Travel + Leisure Co. (NYSE:TNL) Q4 2023 Earnings Call Transcript

Travel + Leisure Co. (NYSE:TNL) Q4 2023 Earnings Call Transcript February 21, 2024

Travel + Leisure Co. beats earnings expectations. Reported EPS is $1.98, expectations were $1.37. 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. Welcome to Travel + Leisure Fourth Quarter ’23 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]. Please note, this conference is being recorded. I will now turn the conference over to Michael Hug, Executive Vice President and CFO. Thank you. You may begin.

Mike Hug: Thank you, Sherry, and good morning to everyone. Before we begin, we would 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 accompanying this earnings call. And you can find a reconciliation of the non-GAAP financial measures discussed in today’s call in the earnings press release available on our website at travelandleisureco.com/investors.

This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our fourth quarter full year results and outlook. And then I will provide greater detail on the quarter, our balance sheet and outlook for the rest of the year. Following our prepared remarks, we will open up the call for questions. With that, I’m pleased to turn the call over to Michael Brown.

Michael Brown: Good morning, and thank you for joining us. As you saw from the press release, we had a solid finish to the year with fourth quarter adjusted EBITDA of $240 million, a 7% increase over the prior year. Adjusted diluted earnings per share was $1.98, inclusive of a $0.37 income tax benefit, which Mike will discuss. Excluding this benefit, our adjusted EBITDA — adjusted earnings per share growth would have been 24% over Q4 2022. Our full year 2023 results reflect an intense focus on organic execution, delivering 5% year-over-year top line growth, 6% year-over-year adjusted EBITDA growth to $908 million, 10% adjusted EBITDA growth in Vacation Ownership, our core business segment, reflecting strong consumer demand for our product and great execution by our teams and 26% adjusted EPS growth over the prior year.

Excluding the Q4 tax benefit, our adjusted earnings per share growth would have been 18%, reflecting in part our strong continued commitment to share repurchases. For the second consecutive year, we returned approximately 15% of our market capitalization to shareholders. That brings our cumulative capital return to shareholders since spin to over $2.1 billion. Now let me review the operational highlights from the quarter and full year and touch upon how we’re positioned for growth in 2024 and beyond? I’ll begin with our core business, Vacation Ownership. In a year that demonstrated the stabilization of domestic leisure travel demand, our VOI business delivered fully to the 2023 guidance that we laid out last February. Gross VOI sales in the fourth quarter increased 4% year-over-year to $540 million with a VPG of $3,058.

For the full year, gross VOI sales increased 8% year-over-year to $2.15 billion with a VPG of $3,128. We delivered both gross VOI sales and VPG at or above the middle of our 2023 expectations, a credit to our sales and marketing teams. Tours increased 17% year-over-year in the fourth quarter and 18% year-over-year for the full year. We made great progress last year in sourcing and securing new owners. As we mentioned in last quarter’s call, we have been investing in new owner marketing channels, focusing on both additional marketing packages for future stays as well as adding new off-premise marketing locations. The results have been strong with new owner transaction mix improving 330 basis points in the fourth quarter and 240 basis points for the full year.

In our experience, new owners in the system spend on average an additional 2.6x their initial purchase during their ownership, giving us a large, reliable revenue pipeline. Our receivables portfolio continues to perform well. The portfolio grows naturally with sales, but we are accelerating that growth somewhat while maintaining our tightening credit standards to help offset higher interest expense. We expect the provision to remain below 19%. Turning to Travel and Membership, we reported fourth quarter adjusted EBITDA of $52 million, above the range of $45 million to $50 million we shared on our October third quarter call. We completed our cost realignment during the quarter and feel confident that we have right-sized the business to execute our plan and fully leverage future opportunities.

With these changes, we expect Travel and Membership adjusted EBITDA to grow low single digits in 2024, providing recurring revenue, high margins and strong free cash flow. In addition to strong organic execution in 2023, we were excited to announce the acquisition of the rights to the Sports Illustrated Vacation Ownership business in September. It represents an opportunity to drive incremental growth for years to come with the most celebrated name in sports. So far, we have announced our first resort in Tuscaloosa, Alabama, home of the University of Alabama, which is expected to open in late 2025. The Sports Illustrated club will be immaterial to 2024 earnings but will support our long-term growth. We look forward to announcing more locations and universities and leisure destinations in the months and years ahead.

Last month, we announced the addition of a core to our Vacation Ownership portfolio, which already includes Wyndham, Margaritaville and as noted, Sports Illustrated. This was the second significant milestone in executing our multi-brand strategy in less than six months, demonstrating great momentum. It is further affirmation of our ability to be a trusted steward of world-class hospitality brands for vacation ownership development. The agreement gives us the exclusive license to grow the Accor Vacation Club brand, utilizing the Travel + Leisure global platform. The acquisition will have 24 resorts, 30,000 members and finished inventory to our Asia Pacific region and lays the groundwork for economic benefits for years to come, providing revenue streams from sales, resort management and consumer finance.

We expect to close the transaction next month and I couldn’t be more pleased to welcome Accor to the Travel + Leisure brand family. Mike will review guidance in a moment, but let me first share some color on the key performance indicators we monitor to gauge the health of our consumer. Forward resort bookings, sales volume per guest and the performance of our consumer finance portfolio. Regarding forward bookings, 2024 owner nights on the books are ahead of 2023, reflecting continued robust consumer demand. VPGs are normalizing from post-pandemic pent-up demand for leisure travel but remained at the high end of our 2021 Investor Day range and 30% above pre-pandemic levels. And finally, as I mentioned earlier, our continued focus on credit quality has resulted in a portfolio that continues to perform to our expectations.

To summarize, we are pleased with our performance and execution in 2023. We delivered our full year plan with 5% top line growth, 6% adjusted EBITDA growth and 26% adjusted EPS growth. We returned a significant amount of capital to shareholders, paying $136 million in dividends and repurchasing 7.8 million shares of stock. These results were achieved by the strength of our business model and by an intense focus on organic execution by our associates around the world. I want to thank each and every one of them. For 2024, we are off to a solid start with a strong foundation in our core Vacation Ownership business and a clear line of sight for execution in the Travel and Membership segment. Reflecting our confidence in the future, we intend to recommend to the Board a first quarter 2024 dividend increase to $0.50 per share.

This action supports our continued commitment to use our significant free cash flow generation to drive shareholder value through increased dividends, strategic M&A should opportunities arise and continued share repurchases. The ability to generate and effectively utilize our free cash flow, combined with our proven track record of organic execution leave us excited about the opportunities ahead. For more detail on our performance and outlook, I would now like to hand the call over to Mike Hug. Mike?

Mike Hug: Thanks, Michael. As well as discussing our fourth quarter results, I will provide more color on our balance sheet and cash flow, as well as our outlook for 2024. All of my comments will refer to comparisons to the same period of the prior year, unless specifically stated. We reported fourth quarter adjusted EBITDA of $240 million and adjusted diluted earnings per share of $1.98, increases of 7% and 52%, respectively. For the full year, adjusted EBITDA was $908 million and adjusted EPS was $5.70, representing year-over-year growth of 6% and 26%, respectively. Full year adjusted EPS includes a $0.35 benefit from foreign tax credit carryforwards that we now expect to be able to utilize. Looking at the fourth quarter performance of our two business units, Vacation Ownership reported segment revenue of $776 million, an increase of 5% while adjusted EBITDA increased 12% to $208 million.

We delivered 172,000 tours in the fourth quarter, growth of 17% and VPG was $3,058 in-line with expectations. Revenue in our Travel and Membership segment was $158 million in the quarter compared to $163 million in the prior year. Adjusted EBITDA was $52 million compared to $57 million in the fourth quarter of 2022. Exchange member count continue to grow, but as expected exchange transactions were down 8%, reflecting the continued mix shift to clubs whose members have a lower propensity of exchange. As Michael said, we have right-sized the business to the current environment, which will drive EBITDA growth in 2024. Our full year performance was solid, despite significantly higher interest rates and disappointing results at Travel and Membership.

We partially offset these challenges with strong decisive cost cuts throughout the year and reductions in variable compensation expense. We continue to drive strong adjusted EBITDA margins across our businesses with our 2023 full year adjusted EBITDA margin coming in at 24.2%. Moving to our balance sheet, our financial position remains strong. And in the fourth quarter, we continued to return capital to shareholders through share repurchases and our quarterly dividend of $0.45 per share. For the full year, we repurchased 10% of shares outstanding at the beginning of the year for $307 million and paid dividends totaling $136 million for total capital returned to shareholders of $443 million. As you saw in the press release, we completed three important transactions in the fourth quarter.

We closed two timeshare receivable financing, a $300 million term securitization transaction in October and a $238 million term securitization transaction in December. Also in December, we secured additional term loan borrowings under our credit agreement which we will primarily use to pay the $300 million senior notes due in April. Adjusted free cash flow was $379 million for the year, resulting in a 42% adjusted EBITDA to free cash flow conversion. Excluding the impact of the Sports Illustrated investment of $41 million, adjusted free cash flow conversion would have been 46%. We ended 2023 with our net corporate leverage ratio for covenant purposes at 3.4x, remember, our goal was to end the year below 3.5x leverage. Overall, our capital allocation for the year was right in-line with what we anticipated when looking at our share repurchases, quarterly dividend and year-end leverage.

Now let me provide some more detail about our expectations for the full year and first quarter of 2024. For the full year, we are providing a guidance range of $910 million to $930 million for adjusted EBITDA and for now we are most comfortable at the midpoint of the range. Note that our guidance includes $30 million of incremental interest expense on our ABS debt and assumes no variable compensation benefit in 2024. For comparison purposes, the variable compensation benefit in 2023 was $17 million. Turning to Vacation Ownership, we expect gross VOI sales in the range of $2.25 billion to $2.35 billion, with CPGs in the range of $2,900 to $3,000. For Travel and Membership, as Mike already mentioned, we expect adjusted EBITDA to grow low single digits in 2024.

For the full year, we expect an effective income tax rate of 26% to 28%. Turning to the first quarter, we expect adjusted EBITDA in the range of $185 million to $190 million. Keep in mind that Vacation Ownership’s adjusted EBITDA faces a $9 million year-over-year headwind to interest expense in the first quarter as a result of higher interest expense on our most recent ABS transactions. In Vacation Ownership, we expect first quarter gross VOI sales of $460 million to $480 million and VPGs of $2,925 to $3,025. For Travel and Membership, we are guiding to adjusted EBITDA in the first quarter of $75 million to $80 million. And finally, we expect our first quarter tax rate to range from 28% to 30%. Turning to cash, we expect our 2024 adjusted free cash flow conversion to be in the neighborhood of about 50%.

Elevated interest rates have increased our ABS and corporate interest expense assumptions for 2024, approximately $75 million from when we set out our cash flow conversion goals in September 2021. However, as adjusted EBITDA grows and interest rates decline, we expect to move towards an adjusted free cash flow conversion of over 55%. In closing, we are pleased with the earnings and free cash flow we delivered in 2023 and proud of our continued ability to return capital to shareholders. For 2024, our guidance reflects our confidence in the strength and resiliency of our business and our ability to grow. Long term, we expect our adjusted EBITDA growth rate to return to high single digits as interest headwinds subside and we no longer lapped to 2023 variable compensation benefit.

With that, Sherry, can you please open up the call to take questions?

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Chris Woronka with Deutsche Bank. Please proceed.

Chris Woronka: Hey, good morning guys. Thanks for taking the questions and for the details so far. Michael, I — was hoping you could talk a little bit about some of these OPC channels and some of the other marketing channels that you’re looking at this year and the question is really kind of you sit here in February, you have a plan, you have — I know you have some new partners. How do you kind of typically evolve or adjust those — some of those — your mix of partners through the year as various events unfold? Just trying to get a sense as to whether, your visibility to some of the tour flow in the bookings improves with your partner mix?

Michael Brown: Good morning Chris. Yes, the new owner question is a very important one and as we came out of the pandemic, we said that there were two very important elements. Number one was, we wanted to increase our marketing standards — the credit standards. And secondly is, we wanted to ensure our marketing partners delivered positive margins, as well as new owners. So we took a very measured approach coming out and we’ve seen our — I would say, diversified OPC channels grow on a regional basis. We’re not overly dependent on a single partner. We do have some bigger partners that generate a lot of tours for us. But region-by-region, each of our regional marketing executives will evaluate the best opportunities in their region.

And therefore, contract locally. What typically happens in the cadence of the year and you also see it in our VPG guidance in the Q — in the first quarter versus the full year is, the summer months are your big new owner months. So our teams right now will be working with marketing partners to sign up deals for the upcoming summer. So you’re just building on the success of last year, which was 18% tour growth from the prior year and we’re expecting tour growth this year over 10%. So it’s just a steady growth on a regional basis of developing the right partners that will deliver; A, new owners; and B, at a profit from day one.

Chris Woronka: Okay. Very helpful. Thanks Michael. Just as a follow-up. This is on the Travel and Membership clubs business. It sounds like you said you’ve right sized the cost structure. And you obviously have a couple of growth initiatives that have started. But the question will be going forward, is it possible to kind of maintaining level EBITDA with very minimal top line growth? Or do you — could you do more on the cost side if you need to? Or do you expect — is the expectation really that we begin to see the top line growth accelerate a little bit in that segment? Thanks.

Michael Brown: Yes. Well, yes, you can get the growth through top line growth. One of the key elements that we’ve modified is that — the addition of the Travel Club business is driving incremental EBITDA growth in that space. Although it’s not meeting the expectations we originally laid out on Investor Day, it is providing growth and it is providing a new source of revenue for that side of the business. So the rightsizing was really a reflection of the growth trajectory we saw in Travel Club, and we’ve seen a lot of predictability start to come into the exchange side of the equation as we’ve seen coming out of pandemic, it dropped, but we’re starting to see that stabilize to a revenue range that we think is pretty predictable. So yes, I think we can see top line growth. And we just needed to make some changes to make sure the cost structure reflected what we thought was the future growth in revenue in the Travel and Membership space.

Chris Woronka: Okay. Very helpful. Thanks, Michael.

Michael Brown: Thanks, Chris.

Operator: Our next question is from Joe Greff with JPMorgan. Please proceed.

Joe Greff: Good morning guys. Mike, the reference to the variable compensation expense benefit in 2023, you indicated that 17 million. Can you break that out between segments? Does that hit corporate? Does that hit VOTM [ph] as well as corporate and that even through the year? And then I guess my bigger picture question is this. I mean, your full year EBITDA guidance implies a low single-digit EBITDA growth rate. You referenced the variable compensation of year-over-year delta, the incremental interest expense of 30 million. Would you basically expect VO to grow low single digits as well and travel membership is flat. I’m just trying to triangulate how you’re seeing the rest of the year what’s incorporated in there.

Mike Hug: Yeah, good morning Joe, thanks for the question. On the variable compensation as you would expect, the biggest impact is going to be at the Travel and Membership segment because they were the ones that as compared to our original expectations, didn’t quite meet to the level that we set out. The second most significant impact would be at the consolidated level, Travel and Membership — I’m sorry, Travel and Leisure because we’re confident Travel and Leisure based on consolidated NAV, and then as Michael Brown touched on, Wyndham Destinations basically performed well for the year, so their impact is going to be the smallest. In terms of the cadence of that throughout the year, pretty much evenly spread in Q2 through Q4.

Obviously, as you’re being laggard [ph] in the year, you get in July and you kind of see how things are going, and that’s when you start to make those adjustments if there are any adjustments to be made. So in your models, you can think about that coming through pretty much evenly in Q2 through Q4. As far as the year-over-year growth rate, you’re exactly right that the 2 big headwinds we have are the $30 million interest expense headwind that we’ve talked about and then the variable compensation, which obviously we mentioned today. If you take those 2 out of the picture, you’re basically looking at 4% to 6% growth year-over-year. When we think about the long term, the reason we believe over the long term, we can get back up to high single-digit growth is we do expect interest rates to subside.