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Executives

Jennifer Klein Trager

Craig M. Nash - Chairman, Chief Executive Officer, President and Member of Executive Committee

William L. Harvey - Chief Financial Officer and Executive Vice President

Analysts

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Stephen Altebrando - Sidoti & Company, LLC

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Interval Leisure Group (IILG) Q2 2013 Earnings Call August 7, 2013 4:30 PM ET

Operator

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, August 7, 2013. [Operator Instructions] I would now like to turn the call over to Ms. Jennifer Klein, Investor Relations for Interval Leisure Group. Ma'am, you may begin your conference.

Jennifer Klein Trager

Thank you, operator, and good afternoon to everyone on the call. Welcome to the Interval Leisure Group's Second Quarter 2013 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 second quarter 2013 press release issued earlier today and in our 2012 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 reconciliation.

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

Craig M. Nash

Thanks, Jennifer, and hello, everyone. Thank you for joining us this afternoon. Interval Leisure Group was very busy during the first half of 2013, exploring options to expand our business and use our strong balance sheet to participate in strategic opportunities. We are pleased to be able to discuss the latest initiative, before mention of VRI Europe, the joint venture management company with the CLC World. As I'm sure you saw in our press release on Monday. ILG will have a 75.5% ownership stake in the new entity, which will manage 21 resorts with more than 1,500 units in the U.K., Spain, France and Portugal.

This joint venture provides a meaningful opportunity to collaborate with one of Europe's most successful resort developers, while we continue to expand our footprint in the shared ownership management space. We expect this deal to close in the fourth quarter.

Now, let's turn to the second quarter financials. ILG GAAP results, which Bill will discuss in more detail, reflect the onetime immaterial out of period correction that positively impacted the revenue for the quarter. Excluding this item, ILG revenue grew by about 2% from the second quarter of 2012. However, gross profit improved by nearly 3%. Net income went from $10.1 million a year ago, to $18.5 million this quarter, with earnings per share up 78%. And adjusted EBITDA was up by 2.4%. While our overall membership count is down from last year, the number of Club Interval enrollments have increased by 50% and Platinum memberships are up by 45%.

Interval affiliated 14 resorts during the quarter. This includes an agreement with Global Access Exchange, the owner and operator of Holiday Inn club, for the multi-year affiliation of Colonial Crossings resort in Williamsburg, Virginia. This developer recently acquired the 120-unit resort and plans to add it to the Holiday Inn Club vacations brand early next year. Interval looks forward to providing its quality benefits and services to existing and new owners.

And Aston added Hotel Renew in Waikiki to its portfolio. Additionally, in the Management and Rental segment, management fee and rental revenue, which excludes pass-throughs, improved by more than 4% for the quarter. And without the incremental professional fees that are attributable to both the VRI Europe joint venture and Aston IT projects, segment adjusted EBITDA would have been up 5.4%.

At Aston, RevPAR continue to improve. According to the Hawaii Tourism Authority, visitor arrivals by air to Hawaii increased 4.1% from the second quarter of 2012. The increase in visitors correlates with an overall increase of 9.5% in revenue for available room at our Hawaii properties.

On the technology front, Aston successfully completed the installation of a new property management system that should improve efficiencies across its portfolio of properties. Additionally, the Aston brands of operating systems, such as DVDNow, that are expected to enhance guest experiences and drive incremental revenue per state. As you can see, ILG had a busy quarter as our team continue to focus on our organic and strategic growth initiatives.

With that, I'll pass the call to Bill, and he will give a more comprehensive review of the financials. Following Bill's remarks, I will return to provide some closing comments. Bill?

William L. Harvey

Thank you, Craig, and hello to everyone. I hope that you have a copy of the press release with our results for the second quarter. I think the details on the numbers will provide a bit of color around key items. Interval Leisure Group results for the second quarter of 2013, including $4.1 million of revenue and $600,000 of certain membership expenses from the Membership and Exchange segment, reflecting an immaterial noncash net understatement for the period commencing January 1, 2011 through March 31, 2013. Excluding these items, second quarter 2013 revenue was $120.9 million, an increase of about 2%. The prior period items are included in the GAAP numbers in the press release and for purposes of this call, I will be speaking to the non-GAAP figures, which exclude these items in order to provide clarity with regarding the operating results for the quarter versus the prior year. We had top line growth in both segments of just under 2%.

Membership and Exchange segment non-GAAP revenue for 3 months was $91.5 million, and included transaction revenue of $50.2 million and membership fee revenue of $32.8 million (sic) [ $36.8 million ]. Transaction revenue improved by 2.2% and membership fee revenue was essentially flat.

Membership and Exchange segment adjusted EBITDA was $36.1 million in the second quarter, up 4.3% from the prior year period. The Management and Rental segment reported a revenue of $29.5 million. Management fee and Rental revenue improved by 4.1%. Aston RevPAR per quarter was $129.17 compared to $117.49, up 9.9%, driven by an increase in ADR. Overall segment adjusted EBITDA declined due to higher professional fees.

Consolidated non-GAAP gross profit was $77.6 million (sic) [ $81.6 million ] versus $75.4 million in Q2 of 2012. Gross margin improved slightly. On the expense side, ILG had $1.3 million of incremental professional fees in the quarter, primarily related to IT initiatives and M&A activity in the Management and Rental segment.

In the second quarter, non-GAAP net income was $18.5 million versus $10.1 million in the same period of 2012. Net income benefited primarily from the retirement of our bonds in September 2012 and lower amortization of intangibles. Non-GAAP diluted earnings per share were $0.32 compared to $0.18. GAAP EPS for the quarter was $0.36 per share.

Consolidated adjusted EBITDA was up 2.4%, mostly due to better transaction revenue at Interval International. As of June 30, the company had $109 million of cash and cash equivalents. This includes $92.4 million held by our foreign subsidiaries, which will be substantially utilized for the VRI Europe transaction.

The joint venture will be funded with cash from ILG and will purchase the European shared ownership management business of CLC for approximately $85.6 million and issuance to CLC of 24.5% of the common stock of VRI Europe. Net cash provided by operating activities was $61.3 million for the first 6 months of 2013. And free cash flow was $54.7 million. At the end of the quarter, ILG had $215 million in debt outstanding, and we had $285 million available on our revolver. This credit facility may be increased by up to an additional $200 million.

For the first 6 months of 2013, ILG paid $6.3 million in dividends to shareholders, which reflects a single payment since the first quarter dividend was accelerated to the fourth quarter of 2012. The third quarter dividend payment of $0.11 per share will be paid on September 18, 2013 to shareholders of record as of September 4.

With that, I'll turn the call back to Craig for his closing remarks. Craig?

Craig M. Nash

Thanks, Bill. Looking at the first month of the third quarter, Interval International transaction revenue is up slightly from last year in part due to a price increase of $10 per U.S. exchange that was implemented on July 1. Aston preliminary RevPAR for July was up 9%. Both segments continue to concentrate on business development opportunities. Aston has just added its first management contract in the Eastern U.S. with the addition of the Tuscana Resort Orlando. This destination is close to all of the area attractions and is comprised of spacious 2- and 3-bedroom condominiums. Interval International through various conference sponsorships has continued its role in educating potential new entrants and existing developers about future trends, resort financing, sales, marketing and shared ownership operations. We are looking forward to Interval's annual U.S. Shared Ownership Investment Conference, which draws about 500 participants and will be held in Miami Beach on October 28 and 29.

As we approach the fifth anniversary as a public company, I believe that Interval Leisure Group has done an impressive job of operating with stability and consistency, while successfully weathering the worst of the recession when it was spun out of IAC in 2008. I am very proud of the hard work and dedication from our team over the past 5 years.

Today, ILG is a stronger, more diverse business with a well-established leadership role and a flexible capital structure. While many parts of our industry have transformed over the past few years, several things remain true. People love to vacation. The hospitality industry is always evolving and our strategy has not changed. We intend to continue investing in our core businesses, execute on the delivery of organic initiatives and deploy capital to expand our presence, primarily in the nontraditional lodging space. We look forward to closing the VRI Europe transaction and we'll continue to pursue opportunities that further our goal of being a multifaceted industry leader.

With that, I'd like the operator to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Patrick Scholes from SunTrust.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

I have a couple of questions here, a little bit of a laundry list. And I know this question has probably been asked many times in the past, but I'm just curious if you can you give us any sense of color on what type of return on invested capital you would look for when you gain such an acquisition? Or historically, how have your other acquisitions such as VRI performed in relation to return on invested capital?

William L. Harvey

I think I forgot. I guess, I'll take a shot at it. As you know, there are many indicators for measuring a company's success. As we said, we focus on highly strategic transactions that are generally immediate or short-term EBITDA accretive. This particular transaction it's steeper surface, it's an asset-like business. It's utilizing our tax trapped cash and it's located in a lower tax jurisdictions. So it really meets all of our criteria and then some for what we've been looking for.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. I guess, I will go with that for now. Can you give a little more color. How did this acquisition come about? And how long roughly has it been in the works?

Craig M. Nash

Well, it's probably been in the works for about a year. This is Craig. I have known Roy Peires for many years and after several months of discussion, we got an alignment of interest in creating a joint venture management business in Europe. It fulfills our strategy of expanding our footprint in this business, something that we know. Clearly, we don't know the European market, and that's why having a partner like CLC is so important.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Any color you can give on, perhaps the motivation for the seller to cash out? Partially?

Craig M. Nash

I think the motivations are the same for both of us. It's to join forces and grow our businesses together. Take the expertise that each have and the resources that each have, and grow the business.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Two more questions. One, you discussed in the press release here, there were some charges for professional fees. Are those going to be different than when I look at the adjusted EBITDA reconciliation for the other non-operating income expenses? I know those others are typically the foreign exchange. But is that $1.48 million going to include any of those professional fees? And if not, what were those fees that reduced the segment EBITDA?

William L. Harvey

All right. The $1.4 million, if I got your question, $1.4 million, the answer is no. And what reduced the EBITDA is predominantly M&A transaction fees.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. But can you give us a rough break out of what those M&A transaction fees were? A lot of companies I cover will give like an adjusted EBITDA number where they back it out, may not like to be able to do the same.

William L. Harvey

We did not do any adjustment number. But in Craig's portion of the script, he mentioned it was -- well, EBITDA would have been off. I mean, you can back into the numbers, but it's for the M&A piece and for Aston IT projects.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay, all right. I'll go back and look at that. And then lastly here, I've noticed that your CapEx has been tracking this year about 2.5% of revenues, historically it's been closer to 4%. A little bit of color on why the difference of late?

William L. Harvey

I think the part of it is we've been growing a little bit. So the top line is growing faster than our need to invest capital. The dollars...

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

A good thing, usually.

William L. Harvey

But the dollars are down slightly, I believe, it's flat to slightly down in terms of raw dollars. So the percentage of the totals is what is really shrinking.

Operator

And your next question comes from the line of Steve Altebrando from Sidoti.

Stephen Altebrando - Sidoti & Company, LLC

Can you speak to what is driving the transaction revenue despite the decline in numbers whether it be pricing or volume?

Craig M. Nash

Sure. We did have a price increase in the transaction. July 1, it was rolled out -- [indiscernible] more important transactions.

William L. Harvey

Pricing earlier.

Craig M. Nash

We had a price increase last year that's driving some of the numbers. For going forward, we've got another price increase for July 1, which should be helpful too. But I think it's a function of transaction price that's driving it, and the fee increase was part of it. And we've also had an increase in, if you will, in the prices of getaway space.

Stephen Altebrando - Sidoti & Company, LLC

Okay. In terms of the new JV, should we view it in terms of the economics of the business? The margin profile similar to what VRI is?

Craig M. Nash

That transaction hasn't closed yet. And we'd like to try to reduce the number of answers that we have until we've closed. But suffice to say that it fits the profile of the types of transactions that we are targeting.

Stephen Altebrando - Sidoti & Company, LLC

Would you view any synergies with this new deal? And I know in particular, you were, I think, looking for an improved platform for the VRI U.S., if you think you've obtained that with this deal?

Craig M. Nash

No. This is a European joint venture. And it does answer the question of inventory being able to be sold out of those properties, and that's why having a partner that's well situated to do that fit our model.

Stephen Altebrando - Sidoti & Company, LLC

But in terms of the IT platform, anything you're gaining with this that's helpful for VRI U.S.?

Craig M. Nash

No. There is no cross usage there with VRI in the states. It's been run totally separately.

Stephen Altebrando - Sidoti & Company, LLC

Okay. And just last question. The professional fees, was that all for CLC? Or is there anything else, any other M&A expenses?

Craig M. Nash

There are no other M&A expenses that are significant. But we do have the IT projects we discussed. Because the rollout -- the last piece of the rollout of the Aston property management systems, that was the piece that came in the quarter.

Stephen Altebrando - Sidoti & Company, LLC

Okay. Actually, one more if I could. If you're still interested in more M&A or you're looking to digest this one first?

Craig M. Nash

We are -- I think, we've said on in the last few calls that the pipeline is pretty healthy. And we continue to look at strategic EBITDA accretive transactions that will expand our footprint internationally.

Operator

[Operator Instructions] And your next question comes from the line of Nikhil Bhalla from FBR.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Craig, just a question on the tax thing that you mentioned associated with CLC, given that it's in a low tax jurisdiction. Is there any way to estimate what that might do to your tax rate going forward? How much would it come down by?

Craig M. Nash

I can't tell you how much it will come down by but the majority of that is going to be at the U.K. rates. A large chunk of it, any tax for us, which as you know, I think in the low 20s now compared to the states.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Got it. So in the low 20% for U.K., right?

Craig M. Nash

Correct.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Just along the same lines. From CLC, so in addition to just the management fees, what might be some other opportunities? I understand that they're in active sales at the moment. Would it be possible to add some of the members into your network? And just some additional opportunities that this acquisition may present?

Craig M. Nash

Well, CLC and Interval International entered into an affiliation agreement last year. So all new sales are being enrolled in Interval already. This really is a management platform that we help to grow over time. And it's pretty much separate from the Interval International relationship.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Okay, okay. And just on revenue per member growth, it was pretty strong growth this particular quarter, I mean, should we think with your recent rate increase you just talk about, that could be a run rate for the third and the fourth quarter? I know you don't give guidance, but just it was so strong. We just want to get a sense of whether we should think of the same magnitude of growth maybe for the next couple of quarters, at least or...

Craig M. Nash

Yes. I want to make sure that you do pick up the footnote, that's excluding the prior period adjustment item.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Sure.

Craig M. Nash

So it's -- there's a little bit of growth.

Operator

We have no further questions at this time. I would now like to turn the call back over to Mr. Nash for closing remarks.

Craig M. Nash

I want to thank you, all, for your interest in Interval Leisure Group and participation on today's call. We look forward to speaking with you again in the future. Operator, you may end the call.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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