Travel + Leisure Co. (TNL) Earnings Call Transcript

Greetings, and welcome to Travel + Leisure Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Andrew Burns, Vice President, Investor Relations. Please go ahead.

Thank you, Donna. Good morning, everyone. Before we begin, I'd like to remind you that our discussion 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 our press release accompanying this earnings call. You can also find a reconciliation of non-GAAP financial measures discussed today in the earnings press release available on our Investor Relations website. Please note that all references to EBITDA, net income, earnings per share, free cash flow made during this call are on an adjusted basis as disclosed in our earnings press release today. Additionally, all references to earnings per share on a diluted basis. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our results and our longer-term growth strategy. And then Erik Hoag, our Chief Financial Officer, will provide greater detail on our results, capital allocation strategy and outlook for 2026. Following our prepared remarks, we'll open the call up for questions. Finally, all comparisons today are to the same period of the prior year, unless specifically stated. With that, I'll turn the call over to Mike.

Good morning, and thank you for joining us. Our strong second quarter and first half results demonstrate consistent execution and the durability of our business model. Healthy owner trends and robust travel demand translated into recurring upgrade sales, increasing new owner sales, predictable cash flow and meaningful capital returns. I want to thank our associates across Travel + Leisure for delivering the exceptional vacation experiences that are the foundation of our success. The sustained momentum we have in our business is clearly reflected in the first half results. Revenue growth, combined with EBITDA margin improvement and our shareholder-friendly capital allocation approach, fueled compounding growth across the P&L. Gross VOI sales, the core engine that drives multiple predictable revenue streams, increased 7%. EBITDA grew 9%, fueled by 120 basis point improvement in EBITDA margin. Earnings per share were up 21% year-over-year as share repurchases amplified per share economics. Through the first half of the year, we've returned $253 million to shareholders through dividends and share repurchases. We've been able to reduce our common shares outstanding by 4%, reflecting our ongoing commitment to disciplined capital allocation. For the quarter, we generated revenue of $1.06 billion and EBITDA of $269 million. Gross VOI sales increased 6% and was above our guidance range, supported by high-quality tours and strong owner engagement. Volume per guest also exceeded plan at $3,318, up 2% year-over-year. Our consumer remains healthy and continues to prioritize travel. First half arrivals adjusted for strategic resort closures increased year-over-year, and forward bookings give us clear visibility into continued growth in the second half. Key booking metrics also remained strong. The booking window was 109 days and average length of stay was 4 days, both at or above prior year levels. Together, these trends reflect the health of our owner base and the value proposition of our products. Overall, this second half visibility, combined with our strong first half performance, gives us the confidence to raise our full year EBITDA, Vacation Ownership sales and VPG outlook. Our updated guidance also reflects the expected accretion from the acquisitions of Yes& Vacations and Spinnaker Resorts, which we announced last week. These acquisitions add high-quality resorts and high-demand vacation destinations, increase our owner base and are immediately accretive to earnings. Let me share with you the strategic benefits in more detail. These acquisitions add 23 resorts, including 6 properties in Hilton Head and 7 in Maui. These are highly sought after leisure destinations where new development is challenging. This more than offsets our recent strategic resort closures, demonstrating our commitment to proactively grow our network while improving the quality, reach and relevance of our resorts. Adding premier destinations through acquisitions and development, while removing older, lower demand properties enhances our owner value proposition and supports long-term growth. We were also adding over 100,000 owners, expanding our owner base by more than 10%. These owners are similar in age and average income to Travel + Leisure's owner base, and approximately 80% of them have fully paid off their timeshare loan. Adding these owners create a larger embedded audience for future upgrade activity, particularly as we introduce these owners to our broader product set and flexible points-based system. From a capital allocation perspective, these acquisitions clear our returns-based thresholds and offer attractive long-term return profiles and immediate accretion. The size of these transactions preserves our balance sheet flexibility and allows us to maintain our capital allocation strategy, including dividends and share repurchases. Importantly, we believe these deals have low integration risk. They are well-run platforms and well -- with established owner bases, existing resort operations and familiar business models. We can preserve what is working locally while thoughtfully bringing the businesses onto our platform, which lowers execution risk and allows us to integrate at the correct pace. During the second quarter, we continue to make meaningful progress scaling our multi-brand strategy. Margaritaville is on track to exceed $150 million in annual VOI sales. Accor Vacation Club sales remain on track to nearly double in 2026, and Eddie Bauer Adventure Club sales are meaningfully exceeding our expectations. Sports Illustrated Resorts is also progressing with our Nashville resort opening in the third quarter and sales already underway at our new sales center. Each brand gives us a distinct way to reach new travel profiles while leveraging the scale, sales expertise and offering platform of travel and leisure. Combined, VOI sales from these brands remain on track to approach 10% of our sales mix this year. Our multi-brand strategy is grounded in a simple but powerful insight: consumers increasingly choose leisure travel that reflects who they are and how they want to spend their time. Whether it is a toast in the sand, drink in hand, the energy of Margaritaville, or the excitement surrounding Sports Illustrated Resorts and FEC football weekends, these brands create more personal and emotional connection with travelers. That is what makes the strategy so compelling. And the measurable progress we are making gives us confidence that it is developing as we originally envisioned. We are also investing in digital infrastructure to support this strategy. We recently launched the Margaritaville app, giving owners a more seamless way to engage with the brand. This is another milestone in advancing our broader digital road map, which is designed [ in ] owner search plan, book and travel through digital channels. By way of example, the award-winning Club Wyndham app, which we launched less than 2 years ago, now represents more than 30% of total club bookings. Turning to the resort optimization initiative. It continues to perform exceptionally well. As a reminder, this initiative involves removing a small number of aging, lower demanded resorts to strengthen the overall system for our club HOAs and owners and improve the financial health of Travel + Leisure. We are realizing the expense savings that we expected as part of our resort optimization initiatives and, to date, stronger conversion and VPG have more than offset the loss tour volume from closed sales centers, allowing us to maintain our VOI sales growth rate. To close, our results reflect exceptional execution and reinforce the strength of our model. We are entering the back half of the year with clear visibility into continued growth. At the same time, we are investing in areas that will extend our growth runway, including scaling our multi-brand strategy, enhancing the quality and reach of our resort portfolio and improving the owner experience through digital innovation. All of these factors support sustainable long-term growth and give us the confidence to raise our full year EBITDA, Vacation Ownership sales and VPG guidance. Now I'll turn the call over to Erik to further elaborate on our results, capital allocation framework and outlook. Erik?

Thanks, Mike, and good morning, everyone. I'll start with our enterprise performance, then discuss our operating segments, capital allocation, our balance sheet and, finally, our outlook. Starting with enterprise performance. We delivered another strong quarter, generating revenue of $1.06 billion and EBITDA of $269 million. Compounding was evident across the P&L. Revenue grew 4%, EBITDA grew 8% and earnings per share grew 14%. EBITDA margin expanded 70 basis points, reflecting healthy operating leverage across the business. We believe the quality of our earnings is just as important as the quantity. Once again, those earnings translated into free cash flow, allowing us to continue investing in the business, return meaningful capital to shareholders, execute accretive acquisitions and maintain a strong balance sheet. Turning to the Vacation Ownership segment. The business continues to perform well across key operating metrics. Gross VOI sales increased 6% to $693 million, segment revenue grew 6% to $907 million, and segment EBITDA increased 13% to $247 million, reflecting healthy demand, continued strength in volume per guest and the ongoing benefits of our resort optimization initiative. Tours increased 1% during the quarter, reflecting solid demand and new owner acquisition. New owner mix was up slightly year-over-year with healthy new owner transaction volume and close rates. Our inventory position continues to evolve favorably. We're exiting older, lower demand resorts through our resort optimization initiative and improving the quality of our resort network through new brands and recent acquisitions. The result is a stronger network, a better owner experience and a higher-quality business. Credit performance in the quarter remained consistent with our underwriting standards. Weighted average FICO scores at origination remained above 740, and down payment levels have improved year-over-year. Our loan provision rate was flat year-over-year and delinquency rates improved sequentially from the first quarter. These results reinforce what differentiates our Vacation Ownership business: a large, engaged owner base, attractive unit economics and multiple avenues for long-term growth, the compounding engine we outlined at the start of the year. Turning to Travel and Membership. Second quarter revenue declined 5% to $157 million, while segment EBITDA declined 11% to $49 million, reflecting the continued evolution of our exchange business. Our focus continues to be on stabilizing the long-term earnings profile and free cash flow generation of the business through operational improvements, new strategic partnerships and digital initiatives. Moving to capital allocation, which continues to be one of our highest priorities. We continue to operate against the framework we set in February: invest in the core business, return capital to shareholders through dividends and repurchases, and pursue opportunistic M&A when returns are clearly superior to buying back our own shares. During the quarter, we repurchased approximately $88 million of common stock, an increase of 25% from the prior year, while continuing to pay our quarterly dividend. Subsequent to quarter-end, we acquired Yes& Vacations and executed an agreement to acquire Spinnaker Resorts. These transactions reflect exactly what we look for: attractive financial returns, high-quality owners that we can upgrade over time, receivables that we can securitize, resorts that enhance our portfolio, recurring management fee streams and businesses we know we can successfully integrate. The financial math on these transactions clears the framework by a meaningful margin. We're investing approximately $340 million to acquire businesses expected to generate about $50 million of EBITDA on a full year synergized basis. After securitizing roughly $80 million of finance receivables, our net capital deployed falls to about $260 million, resulting in a net investment multiple of approximately 5x EBITDA. The transactions add approximately 0.2 per 1 turn of leverage, and we expect to end 2026 with leverage of 3.2x. Importantly, our share repurchase program will continue. We expect a similar level of buybacks in 2026 compared to 2025. These transactions were funded through cash and existing debt capacity and do not require any change to our capital return commitment. We're excited to welcome both organizations to Travel + Leisure and look forward to updating you on our integration progress in the quarters ahead. Turning to the balance sheet. We ended the quarter with a strong liquidity position and leverage below 3.2x, down from 3.4x in the second quarter last year. Liquidity remains strong with over $1.2 billion of available capacity across cash on hand and our revolving credit facility. Earlier this week, we completed our second ABS transaction of the year, raising $300 million at a 98% advance rate and a 5.52% coupon. Overall, our balance sheet continues to provide significant financial flexibility to support investment in the business, shareholder returns and future investment opportunities. Our financial flexibility is a competitive advantage. Moving to the outlook. We are raising our full year guidance for 2 reasons: stronger-than-expected operating performance across our core business and the expected contribution from the acquisitions of Yes& Vacations and Spinnaker Resorts. Starting with the core. Our first half performance exceeded our original expectation, driven by strong execution, healthy owner demand and continued strength in volume per guest. Excluding acquisitions, we now expect full year EBITDA to be between $1.05 billion to $1.065 billion. Turning to the acquisitions. We expect Yes& Vacations and Spinnaker Resort to contribute $15 million to $20 million of incremental EBITDA during 2026. Combining the stronger outlook for the core business with the expected contribution from the acquisitions, we now expect full year gross VOI sales of $2.6 billion to $2.675 billion and EBITDA of $1.065 billion to $1.085 billion. In our consumer finance business, we still expect our full year provision rate to be modestly below prior year levels before the impact of acquisitions. Including the provision on sales from our recently announced acquisitions, we now expect our consolidated loan loss provision rate to be approximately 21%. Additional guidance assumptions include a full year adjusted tax rate of approximately 29%, free cash flow conversion of roughly half of EBITDA and year-over-year EPS growth of approximately 20% supported by EBITDA growth, deal accretion and share repurchases. For the third quarter, we expect gross VOI sales of $700 million to $740 million, EBITDA of $275 million to $285 million and volume per guest of $3,300 to $3,350. In closing, the business continues to perform as designed, and our updated outlook demonstrates the momentum we're seeing in the business. At the same time, we're not standing still. We're deploying capital to make our company even better. Our investment thesis remains straightforward and continues to be grounded in 4 characteristics. First, a compelling consumer value proposition that continues to attract new owners while deepening relationships with our existing owner base. Second, a recurring demand business model that generates durable earnings, cash flow and visibility. Third, multiple growth drivers, including our multi-brand strategy and strategic acquisitions that continue to expand our growth runway. And finally, a strong free cash flow and capital allocation framework that's focused on compounding long-term per share value. That's the business we're continuing to build and why we remain confident in our strategy and our ability to create long-term per share value. Donna, we can now open the line for questions.

[Operator Instructions] Today's first question is coming from Patrick Scholes of Truist Securities.

I'll start out with a high-level question, being that you're the first sort of greater lodging company to report. Mike, just give us your latest thoughts on state of your consumer, how is -- just in general, thoughts around that. And then I'll have a follow-up question for you, Erik.

When we closed out Q1, we were pretty clear that our consumer remained committed to vacations. The metrics supporting them both behaviorally and economically were strong. And as we're 90 days later, nothing's changed in that outlook. When you look at our booking patterns, our forward bookings, length of stay, distance travel to get on vacation, all those are remarkably consistent from what we saw in Q1, in April. You can see through our new owner business, that ticked up. Tours and transactions as well as our owner VPGs being above the range. The economic side of our measurement remains very consistent and very strong. So as we get to getting toward the end of our summer season, we're very pleased to be moving through Q2 and into Q3, the 2 highest quarters of the year with very strong demand from the consumer. And we've not seen anything in our metrics that would indicate there's a weakening occurring. So consistent and strong.

Okay. And Erik, let's talk just a moment on trends in the loan loss provision. Certainly in 1Q, there had been some concerns about a very modest uptick in the early-stage delinquencies. Can you kind of walk us through what's the latest in 2Q and how that has been trending, as well as any other granular thoughts and observations in the loss provision and just trends around that?

Yes, Patrick. So maybe zooming out a little bit on the consumer finance book, and I'll first maybe start with the point of sale. And I mentioned it in my prepared remarks, but the point-of-sale underwriting remains very consistent. It remains very disciplined. We have had FICO scores that have averaged in the 740 range. Down payment rates have moved into the mid-20s. So I think the punchline associated with point-of-sale underwriting remains consistent and disciplined. Moving on to early-stage delinquencies, you're right, in the first quarter, we talked about a roughly 20 basis point sequential increase in early-stage delinquencies. Since that time, we've seen a roughly 80 basis point improvement, since the first quarter, which is more pronounced than what we would typically expect to see between the first quarter and the second quarter, which would have roughly been about 40 basis points. So a meaningful improvement in early-stage delinquencies in the second quarter, which puts us right back into the seasonal pattern that we would expect. And then the third thing associated with the full year loan loss provision, we continue to expect 2026 to be lower than 2025. One thing specifically associated with early-stage delinquencies, at Travel + Leisure, Patrick, you've got to be current on your loan to book travel and you've got to be current on your loan to actually arrive at one of our resorts. So as we have moved from the quarter into the second quarter, we have seen that delinquency pattern move right back to where we would expect it to be as we move into the heavier travel season of the year.

Our next question is coming from Chris Woronka of Deutsche Bank.

Michael, if you could maybe give us a little bit of a background on these 2 acquisitions you just announced in terms of maybe how they came about and what possibly got you guys over the finish line versus maybe some others, either public or private, that might have also been looking? And then I have a follow-up.

Well, let me first say that our strategy around M&A has been consistent on every one of these calls, that we will look for strategic transactions that are financially accretive. We spoke at length throughout the prepared remarks that both of these hit those marks and hit them right in the bull's eye. Both of these companies are well-run companies that have resorts and destinations where we had white space. Hilton Head, South Carolina and Maui are 2 locations that are highly demanded for our owner bases and we had a need in both of those, add on to the fact that development in those areas is super-constrained, we really like these opportunities to put, as we said, 13 of the 23 resorts are in those 2 locations alone, aside from other great projects in their system. So resort expansion for our owners over time, very important in key destinations. On the flip side, opportunities for the Yes& and Spinnaker owner base to see a broader network of what-they-have-available vacations. That's point number one, is resort portfolio and destinations. Number two is owner base, over 100,000 owners. The ability to offer existing owner base of 100,000-plus into our resort network, should they choose points-based system, allowing maximum flexibility. It's just going to be a great offering for the existing owner base that I think will be received extremely well by the embedded owner bases of the 2 companies. And then lastly, the accretion, the financial accretion. I think Erik walked through very while the reasons that this made a ton of sense financially. So it's -- we had to squint really hard to find a reason to not aggressively pursue both. We did aggressively pursue both. And I think from a standpoint of seller and buyer, everyone wanted in both these equations. And we'll be great stewards of both these companies and help to grow their owner bases and grow, I think, satisfaction of our nearly 800,000 owners plus the 100,000 we'll be adding to our system.

Okay. And then as a follow-up, you guys have talked in the past about potentially looking to create value within the Travel and Membership segment. And I'm just kind of curious, as we sit here now, we see a lot of private capital investing in this broader travel and leisure space all over. Do you think there's a higher likelihood that something value-add could happen now than maybe a year ago or 6 months ago?

So let me start it and then I'll hand it to Erik here. Let me just start by saying on our quarterly performance, we continue to stay committed to growing businesses within the Travel and Membership space. When you step into that business, you see the exchange business is the challenged side of the equation, and we continue to grow transactions, albeit lower margin on the travel club business. Related to potential other opportunities, we will absolutely look at them. I think, as I hand it to Erik here, we will be very disciplined just like we were with these 2 acquisitions to make sure that we are checking the right boxes. But given that capital allocation is Erik's bailiwick in addition to mine, let me hand it to him to let him conclude.

Yes, Chris, I think, as Mike said, we are open to a couple of things. Number one, we're going to continue to focus on driving this business -- driving returns in this business, in a way where we can match the EBITDA performance to the revenue performance. So we are very focused associated with managing costs and running the business for cash. We're making some modest investments in the business, as I mentioned in my prepared remarks, associated with some digital capabilities, similar to the apps that we have for Club Wyndham and WorldMark and Margaritaville, to reduce the friction associated with the product for the subscribers in the business. But as far as strategic alternatives for the business, we'll continue to evaluate. We do -- we're very focused associated with total shareholder return and making sure that any decision that we make associated with the portfolio is driving accretion to the shareholder base.

The next question is coming from Stephen Grambling of Morgan Stanley.

I wanted to clarify, I realize it's early, but as we look at the -- I think you said $15 million to $20 million of incremental EBITDA in '26 million from the acquisitions. Is that the right kind of run rate based on the kind of core businesses seasonality to think about for at least a base case for 2027? Are there other puts and takes to consider as we think through the integration and any potential kind of synergies or onetime costs?

So Stephen, this is Mike. Let's start with the fact that we've closed on Yes& about 10 days ago, and although we've signed Spinnaker, we will close on that business in August. So you're not getting you're not getting half year full results this year, which is why, as Erik laid out, $50 million year 1, and we're going to be getting 4.5 to 5 months of that this year. So I think you're better to start with the $50 million year 1 run rate as the starting point. Our process will be pretty clear, is these are well-run businesses that we'll get in and we'll try to realize our synergies as soon as possible so that we can enjoy full synergized cost in 2027. On the revenue synergies, that takes more time to make sure you do that thoughtfully, measure twice, cut once approach. It's clear that we have the opportunity to move systems on to a points-based, which will create a lot of owner value and their upgrade opportunity, and that's not a quarter-by-quarter transition. It will take -- we'll start to transition this year, but it will take several years to realize the full potential of those upgrades. But the $50 million you heard today for year 1 is primarily run rate that's been synergized for the first 12 months.

Got it. That's helpful. So it's all cost, but the revenue might come later. One other just clarification, you were giving some details around delinquencies improving. As we think about the provision, over the past 3 years, the provision has been above write-offs. They both moved higher. If the delinquencies are stabilizing or down year-over-year, at what point would you start to think through maybe unwinding some of the incremental allowance relative to the write-off trend line?

Yes. Stephen, it's Erik. I think it's a fair question. But let me start with the second quarter early stage delinquency improvement. We were down 80 basis points sequentially, reconfirming that the loan loss provision should be down. There will be some modest pressure associated with the loan loss associated with the acquired business. I think as we get later in the year, Stephen, and start to think about our 2027 expectation, that might be an appropriate time for us to reevaluate what we expect the longer-term provision to look like.

The next question is coming from Ben Chaiken of Mizuho.

Maybe just 1 on M&A with 3 parts, if that's okay. It seems like the major opportunity here is upgrades of existing -- Yes& and Spinnaker owners. I guess, number one, is there a medium term, and we don't have to put like a time frame on it, but medium-term upgrade propensity, you think is reasonable, 15%, 20%, 30%? Or maybe a better way to ask is, what have you seen in the past in these type of deals, again, in terms of upgrade propensity of kind of like legacy owners into the new system? Question two would be, were these platforms on points or were they needed? And then three, does this also help you -- or maybe I'll stop there and then there's a quick third follow-up.

So let me try to get the second one first, which is One of the companies was not on a points-based system. So it's an obvious move just to honor and recognize their current ownership but give them the opportunity to move to a points-based system. The industry has moved there, high flexibility. And the other company had just a variety of different product types, but not cleanly on a points-based system. So we look across the 100,000 owner base, you're looking at the opportunity to move them all on to a points-based system. So I would describe the opportunity as pretty full related to that owner base. I'm not going to today give an upgrade propensity likelihood. What I would say is what we really enjoyed about the process and getting to know both companies is we saw tons of owner synergies between the 2 companies on locations, points usage platforms, and we would expect that, as you rightly said, Ben, the owner opportunity is the first clear and immediate opportunity related to revenue synergies. What I would also say though, and one of the strategic benefits of these transactions, is we're not marketing today in these 2 primary locations of Maui and Hilton Head, which creates a new opportunity that we did not have 30 days ago. So yes, we've all seen this before in the industry. The owner opportunity is the greatest and it's the most immediate, but we really like the subtle long-term opportunity that sits in both of these markets that are new to our system. And let's not forget here, they've got other resorts and other destinations, which do overlap us. But having over 50% of the resorts in new destinations -- and destinations of these quality where you can see 2 oceans is really a great win for us.

That's very helpful. And then just a quick third one. Does this help fill in the gaps to reduce some of the leakage, if I may, from the resort optimization? I guess the reason it's come to mind, and maybe it's just a coincidence, but I think 1 of the acquired assets or a few of the acquired assets are in Branson, Missouri, which is a location you referenced on the last call and as part of the streamlining. I just want to say leakage, meaning like, I mean, I guess just picking -- adding some locations where you may have seen customer friction on the VOI sales side.

Yes. I would not describe this as filling gaps where loss in the resort optimization. I would say it's a broad-based upgrade to our system in multiple locations. Part of -- I know you mentioned Branson, but I think Branson is one of those that's still a seasonal location. What we view this is improving our portfolio, moving from lower demand, highly seasonal location, to year-round ocean-front resorts. That to me is where we can turn around to all 3 of these owner bases, Spinnaker, Yes& and our existing platform and say, we at Travel + Leisure are deploying capital for the benefit of owner bases so that you have less compression, less booking friction and better, newer locations that you can enjoy and will more likely result in fulfillment, which is the number one business that we're in, is getting people on their number one vacation as often as possible. And putting these 23 resorts into the system when we've exited 12 full resorts and 5 partial ones is an absolute numerical increase, but also a quality increase to people's vacation options.

Our next question is coming from David Katz of Jefferies.

Enjoying all the detail about the acquired businesses. Just starting off with one follow-up there. It sounds like one of the acquired companies has owned [ deeded ] product versus points. What insights do you have that that owner base didn't buy what they bought because they only want to go that location, meaning some of the revenue synergies are likely driven by the transferability of those owners to sort of buy in other locations also, right? We've seen that in one of your peers over the years with Hawaii, for example.