Q3 2022 Travel + Leisure Co Earnings Call
Greetings and welcome to travel and leisure companies third quarter 2022 conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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A reminder, this conference is being recorded it.
It is now my pleasure to introduce your host Christopher Agnew Senior Vice President of financial planning and analysis and Investor Relations. Thank you you may begin.
Thank you Doug and good morning, before we begin we'd like to remind you that our discussions today will include forward looking statements actual results could differ materially from those indicated in the forward looking statements and the forward looking statements made today are effective only as of today, we undertake no obligation to publicly.
Date or revise these statements factors that could cause actual results to differ are discussed in our SEC filings and you can find a reconciliation of non-GAAP financial measures discussed in today's call in the earnings press release available on our website at travel on leisure codes I'll call forwards.
<unk> investors.
This morning, Michael Brown, our President and Chief Executive Officer, who will provide an overview of our third 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, we look forward to answer your question.
With that I'm pleased to turn the call over to Michael Brown.
Thank you Chris Good morning, and welcome to our third quarter earnings call. This morning, we reported adjusted EBITDA of $234 million and adjusted earnings per share of $1 in 2008.
Strong leisure demand continued throughout the third quarter and our key indicators point to continued strong travel demand heading into next year.
In September we reaffirmed our $230 million to $240 million adjusted EBITDA guidance with the expectation that we would be at the high end of that range.
However, at the conclusion of the quarter Hurricane Ian and a weakening Australian dollar impacted our Q3 results by an estimated $4 million of EBITDA.
In the quarter, we returned $148 million to shareholders through a quarterly dividend and the repurchase of shares.
Of the $148 million $115 million was dedicated to share repurchases up from $83 million in Q2.
In the third quarter repurchases accounted for three 2% of outstanding shares.
All year through the end of Q3 repurchases have accounted for 6% of outstanding shares.
The key metrics in our business performed well during the quarter with towards increasing 22% year over year and <unk>, maintaining the near record levels from the second quarter up 5% year over year.
New owner transaction met mix increased to 33% up nearly 300 basis points year over year, and 100 basis points sequentially.
While increasing new owner mix normally puts downward pressure on PPG. The strengthened bbeg goes to highlight the consistency and closing rates and how strongly the value proposition of our products is resonating with our customers.
We also saw solid growth in our travel and membership segment with revenues up 5% year over year. Despite the drag from the hurricane at the end of the quarter.
Shifting to booking trends in the third quarter room nights ended at 8% ahead of 2019 at our vacation ownership clubs in the fourth quarter. The strong leisure travel trends have continued and forward bookings remain above 2019 levels.
Room nights on the books are now pacing, 9% above 2019.
Strong <unk> in the quarter helped deliver $555 million of gross VOI sales above the top end of our guidance range of $530 to $550 million at.
<unk> $3393 <unk> for the third quarter was 45% above 2019 with the performance being driven by increased close rates.
Strength in close rates reflect the elevated quality of our marketing criteria and the value our customers see relative to hotel stays and alternative accommodations.
Recent surveys of our owner base show, a 13% increase in the perceived value in their ownership compared to.
Before this period of elevated inflation.
Our consumer finance portfolio was growing which helps to offset the increased borrowing costs, we have seen in the ABS market.
Our portfolio is stronger today because of the changes implemented during COVID-19 to raise credit quality as Mike will discuss in more detail.
I would also like to reinforce how our strategic approach on elevated FICO, it's fundamentally changing our business as a company our exposure to lower in FICO has reduced dramatically and <unk>.
Factors you consider average FICO for new originations across the public timeshare companies. We are now in line with our branded peers.
The last few years have shown once again that vacations are not purely discretionary most of our customers may change, how they vacation, but they rarely forego their vacation as an example during COVID-19. We saw many of our owners choose to drive to destinations rather than fly and they utilize their and sweet kitchens instead of dining out.
Which reinforces once again, what we always understood people prioritize vacations and have a strong desire to travel.
Despite some recent moderation in general consumer indices intention to travel remains high.
According to a mid September survey by tourism market research firm destinations analyst excitement to travel in the next 12 months remains elevated and near the highs of the last few years.
We believe our owners are among the most committed travelers and experience and our experience during the great recession and Covid showed is that most of our owners will use their prepaid vacations.
Timeshare resort occupancy according to Arda, the timeshare industry Trade Association was little changed from 2007 at just under 80% in 2009, when hotel occupancy dropped over 800 basis points over the same period.
It is clear that our cornerstone vacation ownership business is performing well and given the resiliency of our business model with predictable and recurring revenue streams. We believe we have good visibility for the remainder of the year and are confident heading into 2023.
Shifting to our travel and membership business. Despite the impact of the hurricane at the end of the quarter exchange transactions still increased 8% year over year, including a 13% improvement in international transactions.
Exchange revenue per transaction was up 3% in North America, but was offset by declines internationally, primarily due to currency impacts.
Our exchange business continues to perform at a high level with year to year to date operating profit ahead of last year and just below 2019.
Our travel clubs continue to add the building blocks for success and we are making steady progress on many fronts. We added 38 affiliate partners in the third quarter, including some great organizations like readers Digest UK and silver surfers.
The lead time for signing an affiliate to ramp up has taken longer than originally expected with that said, we are ramping up our <unk> transactions, which increased 27% year over year in the third quarter.
Before I hand, the call over to our CFO , Mike <unk>, Let me provide an update on the impact of Hurricane Ian and also make a few final comments related to guidance and cash generation.
First our thoughts go out to everyone impacted by the storm and we thank all of our associates, who work tirelessly to ensure the safety of our owners and guests.
While none of our managed vacation ownership resorts experienced major damage there was water intrusion at several resorts in Orlando in Daytona Beach, Florida, and a number of resorts in coastal South Carolina sale.
Sales operations bookings and travel were impacted around the time of the storm and we lost some capacity for a short period.
RCI has a strong portfolio of resorts, along the Gulf Coast of Florida, particularly in Fort Myers, and Naples, as well as Marcos Annabel in Captiva Islands and.
In late September 114 resorts, along the Gulf Coast of Florida, and Central Florida, as well as coastal Carolina were impacted by the hurricane the damage caused units to be placed out of service in future bookings in those locations temporarily suspended.
This area represented 6% of our U S supply in terms of resort count most have provided reopening dates within the next few months, but over 40 resorts are not expecting to take arrivals until the start of 2023 and seven are not expected to reopen next year.
As a result of hurricane Ian and foreign currency impacts, we are adjusting and tightening our full year adjusted EBIT guidance to 855 million to $865 million, the $10 million adjustment to the midpoint of our guidance reflects the $4 million impact in the third quarter.
Lost RCI bookings due to out of service inventory in the fourth quarter and foreign currency headwinds.
We expect <unk> to be at the high end of our previous guidance at around $3400. We expect gross VOI sales to be between $1 95 billion and $2 billion and loan loss provision for the full year to be around 17%.
Between buybacks and dividends, we are increasing our full year capital return forecast from a range of $350 million to $400 million.
To approximately $475 million or 14% of our market cap.
We expect full year adjusted EBITDA cash conversion from adjusted EBITDA to be closer to 50%. This year as a few timing items, primarily the placing of receivables in term ABS transactions will see cash flow shift to the first quarter of 2023 as of yesterday's market close our current adjusted free cash flow yield.
There is approximately 13% based on our full year expectation.
For more detail on our performance I would now like to hand, the call over to Mike hug.
Thanks, Michael and good morning to everyone.
As well as discussing our third quarter results I'll provide more color on our balance sheet liquidity position and cash flow.
All of my comments reflect EBITDA, EPS and cash flow on a non-GAAP adjusted basis.
Please see our tables to the earnings release or our website for reconciliations.
We reported total company third quarter EBITDA of $234 million and diluted earnings per share of $1 28.
Compared to $220 million in EBITDA, and $1 19, and EPS one year ago.
EBIT margin at kind of a major co was 25% compared to 24, 2% in 2019.
Looking at the performance in our two business segments in the third quarter vacation ownership reported segment revenue of $754 million and EBITDA of $188 million increases of 13% and 4% respectively over the third quarter of 2021 Andrew.
And remember the prior year period included a $13 million EBITDA benefit from the Covid reserve release.
In the third quarter, we delivered 158000 tours and <unk> at $3393, representing increases of 22% and 5% respectively over the prior year.
And looking at our portfolio quality has improved since the great financial crisis with sub 640 borrowers, making up only 10% of our portfolio at the end of the third quarter compared to over 30% at December 31 2008.
And the increased marketing criteria, we have put in place has driven more origination and the higher FICO bands.
Resulting in borrowers with FICO above 700, making up 64% of the portfolio at the end of the third quarter compared to 42% at the end of 2008.
As it relates to portfolio performance, we are seeing some increases in our delinquencies back to normalized levels, primarily on a lower credit quality borrowers as they are the ones most impacted by inflation.
More importantly, we are now growing the portfolio and as a reminder, the dynamics of a growing portfolio is higher delinquencies compared to an <unk> portfolio.
This was the right thing to do because as we increase the percentage of sales finance.
Also increasing future recurring and high interest high margin interest income streams in exchange for a higher provision as a percentage of sales.
Revenue in our travel membership segment was $183 million in the quarter compared to $175 million in the prior year.
EBITDA for travel membership was $65 million compared to $64 million in the prior year.
<unk> was up 5% and 2% respectively over the third quarter of 2021.
Travel membership transactions increased 9% over the prior year and transaction revenue increased 6% as revenue per transaction for RPT was impacted by channel mix travel.
Travel club transactions now represent 43% of total transactions for travel membership.
Our balance sheet remains strong and we are returning capital to shareholders and.
In October we closed on our third ABS transaction of the year or.
$250 million transaction with an advance rate of 88% and a weighted average interest rate of six 9%.
We were encouraged by the strength of demand even during a time of market volatility.
In regards to capital allocation through September 30, we had repurchased $243 million of common stock and paid $103 million in dividends.
At our upcoming Board meeting, we will recommend that our board of directors continue our dividend at <unk> 40 per share in the fourth quarter.
Our net corporate leverage ratio for covenant purposes was three seven times at the end of the quarter and we expect to Delever through EBITDA growth.
Having summarized our strong third quarter, let me provide more detail about our expectations for the fourth quarter and full year.
In the fourth quarter, we expect gross VOI sales to be in the range of $490 million to $540 million a.
13% to 25% increase over the prior year.
In full year gross VOI sales to be in the range of $1 $95 billion to $2 billion.
For the full year.
<unk> to be at the high end of our 3300 to 3400 dollar guidance range.
Also for the full year, we expect adjusted EBITDA between 855 $965 million.
In summary, our results demonstrate our ability to capitalize on the strong leisure travel market to drive earnings and free cash flow and maximize return of capital to shareholders.
With that Doug can you. Please open up the call to take questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Joe Greff with Jpmorgan. Please proceed with your question.
Good morning, everybody.
Morning, Joe.
It seems everything these days revolves around the macro which obviously is more downbeat today than it was six months ago or 12 months ago.
So my question reflects.
That attention.
Talk about as you sit here today and think about next year and vacation ownership.
How your thoughts have evolved in terms of.
Tour flow channels.
The propensity to finance.
At different FICO bands how.
How are you thinking about the mix.
Be more Directionally, then with precision between new and existing owners for next year and maybe how those thoughts have evolved as the macro environment Scott more challenging thank you.
Thanks, Joe and good morning, This is Mike Brown.
When we look at our vacation ownership business, which is.
You can note from our comments this morning, despite all of that macro news that's out there even today.
The demand the sentiment and the forward bookings.
Clearly show that leisure travel demand is still very strong. So as we think about next year. We do have a perspective on what our strategy is going to be we're going to continue to grow our new owner mix.
The place that <unk> targeted in the 35% to 40% range with 33% in the third quarter.
We believe that our order bookings are very clearly going to.
Continued to deliver strong owner demand and strong level <unk> into next year.
We've already have been early look into one Q of 2023 owner bookings which are up.
Up 2% and that's an early and very positive sign.
I would say what we're watching most closely is our volume per guest or volume per guest is driven by higher close rates transaction sizes are very similar so as we head into next year, we had long range guided towards 2000 and 703 thousands to the 3400.
A combination of new owner mix and maybe a weakening economy, we will see.
Mindful BTG back but.
The level that they could come back we'd still be at or above our long term outlook on <unk>. We would expect so fundamentally our strategy doesn't change continued increased new owner mix continue to drive heavily to our relationship with Wyndham hotels, and the blue thread marketing.
<unk> and close rates and continue to support and invest in that business, which we know will generate future revenue and EBIT streams and one. Other question. You asked was financing propensity, we will remain committed to growing our portfolio next year because really the primary.
Alta between US today in 2019 is the size of our consumer finance portfolio in effect. The NII. So we will remain urgent to growing our portfolio back in 2023, and Joe just one thing on that portfolio growth. It will come from the higher FICO bands, which is what we're seeing now and the reason for that is if you think about.
650, <unk>, there's a high likelihood they are probably already putting only 15% down so as we lower down payment requirements. It was <unk>, 25% to 35% to 40% down. So that's why you see the higher FICO is making up a larger percentage of our mix today as compared to the past and Thats why in the future of the <unk>.
We'll continue to come from those higher <unk> because they are the ones that had some room between the minimum down payment in what they were actually paying.
Great and.
Sort of on those that the last couple of topics you guys talked about it was nice to see the consumer financing revenue line grow year over year I guess, that's the first time since the pandemic.
Going forward, how do you how do you think about that for next year in terms of that consumer financing.
Revenue growth rate.
<unk> three versus 22 or kind of I guess as you think about it more medium term.
Yes, Matt I think we'll see the portfolio as we've talked about when we think about portfolio right.
It naturally declines about $1 billion a year through principal principal payments, primarily and then some defaults and so when we think about portfolio growth you take the VOI sales and with our percentage of sales finance now being at up around 60%.
We can think about growth into futures, a natural reduction of about $1 billion replaced by new originations at 60% of VOI sales.
Thank you.
Sure. Thank you Jeff.
Our next question comes from the line of Patrick Scholes with Charlie. Please proceed with your question.
Alright. Thank.
Good morning, Michael and Mike.
Good morning, Patrick.
Good morning.
Michael I just wanted to.
Go back to some of the targets that were laid out.
For your B to B and C travel clubs at the Investor Day a year.
Joe I just wanted to touch base.
Whether those are still on track some of the percentages laid out specifically for my notes I had at that time.
Between 21, and 2021, and 2025 expecting revenues up 27% to 30% and adjusted EBITDA, 13% to 17% annually.
Are you still on track for those at Investor Day.
Figures.
So.
A lot has happened in a year and the short answer on the travel and membership for this year, especially as it relates to the travel clubs as well.
We have when we talked about on the last call and the case is still.
Through today is the ramp up of those clubs is more predrag protracted than we anticipated.
Initially the idea of ramping up the clubs from signing to actual execution is is months longer than we originally anticipated. So those 2022 numbers have come down from our original expectation.
With that said.
Add to this and I think these are these are the critical long term points that we're really focused on is.
You need to sign up affiliates.
To develop and grow your new travel clubs B to B and we are doing that consistently our pipeline is clearly ahead of what we thought it would be at this time.
In October of 2022, so that part is ahead for sure.
The transition from affiliates sign ups to transactions is the part that's been delayed and therefore.
Impacting our transaction growth.
What I would say and what I mentioned on the last call was we would expect transactions to grow in the latter half of 2022 and that's what we're starting to see transactions were up 27%.
Quarter from prior year.
Those two leading indicators being affiliate sign ups.
And year on year growth on transactions.
Me a lot of confidence of where we're going with these travel clubs and that the markets. There the market has demand for it. It is a new business. So there is more variability than we anticipated, but we know what needs to be done now is take the affiliates who have said we want this and make sure that they can start to do.
<unk> the higher transactions that we originally forecasted and if I can just take it up one level.
For us the really encouraging part as we said at the outset related to the travel of membership business. We wanted to ultimately take this from a zero to 2% business growth business and add a growth component to it by adding travel costs.
That's exactly what.
We will be doing and that supports an already and consistently strong view business. So you wrap all of this together the ultimate goal here is increased growth rate from travel and leisure co and I think all the leading indicators point to that and fully acknowledge that one component of that.
<unk> transactions and therefore, the revenue associated with them is delayed in its ramp up but again, the leading indicators, we see as being there for future success.
Okay. Thank you and.
For Mike Mike Hug.
I saw the loan loss provision was up a bit.
And the most recent quarter.
Is that just the seasonality related also related to that.
Yes, Patrick you're right, so and we've talked about on the last call that we expected the provision to be up a little bit this quarter seasonality as well as that continued increase in percent of sales finance, which can add 150 to 200 basis points to the <unk>.
So the provision so as I mentioned in my comments right growing the portfolio you do take the provision hated the current period as a percent of sales, but helps get that interest income stream growing again.
Obviously with margins as well, that's nice interest margin, but not at all surprised by where the provision came in right in opex for patient and really as I mentioned, what we've talked about on our second quarter call.
Okay. Thank you and then one last question.
Mike.
In the current increasing interest rate environment.
Have you been raising your lending interest rates. This year, how do you think about that.
Where are you currently.
In doing that and is there sort of a cap or a maximum that you would go up too.
As interest underlying interest rates continue to rise. Thank you.
A couple of things.
When we think about pricing broken some or we look at the cost of the product to the price we charge the consumer for the product as well as the interest rate and what we've done this year has chosen to really.
Drive the pricing through price increases on the product itself.
Depending on the product mid to high single digit price increases, which is probably about twice as high as we do on a regular basis, we havent moved interest rates up yet we're in that 14, 5% to 50% range that we charge on average something that we'd look at.
But this year, where the pricing increases that come through.
The cost we charge of approximately charter consumer which is one of the reasons that the btg's are strong as they are and the value proposition is incredibly strong and that's allowed us to take pricing there as opposed to interest rates at the current time.
Yeah, Patrick if I could just add one other component to that we get the question often about.
How much of these interest rates affecting.
Your bottom line.
We have not changed our percent finance to drive incremental NII, we would probably be facing about $7 million headwind. This year and we've cut that at least half if not 75% by the increase in NII generated by our additional percent finance so.
I think it's another example of.
If you just look at one variable and people raising interest rates, you say, well, that's a $7 million headwind and wheat.
We found ways to offset that and overcome it.
Through just underlying operating performance of the business and it's been a real positive result for us this year by increasing our percent finance.
Okay. Thank you both of you for the color and updates I'm all set thanks Patrick.
Okay.
Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.
Thanks, everyone. Good morning.
David I wanted to just go into the ABS financing market I know it's.
I may be asking unanswerable questions, but I'm, hoping you could provide a little insight on where you think where we might best guess.
This is headed this year in terms of what kinds of terms, we could see and where your tolerance for those things are.
And I know you've talked about this in the past, but it might be helpful and instructive to just revisit.
The calibration for how those.
Benefit or impact earnings.
Please yes so.
Let's say roughly $800 million.
Securitization right at 5%.
Interest increase represents about $4 million right. So.
Really when we think about the interest rates that were kind of getting charged in the ABS markets. They are the highest they've been really since back in 2009.
So.
When we think about where they'll go we'd like to think that in the future. They start to trend back down obviously, we were in a cycle. The last few years where the.
The rates were incredibly low.
As Michael mentioned, we're doing what we can to grow the portfolio in the higher FICO bands to offset the higher expense that we're seeing.
But the benefit we get from these ABS transaction of at least the last transaction was at $43 million.
Increasing our cash so moving it from the conduit to the ABS transactions generates $43 million.
With our share price, where it was that that's one of the big reasons, we were able to accelerate share repurchases. So we would like to think that they will move back down.
One unusual trend we've seen this year is as rates have gone up spreads widened as headlined as well and usually it goes the other way if rates go up spread touch spreads tighten a little bit so.
Can't predict the future, but they.
Like I said it at really high levels right now when you look back historically and we'd like to think that.
They start to trend back down the other thing on the advance rate, even though our advanced rate is coming in a little bit lower in the 12 months. Following the date of the transaction, we recover about 40% of the cash.
That didn't get captured in the bigger advance rate. So it is a small timing issue, it's not like the cash disappears forever, we recover almost half of it in the first 12 months so.
That cash will be coming back to us very quickly throughout 2023.
Why.
We're confident in our free cash flow generation next year and one of the reasons, we've talked about the timing the timing that we've talked about from a cash flow standpoint is the lower advance rate purchase cash collections into next year.
And then secondly, as of the end of third quarter, we have over $100 million more in receivables. This year than we did at the end of last year that won't get an ABS transaction until next year. So when you look at on a cumulative basis. It kind of all works out but in the short term when you mention on a calendar year.
The buildup in the receivable portfolio is.
Taking our cash conversion down this year, but like I say gives us confidence in our cash conversion next year.
Understood if I can just follow up.
I think you may have given us in the past a bit of a.
I know, it's not always cut and dry a little bit of calibration as to a 100 basis points in coupon.
Impacts EBITDA by.
No.
Why numbers right.
You've given us that and would you mind just kind.
Going back to at one time for us.
Well.
Let me let me just give you the impact of this year and I alluded to it on Patrick's question, but we've had a net impact between increase in net interest income and borrowing.
$3 million to $4 million this year so.
When you look at the change from the start to the finish of this year and our transactions it was a.
Headwind.
$3 million to $4 million after we.
Responded to with increased percent finance.
Okay.
Thank you very much.
Thanks, David.
Our next question comes from the line of Brent <unk> with Barclays. Please proceed with your question.
Hey, good Hey, good morning, everybody and thanks for taking my questions.
Maybe switching gears back to <unk> and timeshare sales I think investors sometimes struggle.
With.
The staggering magnitude of Z P. G lift we're seeing across the industry and with you guys.
Just trying to get a sense for how much of a sustainable manner.
You guys get this question a lot.
You bet.
And you referred back to your long term guide and if I'm doing my math correctly that sort of implies something like 20%.
Blips above 19 and so.
If I assume that or if we assume that that's the base case.
And anything above that is is something you don't want to necessarily hang your hat on or are there is mix.
New repeat mix shift there that could give some back.
How much of that 20% base case is.
Is is channel mix right, which is permanent.
And how much is would you just look at as sort of like a same channel close rate related lift if that makes sense.
It does and let me come at it from both sides, let me come at it from where we are today the approximately 3400 of APG.
I would first say that across the timeshare industry.
There was a very clear message, that's playing out which is prepaid vacations that show tremendous value lead to industry wide success on volume per guest and it has continued in our vacation ownership business.
We came out of Covid.
Had guided.
Last September to a number and those numbers have been exceeded I think the combination of an incredible sales and marketing organization channel mix and.
The additional <unk>.
<unk> that's created by this inflationary environment, So I would say in general.
Our first observation is we came out higher than we originally expected and I see that as sustainable.
The 3400, especially in Q3 and I'll put a rope on our board and audit, we increased our new owner mix to 33% and that usually puts 100 $150 of BTG pressure on that 3400 that we finished Q2 with it stayed consistent which I do believe there is an element.
<unk> of.
The inflationary value creation between vacation ownership in hotels and alternative accommodations, that's providing that incremental benefit today. So I would expect it to come back as we stabilize at a 35% to 40% in the order mix I think there is a mix component of it.
And I think it will come back a little bit due to inflation once inflation starts to cool.
My growing belief is that that.
That range that we are staying at today of 2700 to 3000.
Simply based on the performance that we've seen post COVID-19.
And when we adjust for the new owner mix. So I believe there is a lot of cushion between where we're performing today in the high end of our range that would reflect a stabilize great performance by <unk>.
Our sales and marketing team and the value that's being created for our consumers and prepaid vacation. So.
Did that answer your question I put a lot out there, but wanted to make sure that that addresses your space.
It did it did and I appreciate those.
Just thoughts, Mike and maybe maybe for Mike hug.
Just to clarify some points in your script about the delinquency uptick that you saw and relating that to the growing consumer.
Loan volumes I'm, just I just want to make sure I understand the connection there just because.
Is there a lot of delay is their delinquencies that are typical of new.
New sales I guess.
I guess I can ask it a different way and just ask Howard delinquencies looking for this season portion of your loan book and that pool of consumers yes.
Yes, so the season portion, where we're seeing the pressure locked a lot of consumer lenders that ROI with the lower FICO bands. So we're starting to see that normalized level.
Levels that historically had been at primarily because of various.
Yes.
Financial support they've gotten whether it's government or rent relief or whatever it might have been so as those go away as we expected those lower bands are starting to normalize a little bit not on like you've heard from everybody out there, but some of the portfolio.
The other point that I was trying to get across in my script was.
A younger portfolio.
As we grow the portfolio, it's less season, which means it is when we have more defaults in the future. If you have a portfolio that is three years old it's already experienced the majority of this default so as we grow the portfolio naturally our provision goes up to provide for those default in the future more than offset by the increase decrease in interest income that we have so that's the real dynamic that in.
I want to make sure people understand is as that portfolio gets back to growing your provision as a percent of sales is higher.
A younger portfolio has more.
Basically replace a 20 year old mainframe system, we had less than 1% about 50% of accounts or less that were impacted by some data conversion.
And so as we talk to those consumers get the data out updated or as they call them make reservations and <unk>.
David will be able to collect those payments from them, but that's a pretty small impact but.
It will be shown in the numbers, but overall the portfolio quality when compared to 2008 as ive talked about it as much better.
Sub 645 goes below 10% they are the ones that are feeling the most pressure.
And one of them.
Going back to David's question, David I think I misspoke and I understand what you were asking that as it relates to a couple of the draw.
Drivers that we had mentioned a 50 bps increase in the interest rates equates to about $4 million in interest on the 800 million securitization that we do.
When we look at that compared to PPG lit. It takes about 14 to RVP, Chile to cover that so I think those are the steps that you were looking for that I misspoke, when I said, 5% equates to $4 million such as that 50 bps.
And Brian did that answer your question, Yes did very clear thanks, and thanks, everyone.
As a reminder, it is star one to ask a question.
Our next question comes from the line of Stephen Grambling with Morgan Stanley . Please proceed with your question.
Hey, Good morning, you mentioned that 33% mix of new owners and expectations for that to continue to ramp into next year can you just walk through some of the how different sources are performing to drive new owner mix as we think about blue thread versus recovering direct marketing channels or even splitting it by call transfer versus digital versus other channels.
Yes.
Thanks Steven.
What is back to 2019 already as the Blue thread relationship and when you look at the overall.
[noise] umbrella of new owner sales.
That's our highest PPG best margin, new owner channel and it makes sense because its affinity.
Now represent 16% of our new owner sales and although we won't quite get to 100 million. This year, we're going to be really close which is back right at if not slightly above our our peak pre COVID-19. So our relationship with Wyndham hotels remains as strong as ever the performance of those leads.
And ultimately.
Our ability to drive new owners is right back on track and our objective is to double.
Double that over the next few years.
As it relates to non affinity basically market by market, we have different marketing partnerships.
We invested heavily in that this summer we saw the benefits of our new owner investments by restarting a number of non affinity channels that we have out in each of the individual markets. That's what drove the 33% our new owner mix.
In the last quarter.
And now that we've seen that and the team has been able to hold the <unk> and close rates on on the new owner mix across the board.
Q4, and Q1 are more older quarters.
Really reaffirms, what we'll be doing next year, which you'll be investing even further into increasing our new owner mix in 2023.
And sorry, one clarification there I think you said that your objective is to double the blue thread.
Vantage of new owner sales does that is that right no absolute volume. So let me round up to 100 million. This year, we see that potential to be over $200 million.
Over the next few years.
Great and then one other quick follow up to David's earlier questions on rates. How are you thinking about the higher ABS and likely corporate borrowings longer term in evaluating capital allocation the right <unk>.
Leverage for the business, particularly in a maybe less certain economic environment. Thank you.
Yes, I mean I think we've.
<unk> talked about and still believe the right leverage rate is two and a quarter to three times.
And our intention remains to continue to delever through growing EBITDA. So.
At this point we haven't.
Change that view in terms of using cash to Delever at this point once again grow the EBITDA leverage comes down we've got a $400 million maturity next March take care of that at the right time to push that out to sometime in the future.
Our mineral about $12 million outstanding on our $1 billion conduit. So if we did have to carry that $400 million on the conduit for some period of time, we can do that pre COVID-19, we used to carry to $250 million to $300 million balance on our conduit so not unusual for us to do that.
But we'll just see what the markets do over the next four months and be ready to take care of that at the right time.
Excellent. Thank you sure.
Our last question comes from the line of Christopher Wonka with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question.
I know you've covered a lot of ground already so I kind of wanted to on a slightly different direction with which is.
I guess is there any thought to maybe altering kind of a creating a new kind of VOI product, where maybe you can.
So maybe.
Maybe it's a shorter term or lower dollar value, but what it doesn't have the finance risk in other words, maybe ask somebody to.
<unk> thousand $500, but they did get a very limited number of points is there any way to think about that and is that a possibility to kind of get more first timers in and without bringing on incremental finance risk.
The very short answer is yes.
When we moved our FICO band marketing qualifications up to 640.
The people that we previously market too that were below that FICO band definitely did not stop vacationing.
And what we ended up doing Chris once we made that shift coming out of Covid. We spent some months and really developed a short term product.
And we've launched that short term product and are in the process of testing it in a number of different markets.
We've already opened in two of our bigger markets.
It is completely a complementary or incremental opportunity for us for exactly.
The nature of your question, which is to grow new members.
Exception to that has been fantastic.
At well in most cases above what we expected from an acceptance, but we want to see it play out over six months to 12 months on travel patterns, how they use it what they like and don't like which is why we've chosen to roll it out in some of our bigger markets.
We haven't spoken about it yet simply because we want a little more traction and know how will ultimately land on a final short term product, but what we rolled out.
The East Coast first was well received by consumers.
We've since taken it to a second market at the beginning of October it's already been received there as well so very encouraging for us.
And if that success continues that will ultimately end up into a national program. It would be a very nice either feeder.
Two our eventual timeshare product or simply a great product, which aligns to our our mission to put the world on vacation, which is which is a leisure travel product and this is a we believe the right product for that consumer which is shorter duration and.
Lower financial commitment.
Great.
Very helpful. And then just as a follow up I know that Wyndham is alright, expanding the altra, all inclusive brand and a lot of the Caribbean markets, which I guess will bring a lot of new owners.
Intuit and affiliation with them are you aware of any any possible to expect there to be any possible opportunities to source inventory from some of those all inclusive resorts or in the future that on the radar.
So.
Well first of all I think the hotel group is doing a phenomenal job in.
The development side and growing their brands and that is a direct benefit to our owner base and.
Their ability to access via Wyndham rewards the Wyndham product, it's just a great benefit so really impressed with what they're doing and very happy of what that in turn does for our owner base.
On an inventory basis.
We have a very clear objective we have.
Without any inventory coming back to us about four years of inventory on hand, which means we are we will strategically be minimizing our cash outlay for new product and less doesn't mean that we won't do anything it just means that we don't have an.
An imperative to do anything.
Two new projects and therefore, we have the ability to preserve a lot of cash and deploy it in different forms.
Example of that.
Q3 is a great example, where where are our our prices are very attractive we can deploy more capital and I think as we get into 2023, where our inventory commitments or even less than they were this year.
We're gonna be very shrewd and preserving cash and deploying it back to shareholders either through our dividend growth or share repurchases and obviously the continued evaluation of M&A opportunity.
Okay.
Helpful. Thanks, Thanks, Michael.
Thank you Chris.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks. Thank.
Thank you Doug.
Our third quarter results and full year outlook underscore the persistent strength of leisure travel people's commitment to vacations and the consistent performance of our timeshare model.
This is all thanks to our owners members guests and associates, who make it happen every day. Thank you and have a great day.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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