Q1 2022 Marriott Vacations Worldwide Corp Earnings Call
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Tony Chery Executive Vice President and Chief Financial Officer for Marriott Vacations worldwide. Thank you you may begin.
Thank you and welcome to the Marriott vacations worldwide first quarter 2022 earnings Conference call I'm joined today by Steve Wise, Chief Executive Officer, Andrew President John Geller.
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.
Forward looking statements in the press release that we issued last night and the presentation. We added to our website. This morning as well as our comments on this call are effective only when 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 and Pwc Dot com.
Now my pleasure to turn the call over to our CEO , Steve Wise, Thanks, Tony Good.
Good morning, everyone and thank you for joining our first quarter earnings call.
Before we share our financial results I want to recognize the continued uncertainty in the world today from.
From significant geopolitical issues supply chain disruptions and inflationary pressures impacting our day to day lives to adjusting to a new normal as the pandemic wanes. The world definitely continues to be a complex place.
However, despite these uncertainties I couldnt be more proud of our associates and their continued dedication to our owners members guests and each other.
Let me take a moment to acknowledge every one of them at our destinations across the world, our corporate and regional offices and our sales centers. Their continued dedication is the driving force behind our success.
While we are operating in a challenging landscape there is something that remains true.
People want to spend time and create memories together and one of the best way to do this is through a vacation and we are perfectly positioned to make that happen.
As I look at some of the compelling statistics about the state of leisure travel right now I see that despite some of the inflationary headwinds Americans continue to spend on travel.
In fact in one survey, 61% of Americans said that travel will be a high budget priority over the next three months, reflecting strong leisure demand.
Specific to our owners over 108000 destination services searches were completed on our own website in March a 20% increase versus March of last year. So that tells me that demand for leisure travel continues to be robust.
Consumer sentiment around Interac International travel is also showing some green shoots and for US that means international travelers are starting to come back to key domestic markets like Florida and Hawaii.
In fact, though not returning to pre pandemic levels yet according to the U S Travel Association International travel to the U S is forecasted to be significantly higher in 2022 than it was in 2021.
So let's transition to our results for the quarter adjusted.
Adjusted EBITDA for the quarter totaled $188 million and contract sales totaled $394 million, both representing significant improvements over the prior year and exceeding pre pandemic levels.
In fact, even excluding wealth and despite some headwinds from the omicron variant in January this was the highest first quarter contract sales result, we've had as a public company showing the strength in our business we.
We continue to see strong occupancies in the first quarter in our vacation ownership business, even as inflation persisted and gas prices rose toward the end of the quarter.
Our total occupancy levels were 88% in line with pre COVID-19 results. Despite a lag in the recovery in certain urban and international markets.
Cpg's once again far outpaced our expectations to reaching over $4700 in the quarter showing the continued demand for leisure travel experiences and the relevancy of our product offering.
At the end of March we began pre marketing our new combined product offering at our Marriott Westin and Sheraton sales centers and we expect to complete the development of the related technology and officially launch the product later this summer.
The combined product offering will bring our Marriott Westin and Sheraton branded vacation ownership products together, allowing owners of each product more flexibility across our Marriott branded portfolio.
Early feedback from owners has been quite positive to the offer of more destinations and flexible usage options.
Before we move on to the exchange and third party management I want to touch on the integration of the Welkin Hyatt vacation ownership businesses.
You may recall that we completed the acquisition of Welk resorts just over a year ago.
And I am pleased with the progress significant progress we continue to make integrating the businesses under the Hyatt vacation ownership umbrella.
This past April we introduced Hyatt vacation club and rebranded Wealths vacation ownership program as the Hyatt vacation club Platinum program converting former wealth sales et centers centers to now sell a hyatt branded vacation ownership product.
The platinum program includes expanded vacation benefits and access to our collection of upscale resorts and highly desirable vacation destinations.
Most of these former Welk resorts are now available for rentals aren't stays on Hyatt Dotcom and beginning later this year owners will be able to exchange their annual usage for world of Hyatt loyalty club points.
We look forward to sharing a more in depth overview of our new Marriott combined product offering as well as the Hyatt vacation ownership initiatives with you at our Investor Day on Thursday June 16 at the New York Stock Exchange.
Moving on to exchange and third party management, specifically to interval international we experienced 9% year over year member growth as a result of the new agreements and affiliations that I discussed last quarter.
In addition to these new affiliations, we just renewed our agreement with Westgate resorts one of the largest privately buying branded timeshare companies, thereby extending one of our most tenured affiliations for another five years.
From an exchange perspective inventory availability at interval international continues to be challenging primarily due to lower member direct deposits as.
As you might imagine lower owner traveled during the pandemic has led to a higher than historical average owner usage as travel restrictions eased.
That higher owner usage directly impacts member inventory deposits international.
However, despite the lower deposits interval has done a fantastic job managing the inventory they do have with from it with an inventory utilization.
About that pre pandemic levels.
I was there for third party management front I am pleased to announce that we closed on the sale of our V. R. I Americas business last week for approximately $60 million of net proceeds or 15 times 2022 full year adjusted EBITDA.
As a reminder, V. R. I Americas is an independent manager of unbranded vacation ownership resorts, which we acquired as part of the I O G acquisition in 2018.
In 2021 after evaluating the growth prospects of V. R. I relative to our other businesses, we entered into the process to find V or a home with an operator that get better unlock its growth potential and provide enhanced value.
Two it's manish homeowner boards and associations.
Given V. R is limited contribution to the company's overall adjusted EBITDA the sale does not impact our guidance for the year.
I'd like to thank <unk> associates for their dedication to M VW and their own and their customers.
Overall I'm very pleased with the strong start we've had in 2022 and I'm excited about the innovations we have plan for the months and years ahead and with that I'll turn the call over to John to provide a deeper overview of our first quarter performance.
Thanks, Steve and good morning, everyone.
Today I'm going to review, our first quarter results and discuss the continued strong recovery, we've seen across our businesses.
After that I'll turn the call over to Tony to discuss the strength of our balance sheet and liquidity position as well as provide color around our 2020 to expectations.
Starting with our vacation ownership business.
While we did see some impact from them from the omicron variant in the early part of the first quarter, we still saw significant year over year improvement in all parts of the business as our operations continue to recover and ramp back up to and in most areas exceed pre pandemic levels.
Our product continues to resonate very well with customers and our tour channel optimization or once again has generated strong results.
Tours were up 71% from the prior year contract sales in the quarter grew 75% to $394 million in contract sales for all of North America, even after excluding wealth, where over 7% higher than Q1 2019 RV.
<unk> remained strong reaching $4706 up 9% sequentially.
First time buyers represented 29% of contract sales, a 300 basis point improvement from last year's first quarter and in line with the fourth quarter of 2021.
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.
As we progressed throughout 2022.
We expect continued recovery of first time buyer tours to pre pandemic levels.
And higher demand from direct marketing offers has also produced strong package growth as of the end of the first quarter. Our package pipeline remained strong at nearly 200000 tours with 40% of those packages already activated for future arrivals.
We saw significant year over year improvement in development profit, which increased to $68 million in the quarter adjusting.
Adjusting for the impact of approximately $24 million of negative report ability. Our adjusted development profit margin expanded by 780 basis points over the first quarter of 2021 to 228, 3% highlighting the benefits of more efficient marketing and sales spend low.
Sure inventory costs and our business transformation savings as a reminder, since report ability is just the timing issue the revenue and profit from these sales will be reflected in our second quarter earnings.
Turning to our vacation ownership rental business total rental profit remained in line with the fourth quarter of 2021 and continues to recover however.
Domestic occupancies have averaged 90% for the quarter, given a reduced rental inventory availability due to higher owner usage. This part of our business still has room to improve to return to pre pandemic profit levels.
The stickier revenue portions of our vacation ownership ownership business also performed well in the quarter.
Resort management revenue increased 34% year over year and profit increased 22% to $72 million driven primarily by continued recovery in our ancillary businesses.
In answering profit increased 31% in total from prior year, given the acquisition of wealth as well as our strong sales volumes. Excluding Meanwhile, financing profit grew 7% organically.
I'm also pleased to say that our portfolio continues to perform very well with delinquency and default levels at or even below levels experienced in 2019.
Bringing it altogether for the vacation ownership segment adjusted EBITDA delivered $199 million in the first quarter with strong contribution from all parts of the business, we were able to deliver adjusted EBITDA margin of approximately 32% nearly 360 basis points higher than.
Q1, 2019, the quarter also benefited from the addition of wealth, which contributed $24 million of contract sales and $13 million of segment adjusted EBITDA.
Turning to the exchange <unk> third party management segment active members at interval increased 9% year over year as a result of the new affiliations, we highlighted last quarter, while average revenue per member declined 6%.
As Steve mentioned not unlike what we're seeing in vacation ownership increased owner usage is putting pressure on the volume of member deposits as people have increased vacation activity post pandemic. In addition, while our member base has grown from the new affiliations it will take time to.
Ramp revenues from those members as many have already booked near term travel plans.
Our Aqua Aston business showed year over year improvement as well as Hawaii continues to recover from the pandemic as a result segment adjusted EBITDA at our exchange and third party management segment increased roughly $2 million or 4% to $43 million.
From the prior year quarter with adjusted EBITDA margin remaining strong at 57%.
Finally, similar to what we saw towards the end of 2021, our corporate G&A expense increased $15 million in the first quarter year over year as a result of higher salary costs due to reduced work week programs in the prior year.
Bonus expense and a decrease in credits related to incentives under the cares Act. However, however, given our synergy efforts corporate G&A remains well below pre pandemic levels.
For the total company, our adjusted EBITDA was $188 million, 13% higher than Q1, 2019 and margin improved over 300 basis points to nearly 25% demonstrating the ongoing strength of our leisure focused business model continued recovery in the business.
And the benefits of our transformation initiatives with that I'll turn the call over to Tony to discuss our balance sheet cash flow in 2022 guidance Tony.
Thanks, John .
I'm very happy with our strong results this quarter, starting with our balance sheet and liquidity position you may have seen that we amended our revolving credit facility at the end of the first quarter, increasing the capacity by $150 million to $750 million and extending the term to March 31 two.
Thousand 27.
With that increased capacity, we ended the quarter with $1 $2 billion in liquidity, including $354 million of cash $120 million of gross notes receivable eligible for securitization and $748 million of available capacity under our revolver.
At the end of the first quarter of 2022, we also had $2 $7 billion of net corporate debt outstanding and $1 $8 billion of nonrecourse debt related to our securitized notes receivable.
In our financing business with our notes balance currently approaching the average balance for 2019, a full year of wealth results included and contract sales expected to grow double digits. This year, we expect financing profit to also increased double digits compared to last year. We also expect to complete a six.
Iridization in the second quarter.
With rising interest rates, we anticipate a higher cost of funds for this transaction than what we've seen in recent years, but still comparatively low on a historical basis.
We had already factored these increases into our guidance for the year.
As it relates to our net corporate debt. We believe we are well positioned with only $230 million.
Of near term debt maturities and 90% of our net corporate debt effectively fixed.
Given our continued strong performance in the first quarter, we returned approximately $168 million of cash to shareholders, including repurchasing $119 million of our common stock at an average price per share of $156 50 and.
And paying two quarterly dividends totaling $49 million.
As of March 31, 2022.
We have approximately $350 million of remaining capacity under our share repurchase authorization.
Now, let's turn to our 2022 guidance, we had a solid performance in Q1, and we are optimistic about the remainder of the year in fact based on where we are today if trends continue we expect to be closer to the upper end of our ranges for contract sales and adjusted EBITDA. However, given some of them.
The uncertainties, Steve mentioned earlier, we are maintaining our previously stated full year guidance at this time.
We continue to carry excess inventory on our balance sheet, ending the quarter with nearly $630 million of excess inventory give.
Given our recent purchase of 88 units in Bali, Indonesia, we have no further new inventory commitments. Besides the normal purchase of low cost reacquired inventory.
With adjusted EBITDA, continuing to meet our expectations, we should generate substantial free cash flow as a result, we reaffirm our previous guidance of between $560 million and $640 million of free cash flow, resulting in a 65% to 70% adjusted.
EBITDA to free cash flow conversion ratio.
We still have roughly between 95 and $120 million of potential cash proceeds from non strategic real estate assets that we are working to dispose of over the next couple of years. This range excludes the net proceeds from the sale of <unk> Americas.
Consistent with our past approach, we will seek to use free cash flow to invest in growing the business organically or through strategic acquisitions in 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 started the year off strong and we expect that performance to continue throughout the remainder of 2022.
As always we appreciate your interest in Marriott vacations worldwide with that we will be happy to answer your questions Melissa.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
I should have time, we ask that you each keep to one question and one follow up.
Our first question comes from the line of Patrick Charles Maturing Securities. Please proceed with your question.
Hi, Patrick good morning, everyone.
Good morning, everyone. Good morning.
A couple of questions here and I apologize if you did say this in the prepared remarks I'm curious statistics on how your prepaid packages are tracking for the rest of the year versus.
Say 2019, and then any initial indications on that versus Oh, I'm sorry for your 2023 packages are tracking thank you.
I can give you some numbers and it is a combination of owner and preview package bookings Patrick compared to 19.
So for the first half of the year, it's 9% over 2019 for the second half of the year, it's 14% over 2019. So you put the two together arithmetically, it's 11% I don't have in front of me the 'twenty 'twenty three numbers, however, I would I would surmise.
That oh.
There continues to be strong obviously.
Again get to the point from a comparison standpoint that.
You know obviously working off.
Of our base.
The percentage numbers may be a little bit smaller, but I still think it's very positive.
The only other color I would add is just on the package offerings.
We are seeing a substantially higher uptake on those offerings versus 2019 to the point, where in some cases, we actually push the price of the debt.
Daycation package and in certain areas as we've talked about we've had very high owner occupancy, which will continue here as we move through this year it'll start to abate I think as we go into <unk> into next year, but that once again the same thing on the rentals, but the same thing on the packages. It does limit some of the availability but.
The overall demand for the packages is the best I've ever seen it.
Okay.
Good.
It sounds like my follow up question is.
On the the unchanged EBIT guidance for the rest of the year. It from the tone of the call you know it certainly sounded like <unk> was above your expectations. It was above street expectations.
I I understand and I appreciate conservatism certainly in this world, but is it fair to think that you know without barring any black.
Black Swan events that.
You know the rest of the areas is the implied guidance is in fact conservative unless again, something we cant forecast happens.
And again I don't forget it.
The words in your mouth.
Okay.
It's a fair question and I think you heard Tony said clearly where we're.
At least our dialogue is about guiding towards the higher end of our guidance.
As you will recall it about a month, we've got an investor day.
And I would expect us to be more declarative about where we think things are going to go I mean.
Depending on the news of the day Juno and the kind of the macro environment, we have a tendency to always want to not only meet but exceed the expectations of our investors and the street.
You could get out a little further over your skis and all of a sudden have something.
Go run a buck in the economy, which would cause that to be probably too aggressive. So that's that's the reason why we typically have been a little more conservative.
But we'll have a lot more to share in a little over a month.
Okay, Great I appreciate it and I'm looking forward to the Investor day. Thank you.
Thank you that X factor.
Thank you. Our next question comes from the line of Ben Chaiken with Credit Suisse. Please proceed with your question.
Hey, How's it going.
Hey, How's it going.
There's been a nice mix shift down in your cost of product on the realized side I guess your inventory cost rather.
You know, presumably as you collected inventory the last two years through defaults and repurchases et cetera.
Cost channels.
Which is visible today in the quarter.
Looking at your balance sheet today, you have several years of unsold inventory does the benefit that we're currently seeing apply to the rest of that inventory or is this just kind of like a one or two quarter tailwind how do you think about it.
Yes, I can tell you that we expect these inventory prior cost levels to continue for the next few years.
We are continuing repurchase activity right now, we do get low cost inventory back from our owners routinely.
Agreements with our associations to take their inventory back. So that's ongoing year over year, we do have some new developer.
Inventory was gone from asset light transaction herself developed inventory on the balance sheet that could be a little bit higher product costs, but you'd have that lower inventory lower product costs inventory coming in for our normal repurchase activities. So when you blend those two together we believe that going forward. We have we can maintain those lower inventory product cost levels.
For a while.
That's really helpful. Thank you.
And then I think you.
You mentioned on the call report ability I believe was a touch higher than we were expecting can you just remind us and I know that's just like a timing issue that will come back later, but can you remind me how that occurs is that does that is that a function of sales accelerating towards the end of the quarter, thus, creating a timing issue when theirs.
Like a precision period yeah. Thanks.
Yeah, Yeah, you're exactly right Ben.
And if you go back even to the coupon of 2021, it had a similar notwithstanding lower contract sales, but it had a similar.
Deferred.
Revenue impact if you will so yes, what's your what's basically happening is because of how we recognize for GAAP revenue those contract sales based on closing it.
It just means that your contract sales accelerated at the end of the first quarter much higher than what you finished the year at right. So just the natural result is that that revenue is coming and the associated associated EBITDA that I mentioned, the $24 million and that'll happen in the second quarter I mean, the cadence throughout the year generally is.
You have your biggest higher deferred impact for the first quarter.
You have some in the second quarter, because usually in the second quarter stronger right in June and then you end the first quarter.
And then as you start to move through the third and most of that ultimately it comes back in the fourth quarter. So that's kind of been the cadence. So it's not it wasn't necessarily that much higher than we were expecting at was somewhat in line and not really unusual from a historical perspective.
Thank you very much.
Thank you.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Chris <unk> with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys.
Hi.
Good morning, So I think you mentioned that the mix of first time buyers was 29% and that was up 300 basis points year over year.
I know longer term you guys want to want to get it as high as possible what what do you think it takes to kind of get there and is there anything you know how much more can you kind of do to to juice things to get it there how much of it has to kind of happen naturally.
Yeah.
I think historically weak.
Kind of pre spin off.
It's kind of a hay day, we were at like a 50 50 mix keep in mind.
We had a much lower owner base at the time.
So again you apply the arithmetic that gets in the way a little bit I. You know I think if you think about you know kind of 40% to 45% first time buyers as kind of the optimal point that you're trying to get to you're trying to bring more people into the system.
For a variety of reasons number one obviously you expand year over year ability to.
Sell more financing to these folks are you their upgrade program. After the typical results are in the first five years after their purchase they have a tendency to buy as much as it is the first time out.
You're getting more maintenance fees more club PS etcetera, plus you get referrals.
Referrals from.
From those owners that you haven't been able to enjoy otherwise.
So typically how that will happen is as you.
Open up new source channels.
To bring people in that and then you'll start to see increased first time buyers. The one thing that.
There have been some things that we've stepped away from I think you've heard us talk about the OTC channel, which.
Wow can be a source of first time buyers, it's a relatively inefficient.
The allocation of your of your of your cost to do so in other words, it's a high cost low yield channels. So aside from Hawaii, where we still maintain.
Some O P C locations and in the wealth business right now who's made they've done reasonably well with OTC.
And that will change over time, as we switched to more hyatt sourced channels Youll.
You'll see some of that the the other place that you typically get a first time buyers is through linkage locations and as you might imagine over the last couple of years, we've stepped away from a lot of those linkages locations because the hotels were empty.
We are now starting to turn those back on selectively and you'll see that start to come.
So you know what.
We'll see that number continue to rise I'm not the least bit embarrassed to tell you that our owners want to buy more of our product.
We're happy to have that so we can walk and chew gum at the same time.
And but you know if we can get up in that 40% to 45% range I think that would be pretty optimal for us.
Okay.
Thanks, Steve and then follow up question was on Libra.
Labour, but more in the sense of in the sale centers I'm thinking here.
Top producers right, they do pretty well there on commission, but is there any issue attracting.
Young folks or beginning entry level salespeople, because maybe they can get a much higher wage at a better.
Retail operation of some kind versus.
Taking a chance on a commission is there have you seen any challenges there.
Well.
Let me break it down into the two component parts, which is both mark and marketing side and the sales side on the sales side, Yeah. We you know.
And I think we've made great progress on the sales side, where.
We're pretty pretty well staffed on the sales front and not to say that we won't add more salespeople between now and the end of the year, but we've had to do that with some side on incentives et cetera.
But you know that's all manageable because as you mentioned it is largely a commission based sales force.
On the marketing side, we've had more of a challenge.
Marketing folks do make a commission, although it's a it's a different scale al et cetera, and we've had some difficulties getting marketing people again, that's starting to improve.
But I would not want to mislead you by saying we've got we've solved the gordian knot here we haven't.
You you've seen you've seen the statistics about the number of people that continue to leave the hospitality industry et cetera, and we will continue to be very vigilant about how we go out and try to recruit and find talent and add them to the organization and the good news is once people join US as you have mentioned you.
You can make a pretty good living.
By by being part of this organization and they're generally pretty satisfied but because of the pandemic. Obviously, we had to scale back and when we when we did so we shed some jobs, which we now are in the project progress.
Process of trying to.
Recoup an add back to the system.
Okay very helpful. Thanks, Steve.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Weiss for any final comments.
Thanks Melissa.
As we close today's call I want to touch on the idea that vacations today are infinitely more meaningful than they were over 10 years ago. When we first became a publicly traded company and.
And over that same time frame the pace of life is significantly accelerated and life overall has become more complex, particularly during the past two years.
While digital innovations have helped many stay more connected the pressure of doing so is taken away from something special that we at Marriott vacations worldwide can provide togetherness.
Vacations, let you disconnect and reignite the relationships and interactions that you're not always occurred during the normal pace of life today and definitely not through a video call her facetime.
As a business, we are 100% focused on leisure activities and providing the power of vacations are business is vibrant resilient and well positioned not only today, but for the future.
I'll be excited to see many of you next month at our Investor Day in New York City and as always Thank you for your interest. We wish you continued health and treasured time with your family and friends and finally to everyone on the call and your families stay safe and enjoy your next vacation.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.