Q1 2023 Marriott Vacations Worldwide Corp Earnings Call

Come to the Merit vacations worldwide first quarter 2023 earnings call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press stars 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 Mister Neil Goldner, Vice President Investor Relations for vacations worldwide. Thank you you may begin.

Thank you Melissa and welcome to the Merry applications worldwide first quarter of 2023 earnings Conference call.

I am joined today by John Geller, President and Chief Executive Officer, 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 not considered forward looking statements under federal Securities laws famous a subject of numerous risks and uncertainties as described in our SEC filings, which could cause future results of differ materially from those expressed in or implied Beryl comments.

Forward looking statements in the press release that we issued last night as well as our comments on this call are effective only one made it 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 got financial measures referred to in our remarks and the schedules attached to our press release as well as the Investor Investor away since page of our website at I R. Dot M. B W. C Dot com.

With that it's now my pleasure to turn the call over to John Geller.

Thanks, Neil and good morning, everyone and thank you for joining our first quarter earnings call.

Looking at our year to date results, it's clear that consumers are prioritising travel, which we saw in her occupancy rates and contract sales growth during the first quarter.

Spring break travel made headlines this year with record breaking numbers in March with beach vacations topping the list of preferred destinations.

In addition over 45% of Americans, earning over $100000 a year recently surveyed believed now is a good time to spend on leisure travel and intentions to bulk leisure travel have been on a clear uptrend.

Since becoming C E O earlier this year I've been on the road visiting a number of our resorts and have had the chance to meet with many of our associates, who are responsible for delivering unforgettable vacation experiences for our owners members and gas.

Our unique destinations trusted brands excellent service and carrying culture or just a few of the reasons, we see vacationers coming back to visit us time and time again.

Looking forward despite the uncertainty of the overall economic environment, we expect strong occupancies from our owners members and guests to continue this year consumers, one a vacation and they want to do.

With brands, they trust and spacious upscale accommodations and highly sought after markets and we have some of the best brands and the most desirable locations in the industry.

Now moving onto our results 2022 was a great year for Mary out vacations, and we kept the momentum going as we enter 2023.

Hockey Fancy was early 90 per cent in the first quarter with our ski Beach and golf markets. All in high demand, while Asia Pacific continue this recovery with resort occupancy more than 30 points higher than last year's first quarter.

With the strong Occupancies, a robust tour package pipeline and the work of our marketing teams. We grew tours by 18% on a year over year basis as expected V. P. G declined year over year due to the strength of last year's first quarter, but it increased 7% sequentially and remains 30%.

About pre pandemic levels, we grew contract sales by 10% in the first quarter compared to the prior year illustrating the strong demand for our vacation ownership products.

First time buyers represented more than 30 per cent of our contract sales this quarter up roughly 200 basis points from the prior year.

A bound by Mary applications, which we launched last year continues to resonate with owners and first time buyers.

As a reminder of the bound program allows the owners of our Marietta, Westin and Sheraton vacation club products to have seamless access across the street branded resort systems.

And is helping us drive tour fluff.

And our highest vacation ownership business, we continue to make great progress integrating the legacy Welk resorts in March we launched a new owner benefit that provides discounted stays for those able to take advantage of near term resort availability. Later this year, we will rebrand all of the legacy wealth resorts.

His highest vacation club were also add more vacation options as we launched the beyond program, allowing owners to exchange for cruises tours and hotel stays.

Moving to our exchange in third party management segment inventory utilization remain very strong and we're starting to see higher transaction activity from the accounts, we added last year.

However, with inventory deposits lagging last year revenue was down year over year and profit excluding VII America's which we sold last April declined $4 million.

Finally, while lower inventory avail building negatively impacted our first quarter results, we did see inventory improve as for the quarter progressed.

In summary, despite concerns about inflation and the broader economy consumers continue to prioritise vacations, enabling us to grow adjusted EBITDA by 8% on a year over year basis, and return $134 million to shareholders through a combination of share repurchases in dividends looking.

Looking forward I remain excited about the trajectory of our business and the opportunities that lie ahead for us with that I'll turn it over to Tony.

Thanks, John I Am also happy with the way we started the year.

Today I'm going to review her first quarter results the strength of our balance sheet and liquidity and our 20 twenty-three outlook starting with our vacation ownership segment as John mentioned with consumer demand for leisure travel remaining strong and global resort Occupancies running nearly 90% we grew tours by.

18% in the first quarter on a year over year basis.

Consistent with our previous guidance V. P. G decline compared to last year due to a difficult comp improve.

Improved sequentially.

The overall result was a 10% increase in year over year contract sales a strong start for the year.

We also grew a tour package pipeline and in the first quarter with over 230000 packages, including the growing pipeline for high vacation ownership and in total more than 35% of these customers have already booked their vacation for the current.

Yeah.

Adjusted development profit increased 14% year over year to $109 million adjusted development profit margin increased 90 basis points compared to the prior year to 29%. This was driven by the growth and contract sales and favorable inventory costs.

As expected excluding the western port over our yard a hotel that was sold last June profit in our rental business declined $4 million to $25 million compared to the prior year <unk>.

Revenue for available key increased 9%, but was more than offset by higher unsold inventory and cleaning costs and as well as increase explorer usage.

In the stickier parts of our vacation ownership business financing profit increased $2 million as increases in contract sales and financing propensity were partially offset by higher borrowing rates on our new and our newer securitization.

Profit from a resort management business declined $1 million is higher management fees were offset by the timing of club dues revenue.

As a result, adjusted EBITDA inner vacation ownership segment increased 15% in the first quarter to $229 million and merging remain very strong at more than 31%.

Moving to our exchange and third party management business revenue declined 2%, excluding VII America's primarily as a result of lower getaway revenue related to reduced inventory deposits.

Tested EBITDA was $37 million, a decrease of $4 million from the prior year due to the lower revenue as well as higher wage and benefit costs and operating margin remains strong at 56% for the quarter.

Finally, as expected corporate G&A expense increased $7 billion year over year as costs related to implementing our vacation next program and new product development initiatives were partially offset by lower bonus expense.

As a result total company adjusted EBITDA increased to $203 million, 8% higher than last year's first quarter and adjusted EBITDA emerging was 25% in line with last year, demonstrating the strength of our leisure focus business model.

Moving to the balance sheet.

We ended the quarter with approximately $1 billion in liquidity, including $306 million of cash $120 million of gross notes receivable eligible for securitization and $549 million of available capacity under a revolver with.

With $3.1 billion of corporate debt outstanding at the end of the quarter, our net debt to adjusted EBITDA ratio stood at three one times roughly in line with our targeted two and a half to three times leverage range with expectations to be within our targeted range by year end.

And we remain well positioned in today's elevated interest rate environment with 85% of our corporate debt effectively fixed at an average interest rate of 3.2% and no corporate debt maturities until 2025.

We also ended the quarter with $1.9 billion of non recourse that related to our Securitas note receivables.

In April we completed our first time-share receivable securitization of the year issuing $380 million of notes at an overall weighted average interest rate of 5.5%, including the $11 million of class ski notes we retained.

The transaction restructured with a 98% grocery advanced right and the blended interest rate was more than 100 basis points lower than our last securitization.

Finally sales reserve as a percent of contract sales increased year over year, largely due to revenue reported ability and higher financing propensity. However, despite concerns about the broader economic environment or notes receivable portfolio continues to perform well with delinquencies into.

Fault up only 20 basis points compared to pre pandemic levels, excluding legacy wealth, reflecting the strength of our borrowers.

We also returned $134 million to shareholders in the first quarter repurchasing $80 million of common stock and paying $54 million in dividends.

Moving onto our 2023 guidance.

As you saw in last Night's earnings release, we affirmed are 950 million to $1 billion adjusted EBITDA guidance for 2023 and continued to target 529% contract sales growth this year.

Despite having another difficult year over year V. P. G comparison in the second quarter, we still expect full year V. P. G. Two only declined a few points compared to last year and four tour growth to remain robust, though not as strong as the 18% growth we saw in the first quarter.

We continue to optimize our digital technology to drive lower marketing costs per tour, and we expect product costs to remain relatively low this year compared to historical levels. As a result, we expect development margin to be around 31% this year.

Rental profit in our vacation ownership segment is expected to decline year over year in the second quarter due to higher preview key usage and increase maintenance fees on our own soil inventory. However, it is still expected to increase more than 10% for the full year due to the timing of explorer.

Cos and an easier second half comfort comparison.

We expect financing profit to be up slightly for the year. Excluding last year's 19 million dollar alignment benefit is increased contract sales and higher financing propensity are expected to more than offset higher borrowing costs. We also expect profit from our vacation ownership resort management busy.

<unk> to be up roughly 5% for the year.

In our exchange in third party management segment, while inventory deposits of interval have begun to improve.

We're still below the levels, we were at this time last year.

So we continue to experience high utilization of the inventory, we receive with lessons venturi deposited for members to exchange into we expect lower exchange and get away transactions. This year as a result, we now expect adjusted EBITDA in our exchange and third party management segment to be for.

<unk> two down slightly this year.

Moving to cash flow.

We ended the quarter with roughly $465 million of excess inventory, which we expect to sell in the coming years.

We will also look for opportunities to add new resorts, where we can establishing new sales center and we'll look to do this in the capital efficient manner.

Are adjusted free cash flow guidance remains unchanged for the year expecting to generate between 600 and $670 million. We continue to look to use our free cash flow for organic growth or strategic acquisitions in the absence of compelling acquisitions are best use of.

<unk> free cash flow remains returning it to shareholders.

In summary, we started the year on a strong note growing contract sales by 10% in the first quarter and returning $134 million to shareholders.

Occupancies, where nearly 90% and we expect them to remain strong throughout the year.

Finally, a bound by mirror vacations continues to resonate with customers and the integration of the legacy web business into higher is progressing well.

As always we appreciate your interest in mirror vacations worldwide with that we will be happy to answer your questions.

<unk>.

Thank you.

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Yeah.

Our first question comes from the line of Patrick's calls.

Please proceed with your question.

Great. Good morning, everyone and thank you for that.

Good morning, Tony just a question for you first off on the quarter here, one thing that I think surprised us off you know year over year. Despite your.

Sales education dollars of products up.

Quite significant like actually your cost of vacation ownership products went down.

Can you give us some caller on that thank you and then we'll have another question.

Oh sure yeah, the cost of vacation or extra products is going to be driven by the inventory that we load into the trust each year right now, especially coming off of Covid, we weren't adding a whole bunch of new inventory to that mix. We did complete the existing obligations that we had and those were sitting on our balance sheet net.

Part of that $465 million worth of excess inventory that we talked about.

But we did have a pretty significant amount of repurchased inventory and that comes in at let's call below market cost.

Below replacement cost actually.

So with a lot of that inventory and some of the more previous loads. It really drives the cost of vacation ownership products down a lot and so we expect that to stay fairly low over the next couple of years as we get through all the required inventory that we've been taking.

Okay. Thank you and then I had another question for Ya, Tony and then just one final one after that I'm, just sort of high level <unk> question, Yeah. The volume of share repurchases was down.

Quarter over quarter anything to read into that and thoughts on that going forward and then lastly, if you folks will be so kind to just sort of touch on you know expectations for summer leaves old travel.

Versus last last summer you know just in general how you think that's shaping up how that's trying to eat and then I'm all set thank you.

Alright, Thanks, Yeah, I wouldn't read a lot into the volume of share repurchases again, we're sticking to our capital allocation strategy that you've heard a million times by now and anything that we get that's in your past what we're going to use internally in passing you any strategic acquisitions, we do plan to return to shareholders last year we.

He had the benefit of not a lot of cash outflow for inventory or other uses and we actually generated a decent amount of cash and had some dispositions it through some cash at us. So we actually had a pretty robust adjusted EBITDA to adjust your free cash flow conversion last year. It was above 80% this year.

Sure, it's going back to I think in the mid sixties. So then we said that would normalize back down to the mid fifties in the next few years as it was obligated you should come back up so really we're just following our capital allocation strategy returning as much as we can to shareholders in light of those other capital allocation strategy said we'd.

Look at.

So nothing really to read into there.

And then you wanted to understand what we're seeing yeah, yes, yes, sorta give us you know some high level thoughts about some are certainly.

We'd look.

What about deep red.

<unk> types of product, it's <unk> it looks like it'd be a you know a mixed bag.

You know if we'd look at sorry traditional domestic resort hotel occupancy for the summer I was tracking it's it's kind of software as we look at other types of vacations, notably take cruise lines Royal Caribbean reported this morning extremely strong results and looking good for the rest of the year you know how how do you see.

Vacation ownership demand.

You know for the summer started getting into that.

Travel plans. Thank you.

Patrick all our forward bookings are as strong as they've ever been right from a historical basis as we look into the summer I think where you're seeing some uptick too for US is internationally on Asia Pacific as we talked about yeah, I was a fairly low number last year in the first quarter in terms of occupancy that our Asia Pacific.

Resorts, but we were up about 30 points and occupancy in the first quarter and I expect those trends to continue and I think coming into the U S. You got more international travel Hawaii is recovering a little bit with some of the spam, but still has a ways to go to get back to those levels. So we feel good about the summer I think all the <unk>.

Kind of forward looking channels looked very strong for us.

Okay. Thank you good to hear I'm all set.

Thank you. Our next question comes from the line of Chris Rock.

Please proceed with your question.

Hey, good morning, guys mourning mourning.

Good morning, So I guess the first question would be have you seen any if you if you drill down into kind of your your customer base.

The sweat and whether we're talking tours or maybe contract sales whenever the right metric is any delineation in kind of trends or performance kind of west coast versus East Coast U S and not just specifically asking you about the Silicon Valley Bank stuff, but you know in general with with some of the tech pressure out there.

Or is there anything you can and all that you see in the data that would indicate a difference in in geography.

Yeah, Hey, Chris.

Yeah for the first quarter, not really very strong yeah. Some of the things notwithstanding our our growth and contract sales for us where we've underperformed in the first quarter on the sales side is really the transitions we've been making.

Whether it's the marry out of bound program right and started and we've talked about this in the past where you start to transition.

Transition to sell the new product from Yeah, I'll say the old West and are sure to flex product and that transition right can be you know bumpy at times. So we we see it more in that same thing on the height and wealth side, because you know.

<unk>, you're a lighting business models compensation leadership, you have to educate the existing owners who were your big buyers right on the new product get them comfortable and all that so if we'd seen any softness and like I said, we're contract sales were up 10%, it's actually around some of.

Those call them self inflicted transitions that that's opportunity right going forward, yeah, well, we're gonna get those back to where they need to be but as you go through it as we've always said you get a little bit of Bumpiness I'd say you know as you get as we got into April add to your question that that we can put our finger exactly on it we did see.

Some softness if you look in the desert out in California, So you talk west, but it wasn't it wasn't across all our worst right leg. So there was there were pockets. There are some you know some <unk> a little bit in Hawaii and just in terms of the the performance, but nothing you know nothing pervasive.

Across it and and the east on a relative basis, Yeah continued to perform very well as well as Florida, Caribbean et cetera, So nothing concerning but like I said are are bigger.

Things were working through our things that are within our control right not macroeconomic.

Yeah, Yeah I understood. Thanks, Thanks for the detail John and then as a follow up you guys talked about higher propensity to finance and I know that some of that just because I guess prices are higher and you're also getting a higher mix of first time buyers, but is there anything further to kind of mix.

<unk> and and maybe the better question would be if we look at first time buyers today versus say 2019 are they also are those first time buyers more of them opting Tiffany answered refinanced at higher levels, just trying to get a little color on what's driving that given that rates are up and it will be more.

That's up to the finance.

Yeah, well, if you think about it Chris the way we offer our financing while our average lending rate I think if you look at the securitization. We just did versus the one we did last year was 30 40 basis points higher as we've talked about yeah. The the financing we provide at <unk>. You know is is really.

Just to help in terms of ease for the the the consumer that's fine. So we haven't moved our rates on a relative basis. The same as what you've seen in the in the broader interest rate market. If you will so but you're right you're you're seeing slightly high.

Near propensity some of that some X as we talked about we did have more first time buyers historically first time buyers because they they buy a little bit more than owners that are buying more and it could just be there's obviously coming out a cold with a lot of excess cash out there may be some of the buyers don't have as much access cash so there.

Opting for the convenience of the financing, but we haven't seen any yep I dunno, if Tony as anything that <unk> I'm not aware of any you know different tribes, we clearly haven't <unk> change our underwriting standards or done anything that is different in the first quarter than we were doing last year, you are absolutely right, John and Chris John .

Hit it on the Mark when he talked about the cost of our financing it's not that much more right now we've probably raised rates, maybe 25 basis points. We don't go in lockstep with the brighter environment economic environment. We didn't take reached down point for point when interest rates were dropping were not taken a moot point for point, while they're growing up.

I mean, we did see higher financing propensity in Q1 than the previous year, we're probably at 54% Q1. This.

This year versus 50% last year. However, we're not back to where we were back in 2019.

Okay very helpful. Thanks, guys.

Thank you. Our next question comes from the line <unk>.

Mm. Thanks, Thanks, everybody I appreciate all the color. So John I was hoping maybe you could give us a little bit more color on the cadence of tours this year.

Through the lens of you know <unk>.

Repeat owner tours are a little bit more shorter lead time and you know you guys have a plan for new owners well in advance and build that pipeline upset you know I I.

I take it you guys have pretty good visibility and how you think new <unk>, New Orleans, you got a layer and throughout the year.

And just sort of talk about about that set up in relation to how you guys manage for optimal V. P. G as an optimal margins.

Yep, Yep, but yeah, I think <unk>.

You hit the the key components, one our package pipeline, which we talked about is that all time highs right. So we've got a strong package you know people that have prepaid for their vacation that are kind of come and take a tour and as you look out for the balance of the year, we expect that those those.

Packages to be higher than last year right. So that's going to continue to drive tours through the balance of the year a lot of it is you know in terms of getting those those packages to where they Wanna go that that's where there can be some lead time cause or occupancies are so high. So we continued to try and get that and can add build the package <unk>.

<unk> at the same time, but we continue to try and get those those customers yeah on vacation in on a tour to drive.

Five you're you're what we call our own or tour penetration much higher and that's what we saw in the first quarter first last year, because owners want to come in and they want to talk about the new program understand new vacation options and things that that come either with a bound or later this year with the the highest beyond program. So we're all.

Try that to maximize <unk> you saw a great tour flow growth in the first quarter and and the balance on all of that and this is where we continue to to drive some of our digital marketing and getting our marketing costs down per tour because as you drive those stores you are sometimes opening up.

Thanks, so much.

Thank you next question comes from the line Echelon Kelly with Bank of America. Please proceed with your question.

Hi, Good morning, everyone. Thank you. Thank you for taking my question.

Specifically I wanted to ask about the exchange in third party management business. I think you you made a comment in the prepared remarks about seeing inventory improve as the quarter progressed and I was wondering if you could just elaborate on that a little bit what maybe drove that and do you expect that to continue yeah either through <unk>.

Yeah.

Go on a cruise I think Patrick talked earlier about the the demand for cruises. So they can exchange or week for a cruise that gives us inventory. So we run you know different they'll call yeah promotions to the members and we've been doing more of that to drive some of it. It's also talking with our developers are you that.

That put in bulk deposits, a you know coming out of Covid. Some of the historical trends of timing and owner usage like we've seen we've seen higher owner usage right. When you have higher owner usage, Yeah, you don't get as many deposits on the exchange side. So we do think that's gonna help going forward there'll be some normalization.

Asian people will get back to more exchanges doing other things. So it's really a combination of the two some of the the the member you know activity, but also trying to promote some of this exchange activity and obviously, if we can do that that provides more inventory, which then provides more exchange or transact.

<unk> opportunity for us.

Excellent that thanks, Thanks for that John and then the second kind of follow up to that would be you know just are are you seeing any kind of alluded to this or are you seeing you know kind of any normalization in that that you know owner utilization piece of the business right. So our things reverting back to normal for my behavior.

<unk> at all are still things just you know <unk> you know really humming in terms of usage rates just give in I guess alternative pricing costs out there.

Yeah, No I think we you know the the owner usage still is probably a little bit higher than it was pre COVID-19, but it's probably come down a little bit I would say from from kind of what we saw coming right out of Covid right with owners getting back onto to our resort so <unk>.

You know I I do think my status would be that it will continue to normalize back and people maybe after go onto their home resort or or for the past year or two once again to try and get out and exchange I mean, we see it on our vacation ownership business, you know typically about 25% plus or minus exchange in too.

Thank you very much.

Thank you.

Please proceed with your question.

Hi, Good morning, everyone. Thanks for taking my question digits how are Ya.

You know pretty good guidance also but at the same time. So this looming ah slowdown recession or how we'd like to characterize it that has yet to define itself I'm. Just curious how have you thought about that.

Looming whatever it is.

<unk>, what you talked about and given us today and or are you just staying focused on calling it like you see it.

So far.

Yeah, Hey, David Yeah, I mean this this looming recession, yeah, it's kind of been looming. It feels like for 18 months now 80 years right. It keeps getting pushed out now you know what where's it Gonna go out <unk> gotta be is it gonna be a hard landing soft landing all that so yeah, we <unk>.

Right. We don't remember are probably not going to grow it as fast as you know we've guided here, but yeah. If you look at the different parts of the business was like we've talked about the exchange side to go back to the financial crisis, even yep people own their their timeshare, they're going on vacation resort Occupancies on the video side will continue remain very <unk>.

And overall for the full year, we've we still feel good yeah, we'll be maybe down a couple of points for overall V. P. G year over year or so <unk>. The full your outlook hasn't change Yeah. You saw a very strong Q1 and Q2 at 40 740 600 rounded last year. This year I think.