Marriott Vacations Worldwide Corporation (NYSE:VAC) Q1 2024 Earnings Call Transcript

Marriott Vacations Worldwide Corporation (NYSE:VAC) Q1 2024 Earnings Call Transcript May 7, 2024

Marriott Vacations Worldwide Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Marriott Vacations Worldwide First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations for Marriott Vacations Worldwide. Thank you. You may begin.

Neal Goldner: Thank you, Melissa. And welcome to the Marriott Vacations Worldwide first quarter earnings conference call. I’m 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. Forward-looking statements in the press release that we issued last night, 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 referred to in our remarks 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.

John Geller: Thanks, Neal. Good morning, everyone, and thank you for joining our first quarter earnings call. It was great to see so many guests enjoying time with their family and friends at our resorts, making lasting memories during the first quarter. That’s why they come back year in and year out. And with a systemwide occupancy running 90% in Q1, we grew contract sales by 3% excluding Maui, despite having a difficult VPG comparison, with first-time buyer tours growing 9%. We also started taking reservations for our new Marriott Vacation Club Resort in Waikiki at the end of the quarter, which remains on track to open later this year and reservations have been strong for this new property. Owners have consistently told us they wanted us to add a location in Waikiki, and this new resort is already bringing excitement to the system.

Concurrent with the resort opening, we plan to open a new sales gallery that we believe could be a meaningful contributor as it ramps up over a few years. And with Japanese arrivals to Hawaii up almost 75% year-over-year in the first quarter, the timing of this new resort couldn’t be better. We’ve made good progress adding new marketing and sales executives in Maui, and still expect contract sales to be up around $5 million this year. International contract sales grew more than 25% year-over-year, driven by double-digit growth in Asia-Pacific as the market continues to recover. I’m also happy to announce that we recently signed an agreement to develop a new 60-unit Marriott Vacation Club Resort in Thailand. The resort will be co-located with an existing JW Marriott hotel in Khao Lak, and will include a new on-site sales gallery when it opens in a few years.

This will be our seventh resort in the Asia-Pacific region, and the team is busy working on other potential development opportunities around the world. Our Hyatt business also continues to progress nicely. By leveraging proven branded channels, we’ve been able to grow our Hyatt package pipeline while simultaneously replacing lower quality tours with higher quality, more cost effective tours. Our Hyatt Vacation Club owners continue to utilize and enjoy the new owner benefits that we rolled out last year through the BEYOND program, and we continue to work toward launching a consolidated Hyatt product. In our Exchange and Third-Party Management business, Interval International performed in line with our expectations for the quarter, with active members unchanged year-over-year and membership and getaway revenue increasing.

As previously discussed, last year we hired a new Chief Information Officer to drive our IT transformation efforts, and he spent a considerable amount of time analyzing where our opportunities lie. While this is a multiyear journey, our IT efforts this year will continue to be centered around consolidating legacy systems, modernizing our software and increasing automation, while continuing to enhance our data and analytics capabilities to improve the efficiency of our marketing campaigns. Looking forward, we ended the quarter with 270,000 packages, and our team is working hard to get these customers on vacation. At the same time, the consumer shift to experience services continues to benefit our business, with 84% of people recently surveyed planning to spend more or the same amount of money on travel this year compared to last year.

International inbound travel to the U.S. continues to recover and is expected to approach pre-pandemic levels this year. Meanwhile, although the economy remains on solid footing, consumers are concerned about elevated price levels which could impact their spending. Finally, as we approach the important summer vacation months, keys on the books in both North America and internationally are up a few points year-over-year. With that, I’ll turn the call over to Jason to discuss our results.

Jason Marino: Thanks, John. Today I’m going to review our first quarter results, our balance sheet and liquidity position, and our outlook for the rest of the year, starting with our Vacation Ownership segment. Coming into the year, we knew our most difficult sales comparison was going to be in Q1, so we feel very good about our first quarter results. Contract sales declined 1% due to Maui and the difficult VPG comp, while tours increased 4% year-over-year. And as John mentioned, contract sales grew 3% year-over-year excluding Maui. As expected, development margin declined year-over-year due to lower VPGs, higher marketing and sales costs and a higher sales reserve, as well as unfavorable reportability. The delinquencies and defaults continue to run higher than history would suggest, which is a continuation of last year’s trends.

We continue to work hard to get delinquencies down, and we believe our reserve is currently at appropriate levels, though we do need to see loan performance improve. Rental profit increased $12 million year-over-year, driven by increased rental revenue and lower expenses as more preview nights were used for marketing purposes. Financing profit declined 4%, driven by higher interest expense partially offset by higher financing revenue, while resort management profit increased 8%. As a result, adjusted EBITDA in our Vacation Ownership segment declined 7% year-over-year, driven primarily by lower development profit, while margins remained strong at 29% in the quarter. Moving to our Exchange and Third-Party Management business. Adjusted EBITDA declined $5 million compared to the prior year, with lower average revenue per member and exchange volume being partially offset by higher getaways at Interval, while profit at Aqua-Aston declined year-over-year due to softness in Hawaii.

As a result, total company adjusted EBITDA declined 8%. Moving to the balance sheet. We returned $78 million to shareholders during the first quarter, repurchasing $24 million of common stock and paying $54 million in dividends. And with the shares we’ve repurchased over the last 12 months, diluted shares outstanding declined 5% year-over-year. Given the seasonality of our cash flows, we ended the quarter with net debt-to-adjusted EBITDA of 3.9x and $855 million in liquidity. At the beginning of April, we refinanced our term loan, which was our only near term maturity, extending it out to 2031. As a result, our next maturity isn’t until Q1 2026. We also have nearly $1 billion of inventory on the balance sheet, including inventory and PP&E, enough to support more than two years of future sales.

We also completed our first securitization of the year, raising $430 million at a blended interest rate of 5.5%, which is approximately 100 basis points below our last ABS deal. Moving to guidance. Our full-year adjusted EBITDA guidance remains unchanged at $760 million to $800 million. We still expect contract sales to grow 6% to 9% this year, with our stronger sales growth coming in the second half of the year as we lap the Maui wildfires, and for development margin to be down a few points, including in the second quarter. Financing profit will continue to be a headwind to growth this year due to higher securitized debt costs. And while we do expect rates to be a headwind again next year, financing profit should increase. Our rental business had a good first quarter, and we’re working hard to drive incremental demand and manage our cost.

And management profits should show fairly consistent year-over-year growth over the balance of the year. In our Exchange and Third-Party Management business, we expect Interval members to be down slightly and for average revenue per member to increase. Finally, we still expect G&A expense to be slightly — up slightly year-over-year. Moving to cash flow. We expect our adjusted free cash flow to be in the $400 million to $450 million range this year. Our plan is to deploy our free cash to repay some of our corporate debt as well as return cash to shareholders through dividends and buybacks, while targeting to get our leverage back to 3x by the end of 2025. With that, we’ll be happy to answer your questions. Operator?

See also 15 Countries with the Negative Population Growth in the World and Latest Insider Trading Activity: 11 Stocks Executives and Directors are Buying.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ben Chaiken with Mizuho Securities. Please proceed with your question.

Ben Chaiken: Hi, good morning. Thanks for taking my question. Would love to dig into the strength in rentals. It sounds like from the prepared remarks, there was more preview nights. Is that pretty lumpy through the year or do you expect to stay elevated for the rest of the year? And then I guess related, do the higher preview nights play a role in the higher VOI sales and marketing? If not, what drove that up? Thanks.

John Geller: Sure. Hi, Ben. Yes, I think as you look at rentals for the year and what happened in the first quarter, you had a couple of things. You’ve mentioned the preview nights. And given all the packages we have and what we’re seeing on the books, we do expect those to, you know, continue to be much higher than the previews that we’ve done last year. So that obviously helps from a tour perspective on the sales side. And with that is, as you also mentioned, it’s a bit of geography on the P&L. There was about $6 million of higher costs, right? We use rental inventory to supply those, and that cost gets charged over to marketing and sales. So it was a headwind on the development margin, but a benefit to about $6 million on the rental side of the business.

The other area that outperformed a little bit in the first quarter over last year were our usage of PlusPoints. So those are the single-use points we give out as incentives. They were up in terms of the timing of those usage, and so that also benefited the first quarter year-over-year. So as we set up for the balance of the year, you know, we feel better about rentals and where we’re heading. The other thing I should mention too on the rental side, our RevPAC was up about 3%. So, you know, the actual rentals, we are — mostly through occupancy rate was relatively flat, but we’re able, through a lot of our marketing campaigns, to continue to get those rentals on the books. We talked about overall occupancies being up a couple points as we go into the summer months.

So people want to get on vacation, and we’re seeing that in our rental results.

Ben Chaiken: Got you. And then just a quick follow-up. In Maui, it sounds like demand is coming back. I think the base — your baseline expectation is limited year-over-year growth in Maui, you mentioned $5 million of contract sales or so. Is the major headwind still on the sales side, like meaning the personnel side? And then if so, what’s being done to alleviate that? How do you think about the business going forward? Thanks.

John Geller: Sure. Yes, in Maui, it’s a couple things. One, resort occupancies in the first quarter were in the low 90s, so not back — you know, typically, in Maui, we’re running 97% type occupancy, so occupancies are coming back. So that that’s obviously, you know, a bit of a headwind just in terms of in-house tour flow. But we expect to hopefully see that continue to come back over the balance of the year and get back to more pre-fire levels. And then it is on the, you know, the sales and marketing talent. We’ve made good progress in terms of, you know, replacing some of the talent we lost. We’re not completely back to fully staffed yet. You know, the trade-off a little bit is, you know, you’re bringing in, you know, potentially new talent, right, versus losing experienced talent.

So there is a bit of a ramp-up time getting those salespeople up to, you know, kind of that normal production. But, you know, the setup right now is pretty good. We expect it to continue to get better as we go through the year. And as you mentioned, and I talked about in my remarks, we should be up year-over-year. And obviously we got, you know, easier comps in the second half of the year in Maui with, you know, the impact of the wildfires last year.

Ben Chaiken: Understood. Thank you. Nice quarter.

John Geller: Thanks, Ben.

Operator: Thank you. Our next question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Patrick Scholes: Hi. Good morning.

John Geller: Good morning, Patrick.

Patrick Scholes: I want to follow up on what I thought was a bit of a cryptic comment in the prepared remarks. This concern the loan loss provision. You talked about needing to see performance improve. I assume that means if it does — am I correct to interpret that if it doesn’t improve, you would have to take another charge? Maybe you can flesh out, talk a little bit more about that.

John Geller: Sure. Yes. I’ll give you some comments, and then Jason can add too. You know, when we took the reserve last year in the third quarter, obviously we were seeing higher delinquencies, higher defaults and we took an, you know, estimate as to how those would kind of play out. But we said at the time, you know, the expectation would be over the next, you know, three, four quarters, right, we’d start to see the improvement, some of the timing and what we thought was the impact of, you know, the defaults really coming from some of the higher CPI inflation, things like that, that were impacting some of the customers. So the good news in the first quarter was while delinquencies were higher than they were last year, over the course of the quarter we saw those delinquencies improve sequentially.

And even through April here, we saw some more improvements. So the trends are still good. But yes, if our delinquencies — I guess, Patrick, to answer your point, if delinquencies never came down from what we were experiencing, yes, that would potentially be, you know, more loan loss reserves we’ve had to take. We feel good about where we’re at in the trajectory, but we still need to see some more improvement here over the next quarter or two to get back to more normalized delinquency trends.

Patrick Scholes: Okay, thank you. And then some follow-up questions on Maui. You know, starting in August, you’ve been lapping the, you know, the horrible fires of last year. You know, John, in your view, do you think that sets you up for, you know, a proverbial easy year-over-year comparison, or do you think Maui is still going to be struggling where you wouldn’t necessarily refer to it as a easy year-over-year comparison beginning in August?

John Geller: You know, simply, yes, it’ll be an easier year-over-year comparison because for a period of time, obviously we were shut down, right? We’re running 90-plus-percent occupancies, as I mentioned, right now. You know, we’re back, we’ve got most of our sales force replaced. Hopefully, as we get to August, right, a lot of those newer salespeople will be, you know, hitting more, you know, normalized production levels for salespeople. And so, yes, on an absolute basis, we should do much better August forward than we did last year, just given the trajectory of where we’re at right now.