Marriott Vacations Worldwide Corporation (NYSE:VAC) Q4 2023 Earnings Call Transcript
Marriott Vacations Worldwide Corporation (NYSE:VAC) Q4 2023 Earnings Call Transcript February 22, 2024
Marriott Vacations Worldwide Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Marriott Vacations Worldwide Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Neal Goldner, vice President, Investor Relations from Marriott Vacations Worldwide. Thank you. You may begin.
Neal Goldner: Thank you, and welcome to the Marriott Vacations Worldwide fourth quarter 2023 earnings call. I'm joined today by John Geller, President and Chief Executive Officer and Jason Marino, our Executive Vice President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued last night, as well as our comments on this call, are effective only when made and will not be updated as actual events unfold.
Throughout the call, we will make reference to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures and is schedules attached to our press release, as well as to the investor Relations page of our website. Before I turn the call over to John, as you saw in our earnings release last night with four vacation ownership resorts in West Maui, the wildfires had a negative impact on our results in the third and fourth quarter, despite having no physical damage to our properties. We added a table to our earnings release last night to illustrate the impact the wildfires on our business. In addition, during last year's third quarter with the launch of Abound by Marriott Vacations, we aligned the contract terms of vacation ownership sales across our Marriott, Westin and Sheraton brands.
We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands. These changes, which we refer to as the alignment, resulted in a non-recurring benefit of $7 million to last year's fourth quarter adjusted EBITDA. The schedules we provided in last night illustrate what our results would have been in prior year without this benefit. With that, it's now my pleasure to turn the call over to our CEO, John Geller.
John Geller: Thanks, Neal, and good morning, everyone and thank you for joining our fourth quarter earnings call. As you saw in our press release last night, we ended the year on a positive note, with contract sales increasing 4% year-over-year adjusting for the estimated impact of Maui. We're also very encouraged with how fast travelers have returned to Maui with occupancy during the month of December approaching the prior year. Housing in Maui continues to be a challenge for residents including many of our associates. Fortunately, our operations team was close to fully staffed as we entered the New Year, though only approximately 75% of our sales organization was back to pre-fire levels. Throughout last year we worked with owners to educate them about the benefits of the Abound by Marriott Vacations program, while at the same time our sales executives gained experience selling under Abound.
Today more legacy Sheraton and Westin owners are using the Abound program enabling them to experience its many benefits. VPG, excluding the estimated impact of the Maui fires was in line with the prior year. A meaningful improvement compared to where we were just a few quarters ago. And at this point, the impact of the Abound transition is behind us. 2023 was also an exciting year for our Hyatt business. We brought our 22 Hyatt resorts together under the Hyatt Vacation Club brand, unified our customer touch points and introduce the BEYOND program, which provides owners more vacation options. We also expanded our highly successful preview booking engine and we'll continue to replace inefficient off-premise marketing channels with more efficient branded channels.
This will enable us to grow towards and increase VPG in our Hyatt Vacation Ownership business this year, allowing us to better leverage our marketing and sales spending. First-time buyers represented roughly half of our tours last year and nearly one-third of our contract sales as we continue to focus on driving new owner growth. We also ended the year with more than 250,000 packages in our pipeline, which is an all-important driver of future sales. We saw strong growth in our international business last year, with contract sales growing more than 50%, and we expect strong growth in Asia Pacific again this year as the market continues to recover. On the development front, we announced two new domestic Westin Vacation Club projects, Charleston and Savannah, each of which will bring a new sales center when they open in a few years.
We'll also be opening our first Marriott Vacation Club Resort in Waikiki during the second half of this year, which comes with a new sales center as well. On the international front, I'm happy to announce that we recently signed an agreement for a 58-unit expansion, at one of our existing Marriott Vacation Clubs in Bali, bringing our presence in that destination to nearly 200 units. And our team is actively working with other new development opportunities to grow our resort portfolio. In our Exchange and Third-Party Management segment, interval ended the year with approximately 1.6 million active members, in line with the prior year while average revenue per member increased year-over-year for the third quarter in a row. On the inventory front, we've been working closely with our developer partners to stimulate supply earlier in the year, which we hope will drive higher inventory utilization and exchange transactions.
Despite the growth in leisure travel over the past few years, 92% of Americans recently surveyed said, they plan to travel as much or more this year, as they did last year and demand for international travel continues to be strong. While demand for domestic travel has normalized, it does appear that travel will benefit from a more lasting shift in spending, with consumers prioritizing experiences. As a company whose sole focus is providing memorable vacations for our owners and guests, that puts us in a great position to grow. At the same time, GDP is growing consumer confidence remains positive. Wealth indicators such as the stock market and home values remain robust and inflation is normalizing, all of which is good for us. Looking forward, we've got a great business with the exclusive rights to use the Marriott Sheraton Westin and Hyatt brands in our Vacation Ownership business, with products that resonate with customers and opportunities to continue to evolve our core offerings to meet the needs of today's consumer.
We also made significant changes in our business last year that are the right strategic decisions to help position us for growth. We took actions to realign our organization to best deliver long-term results, including hiring a new CIO to drive our IT transformation efforts, while revamping our organizational structure to create efficiencies. We also welcomed our first Global Head of Data Analytics to help us, find new ways to unlock the power of data while also providing more self-service options for our owners. Our Marriott Vacation Club brand will celebrate its 40th anniversary this year, and continues the bold vision to change the way people vacation. I've also had the opportunity to meet many of our associates around the world in my first year as CEO, and the energy and passion our teams bring to delivering consistently exceptional vacation experiences is apparent in each of them.
As we enter 2024, we're also watching our summer bookings closely given the change in travel patterns we saw last year. Right now, our keys on the books for the summer months in North America and international are up a few points, which is encouraging, but it's still early days. With that, I'll turn the call over to Jason to discuss our results.
Jason Marino: Thanks, John. Today, I'm going to review our fourth quarter results, the strength of our balance sheet and liquidity and our 2024 outlook. Starting with our Vacation Ownership segment. Contract sales in the fourth quarter declined 2% year-over-year, but increased 4% excluding Maui. VPG down 2% year-over-year, but was unchanged adjusting for the estimated Maui impact illustrating the substantial improvement, we've made since the second quarter. Adjusted development margin increased 160 basis points year-over-year to 33% driven by lower product cost. As we've mentioned in the past, one of the benefits of the alignment is that we do not expect to have the kind of quarter-to-quarter reportability impacts that we used to have.
So while we did report a $20 million net reportability benefit in our development profit in last year's fourth quarter, it was only a $1 million adjustment this quarter. As expected, sales reserve as a percent of contract sales increased due to the higher financing propensity and slightly higher reserve on originations as a result of the default trends we've been experiencing over the last several quarters. Delinquency and defaults were each up around 60 basis points on a year-over-year basis, largely consistent with what we saw in the third quarter and we believe our reserve is currently at appropriate levels. Reviewing the rest of our vacation ownership segment, rental profit was largely unchanged compared to the prior year with more keys rented being partially offset by increased unsold inventory expense.
Financing profit was largely unchanged with higher interest income offset by higher interest expense and resort management profit increased driven by higher management fees. Adjusting for the Maui impact in last year's alignment benefit, adjusted EBITDA in our vacation ownership segment would have increased 3% year-over-year. Moving to our exchange and third-party management business, higher revenue per member was offset by fewer member exchanges and lower getaway volume. As a result, adjusted EBITDA was $31 million in the quarter, while adjusted EBITDA margin was again strong at 52%. Corporate G&A costs increased $22 million year-over-year due to higher wages due to inflation, cost of transitioning IT service providers and incremental IT project spending to drive our digital and data initiatives.
Finally, total company adjusted EBITDA would have declined 10% year-over-year in the fourth quarter, adjusting for Maui and the prior year alignment benefit driven largely by those higher G&A costs. Moving to the balance sheet. We ended the quarter with more than $900 million in liquidity. We repurchased $38 million of common stock in the quarter and $286 million for the year or 6% of our shares outstanding. We also paid $106 million in dividends last year, bringing our total cash return to shareholders to nearly $400 million. We ended the year with net debt to adjusted EBITDA of 3.7 times, above our long-term target of 2.5 times to three times. Given our current leverage we think it is prudent to repay corporate debt, while also returning cash to shareholders in the form of dividends and buybacks.
We are targeting to get back to three times debt to adjusted EBITDA by the end of 2025. Moving on to our 2024 guidance. As you saw in our release last night, we expect our adjusted EBITDA to be between $760 million and $800 million this year. With the Abound transition behind us, growth in international contract sales and a strong package pipeline, we expect both VPG and tourists to grow year-over-year. While Maui occupancy has recovered nicely, rebuilding our sales force is going to take more time and we only expect to recoup a small portion of Maui's lost sales this year, making 2024 a rebuilding year for the Maui market. Because of the timing of the wildfires last year, we will have a more difficult comparison in the first half this year, though we will have an easier comparison in the second half.
Even before Maui, we had a difficult VPG comp in the first quarter due to last year's strong start of the year. So I would expect sales to be flattish in Q1 this year but to grow 6% to 9% for the year. We also expect tourists -- we expect development profit to increase driven by the higher contract sales. We expect development margin to be down a couple of hundred basis points in the first quarter due to the Maui impact and higher costs, including the higher sales reserve on new note originations, which I mentioned on our last call. As a result, we expect development margin to be down slightly for the year. Financing revenue is expected to increase this year, but financing profit is expected to be down due to the continued resetting of borrowing costs in the ABS market.
And rental profit will be impacted by higher inventory expense, both of which we mentioned on our last call. In our exchange and third-party management business, we expect Interval members to remain relatively flat and for average revenue per member to increase slightly. Finally, we expect G&A expense to increase year-over-year due primarily to the return of variable compensation expense. Moving to cash flow. We expect our adjusted free cash flow conversion to be in the 55% range this year and adjusted free cash flow to be $400 million to $450 million. This is after our plans to spend $65 million to $85 million in non-inventory capital expenditures for IT investments and upgrades to existing sales centers is -- well is -- roughly $65 million related to our new Waikiki project, which we expect to open later this year.
We also ended the year with roughly $1 billion of inventory on the balance sheet enough to support around $4 billion of future sales. Looking back, we delivered nearly $1.8 billion in contract sales in 2023, and although things didn't go quite as well as expected we did end the year on a positive note. Looking forward, we have a great business model with attractive margins and global growth opportunities. We also generate substantial free cash flow. As always, we appreciate your interest in Marriott Vacations Worldwide. And we'll be happy to answer your questions now, Operator?
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