Interval Leisure Group's (IILG) CEO Craig Nash on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Interval Leisure (IILG)

Interval Leisure Group, Inc. (NASDAQ:IILG)

Q2 2014 Earnings Conference Call

August 5, 2014 04:30 PM ET

Executives

Jennifer Klein Trager - IR

Craig Nash - President and CEO

Bill Harvey - EVP and CFO

Analysts

Patrick Scholes - SunTrust

Nikhil Bhalla - FBR

Steven Kent - Goldman Sachs

Steve Altebrando - Sidoti

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 August 5, 2014. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (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, Frances, and good afternoon to everyone on the call. Welcome to the Interval Leisure Group’s Second 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 second 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 Web site 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 Nash

Thanks, Jennifer, and hello everyone. Thank you for joining us this afternoon. ILG’s ongoing initiatives to broaden its business by expanding into adjacent non-traditional lodging markets that complement our existing offerings, helped drive record second quarter revenue of $143.5 million. Across the board, ILG is laser focused on building the foundation of our future growth. One of our major priorities is the integration of recently acquired businesses. Simultaneously we continue to identify areas of organic opportunity for Interval international such as Club Interval, Platinum Membership and E Plus. And to support both of these goals, we continue to invest in and expand our technology infrastructure.

During the second quarter ILG experienced strong revenue and adjusted EBITDA growth that was driven by the contribution from our strategic and accretive acquisitions as well as organic growth in the management and rental segment. The existing shared ownership, resort management businesses experienced 69% organic adjusted EBITDA growth year-over-year, mainly from cost savings related to integration as well as increased revenue. Earlier in the year, we consolidated the operations of VRI and TPI under a restructured management team that is headed by an industry leader with more than three decades of experience. More recently, we were able to cost effectively combine the headquarters of these businesses into one location.

We have assessed and are exiting a number of unprofitable contracts. The next step will be to capture certain opportunities that we see emerging in the next year that should help us provide a broader set of services to the HOAs at our managed properties.

A number of initiatives are in process across the management and rental segment. The combination of Aston and Aqua has involved integrating the management teams as well as analyzing how this business can benefit from new economies of scale.

The team is in the early stages of rolling out stronger brand differentiation for the managed portfolio. We envision Aqua as young, urban and hip while Monogram is the unique upscale boutique product and Light will target the budget traveler. Aston will fill the family niche.

As part of this we have begun the development and implementation of much more robust and clearly defined brand standards for the Aston brand. Additionally since the announcement that we are acquiring Hyatt's shared ownership business, ILG has devoted considerable efforts to activities and preparation of our expected fourth quarter close of this transaction.

For example, we are ramping up technology and other resources to help ensure a smooth transition, so that we can hit the ground running once the deal is completed. Our membership and exchange segment results for the quarter reflect the impact of market dynamics that we discussed on our first quarter earnings call. While transactions were softer year-over-year, we are benefiting from increases in new services such as E Plus, a $49 upgrade to Exchange that provides increased booking flexibility. Member count is roughly flat with the prior year but we are seeing consistent increases in the number of new club interval and platinum memberships which grew by over 17% each for the first half of 2014. Overall, new members entering the system increased by over 10%.

During the second quarter Interval International affiliated 24 resorts. This included an expanded relationship with Breckenridge Grand Vacations, a leading independent developer with four locations in a high demand destination. A client since 1985, this top tier luxury operator renewed their existing affiliation and has added their newest resort, Colorado Grand to the Interval network. The Latin American market remains a good opportunity for Interval international growth. Since the majority of affiliations in the region are done with traditional membership economics, these affiliations typically generate a higher yield per member.

During the second quarter, we affiliated a regional Brazilian hotel chain that is a new entrant to the vacation club market and it is encouraging to see more international developers embrace the shared ownership model. The membership and transaction components of the exchange business were primarily affected by the external trends that have been shaping the shared ownership landscape. The Exchange product is evolving in a more diverse, flexible and increasingly competitive market.

Having said that Interval International remains an important part of the overall value proposition, providing members with access to a network of approximately 2900 branded and independent resorts. However, coopetition is often the norm. Larger branded developers have created clubs that offer loyalty program access that includes inventory from hotels, as well as shared ownership resorts. These systems are providing more exchange options to members. The changes to our industry are not a surprise, we’ve been taking action over the past four years to broaden the role that ILG plays in non-traditional lodging. Before I describe some of the details around our strategic plan for the company, Bill’s going to walk you through the second quarter financial results. Bill.

Bill 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’ll give the details on the numbers and provide bit of color around key items. Before I run through the P&L I want to point out that we have presented non-GAAP figures such as adjusted EBITDA, adjusted net income and adjusted earnings per share to help investors understand the operating results by excluding items that we believe to be noncore.

Interval Leisure Group GAAP results for the second quarter of 2014 reflect about a $1 million in after-tax expenses tied to M&A activities, restructuring and non-operating currency translations. Please refer to the reconciliations presented in the press release for more details. Consolidated revenue for the second quarter of 2014 was $143.5 million. When comparing revenue to the prior year period please keep in mind that last year ILG reported second quarter revenues included $4.1 million related to an out period item.

On an apples to apples basis excluding this item, revenue increased by 18.7%. Membership exchange segment revenue for the three months was $86.9 million and included transaction revenue of $47.3 million and membership fee revenue of $31.6 million.

M&A adjusted EBITDA was $32.9 million in the second quarter versus $36.1 million last year. Softness in the segment adjusted EBITDA stems from weaker economics tied to certain corporate renewals effective from the beginning of the year and to a lesser extent reduced transaction propensity as a result of the shift in membership mix and lower amounts of high demand Interval network inventory. As we look to the second half of the year, we expect the decline in year to year comparable inventory levels to moderate.

The Management and Rental segment reported revenue of $56.6 million, an increase of 92%. The majority of revenue growth came from the contribution of Aqua and VRI Europe, businesses that were acquired in the fourth quarter of 2013. The Management and Rental segment contributed roughly 40% consolidated revenue for Q2, which compares to about 24% last year.

Combined Aston - Aqua RevPAR for the quarter was $110.39. Standalone Aston RevPAR was $125.21, a decline from the prior year of 2.9%. This reflects an incremental five properties undergoing construction for renovation or maintenance and the inclusion available room rates from Orlando a lower ADR market.

Consolidated gross profit was $83.8 million versus a non-GAAP $77.6 million in Q2, 2013. Gross margin declined due to an increased contribution from the Management and Rental segment and specifically from the inclusion of VRI Europe.

As I mentioned in the past, VRI Europe has a slightly different business model than our other management businesses with a lower gross margin in TPI or VRI but with a more profitable bottom line. In fact management rental segment adjusted EBITDA margin excluding passthroughs increased by 41.3%, reflecting the contribution from accretive acquisitions.

M&A segment gross margin, excluding the out period item is consistent with last year. In the second quarter GAAP net income was $18.4 million. Excluding the non-core expenses that I detailed earlier, adjusted net income was $19.3 million versus $17.9 million in the same period of 2013, an increase of 8%.

Adjusted net income benefited from the inclusion of Aqua and VRI Europe as well as organic contribution from the existing vacation ownership resort management businesses. Adjusted diluted earnings per share were $0.33 compared to $0.31. GAAP diluted EPS for the quarter was $0.32 per share. Consolidated adjusted EBITDA was up 7%. As of June 30, the Company had $74.6 million of cash and cash equivalents. This includes $57.2 million held by our foreign subsidiaries.

At the end of the quarter, ILG had $268 million of debt outstanding and we had $332 million available on our revolver. This credit facility maybe increased by up to an additional $100 million. Net cash provided by operating activities was $55.7 million for the first six months of 2014 and free cash flow was $46.5 million. The decline in free cash flow was principally due to payments made during the first quarter in connection with long-term agreements. CapEx was 3% of revenue.

As of June 30th, ILG had returned over a half of its free cash flow generated thus far in 2014 to investors. Entering the quarter, ILG had $4.1 million remaining under a $25 million share repurchase program authorized in 2011. On June 4th, the ILG Board of Directors authorized a share repurchase program for up to 20 million. During the quarter, the company acquired over 600,000 shares of ILG stock for $13.6 million. At the close of the quarter, $10.5 million remained available for share repurchases.

For the first six months of 2014, ILG paid $12.7 million of dividends to shareholders. The third quarter dividend payment of $0.11 per share will be paid on September 17, 2014 to shareholders of record as of September 30th.

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

Craig Nash

Thanks, Bill. In my closing remarks, I'm going to discuss some of the industry changes that are occurring and how they have shaped our current strategic plan. You know that in general, the hospitality business have seen several meaningful shifts over the years. These range from the ascent of online travel agents to the emergence of alternative business models associated with rent your room listing companies. Non-traditional lodging continues to evolve to reflect new technology as well as consumer preferences. In shared ownership, the industry is a long way from its original incarnation and that includes the Exchange business.

In my more than 30 years in this business, I can say that I'm incredibly proud to be part of a company that has provided millions of exchange and getaway vacations as well as hotel, crews, car rental, vacation package bookings to Interval International members. In order to provide the highest quality experience to its members, our Exchange businesses have to be at the forefront of innovative options and technology. As the Interval International develop our clients, introduce new shared ownership products such as points, fractional or vacation clubs, the exchange service has adapted and continue to serve as a major part of the overall value proposition.

Today, the exchange business has broadened to include develop or manage vacation systems, non-membership or direct-to-consumer listings as well as the membership based exchange model. Our strategy today is to expand our business, so that ILG may capture more market share while building a leading role in all of these areas. The growth from our management and rental business supports this goal. This segment not only generates profitable fee-for-service revenue but it is a vehicle for deepening ILG’s relationship with independent timeshare resorts and owners. Once we close the Hyatt transaction in the coming months, we will have the components required to create a holistic vacation system that adds development, financing and sales and marketing.

We are still in the early stages of this process but we absolutely believe that ILG will have a foundation in place for the next phase of growth and creation of shareholder returns. We are energized and enthusiastic about this future opportunity. The integration process should continue for at least the next year or so with events that are already beginning to show. There is substantial work ahead and we will keep apprised of our progress on these quarterly calls. With that, I would like the operator to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question will come from the line of Patrick Scholes from SunTrust. You may begin.

Patrick Scholes - SunTrust

A couple of questions here for you, first-off, is there anything you can disclose that’s changed as far as the pending transaction, any update to any of the metrics that you've provided over the past couple of months?

Craig Nash

Pat, if you are talking about the Hyatt transaction, at this point there is nothing that we are aware of that's changed and we are looking forward to closing in Q4.

Patrick Scholes - SunTrust

My next question is on the share repurchases, have you bought any shares back so far in the third quarter and would you intent to increase that repurchase authorization?

Craig Nash

We have bought some shares back subsequent to June 30th and I think the Board evaluates our capital allocation on a periodic basis.

Patrick Scholes - SunTrust

Well can you be a little more clear on your definition of some?

Craig Nash

It is about -- it’s little under $1 million I believe from…

Patrick Scholes - SunTrust

Okay, several more questions here, it looked as I go through the P&L here, looks like the selling and marketing expense actually fell year over year, which I mean one-time, anything one-time that made that happen and the reason I ask you is try to figure out what you know real estate run rate in light of it falling year over year.

Craig Nash

There is a magazine that will be in out of period, it’s shifting.

Patrick Scholes - SunTrust

What do you mean by?

Craig Nash

The shift -- although we shifted it from this quarter towards the end of the year.

Bill Harvey

Interval International consumer magazine that we had during the quarter is moving to the fourth quarter.

Patrick Scholes - SunTrust

Roughly how much does that run you on expenses?

Craig Nash

About $1 million.

Patrick Scholes - SunTrust

$1 million, okay, thank you, and lastly here on the member revenue, the growth rates and I think you alluded to this the last conference call that you took, the biggest hit in the first quarter and then subsequent quarters wouldn’t be quite as bad. When I look at sort of how the membership and exchange revenue fare is down about 5% year over year, about 200 basis points better than that comparable metric in 1Q. Is that roughly a fair run rate that Q2 we should think about through 3Q and 4Q down roughly 5% or does it sequentially get a little bit less bad for the back half of the year.

Craig Nash

You know that the strongest quarter where the most revenue is for that business is in the first quarter, so the second and third are about the same and in the fourth it’s the least, so as….

Patrick Scholes - SunTrust

I’m thinking more on percentage as opposed to dollar.

Craig Nash

But it would be the same thing.

Patrick Scholes - SunTrust

Okay.

Craig Nash

If you think about it -- if you think about the percentage comp in the second and third quarters are less of a revenue to Interval International.

Operator

Your next question will come from the line of Nikhil Bhalla from FBR, you may begin.

Nikhil Bhalla - FBR

Just question on the seasonality of the member and rental -- management and rental line item here on the revenue side, you know with the acquisitions that you had in 4Q last year, you had a pretty good fourth quarter. As we think about some of the seasonality of revenues this year would you say in that segment your fourth quarter would be the strongest quarter of the year or would be sort of on the weaker side.

Craig Nash

No, it depends on its business, so if you take a look at the vacation rental business the strongest quarters are the first quarter and the third quarter and the time share management business the revenues and the EBITDA are very consistent throughout the year.

Nikhil Bhalla - FBR

Okay, so if you combine the two and if you look at the sort of seasonality I think 1Q was the stronger quarter there, $62 million of revenues, 2Q 55 million, I’m just trying to figure out should the back half and as I think about 3Q and 4Q, should that be little bit weaker than 1Q and 2Q, should that be a little bit stronger than 1Q and 2Q, from a revenue standpoint.

Craig Nash

The third quarter and the first quarter are very close in that investment.

Nikhil Bhalla - FBR

And then fourth quarter is a little bit weaker?

Craig Nash

Yes.

Nikhil Bhalla - FBR

Okay, so that helps. Just a question on sort of the revenue per member line, so I think when we look back at last year your 2Q was a very strong sort of a quarter for you, I think revenue per member was up 7.7% and sort of the back half of the year was comparatively weaker I think it was up just around 1% both in 3Q and 4Q. I think is that some of the easy comparisons you’re referring to Bill there.

Craig Nash

Well one thing also you got to remember is the out of period item. It does impact the RevPAR I mean the average revenue per member and you can that [indiscernible] on page 10 of the press release.

Nikhil Bhalla - FBR

Sorry, what item is this again?

Craig Nash

Remember the out of period item that we’ve discussed last year, last time,…in the current script it was 4.1 million, so that impacts the average revenue per member and you can see that number on page 10 of the press release…

Nikhil Bhalla - FBR

Okay, got it, and then final question, just in terms of share repurchases, have you thought about programmatic share repurchases, putting something like that in place, every year maybe buyback whatever, 10 million or 20 million, something like that. What’s the view from the Board on that?

Craig Nash

You know we look at our allocation of capital through our various investments organically, our accretive acquisitions and we have a dividend and we look at these things quarterly, so we’ll continue to do that as we move forward in the year.

Nikhil Bhalla - FBR

Okay, one last question on sort of the corporate members, so two thirds of your corporate membership contracts adjusted in 1Q doesn’t look like anything happened in the second quarter, is there an expectation we could have another sort of step down at any point later this year or maybe potentially next year?

Craig Nash

No I think we expect it to be pretty consistent for now.

Operator

(Operator Instructions) Our next question will come from the line of Steven Kent from Goldman Sachs, you may begin.

Steven Kent - Goldman Sachs

Hi, two questions, first can you just, I think you talked about this a little bit, the membership fee revenue declined significantly relative to the transaction and the other revenue, can you talk about that again when that starts to equalize out or what’s driving those.

And then separately now that you’re in the midst of this Hyatt deal and it looks like it’s moving along and you’ll close shortly, are you seeing more opportunities now that people know you’re willing to look at these kinds of properties.

Bill Harvey

Let me get the first one Steve, in the membership fee you got two pieces, the out of period item that was last year was $4.5 million in that membership fee revenue, so the change for the six months is only $2.7 million and then you’ve got the -- or 4.1 million and then you’ve got the resetting of the contracts that will comp up again in Q1 of 2015.

Steven Kent - Goldman Sachs

Okay.

Bill Harvey

So the biggest piece is that 4.1.

Steven Kent - Goldman Sachs

Right, got it.

Craig Nash

So in terms of your second question, this is Craig, yes obviously there’s interest from a number of people and clearly we can’t engage in those kinds of discussions till we close our Hyatt transaction which as we said forms a foundation for a growth over the long term.

Steven Kent - Goldman Sachs

Craig, I’m not sure why can’t you engage in those discussions, I’m not sure I understand that.

Craig Nash

We’re just not a position to really move ahead with anything like that while we’re going through the process of closing Hyatt.

Operator

Your next question will come from the line of Steve Altebrando from Sidoti, you may begin.

Steve Altebrando - Sidoti

Thank you, can you talk a little about, maybe talk about Steve’s question a little bit, your appetite for deals and how you balance kind of the, how you looked to grow and financial leverage still being very low, versus some of the integration, that you’ve, you guys put forward for the last few deals over the last couple of years?

Craig Nash

We clearly have an opportunity to grow our business. Our goal was to create the platform we had, different legs to the stool that we could grow the business through organic investments through efficiencies as well as a bolt on or tuck in acquisitions. There are opportunities out there, we’ll continue to look at those, we’ve been very successful in finding the right kinds of accretive deals and we intend to continue to do that as we move forward, as it relates to leverage we’ll continue to look at that in the context of these deals and we feel pretty comfortable with where we are in terms of leverage after this transaction.

Steve Altebrando - Sidoti

Okay, that’s helpful and then in terms of when Hyatt does close, would you plan to use their selling and marketing apparatus to sell inventory on some of the properties that you’re managing currently or would that be kind of a separate function.

Craig Nash

You know we haven’t really thought through that a 100% but clearly their expertise will be helpful in formulating a more aggressive manner in which we can distribute that inventory, so we’re definitely looking forward to getting around the table with that and discussing ways to do that and provide value to the HOS.

Steve Altebrando - Sidoti

And then just lastly, is there any color you can provide on July in terms of transaction and RevPAR?

Craig Nash

In terms of transactions it’s too early to tell, we pushed a promotion up earlier in the quarter which is doing very well but it’s way too early to say what the quarter is going to be as we comp against the promotion that was in later in the quarter, but as we said we believe that the inventory issue in terms of the high demand inventory is less of an issue in the second half of the year which it has been historically, so we feel better about that moving into this quarter.

Steve Altebrando - Sidoti

Okay and then any update on RevPAR in Hawaii?

Craig Nash

No, it’s too early to kind of give you an indication on that.

Bill Harvey

[Indiscernible] with him because I guess we’ve got two potential hurricanes (bearing) [ph].

Operator

At this time there are no other questions, I’d like to turn the call back over to Mr. Craig Nash for your final remarks.

Craig Nash

Thank you 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

Thank you, and ladies and gentlemen this concludes your presentation, you may now disconnect, enjoy your day.

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Interval Leisure (NASDAQ:IILG): Q2 EPS of $0.33 beats by $0.02. Revenue of $143.5M (+14.8% Y/Y) beats by $4.61M.