Travel + Leisure Co. (NYSE:TNL) Q1 2023 Earnings Call Transcript

Travel + Leisure Co. (NYSE:TNL) Q1 2023 Earnings Call Transcript April 26, 2023

Travel + Leisure Co. beats earnings expectations. Reported EPS is $0.89, expectations were $0.78.

Operator: Hello. And welcome to the Travel + Leisure First Quarter 2023 Earnings Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It’s now my pleasure to turn over to your host, Chris Agnew, Head of Investor Relations. Please go ahead, Chris.

Chris Agnew: Thank you, Kevin, and good morning. Before we begin, we would like to remind you that our discussions today 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 effect of — 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 in our earnings press release accompanying this call. And you can find a reconciliation of non-GAAP financial measures discussed in today’s call in the earnings press release available on our website at travelandleisureco.com/investors.

This morning, Michael Brown, our President and Chief Executive Officer will provide an overview of our first quarter results and full year outlook; and Mike Hug, our Chief Financial Officer, will then provide greater detail on the quarter, our balance sheet and liquidity position. Following our prepared remarks, we look forward to responding to your questions. With that, I am pleased to turn the call over to Michael Brown.

Michael Brown: Thank you, Chris. Good morning and thank you for joining us today. This morning we reported strong first quarter results, exceeding the expectations we laid out at the end of February. With Leisure travel showing continued strength, our teams were able to translate that demand into significant adjusted EBITDA and EPS growth. We reported adjusted EBITDA of $184 million, an 8% increase over the prior year and adjusted earnings per share of $0.89, a 29% improvement over Q1 2022. EPS growth is reflective of continued EBITDA growth and the impact of share repurchases over the last 12 months. Our confidence in 2023 free cash flow allowed us to repurchase 3% of our shares outstanding in the first quarter alone. Our Vacation Ownership business is performing incredibly well, among the key metrics we use to track the business and measure consumer sentiment are forward bookings, sales volume per guest, or VPG and the performance of our consumer finance portfolio.

These three metrics give us a perspective, current and retrospective look at consumer trends. Each of these metrics has shown no discernible change from the positive trends we saw in 2022. Consumer demand and operational performance continued in Q1 and into April. Forward bookings of our owners are pacing above 2019 levels in the second quarter, providing us good visibility as we head into the summer. We are seeing strong demand in the major destination markets of Orlando, Las Vegas and Hawaii. Length of stay, which increased post COVID, remains 6% above 2019. VPGs have been strong following the pandemic as a result of leisure travel demand and our decision to raise our marketing standards. The first quarter was no exception. VPG of $3,215 exceeded our expectations even as our incremental new owner channels started to ramp.

Tours increased 24% over the prior year, and sales close rates remain well above historical levels. This is a reflection of the strong and still improving value proposition of our product relative to increasing prices and other travel accommodations. Our receivables portfolio is performing well and delinquencies are trending below 2018 levels. The strategic move we made in 2021 to raise credit standards has positioned us well for the current inflationary environment. At the end of the first quarter, less than 11% of our portfolio had a FICO below 640. The portfolio is growing again and at over $2.9 billion is 6% higher than one year ago. The prepaid nature of timeshare ownership is a key differentiator in predicting future leisure travel, 80% of our owners have fully paid for their timeshare, and therefore, the choice to vacation is less dependent on economic conditions.

This is important as we face macroeconomic uncertainty, and is one of the main reasons we expect our business will be more resilient if we enter a more challenging economic environment. This resiliency in demand amongst timeshare owners has been proven time and time again, most recently coming out of COVID. As such, we have great visibility and confidence in the coming months to generate tour flow. Looking forward, we have $19 billion of embedded revenue potential over the next 10 years, associated with our existing owner base alone, giving us a pipeline of anticipated recurring revenues in a resilient and predictable business model. Turning to Travel and Membership, this segment came in below our expectations, with exchange being the primary cost.

Exchange accounts for 93% of Travel and Membership adjusted EBITDA. Trading activity leveled off later in the quarter after a strong January. Booking pace in late February and March will closely resemble 2019 booking trends as opposed to the strong recovery we saw in 2022. Exchange revenue per transaction was up 6% year-over-year, but offset by a 4% decrease in transactions due to lower membership. At our Travel Club, transactions increased 1%, with revenue per transaction down 5%, mostly due to mix. The transactions in the quarter include the impact of a customer loss late in the quarter, which will also impact transactions in Q2. We are now anticipating a year-over-year decrease in Travel Club transactions in Q2. However, we have a comparable new customer signed that will begin transacting in the second half of the year.

Turning to our 2023 outlook. For the full year, we are raising our adjusted EBITDA guidance range to $925 million to $945 million and reiterating our expectation for gross VOI sales to be within a range of $2.1 billion to $2.2 billion and a VPG range of $3,050 to $3,150. Our business model has a base of steady and predictable revenue and we reaffirm our guidance of 55% to 60% of our adjusted EBITDA conversion to adjusted free cash flow in 2023. We expect to allocate that capital to pay our dividend, repurchase common stock, reinvest back into our business and/or for compelling M&A opportunities that may arise. For more detail on our performance, I would now like to hand the call over to Mike Hug. Mike?

Mike Hug: Thanks, Michael, and good morning to everyone. As well as discussing our first quarter results, I will provide more color on our balance sheet, liquidity position and cash flow. We reported first quarter adjusted EBITDA of $184 million and adjusted diluted earnings per share of $0.89, increases of 8% and 29%, respectively, over the prior year. As Michael previously mentioned, the healthy acceleration in adjusted EPS growth is benefiting from our continued share repurchase activity. Looking at the performance of our two business segments in the first quarter. Vacation Ownership reported segment revenue of $685 million and adjusted EBITDA of $131 million, increases of 12% and 25%, respectively, over the first quarter of 2022.

We delivered 135,000 tours in the first quarter, 24% growth over the prior year and VPG was $3,215, above the top end of our expectation. Revenue in our Travel and Membership segment was $200 million in the quarter, flat compared to the prior year. Adjusted EBITDA was $71 million, compared to $82 million in the first quarter of 2022, due to higher cost of sales driven by transaction mix, higher marketing costs to support Travel Clubs and unfavorable foreign currency impact. Turning to our balance sheet. Our financial position remains strong, and in the first quarter, we continued to return capital to shareholders through share repurchases and our regular quarterly dividend, which we increased to $0.45 per share and paid on March 31st. We continue to drive shareholder value through the repurchase of $102 million of common stock in the quarter, reducing outstanding shares by 2.5 million or 3.2% of shares outstanding at the beginning of the quarter.

In early April, we closed a $250 million ABS term transaction with a weighted average coupon of 6.3% and an advance rate of 91%. The transaction was heavily oversubscribed, underlying the strength and resiliency of our ABS program and the market’s confidence in our business model. Adjusted free cash flow was a use of cash of $8 million in the quarter, compared to a source of cash of $146 million in the same period of 2022, due to timing of inventory spend in our first ABS transaction, as well as higher year-over-year originations in our loan portfolio. We continue to expect to be within our targeted 55% to 60% adjusted free cash flow conversion range in 2023 and to remain below our historical levels of inventory spending for our Vacation Ownership business for several years to come.

2023 is no different with expected inventory spend between $90 million and $100 million. Our corporate net leverage ratio for covenant purposes was 3.7 times at the end of the first quarter. As a reminder, at the end of the second quarter, we expect our leverage ratio to increase slightly due to the timing of cash flows before starting to decline again and ending the year below 3.5 times. Now let me provide some more detail about our expectations for the second quarter and the full year. Overall, we expect adjusted EBITDA for the second quarter to be in the range of $230 million to $240 million. For the full year, we are raising our outlook to $925 million to $945 million. Gross VOI sales for the second quarter are expected to be in the range of $550 million to $560 million, with VPG in the range of $3,050 to $3,150.

With respect to our provision for loan loss, we expect it to be in the range of 18% to 19% for the full year. In summary, the first quarter of 2023 was another great quarter for us as we continue to drive adjusted EBITDA and earnings per share growth and return capital to shareholders. With that, Kevin, can you please open up the call to take questions.

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Q&A Session

Operator: Certainly. Our first question today is coming from Joe Greff from JPMorgan. Your line is now live.

Joe Greff: Good morning, guys. Nice results.

Michael Brown: Thanks. Good morning, Joe.

Joe Greff: Michael, I was hoping if you can talk about sort of in Vacation Ownership is about maybe the monthly cadence within the quarter and what you are seeing so far in April in terms of close rates in VPG. Did you see, I guess, the degradation of trends throughout the quarter, just given what’s been going on in the financial markets and just the macro in general? And then, my second — my follow-up question, my second question is, with respect to Travel and Membership in the second half, obviously, it will be better than what you have talked about in sort of the ingredients for the first quarter and what you are expecting for the second quarter. Last year, you did about $122 million in EBITDA in the second half in Travel and Membership, could — do you expect that to grow and can you talk about what your expectations for growth there is and actually what the drivers are? Thank you.

Michael Brown: Thanks, Joe. Yeah. It’s a great question about just sort of the cadence of the first quarter, because as we started January and February, really all the metrics were continued strength of what we saw in 2022 and as we move through March, those trends continued. Post the SVP banking crisis, we did see some volatility and some weakening in some of the VPGs, and as a result of that, we were really watching the trends as we moved into April. The April trends really across the Board, whether it’s close rates or VPGs return to where they were at the beginning of Q1. So it feels like it was a temporary blip. The cause of it, I don’t know if the timing was coincidental or not, but it really was the last two weeks of March.

But again, April trends have returned back to where we saw them toward the end of 2022 and the first part of the quarter and we are really expecting those trends to continue as we head into the remainder of the second quarter. As it relates to Travel and Membership, I will ask Mike to talk specifically about the numbers of the growth in the second half of the year. But just more generally, we do expect growth in the second half of the year as it relates to the exchange business, which again is about 92% of our total EBITDA in that segment. Two things that we are really focused on. Number one is, as new owners continue to come back into the timeshare space as we are predicting and forecasting a nice jump this year in our business, that will provide a nice tailwind to the second half of the year and into 2024 for the majority of the EBITDA and transactions related to the exchange business.

And as it relates to the Travel Club, had we not lost this client, which is creating a four-month timing issue between the new ones we are bringing on. We would have had about mid-single digits growth, about 5% growth in the first half of this year. So we will get some tailwind on that Travel Club transaction in the second half of the year. And I will ask Mike to answer specifically about the second half growth.

Mike Hug: Yeah. Thanks, Michael. And we do expect growth in the second half of the year. I would note that, historically, as you guys are aware, the first quarter is always the largest quarter for the exchange business. So as we go through the year, the impact of Travel and Membership on our overall EBITDA continues to become a smaller portion of the overall EBITDA of the consolidated business due to the timing within the quarter — within the year.

Joe Greff: Got it. And then just one follow-up question on the one client that left the Travel Club in creating this form of timing issue. Does that push out what you think the ramp would be next year by four months or is it really not that material?

Michael Brown: Well, it was a high volume transaction and they left due to the type of travel that they were looking for. Ours is more a combination based, they were looking for more air based platform. So we think the replacement depending on the scale of the replacement one, which will start early in the second half of the year, might be able to offset that ramp, if not, the impact will be minimal. Again, these transactions are a relatively small part of our EBITDA, but it might slightly delay the ramp.

Joe Greff: Thank you very much.

Michael Brown: Thanks, Joe.

Operator: Thank you. Next question is coming from Chris Woronka from Deutsche Bank. Your line is now live.