Travel + Leisure Co. (TNL) Earnings Call Transcript
September 14, 2020
Earnings Call Speaker Segments
All right. Good morning, everybody. This is Joe Greff from JPMorgan. Welcome to our Gaming, Lodging, Leisure Management Access Forum. Unfortunately, we can't be in person, so we have the next best thing with Zoom. With me from Wyndham Destinations is Michael Brown, CEO and President; and Michael Hug, Mike Hug, Chief Financial Officer. We have about 40 minutes for a fireside chat session. I have prepared some questions. [Operator Instructions] So with that, I'll turn it over to the 2 Mikes.
I know you put out some disclosures this morning in terms of the improvement in revenues in August relative to July and just trends moving more positively as you've moved throughout this third quarter. Just I'll leave this as an open-ended question. Can you just talk about and maybe highlight those trends that you're seeing and what you're seeing from the timeshare consumer more recently?
Absolutely. And good morning, Joe. Appreciate the opportunity to be with you today. The -- really, there's a few things that I think are important to note about how we're moving away from a reopening phase into a little bit more normalized phase that we're under. We talked a lot about -- 30 days ago about how the increase of infections in the month of July really was impacting our arrivals, and we made some adjustments to our remainder of the year 2020 forecast. And we said at that time that to the extent that infections began to decline and consumer sentiment began to improve, that overall arrivals to our resorts and the performance of our business would improve. And 3 months, quarterly calls are a lifetime given where we are. So we wanted to get out there today and just share a little bit of news that we're seeing incrementally on business metrics. And as you pointed out, we saw nice sequential improvement from July to August. We recorded about $95 million of sales in the month of August compared to $73 million in the month of July. And if you remember, we had $18 million in June. So a nice steady improvement to our contract sales with the sale of VOI business. I think importantly as well in there is although we're materially down from last year as far as tour flow and ultimately sales, the really strong leading indicator for our industry and our business is arrivals back to the resorts. And what we're starting to see is occupancy continuing to improve, culminating in a really, really good Labor Day weekend that looked like 2019 Labor Day for the resorts that remained open. And we're starting to see net reservations, meaning future vacations, at our resorts as well sequentially improve and start to look like they did in 2019. Some days better, some days worse. But those green shoots are starting to show up in our business in the key areas. I'll sort of end with this is the one piece of our business that I think everyone wondered about in March and April is when people do start to travel, will they continue to buy timeshare. And if they do, how will things be different? And the metrics that we're seeing in our business are returning to pre-COVID levels in the sense of buying behavior. And that's a really good sign for the long-term sustainability.
And what -- can you just provide the indications for buying consumer behavior? What specifically are those activities?
Right. So there -- I'll list a bunch of different metrics and share what average transaction price looks the same as it did pre-COVID. Close rates, meaning the number of people who buy for every 100, is actually slightly up, which means if your transaction price is the same and your close rates have increased, your volume per guest, which is sort of the equivalent in timeshare to RevPAR, is -- has gone up. And ours has gone up over 30% post-COVID reopening as compared to when we shut down in March. The one thing that is behind is tour flow. We project it to be 60% down in the second half of this year, and we are reaffirming that guidance. But what we're seeing is sequential improvement from July to August on tour flow generation. So that's really the metric that we're all watching to see how quickly that rebounds, and we're seeing some nice improvement from June to July and August.
Got it. Typically, your business is stronger during warmer months, holiday periods, vacation periods and your shoulder period, the fourth quarter, not as strong. Do you think because of what's been going on or what has gone on and maybe people -- families having, like myself, kids at school doing at least some partial remote learning that the seasonality changes in the fourth quarter and that the fourth quarter seasonality could be maybe less of a drag or less of a sequential sort of metrics to look at?
Short answer is you're correct. I think the fourth quarter will not be that typical lull in our season that we've had in -- our first and fourth quarters are usually our slowest quarters. And the reason I believe that's the case is there's, in my opinion, 2 indicators that are leaning toward that. Number one is ownership in our timeshare is not perishable, meaning just because you couldn't vacation in March and April, it doesn't mean that you've lost anything. People have, in effect, increased their balance in their points bank accounts. So they'll be wanting to use. And what we're seeing is starting to see increasing amount of short-term bookings. Typically, our booking window is 120 days and beyond, and we're seeing that shorten to that 90-day window. So I do think the fourth quarter will be maybe a little better than expected from a weighting standpoint of the year. And then also just to point out, the summer is our biggest -- Q2 and Q3 are our biggest quarters because that's the summer season. That's when we generate the most amount of our new owners. So bigger volumes, slightly lower margins. So we've missed that season. So we should see, I believe, a pretty good fourth quarter with heavily weighted toward owner volume.
So you said earlier, more recently, close rates higher than prior periods, average transaction size at the same level as year ago levels. When you look at it between the transaction size, when you look at it between new and existing, are we seeing then the existing timeshare owners buy more in points then -- how does that mix impact that flat level?
Right. So let's just -- let me hit a few points here. On the volume per guest standpoint, we're up over 30%. A portion of that is due to mix adjustment, meaning we're selling more as a percentage of our sales to owners. But if you go to the next layer down, our VPGs are up on the owner side, and our VPGs are up on the new owner side. So the whole VPG equation looks much better than it did pre-COVID, and we can talk about why that's the case in a few minutes. But as we move forward, we think our 37% new owner sales will probably be between 20 and 25 for the foreseeable future, not because we are ramping up our owner business. That's -- we're trying to get back to historical levels of owner business. That's coming back quicker. It's the new owner business that is returning slower. A few reasons. Number one is we've missed the summer season, which is typically our highest period. Secondly, as we've taken this opportunity to retool some of our marketing qualifications and we've elevated those FICO qualifications from 600 to 640, which means we are intentionally going to be taking less new owner tours, but they should be better performing when they hit our portfolio. And we've got some early signs that that's the case. So some of this is intentional. Some of it is just natural that markets like Orlando and Las Vegas, which are big markets for us, have been a little slower to return to -- compared to a beach location, which -- the beach never went away.
Right. So when you think about Las Vegas and Orlando as the slower markets and then markets that are still relatively closed, like Hawaii and many of the markets in California, when those things open up, does that help you proportionately more with new owners versus existing owners? Or is it really just a function of those markets have more new or existing base on how Wyndham Destinations markets to those segments? What's the more important driver there for that?
Well, just to sort of go down that list of big geographical regions, the beach locations have done great. Most have been -- most of our beach locations are in the southeast. They did very well this summer even with lower occupancies, and we anticipate they'll remain strong. The ones that have lagged, Las Vegas and Orlando, are great new owner locations for us for sure, but they're also just mega markets in general for the timeshare industry. Our Orlando property, Bonnet Creek, which is right next to Disney, is our #1 requested destination in our entire portfolio. And in June and July, we couldn't fill it up. And then on Labor Day, we had reached our capacity just like the theme parks had reached their capacity albeit limited. So what that means for us is, number one, it gives us more new owner opportunities in Las Vegas and Orlando. But number two, it just begins the rebuilding of these mega markets for not only ourselves but the entire timeshare industry. And then lastly, the ones that have not reopened yet, Hawaii, we expect it to be opened on September 1. It appears it could be October 1, but they keep delaying. And then there are pockets of California that are still closed, specifically San Francisco. Hawaii is less than 5% of our total revenue. So although we want it to open, it doesn't materially change our top line.
Okay. Can you just talk about how delinquencies -- I guess, that's the one thing on the financing side I'm not so sure there was much new in today's disclosures on that. But can you just talk about what you're seeing from consumer -- on the consumer financing side and how that is tracking relative to how you thought the summer would unfold?
Yes. There's some good news, so I'll let Mike Hug speak about that.
Yes. Thanks, Joe, once again for letting us present today. I think when we look at the portfolio, we've been pleased with the performance. It's definitely been in line with expectations. A number of things we look out there. We've talked about the fact that we did offer a deferral program. As those consumers are coming off of deferral, over half of them are resuming their monthly payments on their loans. So we're excited about that. That shows that the deferral program is working. And currently, about 3% of our portfolio is on deferral, so very manageable number. And once again, happy with the way the consumer is performing when that deferral period ends. As it relates to delinquencies, we're seeing a good trend there as well where the year-over-year delinquencies continue to decline, so seeing a better delinquency rate. We look at the aging buckets, which we think is a great sign. And then also when you look at the fact that we were able to execute on that ABS transaction, it was after the earnings call, but we did do a $575 million transaction and 90% advance rate, those transactions are rated by S&P and Fitch. And when they're looking at their rating, obviously, they're looking at the portfolio, looking at projected losses, and we felt that, that was very, very encouraging that we were able to do that under those terms. And obviously, the investors in those transactions are relying on the underlying portfolio for repayment of that debt. So overall, the portfolio has been performing in line with expectations. We did put the $525 million reserve in place and are comfortable with that reserve as it currently stands. So overall, I think the signs have been positive, and it just goes hand-in-hand with our owners trying to get back on vacation.
And just on the topic maybe of owner exits, I guess, the maintenance bill goes out at the end of the year, and then it's due early the following year. Do you think that is maybe a trigger for a greater proportion of owner exits in early part of next year? And is that something you're concerned about? Are you trying to get in front of that if that does happen?
Well, one other thing that's a little bit different about our program than some of the others in the industry is for our points-based program, the majority of our owners are paying on a monthly basis. And that's part of what makes it very affordable is if their maintenance fee is $1,200 a year, all they're doing is paying $100 a month. And in essence, their vacation's prepaid. So we're actually able to keep a good handle on how the maintenance fee side of it is performing because people -- the majority of them are paying monthly, 85% on auto pay. And what we're seeing is there's not a significant increase in delinquencies as it relate to maintenance fees. When we look at deferrals that we also offer into that, we bill over $1 billion in maintenance fees on an annual basis. And to date, deferrals have been less than 1 million, so minimal deferrals. Keep in mind, of our 880,000 owners, the great majority of them have already paid off their loans. So all they're doing is making that $70 to $100 monthly payment. So we've been very pleased with the health of the owner as it relates to maintenance fees. Obviously, keeps the HOA healthy. And as we're collecting that monthly, that means we can also collect that monthly management fee that's a nice recurring revenue and income stream for us.
Got it. So I have a question that doesn't necessarily relate to the very near term and is so COVID-19-based, but once all of us and the world emerges from COVID-19, how do you think timeshare needs to be positioned for a younger demographic? Or how do you market timeshare differently in the years ahead than in the years behind us?
Yes. So I actually think the COVID period has been extremely helpful to us in a number of different ways. Whether it's the younger demographic or all demographics, Joe, I really think the biggest investment that we need to make and continue to be making is in -- are the digital experience and our -- the technology that we use to deploy timeshare. And the reality is, is when you look at the macro trends, drive to destination, vacationing in more space, especially in COVID-19 but even beyond, traveling with a brand that you can trust that not only will take care of your vacation but also your cleaning protocols, all the macro trends are in place that should be supportive of our industry. I would say that 3 years ago, we were behind on the digital and technology front. That's how owners want to be communicated, even the younger demographic. And that continued investment is what I believe is going to be the most critical to continue to attract the younger demographic. We have seen our younger demographic go from like 5% of our new owners to over 20%. And if you've watched our recent developments, we've continued to look for product in urban destinations, our most recent announcement being Atlanta, Georgia. We now have 35 resorts in 20 urban destinations, and those have been extremely attractive towards the younger demographic.
Can you talk about the changes you made recently in Panorama and how you see that business evolve versus -- maybe our perception of that business is that it was sort of modest to no growth, good margins and very free cash flow generative, I mean, sort of the changes that you're making there. Can you talk about how you can augment both growth and profitability versus how it was managed in the past?
So first of all, you've described it perfectly as to the general market perception of that brand. And candidly, that was the reality, not only the perception, but the reality. So imagine everything the same, low capital investment, recurring revenue streams, but instead of low to no growth, adding a growth component. That's the underlying strategic imperative for us to make the change that we did to the RCI business, which is now Panorama. The truth of the matter is we have a member base of roughly 4 million members. We've got a long experience of exchange of travel in the travel and leisure space, and what we've always done is limit our point of view to timeshare exchange. And the reality is, is there's a lot of travel and tourism opportunities out there that we have core competencies to be part of really on a B2B basis, providing discounted travel services to non-timeshare companies, affiliations, et cetera. And we believe that, that will provide a growth component going forward. That's the concept. And I'd expect, because there's a lot of different avenues or swim lanes we can start swimming in, to have a few announcements in the very near future so that we can walk you through how that Panorama business is going to begin to evolve outside of purely timeshare. But that fundamental concept of recurring membership or transaction fees by providing travel within the travel space is where that Panorama is going. And I don't want to narrowly define it because as we all know, travel and tourism is very broad, and we have great connections into both.
And would it be more of a domestic -- the growth coming from domestic travel and tourism markets? Or would it be more from outside of the U.S. market?
So today, our revenue and EBITDA streams are roughly 90% in the U.S. I would expect it to be similar to that. There are some clear international opportunities that we've already identified. But I wouldn't expect it to veer heavily from that 90-10 split that we currently have in the entire Wyndham Destinations portfolio.
Got it. And so if we look out a few years and you have executed successfully on these growth targets or these growth projects, what would be sort of the targeted growth that you would be happy with both from a revenue and an EBITDA perspective?
Well, I won't get into specific numbers today. But conceptually, when you look at how we've laid out our EBITDA growth in the future, you've got sort of that 6% to 8% on the Wyndham Vacation Club side, which is more capital heavy, even though we've turned it into a capital-efficient business; and then 0% to 2% on the RCI Panorama, which blends out to that mid-single digits. Our objective is to raise the profile on the low-capital investment and the recurring revenue side of the business, being Panorama, and begin to equalize those 2 segments of the business so that they're both carrying equal amount of growth weight. That's the vision going forward. I'm not going to set it at a certain level today. But the point is just to have 2 growth vehicles and a little more weighting toward noncapital-intensive going forward.
Mike Hug, you've talked in the past about some of the expense that you've taken out of the business. Can you just give us an update in terms of where you think you guys are with the expense removals? And I know you talked about some of the expenses maybe being permanent and some not being permanent. But if you can give us a recap on that, that would be helpful to understand maybe the margin profile of the enterprise going forward.
Yes. So when we look at the permanent savings that we expect, we expect our permanent savings to be excess -- in excess of $60 million on an annual basis. So you can see that full number coming through in 2021, and what that does is obviously help protect those margins. We have talked about the advantage of our size and scale, and you lose a little bit of that with the drop in sales that we've had. So this helps protect the margins going forward. The other thing, too, when we think about our margins is -- we've talked about [ VP ] and also the lift in the underwriting standards with our minimum FICO going up to 640. So the way we protect our margins is through those expense savings, focusing on the right tours, which gives us that VPG lift. And also that right tour means a better quality customer, which should give us a benefit in provision. And we'd expect our provision in the second half of this year and throughout 2021 to be below 20%. So taking this right opportunity to really focus on the right expenses that we need to incur, but just as importantly, to focus on the right consumer as we exit COVID and start to ramp back up our marketing operations.
So in today's disclosures, you talked about adjusted free cash flow in the second half being positive. How do you think about -- as free cash flow continues to stabilize and grow and becomes more meaningfully positive, how do you think about deploying free cash flow, whether it's looking at the second half of '21 and beyond or just looking at it in general? Obviously, you have a dividend in place now, and that makes you fairly different than others in our coverage universe of about 30 companies that eliminated dividends or has got to -- at least a couple of them went to stock. How are you thinking about the timing and what you need to see from a redeploying of free cash flow from where you guys are today?
Yes. So what we've talked about for the full year is being cash flow positive, as you noticed. So that's our goal is to be cash flow positive for the year. Obviously, executing that ABS transaction was a big step forward. The nice thing about that transaction getting completed, the size of that is -- we were expecting to be in the market with 2 transactions. Normally, we're in the market in the third and the fourth quarter. Because we were able to upsize this transaction, we're basically able to take care of both of those transactions in one transaction which limits derisk later in the year, whether it's because of the election or relapse in COVID or whatever. So that gave us great comfort in terms of 2020 and arriving at that free cash flow positive. When we look forward, obviously, you noted that we still continue to pay a dividend. We made, obviously, a conscious decision to do that because we believe in the long-term health of the business. We believe in the recurring revenues and the recurring cash flow flows. And we've always talked about since our spin-off of the hotel group back in 2018 that we feel this business is very resilient. We think this downturn gives us an opportunity to really improve that resiliency. And I think continuing to pay that dividend demonstrates that we have great confidence in this and that we will come back quickly as it relates to strong free cash flows. When we amended our revolver, which we did back in July, we also maintained the ability under that to do M&A activity up to $250 million. So I think when we look into next year, whether it's M&A activity or whether it's taking advantage of inventory opportunities that come away in the second half into next year, we think we've positioned ourselves very well from a capital allocation standpoint. And when we renewed the revolver, did it from a position of strength to be able to maintain flexibility as to our capital allocation and make sure that we take advantage of opportunities that will maximize shareholder return.
Is there much in the way of, I don't know, distressed things, distressed real estate for you to buy right now? I mean I know it's something that you've talked about in the past is maybe not front and center in terms of how to use your balance sheet free cash flow. But is there stuff there that you find interesting that would help you execute on some of these growth goals?
Well, we've definitely seen real estate opportunities show up in the short term. They've already come our way. But the reality is, Joe, we had our pipeline of commitments for 2020, which Mike and I have been able to work with the team to reduce those to what we think is absolutely essential. But with sales declining and inventory spend going down, there is -- we still get the same amount of run rate on that inventory. And therefore, the need to do deals isn't really there for us in the short term. I think that changes potentially at some point next year. So we'll be very opportunistic. But at this stage, there's not a concern about our inventory or need for inventory, so we can be highly selective on what we choose to go after. And as I mentioned at the very beginning here, inventory is coming -- inventory deals are coming our way and think they will at least for the next year.
Got it. And...
And keep in mind, those inventory deals can come in a lot of different fashions, right? They can be hotel conversions. They can be apartment complex conversions and obviously, hotel, condo and timeshare deals as well. So that's why we're confident that it's not just the short-term availability that will be available to us. We can be patient because there are lots of different types of deals that can come our way that could eventually be a nice inventory -- nice markets for us.
Great. I will now ask participants if they have any questions to dial into the question box on Zoom, which I think only I can see and the 2 Mikes cannot. Just with regard to the next potential securitization transaction. Obviously, you upsized this most recent one. So what's your thinking in terms of having enough inventory to then access the securitization market again?
Yes. I think by upsizing this transaction, we pretty much used all the available collateral we had. And once again, we view that as a positive because it eliminates any risks associated with having to do another transaction this year. So we wouldn't expect to be back in the ABS markets until next year and would expect at that time to start to be on a regular cadence that we've been on for the last several years.
Okay. Great. We are at now 30 minutes, and I do not see any additional questions in the Q&A box. So Mike and Mike, thank you very much for your time. Appreciate your thoughts. And hopefully, next time when we're doing our conference, we're all in person. So thank you so much, guys.
I hope so.
Thanks, Joe. Appreciate the opportunity to talk with you.
Thanks, Joe.
Thanks.
Have a good one.
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