Q2 2024 Marriott Vacations Worldwide Corp Earnings Call

Speaker Change: [music].

Unknown Attendee: Greetings and welcome to the Marriott Vacations Worldwide 2nd quarter 2024 earnings call. At this time, all participants are in a listen-only mode.

Greetings and welcome to the Marriott vacations worldwide second quarter 2024 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

Unknown Attendee: A brief question-and-answer session will follow the formal presentation. 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.

Neal Goldner: It is now my pleasure to introduce your host, Neal Goldner, Vice President and Vester Relations.

Unknown Attendee: Thank you, Neal. You may begin.

Neal Goldner: Thank you, Paul, and welcome to the Marriott Vacations Worldwide 2nd quarter earnings conference call. I am joined today by John Geller, our President and Chief Executive Officer, and Jason Marino, our Executive Vice President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, which could cause future results of different material from those expressed in or implied by our comments.

Operator: Thank you, Paul, and welcome to the Marriott Vacations Worldwide Second Quarter Earnings Conference Call. I am joined today by John Geller, our President and Chief Executive Officer, and Jason Marino, our Executive Vice President and Chief Financial Officer.

John E. Geller: VPGs for owners were flat in the second quarter compared to last year, reflecting the value owners put on their vacations. We were able to grow first-time buyer tours by 9 percent, reflecting our strategy to grow new owners, but we did see a 12 percent decline in first-time buyer VPGs. We were able to grow contract sales 3% in the quarter, excluding Maui.

John E. Geller: This illustrates the quality and location of our upper-upscale vacation ownership product, the high premium people put on their vacations, our tour growth, and the fact that our owners continue to see long-term value in investing in their future vacations. Meanwhile, our resort occupancies in the quarter were up more than a point year over year, driven by a four-point improvement in rental occupancies as consumers continue to prioritize spending on experiences. Our rental results also had a very strong quarter, driving higher revenue from more keys rented and lower costs, primarily from higher preview packages to drive contract sales.

John E. Geller: As a result, rental profit in our VO segment increased more than 60 percent compared to last year, with margin improving to more than 20 percent. Meanwhile, July VPGs improved from the softness we saw in June. The midpoint of our guidance for the second half of the year reflects VPGs being down around 7% compared to down 6% in the first half. While we're disappointed with the additional sales reserve we took, we continue to manage the business through the broader macro uncertainty.

Neal Goldner: Go at looking statements and a press release as well as comments on this call or effect them only when made and will not be updated as actual events unfolds. Throughout the call, we will make references in non-GAAP financial information.

Neal Goldner: You can find a reconciliation of non-GAAP financial measures and a schedule attached to our press release and on our website.

Neal Goldner: With that, it's now my question to turn the call over to John Geller.

John Geller: Thanks, Neal.

John Geller: Good morning, everyone, and thank you for joining our 2nd quarter earnings call. We had a mixed 2nd quarter with rentals exceeding our expectations and lower VPGs negatively impacting our contract sales. In addition, we have not seen the necessary improvement in our loan delinquencies, so we increased our sales reserve to reflect higher expected defaults, which Jason will provide more color on later in the call.

John Geller: So let's start with contract sales. As we look back at the cadence of the quarter, April VPG was soft, but May was in line with the prior year, which gave us confidence for the rest of the quarter. However, June VPG declined on a year-over-year basis, and contract sales declined 1% for the quarter as we were successful growing tours, offset by a decline in VPG. VPGs for owners were flat in the 2nd Cumble quarter compared to the last year, selecting the value owners put on their vacations. We were able to grow first-time buyer tours by 9%, reflecting our strategy to grow new owners, but did the 12% decline in first-time buyer VPGs.

John Geller: We were able to grow contract sales 3% in the quarter, excluding Maui. This illustrates the quality and location of our upper upscale vacation ownership product. The high premium people put on their vacations are tour growth and the fact that our owners continue to see long-term value of investing in their future vacations. Given the higher cost environment consumers have been dealing with over the last few years and the uncertain broader macro picture, we have adjusted certain sales promotions recently to combat the softening in VPGs. Meanwhile, resort occupancies in the quarter were up more than a point year-over-year, driven by a forepoint improvement in rental occupancies as consumers continue to prioritize spending on experiences.

John Geller: Our rental results also had a very strong quarter, driving higher revenue from more keys rented and lower costs, primarily from higher-preview packages to drive contract sales. As a result, rental profit and our VO segment increased more than 60% compared to last year, with margin improving to more than 20%. In our exchange and third party management business, Interval International ended the quarter with more than 1.5 million active members, while inventory utilization was in the low 90% range, consistent with last year.

John Geller: As we look forward, we adjusted four-year contract sales guidance to reflect our expectations for lower VPGs for the second half of the year. While July VPGs improved from the softness we saw in June, the midpoint of our guidance for the second half of the year reflects VPGs to be down around 7% compared to down 6% in the first half. Intours to grow around 12% as we lap Maui, implying a 5% contract sales growth in the second half. Maui continues to recover, though we now expect contract sales to be down roughly $10 million for the full year, as the recovery is turning out to be slower than our original expectations.

John Geller: This should still provide us a two-point tailwind in contract sales growth in the second half of the year, as our sales centers were closed from mid-August until the end of September last year. We also expect to generate higher first-time buyer tours, which carry a lower VPG. We ended the quarter with nearly 270,000 packages, with roughly 30% of those customers having already confirmed to take the vacation in the second half of the year. While we're disappointed with the additional sales we took, we continue to manage the business through the broader macro uncertainty. On one side, consumers appear cautious after two years of inflation, while on the other side they are still spending on travel and experiences.

Speaker Change: What percent of those customers, having already confirmed to take their vacation in the second half of the year.

Speaker Change: While we are disappointed with the additional sales reserve. We took we continue to manage the business through the broader macro uncertainty on one side consumers appear cautious after two years of inflation.

John E. Geller: On the one hand, consumers appear cautious after two years of inflation, while on the other hand, they are still spending on travel and experiences. We're seeing that play out in our resorts, where we ran over 90% occupancy in the second quarter.

Speaker Change: While on the other side they are still spending on travel and experiences.

John Geller: We're seeing that play out in our resorts where we ran over 90% occupancy in the second quarter. If we exclude the impacts of the additional sales reserve, the improvement in our rental performance in our other cost management initiatives would have offset most of the impact from the lower contracts sales guidance compared to our original full-year adjusted EBITDA guidance. We have also been working through our 2025 maintenance fee budgets and expect the average maintenance fee will increase less than 5% for our points products after two years of significantly higher increases.

Speaker Change: We're seeing that play out in our resorts, where we ran over 90% occupancy in the second quarter.

Speaker Change: If we exclude the impacts of the additional sales reserve the improvement in our rental performance in our other cost management initiatives would have offset most of the impact from the lower contract sales guidance compared to our original full year adjusted EBITDA guidance.

John Geller: We believe this will help restore confidence from both recent first-time buyers as well as long-term owners.

Jason Marino: With that, I'll turn it over to Jason to discuss our results in more detail.

Jason Marino: Thanks, John. Today, I'm going to review our second quarter results, our balance sheet and liquidity position, and our outlook for the rest of the year. Starting with our vacation ownership segment, contract sales declined 1% in the quarter on a year-over-year basis, with a 5% increase in tourists being offset by lower VGPG and sales growing 3% year-over-year, excluding Maui. As I mentioned during our last call, we needed the improvements in delinquencies that we saw in March and April to continue, which did not happen.

Jason Marino: Thanks, John.

Jason Marino: Today, I'm going to review our second quarter results, our balance sheet and liquidity position, and our outlook for the rest of the year. Starting with our vacation ownership segment, contract sales declined 1% in the quarter on a year-over-year basis, with a 5% increase in tours being offset by a lower VG and sales group 3% year-over-year, excluding Maui. As I mentioned during our last call, we needed the improvements in the linkancies that we saw in March and April to continue, which did not happen. While the linkancies were flat to the first quarter, they were 120 basis points above 2023 levels, driving the need to increase the reserve on the balance sheet by $70 million.

Jason Marino: Under Time Share Accounting rules, we booked a $13 million offset in cost of vacation ownership products, so the net impact to adjusted EBITDA was $57 million. We also expect our sales reserve to be 11% to 12% of contract sales for the bounce of the year, several hundred basis points above our historical norms, where I expect we will remain until we see long performance improve. As John mentioned, we believe lower inflation and a more normalized maintenance fee increase for 2025 will improve our portfolio performance in the future. Development margin declined year-over-year, excluding the increased reserve due primarily to lower BPGs and higher marketing and sales costs, partially offset by lower product cost.

Jason Marino: Under timeshare accounting rules, we booked a $13 million offset in cost-of-vacation ownership products, so the net impact to adjusted EBITDA was $57 million. Development margin declined year-over-year, excluding the increased reserve, due primarily to lower VPGs and higher marketing and sales costs, partially offset by lower product costs. Rental profit in our vacation ownership segment increased $11 million year-over-year, driven by higher rental revenue and $8 million of incremental costs allocated to marketing and sales expenses.

Jason Marino: Excluding the increase in our sales reserve, our development margin would have been 27% in the quarter. Rental profit and our vacation ownership segment increased $11 million year-over-year, driven by higher rental revenue and $8 million of incremental cost allocated to marketing and sales expense. Finally, as expected, financing profit declined 10% year-over-year driven by higher interest expense, partially offset by increased financing revenue, while resort management profit increased 9. As a result, adjusted EBITDA on our vacation ownership segment declined 26% year-over-year. Moving to our exchange and third-party management segment, adjusted EBITDA declined $7 million compared to the prior year, driven by lower exchanges and getaways at Interval, and decreased profit at Aquasthen due to softness in Maui.

Jason Marino: As a result, adjusted EBITDA on our vacation ownership segment declined 26% year over year. As a result, total company adjusted EBITDA declined 29% year-over-year and would have been roughly in line with our expectations and consensus EBITDA for the quarter, excluding the increase in our sales reserves. Moving to guidance. With the first half behind us, we are lowering our full year adjusted EBITDA guidance range to between $685 million and $715 million. We now expect the development margin to be around 22% for the year, including a three-point impact from the additional reserve. Thank you. We'll now be conducting a question.

Jason Marino: As a result, total company adjusted EBITDA to decline 29% year-over-year and would have been roughly in line with our expectations and consensus EBITDA for the quarter, excluding the increase in our sales reserve.

Unknown Attendee: Perfect, very helpful, and if I could just follow up and and ask about sort of the trajectory through the quarter and you know whether, and you may have touched on this, but you know whether June was worse than May and May was worse than April, etc., whether there were some accelerations or not.

Unknown Attendee: Okay, sorry for the third question. I appreciate it. Thank you.

John E. Geller: If COVID was only a $42 million charge, but much, much higher now, how do you rationalize that?

Jason Marino: Moving to the balance sheet, we ended the quarter with net jet to adjusted EBITDA 4.4 times and $820 million in liquidity. We also have nearly $1 billion of inventory on our balance sheet, including inventory reported in property and equipment, enough to support more than two years of future sales.

Jason Marino: Moving to guidance, with the first path behind us, we are lowering our full-year adjusted EBITDA guidance range between $685 million and $715 million. We now expect contract sales to grow 1 to 3% for the year, reflecting second quarter results, and our updated second half forecast of 3 to 7% growth. We expect second half to where it's to grow 12% year-over-year at the midpoint, with VPG declining 7%. Three points of the tour growth is expected to come from lapping Maui this month. Asia Pacific, which will benefit from the reopening of our second Bali sales center, is expected to drive another 4 points of the growth.

Jason Marino: Our package pipeline is expected to drive another 2 to 3 points of tour growth the second half of the year, while the opening of YTK will drive another point. Excluding Maui, we expect year-over-year contract sales growth in the second half of the year to be approximately 3% at the midpoint of our revised guidance range, consistent with our first half performance. We now expect development margin to be around 22% for the year, including a 3-point impact from the additional reserve. Our VL rental business had a very strong first half, and transient keys on the books for the second half are a 4% compared to last year.

Jason Marino: As a result, we now think rental profit could increase by more than $30 million. of the year. We also think resort management profit growth in the second half of the year will be consistent with the first half. In our exchange and third party management business, we expect to $10 million a year over year in the second half driven by our cost savings initiatives.

Jason Marino: Moving to cash flow, we now estimate that our adjusted free cash flow will be in the $300 to $340 million range this year, reflecting our updated adjusted EBITDA guidance. Included in this guidance is $10 million of lower inventory spending. Our plan is to deploy our free cash to reface some of our corporate debt as well as return cash to shareholders to dividends and buybacks while our goal remains to get our leverage back to three times by the end of 2025.

Unknown Attendee: With that, we'll be happy to answer your questions.

Unknown Attendee: Paul? Thank you.

Unknown Attendee: Well, now we conduct any question-and-answer session. If you would like us to question a star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. Let me press star two if you'd like to remove your question from the queue. For participants using clear equipment, maybe necessary to pick up your hands up before crossing the star keys. One moment, please, while we follow for questions. Thank you.

Ben Shikin: Our first question is from Ben Shikin with Mizzouho. Please proceed with your question.

Ben Shikin: Hey, how's it going? Good morning. Thanks for taking my question. You give us a lot of information on the call, which is super helpful.

Ben Shikin: Maybe stepping back and just simplifying. When you updated the guide in June, it implied plus 7% growth x Maui in 2Q. And then X Maui accelerate to plus 10% in the back half of the year. I think from the guide today, based on our math, and I think you confirmed it, chasing it implies in the back half plus three X Maui. So can we just like simply just walk through a few of the buckets. What are the biggest factors that have to help you bridge from the plus 10 that was previously implied in the back half again, X Maui plus three, which I think is correct.

John Geller: Thanks. Yeah, Ben, most of it is going to be our assumptions around VPGA. You know, we, as we talked about on the call, did see some softening in VPGA on first-time buyers. As I mentioned, we are adjusting promotions and both for owners, but also, more importantly, for some of the first-time buyers to try and drive that VPGA up in the second half of the year. But till we see the improvement, we guided it a little bit more conservatively. I'd say on what we think VPGs are going to do versus our original expectations. So a lot of work getting done.

Speaker Change: Thanks.

Speaker Change: Yeah.

Ben: Yeah Ben.

Speaker Change: Most of it's just going to be our assumptions around V. P. G M. Yeah, we as.

Ben: As we talked about on the call. We did see some softening in V. P. G on first time buyers.

Ben: I also mentioned we are adjusting promotions in both for owners, but also.

Ben: More importantly for some of the first time buyers to try and drive that <unk> up in the second half of the year, but until we see.

Ben: The improvement, we guided a little bit more conservatively I would say on what we think <unk> are going to do versus our original expectation. So lot of work getting done the team's focus on it.

John Geller: The team's focused on it, but no different than a lot of consumer businesses that you're hearing. There's some cautious folks out there on the spend side. The good news for us is people are prioritizing, getting on vacation. We're seeing that in our resort occupancies at 90 plus percent. People are renting. We're seeing that in our rental business and getting on vacation. So that both well, maybe offset some of that uncertainty, but we need to get our VPGs going back the right way.

John Geller: Gotcha, and I guess that is fortunate you saw it was just in the last couple of weeks of June, and then I guess has it gotten continued to get worse? Yeah, we had a great May. BPGs were in line with last year on a total basis, and as we talked about, the EPG for owners were flat year over year, which was great. Owners loved the product, prioritized that spend in terms of getting on vacation where we saw the softness from May to June was more in that first time buyer. And at the same time, our strategy is we talked about is to grow first time buyers, right?

John Geller: So tours were up 9% to first-time buyers, but you saw that softening in BPG, which you know, once again, given the broader macro, I'm not sure is a big surprise. The good news, right? You know we just obviously closed July yesterday. We don't have all the details, but at a high level, we saw those BPGs improve sequentially. Still down a bit year over year, but not what we saw in June. So we already made a few adjustments in the middle of July and some of our owner programs and upgrades sales and things like that. So that helped in July, and as I mentioned, we're rolling out other promotions here more broadly for both owners and first-time buyers, so we expect to get some traction with that going forward as well.

Ben Shikin: I appreciate it. That's awesome.

Ben Shikin: Thank you.

Ben Shikin: Thanks, Ben. Thank you.

David Katz: Our next question is from David Katz with Jefferies. Please proceed with your question.

David Katz: Hi.

David Katz: Good morning, everyone. Thanks for all the information. If we could maybe go one more layer, it is, you know, if we broke down the inbound, you know, new buyer target customers. Is there any segmenting we could do where we could point to specific categories or groups or geographies or, you know, any further inside on where there's more weakness rather than less. Sure. Yeah, I mean I think at a high level, David, to your question, you know, locations like Orlando, right. Myrtle Beach where you know probably a little different customer than today's going to Hawaii for example or you know some of our California locations.

John Geller: You're probably seeing a disproportionate impact on you know from first time buyers coming from consumers at that location more broadly from last year. But yeah, it is a little bit the consumer right in the mix of the consumer who's showing up. We talked about Maui being softer and recovering slower. You are seeing that in terms of the visitors you know occupancies for us are back, still softer than where they were pre wildfires. But the visitors, because of the discounting, and it's a little bit different, right? And that's a little bit different customer in terms of buying vacation ownership.

John Geller: So we've seen that a little bit in terms of that recovery there in Maui, but yeah, I think a little bit is just the location at times and the consumers that are going to those locations.

David Katz: Perfect. Very helpful.

John Geller: And if I could just follow up and ask about sort of the trajectory through the quarter and, you know, whether—and you may have touched on this—but, you know, whether June was worse than May and May was worse in April, et cetera, whether there's some acceleration. Sure. Yeah, April started out a little bit softer than our expectations, and then we saw, you know, May doing very well, kind of flat DPG's, as we talked about, and you know, we drove owner and first time buyer tours. And so when we put that, you know, outlook for the second quarter in the beginning of June, the trajectory looked good.

John Geller: And then all of a sudden we saw, you know, some of that softness, you know, more in the first-time buyer side, but a little bit, even on the owner side in June, with VPGs being down a little bit. Like I said, now moving into July, we've seen those VPGs recover right from where we were in June, still down year over year. So we've got some opportunity there, but that's what we're building into the forecast: that they are going to be a little bit softer than the first half. But, you know, as I mentioned, we're, you know, we're rolling out some programs and things to really try and drive that VPG higher here as we go through the second half of the year.

Ben: Now moving into July we've seen those V. P. G's recover right from where we were in in June still down year over year. So we've got some opportunity there, but that's that's what we're building into the forecast that they are going to be a little bit softer than the first half.

Ben: But as I mentioned, we're rolling out some programs and things to really try and drive that <unk>.

Ben: Higher here as we go through the second half of the year.

John Geller: And so July is slightly better, right? Yeah, July was, you know, on an absolute basis, you know, VPGs in July were kind of what we saw overall for the second quarter, maybe a little bit better. Now from it, there's always some seasonality in things, so you would expect a little bit of an increase, but directly, it was, you know, overall good to see some of the programs that we did roll out in, you know, mid July. But like I said, some of these programs were just getting rolled out here now, so not necessarily reflected in what we're seeing in July.

Ben: And so July is slightly better.

Ben: Alright.

Speaker Change: Yes July was on an absolute basis <unk> in July were kind of what we saw overall for the second quarter, maybe a little bit better now there's always some seasonality and things. So you would expect a little bit of an increase but.

Ben: Directionally it was.

David Katz: Okay, sorry for the third question. Appreciate it. Thank you.

David Katz: Thanks, David. Thank you.

Patrick Sholes: Our next question is from Patrick Sholes with Truist Securities. Please proceed with your question.

Patrick Sholes: All right.

Patrick Sholes: Good morning, everyone. Morning.

Jason Marino: Really want to talk about the charge that you took. Really getting to the bottom line here is, you know, how can your financial control process rationalize two huge loan loss reserve charges in really just a few short months here, and really in relation to the, you know, COVID? It was only a $42 million charge, but much, much higher now. How do you rationalize that? Thank you. Yeah, when we took the charge last year, as we talked about, you know, we were seeing higher delinquencies, which obviously leads to higher defaults. But we didn't have as much visibility, so we had to make assumptions.

John E. Geller: Yeah, when we took the charge last year, as we talked about, we were seeing higher delinquencies, which obviously leads to higher defaults, but we didn't have as much visibility, so we had to make assumptions. And, you know, some of the thought around it was, those higher delinquencies were coming from, you know, sales to people 22, and even 23, that bought when, you know, costs were lower, for their own pocketbook. Right, in terms of higher inflation, you did see, you know, over those couple years, interest rates going up, if you had credit card debt, things like that. So that stress on the consumer.

John Geller: And, you know, some of the thought around it was those higher delinquencies were coming from, you know, sales to people in 22, and even 23 that bought when, you know, cost lower for their own pocketbook, right, in terms of higher inflation. You did see, you know, over those couple of years, interest rates going up if you had credit card debt, things like that, so that stress on the consumer. And the expectation was that, given historically how our notes performed, that those delinquencies would trend down. And we did start to see that, like we saw in the first quarter, those delinquencies came down. You know, we're trending down in April, but as Jason mentioned in his comments, then they kind of flattened out. You know, we were, you know, that those delinquencies from April and May and June, they didn't go up.

Unknown Attendee: And the expectation was that, given how our notes perform historically, that those delinquencies would trend down. And we did start to see that, like we saw in the first quarter, those delinquencies came down. You know, we're trending down in April. But as Jason mentioned in his comments, then they kind of flattened out, you know, we are, you know, that those delinquencies from April and May and June didn't go up. But as we talked about on the call, we needed to continue to see that improvement.

Ben: Bulk right in terms of higher inflation.

Speaker Change: You did see over those couple of years interest rates going up if you had credit card debt things like that so that stress on the consumer and the expectation was that given historically, how our notes perform that those delinquencies would trend down and we did start to see that.

Speaker Change: We saw in the first quarter those delinquencies.

Speaker Change: Came down we're trending down in April, but as Jason mentioned in his comments then they kind of flattened out.

Unknown Attendee: So, you know, based on the higher delinquencies and not seeing the improvement that we expected when we took the original charge, we really looked at it. And so going forward, you know, those delinquencies have to continue to come down significantly, right? You know, we do expect that, hopefully, they will get a little bit better here. Part of that is that now, you know, inflation's stabilized at a higher level. You know, we'll see with interest rate cuts and how that impacts consumer debt when they start.

Jason: Those delinquencies from April and May and June they didn't go up but as we talked about on the call we needed to continue to see that improvement so.

John Geller: But, as we talked about on the call, we needed to continue to see that improvement. So, you know, based on the higher delinquencies and not seeing the improvement that we expected when we took the original charge, we really looked at it. And so, going forward, you know, we've kind of taken out a little bit of the risk of those delinquencies having to continue to come down significantly, right? You know, we do expect that, hopefully, they will get a little bit better here. Part of that is now, you know, inflation is stabilized on a higher level.

Jason: Based on the higher delinquencies and not seeing the improvement that.

Speaker Change: We expected when we took the original charge.

Speaker Change: We really looked at it.

Speaker Change: So going forward.

John Geller: You know, we'll see with interest rate cuts and how that impacts consumer debt when those start. But also, more importantly, as I mentioned, our maintenance fees, you know, at this point, we'll, we'll, you know, go up more inflate, you know, also helps for owners in the cost of their vacations going forward. So, that gives us some confidence here that this is enough to really cover what we're seeing. And, and we're going to continue to work like we have been on getting those delinquencies down in collections and hope we do better than we're expecting.

Unknown Attendee: But also, more importantly, as I mentioned, our maintenance fees, you know, at this point, we'll only, you know, go up more inflationary, less than 5% on our product, which also helps owners and the cost of their vacations going forward. So, we're going to continue to work like we have been on getting those delinquencies down in collections and hopefully do better than we're expecting.

Patrick Sholes: Okay, I'm giving you more color on what aspect of the loan loss is really driving the charge, you know, specifically what vintage and even more so, whose vintage are we talking about?

Unknown Attendee: Okay. Give a little more color on what aspect of the loan loss is really important. Even more so, whose vintages are we talking about?

Jason Marino: Is it Astana? Is it Welk? Is it Legacy? Marriott Vacations?

Jason Marino: Yeah, Patrick, this is Jason. So, as we've talked about, you know, over the last couple of quarters, it's really a little bit across the board in terms of brands as well as FICO. So it does depend the materiality and the amount does depend on which brand to your point, as well as. The different FICO bands above 700s are continuing to perform the best, but they have a little degradation. And then, as you go down the FICO bands, you definitely see more stress in the below 700s, and even a little bit in the below 600; you're starting to see even more stress.

Operator: Yeah, Patrick, this is Jason. So, as we've talked about, you know, over the last couple quarters, it's really a little bit across the board in terms of brands, as well as FICO. So it does depend, the materiality and the amount does depend on which brand to your point, as well as the different FICO bands. So our, you know, above 700s are continuing to perform the best, but they have a little degradation.

Speaker Change: And to your to your point as.

Speaker Change: As well as the different FICO bands are above seven hundreds are continuing to perform the best but they have a little degradation and then as you go down the FICO vantage you definitely see more stress.

Operator: And then as you go down the FICO bands, you definitely see more stress. And this happens in the below 700s. And, you know, even a little bit in the below 600, you're starting to see even more stress. So as you think about how that looks, that's, you know, that's what we're focused on. And that's really, you know, that's really kind of how it segregates. I don't think what you're seeing in our portfolio is, frankly, different than what you're seeing in the broader, you know, finance sector.

Speaker Change: In below seven hundreds and even a little bit in the below 600, youre starting to see even more stress. So as you think about how that looks so that's that's what we're focused on and that's really that's really kind of how it segregates I don't think what you're seeing in our portfolio is frankly different than what youre seeing in <unk>.

Jason Marino: So, as you think about how that looks, that's what we're focused on. And that's really, you know, that's really kind of how it segregates. I don't think what you're seeing in our portfolio is frankly different than what you're seeing in the broader, you know, finance sector. The lower the FICO scores, the worse they perform. And that's why you are, you know, a lot of commentary revolves around whether it's the lower end consumers or not. So I think our performance is relatively consistent on a relative basis with what you're seeing more broadly out in the economy.

Speaker Change: The broader finance sector, the lower the FICO score is the worst they perform.

Operator: The lower the FICO scores, the worse they perform. And that's why you hear a lot of commentary revolve around whether it's the lower end consumers or not. So I think our performance is relatively consistent on a relative basis with what you're seeing more broadly out in the economy.

Speaker Change: And that's why you are.

Patrick Sholes: Okay. Thank you. I'll hop back in the queue. Thanks.

Brent Montour: Thank you. Our next question is from Brent Montor with Barclays.

John E. Geller: Thank you. Our next question is from Brandt Montour with Barclays. Please proceed with your question.

Brent Montour: Please proceed with your question.

Brent Montour: Good morning, everybody. Good morning.

John Geller: Thanks for taking my question.

John Geller: So question on first on the demand side. I'm just trying to square the comments, John, of demand for travel being strong, but BPGs for new buyers and close rates being soft. I mean, the obvious reason, I guess, which I guess we haven't said it, but it's just, it's just sort of the rejection or shifting away from large ticket purchases on the consumer.

John Geller: Can you just maybe let's level set a little bit and try and figure out if this is more cyclical or post-COVID normalization, you know, where are new buyer close? I know you can't tell me the exact number, but new buyer close rates now versus where the averages throughout the cycle versus where it is generally when it drops in the cycle. That would probably be helpful, just roughly directionally.

John Geller: Yeah, I'm not sure I have, you know, the kind of historical close rates to kind of walk through. We can clearly pull some of that analysis, but they're clearly lower than what we saw coming out of COVID, obviously, in 22. You know, high level, I'd expect that, you know, they're probably more in line with what we've seen historically on close rates. It could be a little bit lower, but yeah, what you're seeing is the, you know, a little bit of the softness with the first time buyer is that that broader macro people are traveling, but time shares a bigger commitment, right?

Unknown Attendee: They're probably more in line with what we've seen historically on close rates, although it could be a little bit lower. But, yeah, what you're seeing is, you know, a little bit of the softness with the first-time buyer is that broader macro. People are traveling, but time is a bigger commitment, right, if you're going to buy into it, and they haven't had the benefit of owning the product. That's where the good news is.

John Geller: If you're going to buy into it, and they haven't had the benefit of owning the product. That's where the good news is. You are seeing, notwithstanding a bit of the pressure on the consumer, owners continuing to buy in those closing rates or, you know, while lower than 22, as we've seen some of that normalization have been pretty steady here. So, you know, we'll continue to work through it. That's where some of the incentives and, you know, trying to help with that first time buyer close and things like that from a value proposition; those are all the things that we continue to work on.

Speaker Change: If youre going to buy into it.

Speaker Change: And they haven't had the benefit of voting the product that's where the good news is you are seeing notwithstanding a bit of the pressure on the consumer owners continuing to buy in those.

Unknown Attendee: You are seeing, notwithstanding a bit of the pressure on the consumer owners continuing to buy, and those closing rates are, you know, while lower than 22, as we've seen some of that normalization has been pretty steady here. So, you know, we'll continue to work through it. But that's where some of the incentives and, you know, trying to help with that first-time buyer close, and things like that from a value proposition, those are all the things that we continue to work on.

Speaker Change: Closing rates are while lower than 22.

Speaker Change: We've seen some of that normalization of have been pretty steady here. So.

Unknown Attendee: Okay.

Speaker Change: We will continue to work through it that's where some of the incentives and trying to to help with that first time buyer flows and things like that from a value proposition.

Speaker Change: Those are all the things that we continue to work on.

Brent Montour: Okay, thanks for that. And then on the consumer loan piece, I guess we're a little bit confused because of second charge in three quarters. We see one of your peers, who's thought to have a slightly worse consumer, hasn't had any charges yet. And I know that they reserve a lot higher than you guys do on a run rate basis. But I guess yours is getting sequentially worse relative to them.

Jason Marino: And so I want to make sure that I understand: has there been a shift in your lending strategy that has changed the quality of your consumer over time versus your prior sort of run rate? And then a specific stat, if we could just Jason give us the percentage of the book that's below 700. Sure, now in terms of targeting our consumer, our bank goes scores; how we target, nothing has changed. I mean, if you look at more historically, obviously with the acquisitions that we did, first with PILG and Vistana, with the Sheraton customer, probably on average lower quality from a credit, then we have seen historically on the legacy Mary outside.

Jason Marino: And then the same thing with the wealth acquisition, the legacy wealth customer below in terms of the credit quality that so that mix has changed with some of the acquisitions. But as you talk about the last couple of years, and specifically how we target, how we underwrite, really no shift in anything there. It is more, like I said, some of the macro, I think on the consumer, as Jason mentioned, whether it's credit card delinquencies, I think are the highest they've been in 12, 13 years, I think I saw on something. So, depending on the consumer, I think there's more stress on some consumers versus others.

Speaker Change: Quality that so that mix.

Speaker Change: Has changed with some of the acquisitions, but as you talk about.

Speaker Change: The last couple of years.

Speaker Change: Specifically, how we target how we underwrite.

Speaker Change: Really no shift in anything there it is more.

Speaker Change: Like I said some of the macro I think on the consumer as Jason mentioned.

Jason: Whether it's credit card delinquencies I think for the <unk>.

Speaker Change: They've been in 12 13 years, I think I saw on something so.

Jason: Depending on the consumer I think there's more stress on some consumers versus others.

Jason Marino: Yeah, and I think it's also important to remember that this is relative to our expectations. So, to your point, our reserves have historically been lower and still remain among the lowest in the industry. And then to your last question, 28% of our loan book is below 700 right now, and that's been pretty consistent over the last couple of years. So no real changes in that stratification.

Brent Montour: Okay, thanks everyone. Thank you.

Chris Woronka: Chris, do you want to talk with Deutsche Bank? Please proceed with your question.

Chris Woronka: Hey, good morning, guys. Thanks for taking the question. Chris, thanks for taking the question.

John Geller: Hey, John. So I did have one last one follow-up question on the loan loss, but we can take a break in that for a minute. And the first question, if we look at Maui, and you know, you guys are not alone in inflating that is, you know, being slower to recover. I think, you know, some of your peers in the hospitality industry have, you know, kind of suggested that the, you know, the marketing efforts by the government, maybe, you know, could, could use a little bit of a boost. Is that, you know, a fair assessment, or are you guys working with them to try to, it's not a position they've historically had to be in.

John Geller: I get it. But is there anything that, you know, would encourage you that they're, you know, getting more ramping up their efforts to get folks back? Yeah, I would say it's kind of a true observation. We continue to work with the local governments. We'd love to see that, but it's a bit of a balance with the Maui residents and people returning to the islands. So we're going to continue to work that. We're going to be there a long time. We know that's going to be a great destination like it was over time. So we'll continue to work with the local island governments and do and work with them in the right way.

Speaker Change: To work.

Speaker Change: With the local governments, we'd love to see that but.

Speaker Change: It's a bit of a balance right with the Maui residents and people returning to the island.

Speaker Change: So we're going to continue to work that we're going to be there a long time, we know thats going to be a great destination like it was overtime so well.

Speaker Change: We'll continue to work with with the local island governments and do.

Speaker Change: Work with them in the right way.

Speaker Change: Okay.

John Geller: Okay, fair enough. Thanks, Sean.

Speaker Change: Fair enough. Thanks, Thanks, Sean and then the follow up on the back to the loan losses.

John Geller: And then the follow-up on the back to the loan losses. I guess how much data are you collecting from folks? I know you get pico, and you get all the things on the application, but are you getting any feedback from folks about why they're walking away? Is it purely financial? Is it maintenance fees? Is it something else?

Speaker Change: How much.

Speaker Change: I guess how much.

Speaker Change: Dean are you collecting from folks.

Speaker Change: I know you might go and you get all the things on the application, but are you getting any feedback from folks about why they are walking away purely financial as it maintenance fees.

John E. Geller: And is there anything that makes you want to, you know, change the application process a little bit to collect a little more information on these folks? And maybe also, are these folks just walking away? Are they totally defaulting, or are they going through a third party or any color? And that would be great. Thank you.

John Geller: And is there anything that makes you want to change the application process a little bit to collect a little more information on these folks? And maybe also, are these folks just walking away? Are they totally defaulting, or are they going through a third party or any car? That would be great. Thanks. Yeah, so first, we have not seen really any evidence that any of the folks are being caused by the third party. We haven't had that really in our entire history, and we don't have it today. So I think that's on the positive side that that activity hasn't picked up for us, like it has maybe for some others.

John Geller: In terms of why folks default, most people don't really tell you at the end of the day. We do ask; we do solicit feedback. We capture that feedback, but generally, the number one answer is it's expensive, right? And with given inflation and everything else, this is my words, not necessarily a customer's words. It makes sense. The overall cost of living out there has increased pretty significantly over the last two years, not just the cost of the time share product, but also just everyone's daily living cost. And that seems to be putting more pressure. But most don't really give you a reason.

John Geller: And then that would be the number one reason that people do give you if they do give you a reason at all. Okay. Fair enough.

John Geller: Thanks, guys, and best of luck in the second half.

Sean Kelley: Our next question is from Sean Kelly with Bank of America. Please pursue your question.

Sean Kelley: Good morning, everyone. Thanks for taking my question. I just wanted to hit on a subject of margins a little bit. You know, I think we rewind. I heard a bit about mid shift as it relates to, you know, a bigger focus on, you know, first time in new owners. Obviously, that's what's partially dragging down the VPGs. And then secondarily, you know, John, I think a number of times you mentioned incentives as sort of a way to, you know, I guess drive tour flow and probably, you know, push the contract sales piece a bit. So I'm wondering about the implications that a little bit as it relates to margins.

Sean Kelley: Could you just walk us through sort of, you know, the impact of that mix and how you factor that in, be it to your outlook for development margin or your outlook for just broader V.O.I. margin. And am I right in thinking that, you know, those should have some negative impact there. Thanks.

John Geller: You're absolutely right on the first-time buyer mixes. We talked about in the second quarter, our strategy to grow first-time buyers, package tours, which are focused primarily on first-time buyers. So, as that mix or mix of tours goes up, yeah, the map would be, you know, you get slower VP or lower VPGs on an overall basis. And that into how we thought about our guidance for the second half of the year. So that's in there. And then the other piece, right, if the incentives work, right, yeah, there could be a little bit more cost, right, related to that, that would negatively impact.

Jason Marino: You're absolutely right on the first-time buyer mix, as we talked about in the second quarter. Our strategy to grow first-time buyers package tours, which are focused, you know, primarily on first-time buyers So as that mix or mix of tours goes up, yeah The the math would be you know, you get slower VP or lower VP G's On an overall basis and yes, we factored that into how we thought about our guidance for the second half of the year, so That's in there and then the other piece right if the incentives work, right?

Speaker Change: Our strategy to grow first time buyers package tours, which are focus.

Speaker Change: Primarily on first time buyers so.

Speaker Change: That mix or mix of tours goes up yeah, the math would be.

Speaker Change: You get slower VP or lower <unk>.

Speaker Change: On an overall basis, and we've factored that into how we thought about our guidance.

Speaker Change: For the second half of the year so.

Speaker Change: That's in there and then the other piece.

Speaker Change: <unk> right.

Speaker Change: This work rate, yes, there could be a little bit more cost right.

Jason Marino: Yeah, there could be a little bit more cost, right? Related to that, that would negatively impact, but the VP G's up, you get the flow through. You can offset that or maybe do a little bit better depending on how the VP G's, you know, improve.

Speaker Change: Related to that that would negatively impact, but the btg's up to get the flow through.

John Geller: But the VPGs up to get the flow through, you can offset that or maybe do a little bit better, depending on how the VPGs, you know, improve. So that's where we're, you know, and we talked about this. We're always, you know, making tweaks to the promotions and things based on what we're seeing. So sometimes it's based on, you know, particular things that we see and what's going on, like we're seeing now with first-time buyers, so we'll adjust those accordingly. And if we can execute on the VPG side, that hopefully offsets the margin impact of the cost of the higher incentives.

Speaker Change: You can offset that or maybe do a little bit better depending on how the <unk>.

Speaker Change: Improved so that.

Speaker Change: That's where.

Jason Marino: And did I cater correctly that you said 26% develop the margin in the quarter if you adjusted for the sales reserve? Was that the right number? And is that, are we looking at a similar magnitude for the back half, just sort of putting all the X's nose together? Is it better than that, or worse than that? What just kind of trying to understand the underlying assumption in the guides? Thanks. Yeah, it was 27% for the second quarter. If you add back that charge, we did in our prepared remarks say 22% for the year, including three points from the charge.

Jason Marino: Yeah, it was 27% for the second quarter. If you add back that charge we did in our preliminary mark, say 22% for the year, including three points from the charge. So that would be, say, 25 for the kind of full year.

Jason Marino: So that would be called 25 for the, for the kind of the full year. Okay, 25 for the full year.

Jason Marino: And just last one for me would be Jason, can you compare that to work? We percent on that as a percentage of contracts; else going forward, which is a little bit higher. And then we should see some benefit in product costs. Our product costs are coming in lower this year than we had originally expected, so we do have them picked up on that side in the guidance as well. Thank you very much.

Speaker Change: Yeah.

Patrick Sholes: Thanks.

Speaker Change: Thanks.

Speaker Change: Okay.

Patrick Sholes: Thank you.

Patrick <unk>: Thank you. Our next question is from Patrick <unk> with <unk> Securities. Please proceed with your question.

Patrick Sholes: Our next question is from Patrick Sholes with Truist Securities. Please proceed with your question. Great. Thank you. I have a number of follow-up questions here.

Patrick: Great. Thank you.

Patrick: I mean number of follow up questions here.

Patrick Sholes: Have you changed anything in your, in the last couple of years, as far as your new sales writing? I mean, using new sales underwriting criteria, and if so, you know, what specifically did you change and related to that? You know, how is your sales underwriting criteria? In your legacy, Marriott, vacation's product, different from... You know, that of wealth. And I'm trying to really, you'll see in my further questions trying to drill down more on wealth here. Thank you.

Speaker Change: Have you changed anything in your.

Patrick: In the last couple of years as far as your new sales writing.

Speaker Change: Do you have any new sales underwriting criteria and if so what specifically did you change and related to that.

Speaker Change: How is your sales underwriting criteria.

Speaker Change: In your legacy Marriott vacations product different from.

Unknown Attendee: in your legacy Marriott Vacations product different from, you know, that of Welk? And I'm really, you'll see in my further questions, trying to sort of drill down more on Welk here. Thank you.

Speaker Change: That of wealth and I'm trying to really you'll see in my further question is trying to sort of drill down more on on Wellcare.

Speaker Change: Thank you.

John Geller: So I just saw I'm clear when you say sales, are you talking credit underwriting, Patrick? Yeah, yeah, get credit underwriting app for this sale. Yeah, nothing significant in terms of, you know, holistic changes. We're always looking at, you know, down payment requirements and things like that. Yeah, we could have had some tweaks to bring those up in certain locations, but nothing holistically. I don't want to say nothing's changed, but I wouldn't say there were any pervasive changes in terms of how we look at our underwriting and the requirements to get enough financing.

Speaker Change: Just so I'm clear when you say sales are you talking.

Patrick <unk>: Credit underwriting Patrick.

Patrick <unk>: Yeah, Yeah, good credit underwriting for the sales discussion.

Speaker Change: Yeah.

Speaker Change: Nothing significant.

John Geller: Okay, let's talk a little bit about wealth. You know, how is that deal performing versus your expectations at the time of acquisition? And, you know, what trends are you seeing within specifically the wealth customer as far as default rates versus your legacy. Thank you. Yeah, I mean, from a default rate, we knew this coming in. Wealth customers had a had a higher default rate, so that's kind of in our mix, if you will, the overall higher defaults on the portfolio. Yeah, I take from an overall transaction, you know, we still see the long term value.

Unknown Attendee: Okay, let's talk a little bit about WELC. How is that deal performing versus your expectations? customers. Thank you.

John Geller: I think some of the transition, you know, it's probably taken a little bit longer. We're seeing a lot of good traction this year on our sales performance there, but still a lot of opportunity. We're not, we're not where we want to be at in terms of overall VPGs and things that we're seeing at our high portfolio products, so a lot of good work there by the team and a lot of good improvement, and we're on a good trajectory there. But, like I said, we're overall, we're probably not where we wanted to be when we first underrated, underrated; but that means there's also good opportunity going forward.

Speaker Change: At our Hyatt.

Speaker Change: Portfolio.

Speaker Change: Products so.

Speaker Change: A lot of good work there by the team and a lot of good improvement.

Speaker Change: We're on a good trajectory there, but like I said, we're overall, we're probably not where we want it to be when we first underwrite underwrote it but.

Speaker Change: That means there is also a good opportunity going forward.

Patrick Sholes: Thank you.

Speaker Change: Thank you there are no further questions at this time I'd like to hand, the floor back over to management for any closing comments.

Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing comments.

John Geller: There are no further questions at this time.

John Geller: I'd like to hand a floor back over management for any closing comments. Great. Thank you, everyone, for joining our call today. As you heard on our call, second quarter results were mixed, with double digit rental profit growth being offset by lower contract sales. In addition, while Maui is recovering, it's not recovering at the pace we expected. Our new Walkie Key Resort is slated to open in early October. This will be our first new U.S. Resort opening since the pandemic adding more exciting vacation destinations for our owners and other guests. We also have a number of new resorts planned to open over the next few years, including our new Western resorts in Savannah and Charleston, as well as a new Marriott resort in Thailand and additional units in Bali.

Speaker Change: Great. Thank you everyone for joining our call today as you heard on our call second quarter results were mixed with double digit rental profit growth being offset by lower contract sales. In addition, while Maui is recovering it is not recovering at the pace we expected.

John E. Geller: Great, thank you everyone for joining our call today. As you heard on our call, second quarter results were mixed, with double-digit rental profit growth being offset by lower contract sales. In addition, while Maui is recovering, it's not recovering at the pace we expected.

Speaker Change: Our new Walkie key resort is slated to open in early October this will be our first new U S resort openings since the pandemic, adding more exciting vacation destinations for our owners and other guests. We also have a number of new resorts planned to open over the next few years, including our new western resorts in Savannah and Charleston.

John Geller: And while we're not satisfied with our results, we have fundamentally, we have a fundamentally strong business that generates free cash flow, a high percentage of owner sales, which reflect the quality of our product offering. And a team of dedicated associates should go to work every day to provide memorable experiences for our owners and guests. On behalf of all of our associates, owners, members, and customers around the world, I want to thank you for your continued interest in our company, and I hope to see you on vacation soon.

Unknown Attendee: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.