Travel + Leisure Co. (TNL) Earnings Call Transcript

Greetings, and welcome to the Travel & Leisure Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Andrew Burns, Vice President, Investor Relations. Please go ahead, Andrew.

Thank you, Kevin. 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 estimates. The factors that could cause actual results to differ are discussed in our SEC filings and in our press release accompanying this earnings call. You can also find a reconciliation of non-GAAP financial measures discussed in today's call in the earnings press release available on our Investor Relations website. Please note that all references to EBITDA, net income, earnings per share and free cash flow made during this call are on an adjusted basis as disclosed in our earnings press release. Additionally, all references to earnings per share are 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. 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. Travel & Leisure delivered another strong quarter, extending the momentum we built throughout the year. Our owners continue to prioritize travel, demand remains healthy, and we are translating that strength into growth in earnings and cash flow. More broadly, this quarter shows how the actions we have taken over the last several years are improving the quality of the enterprise. The core business is growing. Our multi-brand platform is scaling and our acquisitions and portfolio actions are expanding both our earnings power and long-term revenue potential. . Quarter after quarter, our results validate that strategy and that compounding impact on our financial results is evident. From 2024 to the midpoint of our 2026 guidance, we expect to grow EBITDA by 16% and earnings per share by 33%. From a profitability standpoint, we are generating industry-leading EBITDA margins of approximately 25% while making meaningful investments in our long-term growth strategies. On the capital allocation front, since 2024, we have increased our annual dividend by 20% and reduced our common shares outstanding by 10% and made 2 strategic acquisitions for approximately $350 million. And we've done all this while maintaining our leverage ratio at around 3.3x and which is the lowest leverage ratio of our peers. The durability of our model and the free cash flow it generates gives us a distinct advantage. We can invest in growth, pursue strategic acquisitions and return meaningful capital to shareholders at the same time. Each dollar has a clear purpose, strengthening the company and increasing per share value. Our results over the last 24 months demonstrate the power of that approach. For the quarter, we generated revenue of $1.1 billion, EBITDA of $283 million and earnings per share of $2.21. Gross VOI sales were up 6% year-over-year, driven by strong execution and the initial contribution from recent acquisitions. Tours increased 7%, led by new owner tours, reflecting healthy top-of-funnel demand. Volume per guest on an organic basis was up low single digit and within our guidance range, reflecting consistent execution across our sales and marketing teams. Reported volume per guest of $3,286 was down 1% year-over-year, reflecting the mix impact from recent acquisitions. On the consumer front, the indicators we track remain healthy. While we continue to monitor the broader consumer environment, our owners continue to make travel and priority. Guest surveys and industry data show our owners plan to take 1 more trip over the next 12 months than the average U.S. traveler. That commitment is also reflected in our bookings, which point to continued momentum through the holiday season. Owner travel behavior, including booking windows, length of stay and distance travel to our resorts, all are stable. We are also seeing positive underlying portfolio trends in our consumer financing business which Erik will address in more detail later in the call. I'd now like to provide an update on our recent acquisitions, which are already providing immediate accretion to our overall financial performance. We closed the Spinnaker Resorts acquisition ahead of schedule on August 1 and integration across both acquired businesses is progressing well. Our integration approach is straightforward, preserve the local strengths that made these businesses attractive while embracing best practices. We are quickly deploying our technology and commercial capabilities and expect to be able to realize the full cost benefits of this integration within the first 12 months. We are also investing in the inquiry resorts to enhance the guest experience and add more options for our owners. I have spent significant time with the leaders and associates across both businesses in recent weeks and have visited nearly every resort. Those interactions have only strengthened my confidence in the strategic fit of these acquisitions. Moving past the near-term integration and cost synergy realization, these 2 acquisitions grow our owner base by over 100,000 owners. In November, we will begin selling Club Wyndham points at select properties alongside their existing product suite. In these early months, we will test and methodically optimize our offerings to appeal to the existing owner base. I see a meaningful long-term opportunity to expand sales across the acquired businesses by bringing our points-based products and expanded resort network to their owner basis. Another growth initiative for us is our multi-brand strategy, which is moving from proof of concept to a scale platform. This strategy allows us to reach new consumer segments, geographies and vacation experiences while leveraging our established technology and operating infrastructure. Each brand is progressing along its maturity curve from Margaritaville Vacation Club in a core Vacation Club, which are generating outsized growth to Eddie Bauer Club and Sports Illustrated resorts, which are earlier in their commercialization. Each brand broadens our growth opportunities without meaningfully increasing complexity or capital intensity. During the quarter, we continued to see strong momentum across the portfolio. Margaritaville Vacation Club is on pace to deliver more than $175 million of gross VOI sales this year. Our core Vacation Club is approaching $50 million in annual gross VOI sales in only its third year of operation. Eddie Bauer Adventure Club continues to expand with the announcement of its second resort in the Hill Country outside of Austin, Texas with cabins, geo domes, hiking trails and outdoor activities, it brings the brand to life through an immersive outdoor experience. The resort is scheduled to open by next summer. Sports Illustrated resorts reached an important milestone with the opening of the Nashville Resort and the early response has been encouraging. To date, we've announced 4 Sports Illustrated resorts, and we are closing in on our first $1 million sales month. Earlier this month, we announced the expansion of our partnership with Wyndham Hotels & Resorts to bring the Sports Illustrated concept to traditional hotels and mixed-use destinations. Together, we see an opportunity to create immersive year-round destinations in college towns and major urban markets featuring distinctive programming, premiere sporting events and unique guest experiences. With this expanded partnership, I believe that we will be able to enter more markets and scale Sports Illustrated resorts even faster. Our multi-brand strategy is doing exactly what we intended it to do, expanding our addressable market, creating new growth avenues and demonstrating the power of the travel and leisure platform. What began as a collection of individual opportunities is increasingly a meaningful contributor to our long-term growth algorithm. As a reminder, we expect these new brands to be approximately 10% of our total sales mix this year and continue to grow as a percent of the mix in the years ahead. In closing, we spent the last several years proving the resilience of our model. In 2026, we are showing how much more the platform can become. Since raising our full year outlook last quarter, we've achieved the high end of our third quarter EBITDA guidance, completed 2 acquisitions and continue to scale our multi-brand growth platform. This quarter, we are raising the midpoint of our gross VOI sales and EBITDA guidance once again. Overall, we are delivering results, widening our growth runway and improving the quality of the enterprise, and we are doing it with the financial discipline our shareholders expect. With that, I'll turn the call over to Erik. Erik?

Thanks, Mike, and good morning, everyone. I'll start with our third quarter results, then cover vacation ownership, our acquired businesses, travel and membership, capital allocation in the balance sheet and finally, our outlook. Third quarter revenue grew 5% to $1.1 billion and EBITDA increased 6% with 20 basis points of EBITDA margin expansion. Net income grew 16% and earnings per share of $2.21, increased 23% over last year. This third quarter progression mirrors the consistent performance we've delivered all year. Through the first 3 quarters, revenue was up 4%, EBITDA is up 8%. Net income is up 15% and EPS is up 21%. Compounding growth across the P&L consistent with how the business is designed to perform over time, high-quality earnings growth that converts into cash and per share value. Third quarter Vacation Ownership segment revenue was $953 million and segment EBITDA was $250 million. Gross VOI sales increased 6% year-over-year on top of 13% VOI sales growth we reported in Q3 last year. As Mike referenced earlier, we generated healthy year-over-year tour and VPG growth on an organic basis. On a reported basis, including acquisitions, tours increased 7%, while volume per guest of $3,286 was down 1% year-over-year. With Spinnaker Resorts closing ahead of schedule, it contributed more to the quarter than forecast, resulting in higher tour flow growth and greater VPG dilution. New owners represented 33% of gross VOI sales during the quarter, consistent with our targeted mix of approximately 1/3 new owners and 2/3 existing owners. We believe this balance supports current sales productivity while building the customer base for future upgrade opportunities. In our consumer finance business, credit performance continued to improve during the quarter. The underlying profile of new originations remained strong with weighted average FICO scores above 740 and average down payment percentages approaching the mid-20s. In our portfolio, the loan loss provision rate declined approximately 150 basis points year-over-year, reflecting lower overall percent of sales finance. Separately, delinquency and default performance has continued to exceed our expectations, giving us confidence to improve our full year provision outlook from approximately 21% to closer to 20%. On the M&A front, we closed Spinnaker Resorts on August 1, so the third quarter reflects a partial period of ownership. Together, yes and vacations and Spinnaker Resorts contributed approximately $21 million of gross VOI sales and $7 million of EBITDA, tracking to our 2026 accretion guidance of $15 million to $20 million. The early performance and progress on integration, we are making supports the financial thesis we outlined when the transactions were announced. Immediate earnings accretion, high-quality resorts and owners, identifiable cost synergies and finance receivables that fit directly into our securitization model. Turning to travel and membership. Segment revenue was $150 million and EBITDA was $51 million. Results were in line with our expectations and continued to reflect the ongoing mix shift from higher-margin exchange activity to Travel clubs. At the same time, we've taken actions to better align our cost structure with the economics of the business, including greater use of shared enterprise capabilities. These actions are expected to generate approximately $16 million in annualized savings with the majority of the benefit realized in 2027. Moving to the balance sheet. We ended the quarter with net leverage of 3.3x and over $900 million of available liquidity, providing ample flexibility within our capital allocation framework. Subsequent to quarter end, we completed our third ABS transaction of the year. Across our 3 transactions in 2026, we've raised $925 million, all at a 98% advance rate. That consistent execution remains an important part of our free cash flow model, allowing us to efficiently monetize receivables and recycle capital back into the business. While benchmark rates have moved higher, our ABS spreads remain attractive, reflecting continued investor demand for our receivables. Moving to capital allocation, which continues to be 1 of our highest priorities. Through the third quarter, we returned $364 million to shareholders through dividends and share repurchases and deployed approximately $350 million towards acquisitions. Share repurchases are up 18% year-over-year, and we increased our dividend by 7%. We've done all of this while maintaining a strong balance sheet and significant financial flexibility. We expect return on invested capital to remain in the high 20s this year, well above our cost of capital. That return discipline is central to how we evaluate organic investment, acquisitions and share repurchases. At current valuation levels, we believe repurchasing our own shares represents a highly attractive use of capital relative to the alternatives available to us. Since the spin, we reduced share count by approximately 40%. As we look ahead, the portfolio actions we completed this year create meaningful incremental cash opportunities in 2027. Through the resort optimization initiative, we were able to strengthen our balance sheet and operating performance while reducing the capital intensity of the business by retiring 17 lower demand properties, we're creating to monetize the associated real estate for owners, of which we are the largest. Additionally, our acquisitions had receivables that we expect to generate an additional $80 million of cash when securitized. Combined with the underlying free cash flow generation of the business, these actions should provide additional capacity for share repurchases in 2027, while maintaining our leverage and liquidity guardrails. Turning to our outlook, which we raised last quarter. With 9 months behind us and high visibility into the balance of the year, we are narrowing our full year gross VOI sales and EBITDA guidance to the top end of the range and increasing our earnings per share guidance. For the full year, we expect gross VOI sales in the range of $2.625 billion to $2.675 billion, volume per guest of $3,325, to $3,375 and EBITDA of $1.07 billion to $1.085 billion. Additional guidance assumptions include a full year adjusted tax rate of approximately 28%, free cash flow conversion of roughly half of EBITDA and earnings per share growth to be a low 20s percent. When we issued guidance back in February, our initial range was above consensus expectations. Since then, we've outperformed on several fronts. We raised our core VOI sales and VPG outlook, raised the midpoint of our EBITDA guidance twice, added accretion from 2 acquisitions and loan loss provision and tax rate assumptions. That progression reflects the strength of our model and demonstrates our financial and operating discipline that converts growth into cash and compound per share value. In closing, we're exiting the third quarter with the core business growing, credit improving, our acquired businesses performing well and a stronger resort portfolio. But what really matters most is how we translate that into long-term shareholder value. Our goal is straightforward, grow earnings, convert those earnings into cash, invest the cash where returns exceed our cost of capital and return excess capital through dividends and share repurchases when we believe our shares offer an attractive return. Over time, that's how we grow free cash flow, compound per share value and create durable value for our shareholders. With that, I'll turn the call back over to Kevin for questions.

[Operator Instructions] Our first question today is coming from Stephen Grambling from Morgan Stanley.

Just to start, there was a release about 1 of your competitors this morning maybe on a little bit of a weaker trend line. I'm just curious if, one, you're seeing any kind of change over the course of the quarter in terms of conversion rates and dynamics between existing and new owners, but then also anything in the competitive dynamics as you think about your salespeople and the cost to keep people -- some of the better people in the system as there's maybe a change in the competitive landscape?

The short answer on both is no, we're not seeing any impact. If you look at our via performance throughout the quarter. There was a lot of consistency, no changes as we came to the close of the quarter and now that we're well in October no modulation whatsoever to our performance, which, as Erik methodically laid out there has been extremely strong and shows a lot of strength in our core vacation ownership business. . As it relates to talent movement, no, we're not seeing impact as it relates to talent movement. The industry has always reflected constant movement amongst the peers. But a, as you can see from our performance, it's not impacting us. And b, I think culturally, our consistent line of success, our clear strategic outlook is 1 of the best retention components you can have. And all of that really leads to no consumer trend changes throughout the quarter. And in October and no impact as it relates to talent movement, and clearly, that's showing through in our results.

Great. If I can sneak 1 follow-up maybe unrelated. You talked about having increased cash while holding leverage next year. And -- just curious, maybe I missed this on some of the opening remarks, but as we think about some of the building blocks to next year, any major changes that we should be thinking about between VPG and tour flow thinking through kind of the moving parts between the recent acquisitions as well as the ramp in Sports Illustrated and some of the other brands.

Yes. Sure, Stephen. So big picture, as I think about 2027, we still see our 6% to 8% gross VOI sales and mid-single-digit EBITDA growth algorithm intact. The tailwinds as we start the budget process, we're not getting too far ahead of the process, but tailwinds would certainly be the full year contribution from our acquisitions. We do expect further improvement in the loan loss provision as well as some G&A efficiencies. And I think that those benefits will be partially offset by higher ABS funding costs a modest margin headwind as we continue to invest in our new brands. But right now, no change in the underlying framework, and we'll provide more on that when we get to February, associated with incremental capital -- free cash flow in 2027. Our long-term target remains roughly 50% free cash flow conversion from EBITDA. And we see let's call it, $150 million of incremental liquidity next year with roughly half of that coming from the acquired receivables that we've talked about and the other half coming from the resort optimization initiative. And we're targeting 2027, although some of those real estate proceeds could certainly extend into 2028. But that gives us additional capacity to return capital. And as I mentioned in my prepared remarks that current valuations buybacks are very compelling.

Your next question today is coming from David Katz from Jefferies.

This may be a premature follow-up to the prior answer. But my question is how do you think longer term. It's a future date about what your algo could become. I appreciate Michael's comments about the incremental brand sales opportunities. Are these intended to accelerate your algo over time? Or should we think about you in the context of where you are today?

I would suggest that our current outlook related to VOI and EBITDA doesn't change. What it does is broaden our platform as as a brand as our -- some of our core brands, continue to mature and get larger in scale, growing at 6% to 8% at $2.5 billion, $2.6 billion this year, becomes more and more challenging in its marketing reach and what these new brands are providing us Margaritaville, Accor, Eddie Bauer Sports Illustrated is a new marketing platform to widened top of funnel. Take Sports Illustrated this month that will likely hit the $1 million mark. Every single 1 of those, at least as far as I'm aware, is a new owner. These new brands give us that next leg up to keep our long-term algorithm of new owners, combined with owner upgrades to drive these mid-20s margins, a realistic outlook that has clear visibility. So I would say it's more about maintaining the algo with broadening our marketing universe as opposed to digging deeper and deeper into a singular approach.

Understood. And as my follow-up, with respect to the provision, it's possible that I missed it, but I wanted to just understand for the how or why that is happening? Is that circumstantial or that something that you're strategically driving?

Yes, sure. So the provision, as I mentioned, is down in the third quarter, 150 basis points year-over-year. And that's the third consecutive quarterly year-over-year decline. In the quarter, we benefited from lower percentage of sales finance, but more than anything, the underlying credit trends also continue to improve. Early-stage delinquencies were relatively stable at 5.1% between the second quarter and the third quarter, and that's typically where we would expect a seasonal uptick in delinquencies moving from 2Q to 3Q. We are now expecting the full year loan loss provision to be closer to 20% versus the 21% the default and delinquency trends that we're experiencing, I think give us confidence that not only will 2026 be lower than 2025, but 2027 will be lower than 2026. So the 3 things that we've been pretty methodical about talking about in terms of the actions. Number 1 is the focus on point-of-sale underwriting. We continue to talk about FICO scores that remain in the mid-700s and increasing down payment rates. The second thing is new owner engagements. And this is really trying to get our new owners on vacation and getting that first vacation booked. And then the third thing is a very proactive approach to improving our servicing and collection efforts. This is better technology, broader outreach, more auto pay. So is it are the actions that we're deliberately taking driving outcomes. The answer is yes.

Next question is coming from Chris Woronka from Deutsche Bank.

So Michael or Erik, I certainly appreciate the kind of mechanics of how your closings of the acquisition of Spinnaker in Q3 impacted your your reported VPG. I guess -- so the question would be, over time, do you guys see an opportunity to kind of close that gap versus your, I guess, legacy CPG. And how should we think about the the timing and potential cadence of that? And then I have a follow-up.

The short answer to that, Chris, is yes. We acquired acquired a business in early Q3, and we're looking closely at what the opportunities are going to be. Interestingly enough, the VPGs on the acquired businesses are about where we were as an enterprise pre-COVID. And you've seen how we've been able to grow those VPGs over time to where they are today from the low 2,000s to the low 3000s, 3,250, 3,350. So yes, there's clearly opportunity there. We're not going to rush to get there because we're evaluating resort upgrades, broadening the the usage system. And then more importantly, the point system is a new concept. So we want to train up right on that. But absolutely, there's an opportunity to close the gap we're evaluating the way they sell and components that they have that have made them successful until now and maybe there are some things we can incorporate. But ultimately, it's a great starting point. We see lots of opportunity to grow that business over time. We're focused right now on a world-class integration, ensure that we realize the cost synergies very promptly. And as we start in 2027, we'll get a full year realization of the sales opportunity. But VPG's one of the many opportunities we see with these acquisitions and feel more confident in October of them than we did even when we made the purchases in July.

Okay. That's super helpful. And then my follow-up is a question you're pretty familiar with comes up pretty much every quarter. Anything new that you're thinking about on the travel membership piece. And the reason I ask is, obviously, I think from an industry perspective, we're seeing a pretty decent M&A backdrop despite higher rates. And so I'm just kind of curious whether there's any movement on things that might be a foot that you're considering there? .

Yes. Chris, it's Erik. The T&M business is an important contributor to consolidated EBITDA and cash flow, it helps fund enterprise growth, shareholder returns. We remain open to alternatives and we'll evaluate opportunities when a transaction could unlock greater shareholder value than continued ownership. In the meantime, we are going to try to inflect the revenue curve. We are going to continue to be focused associated with the cost structure of that business to ensure that we're getting a relapsed drop of EBITDA and cash flow out of it.

Our next question is coming from Ben Chaiken from Mizuho.

There's a lot of very helpful commentary in the prepared remarks. I think I caught that you mentioned, Erik, I believe $16 million of cost saves, primarily for '27. This is separate from the portfolio streamlining, correct? Because I think the latter is more maintenance fees, if I'm not mistaken. So assuming this is correct, maybe what brought this opportunity to the surface? And then 1 follow-up.