Yahoo Finance Travel + Leisure Co. (NYSE:TNL) Q3 2023 Earnings Call Transcript
Travel + Leisure Co. (NYSE:TNL) Q3 2023 Earnings Call Transcript October 25, 2023
Operator: Hello and welcome to the Travel + Leisure Q3 2023 Earnings Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to turn the call over to Christopher Agnew, Investor Relations. Please go ahead sir.
Chris Agnew: Thanks, Kevin and good morning. Before we begin, we'd 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 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 the earnings call. And you can find a reconciliation of the 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 third quarter results and Mike Hug, our Chief Financial Officer will then provide greater detail on the quarter our balance sheet and outlook for the rest of the year. Following our prepared remarks, we will open up the call for questions. With that, I'm pleased to turn the call over to Michael Brown.
Michael Brown: Thanks, Chris and thank you for joining us on our third quarter earnings call. This morning we reported adjusted EBITDA of $248 million, a 6% increase over the prior year and adjusted diluted earnings per share of $1.54, a 20% improvement over Q3 2022. Third quarter adjusted EBITDA margin was 25% flat compared to the prior quarter and prior year. Our team delivered solid results against key performance indicators, particularly the Vacation Ownership business. Sales volume per guest and gross VOI sales were at the top end of expectations, as well, new owner, and total tour flow increased 36% and 18% respectively year-over-year. In keeping with our commitment to grow our new owner base, the transaction mix increased nearly 200 basis points to 35% of sales.
The provision for loan loss came in ahead of expectations at just over 18.5% reconfirming the improvements in owner credit quality. Regarding capital allocation, we returned $98 million to shareholders in the third quarter through a combination of dividends and share repurchases which puts us on track to reduce our outstanding shares by 10% for the full year. From the start of 2022, until the end of the most recent quarter, we have reduced our share count by 16%. Since then, we have reduced our share count by 27 million shares or 27% of shares outstanding. Let me update you on the key performance indicators we monitor to gauge the health of our consumer. Forward resort booking sales volume per guest and the performance of our consumer finance portfolio.
Regarding forward bookings, Q4 owner nights on the books are 7% ahead of fourth quarter 2019 reflecting a continued strong booking pace. Total owner arrivals are ahead and length of stay is 5% above the fourth quarter of 2019. Of note, in our postpaid surveys, nearly one quarter of respondents worked remote while staying at our resorts reinforcing the work from anywhere trend that we believe is one of the factors behind longer length of stay. Turning to BPG, our third quarter BPG was $3,108 above the top end of our guidance range. On an absolute basis, BPGs are healthy and reflect the strong value proposition of our products and for the full year our outlook is improving to $3,100 to $3,150. BPG did declined $42 from the second quarter, but 90% was due to the higher new owner mix.
BPG remains well above our long-term guidance range of $2700 to $3,000. In 2023, we made a strategic decision to ramp up new owner marketing channels to continue growth of new owner tours. Year-to-date, we have had success with new owner tours which have increased 35% over the same period in the prior year. Over 70% of this growth have come from open market channels or package sales. This investment positions us to achieve our long-term plan for new owner transactions to be 35% to 40% of all sales. We expect this tour pipeline to yield incremental growth over the next 12 months and grow our pipeline of future upgrade sales. Blue Thread, which is our new owner marketing channel, aligned with Wyndham Hotels continues to exceed expectations with BPGs nearly 50% higher than other new owner channels.
We expect Blue Thread sales to finish the year at an all-time high over $100 million. Our third key performance indicator is our consumer finance portfolio, which performed well in the quarter. Delinquencies remained below 2019 levels and our outlook for the full year loan loss provision is unchanged at 18% to 19%. At the end of the third quarter, only 10% of our portfolio had FICO below 640. And year-to-date the average FICO score for originations is 738. All in all, our Vacation Ownership segment continues to perform well. The continued strength in our Vacation Ownership business was challenged by headwinds in the Travel and Membership segment. This segment continues to lag expectations due to lower exchange propensity and slower than anticipated ramp up of travel clubs.
Accordingly, we are making structural and operational changes to reduce its cost structure, while maintaining focus on driving transactions in both exchange and travel clubs. These changes will occur prior to year end allowing us to enter 2024, more streamlined. Coming into this year, our expectation was that our exchange business would maintain the 2022 transaction propensity levels and that travel clubs would ramp up through the year. Instead we experienced a decline in exchange propensity throughout the year. To put it in perspective, or exchange propensity is nearly 20% off pre-COVID levels. Mike will provide more details in a moment, but the lower expectation at Travel and Membership in combination with 3Q coming in toward the lower end of our guidance is the reason for our full year reduction - for our reduction in full year adjusted EBITDA guidance to a range of $900 million to $915 million.
As we look at next year, it is worth reflecting the Travel and Membership over the last four quarters had revenues of $716 million and adjusted EBITDA of $253 million with a healthy 35% adjusted EBITDA margin. The business has low capital requirements, strong returns in cash flow. We expect that Q4 will mark the trough in revenue momentum for Travel and Membership due to a combination of stabilizing transaction propensity trends and pricing at RCI and growth in our travel clubs. On the strategic front, we acquired the rights to the Vacation Ownership business of Sports Hospitality Ventures, the hotel and resorts licensee of the Sports Illustrated brand. Our plans including network of sports themes resorts located in popular college towns and in leisure destinations.
A family boarding an airplane with their suitcases, symbolic of the company's reach into the global travel industry. Editorial photo for a financial news article. 8k. --ar 16:9
We will be launching and managing a Vacation Ownership Club under the Sports Illustrated Resorts brand. Among the strategic goals we shared at our Investor Day with the intention to add incremental Vacation Ownership revenue streams under the Travel + Leisure brand. We are proud to launch this expansion with Sports Illustrated, the most celebrated name in sports with nearly 70 years of legendary content. Tuscaloosa, Alabama, Home of the University of Alabama has been selected as the first college destination in the Sports Illustrated Resorts portfolio and is projected to open in late 2025. Our goal is to develop Sports Illustrated Vacation Ownership inventory in a capital efficient manner. We have several addition locations - additional locations in the pipeline and more consideration after significant inbound inquiries following the Tuscaloosa announcement.
We're excited by the initial representation of our strategy to add new brands to our portfolio and we look forward to sharing more with you over the coming quarters. As a reminder, it's important to remember that the prepaid nature of timeshare ownership is a key differentiator for our business model within the leisure travel industry. 80% of our owners have fully paid for their timeshare and therefore the choice to vacation is less dependent on economic conditions. As we have seen historically, our healthy mix of recurring and predictable revenues is one of the reasons we expect our business will continue to be resilient as we enter a more challenging economic environment. This resilience in demand among timeshare owners has been proven time and time again, most recently coming out of COVID.
With that and for more detail on our performance, I would now like to hand the call over to Mike Hug.
Mike Hug: Thanks, Michael and good morning, to everyone, as well as discussing our third quarter results, I will provide more color on our balance sheet and cash flow, as well as update our outlook for the remainder of the year. All my comments will be first comparisons to the same period of the prior year, unless specifically stated. We reported third quarter adjusted EBITDA of $248 million and adjusted diluted earnings per share of $1.54 increases of 6% and 20% respectively. Year-to-date, adjusted growth is 5% and adjusted EPS growth is 16%. The adjusted EBITDA growth was achieved in spite of several headwinds in the third quarter, which includes the fires in Mali, two hurricanes in Florida and up the East Coast of the US and higher than anticipated healthcare expenses.
Although not individually material, they amounted to $5 million and combined to push our results to the lower end of our guidance range. Vacation Ownership reported segment revenues of $812 million, an increase of 8%, while adjusted EBITDA of $203 million also increased 8%. We delivered 187,000 tours, in the third quarter representing 18% growth and BPG was $3,108, above the top end of our expectation. The Vacation Ownership segment also incurred some incremental marketing expenses in the quarter associated with the ramp up of our tour package pipeline and opening of additional new owner marking locations, both of which are designed to benefit our tour flow in 2024 and beyond. Revenue in our Travel Membership segment was $174 million [Ph] in the quarter, compared to $183 million in the prior year.
Adjusted EBITDA was $62 million, compared to $65 million in the third quarter of 2022. Exchange member count has started to recover but not enough to offset the reduction in transaction propensity. We expect the headwinds to exchange transaction propensity to continue into the fourth quarter. Turning to our balance sheet, our financial position remains strong and in the third quarter, we continue to return capital to shareholders through share repurchases and our quarterly dividend of $0.45 per share. Through the first three quarters of the year, we repurchased $267 million of common stock and paid $104 million in dividends. In October, we closed our third ABS transaction of the year, a $300 million transaction with a weighted, average coupon of 6.8% and advanced rate of 92%, continuing to demonstrate our ability to access this market on a regular basis.
In addition, during the quarter, we renewed our $600 million ABS condo facility and moved the maturity date to September 2025. Adjusted free cash flow was $81 million for the nine months, compared to $195 million in the same period last year. Similar to the first six months, this is due to higher year-over-year originations on our loan portfolio, certain other working capital items and an increase in interest payments on our corporate debt. For the full year, our expectations for free cash flow conversion from adjusted EBITDA is for it to be around 50% with the majority of free cash flow generated in the fourth quarter. Our net corporate leverage ratio for covenant purposes was 3.7 times at the end of the third quarter. We continue to expect our leverage ratio to decline by the end of the year to below 3.5 times.
Turning to our outlook for the rest of the year, we are reducing our expectations for full year adjusted EBITDA to range between $90 million to $915 million, a 5% to 7% increase over 2022. Our expectation for the fourth quarter is for adjusted EBITDA of between $233 million to $248 million. With respect to Vacation Ownership we remain confident on our core timeshare business and its ability to continue to deliver strong sales performance. We're increasing our outlook for gross realized sales for 2023 to range at $2.15 billion to $2.2 billion on improved BPG guidance of $3,150 to $3,150. In the Travel and Membership segment we expect fourth quarter adjusted EBITDA to be in a range of $45 to $50 million. Related to EPS, we are expecting our effective tax rate to be around 27% for the full year, with stock-based compensation expected to be around $12 million in the fourth quarter and anticipate net interest at $62 million in the fourth quarter.
Looking ahead to next year, we expect the rapid rise of interest rates in ‘22 and 2023 to stabilize at elevated levels in 2024. As such, our expectation is that interest expense on our asset-backed securitizations once again, be an incremental $30 million headwind to adjusted EBITDA in 2024, similar to 2023. As we continue our 2024 planning process over the next few months, we will also revisit our longer term outlook. This will allow us to take into account the impact of the interest rate environment over the full-time horizon, slower Travel and Membership growth and the updated view of a well-performing VOI business. We'll provide more color in the first quarter of 2024. In summary, we are pleased with our third quarter performance, our continued growth in adjusted EBITDA and double-digit growth and adjusted diluted earnings per share, as well as our continuing return of capital to our shareholders.
With that, Kevin, can you please open up to call to take questions?
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