Marriott Vacations Worldwide Corp (VAC) 2020 Q1 法說會逐字稿

(technical difficulty)

declined 2% through the end of February, and revenue per member was roughly flat. But with roughly 1,300 of Interval's Exchange resorts either closed or not taking reservations in the short term due to COVID-19, transaction activity was adversely impacted in March, resulting in a decline in average revenue per member. As a result, adjusted EBITDA for the segment was down $13 million in the quarter.

After adjusting for onetime costs, including those related to COVID-19, G&A expense declined $10 million in the quarter, reflecting the continued benefit from our synergy initiatives. We realized $17 million of synergies in the first quarter, bringing our total run-rate savings to roughly $70 million. However, as we talked about in March, we've decided to defer most of our investment spending for the time being. As a result, it may take us a little longer to achieve our $125 million goal, but we remain committed to generating at least this amount of synergies by the time we're done.

So with the first quarter behind us, I want to spend the rest of my time talking about the actions we've taken to manage through the current environment. As I mentioned earlier, our resort management and financing businesses generate a substantial amount of high-margin recurring revenue. These 2 businesses represent nearly 45% of our annual adjusted EBITDA contribution.

Diving in a little deeper, about 36% of our adjusted EBITDA contribution comes from our Management and Exchange Businesses with about 80% of this revenue coming from stickier recurring sources, including the revenue we generate for managing the resorts. And our financing business represents nearly 20% of our adjusted EBITDA contribution, nearly 85% of which comes from notes we originated in prior years.

The remaining 55% of our adjusted EBITDA contribution comes from more transactional and economically sensitive businesses. In order to manage through the current environment and come through the other end in a strong competitive position, we've had to make some very tough decisions. For example, we furloughed 65% of our associates and reduced work weeks for the remainder by 25% on average. We've deferred merit increases, instituted a hiring freeze for all but critical positions and deferred our 2019 401(k) match contributions. We've also eliminated all travel and all site meetings and curtailed all discretionary spending. These were hard choices, but we think we can manage at this level until business starts to return.

On top of these cost-reduction actions, we're also minimizing all CapEx, inventory and integration project spending that will allow us to defer up to $260 million of investments this year, and we are suspending all share repurchase activity and dividend payments for the foreseeable future. As a result of these actions, combined with the revenue and cash flow generated from our management and financing businesses, we believe our monthly cash burn will be roughly $10 million per month for May through December, even if sales and rentals don't resume this year.

Moving to our balance sheet and liquidity. We ended the quarter with $650 million of unrestricted cash and $98 million of gross notes receivable that are eligible for securitization. We increased our warehouse facility to $531 million at the beginning of April to make sure we have enough capacity in case the securitization market isn't available on reasonable terms. At the end of April, we had only used about half the total amount, so we have enough warehouse capacity to support another $375 million of new sales, assuming 50% financing propensity.

We have no corporate debt maturities until September 2022, which is our convertible note, and that's only $230 million. With the credit markets open and rates relatively attractive given the environment, we decided to raise an additional $500 million of senior secured notes, which will take our available liquidity to at least 2021 if occupancies remain at current levels and our sales centers remain closed for an extended period of time.

Our leverage for covenant purposes stood at only 1.3x on March 31 number compared to the 3x first-lien leverage ratio limit in our credit agreement. Depending on the length of the shutdown, we could be above the 3x by the end of the third quarter. As a result, we are pursuing an amendment to our credit facility to suspend this covenant through the first quarter of 2021. So as difficult as the current situation is, we believe we have positioned the business to weather the storm and emerge in a strong position when business starts to rebound.

With that, Steve and I will be happy to answer your questions. Operator?

(Operator Instructions) We have a question from the line of Patrick Scholes.

Busy morning. So I apologize if you did mention these on the -- in your prepared remarks already. You took a large, not -- unsurprisingly, charge on the loan loss provision. Going forward for the rest of the year, what would you expect the trends to be in that loan loss provision percentage?

Sure. So what we did in the quarter, and we thought this was a good point of reference. We went back to the '08/'09 financial crisis. And we looked at, for both our MVW portfolio as well as the Legacy Vistana business, we looked at how those portfolios performed, call it starting in late '08/'09. And what we saw there was, we saw, call it, delinquency rates on average go up roughly 50% from where they were at, at the time for, call it, a 15- to 18-month period, and then they started to come back down to more normalized levels. So we did the same thing. We went to our defaults prior to COVID-19 and the current trends, and then we took those default levels up on the existing portfolio, assuming a 50-ish percent increase for a 15- to 18-month period, and that's how we came up with the $52 million charge that we took in the quarter.

Time will tell, Patrick. Obviously, this is a little bit different, but our business was different back then, too, in terms of -- if you remember, we were chasing sales a little bit at the time to grow the top line. It was a good economic environment, and we've been a lot more disciplined this time. So we've got a strong customer like we've always talked about with average household incomes in terms of where we target of $125,000 or more and generally net worth of in excess of $1 million. So with that said, we'll see higher defaults. But for now, we think that reserve, hopefully, will cover what comes at us down the road.

Okay. Thank you for the detail on that. You cut your -- the next question, you cut your dividend just yesterday where, previously obviously it was maintained. Is that due to changes in your assumptions for macro conditions since you had your update call a month ago? Or was that a requirement to receive the additional lending that you just have taken?

Yes. First of all, Patrick, I think if you go back to the call that we had at the end of March, I don't think we gave any indication that we were going to continue to pay a dividend in the short term. With that said, I'll let John address your question about whether there's an additional covenant or something that require that, which there is not.

Right. No, I mean, Patrick, I think in this environment, and you saw we went out, not that we expect we're going to need the additional $500 million in liquidity. As management of the business, we're making sure we position the company and manage the risk. There's clearly -- unless you've got a good crystal ball, there's clearly a lot of uncertainty going forward. And we felt like, given all those risks and all the other measures we've taken in terms of reducing workweeks, furloughing folks that, while sure, we've got the cash and we could pay the dividend, we didn't think it would be a prudent decision to do that at this point in time until we have a better sense as to when things start to open back up and how the sales start to come back and we have better visibility into that. And then clearly, we'll be able to readdress those decisions going forward.

Okay. One last question. Thoughts on if and when you might be doing your next securitization and what are you hearing, feeling from the securitization market as far as an appetite for an issuance.

Sure. Yes. We're working on our normal term securitization right now, still working through some stuff with the rating agencies in terms of default assumptions, things like that. I think for our portfolio, time is our friend because we'll be able to see how our portfolio performs. And it'll age a little bit here. And I think for us, I expect our portfolio to perform well. That's going to help.

But that being said, as we talked about, we increased our warehouse facility. We just got a couple hundred million dollars of capacity there. As I said in my prepared remarks, that's roughly $375 million of future sales at a 50% financing propensity. We get an 85% advance rate and our all-in cost of funds on that warehouse, which goes through late 2021, is less than 2%. What I can tell you right now, on the term market, we could get slightly better advance rates. But given the market right now, not much better than what we're getting under our warehouse, and the rates are higher.

So given our liquidity position, and the reason we always put the warehouse in place is it gives us optionality. And we don't need to go to the term market and do a securitization until that market has the right borrowing costs and advance rates that we'd be looking for. So we'll continue to be ready, just like we were to go to the bond market here and take advantage of that. But at this point, we're going to see how things play out here over the next month or 2, and we'll go to the market if it comes back a little bit.

Your next question comes from the line of Brandt Montour.

So just I was hoping, Steve or John, you could flesh out a little bit more about what a reopening might look like sort of more on the phased approach? And then if you are potentially going to be able to open some of the more drive to heavy markets in, let's say, early summer, what quarter thereafter do you think you might be seeing tour generation that's comparable?

Okay. Thanks, Brandt. First of all, I guess I feel obliged to remind everyone that only 32% of our resorts are closed. The others remain open, although under fairly substantial restrictions from state and local municipalities in terms of what kind of services can they offer, et cetera. So when we speak of reopening, I'll take it in 2 different phases.

Obviously, for those that are currently opening -- or are currently open, we will continue to ramp up activity. We have not taken new reservations for arrival until, call, the end of May. However, we are honoring all existing owner reservations that are arriving in May. We have canceled all rentals, and we'll begin to take those back up beginning of June and the same thing on our preview guests, which will also begin in June.

I think what you're going to see is, because there is this patchwork of different regulations that are in place, as recently as this morning, I saw that New Jersey, for instance, has now implemented an additional 30-day restriction on travel while there are some other parts of the country, call it, South Carolina, that seem to be much more open to allowing businesses to get back in place.

So in each particular case, what we will do is, as we see demand continue to pick up, we will obviously increase our staffing level at resorts. As you might imagine, with low single-digit occupancies, we've got a largely skeleton staff and those required to keep the facility maintained and looking good. But we'll begin to bring people back into the business. And then following that as occupancy levels at resorts continue to build, when we believe we can operate a sales operation, which is, generally speaking, coresident on the property with our resort, when we can operate that at, at least a cash flow neutral basis, we'll begin to ramp up those sales activities.

So while I'd like to sit here and tell you that on this month or this day that the system-wide, it's going to look like this, I think this is really going to be a wait-and-see approach. I mean I can give you, even here and just looking in Florida, I can tell you that some of our beach locations in Florida, the advanced bookings for those, even into the middle or the end of May, are looking stronger than, say, Central Florida. I would say in Central Florida, here in Orlando, a lot of it will be contingent upon when the various parks and attractions reopen.

So I don't know if that's helpful to you. I can certainly get into more particulars, but I -- hopefully, it gives you a sense of what we're doing.

Yes, that does. And then wanted to follow up on your comments on the virtual tours. Maybe you could kind of tell us how this has affected the original rollout plan for those digital capabilities? And do you expect that virtual tour sales will be meaningful over the next couple of quarters? Or will that actually move the needle for you?

Let me be clear about what we're talking about. We're talking about telesales. This is expanding the number -- we've always had a telesales operation within our company. However, what we've done is we've taken the, call it, the top 150 of our line sales executives, the people that normally take tours at our resorts. We've trained them how to sell over the phone versus selling in person. May not sound like a huge difference, but in fact, it is. And we're in fact, conducting sales with people over the phone.

There's no virtual tour, per se, in place today. And I think what we'll see is a learning that comes out of this that we'll see people that are good at face-to-face tours, some of which will be very good at telesales, honestly, there'll be some that are very good at face-to-face that aren't very good at telesales.

I will say this, our best sales executives have always had a book of business that -- with their existing owner base that they have consistently been in touch with over the years, and so they've always had some form of telesales. In many cases, it's a sales executive fielding a call or talking to an owner or says, "Hey, I'd like to buy some more points." They write the contract and it's all said and done. So I think we'll wait and see just how successful it is. It's very early in the telesales arena.

I can tell you that we're cautiously optimistic about the results that we're getting, but it's certainly too soon to declare victory or not. But we think it's certainly another piece of -- if you try to find any downsides in this horrific kind of set of circumstances that we're in, I think it's kind of causing us to be a little more innovative, even more so than we had originally anticipated. And then telesales may be an even bigger prong of what we think going forward, but it's impossible to predict how big it might be.

We have a question from the line of Jared Shojaian. That question has been withdrawn. We have a question from the line of Brian Dobson.

So I've got a couple of quick questions about owner appetite to return to the resorts following the lift of travel advisories. Could you give us an idea of what your forward bookings look like for the second half of this year in comparison to 2019 levels for existing owners? And in terms of sales to existing owners, what percentage of overall sales do you see that comprising, call it, in the back half of this year and first half of next year in comparison to 2019?

Yes. So if you look at total room nights or keys, depending on the vernacular you want to use, I can tell you that we have 2.018 million keys from July to December of 2020. That contrasts to 2.093 million last year, so down about 3.6%. Of the 2.018 million, owner stays are 78% of that total, and they were 77% of the total in 2019. So doing the arithmetic for you, owner occupancy for the second half of the year is down 1.8%. Previews are actually up, call it, 1%. And transients are down 16%. That's -- I think the transient thing is the most logical, to be fair. I think people will book reservations as they begin to feel more comfortable about travel and the state of our resorts being opened with full facilities, et cetera.

About, call it, 60% to 65% of our sales typically are to owners. I would expect that percentage to actually be a little higher because, as you might imagine, in our telesales activity, even in the time that we are dark in our sales galleries, there's been a lot of focus on owners and giving them what we think is a very attractive offer to add to their portfolio. So it will not surprise me if the owner sales percentage goes up from where we traditionally have it. But obviously, it's -- I can't say that with any degree of assurance, it's just logical, I think.

And remember, Brian, I know you're aware of this, our resorts run, on average, at 90% occupancy. So when Steve compares what's on the books to this year last year, right, we would have ran a 90-ish percent occupancy in the second half of last year. So it's a very high occupancy to begin with, and it's only down slightly.

Yes, that's right. So those existing owner sales are usually done at higher margins than new-to-timeshare sales. Do you expect those higher margins to hold, or are you offering incentives to -- which would generate a somewhat lower margin?

Well, we're certainly offering incentives. We've rolled back the cost per point. And we're providing some additional purchase incentives for people to make a decision now, plus we're incenting cash sales at a little better degree than we are in finance sales, all in an effort to kind of supplement our cash flow.

In terms of -- yes, I mean, typically, an owner purchase carries a lower marketing cost because we've already -- have a relationship with that owner. And so you would think that, all other things being equal, that your margin would improve somewhat because of that.

With that said, you got to factor in they've got a lower price point than they had before. We've got a little higher incentives. So it's difficult to prognosticate exactly what will happen for the balance of the year, but we believe that trying to tap in to that owner vein is certainly the most logical and appropriate thing for us to do now, and we'll see how the numbers come out at the end.

We have a question from the line of Jared.

Can you hear me okay?

We can, yes.

I'm sorry, I've been having technical difficulties since before this call started. So -- and I apologize if you've already covered any of this, but I'm just hoping to understand a little bit more of some of the comments you made on liquidity because you said you have liquidity in a shutdown through at least beyond 2021, I believe. But I think you said you're only burning about $10 million a month through year-end. And at that rate, it would seem that you would have a lot longer than through 2021. So are there some inventory costs or other obligations that are coming up next year? Can you just help me think about that?

Sure. Jared, it's John. Yes, you're right on. When we talked about getting it with all the reductions and furloughs and all that to get it to close to as possible. Those went into effect here at pretty much at the end of April. So when you look at, call it, May through the end of the year, December, our cash burn rate is about roughly $10 million so pretty close to what we thought we could get to when we talked about it back at the end of March when we first started doing all the different initiatives. But if you think about our time to our normal business model working capital outflows, you have significant maintenance fees for the inventory that we own, that we haven't sold yet, that we pay, call it, at the end of the year, beginning early part of the year. Just like owners pay their maintenance fees, right? So that's all the inventory. That generally is, call it, about $150 million or so of maintenance fees typically we'd have to pay. And then the others, which these aren't new. If you go and look at our commitments, we've got the New York asset-light deal, San Francisco as well as Bali and, to a lesser degree, Costa Rica, that's about $140 million in the first quarter next year.

So when you put those 2 items together, first quarter of next year; all else being equal with everything shut down, no rentals, no sales; it's about a $300 million outflow, right? But that's just kind of typical timing. Once you get through the first quarter, you're kind of back to the run rate that we're talking about here. And we have no other significant capital commitments. We've got to work through Waikiki, which we did and announced earlier as an asset-light deal. And we're working with a partner that, that would get built later and develop. That would be, hopefully, inventory we would need to develop and take down for a couple years here, given where we're at. But that's it. We don't have -- as we talked about coming into the year, we needed to get out there and find new development deals. So we don't have a lot of other commitments at this point. And so if you think about it on a full year basis, yes, you're probably looking at, call it, a $30 million burn rate based on the numbers I just talked about, if you normalize for the full year given that big outflow in the first quarter.

Okay. That's really helpful. And then just switching gears, can you tell me how much gross VOI sales declined in April? And I guess the angle here is I'm just trying to figure out how meaningful the telesales are, and you still have many resorts that are still open. So I'm just wondering if you're selling any time shares at those resorts and just trying to understand that dynamic a little bit better.

Yes, Jared. No. All of our sales centers, even in those resorts that are still open, have been closed since the end of March. So yes, there's still some telesales activity that, on a normalized basis, under the kind of -- I'm going call it our traditional telesales program. I don't have that number here in front of me. I will tell you that it's all that material. And we've just spun up the new telesales program here in the beginning of May. So for all intents and purposes, I think you would probably assume that close to 100% decline in VOI sales in April for the business, and that's across the entire business.

Okay. That's helpful. And then just one more quick follow-up for me. Do you know what percentage of your owners are retired and maybe even broken down further between existing owners versus the new owners you're selling to and if there's a meaningful difference for those that have loan balances that are retired?

The answer is no. I don't know what percentage are -- I mean, this is one of those things that we might have sold somebody something 15 years ago when they were gainfully employed and everything else, and they make a decision. They own their inventory 100%. They make a decision to retire. We certainly don't inquire of them whether they're retired or still working. And so I -- it would be nothing more than a swag, and I'm not kind of in that business. So I wish I could tell you, but I can't.

Okay. Understood. I appreciate it. Just the angle of the question was just the idea that I think, if you're retired, you're not obviously dependent on a job, and you have just stable income already coming in. And I would think anyway in this industry, in particular, you would have a lot more retirees and particularly with leisure travel. But all right.

Hey, Jared, I mean, as I talked about earlier, I mean, I think retired is interesting, right? But household income or net worth, some of the other key statistics, our owners tend to trend first-time buyers, 50 years old, plus or minus. So you're talking about people that are -- got the household income if they aren't retired but generally have more net worth than your average consumer given where we target. So once again, just some other data points, like Steve said, knowing whether -- just because somebody is 65 nowadays doesn't mean you retire. So we don't poll people on that but understand your question, but I think some of those other metrics are pretty good in terms of thinking about our owners.

There are no further questions at this time. Mr. Weisz, do you have any closing remarks?

I do. Thank you, Alicia. Thank you, everybody, for joining our call today. We do apologize. We know there have been a few technical challenges along the way. And we -- this is not traditionally how we conduct the call, but we appreciate your patience.

Well, I obviously don't know when this all will end. I hope we've illustrated today that we have a unique business model with substantial recurring revenue and an owner base that has proven in the past its desire to get back to vacationing as quickly as possible. We've taken difficult and necessary steps to protect our great company and have the balance sheet and liquidity to see this through and emerge in a strong position when we do.

Finally, I wish all of you well and encourage you to be safe, take care of each other, take care of yourself. And hopefully, in the not-too-distant future, we all will be able to enjoy our next vacation. Thank you.

This concludes today's conference call. You may now disconnect.