Travel + Leisure Co (NYSE:TNL) Q2 2021 Earnings Conference Call July 28, 2021 8:30 AM ET
Christopher Agnew - SVP, IR
Michael Brown - CEO, President & Director
Michael Hug - EVP & CFO
Conference Call Participants
Chris Woronka - Deutsche Bank
Charles Scholes - Truist Securities
Joseph Greff - JPMorgan Chase & Co.
David Katz - Jefferies
Good morning, and welcome to the Second Quarter 2021 Earnings Conference Call for Travel + Leisure Co., formerly Wyndham Destinations. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded. If you do not agree with these terms, please disconnect at this time. Thank you.
I would now like to turn the call over to Chris Agnew. Please go ahead.
Thank you, Britney. Good morning, and welcome. Before we begin, we'd like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings, and you can find a reconciliation of the non-GAAP financial measures discussed in today's call in our earnings press release available on our website at investor.travelandleisureco.com.
This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our second quarter results; and Mike Hug, our Chief Financial Officer, will provide greater detail on the quarter, our balance sheet and liquidity position. Following these remarks, we'll be available to respond to your questions.
With that, I'm pleased to turn the call over to Michael Brown.
Thank you, Chris. Good morning, everyone, and thank you for joining us today.
As you saw from our release this morning, leisure travel returned significantly last quarter, which led to our very strong second quarter results. We reported second quarter adjusted EBITDA of $193 million and adjusted diluted EPS from continuing operations of $0.88.
As vaccination rates climb and domestic travel restrictions are lifted, leisure travel demand is increasing, and we are fully participating in the recovery. Adjusted EBITDA margin in the quarter was 24.2%, 30 basis points below the second quarter of 2019. We were able to achieve this margin despite a $26 million net interest income headwind due to a reduction in our consumer finance portfolio.
To put in perspective, the strength of our second quarter recovery, if we equalize the 2021 portfolio size to 2019 and exclude the COVID reserve release, adjusted EBITDA margin would have been approximately 25.3%, 80 basis points higher than the 24.5% in the second quarter of 2019.
Changes we made during 2020, including the upgrading of tour quality and the structural cost reductions are 2 key factors driving the underlying improvement of margins. The strength and resiliency of our business from consumer demand, to cash flow generation, to a fortified balance sheet has been on full display over the past year.
In 2020, our adjusted free cash flow remained positive and allowed us to maintain meaningful dividend throughout the crisis. As performance continues to improve, we look forward to returning to a regular cadence of capital return to shareholders.
Specifically on consumer demand, owner booking trends continue to be above 2019, and the average owner booking window is now 126 days out, an encouraging sign as it is now above 2019 levels.
Net vacation ownership reservations for the second half of 2021 and the first of 2022 are 6% and 5%, respectively, ahead of 2019. California, Florida and Hawaii are seeing some of the strongest growth in bookings. We are optimistic about the remainder of the year, but we are keeping a careful eye on the spread of the delta variant, persistence in the variant spread and the reintroduction of domestic travel restrictions could impact our outlook.
During the second quarter, both Vacation Ownership as well as Travel and Membership exceeded our internal expectations. Although we observed the initial signs of the leisure travel rebound at the end of the first quarter, the rebound emerged earlier and faster than we projected.
In the second quarter, we benefited from trends we expected to materialize in the second half of 2021. Gross VOI sales were $383 million, ahead of our $355 million to $365 million guidance range. This was an increase of 62% from the first quarter, driven by improved close rates and VPGs that were 30% higher than 2019. As well, our VPG increase reflected a 30% mix of new owner transactions, about 400 basis points above our new owner mix expectation.
Wyndham Destinations, our Vacation Ownership division, is the core of our enterprise, and we are fully committed to growing our vacation ownership business at or above historical levels. How will we do this? We have a large untapped pipeline of future upgrade sales, and we will continue to leverage our partnership with Wyndham Hotels & Resorts and its loyalty program, Wyndham Rewards. Additionally, with the acquisition and rebranding to travel and leisure, we also have the opportunity to launch new vacation club brands in the vacation ownership space.
Travel and Membership, which includes RCI and Panorama Travel Solutions, or PTS, also exceeded expectations with revenue just 6% lower than Q2 2019 when normalized for acquisitions and divestitures.
Adjusted EBITDA margin was 37% compared to 32% in 2019. RCI remains the core business and primary driver of EBITDA in this segment, and we are squarely focused on elevating RCI's growth by offering a broader array of travel services to its 3.6 million members.
PTS is our newly launched B2B offering that specializes in designing and operating travel membership programs. PTS made progress in the quarter, announcing an agreement with the National Association of Realtors, America's largest trade association with 1.4 million members. We expect deals like this to fuel transaction velocity, as we continue to focus on increasing premium memberships through revenue-sharing agreements by actively marketing our travel solutions and our partner brands.
Last, but certainly not least, we continue to work towards the full launch of our Travel & Leisure club in September. The club launch was one of the primary reasons we purchased Travel & Leisure. The combination of the macro demand for subscription products, the absence of product in the leisure travel space and our ability to offer curated, exclusive travel offerings inside the club makes us excited for the upcoming launch.
Before turning the call over to Mike, I want to share our expectation for the rest of this year as we return to providing full year guidance. We expect tours of 440,000 to 450,000, VPG around $3,000 and gross VOI sales of approximately $1.4 billion to $1.5 billion.
Based on these sales, we would expect net interest income to be between $315 million and $320 million. Overall, we anticipate adjusted EBITDA in the range of $720 million to $735 million for the full year and adjusted earnings per share of $3.20 to $3.30.
For the third quarter, we anticipate VOI sales will be in a range of $450 million to $470 million. I'd like to point out that our full year guidance reflects an average expected portfolio size of $2.8 billion to $2.9 billion over the last 6 months of this year, with net interest income, our most notable headwind to retracing to pre-COVID EBITDA levels.
Projected third quarter VOI sales would represent an 18% to 23% sequential increase from the second quarter. And as a result, we believe third quarter adjusted EBITDA will range between $200 million to $210 million.
With that, I would like to hand the call over to our Chief Financial Officer, Mike Hug. Mike?
Thanks, Michael. Good morning to everyone, and thank you for joining us today. I will discuss our second quarter results and provide you with more color on our balance sheet, liquidity position and cash flow. My comments will be primarily focused on our adjusted results.
We reported total company second quarter adjusted EBITDA of $193 million and adjusted diluted earnings per share of $0.88 compared to $16 million and a loss of $1.11 one year ago, respectively. In the second quarter, the Vacation Ownership segment reported revenue of $599 million, gross VOI sales of $383 million and adjusted EBITDA of $133 million. VPG of $3,151 was 30% higher than the pre-pandemic second quarter of 2019, benefiting from owner mix and improved tour quality.
Tours were 53% lower than 2019, as a result of our very deliberate decision to focus our new owner marketing efforts on higher-quality tours. These efforts resulted in a new owner VPG increase in the second quarter of 2021 compared to 2019 and were contributing factors to our strong second quarter margin. We expect to focus on quality to also benefit us over the long term as it should continue to yield a stronger portfolio. In the second quarter, we released $26 million of the COVID-specific reserve we recorded in March 2020 due to continued strong performance of the portfolio, resulting in a $16 million benefit to adjusted EBITDA. To update you on the COVID-related reserve, we originally recorded a provision of $225 million, including the reverse on the second quarter, we have reversed a total of $46 million. And since the reserve was established, we have charged off $85 million of default against it.
At the end of the quarter, our total reserve as a percentage of vacation - gross vacation ownership contract receivables was 19.8% compared to 25% at the end of the first quarter of 2020 when we put the COVID-related reserve in place and compared to 19.3% at the end of 2019. Revenue in our Travel and Membership segment was $204 million in the second quarter compared to $106 million in the prior year. Travel and Membership second quarter adjusted EBITDA was $75 million, an increase of 114% compared to last year's $35 million.
Travel and Membership net transactions in the second quarter were 524,000, 4.5x higher than the same period last year with growth in all geographies. The largest improvements were North American exchanges and our nonexchange business lines, which were fueled by the strong domestic travel recovery we are seeing in the U.S. We continue to be pleased with the growth of Travel and Membership's nonexchange business, which accounted for 40% of total transactions in the quarter.
Turning to our balance sheet. Our corporate net debt at the end of June was $3.4 billion and our leverage rate was 4.7x. We continue to remain focused on reducing our leverage and with continued EBITDA growth, we expect to see the leverage rate decline to below 4.25x by the end of the year.
Throughout the pandemic, we have demonstrated our commitment to return capital to our shareholders. We paid our second quarter dividend of $0.30 per share on June 30, and we'll recommend a third quarter dividend of $0.30 per share for approval by our Board of Directors in August.
Now I may add some color to a couple of items in our model that drove our 2021 outlook that was discussed by Michael and how those factors will impact us in 2022.
Based on our view for VOI sales for the second half of the year, we can now estimate those headwinds we will face next year from lower net interest income at our Vacation Ownership business and lower membership fees at our Exchange business. As we enter 2022, both of these resilient parts of our business will have been impacted by sales running well below historic levels for nearly 2 years. And this has a compounding impact that is worth highlighting to better understand what our baseline adjusted EBITDA should be.
With our portfolio down to $3 billion from $4 billion at the end of 2019, net interest income will be up to $120 million lower in 2022 than in 2019. At RCI, with our member base down from lower new enrollments, adjusted EBITDA could be impacted up to $50 million when compared to 2019. It is important to understand these headwinds as we think about 2022.
Finally, on free cash flow, we expect 2021 adjusted free cash flow conversion to be 25% to 30% of adjusted EBITDA. The reduction from our historical conversion rates of 55% to 60% is expected to be temporary due to reduced net interest income from consumer financing, higher corporate interest expense as a percentage of adjusted EBITDA and the timing of working capital. We expect 2022 free cash flow conversion to move closer to our historical target range.
In summary, we are very pleased with our performance as we emerge from the pandemic and look forward to seeing many of you in person at our Investor Day in September.
With that, Britney, can you please open up the call to take questions.
[Operator Instructions]. And we will take our first question from Chris Woronka with Deutsche Bank.
Appreciate all the data points. So the first question was kind of as you talk about reaffirming the commitment to kind of growing the VOI segment in line with historical ranges. And I guess at the same time, your pruning the tour flow base a little bit to focus on quality. How do we square those 2? Is it just going to be a function of higher close rates in VPG going forward? Is that all there is? Or is there something else we should think about?
Chris, that's a good summary, but let me just come back to the historical rates comment, that focus is really around EBITDA. We want to get back to where we've historically been, and we believe we can grow our VO business at, if not above, historical rates.
As we come out of the pandemic, we've laid out our clear strategy on how we plan to do that. It is to focus on a more efficient way of growing our bottom line through changing the tour quality, focusing a more holistic quality earnings component, which has seen - we've already seen play out. Our VPGs are 50% higher, as we mentioned. We're not chasing tour flow. And the net effect of that is, in the first full quarter coming out of COVID being the second quarter, our margins are already back where they were pre-COVID. And I should point out, those are already industry-leading margins.
So our plan going forward is to get back to pre-COVID EBITDA levels in preference to or ahead of a desire to get back to a VOI and a tour level. We just - our focus is to get back more - to a more efficient EBITDA margin and ultimately bottom line.
Okay. Very helpful. And then the second part, I was hoping we could talk a little bit about the PTS, the B2B bookings. Is there any way to - I know that's a longer-term business, but is there any way to kind of define the TAM, the way you're looking at it? I'm not looking for really a specific number, but just directionally, what is the cadence of growth within that going to look like?
And just for everyone on the call, our PTS is our B2B subscription business where we, in effect, partner with great brands out there or associations like we've done with the Realtors Association, providing them travel services and then transition that to an economic model that looks a lot like the RCI model, upfront subscription fees, ongoing transaction fees, really driving that recurring and membership revenue component.
When we look at TAM on the PTS side, the number of companies, associations out there are endless. So I think that's the actual perspective we have on PTS is that as we sign companies or associations like the National Realtors, we have a few other really strong names in our pipeline that we hope to announce very soon. We think that there will be a huge attraction for people who want to provide that benefit without having to scale that internally.
If I could just transition your question to the Travel & Leisure club that we will eventually launch in September, the U.S. household market TAM is 90 million households, and we believe those that would fit in that space is probably about half of that, about 40 million to 50 million. And we'll speak a bit more depth about that at Investor Day. And that fits into a sizing of the timeshare industry today, which is about 10 million households. So we've got 10 million time share, 40 million to 50 million around the subscription side and an overall leisure market in the U.S. of about 90 million.
And we will take our next question from Patrick Scholes with Truist.
A couple of questions here. First on the release on the loan loss provision, what metrics triggered that? And related to that and assuming favorable demand in lending trends continue, can we expect more releases from the provision going forward?
Thanks for the question. Basically, when we look at the portfolio, every metric that we have is positive. If you look at delinquencies for the second quarter, they're down below second quarter of 2016 levels. Deferrals are now less than 0.5% of the portfolio. Second quarter defaults were down $33 million year-over-year. So the portfolio is really performing well.
And I would say it's all those factors come into play when looking at the relief that we took. And then obviously, we've talked about unemployment trends and what those trends look like through the end of this year and the first quarter of next year. So I couldn't be happier with the way - the portfolio performance. Obviously, it drives great interest income, but just as importantly, it drives great cash flow. And we'll sit down at the end of every quarter like we always do. And if the trends remain positive, there might be opportunity there.
But right now, we think we're appropriately reserved. And I think we would all agree when you look at the new variance that's out there and when you look at government support wane here in the coming months, we just think it's prudent to make sure we're appropriately reserved as we really work through the next 6 to 9 months of this pandemic we're dealing with and how it impacts the consumer.
Okay. And related to that, should we expect another securitization sometime later this year?
We would expect to do another one later this year. Normally, as you know, we do 3 with the volume being down, it's been reduced down to 2, but we would expect another ABS transaction, which is one of the reasons we're going to generate the cash flow that we talked about. It's going to be in that 25% to 30% range. And then obviously, next year, we would see it come up into that 55% to 60% range. So a temporary dip, but yes, the ABS markets remains strong, very confident in our execution, and we will do another transaction later this year.
Okay. And then just my last question here. Mike, you had mentioned in your prepared remarks about RCI, I believe, being down $50 million versus 2019. Is that because of membership loss over the past year that would drive that number there?
You're exactly right. In essence, as we all know, across the entire timeshare industry sales been down and will have been down for close to 2 years. And so it's just no new members or minimal new members coming in compared to historical levels. So operationally, the business is performing very well. You can see the great quarter we had at PTS, strong transactions driven by North America primarily and then great margins that they control their costs. So very happy with the way the RCI business is performing and that - unfortunately, just have some headwinds as it relates to new members coming in.
And we'll take our next question from Joe Greff with JPMorgan.
Michael or Mike, if you had guided for the second half of the year 3 weeks ago before the delta variant spikes, would that guidance be different than what you're providing this morning?
It would not, Joe. Needless to say, as we have for the last 18 months, we're keeping a very watchful eye over what's going on with the most recent surge. I think it's a little too early to say if it's going to have an impact to our second half results. But here we are on July 28, so we have pretty good visibility on the first third of this quarter, and the results we're seeing, especially on the Vacation Ownership side of the business, reflect a consumer that still wants to travel at VPGs for us that are 40% to 45% above where we were in 2019 for that same July period.
So again, we will keep a watchful eye. I think it's a little too early to say that there will be any meaningful impact and July results say that we're not seeing it yet. And so I would say, no. If we did the same call 3 weeks ago, our guidance would have been the same.
Got it. Obviously, VPG was up nicely, and I think in your prepared comments, you talked about it being a little bit maybe close rate related and that's a function of raising the quality standards. Can you just talk about, I think maybe more directional, you probably want to talk about it, close rate and transaction size changes between new owner and existing? And is it directionally similar between those two buckets of customers?
Absolutely. It's a great question because as you know, as you dig deeper, there's a lot of detail and information that comes out in that detail. For me, I mean, we've had an incredibly encouraging first half of the year, but there's a few things that are especially encouraging. First of all, we said earlier in the year that our new owner mix would be about 25%. Here we are, and it's already close to 30% and July is even better than that.
So the new owner recovery is good. And that's despite, Joe, that we've been very methodical in the way we bring back our new owner tours. Blue Thread tours that we're bringing back are at a much better growth recovery than our open market channels, and that is a deliberate decision we made because reopening those open market channels will bring lower VPGs and lower margins.
So as we look to the second half of this year and as we've already seen in the first half of the year, the VPGs core, especially Blue Thread in our open market channels are much higher than they were pre-pandemic, and we think that those are sustainable for the long haul. And we're using that as the foundation of how we want to finish this year and move into 2022 in order to drive maximum margins out of the VO business.
Great. And then one final one. Your second half EBITDA guidance, does that include any benefit from some of these $94 million of that reserve from last year being reversed? And how much if that's the case?
Joe, this is Mike Hug. No, the guidance that we have does not assume that we take any additional benefit from the covered reserve that we put in place.
Got it. And so are we kind of looking at sort of 18% as a loan loss provision as a percentage of gross VOI sales? Is that what's embedded or what is embedded in the guidance for that?
Yes. No, we're assuming it's going to be under 19%, which is historically right, while - or at least not spoken, but first half of this year, we've been actually a little bit closer to 18%. So the guidance assumes between 18% and 19% provision, exclusive of any reserve benefit or reserve release.
[Operator Instructions]. And we will take our next question from David Katz with Jefferies.
I wanted to just go back and focus on the reserve for a minute, and I did, Mike, just hear your answer about it. The long-term target was always to get below that, right? And if we can maybe just focus on the long-term opportunities for a minute, is there still opportunity to get it down to somewhere in the mid-teens over time? And how is that still a realistic outcome post COVID?
Yes. I think over time, we can get to that 16% to 17% range. I think the big challenge we have and you guys have seen it over the years, we use 10-year loss curves when calculating in our allowance. So the allowance didn't go from 16 to 20 overnight, it went up over time as those loss curves moved over time.
So the challenge we have now is every quarter, when we add a new provision at around 18%, it just takes time for those loss curves to start to move down. And hopefully, we continue to focus on quality and that provision comes down over time. So in the longer term, I think it's possible, but when we think about next year, I wouldn't expect it to be in the 16% to 17% range next year.
And does that necessarily have to correspond with tour flow growth moderating? Or can we have an and rather than an or?
No, it doesn't. I mean it's all based on several factors, right? First of all, it would be tour quality; and then secondly, the level down payments that we look for from the consumer. I mean that's the thing that we're looking at every day is, the benefit to a lower down payment is you get that interest income in the future, but you sacrifice on the current earnings because of a higher provision.
So that's the thing that we look at when we run the business. When we think about 2022 and what level down payment do we want, what type of tour we want to see. But no, I think we can continue to grow our tour flow and keep a provision that's below 19% starts to, over time, approach 16% to 17%. A lot of different levers we can pull, but just keeping everything in mind as it relates to cash flow and current earnings.
David, if I could just add. When we started this conversation in June of '18, we became our own independent company, we were much higher than that in the way of provision. And over the last 3 years, we've taken a very holistic point of view on how we want to improve the quality of tour flow, the owner experience, the accessibility to inventory, the efforts we've made around third-parties. And I think all of that, combined with the latest move we've made during COVID, have put us in the position we are today, which I think what Mike has laid out both with the reserve release and our ongoing provision is a very strong position for us to continue all of those efforts into the next 2 to 3 years.
So I fully agree with Mike, that it's not dependent - it's not directly correlated to tour flow. It's - I think it's more correlated to the holistic actions we're taking as an enterprise.
And not to continue on, but just 1 other thing, I mean, obviously, we - a lot of questions out there. When we run the business at a provision that was north of 20%, what the quality of the portfolio looks like? How is that going to impact your margins, right? Our margins were still industry-leading when we ran at 20% provision. And I think we've proven through the pandemic that we had a very strong portfolio. I mean we've only had $85 million in additional defaults on a $4 billion portfolio since the pandemic hit.
So I know everybody gets focused on that provision, but we also like that net interest income and the recurring revenue stream it brings. So I think it's important to understand that, that provision is not just an indicator of necessarily the quality of the tours that we're seeing. But if we do look for lower down payments, that grow the portfolio quicker and brings in net interest income in the future. So just a lot of factors that drive that. And I think once again, the pandemic gave us the opportunity to prove that there were a lot of questions about our portfolio strength and the portfolio has performed incredibly well.
Perfect. And if I can just ask 1 follow-up, Michael, at the risk of taking some thunder that you probably planned for the Analyst Day. You've laid out a TAM for the T&L side of things that seems quite large. If we took a long-term view of how the company evolves, how would you have us think about kind of the mix of your current core timeshare business with all of the other new things that you've laid out over time? Is it possible that it could be closer to a 50-50 mix over the much longer term?
So let me come back and just reground everyone on how we're thinking of our core business. Our core business, Vacation Ownership and RCI, those are the fuel of our engine for the next few years, simply because on an absolute basis, we were pre-pandemic nearly $1 billion of EBITDA, and we've laid out our guidance here. So sort of the law of big numbers dictates that they will be the preponderance of EBITDA in the next few years. And it's why I reiterate not only on this call, but in my other public comments that we are committed to growing at or above historical rates in our core business.
With that said, it is our clear intention to start growing the mix of our business toward recurring predictable revenue streams that don't require heavy capital investment to mirror what you see on the RCI business model. 50-50, if you just do the math, would require a pretty dramatic shift. And I know I don't think we will be there in the next few years. But I do think, and we will talk about it in more detail in September, we will start to show that we are beginning our shift into that recurring revenue stream.
And that's - it's not going to happen as fast maybe as everyone expects because our core business is continuing to grow at a healthy rate and a rate that we know that we can continue to achieve. What we're focused more on that side is reducing our capital commitments. And we can talk about that in a separate question, but that's our overall perspective on how we want to grow the business. We want to grow at above historical rates. Obviously, these new lines of business, much above and then stay committed to what's got us to the party, which is the Vacation Ownership and Vacation Exchange business.
That concludes our question-and-answer period. I would now like to turn the call back over to Michael Brown for closing remarks.
Absolutely. Thank you, Britney. I appreciate all the questions and answers today. I'd just like to conclude by saying we're very excited about our future at Travel & Leisure and look forward to sharing more details about the outlook of our core business and our growth plan for our new businesses at our Investor Day on September 10 in New York City.
As always, I have our team to thank for their service to our owners, members and guests as we embark on what is turning out to be a very busy summer season. Thank you, everyone, and have a great day.
Thank you. That concludes Travel & Leisure Second Quarter 2021 Earnings Conference Call. You may now disconnect your line at this time, and have a wonderful day.