everything else. So I think our sales team continues to be even better obviously, the economic backdrop at least prior to yesterday.

Literally adventure from potent.

I think the economic backdrop has continued to be.

Increasingly good so for all those reasons, we are very very bullish about how we think <unk> is going to play out at least for 'twenty, two and potentially into the years beyond that.

And Chris on that note.

The numbers Steve was mentioning.

It's a 21% increase in <unk> for the first time buyers and a 17% increase for the owners. So those first time buyers are increasing at a faster rate for PPG, which is pretty interesting as well.

Okay, Yes.

That's terrific thanks, guys very helpful.

Thank you.

As a reminder to ask a question you May press Star one.

Question is from the line of our sheet GFR with Jefferies. Please proceed with your question.

Hi, good morning.

Are you guys, maybe they will touch on or expand on just the long term opportunity for Wow.

In terms of relative size of the revenue or EBITDA of the company.

Well.

I mean.

At a 30000 foot level.

We are essentially increased the size.

When you fast forward one all the wall properties effectively.

Effectively all re badge and rebranded as Hyatt.

We will have increased the size of the portfolio by 50% and the number of owners.

I think it's 80% or 90% is my recollection.

Obviously with fat NK. So we've got additional sales centers in that will come into the Hyatt portfolio, which were previously wealth centers.

Have been and are continuing to be in the process of making sure that we are trying to reposition those sales centers and the channels that they play in.

Not on similar to what we did with the.

The staff sales centers in terms of channel optimization and getting out of some of those high cost low yield channels and the like.

If youre looking for a specific dollar number I'll ask John to jump in yeah. So just a little bit of background rate when we underwrote and bought well Theyre 19, pre COVID-19 numbers was roughly $30 million in EBITDA and what we talked about kind of on an apples to apples basis, where we could drive development.

<unk> improvement better rental profits grow contract sales by leveraging the Hyatt brand and all of that on a comparable basis, we wanted to get to call. It 60% to $70 million. So it would take a few years to get there and Steve walked through in his prepared remarks, all the great stuff that we're launching this year with well as we.

Start the rebranding process. The first one really be I mean, we're still selling a wealth product today in the second quarter. The goal is to rebrand the wealth <unk> program and then have to the Hyatt brand and then start to sell that product branded Hyatt right at all the legacy wealth now seem to be highest sales centers that.

All of those resorts and then.

Start to unlock the benefits that the owners will get.

And then over time as you move through the year get all the rebranding and then bring the existing Hyatt clubbed together with the rebrand it well. So we haven't really seen a lot of the benefit yet, but what I can report for 'twenty one.

On the business for three quarters, but if we pro forma in the first quarter. It was roughly we delivered about $50 million of EBITDA last year versus where we want to get to the $60 to 70 that we underwrote. So we're we're well on our way and we haven't really unlocked a lot of the stuff right more blocking and tackling integrating the.

Ms et cetera, so it's going very well hopefully we'll be able to report something more than the 60 to 70 as we start to get more of the benefits down the road, but just in the in the 'twenty. One numbers, we saw that development margin in the double digits, where when it was well it was call it roughly 5%, so youre getting that flow through there.

And then once we get these properties here in the second quarter on Hyatt Dot com.

Spec to be able to drive some of the rental income et cetera over time, So I think.

We're probably a little bit ahead of where we thought we'd be at this point in terms of the results. We're on track with the rebranding and the timing of all that it's just that we haven't necessarily started to see any of that benefit yet right because that's going to some of that will start.

Here in the second quarter.

Great. Thank you and then if I can also just ask what are you guys seeing today or maybe expect to see with just respect to the ABS market for securitization deals just given the rising rate environment.

Yes, we are.

Talking to the banks already and monitoring.

The economic environment right now rates are slightly higher and there is still in the two handle range.

Range right now, but that changes every day versus what we see we still have an expectation of doing a couple of ABS deals this year.

And so.

That is in our plan going forward. So we will be using that or Conversely, we do ever warehouse available that we could use as well yes.

One benchmark I'd add to Tony's is remember the deals we did last year in the one five to one six those are the best deals we've ever done so interest rates have increased but to put it in perspective at the end of the year, our weighted average securitization rate was roughly $2 seven two way right. So even.

And if rates go up over 100 basis points at which is generally what we're seeing right now.

If you do a deal in the high twos, 3% Youre still net net replacing it what's coming off your balance sheet not $2 seven to eight range was something very comparable in terms of how you think about the weighted average excess spread on these deals so.

I guess, that's the nice thing about how we outperform last year is that it shouldnt necessarily depending on where we see rates today cut into rate excess or excess spread.

I appreciate it thanks for the time.

Okay. Thank you.

Thank you at this time, we've reached the end of the question and answer session and I will turn the call over to Steve Weiss for closing remarks.

Thanks Ralph.

Thanks, everyone for joining our call today.

'twenty one proved to be quite an eventful year for our company.

Among our many accomplishments we delivered nearly $1 $4 billion in contract sales invested in new digital initiatives to drive growth in the future.

Acquired well substantially improved margins and started to return cash to shareholders again.

And we ended the year on a strong note.

In our vacation ownership business, we grew contract sales by 7% sequentially in the fourth quarter exceeding our 2019 levels for the first time since the pandemic started despite the emergence of the omicron variant in the fourth quarter.

We're also adding new first time buyers, which is a key part of our strategy and have nearly 224000 tours in our pipeline, which puts us in a great position to drive tours and sales this year.

In our exchange <unk> third party management segment interval signed a number of new customers, including Disney vacation club that in total will add more than 300000, new members in 2022.

We returned more than $100 million in cash to shareholders in 2021, and just last week, our board approved a 15% increase to our quarterly dividend and increased our share repurchase authorization.

Also investing to provide more personalized experiences for our customers.

Sorry.

You got 11, Apple watch I apologize, we're also investing to provide more personalized experiences for our customers and using data analytics and new and exciting ways to further enhance our business.

As the past few years have proven anything it's that people want to go on vacations and as a company whose sole purpose is providing travelers great vacation experiences, we couldnt be in a better position as always thank you for your interest take care of yourselves and finally to everyone on the call and your families stay safe and enjoy your next to vacate.

<unk>.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

[music].

Greetings and welcome to Marriott vacations worldwide fourth quarter 2021 earnings call.

At this time, all participants will be in listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero from your telephone keypad.

Please note this conference is being recorded.

At this time I'll turn the conference over to Neal Goldner, Vice President of Investor Relations Neal you May now begin.

Thank you, Rob and welcome to Marriott Vacations worldwide fourth quarter 2021 earnings Conference call I'm joined today by Steve <unk>, Chief Executive Officer, Our President John Geller, and Toni Terry Our executive Vice President and Chief Financial Officer.

I need to remind everyone that many of our comments today are not historical facts and are considered forward looking statements under federal Securities laws.

Throughout the call we will make references to non-GAAP financial information you can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release as well as the Investor Relations page of our website at IR Dot MV WC Dot com. It's now my pleasure to turn the call over to <unk> CEO .

Steve lives.

Thanks, Neil Good morning, everyone and thank you for joining our fourth quarter earnings call.

At the start of 2020, I Couldnt imagine, we'd still be navigating the landscape we have over the past two years, but despite the continued challenges of the Covid pandemic. The past two years prove people still enjoy going on vacation arguably now more than ever it.

Also shows we have a resilient business model this leisure focused and that our owners members and guests value of the time they spend with us.

As you know we have a long history of supporting philanthropic efforts such as children's Miracle network hospitals claimed the world and our harvest for hunger campaign.

With that in mind I am very happy to say, we are making exciting commitment with mega wish to offer unique first days and the other memorable vacation experiences for deserving children and their families.

We all know how vacations are restorative and invigorating and we are honored to share our vacation destinations and experiences with those who need them most.

Wheat, our board approved a 15% increase to our quarterly dividend to <unk> 62 per share and increased our share repurchase authorization, bringing our remaining capacity to approximately $445 million.

Looking ahead, we see continued strength in our business and our products, which we expect will enable us to drive strong growth and free cash flow this year and for years to come.

Before I turn the call over to John and Tony I'd like to share what I think are some of the highlights of the quarter and I'll start with our vacation ownership business.

For example, we ran over 95% occupancy in Hawaii at our Florida Beach resorts for the quarter.

Occupancy at our desert resorts, which include Phoenix, Scottsdale, and Palm desert exceeded 90%.

Orlando another large market for us ran over 85% and a couple of our urban locations have also come back nicely with San Diego running 85% occupancy and Boston running nearly 95%.

With domestic occupancy averaging nearly 90% in the quarter strong sequential tour growth and <unk>, 23% higher than two years ago.

We delivered $406 million in contract sales exceeding 2019 levels for the first time since the pandemic began.

First time buyers represented 28% of contract sales, which was a 600 basis point improvement from last year's fourth quarter.

Aces book their vacation dates is now alive and positively impacting our package sales growth.

We're also making good progress integrating well into our Hyatt vacation ownership business.

Interval International successfully welcomed Walt garners as members effective January one.

Our plan to rebrand <unk> points program to Hyatt in the second quarter is progressing.

This will enable our former wealth sales centers to start selling a hyatt branded vacation ownership product.

In the second quarter. The resorts are also expected to be added to the Hyatt reservation system, giving us the ability to list our rental inventory on Hyatt dot com that we.

We also plan to implement new owner benefits, including enabling wealth owners the ability to trade their points for world of Hyatt points and later this year, we will begin rebranding the individual resorts, which we expect to complete next year.

So 2022 is looking to be very busy, but exciting and exciting year for our Hyatt business.

Moving to our exchange <unk> third party management business in December we announced an exciting new agreement affiliating Denver Disney vacation club with interval with its nearly 270000 members Disney vacation club is one of the largest brands names in the vacation ownership business and this agreement further solidifies.

Intervals position as the Premier Exchange company in the industry, representing some of the highest quality and most sought after resorts in the business.

<unk> also welcomed more than 38000, new wealth members in January as well as nearly 12000, new members from <unk> resorts.

And it will also entered into a long term agreement with RCD hotels to affiliates of our newest project Nobu residences, Los Cabos, which is expected to open later this year.

So let's talk about the coming year.

Our marketing team continues to do a great job growing our tour package pipeline.

In a recent CNBC survey, 70% of leisure travel or said they plan to spend more money on travel in 2022 than they have in any of the past five years.

In a separate Expedia survey, 81% of people said they plan to take at least one vacation with family members. This year.

And two thirds of our owners survey said they were likely to travel in the next three months.

Over the past two years has proven anything is that people appreciate their time with family and friends and want to go on vacation.

As a company, whose sole purpose is providing travelers great vacation experiences, we couldnt be in a better position.

We also have a lot of new things, we've been working on to grow our business long term, which we will discuss in more detail during our June 17th Investor Day.

Many years to come.

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

Our 2020 to expectations.

Starting with our vacation ownership business. Despite the emergence of omicron omicron variant in the fourth quarter Occupancies remained very strong averaging nearly 90% for the quarter, Despite lower occupancies at our European and Asian resorts and tourist grew sequentially.

With our product continuing to resonate very well with customers and our tour channel optimization work.

<unk> increased slightly on a sequential basis and remained well above pre pandemic levels.

As a result, we ended the year on a strong note growing contract sales by 7% sequentially in the fourth quarter to $406 million exceeding our 2019 levels for the first time since the pandemic started.

We grew adjusted development profit by 13% sequentially to $111 million.

Adjusted development profit margin expanded sequentially by 160 basis points to 31%.

<unk> margin and our 10 years since becoming a public company highly.

Highlighting the benefits of more efficient marketing and sales spending lower inventory costs and our synergy savings.

$32 million in the quarter with average revenue per key increasing 14% sequentially.

The stickier revenue businesses within our vacation ownership segment also performed well in the quarter <unk>.

One of our few locations that has not fully recovered from COVID-19 .

Excluding that resort management profit would have been relatively flat compared to the third quarter and margin would have been roughly 56%.

And the financing and financing profit increased 26% from the prior year, primarily due to the inclusion of wealth.

Enabling us to deliver margins that were 130 basis points higher than two years ago.

Quarter also benefited from the additional well, which contributed $27 million of contract sales and $14 million of adjusted EBITDA in the fourth quarter.

Turning to the exchange and third party management segment active members at interval declined slightly on a sequential basis and average revenue per member was largely unchanged.

As a result, adjusted EBITDA added at our exchange and third Party management segment declined roughly $4 million sequentially.

Looking forward with the addition of Disney wealth and <unk> members that joined interval in January we expect to see solid growth in our exchange and third party management segment. This year.

Finally, our corporate G&A expense remained relatively in line with the third quarter as we continue to closely manage our expenses for.

<unk> initiatives.

With that I'll turn the call over to Tony to discuss our balance sheet cash flow in 2022 guidance Tony.

Thanks, John and good morning to everyone.

I'm very happy with our strong results this quarter.

With our balance sheet, we ended the year with nearly $1 1 billion in liquidity, including $342 million of cash gross notes receivable eligible for securitization.

$13 million and almost $600 million of available capacity under our revolver.

We also had $4 $5 billion of debt outstanding include.

Including $1 $9 billion of nonrecourse debt related to our securitized notes receivable.

Given our strong performance in October we repaid $250 million of our 690% notes due in 2025.

We also returned nearly $100 million in cash to shareholders in the fourth quarter, including the repurchase of $74 million of our shares and paying our first dividend since the pandemic started.

In addition, we used $59 million of cash to acquire the remaining San Francisco units fulfilling our.

Our commitment for this capital efficient arrangements.

Now, let's turn to our 2022 guidance.

With that growth, our channel optimization work and our ability to leverage fixed marketing and sales costs I would expect our adjusted development margin to remain well above 2019 levels. This year.

Moving to our rental business given the strong leisure travel demand environment, we expect transient keys rented and average revenue per key to be up compared to last year. This.

In our financing business.

In our exchange <unk> Third Party management segment. The addition of Disney Vacation club wealth and they will see it progress over 300000, new interval members at the beginning of this year, a more than 20% increase compared to where we ended in 2021.

In total we expect to generate $860 to $920 million of adjusted EBITDA, this year or more than 35% year over year growth at the midpoint and just as importantly, 17% higher than 2019.

Our adjusted EBITDA guidance also includes roughly $25 million to $30 million of incremental in the year synergy savings as we work to achieve our totaled $200 million run rate savings.

Inflation is obviously in the news today, So let me spend a few minutes talking about the impact of inflation on our business.

Generally speaking higher inflation is not good for the consumer or the economy as a whole since it can decrease purchasing power. However, our business has some natural mitigates against inflation for.

For example, our.

Our target customer has a median annual income of around $130000 and a self reported net worth over around $1 $5 million. So their disposable income it is typically less impacted.

Wages and benefits and wages and other expenses at the property level are borne by the homeowners associations, while many of our marketing and sales positions our commission and incentive oriented based on production.

We have the ability to drive price per point as well as higher pricing in our ancillary and rental businesses, allowing us to offset the potential impact to our margins and a higher cost environment.

In addition, higher pricing in the rental business often translates to a better value proposition to our customer given the increased cost of alternative products.

And from an interest expense perspective, roughly 90% of our funded corporate debt is fixed and increases in ABS cost would only impact future issuances.

So while we're not completely immune from higher inflation, our exposure is manageable.

While we are not providing quarterly guidance, we do expect the softness we saw towards the beginning of the quarter due to omicron to impact our first quarter results.

This year's first quarter I would expect it to be in the similar range.

As a reminder, this is only timing as the revenue and profit will get reported as we go through the year with most of the deferral being recur being recovered in the fourth quarter.

This results in the addition of approximately 5 million shares of common stock to the diluted earnings per share calculation and in excess of $30 million and lower interest expense.

With the strong adjusted EBITDA growth, we are expecting this year, we should generate substantial free cash flow.

We ended 2021 with nearly $600 million of excess inventory and we expect to spend more than $100 million on reacquired low cost inventory this year.

In addition, given our previously reported pay down of outstanding debt, we expect our 2022 cash interest expense to be around $20 million lower than 2019.

As a result, we expect our free cash flow conversion to be into 65% to 70% range. This year and we expect to generate adjusted free cash flow of between $560 and $640 million highlighting the continued benefits of our capital efficient development model and the bench.

Of our excess inventory.

In summary, we.

We finished the year strong and we expect 2020 to be a strong growth year for the company as always we appreciate your interest in Marriott vacations worldwide.

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

Thank you we will now be conducting a question and answer session.

To ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue.

May press star two if you'd like to remove your question from the queue.

For participants are using speaker equipment may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Okay.

Thank you and our first question will be coming from the line of Patrick <unk> with <unk> Securities. Please proceed with your question.

Hi, Patrick Hi.

Good morning, good morning, everyone.

Several questions here I know you folks have talked about.

In the past the trajectory of <unk>.

<unk>.

Going down.

Is that is that.

It's still the case here going forward, how should we think about that.

Trajectory over the next several years. Thank you.

Arris Arithmetically, one would assume that as you increase the number of first time buyers, which traditionally have a lower <unk>.

Owners that when you mix that all together you get a reduction in V. P. G. I will say to you that we have been expecting that turn to.

We still maintain a very robust <unk> with our existing owners and Oh by the way. The first time buyer of EPA has actually grown so between those two things. It is not dropped I would expect however that as we get through more first time buyers and a higher percentage of the mix as we go further.

That youll see some decline however, we fully expect that.

<unk> for the full year.

We will still materially outpaced what we did in say 2019.

Okay. Thank you and then just.

A question regarding the share count as it relates to the convertibles.

The implied share count for this year backing into it is about $48 6 million.

What.

You do have some convertibles that expire roll off this year the 2020 twos.

Would that imply if we're going to be.

Modeling to say 'twenty, three or 'twenty four EPS, what would the implied share count be once those 20 two's expire because you still have the I think it's a 2026 is left in there.

Yes, the impact of the.

The 'twenty twos I think is about one 7 million shares. So in total there was about $5 million due to the change in the accounting rules of shares that go into our diluted the remainder to get you up to $5 million is $575 million notes right.

Just a little bit of history right the existing accounting through the end of 'twenty one.

And the money right and it was only I think.

The $230 million at times had been in the money, but it was about a couple of hundred thousand shares of dilution impact under the new rules the accounting changes the whole discount for GAAP goes away et cetera. So it's essentially cash runs through your GAAP net income that you're getting the benefit if you will right of higher net income however, the rule.

Say you have to assume that.

<unk> converted the debt as of the first of that year right and it was outstanding that's why we put the 5 million shares in that right. So.

But you also think about it from a capital perspective, if youre, assuming that rate higher share count well I've got $805 million of less debt right in my capital stack because so R.

Our corporate debt wouldn't be two six that would be 800000 last rate or $800 million less for the convertible debt. So just.

But different accounting, but that's the that's kind of where the accounting rules take everybody for convertible debt on January one.

Understood I appreciate it I'll go back and adjust your models accordingly.

I'm all set thank you.

Yes, Thanks Patrick.

Thank you. Our next question is from the line of Chris <unk> with Deutsche Bank. Please proceed with your question.

Good morning, Hey, good morning, guys.

Hi, good morning.

Good morning.

So you guys talk a little bit in the prepared comments about.

Increased attractiveness of timeshare with hotel rates, especially resorts going where they are.

Have you formally changed kind of the marketing.

To run through the math with people. If you have you been able to kind of.

Formally changed those formula is yet to come.

Make that argument even more convincing.

When you say marketing I assume youre talking about when you're talking to a prospect about becoming an owner is that right.

Yes, that's right kind of that yes, the formal process, where you walk through the math sure I mean typically in <unk>.

There is no every conversation we have with that owner is very much based on kind of a discovery process, we use with that owner and things that we accentuates or not do so no. One no two presentations are identical but <unk>.

Generally speaking one of the things we talk about is the relative value of owning timeshare overtime versus.

Spending time in hotel rooms.

On a similar type vacation so.

Examples we've used in the past or if you were here in Orlando and staying at the <unk> Marriott <unk> Grande Lakes and <unk>.

You and your family have to occupy a couple of rooms, and it was 30 or $350 a night, which now may be $400 90 based on some of the inflationary trends and everything else.

At the end of the so youre spending $800 a night on just your accommodations arguably with less square footage than we have in one of our yards.

Then contrast, a week stay there which were just doing the arithmetic.

It says that you know you're going to spend $5000.

And at the end of the day, you're going to walk away with.

Copy of a receipt and maybe some points earned on your credit card, but thats all you have.

Well, if you bought call it 2500 points from us.

Currently that would cost you about $32000 plus or minus.

So you do the Chris a quick arithmetic and say six or seven year timeframe. When you include the maintenance fee that youre going to pay every year you are paid off and then.

Cost of staying in the system not just here in Orlando, but just cost of staying in the system is really limited to.

What goes on with your with your annual maintenance fee.

So.

To be honest I mean, some people are far more sensitive to that discussion are going through the mental gymnastics of looking for the how many year payback and I got to get other people are not as we've talked about obviously our demo for our customers has a tendency to skew towards the higher end.

<unk>.

But there is no question when the cost of alternative stays are our priority.

Ways to vacation someplace continue to go up I think it makes the argument about buying a time share interest more compelling.

Okay I appreciate that Steve and then I'll.

Just as a follow up you mentioned in the comments you think PPG for 'twenty, two will still be above 19, as Youre building back tour flow.

The question is it based on what you've seen maybe past three to six months as the recoveries gain some steam.

Are you seeing higher <unk> from first relative to kind of pre COVID-19 .

First time buyers spending more or the.

The returning existing owners spending more relative to what maybe they spin I know it's tough.

Tough question to compare apples to apples, but I actually think it's a very good question Chris.

Very good question, because I got a statistic in front of me, but I can point to.

Yes.

So let me just give you a contrast of what's happened with <unk> and I'll contrast, what's happened in the fourth quarter of 2021 versus the fourth quarter of 2019.

Our <unk> for first time buyers are up $500.

Or what they were in 2019.

<unk> for owners are up $800.

Compared to where they were in the fourth quarter of 2019. So we are seeing improvement in APG on both owners and first time buyers.

And part of that is.

Hey, we've gone through continued to go through looking at channel optimization and everything else. So I think our sales team continues to be even better obviously, the economic backdrop at least prior to yesterday.

Literally adventure from potent.

I think the economic backdrop has continued to be.

Increasingly good so for all those reasons, we are very very bullish about how we think <unk> is going to play out at least for 'twenty, two and potentially into the years beyond that.

And Chris on that note.

The numbers, Steve was mentioning it's a.

21% increase in <unk> for the first time buyers and a 17% increase for the owners. So those first time buyers are increasing at a faster rate for PPG, which is pretty interesting as well.

Okay, Yes.

That's terrific thanks, guys very helpful.

Thank you.

As a reminder to ask a question today you May press Star one to the next question is from the line of our sheet, Jeff <unk> with Jefferies. Please proceed with your question.

Hi, good morning.

Have we got.

Are you guys, maybe they will touch on or expand on just the long term opportunity for Wow.

Maybe in terms of relative size of the revenue or EBIT of the company.

Well.

I mean.

At a 30000 foot level.

We essentially increased the size.

When you fast forward to when all the wealth properties.

Effectively all re badge and rebranded as Hyatt.

We'll have increased the size of the portfolio by 50% and the number of owners.

Q4 2021 Marriott Vacations Worldwide Corp Earnings Call

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