Marriott Vacations Worldwide Corporation's (VAC) Q3 2022 Earnings Call Transcript

Marriott Vacations Worldwide Corporation (VAC)

Q3 2022 Earnings Conference Call

November 1, 2022 8:30 AM ET

Company Participants

Neal Goldner - Vice President, Investor Relations

Steve Weisz - Chief Executive Officer

John Geller - President

Tony Terry - Executive Vice President and Chief Financial Officer

Conference Call Participants

Ben Chaiken - Credit Suisse

Patrick Scholes - Truist Securities

David Katz - Jefferies

Brandt Montour - Barclays

Presentation

Operator

Greetings, and welcome to the Marriott Vacations Worldwide Third Quarter 2022 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] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations for Marriott Vacations Worldwide. Thank you. You may begin.

Neal Goldner

Thank you, Melissa, and welcome to the Marriott Vacations Worldwide third quarter 2022 earnings conference call. I am joined today by Steve Weisz, Chief Executive Officer; our President, John Geller; and Tony Terry, 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 and the presentation we added to our website this morning, as well as our comments in 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 the Investor Relations page of our website at ir.mvwc.com.

As you saw in our earnings release last night, during the call – during the quarter, we aligned the contract terms for vacation ownership sales across our Marriott, Westin and Sheraton brands resulting in the acceleration of $46 million of revenue. We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands resulting in a $19 million decrease in the reserves for the acquired notes offset by an increase in the reserve for our originated notes.

The schedules to our earnings release provided a reconciliation to show what our reported results would have been without these benefits. During our call today, all of our discussion and commentary will refer to our results after adjusting for the alignment including the $44 million benefit to adjusted EBITDA.

With that, it's now my pleasure to turn the call over to our CEO, Steve Weisz.

Steve Weisz

Thanks, Neal. Good morning, everyone, and thank you for joining our third quarter earnings call. Before getting started, it's been a month since Hurricane Ian battered Florida. Many of our associates in the area were impacted by power outages and damage to their homes and personal property. Despite this, they have been working tirelessly to get our affected resorts back open as quickly and as safely as possible. Our thoughts and prayers are with those still suffering in the aftermath of the storm.

It's been a remarkable year for Marriott Vacations as we continue to see high demand for leisure travel. In fact, here are a few examples; Air travel over Labor Day weekend exceeded 2019 for the first time since the pandemic began; All Americans are concerned about the economy; Many view travel as essential with more than half of all American surveys seeing leisure travel as an important budget priority and roughly 3/4 saying they believe that travel was a worthwhile investment even if the economy were to contract; And in a recent proprietary survey, 70% of our owners told us that they are planning a trip in the next three months.

We are delighted to see people going on vacations, some to visit friends and family they haven't seen in quite a while and some just to make up for lost time. Regardless of the reason, we are honored to be part of that experience for our owners, members and guests.

Another exciting news, our company has been ranked number four on Newsweek's Top 100 Most Loved Workplaces list and first in the hospitality sector. This coveted award is given to companies where associates are the happiest and most satisfied at work. I'd like to extend my appreciation to all of our associates, without whom none of this would be possible.

They are the ones who managed through a very difficult two years during the global pandemic and most recently, the impacts of Hurricane Ian. I've been in the hospitality industry for 50 years and I can attest that our associates are the best in the business.

So moving on to our results, the third quarter once again illustrated the resiliency of our business model. Despite higher inflation, the volatility in the stock markets and rising interest rates, we generated $483 million in contract sales in the third quarter, up 27% from the prior year with first-time buyers representing a third of our contract sales in the quarter.

Adjusted EBITDA grew by 17% year-over-year driven by strong growth in both of our business segments. We ran approximately 90% occupancy during the third quarter with our beach, mountain, golf and urban markets in high demand, while Asia Pacific saw continued signs of recovery with occupancies increasing to 62% from 36% a year earlier.

Tours grew 24% on a year-over-year basis and were within 5% of our pre-pandemic tour flow. VPG remained elevated, increasing 1% year-over-year to $4,350, 26% higher than the third quarter of 2019, illustrating the continued demand for leisure travel and the relevancy of our core product offering, especially in today's inflationary environment.

As we announced previously, during the second quarter, we launched Vacation Next, our multiyear journey to leverage our brands and digital strategy to unlock our growth potential. We started by unifying our Marriott-branded vacation ownership products under a new umbrella name, Abound by Marriott Vacations.

Through this exclusive new program, Marriott, Westin and Sheraton owners will have direct access to a portfolio of more than 90 Marriott-branded resorts and thousands of unique vacation experiences around the world using a common points of currency. We launched Abound by Marriott Vacations at the majority of our Marriott, Sheraton and Westin sales centers during the third quarter and we've seen a meaningful increase in interest by our owners.

Looking forward, we will further leverage our investment in technology to continue transforming our marketing, sales and services for our owners. We've also been investing in technology to improve the effectiveness of our direct marketing efforts with great success.

Today, nearly all direct marketing programs are using our digital booking engine and we've experienced a significant lift in our response rates with the new technology. This has substantially improved our campaigns while reducing our marketing costs. We are expanding the use of this technology to include other online campaigns, which we expect to launch by the end of the year.

In the continued growth of our portfolio, we plan to open our second resort in Bali next week. This 88-unit villa property is located – co-located, excuse me with a 5-star Renaissance Bali Nusa Dua Resort and offers our guests shared amenities, including six food and beverage venues and four outdoor swimming pools, delivering on our promise to offer great vacations with authentic cultural experiences.

In our Hyatt Vacation Ownership business, we continue to make great progress integrating the legacy Welk and Hyatt businesses. We've already affiliated the former Welk Resorts with Interval International, moved them on to the hyatt.com platform from a rentals perspective and rebranded the legacy Welk Points program to Hyatt Vacation Club.

Looking forward, our integration efforts will include a consistent service culture, on-site and digital experience, plus a harmonized marketing and sales program. We are also working on developing new vacation offerings for our owners, which will provide enhanced value to their existing ownership plus provide incentive for additional purchases.

In our Exchange & Third-Party Management business, membership in Interval International grew 21% year-over-year, primarily driven by the new affiliations we signed last year. Excluding VRI Americas, which we sold in April, adjusted EBITDA increased 18% driven by higher transaction revenue from exchanges and getaways, increased management fees at Aqua-Aston, as well as benefits from our cost-saving initiatives.

In summary, we had a strong third quarter with substantial profit growth and margin expansion and expect to deliver adjusted EBITDA and adjusted free cash flow this year. We are seeing great interest in the launch of Abound by Marriott Vacations product and we continue to return a substantial amount of free cash flow to shareholders, which Tony will discuss later.

Finally, despite the macroeconomic backdrop, I remain very optimistic about the long-term trajectory of our business.

With that, I'll turn the call over to John.

John Geller

Thanks, Steve, and good morning, everyone. Today, I am going to review our strong third quarter results. After that, I'll turn the call over to Tony to discuss the strength of our balance sheet and liquidity position, as well as our outlook for the balance of the year.

Starting with our vacation ownership segment, in today's environment, the value proposition of our vacation ownership product has only grown more compelling with lodging average rates well above pre-pandemic levels. We continue to capitalize on strong demand for leisure travel during the third quarter, driving a 27% increase in year-over-year contract sales with tours growing 24% and VPG improving 1%.

We also maintained a robust tour package pipeline, ending the third quarter with nearly 204,000 packages with 36% of those customers having already booked their future vacation. With strong growth in contract sales, adjusted development profit increased to $132 million, a 36% year-over-year improvement.

Adjusted development profit margin was 32% in the quarter, improving nearly 250 basis points compared to the prior year driven by lower inventory costs. Profit in our rental business was $24 million in the third quarter, unchanged compared to the prior year as a 17% increase in revenue per available key was offset by greater owner and preview package occupancy, which reduced transient rooms available to rent.

The stickier parts of our vacation ownership business also performed well in the quarter. Profit from our resort management business was $72 million, an increase of 2%, compared to the prior year while financing profit increased 6% to $50 million. As a result, adjusted EBITDA in our vacation ownership segment increased 19% to $255 million in the third quarter and we delivered adjusted EBITDA margin of approximately 33%....

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