Marriott Vacations Worldwide Corporation (NYSE:VAC) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Greetings and welcome to the Marriott Vacations Worldwide Third Quarter 2023 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] I would now like to turn the conference over to your host, Mr. Neal Goldner, vice President, Investor Relations from Marriott Vacations Worldwide. Thank you. You may begin.
Neal Goldner: Thank you, Melissa and welcome to the Marriott Vacations Worldwide third quarter 2023 earnings conference call. I’m joined today by John Geller, president and Chief Executive Officer and Jason Marino, our Executive Vice President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. forward-looking statements in the press release that we issued last night, as well as our comments on this call, are effective only when made and will not be updated as actual events unfold.
throughout the call, we will make reference to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release, as well as to the investor Relations page on our website at ir.mvwc.com. Before I turn the call over to John, as you saw in our earnings release last night with four vacation ownership resorts in West Maui, the wildfires had a negative impact on our results in the third quarter, despite having no physical damage to our properties. To facilitate a conversation this morning about our business, excluding the Maui wildfires impact, our discussion and commentary this morning about our consolidated results for the quarter will exclude the impact of the fires, except where noted.
We added a table to our earnings release last night to illustrate the impact the wildfires by line of business to facilitate your analysis. In addition, during last year’s third quarter with the launch of Abound by Marriott Vacations Worldwide, we aligned the contract terms of vacation ownership sales across our Marriott, Westin and Sheraton brands. We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands. These changes, which we refer to as the alignment, resulted in a non-recurring benefit of $44 million to last year’s third quarter adjusted EBITDA to the acceleration of revenue from the sale of Marriott branded vacation ownership interest. The schedules we provided in last night’s earnings release illustrate what our results would have been in prior year quarter, and year-to-date period without this benefit.
During our call today, all of our discussion and commentary about year-over-year changes exclude last year’s alignment benefit. With that, it’s now my pleasure to turn the call over to John Geller.
John Geller: Thanks, Neal. Good morning, everyone and thank you for joining our third quarter earnings call. I wanted to start the call today by reflecting on one of the most significant happenings in the third quarter, the wildfires that battered West Maui. While we did not have any physical damage to our resorts, the wildfires had a profound impact on our associates and their families with several hundred of them losing their homes. for all of our associates in Maui, our thoughts and prayers continue to be with them as they work with each other and their community to rebuild. Thanks to the hard work and dedication of our associates, we have reopened our resorts in West Maui although occupancy in October was well below normal.
we are seeing reservations build for the balance of the year, though we expect it’ll take until early next year until occupancy returns to more normal levels. At the same time, our focus has been on educating our owners, members and guests on respectful travel as the community rebuilds, and encouraging any visitors to explore the island and enjoy local businesses that need the support of tourism. Moving to our third quarter results. it was only a year ago when we first announced Abound. Our enthusiasm, at the time to provide owners and first-time buyers direct access to a much broader portfolio of resorts using a common currency, couldn’t have been higher. Since then, thousands of owners and other customers have been introduced to Abound, and we continue to see elevated interest at our resorts with people wanting to learn more about Abound in its benefits.
Despite the near-term impacts of the transition, there’s no doubt in my mind that it is fundamentally a better product. for legacy Marriott owners, they are now able to book directly into any of our Sheraton and Westin resorts using their points. and for legacy Sheraton and Westin owners, who had previously had access to a more limited system of resorts, they can now book directly into any of the more than 90 Marriott branded vacation ownership resorts around the world using a common currency. In addition, legacy Sheraton and Westin owners now have a much more robust selection of vacation options to choose from with, excuse me, the new access to thousands of other vacation alternatives using their points from hotel stays and cruises to sporting events, Broadway plays and more.
Over the past year, we’ve been working hard educating consumers about the benefits of abound and our salespeople are getting more experience selling it. We have also seen three times the number of legacy Vistana owners elect to use the Abound program this year, compared to last, which will allow more owners to experience the benefits firsthand. This was evident in our results this quarter, where VPG for sites that transitioned increased more than 15% sequentially from the second quarter. and in our legacy wealth business, the changes we’ve made help drive a 5% sequential VPG improvement. As a result, total company VPG improved 2% sequentially from the second quarter despite the impact of the Maui fires. We also formally launched the Hyatt Vacation Club brand during the third quarter, bringing our 22 former Hyatt Residence Club and Legacy-Welk resort properties under a single brand.
And with the launch of the new BEYOND program, Hyatt Vacation Club owners now have access to more travel offerings, including cruises and vacation experiences, which will help drive higher owner satisfaction and incremental tours. Our international business continues to provide strong growth with contract sales across Europe and Asia Pacific, growing 42% year-over-year. but with more U.S. consumers traveling abroad this year, this has negatively impacted our North America results. We continue to focus on driving sales of new owners with first-time buyers representing half of our tours in the quarter and a third of our contract sales, which is good for the long-term health of the system. On the development front, we acquired a property in Savannah, Georgia, which we intend to convert into a 73-unit Western Vacation Club.
Savannah consistently ranks as a top tourism destination by our owners. This resort will also add new sales centers in the market when it opens in a few years. in our exchange and third-party management segment, our interval business performed in line with expectations this quarter and active members were down slightly year-over-year while revenue per member increased. Looking forward, travel demand continues to revert to historical patterns and economic conditions are mixed with consumers starting to feel the impact of higher interest rates and inflation. At the same time, the changes we’ve made in our Marriott branded vacation ownership business with the launch of Abound, as well as those to our legacy wealth business are encouraging. VPG is improved 2% from the second quarter and we’re up 17% above 2019 Q3 levels, even with the Maui fires impacting our results, reflecting the benefits of our team’s hard work.
taking the longer view, our businesses fundamentally sound with long-term growth opportunities. We have some of the best brands in the vacation ownership industry, each with its own expansion potential. We’re making smart investments in digital technologies to enable more self-service by our owners and members. We’re leveraging data to make the right offers to the right people at the right time while streamlining processes to lower costs across our organization. We also have a substantial amount of high-margin recurring revenue streams that reduce our exposure to economic cycles and times like this, and we generate substantial free cash flow year-in, year-out and at our current stock price, I can’t think of a better use of that cash except to return it to shareholders.
With that, I’ll turn it over to Jason to discuss our results.
Jason Marino: Thanks, John. Today, I am going to review our third quarter results, the strength of our balance sheet and liquidity, our updated 2023 guidance and some early thoughts about 2024. In addition, as Neal mentioned, to facilitate a conversation this morning about our business, all of my comments will exclude the estimated impact of the Maui wildfires, except where noted. starting with our Vacation Ownership segment. Contract sales declined 4%, excluding the estimated $28 million impact of the Maui fires. at over $4,100, VPG was only down 5% year-over-year in the third quarter versus a 14% decline in the second quarter illustrating the benefits of our sales training and sharing of best practices across the organization, as well as the continued owner education about the benefits of Abound.
Another encouraging sign is that our package pipeline continues to be robust and grew 10% compared to a year ago, which is a key driver of future sales. As you saw in our release last night, we recorded an additional $59 million loan loss charge in the quarter on our $2.8 billion gross notes receivables portfolio. As we discussed last quarter, we saw delinquency trends improved from earlier in the year, but they still remain above the prior year and our expectations. based on this, in the mixed macroeconomic data we have observed in 2023, we expect this to continue in the near to medium-term and we adjusted our estimate for the loan loss provision taking these factors into account. with this adjustment, we believe our consumer loan portfolio is adequately reserved.
After the partial offset of approximately $10 million in cost of vacation ownership, the impact to adjusted EBITDA was $49 million, which we have not added back in our calculation of adjusted EBITDA. Rental profit declined $13 million on a year-over-year basis, primarily due to lower RevPAC in Orlando and our mountain locations, as well as higher inventory holding cost. Finally, financing profit increased 3% year-over-year and resort management profit grew 8% reflecting the recurring nature of these high margin revenue streams. As a result, adjusted EBITDA on our Vacation Ownership segment would have decreased 24% year-over-year to $195 million in the third quarter, excluding the estimated impact of Maui. moving to our exchange and third-party management business.
Adjusted EBITDA declined $8 million compared to the prior year, driven by fewer exchange transactions at Interval International and lower RevPAR at Aqua-Aston while operating margin was just over 50% for the quarter. As a result, total company adjusted EBITDA would have declined to $174 million in the quarter. Moving to the balance sheet. We ended the quarter with approximately $1 billion in liquidity and a net debt to adjusted EBITDA ratio of 3.5 times. Our balance sheet remains in good shape with no corporate debt maturities until Q3 2025 when our variable rate term loan B matures, and after our $300 million of interest rate hedges mature in April, our corporate debt will still be 70% fixed with an interest rate of only 4.2% at today’s underlying rates.
we repurchased $86 million of common stock in the quarter, bringing our year-to-date total repurchases to almost $250 million with $476 million remaining in our repurchase authorization. Moving on to our 2023 guidance. As you saw in our release last night, we now expect our adjusted EBITDA to be between $745 million and $765 million, including an estimated $50 million to $55 million impact from the Maui fires and the $49 million net decrease from the increased loan loss provision. For the fourth quarter, we expect adjusted EBITDA to be between $170 million and $190 million, including an estimated $26 million to $31 million impact from the Maui wildfires. We now expect full-year contract sales to be between $1.75 billion and $1.77 billion this year after an estimated $60 million to $65 million impact of the Maui fires and for development margin to be around 27% after the 300-basis point impact of the extra loan loss provision.
for the fourth quarter, we expect contract sales to be between $425 million and $445 million after an estimated $32 million to $37 million impact at the Maui fires. we expect resort management profit to increase more than $5 million year-over-year in the fourth quarter, and for financing profit to be down slightly due to continued higher interest rates in the ABS market. In addition, we expect rental profit to decline slightly year-over-year due to lower RevPAR and higher operating costs as one approximately $5 million estimated impact of the Maui wildfires. in our exchange in third-party management business, we expect profit to decline roughly $5 million in the fourth quarter due primarily to lower transaction at Interval International and lower RevPAR at Aqua-Aston.
As a reminder, we reported a $7 million alignment benefit to adjusted EBITDA in last year’s fourth quarter that will not recur this year. Moving to cash flow. we ended the quarter with approximately $430 million of excess inventory, enough to support more than $2 billion in future sales. However, with the lower expected adjusted EBITDA this year, we now expect our adjusted free cash flow to be between $430 million and $460 million this year. Finally, while we are still working on our 2024 plans, we wanted to provide a little color for next year. We expect revenues and contract sales to grow despite having to rebuild a portion of our marketing and sales team in Maui. However, there are two parts of our vacation ownership business, where we expect profit to decline year-over-year due to cost pressures.
We expect maintenance fees to owners to increase in the mid-teens next year due to inflationary pressures, and labor materials and insurance costs. This will result in higher inventory costs in our rental business, which we do not expect to be offset by increased revenue. And in our finance business, we expect continued higher interest rates in the ABS market to negatively impact our financing profit. In addition, the return of variable compensation expenses will negatively impact G&A expense next year. We’ll be able to give you more clarity when we report earnings in February, when we will also have more information about the recovery in Maui. As always, we appreciate your interest in Marriott Vacations Worldwide, and we’ll be happy to answer any questions you have now.
Melissa?
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