Travel + Leisure Co. (NYSE:TNL) Q1 2024 Earnings Call Transcript

Travel + Leisure Co. (NYSE:TNL) Q1 2024 Earnings Call Transcript April 24, 2024

Travel + Leisure Co. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.85. TNL 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 Travel + Leisure First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jill Greer, Vice President of Investor Relations. Thank you. You may begin.

Jill Greer: Thanks, Maria. Good morning to everyone and thank you for dialing into our first quarter call. Joining us this morning are, Michael Brown, our President and Chief Executive Officer; and Mike Hug, our Chief Financial Officer. Michael will provide an overview of our financial results and our longer-term growth strategy, and Mike, will then provide greater detail on the quarter, our balance sheet, and outlook for the rest of the year. Following our prepared remarks, we’ll open the call up for questions. Before we begin, we’d like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today.

We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings and in our earnings press release. You can find a reconciliation of the non-GAAP financial measures discussed in today’s call in the earnings press release available on our Investor Relations website. Finally, all comments today are comparisons to the same period of the prior year unless specifically stated. With that, I’m pleased to turn the call over to Michael Brown.

Michael Brown: Good morning, everyone. Welcome to our first quarter call and welcome Jill, to the Travel + Leisure team. During our last call, we highlighted two themes, robust demand for vacation ownership and our team’s focus on execution. Our Q1 results show these trends continuing with 4% revenue growth, $191 million in adjusted EBITDA, and adjusted earnings per share of $0.97. I want to extend my personal thanks to the entire TNL team for their excellent performance, which has gotten our year off to a great start. Tours increased 15% year-over-year with new owner tours up 28%. The sizable tour increase is important because it reflects strong interest in our product as well as the benefit of investments we’ve made in our marketing operations, including the addition of new locations.

Q1 VPG ended at $3,035 above the high end of our guidance range, which strengthened as the quarter progressed. We are also pleased with the VPG thus far in April. The combination of higher new owner tour growth and strong VPGs helps answer the central question I’m asked by median investors most often. How is the consumer? From our view, demand for leisure travel remains robust. As we look ahead, we have a 7% increase in owner room nights for the remainder of the year compared to the same period last year. Both booking windows and arrivals by car have normalized more signs that the consumer is confident to book future travel and the trends we are seeing in our business are consistent with broader industry sentiment, a recent future partners report showed that financial optimism among travelers has improved and excitement to travel remains elevated.

With a strong industry macro backdrop, good momentum at Travel + Leisure specifically, and the visibility that we have for this year’s summer travel season, we have increased confidence in our near-term outlook. As we think about longer-term growth in the vacation ownership business, we’re focused on expanding our product portfolio and growing the business both organically and through strategic acquisitions and partnerships. On the product side, the Accor Vacation Club transaction closed in early March, adding a premium product in the international market to our portfolio. With this acquisition, we now have more than 270 resorts worldwide, giving us more opportunities to put the world on vacation every day. Our team is already focused on its ramping of sales as well as the transition of the overall business.

I’d specifically like to thank the leadership team at Accor for working with us on making this a very smooth transition and their thoughtfulness on how to grow going forward. We are also making progress toward the start of sales next year for initial Sports Illustrated brand in resort. This will be the first of a network of sports themed resort and lifestyle complexes, which we expect will include both university locations and leading leisure destinations. With multiple brands, and a broad geographic footprint, our network of resorts provides a natural hedge to individual market fluctuations. In fact, as a result of our highly diversified resort system, we only have one market that produces more than 10% of BOI sales volume. In terms of growth, we are continuing to innovate and invest in acquiring new owners.

Our Blue Thread partnership with Wyndham delivered great results with sales up nearly 10% year-over-year. As a reminder, the Blue Thread channel typically generates 10% to 20% of our new owner tours with a VPG more than 20% higher than other new owner tours. Our new owner transactions were 37% of the total, up 4 points sequentially and 6 points year-over-year, putting us well within our long-term targeted new owner mix. This is an important pipeline of future revenue as historically we have seen that a new owner will spend an average of 2.6x their initial purchase in future years after vacationing with us. This consumer behavior is consistent with artist February sentiment survey, which found that nearly half of all-time shareowners plan to upgrade their current ownership in the next two years.

So overall, we’re in a really good position to grow the Vacation Ownership business. On the Travel and Membership side, the results came in within our guidance range, which shows our focus on aligning costs with revenue generation is paying dividends as we drive the business for time margins and free cash flow generation. To summarize, consumer demand for leisure travel remains robust and we are delivering against plans to efficiently grow our business. We have a great team in place with a record of solid execution and we are on track to meet our 2024 commitments to grow revenue and EBITDA and deliver strong returns to our shareholders. With that, I would now like to hand the call over to Mike Hug.

Mike Hug: Thanks, Michael, and also thanks to everyone for dialing-in this morning. For the March quarter, we reported adjusted EBITDA of $191 million and adjusted diluted earnings per share of $0.97, increases of 4% and 9%, respectively. This result is even more impressive given the interest expense headwinds we noted coming into this year. Breaking this down into more detail for our two business units, Vacation Ownership reported segment revenue of $725 million; an increase of 6%, while adjusted EBITDA increased 3% to $135 million. As Michael described, the trends we are seeing in tours, new owner mix and VPG gives us good momentum in this business. Revenue in our Travel and Membership segment was $193 million, down 4% on a 6% decline in transactions.

Revenue in this segment continues to be challenged, so we are focused on driving cost efficiencies to improve returns. These cost initiatives helped us deliver solid adjusted EBITDA growth of 6% for this segment. While exchange transaction growth will remain pressured due to the previously discussed shift in mix of exchange members, we’re expecting travel club transactions to grow for the remainder of the year as we have lacked last year’s loss of a large customer. Now, let me provide some more detail about our expectations for the second quarter and full year. For the second quarter, overall, we expect adjusted EBITDA in the range of $235 million to $245 million, which includes the year-over-year impact of higher interest rates and variable compensation expense.

In Vacation Ownership, we expect second quarter gross VOI sales of $580 million to $610 million and VPG of $2,900 to $3,000. For Travel and Membership, we’re guiding to adjusted EBITDA in the second quarter of $60 million to $65 million. For the full year, we are reiterating our guidance range of $910 million to $930 million for adjusted EBITDA. The business is performing well and we’re pleased with what we see on the books for the summer. As we move through the year and get more visibility into post summer demand will have the opportunity to revisit our guidance and update if needed. Moving to cash flow and our balance sheet. We generated $47 million of operating cash flow and $22 million of adjusted free cash flow for the quarter. As we previously said, we expect our adjusted EBITDA to free cash flow conversion to be roughly 50% this year.

On the balance sheet, we continue to have solid access to the capital markets and closed on our first ABS transaction of the year. The 5.7% interest rate is the lowest rate we’ve achieved since July 2022. We were also very pleased to see the advance rate move up to over 95%. In earlier this month, we paid off our $300 million debt maturity using the proceeds from the incremental Term Loan B that we issued last year. We have no remaining debt maturities for the next 12 months. Our leverage ratio increased in the first quarter to 3.5x. Consistent with prior year, we expect this trend to continue for the next two quarters and then reverse in the fourth quarter. This sets us up to end the year below 3.5x levered. With the balance sheet in good shape, our capital allocation is focused on growing the business and returning capital to shareholders.

On the growth side, we used $46 million in the quarter for the Accor acquisition. We are excited for the longer-term growth prospects that Accor provides. In March, we increased our dividend to $0.50 per share for a total of $38 million in the first quarter. We’re regulating the market buying back our own stock, and in the first quarter, we repurchased 624,000 shares at an average price of $40.07 for a total of $25 million. Between dividends and buybacks, we returned a total of $63 million and have returned an average of about 10% of our market cap annually since our spin demonstrating a strong shareholder focus. I should also mention that we intend to request approval for an additional $500 million in share repurchase authorization at our upcoming Board meeting.

In closing, I’ll join Michael in thanking the entire Travel + Leisure team for delivering great results this quarter. These results demonstrate the strength of our business and provide us with great momentum heading into the busy summer season. With that, Maria, can you please open up the call to take questions?

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Q&A Session

Operator: At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Joe Greff with JP Morgan. Please proceed with your question.

Joe Greff: Michael, Mike, it seems like volume per guest is tracking better even as you improve your new owner mix. And it’s basically there or knocking on your targeted new owner mix percentage threshold. Can you talk about maybe what’s driving that maybe more favorable relationship between VPG and new owner mix? I mean, you mentioned a little bit about Blue Thread, but that’s not necessarily new or incremental. Is there something else that may be driving that more favorable relationship and how you see that going forward?

Michael Brown: Well, let me — let me first share as it relates to tour flow, because the 28% new owner tour growth year-on-year is really a number that sets us up well, not only for Q1, but going forward. Over the last two years, we’ve said we were going to grow our new owner tours at a steady pace, making sure that everything we added was profitable and we felt was a good incremental new owner tour. We opened over 30 new marketing locations in 2023. We got the partial year benefit of that. And now this year, we’re going to get the full year positive impact of those new owner locations. Additionally, in the third quarter of last year, we started to discuss that we were investing heavier into the marketing package pipeline and those are beginning to come through.

So that, that sort of puts the gross or absolute number on tours going forward. I would say across the Board, what you’re seeing is just really good execution. Both Mike and I mentioned it in our prepared remarks that the team is just executing really well. I think our move to increase credit quality coming out of the pandemic, the steady growth of new owner tours has allowed us to manage that growth efficiently, effectively, not getting ahead of ourselves and really stretching the organization. And as a result of it, I put a lot of it down, just a great execution by the team. And setting ourselves up for what should be a really good continuation of new owner tours. I think you’ve mentioned it, and I know this answer is a bit long, but the 37% of new owner transactions is an incredibly impressive number in Q1.

Q1 is typically our high owner sale quarter, and the fact that we’ve already got within that range and well within our 35% to 40% range, what was the highlight of Q1.

Joe Greff: Great. And then maybe you can talk about in the consumer financing segment of vacation ownership, have your expectations changed more recently for that segment of the business? Given maybe a different perception of where the Fed may take interest rates in terms of delayed interest rate cuts, how are you thinking about that relative to a few months ago? Or did you incorporate some level of conservatism to take into account a different set of interest rate expectations versus maybe what the overall market might be pricing it? And that’s all from me. Thank you.

Mike Hug: Sure. Thanks, Joe. This is Mike Hug. So two things as it relates to consumer finance business. I’ll start off with the ABS transactions and interest rates, and then I’ll jump over into the portfolio. But on the interest rate side, obviously great execution by the team with the March transaction, to your point, since that time, things have changed as far as views on interest rates. If we did that transaction today, the interest rate would probably be about 50 bps higher than it was when we executed transaction back in March. So they have moved up some, but still below the rates that we really had starting in the second half of 2022 and through 2023. So will not be a big EBITDA impact this year because all we have left to do is the second, third transaction will only be impacting EBITDA for the partial year.

So don’t expect much EBITDA impact this year. I think what we’re looking at most closely is we do expect over the next 18 months to 24 months that interest headwind to become a tailwind. And that’s really where the interest rates might impact us is that tailwind might not kick in as early as we thought. But obviously, that’s going to be determined over what happens the next several months with interest rates. On the corporate debt side, 30% of our corporate debt is variable. We probably have about $3 million in exposure on corporate interest and therefore cash flow. Because of the move up in rates compared to what we expect at the beginning of the year, but nothing significant there. So overall, we’re watching it closely, but don’t expect a lot of risk in this year’s EBITDA.

As it relates to the other piece of the consumer finance business, the portfolio, you all saw the provision for the quarter come in at 17.4%. We’re very happy with that. But I would note that as we head into Q2 and Q3, two things that impact delinquencies are the portfolio continues to grow, which means it’s less seasoned, which leads to higher delinquencies. And then that new owner mix coming at 37%, which we’re very excited about, also leads to a higher level of delinquency. So even though we remain confident in our provision for the full year being below 19%, we’ll see it move up in Q2 and Q3 to the higher end of that range and maybe even a little bit over, but overall, very happy with the portfolio. Mike talked about the credit standards we put in place as we exited COVID.

And in the first quarter, our average stock was 742 for new originations, which is the highest average stock we’ve ever had in the quarter. So that business remains strong. Delinquencies will move up, but it’s because of the good growth in the portfolio and the high percentage of sales that we’ve been focusing on to get that net interest income to grow again.

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

David Katz: Hi, good morning. Thanks for taking my question. I wanted to ask about, just broadly speaking, the criteria for repurchases. Just noting that we had a little higher number of repurchases in for this quarter, and whether the degree to which acquisitions or other investments may have played a part this quarter. But just how we might think about repurchases rolling through for the rest of the year, please.