Hyatt Hotels Corp (H) 2014 Q1 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Interval Leisure Group earnings conference call.

Please be advised that this call is being recorded on Wednesday, May 7, 2014.

My name is Latoya and I will be your coordinator for today.

(Operator Instructions)

I would now like to turn the call over to Jennifer Klein, Investor Relations for Interval Leisure Group.

Ma'am, you may begin your conference.

Thank you, Latoya, and good afternoon to everyone on the call.

Welcome to the Interval Leisure Group's first-quarter 2014 earnings conference call.

I want to remind you that on our call today, we will discuss our outlook for future performance.

These forward-looking statements typically are preceded by words such as we expect, we believe, we anticipate, or similar statements.

These forward-looking statements are subject to risks and uncertainties and our actual results can differ materially from the views expressed today.

Some of these risks have been set forth in our first-quarter 2014 press release issued earlier today, and in our 2013 Form 10-K and other periodic reports filed with the SEC.

We will also discuss certain non-GAAP measures.

I refer you to our press release posted on our website at www.IILG.com for all comparable GAAP measures and full reconciliations.

And now, I'd like to turn the call over to Craig Nash, our Chairman, President, and Chief Executive Officer.

Craig?

Thanks, Jennifer, and good afternoon to everyone.

Thank you for joining us for Interval Leisure Group's first-quarter 2014 earnings conference call.

In addition to discussing our financial and operating results, I'm excited to provide further details on the press release we issued this afternoon, announcing our agreement to purchase the Hyatt Residential Group, the vacation ownership business of Hyatt Hotels Corporation, for $190 million.

As part of this purchase, we are acquiring Hyatt's interest in a joint venture that owns and is developing vacation ownership property on Maui, for which we will reimburse Hyatt an additional approximately $35 million.

This amount represents Hyatt's contributions to the joint venture through the anticipated closing.

A key component of this agreement is that ILG has been selected as Hyatt's exclusive master licensee in vacation ownership and we will be taking on the associated assets to support this marquee hospitality name within the shared ownership market.

In return, ILG will pay an ongoing royalty fee to Hyatt.

We are incredibly excited about this transaction as it redefines the role that Interval Leisure Group plays in nontraditional lodging.

ILG has been executing the strategy of diversification for over three years and has generated meaningful expansion for our company.

Momentum from our Management and Rental segment was the foundation for the more than 16% consolidated revenue growth in the first quarter of 2014.

We continue to be pleased with the positive contributions from the various acquisitions in this part of our business.

Since the 2008 crisis, there has been a tremendous amount of consolidation in the shared ownership space.

Part of this market transformation was fueled by bankruptcies, in addition to changes in credit requirements imposed by lenders.

As a result, a small number of well-capitalized participants within the domestic shared ownership business have been fortified.

Today, they function broadly as platforms that provide a combination of sales and marketing, resort management, buyer financing, reservations, exchange, rental, and additional owner services.

Essentially, these larger diversified entities have become vacation system providers, thus blurring the lines between the traditional notions of developers, property management, and exchange companies.

Consequently, we've seen a reduction in sales to new owners, lower inventory levels, and margin compression in our membership and exchange segment.

And this effect was particularly pronounced in the results for the first quarter of 2014.

In order to best serve all of our constituents, while navigating the current external market factors, the team at ILG has expanded the range of business platforms and products to drive consolidated growth and mitigate the impact of disintermediation in the Membership and Exchange segment.

The ILG long-term strategic plan has had two main tactics.

In the Membership and Exchange segment, we leverage our internal expertise at Interval International to introduction Platinum and Club Interval membership products.

Year over year, we continue to see healthy improvements in revenue from these membership levels.

Interval International has long been a technology innovator, since its launch a year ago.

Since our launch a year ago, our app-based sales toolkit for developers has been getting rave reviews.

We just introduced version 2.0 at the annual ARDA Convention in April.

This compelling point-of-sale tool presents a visually engaging, easy to use interface that really helps our clients communicate with their prospects.

This legacy of customer service and quality at Interval International, really a laser focus on consistently and relentlessly doing what we do and doing it exceptionally well, has been one reason that we are able to sign new affiliations and Interval's developer clients continue to renew their long-term agreements.

In the first quarter, Interval added 13 new resorts.

More importantly, Interval International renewed contracts with Diamond Resorts International, Marriott Vacations Worldwide, Starwood Vacation Ownership, and the vacation ownership business of Southern Sun.

Together, these developers account for about two-thirds of Interval's corporate memberships.

Interval is extremely pleased to continue our longstanding relationships by providing quality services to these prominent developers and their owners.

In general, the contracts were signed and negotiated prior to the recession, and it is unusual for affiliations of this size to simultaneously be up for renewal.

While all have signed multiyear agreements, they have different terms and expiration dates.

One thing that has clearly changed is that these negotiations required Interval to reset its economic terms to reflect the current market.

Effectively, there was a magnified impact on the financials for this quarter.

As a result, ILG will likely see a difficult year-over-year comp for this segment through the remainder of 2014.

In Management and Rental, our primary strategic goal was to become a leading provider of resort management services, and we have accomplished this through our various acquisitions over the past few years.

Clearly, we have been diligently focused on broadening, both geographically and in terms of fee for service rental and management services.

Additionally, these acquisitions provide diversification that has added multiple levers that we can pull as an organization, as we continue investing in the business and planning for future growth.

During the first quarter, the Management and Rental segment was the growth engine within our company.

Including VRI Europe and Aqua results, revenue for this segment was up over 88% from last year.

Management fee and rental revenue more than doubled.

Adjusted EBITDA from this segment increased from $6 million for the first quarter of 2013 to $11.8 million in this quarter.

Today, this segment accounts for about 40% of revenue and 23% of adjusted EBITDA, a substantial increase from three years ago.

Now, our acquisition of the Hyatt Residential Group and the exclusive master license agreement furthers this strategy of expanding ILG into a stronger, multifaceted enterprise that is better able to compete in the evolving marketplace as a comprehensive vacation system.

This transaction is an exciting step forward in this long-term plan to strengthen our industry position, add new growth platforms, and increase our fee-for-service revenues.

We've been working long and hard to find the right partner for the next phase of ILG's expansion.

Before I go into more detail about the transaction with Hyatt, Bill is going to give some color on our quarterly numbers.

Bill?

Thank you, Craig, and good afternoon, everyone.

It has been a very busy quarter for our team and I appreciate all of their hard work and long hours.

Now, let me run through the first quarter numbers.

Interval Leisure Group delivered $157 million of consolidated revenue for the first quarter of 2014, representing a 16.4% increase from last year.

Driven by the incremental revenue from VRI Europe and Aqua, ILG is reporting record revenue growth since becoming a public company.

In our Membership and Exchange segment, revenue for the three months was $95.3 million, a decline of 6.6% from the prior year.

Segment revenue included transaction revenue of $56.1 million and membership fee revenue of $31.8 million.

The decline in segment revenue is attributable to the resetting of terms resulting from the contract renewals relating to approximately two-thirds of our corporate members a shift toward more corporate members, which has reduced overall propensity to transact and the corresponding quantity of inventory; a reduction in getaway inventory as a result of developers utilizing alternate distribution channels and, to a lesser degree, the severe weather that impacted the majority of the United States limited inventory in warm weather locations like Orlando and Palm Springs, while it reduced demand for other destinations.

Membership and Exchange segment adjusted EBITDA was $38.5 million, which is down from $45.8 million in the first quarter of 2013.

The reduction in segment revenue, coupled with an increase in non-M&A-related professional fees and employee-related health and welfare expenses, contributed to the overall decline.

Management and Rental segment revenue increased by $28.9 million to $61.7 million, driven by the contributions from VRI Europe and Aqua.

M&R gross margin, excluding pass-throughs, declined to 59.6% from 68%.

This is due in part to the fact that VRI Europe has a slightly different business structure than the other companies within this ILG operating segment.

In the model for VRI Europe, there are no pass-throughs, and as a result, the cost of sales is typically a greater percentage of revenue for this business, while the EBITDA margin is higher when compared to our other management companies.

Combined Aston and Aqua RevPar for the quarter was $141.45.

Aston standalone RevPar was $167.89 compared to $166.39 for the same period in 2013.

The increase in RevPar, when excluding Aqua, can be attributed to a 1.2% improvement in average daily rate compared to 2013.

With the inclusion of Aqua, available room nights have more than doubled from 349,000 to 736,000.

Segment adjusted EBITDA was 97.6% better than the prior year, reflecting the inclusion of VRI Europe and Aqua.

Consolidated gross profit was $93.2 million versus $88.5 million in Q1 of 2013.

Gross margin, excluding pass-throughs, declined from 74% to 70.6% due to the increased contribution from the M&R segment.

In the first quarter, net income attributable to common stockholders was $23.7 million, a decline of 5.2% from 2013, reflecting the decline in M&E revenue that I already mentioned, as well as increased expenses associated with new contract economics.

Amortization of intangibles expense in the first quarter increased by $1 million from the same period last year, primarily due to our recent acquisitions.

Diluted earnings per share were $0.41 compared to $0.44 last year.

Incremental M&A-related expenses cost us over $0.01 of EPS for the quarter.

Consolidated adjusted EBITDA was $50.3 million for the first quarter, a decline of 2.9% from the same period last year.

The decline stemmed from lower M&E revenue and increased expenses.

ILG's effective tax rate for the quarter was 36.7% versus 38.6% last year.

The tax rate was lower primarily due to a shift in the earned income estimates between various countries.

Looking at the balance sheet, as of March 31 the Company had $64.9 million of cash and cash equivalents, of which $48.3 million was held by our foreign subsidiaries.

Due to typical seasonality associated with our Interval business, accounts receivable increased to $58.4 million from $39.8 million at the close of 2013.

This primarily reflects billings for corporate memberships that are predominantly invoiced in the first quarter for the full year.

Net cash provided by operating activities was $34.1 million for the first three months of 2014.

Free cash flow was $31 million versus $44.4 million from the same period last year.

The change in free cash flow was primarily due to prepayments made in connection with long-term agreements.

ILG's capital expenditures, which are primarily related to internal technology investments, were 2% of total revenue.

ILG paid $6.3 million, or $0.11 per share, in dividends for the first quarter.

The Board of Directors has declared an $0.11 per share dividend that will be paid on June 18 to shareholders of record on June 4, 2014.

As you think about our balance sheet for the second quarter, please keep in mind that on April 8, we increased our revolving credit facility from $500 million to $600 million, which provides us with additional flexibility, relaxes the covenants, and extends the maturity by almost two years.

Now, I'll turn the call back over to Craig.

Thanks, Bill.

I'm incredibly proud of everything that our dedicated teams have accomplished.

We are serving nearly two million exchange members, helping our developer clients engage new buyers, integrating multiple acquisitions in our Management and Rental segment, and striking important agreements that will create new opportunities for growth.

ILG has seen the top- and bottom-line benefits of the acquisitions in the Management and Rental segment.

We believe that there will be future opportunities to leverage economies of scale as the integration of these entities continue to progress.

It is an exciting time to be part of shared ownership.

The industry is seeing an increase in sales volume, the return of financing, and a focus on the next generation of timeshare buyers.

But as I said earlier, we are also seeing developers who are operating as self-contained vacation systems that increasingly compete with independent exchange providers.

The nature of timeshare has been evolving to meet the demands of a larger, more diverse market of potential consumers.

Part of the shifting dynamic is that the concept of an exchange is also changing to include the flexibility demanded by consumers who like to travel when, where, and for as long as they want to, on their own terms.

Exchange can be among a global network of thousands of resorts or within a closed club system.

Interval International continues to provide all of our developer clients, branded and independent alike, with industry leading services and products that enrich the shared ownership value proposition.

At this year's ARDA Conference, our mobile technology team was recognized with the top award as the leading industry technology manager, while Interval received the prestigious Circle of Excellence Innovator Industry Partner Award for its Interval Exchange Tracker Tool.

ARDA's annual ACE Awards acknowledge excellence in vacation ownership and others who have demonstrated the commitment to the betterment of the industry as a whole.

The entire Interval International team should be applauded for their dedication to their clients and members.

Now, with the acquisition of Hyatt Residential Group and the exclusive master license agreement with Hyatt, ILG will reframe its role in the shared ownership market.

Just to provide some additional color on what we are acquiring, let me give you a brief description of the Hyatt Residential Group.

HRG markets and manages high-end vacation ownership resorts and includes the Hyatt Residence Club, which provides points-based exchange benefits and reservation servicing to approximately 30,000 owners.

These owners are already members of Interval International's Vacation Exchange Network, so they are familiar with our offerings.

The club's destination portfolio includes 16 upscale vacation ownership properties across North America, including in Arizona, in California, Colorado, Florida, Hawaii, Nevada, Puerto Rico, and Texas.

Included in the 16 properties is an exciting joint venture with Host Hotels and Resorts, a leading owner of luxury resorts, to complete 131-unit project located on Kaanapali Beach in Maui.

This project will add a world-class property to the Hyatt Residence Club in one of the most desirable vacation destinations.

After the transaction closes, we will take over the entire HRG business, which includes the Hyatt Residence Club, as well as sales, marketing, and management of its existing vacation ownership properties and future development.

As a part of the acquisition, we will enter into an exclusive master license agreement with Hyatt with respect to shared ownership.

Hyatt is a premier company in the leisure and lodging sector and we are confident in our ability to be thoughtful stewards of this storied brand.

The business unit will retain the Hyatt name in vacation ownership, and operate independently of our exchange network, Interval International.

While ILG is proud to further diversify its interests in nontraditional lodging, Interval International will continue to provide quality services in the same fashion that it always has to its members, as well as top-tiered branded and independent developers around the world.

Not only are we bringing a stellar brand into the ILG portfolio, but we are pleased that the highly qualified leadership team from HRG will continue operating the business under ILG's ownership.

The Hyatt Residential Group team brings extensive knowledge and experience in shared ownership, so we are confident these executives will help execute our plans.

The addition of HRG should immediately increase existing business line revenues and add a new platform for growth through the inclusion of a vacation ownership sales and marketing infrastructure.

We intend to invest in and grow the HR business through the completion of the Maui project, enhanced marketing efforts, expanding some existing projects, and exploring opportunities to broaden the group's footprint.

This transaction should bring sustainable value to our shareholders.

In addition to creating a strategic long-term platform for growth, we expect the acquisition, including Maui, to generate between $20 million and $25 million of adjusted EBITDA during 2015 based on current estimates.

In addition, we anticipate approximately $15 million to $20 million in net present value of expected future cash savings attributable to a section 338(h)(10) tax election.

We plan to pay for this acquisition with cash on hand, as well as drawing on our credit facility, which we recently increased to $600 million.

Post-closing, our balance sheet will remain strong and we expect to maintain a comfortable leverage ratio.

The deal is subject to customary closing conditions and is anticipated to close later in the year.

This meaningful acquisition leverages ILG's comprehensive existing expertise, adds complementary skills and capabilities and introduces an internationally recognized consumer brand, which all in combination creates a powerful new platform for future growth that we are very excited about.

I want to thank you all for your time and participation on our call.

Operator, please open the call for questions.

(Operator Instructions) And the first question is from Steven Kent of Goldman Sachs.

Your line is open.

Good afternoon.

This is Anto Savarirajan on for Steve Kent.

Firstly, with regard to the Hyatt transaction, can you give us some details on what this means on a trailing basis in terms of multiples?

And does the timeshare business that you're getting into involve you selling on a pure fee basis or will you also be able to partake in financing of timeshare receivables?

We're not going to get into too much detail on this, and we'll be able to give more color regarding this transaction after the close later this year.

Understood.

My next question --

One of the things, though -- we don't disclose multiples.

But we gave color as it relates to 2015 anticipated EBITDA contribution based on the estimates we have right now, which would be between $20 million and $25 million.

Understood.

Okay.

You note that the reduced profitability in connection with the contract renewals, and it also looks like you renewed two-thirds of your corporate members.

How should we think about how the remainder of the one-third gets renewed in upcoming quarters and what that could mean in terms of margins for that segment?

We've been renewing contracts all along.

This just happens to be a quarter, unusual quarter, where we had four large corporate renewals at the same time.

And I think it won't have the same kind of impact you're seeing now.

Okay.

Okay.

The Management Rental margins, you did note the effect of VRI on reported margins.

Is the current quarter run rate a good enough number to use for a full-year basis?

How should we think there?

And was there anything different from a seasonality perspective in the first quarter that impacted those margins?

We don't give guidance, but in terms of that business, it is a full quarter.

Okay.

Thank you.

Thank you.

Thank you.

And the next question is from Patrick Scholes of SunTrust.

Your line is open.

Hi.

Good evening.

Several questions here for you.

On the expected $20 million to $25 million of EBITDA from the acquisition, is that just the acquisition that is costing $190 million or should we add to that income from the project in Maui?

I think you should look at the entire transaction.

Okay.

Then on the $35 million that you'll be paying for the project in Maui, will there be additional construction costs above and beyond that?

There could be up to another $10 million, more or less, depending on when the transaction closes.

Okay.

And another question here.

On Wyndham's conference call their RCI segment noted that the weather definitely hurt their results.

Can you attribute any of the weakness in the first quarter to weather?

We said that we think that there was an impact, less inventory in the high demand destinations, and less bookings in areas where we had a lot of inventory.

But we don't think that was the main driver.

Okay, and one last question here for now.

For this deal, how long was that in the works for?

Quite some time.

Okay.

More than a year?

More or less.

More or less.

Okay.

Thank you, I might come back with more questions.

Thank you.

Thank you.

And the next question is from Steve Altebrando of Sidoti and Company.

Your line is open.

Good afternoon.

Is it possible to get a sense of the $20 million to $25 million EBITDA range, how much of that is coming from the Maui sales?

We're not in a position to be able to give any further color on that.

I think that we'll be able to talk more about the components of that transaction after we close.

Okay.

Were you able to speak to any customers or affiliates about the potential to steal -- I mean you're now going to be in some ways competing with some of your customers.

If you can give a sense of any feedback you'd been able to get, if any, before this deal?

No, haven't spoken to anybody.

But Interval International is going to be operated independently, provides great service to developers, and will be run the same way as it always has been, independently of any of our other businesses.

Okay.

And then in terms of the inventory, I guess, Hyatt Residential inventory, is it substantial?

There are some other developers that have multi-years of inventory.

Is that the case for them?

Yes, there is unsold inventory and there is more land and permits to be able to build at a couple of other -- a couple of the properties.

Would you characterize it as meaningful, two plus years, five years?

Based on their current run rate.

without building, about four years.

Four years.

Okay.

That's helpful.

And then is there any duplicate cost opportunities in this, or being that it's a new business, not really the case?

Well, way too early to discuss any of that.

Once the transaction is closed, we'll figure out what kind of synergies there are.

Okay, and then -- and last one for now.

You mentioned the $15 million to $20 million in tax savings.

Is that kind of like a one time, $15 million to $20 million, one-time maybe over five, ten years or so?

Is that correct?

It is one time and it is over the life, which is a 15-year period, so the NPV.

Okay.

Thank you.

Thank you.

And the next question is from Nikhil Bhalla of FBR.

Your line is open.

Yes, hi.

Thank you.

Congratulations on the transaction here.

Just a question on what you intend to do with the JV eventually.

I mean, is this -- and also wanted to kind of get a sense of what your stake is versus [hosts] in the transaction.

Well, our intent is to fulfill the obligations of the joint venture, build the project, and sell it out.

In terms of the breakout of the joint venture, we'll talk more about that after the transaction closes.

Okay.

And then you also say in the release about investing in the JV as well as the recent acquisition.

Could you expand on that a little bit?

Is this more about just the $35 million that you talk about in release?

Or is there some additional investment in the new acquisition that you're thinking of or long-term?

There's another $10 million that will go into Maui.

And as it relates to other properties, at the right time we'd want to build out units at existing properties where there's room to build.

And clearly, we'd look for other opportunities.

Okay.

In terms of this ownership of real estate here, so obviously JV is one of them where you have the share.

Could you just give us some more sense of in terms of what you end up owning in terms of real estate after this transaction closes?

As we said, there's about four years left of inventory to sell.

I think we'll be in a much better position to talk about that after the transaction closes.

But there are a number of assets that come along with this deal.

There's a portfolio of receivables.

There's timeshare inventory.

There's management contracts.

There's the club itself and there's raw land and the physical plant associated with the resorts.

Okay.

Thank you.

That's all I have.

(Operator Instructions) And the next question is from Adam Hamill of Gates Capital Management.

Your line is open.

It's actually Jeff.

I know you said you could be up to $10 million beyond the $35 million on the joint venture, but is that just what could happen by the time you close or is that the total amount to complete the project?

And when do you expect the project to be finished?

The $35 million is an estimate based on a target closing date and the $10 million would be the additional amount required to finish it.

And when would it expect to be finished?

We expect it to be the fourth quarter.

So you expect the project to be finished by the fourth quarter?

So that inventory will be sold all through basically 2015, 2016, 2017, and 2018?

Is that what you're saying?

Depending on their sales target and how fast they can sell it out, that's a likely scenario.

Sounds right.

Okay, then.

I guess the other question is strategically, would you be looking to buy more vacation ownership properties that are not finished?

Or is this kind of a one-off -- ?

We look at this transaction as another platform in which we can grow overall ILG business.

We clearly are going to look for opportunities to do more joint ventures.

One of the things that's special about this particular Hyatt timeshare group is they've done deals that are joint ventures and many of their structures are fee for service.

A big part is the club and the management revenues, revenue streams.

And we would look to try and enhance the fee for service and these capital-light structures moving forward.

Not to say that we wouldn't look for some unique opportunities where we can deploy more capital on high-return projects.

The other question I have is on the core [integral] EBITDA, it's -- your first quarter is typically the strongest, I think, because of transaction revenue.

Correct?

Yes.

Okay.

So this year it was down $6 million or $7 million year over year.

If we would take -- if we would look at 2013 and put the new agreements you have with the developers on two-thirds -- on the corporate side that you signed, how much lower would the operating income have been in 2013?

Yes, we can't break that out.

I'm sorry -- we can only provide what we've provided.

Okay, thank you.

Thank you.

And the next question is from Patrick Scholes of SunTrust.

Your line is open.

Just a quick follow-up question here.

When I read the press release for the Hyatt acquisition, it brings to mind what occurred with Marriott Vacations and Marriott International.

Is it wrong to assume that this type of licensing agreement would be similar in nature to what occurred with Marriott and Marriott Vacations?

There are many similarities and some differences.

The royalty streams are based on different -- a different construct, but it is a long-term master license.

Okay.

And the employee -- those currently employed by Hyatt Residential, they, I assume, become Interval employees at this point?

Well, they'll come over, yes.

They won't be employed by Hyatt.

They'll become ILG or whatever entity it is that is the acquiring entity.

Okay.

All right.

That's it.

Thank you.

Thank you, Patrick.

Thank you.

And the next question comes from Steve Altebrando of Sidoti and Company.

Your line is open.

Hi, just a couple follow-ups.

Could you give a sense of the revenue mix of Hyatt, or perhaps if it's comparable to some other public peers?

This is an area that we really would rather get into once the transaction is closed.

Okay.

And is Hyatt historically, are they active in the securitization side?

Not really.

No, their business has been relatively small compared to some of the other developers.

But I'm sure that we'll be looking at those sorts of financing structures in the future.

Okay, thank you.

Thank you.

Thank you.

And I show no further questions in the queue at this time.

I'll turn the call back over for closing remarks.

Well, I thank you all for your questions and your interest in ILG.

We clearly have some exciting times ahead as we continue to execute and deliver shareholder value.

I look forward to speaking with you in the near future.

Have a great evening.

Thank you.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.

Good day.