Everything's off.
You can incorporate it in this discussion.
Yeah. Yeah, sure. So we have Michael Brown, President and CEO of Travel + Leisure Co, the world's largest vacation ownership company with over 270 resorts and 800+ owners. He's joined by their recently announced new CFO, Erik Hoag, who takes the reins from Michael Hug, who I see in the audience over here. He's going to be asking very difficult questions. Excited to hear from him as well. Thank you both for kicking things off this morning.
It's a great lineup, so thanks for letting us get started with you.
Yeah, absolutely. We were talking about, was it on the demand side, was it an April showers brings May flowers? Was maybe a debate around a title for our note yesterday, but we felt like flowers was maybe too strong of a word for the tone. Curious to hear how you would characterize the demand environment as you see it and maybe what you're thinking about longer term as well.
Let me answer the question, and then we can figure out the headline here. April, we reported on the 23rd of April, our Q1 results. What we shared at that time was we had a really strong consumer first quarter, and that demand had not abated in the month of April. We would not use the word showers. In fact, it was fairly sunny out in the month of April. We are five weeks on from that, and we have continued to see consistent, strong growth from our consumer demand. We have been listening very closely to what others have had to say. Obviously, there have been some crosswinds out there. I would say from our standpoint, really consistent performance on the top line as it relates to VPGs and tours. April flowers maybe brings May flowers as well.
There we go. That seems better.
It's better than showers.
That's great. I know that we've got our typical questions that we ask for everybody. Because we've got new colleague viewers on stage, we'd love to just hear, Erik, maybe what attracted you to the company and maybe what from your background would you say could be particularly impactful to the business?
First, thanks for having me today. I think that there were three predominant points that really attracted me to T&L. First, the durability of the business. I think that there is an underappreciation for the durability of the business. T&L's got a high concentration of recurring revenue, a lot of visibility to future growth, stable margins, and a very investor-friendly capital allocation approach. I think that the financial profile of the company is very, very interesting. Maybe in items number two and number three, the more I got to meet the leadership team and the management team that Mike had put together and the culture that that team had put together, it just became a very attractive opportunity.
Great. Maybe on your first point about the durability of the model, obviously been a window, even though we've had flowers and flowers, a little bit more anxiety from other folks in the broader industry. Maybe if you can help set the stage for how you think about Travel + Leisure's business model in different economic environments, why is it so resilient?
I think if there's any misperception out there, it's exactly that it's sort of a high-beta business. As soon as the economy goes down, a high-discretionary item is going to really suffer. The reality of our business is that we see the durability and the movement in our top line is to be very minimal. Why is the question? We have 800.
Maybe set the stage in terms of what's the average price point for a new.
For a new timeshare. Let's start with that, the idea that you're going to make a high-discretionary purchase, which is somewhere around $20,000-$25,000 is the average transaction. You don't pay that on a day. You're going to put 10%-20% down and then take a note on for 10 years. If you think about the decision that a consumer is making on the day, can I, does $400 a month fit into my 2025 vacation budget? I think if you look at hotel rates and all the rest, that's well within people's budget. Then you get into the whole value equation and how you like the vacation. That's on the day for a new purchaser. It's not a lump sum upfront. It's a stream of payments that you're going to be making anyways.
If you're going to rent a hotel room or an Airbnb, you're going to be swiping a credit card for multiple thousands of dollars at a single point in time as opposed to $400 a month continually for your loan duration. Now, the other reason that our durability and really consumer continues to remain strong is of our 800,000+ owners, 80% of them have paid off that loan. When they're making a decision in April, do I want to vacation this summer? They're not thinking, do I want to add to my credit card bill because it's already paid for? The cost of not going on vacation is the cost of going on vacation is basically it's a no-brainer. There's no opportunity cost. That's the big driver of why we're going to see high arrivals. We saw them in May above last year arrivals.
June and July is really shaping up to be a good summer. When you say to someone, you've already paid for your vacation, and by the way, you probably paid for it in 2018, 2019 prices, the value is super strong for our consumers.
But then there is also the operating leverage of the business. Maybe if you can touch on, talk about some recurring revenue streams, but also how do we think about the operating expenses of the business and how that might ebb and flow?
We have got a pretty variable model. The three revenue streams, the three profit streams are the sale of vacation ownership, the management of it, and the loans. We have $3.1 billion of consumer notes. It has been securitized to the ABS market, so there is no variability there. You come across to the management, which is a cost-plus basis, and we take 10% above the cost, 10%-15%. That is not going to hurt us. Really, when you get to the sale and the ultimate development of our resorts, the volume per guest, which is the hotel equivalent, is RevPAR. Every single dollar of revenue we get per guest we see has remained consistently high post-COVID. We have seen that able to allow us to drive 22%-25% margins consistently coming out of COVID and even before COVID.
It's been a very consistent model. And as we got through Q1, our margins were again in that similar range, and we expect them to remain there for the remainder of the year.
Right. I think the other area of pushback that we often hear from investors is that timeshare is really for a different generation than the next generation coming up, which maybe is a perennial question mark about a lot of things. How do you think about addressing and assessing the next generation of owners? What KPIs can you share that would bolster your ability to capture whether it's Gen Z or whoever else?
Sure. In the past 10 years, you've seen us have very few Gen X and mostly baby boomers to where we are today, which is about 65% of our new owners are Gen Xers or millennials. We're seeing the Gen Zers show up for the first time in the last two years, small percentages. The reason is the average new purchaser for us is in their 40s, which is where we want to sit for our type of product, which is when people are more dedicated to brand consistency, amenitized resorts, and a network of resorts that you can access. One rhetorical comment I'll make in the room is a lot of people still think of our industry as when you think of timeshare, I'm going to go to Clearwater Beach the third week of March.
I'm going to stay in my same two-bedroom, and I'm going to have the same northeast view or northwest view to the Gulf. That industry went away in 2008. Today, 80% of sales in the industry are done by a branded hospitality company: Hilton, Disney, Marriott, Holiday, and Wyndham, Margaritaville. Therefore, beyond it being a branded industry, flexibility has skyrocketed because you can not only use the 280 resorts we have, but you'll have the CEO of Wyndham Hotels here later on today. You can exchange your ownership to go to any one of the hotels there. The same is true for Hilton and the same is true for Marriott.
Therefore, the balance sheet, the reputation, the flexibility is all there because in the end, whereas you might have in 2007 gone to Clearwater Beach every year and enjoyed your vacation in that same unit because that was timeshare then, now you can go for March Madness in Vegas and go stay in a studio for two nights and then take your family down to Orlando and stay in a two-bedroom for five nights or for eight nights, depending on what you own. That is probably the other big misperception, how dramatically this industry has evolved.
Now, with that flexibility, I think the consumer also then wanted a much more diverse set of options to where they can vacation, but then also led to consolidation in the industry.
It did.
One, are we done with consolidation? Two, how do you think about the scale benefits from consolidation when you have this variable model embedded?
A few things. We've gone from an industry that's over 50 developers, individual developers that have one site, two sites, three sites, and not really a club system to a consolidated industry today that is probably 10 developers of size, if that. Most of them are the branded hospitality companies I mentioned. There might be more consolidation, but it's not at the pace or the scale that we've seen in the past. I think there will be more, but there's just simply by the law of fewer numbers that there can only be so much. How has it helped?
I sort of referenced it in my last question or last answer is the consumer has been the big beneficiary because as long as if I vacation with my ownership for the next 30 years, I won't get to 280 resorts, and I surely won't get to all the hotels that I can exchange into or cruises or events that you can also use your ownership with. It is really broad-based flexibility backed by the quality and consistency that brands offer that has been the major beneficiary. From our standpoint, operating-wise, the scale really comes in sales and marketing is you can do large-scale partnerships, which we have been able to exercise over the last five years to sort of ramp up our marketing as opposed to being a small single-site player.
I guess maybe if you can dig into that a little bit, how has then sourcing changed for customers or how has that marketing evolved?
The three primary sources of marketing in this industry are owners who buy more, which is the most consistent, predictable to the durability of the business. We know when someone buys today, they're going to buy 2.6x more in the future over 10 years. It's locked in high-margin business because they're satisfied. The second is general marketing, which is people who are not familiar with their brand. What you're referring to at these partnerships is finding complementary companies that you can tie our hospitality experience with their lifestyle experience. Let me give you a real-life example. We're partnered with Live Nation.
If you go visit our resort in Vino Bello in Napa Valley, we might be able to tie that to the Bio Rock Festival that's there and have an experience that's outside of the resort and then come back to your resort where you lay your head and enjoy your vacation. We're partnering with different companies as well as Sports Illustrated. We just announced Sports Illustrated Resorts recently, and we've just hosted the Sports Illustrated Club at the Kentucky Derby, where our owners can get access to the paddock, nice buffet, all the stars coming through in their nice outfits, and then sneak out to the track and watch the race firsthand. To me, that's where hospitality is going is not just the bricks and mortar, but also the experiences that come with it.
I just found Sports Illustrated. How quickly can sales ramp as that deal finalizes and how it might be approaching Sports Illustrated, similar or different to the other brands?
The brands we have today are Wyndham, Margaritaville, Sports Illustrated, and Accor. The way we're thinking about our business is each of those businesses, we can leverage our core competencies of sales and marketing management and accessing the financial markets to grow each of those at their own pace without being in conflict with one another. Our core Wyndham brand, which is $2.4 billion of sales, is owners, partnerships, and open marketing. We view these new brands as primarily owners and affinity marketing. Accor Vacation Club using the Accor database, marketing in Accor hotels, growing their brand through owners. We think that the Sports Illustrated, Margaritaville, Accor, maybe Accor has more in it, is probably $200 million-$500 million versus Wyndham, which we've been developing for 40 years, which is now $2.4 billion.
Given that each of these brands is more or less starting at zero, it is a very clear runway to exercise in a new brand what we already do very successfully. We are not trying to reinvent the wheel. We are trying to take our core skill set and apply it to brands that have great loyalty bases, a lifestyle affinity, and hospitality.
Is there a natural cadence to how close rates evolve? I imagine there's some kind of change in how people are selling the product.
Today, in our Wyndham product, two-thirds of our sales roughly are to existing owners, and they close at nearly double the same rates as a new owner, someone buying for the first time. As we launch Sports Illustrated, because we have new owners, everyone we sell will be a new owner. Close rates will start lower. We'll invest capital in those businesses. From there, it'll start to move to the cadence that's eventually where we are with Wyndham. Your margins, your close rates, and your owner mix will change as you grow each of those brands.
Another area that we get kind of pushback or feedback on is really around the receivables portfolio and provisions in particular. It always seems that delinquencies tend to lead to provision and sometimes maybe goes the other direction. How should investors reconcile that you've had an improvement in FICO score, seemingly improved the borrowing base, but at the same time, the provision still feels a little bit elevated versus history?
Why don't we let Erik talk about the provision, and then I can sort of tie it into the consumer demand.
Tag him in.
Yeah. We did see delinquencies. As we talked about in the first quarter call, we did see elevated delinquencies in the first quarter. We also mentioned during the call that during the month of April, in the run-up to our first quarter call, we did see some moderation associated with delinquencies. In the 30 or 40 days since that time, we've seen that moderation persist. The provision for 2025, as we talked about, is 21%. While I think that there's some seasonality that we may experience here in the second quarter and the third quarter that may tick it over 21%, we feel good about the full year 21% number.
Yeah.
If you think about it, if you think about the buying pattern versus the provision, the provision is, as I mentioned, a $3.1 billion portfolio where we borrow at roughly 4% and we lend at roughly 14%. That is great business for us, but it does represent $3.1 billion of consumers who are already in it. When the market is uncertain, when there are maybe the April showers in the more broader macro economy, not necessarily with our performance, that does affect the provision. Every quarter, we update our provision, and it is based on 40 quarters, right? We are just one 40th updating, and it reflects recent reality of what is happening in the market. We are not concerned about waking up one day and seeing, "Oh my goodness, our provision's way off.
We need a big adjustment." Given recent history, I think it's very important people understand is we're seeing what you would normally see in business is slight modulation to the provision, a little bit up, a little bit down. Buying performance, people are still going on vacation. I know that we've seen some news out of the airlines, but what we're seeing is if 80% of our owners have already paid for their ownership and they're going to go, they're like, "I don't know if I want to swipe the credit card for $2,000 for flights for my family." They might just fill up the tank of gas, drive down to Myrtle Beach, or drive down to Tennessee, or go to Nashville and enjoy a vacation and be a little more cautious that way, but they're not going to give up their vacation.
If they're not giving up their vacation, they're talking to us at a point in this environment where they've chosen to go on vacation. That has our sales team and our marketing team continuing to deliver really strong VPGs. We're very pleased with not only the April performance, but how that's continued in May.
Great. I've got a couple of follow-ups on the financial receivables book. I guess first on the provision, if I take a step back and think 10 years ago, which may be dating myself, but the provision stepped up when there was some third-party default activity. This was before the pandemic. As I said, your FICO scores have improved. It seems like that third-party default activity has subsided. We just do not hear about it as much. Maybe some people hear about some of the couple of commercials here or there, but it seems like it has kind of gone away. Is there an opportunity to further reduce the provision as a percentage of the receivables going forward as you have effectively upgraded the owner base?
Yes. We saw last year the provision moving down. It started to move down from sort of the peak of the third-party activity. As you mentioned, our minimum FICO is 640. Our average FICO is between 730 and 740, the highest in the industry. We would expect that as sort of uncertainty abates and increasing confidence comes back to the market, while our top-line performance stays, we see two things as a potential tailwind in our provision. Number one is that it does float back down below 20% eventually. Secondly, depending on if rate cuts come, our lending does not really change, but our borrowing will. We have endured, I think the number was something like $30 million of headwind last year because of interest rates that we had used in the ABS market.
As those begin to come down, it's a very natural tailwind that drops 100% to the bottom line in the next few years if they cut rates.
Right. So maybe on the securitization market and liquidity side, that's another area that I think sometimes people get concerned about that in a tighter macro, that might dry up. What are some of the steps you've taken to bolster the balance sheet and have sources of liquidity in those different environments?
Liquidity is not something that keeps us up at night. I'll point back to COVID where in the second quarter of 2020, when basically every hospitality company got rid of their dividend and pulled down their revolver and loaded up the balance sheet, we cut our dividend from $0.50 to $0.30 and never really sweated it. We turn our EBITDA into over 50% cash flow, and we'll do so again this year. That's our guidance, and we're not changing that.
Ultimately, as you look going forward, as it relates to our ability to generate cash flow and our bolstering of our balance sheet, our free cash flow generation, the fact that we really time our capital spend to revenue, which is a huge change from where this industry used to be, we feel very confident that not only is our balance sheet strong, it allows us to do, and I'll let Erik speak about this, a capital allocation strategy that's in a nutshell, 4%-5% dividend. Every year, we've been buying back 7%-10% of our shares, and we're growing at mid-single digits, all while having a leverage that's right around 3% or 3x levered. We're right now at 3.3. Our capital allocations—let me let you talk about it. I get excited when I talk about our capital allocation strategy.
What is exciting? It comes back a little bit to the durability of the business model that I mentioned at the top of the meeting. From a capital allocation perspective, first, we want to invest and grow. To Mike's point, very capital-light. CapEx is a function of revenue. It's roughly 3%. We'll be opportunistic associated with inorganic growth if there's something that can expand our reach or enhance our products. From a dividend perspective, very committed. Since 2021, our dividend has grown roughly 16% on a CAGR basis. We increased to 12% earlier this year. To Mike's point, the dividend yield right now is roughly 4.6%, 460 basis points. Beyond that, we use our available cash for share repurchase. Over that same time period, 2021, we've retired roughly 7% of our WASO on a CAGR basis.
A large concentration of our available free cash flow is going back to our investors. Again, coming back to that really attractive financial profile.
I want to make sure I get this 100% right, but I think our market cap right now is $3.2 billion, and we've returned $2.6 billion since 2018.
As of the end of last quarter.
As of the end of last quarter.
You're not updating that right now.
We're not updating. I think what Erik said is exactly right, is we've been a very consistent returner to shareholders and absent a clear opportunity, which we've seen them. We used it to change our name to Travel + Leisure. We bought Accor Vacation Club last year. So we're always looking, but we know our investors love that dividend and share repurchase along with the growth.
You talked about that steady capital spend and matching it to revenue. Help frame where inventory levels are. Why is that the right amount of inventory? Why we wouldn't maybe see it go up or go down in the future?
We do not think we have the right amount of inventory today. The reason is, coming out of COVID, a few things happened. We were committed to finishing resorts that were already under construction or we had contract commitments to. We fulfilled those, and that delivered resorts up until about 2022. At the same time, 2020, our sales declined, obviously. We built up inventory on our balance sheet that we are carrying today, roughly four years, maybe four and a half years' worth of inventory. The ideal scenario is one and a half years. That is where I talked about interest income being a tailwind for us going forward if rates drop. This is another area where we have very natural positivity coming in the future because we do not need to go out and build new resorts today. We have 280, plenty for a family to vacation with.
Our ability to conserve cash and not deploy it for resorts that we do not necessarily need today is important. We will opportunistically, but we have tons of optionality of not deploying cash and returning it to shareholders over the next two to three years until that inventory balance gets back to around a year and a half to two years.
Right. Now, a related question on that then is, if you bought inventory back or built it before a lot of that inflation, it seems like that could be a good thing for margins. So maybe talk about the puts and takes to margins.
That's a great place that we are at the moment because we know what's on the balance sheet from a cost of goods sold standpoint. We take back a lot of inventory on an annual basis, either through defaults. Life situations cause people—you lose a job, divorce, death. There are reasons that we take back inventory. When we do, we're taking it back at a relatively low cost that we built years and years ago. We take it back at a very reasonable cost, and then we're selling it at today's prices.
We have a really good situation where when we look at our cost of product going forward, it's one of the areas that we feel we have our hands firmly on the wheel, and we're not concerned about supply chain, tariffs, new build, new construction costs, which is very expensive at the moment because we have our inventory situation absolutely locked in for the next few years on our core Wyndham brand, our core Margaritaville brand. As we do Sports Illustrated and build more core, that will be incremental. It is not a risk factor that's going to materially change as it relates to cost of product.
When you think about your margins from here, not just this year, but maybe looking further out, do we generally think that they're going to have opportunity to expand, hold steady? Are there any pressures to think about or investment in the near term behind some of these new brands that are being folded in?
I would describe it as holding steady because I think we continue to see opportunities, as I mentioned, on potentially our portfolio and inventory, which will drive positivity on our core Wyndham margins. However, anytime you invest in incremental business, do a conversion or a new build for a new brand, you're going to have only new owners, which come with a lower margin, and you're going to have new build construction. The immateriality of the new brands laid against the materiality of our core predictable brand, I think in the end, when you weigh it all, you should be able to retain those over 20% margins going up to 25%.
Right. One of the other questions we've been asking all the companies at the conference has been really around AI and how to think about, is that an opportunity from a top-line standpoint, margin, other, and where are you maybe looking to deploy it currently?
Yeah. Whether it's AI or digital, our core mission is to get people to utilize in the maximum way their ownership. We're deploying both digital opportunities and AI to get people booking more. The more people go to our resorts, the more they buy. It's just absolutely proven. Our first biggest focus is to utilize AI and digital marketing to get our existing owners back to resorts. We have room in our utilization to get that up even higher, and that has huge visibility going forward for us. I think a lot of companies would say we're going to use it to help code in our IT department and build your IT systems both faster and more efficiently. I think the more interesting part for us is consumer-facing.
That's great. We've got a couple of minutes if folks have questions in the audience. We can take one there. Otherwise, I can keep going.
Surely.
I appreciate everyone showing up.
People haven't had their coffee yet.
For their breakfast or coffee.
One of the areas we didn't touch on was travel and membership, that segment. So perhaps talk about the expectation for acceleration of the Travel Club in particular, I think, following the first quarter, and any other kind of puts and takes that folks should think about in that segment.
Yeah. So we've really spent the 40 minutes or 30 minutes talking about vacation ownership, which, as I said, let me just recap that as we really strong VPGs, really good tour growth, and a consistent consumer demand on the vacation ownership side. As we move to travel and membership, we mentioned on the first quarter call, that same consolidation that's helping the entire industry, which we think is great for the industry, puts headwinds around our exchange business because the exchange business was all about connecting single-site developer to single-site developer and giving them a worldwide network. As the industry's consolidated, the exchange business, which represents most of our $250 million of EBITDA in the Travel and Membership segment, has definitely a headwind against it, and we continue to see pressure on the exchange business.
With all that said, our team's doing a great job, and we're sort of hold and serve in that front. On the Travel Club business, that is our first foray outside of timeshare, closed user group, behind a paywall, discounted travel. We do see continued growth in that space. We are excited about not only Travel Clubs, but experimenting with more non-timeshare-based products. The reality, again, sort of although immaterial, it's not enough to sort of offset the exchange headwinds. We are really leaning into vacation ownership that's performing very well. It's more than making up for our Travel & Membership pressure, and then we're trying to really spark some innovation on the Travel Club side to see growth.
On the exchange side, I mean, do we hit a plateau at some point, or what are the different things that you're trying to think about to stem that deterioration in the value proposition there?
It will hit a plateau at some point. I can't sit here today and say, "I thought we would have this time last year, and we haven't." That's okay because although we know that that is an issue that we're having to address, and we sort of talked about this check-in to check-out concept, which is the exchange business, our opportunity is to expand that beyond and get a broader travel share of wallet. We aren't there yet, but we're not sort of just waiting for this plateau to occur and hope the Travel Club takes off. As management, we're there to be proactive, and we're being very proactive to find other opportunities. Keep in mind, 1% growth on that level of EBITDA is $2.5 million. I mean, there are plenty of opportunities out there.
We just need to find the right ones, maybe partner with some other companies to really start grabbing a bigger share of wallet.
We're a little over time. Next up, we will have Marriott joining us, but please join me in thanking Michael and Erik for all their insights today. Thank you.
Thank you.
Appreciate it.
It was a.
Very nice to meet you.
Thank you.