Marriott Vacations Worldwide Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 7, 2024

Key Takeaways

  • Positive Sentiment: Contract sales rose 5% year over year in Q3 with resort occupancy near 90%, driven by targeted promotions, expanded sales channels, and a double-digit increase in first-time buyer tours.
  • Positive Sentiment: Opened a new 110-unit Waikiki resort and announced construction of the first Hyatt Vacation Club in Orlando, each expected to generate $30M–$50M in annual contract sales within a few years.
  • Positive Sentiment: Advanced digital initiatives have enabled 60% of booking and transaction capabilities via self-service, with online reservations majority-booked, chatbots resolving 85% of inquiries, and VO websites processing over $1 billion annually.
  • Positive Sentiment: Created a Strategic Business Operations Office to accelerate internal growth and cost-efficiency initiatives, targeting $50M–$100M of incremental annual savings over the next two years to reinvest in the business and reduce owner fees.
  • Negative Sentiment: Financing profit declined in the quarter due to higher borrowing costs, although management expects revenue growth to outpace interest expenses and financing profit to improve in 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Marriott Vacations Worldwide Q3 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr.

Operator

Neil Goldner, Vice President, Investor Relations.

Speaker 1

Thanks, Rob. Welcome to the Marriott Vacations Worldwide Third 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 to differ materially from those expressed in or implied by our comments.

Speaker 1

Forward looking statements in the press release as well as comments on this call are effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non GAAP financial information. You can find a reconciliation of non GAAP financial measures in the schedules attached to our press release and on our website. With that, it's now my pleasure to turn the call over to John Geller.

Speaker 2

Thanks, Neil. Good morning, everyone, and thank you for joining our Q3 earnings call. Before we begin, our thoughts go out to all the people in North Carolina, Florida and elsewhere who were impacted by hurricanes Helene and Milton. Fortunately, all of our associates are safe and none of our vacation ownership resorts had significant damage. Turning to our results for the quarter, as we've always said, people want to go on vacation regardless of the economic environment And that was again evident this quarter running nearly 90% resort occupancy and increasing contract sales year over year.

Speaker 2

Recognizing that while consumers continue to face economic pressures, they also place high value on experiences offered by our brands. That's why we took a series of targeted actions during the quarter focused on driving revenue, expanding our sales reach and introducing compelling incentives for first time buyers. For example, we adjusted our promotional strategy resulting in an improvement in our first time buyer VPG trends starting in August. We continue to leverage virtual tours and non traditional sales channels such as our roadshows and owner cruises to reach more potential customers when they're not vacationing with us. This represented 10% of our tours this quarter, up more than 30% from a year ago and we've had opportunities to expand this even further.

Speaker 2

And we launched a new first time buyer financing promotion to make it more affordable to become an owner. These strategies, the continued recovery from last year's Maui wildfires and the underlying stability in the business helped us grow contract sales 5% year over year. We grew first time buyer tours double digits compared to the prior year, while our first time buyer VPG increased 6% sequentially. 1st time buyer sales increased year over year and first time buyer tours represented roughly 55% of our total tours, the highest level since 2019 as we continue to work to add new owners to the system. Owner sales also increased compared to a year ago as tours grew and VPG improved.

Speaker 2

We ended the quarter with nearly 270,000 preview packages in our pipeline, up 3% from a year ago, which gives us a good start to next year. We advanced our strategy to expand our presence in key markets, opening our new 110 unit Waikiki Resort in early October. Our owners are continually asking for new experiences like Waikiki and this market will appeal to our Japanese customers as well as those from North America. We also expect the new sales center to generate $30,000,000 to $50,000,000 in annual contract sales within a few years. And under our capital efficient structure, we'll pay for the inventory over 3 years, which better matches the anticipated sales ramp.

Speaker 2

Enthusiasm among owners for this new resort has been very high, and we continue to see strong demand in 2025. I'm also very excited to announce that we intend to build a new Hyatt Vacation Club Resort in Orlando, the first organic addition to the Hyatt Vacation Ownership Portfolio in more than a decade and the 1st Hyatt branded Vacation Ownership Resort in the Orlando area. Orlando is the largest timeshare market in the world and this resort will be a great addition to our Hyatt portfolio when it opens in a few years. And the new sales center that will accompany it will be a nice contributor to contract sales. As with other large projects to efficiently manage our cash flow, our goal is to build this with a capital efficient partner.

Speaker 2

In our exchange and third party management business, our Interval International team is already working hard to secure inventory for 2025 to drive transactions. And with the additions over the past few years, InterVille is now affiliated with more than 160 all inclusive resorts, providing even more usage options for our members. On the IT front, we've made good progress over the last few years updating our legacy systems. While we still have more to do, these are critical steps to enable us to evolve our product offerings. We've also been on a journey to digitize our consumer capabilities, enabling our owners to transact with us the way they want, and we've already made substantial improvements.

Speaker 2

For example, the majority of reservations are expected to be booked online this year, up substantially from only a few years ago. We've also expanded the use of low cost virtual voice assistants throughout the company and 85% of our users who interact with our chatbot are able to complete their transaction without talking to an agent. And our VO websites are transacting over $1,000,000,000 in payments every year, making maintenance fee and loan payments seamless for our owners. In total, nearly 60% of booking and transaction capabilities are available digitally via via self-service today and we believe we still have substantial opportunities to increase this further, driving efficiencies across the organization. We also have opportunities to unlock the power of data through advanced analytics to improve efficiency and drive top line growth and we're making good progress.

Speaker 2

For example, we continue to improve our first time buyer propensity models using advanced data and analytics across our marketing channels to improve response rates for our direct marketing offers. These models are helping enhance our first time buyer sales by more efficiently targeting the right customer with the right offer in the right channel. Another example is the owner propensity model that the team recently expanded. This model drives sales by enhancing our targeting processes to on-site owners by identifying those owners with the highest likelihood of purchasing. We've also developed a robust model to better forecast and optimize available inventory at interval.

Speaker 2

Implementing the use of this information is expected to reduce burn rates and drive incremental transactions. And we are now live on our new sales force enabled enterprise platform for owner data and should incorporate the rest of our VO customer data by the middle of next year. This is an important step to enable us to better service our owners and other customers with personalized products and services. The common thread across all these initiatives is our focus on enhancing the customer experience and growing the top and bottom lines. Technology is a key enabler and the reality is that with most of our businesses 40 years old, we need to ensure that our infrastructure and digital tools keep pace and support our ability to capitalize on the appeal of our iconic brands.

Speaker 2

While we still have work to do, we've made good progress over the past 5 years. While the macroeconomic environment remains dynamic, we believe many of the major headwinds that have impacted our performance are behind us. 15 months after the devastating Maui wildfires, all of our resorts are open, our sales team is appropriately staffed, occupancy is running above 90% and I'm confident that our business there will fully recover within a few years, if not sooner. Similarly, we've had to navigate through the pressures of interest excuse me, rising interest rates and higher inflation. Despite that, we are proud to have kept maintenance fee increases for our point space products to the mid single digits on average over the past 5 years, while maintaining the same high standards our owners expect from us.

Speaker 2

And more importantly, we only expect maintenance fees for these products to increase in the low single digits for 2025. These pressures came while we navigated the implementation of our Bound by Marriott Vacation program. As we've discussed in the past, the implementation is now behind us and more importantly, our Marriott, Westin and Sheraton Vacation Club owners can now use their points to easily move around our system of more than 90 resorts, providing ease of booking and expanded choice, which is critical for continued contract sales growth. As we have navigated these challenges, it's also important to remember that despite a couple of uneven years, we remain a profitable and resilient business with a solid foundation and a bright future. We have the best collection of brands in the vacation ownership business.

Speaker 2

Our products resonate with today's consumer, combining great accommodations at top tourist destinations with significant flexibility. We create our own demand and roughly 35% of our adjusted EBITDA contribution comes from high margin recurring revenue streams. We have loyal and highly satisfied owners who rely on us to provide memorable vacations for their families and we regularly survey our owners and they tell us year in and year out how much they love their timeshares. That's one of the reasons why nearly 70% of our sales year to date have come from existing owners and why our guest satisfaction scores are higher today than they were last year and in 2022. We've added nearly 16,000 first time buyers this year and over 80,000 since the start of 2020 despite the pandemic.

Speaker 2

And based on history, more than 40% of these new owners will buy additional points within. We're adding new resorts with properties coming in Orlando, Savannah, Charleston, Thailand and Bali. And with the investments we're making in technology and talent to leverage consumer insights and personalize and simplify the guest experience, we are well positioned to realize the benefits in the years ahead. Looking forward, we believe we have significant opportunities to accelerate our growth and drive additional operating efficiencies by continuing to modernize and evolve our business. To accelerate these initiatives, I recently created the Strategic Business Operations Office led by one of our senior leaders who report directly to me.

Speaker 2

We believe we can drive an incremental $50,000,000 to $100,000,000 of annual efficiencies over the next 2 years, which is in addition to existing cost savings we have already achieved. We expect to reinvest some of these savings in the business to further accelerate revenue growth by enhancing our customer platforms, products and services. We also expect to generate additional savings that will benefit our owners' maintenance fees. This effort will touch all parts of the organization and I look forward to sharing more details with you on our next earnings call. With that, I'll turn it over to Jason to discuss our results in more detail.

Speaker 3

Thanks, John. Today, I'm going to review our Q3 results, our balance sheet and liquidity position, and our outlook for the year. Starting with our vacation ownership segment, contract sales increased 5% in the quarter compared to last year and increased nearly 2%, excluding Maui. While existing owners continued to buy additional points, we also grew first time buyer sales in the quarter, reflecting our focus on adding new owners. Tours increased 10% year over year, while VPG was 4% lower, and Asia Pacific sales grew more than 40% year over year.

Speaker 3

Importantly, owner VPG increased year over year reflecting the value owners put on vacations. Delinquencies appear to have stabilized and were roughly flat versus our 2nd quarter and our sales reserve was in line with our previous guidance. As a result, development profit increased year over year to $105,000,000 rental occupancy increased 700 basis points year over year, helping us drive 9% revenue growth in our vacation ownership segment. Rental profit increased $14,000,000 compared to the prior year, driven by higher revenue and $8,000,000 of additional costs allocated to marketing and sales expense to drive tours. Management profit increased year over year while financing profit was down due to higher borrowing costs.

Speaker 3

As a result, we generated $231,000,000 of adjusted EBITDA in our vacation ownership segment in the quarter with a 30% margin. Moving to our Exchange and Third Party Management segment. Adjusted EBITDA declined $7,000,000 year over year with roughly half of the decline related to lower profit at Aqua Aston due to the Maui wildfires and the balance due to lower transactions at Interval. As a result, total company adjusted EBITDA increased year over year to $198,000,000 Our balance sheet remains firm ending the quarter with more than $900,000,000 in liquidity and no corporate debt maturities until 2026. We also ended the quarter with $1,000,000,000 of inventory, which we think is the appropriate level to run the business.

Speaker 3

Our leverage declined 0.5 a turn sequentially to 3.9 times, reflecting our higher LTM adjusted EBITDA and lower debt balances. We completed our 2nd securitization of the year raising $445,000,000 at a blended interest rate of 4.5% with a 98% advance rate. The interest rate on this transaction was nearly 200 basis points lower than our November 2023 seconduritization and roughly 100 basis points lower than our March deal. Looking forward, we increased our full year adjusted EBITDA guidance to reflect our strong Q3 results. We still expect contract sales to grow 1% to 3% for the year, driven by increased tours and lower VPG.

Speaker 3

We have a significant presence in Florida and we lost a few selling days due to Hurricane Milton, which we estimate cost us around $8,000,000 in contract sales and a few $1,000,000 of adjusted EBITDA in the 4th quarter. Our VO rental business had a strong 3rd quarter and we expect rental profit to increase in the $35,000,000 range for the year. In our Exchange and Third Party Management segment, we now expect adjusted EBITDA to decline approximately $30,000,000 for the year with roughly half of the decline related to our Aqua Aston business. Finally, G and A is expected to be down around $20,000,000 for the year driven by our cost saving initiatives. Moving to cash flow.

Speaker 3

We expect our adjusted free cash flow will be in the $300,000,000 to $340,000,000 range and remain focused on reducing leverage by the end of 2025, while still returning cash to shareholders. So to summarize, we had a solid third quarter growing contract sales and adjusted EBITDA while reducing our leverage. And while consumers are still facing economic pressures, they also continue to spend on experiences like travel. This puts us in a great position to continue to grow while supporting the balance sheet and returning cash to shareholders. It's also important to remember that our industry generates its own demand, which you can see in our 10% tour growth this quarter.

Speaker 3

We took a number of steps during the Q3 focused on driving contract sales growth, adjusting our promotional strategy, increasing our use of nontraditional sales channels and launching new promotions geared to drive first time buyer tours. We're also making good progress updating our legacy IT systems, enabling our customers to transact with us digitally more than ever and unlocking the power of data and analytics to drive efficiencies and growth. And as Sean mentioned, we believe we have substantial opportunities to modernize and evolve our business and have already started working to achieve this. Our initial analysis shows we can drive an incremental $50,000,000 to $100,000,000 of annual run rate benefits over the next 2 years by improving our cost structure, streamlining our operations and driving efficiencies across our company, providing opportunities to invest in attractive growth initiatives, expand margins and enhance our IT platforms. With that, we'll be happy to answer your questions.

Operator

Our first question comes from Brandt Montour with Barclays. Please proceed with your question.

Speaker 4

Good morning, everybody. Thanks for taking my question. So first question, I guess, it's just the first time buyer financing strategy that you mentioned, John. It doesn't sound like anything that's not sort of normal course of business or sort of minor strategic shifts. But just curious if that's something that's going to meaningfully alter the sort of the way that we think about loan loss provisions or the mix that then would influence that line or anything else that we should be thinking about in terms of you moving in the credit spectrum in new owner sales or in the like?

Speaker 2

No, no. The underwriting standards didn't change in terms of FICO and all that. So, there shouldn't be any impact to your question as it relates to loan loss.

Speaker 4

Okay, great. Thanks for that. And then on the full year guidance, which was raised modestly at the midpoint of EBITDA, I think you guys kept contract sales unchanged. The way to and then free cash flow was also unchanged, but that was for sort of other reasons. Is the way to think about the revisions today that there's that really sort of on the sales side, things are progressing as expected, but you did get some of the efficiencies that you talked about in the 3rd Q4, maybe the Q4.

Speaker 4

And then a follow-up to that question is maybe you could just talk about how much of the savings of the $50,000,000 to $100,000,000 over the next 2 years. How much of that will be in G and A versus the rest of the business?

Speaker 2

Yes. So the initiatives we're talking about are really for next year in 2025, right. We're always coming into this year, we talked about some of the savings initiatives. You see that in our full year G and A, but those were all things that were in process. This is really building on those incremental, if you will, going forward.

Speaker 2

We'll have more on the February call around the timing and we're working through all that. The goal is to have the $50,000,000 to $100,000,000 in place call by the end of 2026. We're going to accelerate as many of those as we can, but some of them are going to take a little bit more time and we can give you more color on that, like I said, in February.

Speaker 3

And Brandt, the guide up, as you think about it, our Q3 was a little bit better than we had originally contemplated. So not necessarily on the contract sales, but in some of the other parts of the business. And that's what you see, which is why you don't see the change to the contract sales guidance.

Operator

Our next question comes from Ben Chalkin with Mizuho. Please proceed with your question.

Speaker 5

Hey, how's it going? Can you hear me all right?

Speaker 2

Yes. Good morning, Ben.

Speaker 5

Thanks. Hey, good morning. So nice quarter. When we step back, your contract sales are now higher year over year as we'll have Maui implied 4Q, a little bit lower year over year. I know it sounds like there's some 4Q hurricane impact as well that you called out.

Speaker 5

Is there anything else lumpy that we need to consider here just in terms of moving parts as we lap year over year?

Speaker 3

No. Nothing that comes to mind.

Speaker 5

Okay, got it. And then and I guess similarly, you had a nice 3Q, contract sales are ramping. As we just step back, your sales and marketing expense is higher year over year.

Speaker 6

Can you talk about some

Speaker 5

of the puts and takes here? And do you see this as an opportunity on a go forward to bring lower?

Speaker 2

Sure. Ian, you're obviously talking based on reported revenues. So some of it is the higher sales reserve, right, which is a deduct from our contract sales, right, nets the revenues down. So, with our reserves, which we've talked about, we're providing at a higher level, that obviously impacts the marketing and sales costs on a percentage basis. A lot of the initiatives that we're working on and are already in place, whether that's how we target and market and do that more efficiently, those continue to be the opportunities to get the right customers on tour that are going to drive higher VPGs, which will help your marketing and sales costs.

Speaker 2

So that continues to be the way to improve, right, more efficient marketing, better VPGs to drive marketing and sales costs as a percentage of revenue.

Operator

Our next question comes from Patrick Scholes with Truist Securities. Please proceed with your question.

Speaker 7

Thank you. Good morning, John and Jason. Couple of questions here. On the 2Q earnings, you had really highlighted softening of VPG on first time buyers and the lower end of the cycle band really underperforming. Can you give us a little bit more color on what you've observed since 2Q earnings and expectations for those going forward?

Speaker 7

Thank you.

Speaker 2

Yes. Sure. Yes. As we talked about on the Q2, if you recall, our year over year VPG to owners, I think, was flat in the Q2. So owners still love the product, we weren't seeing the softening, where we started to see some softening in like May in Q2 was around first time buyers.

Speaker 2

And not surprising given the broader macro and when we talked about on the Q2 call in early August, we rolled out, we changed our promotional grid that we talk about in terms of how the more you buy, obviously, you potentially get a higher 1st day benefit and those types of things and move that around overall as well as change the financing incentive for first time buyers in that program a little bit. And what you saw as you went through sequentially in the quarter, because we had put the incentives in place in July, for example, VPGs were still down double digits year over year. After those incentives went in place, we saw the benefit sequentially in August September where all of a sudden VPGs were down 3%, 4% year over year, right. So that's where you saw the traction on some of the adjustments we made on the sales side and we didn't get a full quarter benefit of that, but we expect to get that year over year and continued improvement here as we go through the Q4.

Speaker 7

Thank you. One more question here for Jason. Certainly on your most recent securitization versus prior over the last 18 months, better terms and net spreads. Certainly over the last 2 years, we've seen those net spreads be a headwind to EBITDA growth. Assuming interest rate trends continue the way they've been going of late, When might you expect those net spread headwinds to possibly turn into a tailwind?

Speaker 7

Thank you.

Speaker 3

Yes. Thanks, Patrick. So as we've talked about in the past, we expect to have higher financing interest expense here going forward for the next couple of years as the interest rates that we issued securitizations at over the last few years at, call it 2% thereabouts for a while roll off and we put on the higher interest costs going forward. So from a margin perspective, we're going to continue to see that impact over the next couple of years. But what we've said is that our revenue on the financing side should start to outpace that expense growth.

Speaker 3

So we do expect here in 2025 to have higher financing profit in the business, but those interest expenses are going to continue to increase here going forward for a little bit longer.

Speaker 2

Yes. So on a net basis, it should be a we should see financing profit grow in 25 versus 2024 where it has been a net headwind.

Operator

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

Speaker 6

Hi, good morning. Thanks for taking my question. John, I wanted to go back to some of the prepared remarks about the strategic business operations office. Can you just elaborate a bit on sort of what that is designed to do and sort of how it works and what we can expect to see and or hear from it? It's quite interesting.

Speaker 2

Sure. Sure. Yes. No, it's a great question, David. A lot of these initiatives and things aren't new, right?

Speaker 2

There are things that we're working on. The idea with the strategic business operations is create not only new ideas, but at velocity to execution to accelerate these opportunities over the next couple of years. So I wanted to make sure we had called a hyper focus on growth opportunities, cost efficiencies with detailed plans on execution and a team to work with the broader business to deliver. And it's really about adding that velocity to what we're trying to accomplish.

Speaker 6

So can I follow that up and just double click on the growth opportunities part of the answer? What is the how would you define the boundaries on what that opportunity set is? Is that more internal, tuck in acquisitions, what kinds of stuff?

Speaker 2

Yes. No, it's going to be a lot on our internal. We've got, I think, great opportunities in our core vacation ownership as well as our exchange business to grow. So it's really those initiatives and moving those longer faster and other new ideas and things that we want to get into place. So, but it's also we're always going to continue to look at whether it's a tuck in acquisition, potentially launching new products that are in the vacation ownership, right, different products than we have today.

Speaker 2

We've got a lot of work going on that front. So, it's both, call it, the organic products we have today and growth there, but we are looking at adjacent opportunities and we always are. And we've got some good things that we're looking at.

Speaker 6

Okay. Thank you.

Operator

Our next question comes from Patrick Scholes with Truist Security. Please proceed with your question.

Speaker 7

Great. Thank you. Just a quick follow-up question regarding your cost saving initiatives. Marriott Corporation, your former parent company, also just launched a large cost saving initiative. I'm just curious if your initiative, is this anything in conjunction with them or is this just purely coincidental?

Speaker 7

Thank you.

Speaker 2

I think you recall, we spun out of Marriott back in 2011, Patrick. So we yes, there are licensor and stuff, how they run their business and how we run our business, totally coincidental. I guess that they were looking at obviously probably different initiatives for their business than we're doing for our business, but no totally unrelated.

Speaker 7

Okay. Just curious. Thank you. I'm all set.

Speaker 2

Okay. Thank you. Thanks.

Operator

We have reached the end of the question and answer session. I'd now like to turn the call back over to John Geller for closing comments.

Speaker 2

Thanks, Rob. Thank you everyone for joining our call today. We had a solid Q3 and reservations look strong for the balance of 24 and into next year. Our strategies are working and we're driving first time buyer sales, which is good for the system. We also ended the quarter with nearly 270,000 preview packages in our pipeline, positioning us well going into next year.

Speaker 2

We kept maintenance fee increases for our points based products to low single digits for next year, which we think will be well received by owners. Delinquencies and defaults have stabilized. We're updating our IT platforms to support our growth and we're using advanced data and analytics to improve efficiency and drive top line growth. We've navigated many headwinds over the past few years from a mixed consumer environment to higher interest rates and inflation to the abound implementation and came through it with a solid foundation for future growth. Through it all, we remain a resilient, highly profitable and cash generative business.

Speaker 2

We also have a significant opportunity to continue to leverage our strategic and competitive advantages to drive substantial recurring benefits over the next 2 years. 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 hope to see you on vacation soon. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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