Marriott Vacations Worldwide Corporation Price & Performance (VAC)

I need to remind everyone that many of our comments today are not historical facts and are forward looking statements under the federal securities laws. These statements are subject to numerous risks and uncertainties, which could cause future results to differ materially from those expressed in or implied by our comments. Forward looking statements in the press release as well as comments on this call were effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non GAAP financial information, You could find a reconciliation of non GAAP financial measures and the schedules attached to our press release and on our website. With that, it's now my pleasure to turn the call over to John Geller. Thanks, Neil. Good morning, everyone, and thank you for joining our fourth quarter earnings call. We had a solid fourth quarter reflecting our team's hard work and the resilience of our demonstrating that our proactive steps to strengthen performance are working. One notable area of strength in the economy continues to be leisure travel. And the steps we've taken to expand our sales reach and adjust our promotions are enabling us to capitalize on this.

I've always believed that people prioritize their vacations following the pandemic, this has been even more pronounced. This trend continued in the most recent quarter where we ran system wide resort occupancy of 90% including 95% occupancy in Hawaii, and we remain committed to meeting the needs of our customers as they prioritize spending on vacation to enjoy time with their families and friends. Believe our resorts with their extensive amenities and spacious accommodations are the best place to do it. And our customers agree with us. Before we get too deep into the fourth quarter results, I'd like to reflect on what we accomplished last year as well as give you my view for 2025. Our owners and our other customers can but they also are facing economic pressures. So last year, we launched a number of initiatives focused on driving revenue expanding our sales reach, and adjusting our promotional strategy. We also expanded our use of virtual tours and non traditional sales channels like road shows and owner cruises.

The result was a 7% increase in contract sales in the fourth quarter with first time buyer sales growing even faster. It was also great to see Hawaii sales grow double digits year over year in the quarter. On the development side, during 2024, we opened our new Waikiki Resort and announced plans to build a new Marriott Vacation Club in Thailand additional units in Bali, and the first Hyatt Vacation Club in Orlando. We also reopened a second Volley sales center in June, which will help us drive outsized tour growth in Asia Pacific in the first half of this year. We rebranded our Pulse locations as our city collection last year To design for those who want to use their ownership to explore urban locations, this collection includes our resorts in places like New York, Boston, San Diego, Bangkok and now Waikiki. And I'm excited to announce that we plan in Downtown Nashville including a new on-site sales center. Known as Music City, Nashville will make a great addition to our city plan to acquire this new purpose built project from a a developer when it opens in late twenty twenty seven. In our exchange and third party management business, Integral welcomed 12 new all inclusive resorts to our global exchange network last bringing our total all inclusive network to over 150 resorts, offering more ways for members to enjoy their membership.

Across the business, we're making great strides in harnessing the power of data and analytics to boost efficiency and growth. We continue to digitize consumer capabilities allowing owners to transact as they prefer and we see further opportunities to enhance customer interactions and drive efficiencies through technology. Looking forward, research shows Americans still have a strong desire to travel. With eighty percent of adults planning to take a vacation this year. While international travelers to The U. S. Are expected to increase this year, and travelers from Asia Pacific are leading the way when it comes to international travel. We believe we are in a great position to capitalize on these growth trends. And enhance operational efficiencies through our business modernization work. As you know, we've made a number of strategic acquisitions over the years to bolster our market position while disposing of a number of smaller non core businesses to focus on key growth areas. Our primary motivation for pursuing this initiative now is to speed decision making across the organization ensure we have the right cost structure for the future and optimize our IT platforms while providing funds to invest in high potential leisure focused This initiative encompasses all areas of our organization and we expect some of the largest buckets of savings will come from increased automation inventory optimization, procurement and corporate overhead.

This initiative also includes substantial opportunities to For example, in our vacation ownership business, by continuing to tour mix, and upgrading our sales center technology we believe we can drive improvements in VPG. And by leveraging a new state of the art revenue and inventory management platform, expect to be able to drive increased occupancy and higher ADR. All in, we expect this initiative to generate an additional hundred and $50,000,000 to $2,000,000 in annualized adjusted EBITDA by the end of twenty twenty six. With half coming from cost savings and efficiencies and the other half from accelerating revenue growth. Jason will provide more details on the timing of the savings and the investments needed to achieve them in a minute. We realized the past eighteen months haven't been easy, but through it all, we've never stopped obsessing about delivering the experience our owners and others expect of us. Which is why our guest satisfaction scores are higher today than they were last year and in 2022. Our overall strategy remains the same though our tactics certainly have evolved over time. We will continue to deliver operational excellence and meet an exceed our customers' expectations This is the most important thing we can do as an organization.

Our core offerings will continue to evolve and expand through the development of new properties and travel experiences, We will further harness the power of advanced data and analytics to improve efficiency enhance the customer experience and increase profitability and we will look for additional ways to drive growth through the launch of our new leisure focused businesses. We are planning on hosting an Investor Day in New York later this year, and I hope to see many of you there. With that, I'll turn it over to Jason to discuss our results in more detail. Thanks, John. Today, I'm going to review our fourth quarter results, our balance sheet and liquidity position, our cost savings and efficiencies initiative and our outlook for the year. Starting with our Vacation Ownership segment. We ended the year on a very strong note over year, outperforming our expectations on adjusted EBITDA. First time buyer contract sales increased 9% year over year our best performance in nearly two years, and owner sales increased 6%. Defaults and delinquencies were largely unchanged on a year over year basis in fourth quarter our sales reserve was nearly 12% in line with our expectations. As we have talked about in the past, we have always had high underwriting standards even through the pandemic we've not lowered them have also taken steps to improve the underwriting standards of our acquired brands.

This commitment is reflected in the rising average FICO scores of our originated notes. Which have increased each year since 2020.

Addition to keeping maintenance fee increases for our points based products to low single digits this year, have also implemented enhanced collection processes and increased staffing to address our default and delinquent impact As a result, our delinquencies have stabilized over the past few quarters. Continuing down the P and L, product cost was relatively flat year over year on a percentage basis marketing and sales costs increased, as a result, development margin was a strong 26%. Moving to the rest of our VO business. Rental occupancy increased 300 basis points and profit increased 20 Marriott% Resort management profit increased 6% and financing profit was 6% lower due to higher borrowing costs. As a result, adjusted EBITDA in our Vacation Ownership segment was $221,000,000 margin was 27%. [indiscernible] Moving to our Exchange and Third Party Management segment, adjusted EBITDA declined $9,000,000 year over year with roughly half of the decline related to lower profit at Aqua Aston and the balance due to lower transactions at Interval. Finally, corporate G and A expense to [indiscernible] driven largely by lower project [indiscernible] As a result, total company adjusted EBITDA decreased 1% to $185,000,000 We We ended the year with leverage of roughly four times, which is higher than our long term goal of three times more than manageable.

We also had more than $900,000,000 in maturities until early twenty twenty six. And with the majority of our interest expense fixed, interest rate exposure for the current year is limited. Also returned $163,000,000 to shareholders in the form of dividends and share repurchase [indiscernible] We have more than three years of inventory on the balance sheet based on 2025 contract sales guidance and we continue to look to optimize our inventory spending. We also plan to spend $90,000,000 to $95,000,000 on reacquired inventory this year. Which is at well below replacement cost and keeps our overall product cost down. [indiscernible] Looking forward, we expect contract sales to grow in the 2% to 6% range this year tours and VPG each growing in the low single digits. We expect to deliver $750,000,000 to $780,000,000 of adjusted EBITDA including $15,000,000 to $25,000,000 from our modernization initiatives. [indiscernible] We added more than 20,000 new first time buyers last year and have added nearly 90,000 since 2020. Based on history, over 40% of these new buyers will purchase additional points within ten years, providing us with substantial built in future sales. [indiscernible] also ended the year with a pipeline of roughly 260,000 packages, with more packages already activated for travel this year compared to the same time last year providing a good start toward achieving this year's contract sales goal, After a good January, we saw some softness at the February, which has since stabilized.

Because of that, contract sales in Q1 could be flattish depending how the rest of the quarter [indiscernible] Moving to the rest of our VO segment, we expect development profit to increase year over year and for financing profit to be largely unchanged. In our VR rental business, we expect profit to decline around $15,000,000 due to a higher mix of keys and lower ADR Marriott, higher inventory balances and the expiration of COVID related programs that drove rental revenue in 2024. As a result, we expect adjusted EBITDA in our VO segment to increase around 5%. Our exchange and third party management segment, revenue at Interimals is expected to be relatively flat while Aqua Ascent is expected to improve due to increased visitation in Maui in the second half of the year. As a result, we expect adjusted EBITDA to be relatively flat for the year. Finally, G and A is expected to increase year over year driven by higher incentive compensation and increased technology spending. G and A is also expected to benefit this year from our modernization work. Moving to our strategic business modernization initiative. As John mentioned, we believe we have substantial through our business modernization work.

We expect to drive $75,000,000 to $100,000,000 of annual run rate cost savings inefficiencies over the next two years from this initiative, as well as an additional $75,000,000 to $100,000,000 of adjusted EBITDA from accelerating growth opportunities. Savings will primarily result from modernizing our processes and systems, optimizing procurement and reducing overhead cost, the revenue benefits are expected to come from a number of areas including higher VPGs, increased tours, improved occupancy and ADRs. For modeling purposes, this year's adjusted EBITDA guidance includes $15,000,000 to $25,000,000 in benefits with the majority coming in the second half of the year. We expect next year's incremental benefit to be an addition with the full P and L benefit achieved in 2027. Do anticipate incurring one time costs related to this initiative, which we excluded for adjusted EBITDA purposes. Moving to cash flow. We expect our adjusted free cash flow will be $290,000,000 to $350,000,000 year? This excludes around $100,000,000 of onetime cash costs this year related to our modernization initiatives and an incremental $100,000,000 next year. Our conversion rate this year will be lower than our past experience and future the current year. Long term plan is to continue to return cash to shareholders while also focusing on reducing leverage back to three times.

We also have a few non core assets that we expect to dispose of over the couple of years that we think could be worth $150,000,000 to $200,000,000 which will largely offset the cost of the modernization effort. Proceeds from the sale of these non core assets are not reflected in our adjusted free cash flow guidance. So to summarize, we had a solid fourth quarter growing contract sales 7% and reducing overhead costs.

Looking forward, our business is in great shape Consumers continue to allocate more of their dollars to experiences.

Including travel and are telling us they love our spacious villas.

We've added nearly 90,000 new owners over the past five years and entered this year with two and sixty thousand packages in our pipeline. Providing us with a long runway to grow tours. Investing in the business to drive revenue and efficiencies across the business expect to generate $150,000,000 to $200,000,000 over the next two years on a run rate basis. We have happy owners who continue to buy more points each year. And we are humbled that they choose to share their memories with us year in And you're out. Finally, we'll be hosting an Investor Day later this year and hope to see many of you there. With that, we'll be happy to answer your questions.

Operator? Thank you. We'll now be conducting a question and answer session. One moment please for the first question. The first question today is from the line of Bruce Naranoff with Deutsche Bank. Please proceed with your questions.

Hey, good morning, guys. Hi, Chris. Thanks for taking the question. Good morning. So you mentioned in the prepared comments the new owner mix it was up nicely in 2024. Is that a trend you expect to continue in 2025? And then kind of along with that, are you seeing any changes in propensity to finance among your first time buyers Yes. Thanks, Chris. Yes, I mean, as we've talked about with with all the package tours and driving first time buyer growth, yes, the goal is to continue to get out outsized performance and more first time buyers. That's what you saw the benefit in terms some of the contract sales growth in the fourth quarter. The offset is we've always talked about, is the acquisition costs, the marketing and sales costs related to those first time buyers is higher than it is for existing owners. So but yes, for the long term health as we've always talked about, we want to continue to grow first time buyers, investing in those stores and excited to see some of that change in mix in the fourth quarter and [indiscernible] propensity for first time buyers, we haven't really seen a big change in propensity Okay.

Thanks, John. And then the follow-up would be Okay. Thanks. So the follow-up would be you mentioned I think $90,000,000 to $95,000,000 of inventory repurchase. This year, does that correlate with the kind of that increased reserve you took last year? In other words, are those units kind of being realized into, I guess, repurchase, if that makes sense? No. I mean, when you think about what we're talking about there, it is more owners that have owned a long time, aren't using their getting on vacation as much and we're taking stuff back. There's maintenance fee, defaults, a smaller piece that we take get back from the homeowners association and all that. So that's fairly stabilized as we look at it just kind of churn, if you will, in the existing owner base Okay, got you. Fair enough. Thanks, John.

Our next questions are from the line of Ben Jakam with Mizuho. Please proceed with your questions.

Hey, how's it going? Thanks for taking my questions. Hey Ben. I'd love Hey, how's it going? I'd love to just maybe think about the bridge from 24 EBITDA the 25 guide, maybe at the midpoint without getting too in the weeds, I know you mentioned there was some pressure on rentals. I believe if I pick that up of around 15,000,000 I guess maybe just like clarifying that headwind and then also on top of that, was there a compensation headwind 'twenty five versus 'twenty four from a management compensation perspective? If so, don't know if I caught that that headwind in the prepared remarks. And then could you also help us presumably there was a 1Q year over year provision headwind just because things ramped in kind of 2Q, 3Q of last year. So I'd imagine that created a tough comp, but just maybe providing a little more context to those numbers? Thanks.

Sure.

I'll start here. Jason can talk a little bit about the provision stuff. Yes, on the rental side, look '24 was a great rental year for us. Us. We had a couple of things going on that benefited '24 versus where we started the year. We knew we had plus points, which are we had given out higher plus points to incent people to buy coming out of COVID. So I think '21, 2022 timeframe. And because of COVID, we gave people longer time to use those two, three years. So there was a kind of a convergence of expirations, if you will, of of some of those COVID points, which we would normally, there's plus points would be our inventory we could otherwise rent, right? But there was slightly higher expiration and we picked that up and then we were also able to drive as we talked about high occupancies and rent those. So we got call it about a $10,000,000 benefit give or take as the year wrapped up in rentals. Really benefited 2024. We just don't we don't have that in 2025. Think as you look at 25% a little bit as we've always talked about on the rental side, different than a hotel company, right, the mix of inventory that we were going to have to rent depends on how people exchange and owner usage and where they're staying and we do expect it to skew towards some lower ADR markets.

I think the desert and Orlando this year, which is a bit of a headwind. That said, with all the modernization work and things we're focused on, we're hoping to do a lot better again in rentals like we did last year. So the team is focused on it. But just as we sit here today as rentals kind of sets up, that's kind of the year over year. Again, on the G and A side, you had two things benefiting us last year. We did have lower bonus payouts. And so the midpoint of the guidance, there's probably roughly $15,000,000 to $20,000,000 of of higher variable compensation, call it bonus expense year over year. Then the other thing in the quarter is, Jason mentioned this in his remarks, we're really focused on the business modernization, the sequencing, all the work that in flight and we wanted to get going. And as a result, from a project spend perspective, we slowed some stuff down till we get the plan finalized and get things kick off here as we were coming into this year. And that probably benefited us, call it roughly $8,000,000 to $10,000,000 last year helped with a little bit of the outperformance.

But we've got a lot of work to do, right? It was a bit of a timing thing. So those are I think year over year the two biggest kind of I'll call them headwinds just because they're going to be higher costs, less rentals, if you will. And then I think your other question was just more on the loan loss? Yes, Ben. On the loan loss, I guess the way I think about it is as we go through the year, it will be a slight headwind year over year in Q1 assuming we're kind of at that 12% number for Q1.

And then we'll obviously have the tailwind as we pass Q2 with the sales reserve increase last year and then the second half of the year should be relatively flat year over year. So that's the way I think about it. And then net it'll be a tailwind. For 2025, but it will be a slight headwind here in Q1 as we lap Q1 Okay, got it. That's very helpful. Maybe just a quick clarification. So on the rental side, just maybe Maybe distill it down or simplify it. Dollars 10,000,000 hard comp from benefit in 2024 and then the way your customers are choosing to travel in 2025. [indiscernible] lower ADR rentals being available.

Correct.

And then it sounds like you've got $15,000,000 to $20,000,000 higher variable comp, which makes sense. And then I guess you were saying you slowed some project investments in 'twenty four. And then those are picking back up in 2025 so that creates another 8,000,000 Just to maybe distill everything?

Yes, I think I said 8% to 10% in that range. That's right.

Yes. Thank you. Appreciate it.

Our next questions are from the line of David Katz with Jefferies.

Please proceed with your questions.

Hi, good morning. Thanks for taking my question.

I'd love just a little more hey, good morning. I'd love to just a little more background or context on around the sort of cost and revenue initiatives and sort of how they I guess how they came about [indiscernible] I imagine there's some ramp post COVID where we're just trying to get the business running again. And maybe now taking attendance on some things that you may not need. But how did all this sort of start come about that would be helpful.

Sure.

Yes. I mean, as you're aware, we've obviously done a few acquisitions here. And so a lot of these initiatives were already identified things we were working on. The real as we took a step back, the real driver was what's holding us back on some of our growth initiatives [indiscernible] [indiscernible] these were all things not all things, because we also engaged the organization more broadly on other ideas and things that we could really do to either drive efficiencies or drive growth and really program around that. That's what we call our modernization effort. And then it was really about sequencing, but the costs we're talking about is really just an acceleration of a lot of things we wanted to do, especially on the technology side. Jason talked about some of the one time investments. These were expected to happen over time, but we weren't getting the growth opportunities by waiting. And so as we took a hard look at it, we said how do we accelerate all this? Which will both take costs out because you'll get off of duplicate applications consolidate, but also use applications that will better marketing and sales efficiencies, right, better technology for digitizing how our consumers interact with us.

Technology that we've rolled out in the call center, on virtual voice to to service our customers and enabling more things in that area.

So it was really putting a hard focus in what I'm excited about is just all the energy it's created with our leaders that have been involved in this and the offer opportunities to really accelerate growth and having a clear plan as how we're going to going to move forward.

Understood. Thanks very much.

Thank you. Next questions are from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Hi.

Good morning, everyone. Good morning. Looking forward to the Investor Day in the fall.

A granular question, specifically on the G and A, we've got a couple pushes and pulls here. And perhaps for modeling purposes, we're starting with a, I guess, a GAAP figure for the full year twenty twenty four, dollars $243,000,000 specifically on a growth rate or perhaps slight decline, off of the February, how should we think about that sort of percentage wise? Hopefully, that makes sense. I think February. Yes. So I think as we talked about, I mean, we're going to have a return already mentioned of call it $15,000,000 to $20,000,000 of incentive comp and then some of that higher IT project spending. So I think you just take those two and and figure out the growth rate there.

Are we missing I maybe not understanding your question, Patrick. Well, you have cost savings, but then you have the higher IC, the higher incentive comp. I'm just trying to see like what's the net of the pushes and pulls in there just so we can [indiscernible] And remember cost savings and things that we're pursuing those aren't all in G and A. Right? Those get spread through some of the different business lines. Now there's a piece in G and A, I don't know, I'm looking at Jason. I don't know how much we kind of spread into the G and A for cost savings from the SBO.

Yes, it's about $10,000,000 right now.

Thank you. At this time, I would like to hand the floor back to Mr. Geller for closing remarks.

Great.

Thank you everyone for joining our call today. Had another solid quarter growing contract sales 7% year over year, with first time buyer sales growing 9%. We also ended the quarter with 260,000 preview package, packages, which puts us in a good spot as we enter the year. Consumers around the world are choosing to spend their discretionary dollars on travel and we have strategies in place to capitalize on that including adding new resorts in The U. S. And in Asia Pacific, along with new sales centers. We also expect to generate $150,000,000 to $200,000,000 in run rate adjusted EBITDA benefits by the end of twenty twenty six through our business model I believe our company is positioned well the excitement from our modernization initiative to accelerate growth has energized our organization. I hope many of you come to our Investor Day later this year to hear about how we plan to grow in the future as well as speak with our senior leaders. Customers around the world, I want to thank you for your continued interest in our company and hope to see you on vacation soon. Thank you.

Thank you, does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.