All right, everybody, we're going to jump into our next session, which is with Marriott Vacations Worldwide. I'm joined by John Geller, who's the President and CEO, and Jason Marino, who's the CFO. Just to start things off, and we had a conversation to start the day with one of your peers. I think one of the things that people often get either confused by, or there's a misconception around timeshare in general and vacation ownership, is that it's highly discretionary, highly cyclical. Maybe talk to us a little bit about how you think about the cyclicality of your business model and maybe help dispel some of that thought process.
Sure. Sure. While it is a discretionary purchase, right, your upfront purchase of timeshare, it is an investment, as we talk to folks, into your future vacations. It is not about just purchasing for this year, right? It is the value you are going to get over the lifetime of vacations. I think half our business is, when you talk about the management portion, management fees, our membership, even our financing business, right, good recurring cash flows. Where you potentially see some volatility is if, on the broader consumer, right, there is some hesitancy to buy for whatever reason. They like the product, but they just decide not the right time to write, on average, $25,000-$30,000 check or finance it with us. We saw a little bit of that as we went through the first quarter.
Like I say, if you're a glass half full, the fact that, given all the macro volatility, our VPGs, whether those were for first-time buyers or owners, were down roughly 2%, right? People are still buying, right? They're making that long-term investment. And quite frankly, if you think there's going to be higher inflation and things like that, it might be a good time to buy because, once again, this is for you're locking in on a price today that is going to go up over time. We take our price per point up, but if it's a highly inflationary market, right, it's going to get more expensive.
You're making me think that we need to do a tour at the end of this day for everybody.
It is the other thing, and you've heard this, I'm sure, from a number of people you talk to in terms of the pure leisure side. Coming out of COVID, people have put a much greater priority on experiences, and that's what we offer. We continue to see that. Our resorts this year will be 90+% occupied year-round across all our vacation ownership resorts. We run a very high occupancy, and we see that as we look through the balance of the year. People are going to show up. For us, it's about informing them about the benefits of that lifetime of vacations and getting people to buy.
One other follow-up on that question would just be beyond just the demand, which maybe we'll dig into the demand side further, but what about from a business model standpoint? Or maybe remind folks of how much operating leverage or lack thereof there is, and what are the main levers that you have to pull to kind of navigate if things go both positive or negative?
Yeah. Like I said, 40% of our EBITDA is recurring, and it typically grows every year. Our financing profit and outstanding higher securitization rates. We're starting to see growth in our financing profit as we've been securitizing at higher rates, and the lower rates have kind of cycled through. The management fee business and even the membership side of that, both on the VOI as well as the Interval side, we see good consistent great cash flow. The volatility comes, and we talked about this a little bit on our first quarter call, was if people are a little bit hesitant in buying. That's where we'll manage that, and that's where we can offer some what we call first-aid benefits, higher incentives to make the value proposition a little bit sweeter and get people to buy. That worked. We rolled out in March for first-time buyers.
We rolled out some incentives, and you saw the increase. I think we were, of all our competitors, that our mix of first-time buyers was the only one that went up. Our competitors went the other way in the first quarter in terms of their mix of owner and first-time buyer sales. On the owner side, we did roll out some promotions here in May. We are starting to see the benefits of that as well in terms of closing efficiencies.
I guess to follow up on that, if you see kind of deviations in the consumer environment, one of the levers, the first lever that you would pull in terms of the playbook that you would follow would be promoting to try to drive demand. It sounds like you saw some of that. Is that, I guess, are we seeing, should we be anticipating then that there's a temporary kind of pressure point on margins before they then re-expand because of some of those?
Yeah. The goal, when you think about our margins, obviously, we have a broader modernization project to take costs out of the business, which should help improve margins across the business. It is really about getting VPG growth, right? Your cost to get all the tours and everything is fixed. If you can get a slightly higher closing efficiency, you're going to get better margins, better flow through in that. We are focused. We had finally started coming out of COVID, which was kind of an all-time high for VPGs in 2022 with a lot of pent-up demand. That had continued to kind of still way above 2019, but you saw the VPGs coming down. Finally, in the second half of last year, we really saw the stabilization. The fourth quarter was, I think, our first quarter where we grew VPGs year- over- year.
As we talked about on our call, we saw January get off to a good start. You had a lot of the more macro noise kind of kick in in February and March, and that is where we saw some of that softness. We do not make those decisions day to day, right? You are looking at it over a couple of weeks. What are the trends? What are we hearing at the sales table to kind of sweeten that offer? We will make adjustments. The good news is, at least knock on wood here, more recently, there is not as much volatility in the day-to-day. That could change. If we are successful, get that VPG growing again, that is going to help with your development profit and leveraging your marketing and sales costs.
Maybe to make sure I reframe correctly, it sounds like there was a bit of a step down from the volatility, but feels like maybe we're on firmer footing.
Yeah. It is definitely stabilized. What we saw, we talked about on the call, we were down. VPGs were down. Our sales were down roughly 3% in March. April, with all the tariff stuff, we saw more volatility, down 4%. For May, we are still down, but not down as much. We saw some improvement with some of the initiatives, and that continues to be the focus. How do we get that VPG going the other way?
Maybe looking long-term, the other kind of area of pushback that we hear from folks is that it's for a different generation, that it's not going to be able to attract the younger consumer. What do you see in your business that would give you confidence that the next generation is going to be as much an owner of your timeshare as the prior?
Yeah. I mean, it's a couple of things. I mean, if you look at our first-time buyers, I think Millennial, Gen X, about 60%, right? I've always said it's a bit of a life stage product, right? At the same time, you also look at how the product has evolved over time. Back when we used to sell a specific week at a certain property and you didn't have all the options, as the product has evolved with the point system and all the things you can do outside of just staying in one of the villas, exchange for cruises, African safaris, there's a lot more opportunity for folks to get on vacation different ways. Also, for younger travelers, we've added a lot more city experiences, and we call our city collection.
We're going to continue to enhance the offer, and it'll become, I think, more and more relevant to folks. Given the size of our units, two bedrooms, typically 1,200 sq ft, full kitchen, amenities, things like that, they do kind of trend towards people with families. That's where I call it more of a life stage as you start to travel if you have kids and staying in a couple of hotel rooms. Different than maybe some of the short-term rentals where you can rent a home or a villa, these are all brand standards, right? For our customer, it is about the value proposition, knowing that you're going to get a very comfortable bed and the units are going to be clean and all that stuff.
That consistency is big in terms of as you get older, right, you're willing to pay a little bit more for that consistency and not have the variability in your vacation. It continues to resonate as we haven't seen the demographics change over the last 20 years in terms of average age of our first-time buyers, early 50s. Average age of our owners are about 60 or so. It is not like you're seeing that age trend change as people and how they want to vacation and what we have to offer. It resonates.
Two follow-ups on that. One is just remind us from a customer demographic, what's the average kind of income and household worth? Then secondarily, as new buyers have, maybe they're not younger, but could their behavior shift in terms of upgrades, or has that been pretty consistent as well?
No. For the first part of your question, average household income we target is in that $125,000-$150,000 a year. Average self-reported net worth is about $1.5 million for our owners. That has been very consistent over the last 15-20 years in terms of who we are targeting. In terms of the upgrades, what we see is a first-time buyer, typically 40% will upgrade. That has not changed much either. As they like the product, they want to make it more of their, I will call it vacation wallet, right? Buy more points, have more time at our resorts. They add more over time, so.
One of the sourcing channels is clearly kind of the existing customer base. For new customers or new owners, I should say, remind us, what are the primary sources and what are some of the initiatives that you have to potentially either expand or enhance those?
Yeah. Yeah. Historically, given our licensing agreements with Marriott and Hyatt, we do a lot of marketing into the Bonvoy and the World of Hyatt. We have probably 28-30 data points that help us focus in based on what we have learned historically of who is most likely to buy, who to make offers to, things like that. It is interesting. More recently, on the Marriott side, for example, there are a lot of people that book at a Marriott hotel but are not a Bonvoy member. Historically, we would say, well, they are not going to be a good marketing prospect. What we have found as we have kind of looked and tested different channels is actually if they have the other data points in there, they actually are a pretty good target.
We're always looking to kind of, I call it, expand the marketing funnel, try different ways of making offers to people that maybe historically we hadn't tried or we thought for whatever reason. With all the data and analytics and things that we've been doing, it helps, right, in terms of expanding that funnel.
I think you mentioned that, was it 70% growth in online as a source? Is that mainly email that they're coming through and clicking through? Do you know or where?
I think what you're referring to is owners are booking 70% of their villa stays now online. Three or four years ago, that was about 30%. People would call our owner services, our call centers to book their villa stays. As we've enhanced the technology, you also got to remember there's more opportunity there because about 20-25% of people use their ownership points each year to book outside of villas. Right now, to book those type of vacation packages, you have to call. The goal is over time, no matter however you want to use your points, in a villa, go on a cruise, all that.
Seamless.
Yeah. Move more online. Gen AI becomes a real opportunity with some of that too in terms of how people want to plan and book their vacations. A lot of great work as part of our modernization to continue to move off. We use AI today. We've rolled it out in our call centers over the last couple of years, whether that's our virtual voice. A lot of questions, you don't even need to talk to a live operator. They can handle. We've got chatbots and things like that that we continue to enhance what they can handle. That's where, once again, with Gen AI, you start to get the real opportunities there over time. It'll be able to handle more and more without ever talking to an operator.
I guess I was also thinking about then that can also, I would imagine, over time tie into how you even get people to tour, how to sell packages.
Yeah. Absolutely.
Maybe remind us what % of your tours come from packages and then what could that be?
Yeah. It's about 25%. And typically, those are first-time buyers that are potential first-time buyers. We want to, first and foremost, and I said we were on a 90% resort occupancy. We want to get our owners happy with the product because they potentially buy more. We want to make sure they get their vacation needs met. We also get a big chunk of inventory every year for people that exchange to go outside the system or inventory that we own that we haven't sold yet. That's where we typically, that's the inventory we use for packages because we could otherwise rent it. For us, when you run a 90% occupancy and definitely high-demand locations like Hawaii, where you might run a 97%-98% year-round occupancy, it's more the supply of rooms to put those packages in.
It becomes a bit of a limiting factor in terms of driving more package growth over time. We will continue to do it because, yeah, you make a little bit of money on the rentals. The opportunity to make sales, right, is more than worth it. It is always trying to maximize that value.
You talked about the consistency in owner upgrades. I guess what percentage of owners have upgraded at this point?
I don't know if you know the.
So.
Yeah. I mean, we used to talk about in terms of weeks, but on average, that has not changed much. An owner owns on average about one and a half weeks of timeshare, right? One of the things that we do with our points program, and we have on the Marriott side of the business now over 40 years, is people that have gotten a lifetime of vacations are not traveling as much. We recycle that. We are taking people out that would not otherwise buy more and replacing those with first-time buyers and that opportunity to buy more and upgrade over time. We do know, like I said, first-time buyers on average in the first, call it 10 years, 40% of them will buy more. That might be half a week, a week. It could be a couple of weeks, right? That is where depending on the owner.
When you were referencing the volatility and the demand, was that centered on any particular sales center or geographies?
No. It was generally kind of across the system. Like I said, in the first quarter, VPGs for first-time buyers and for owners were down 2%. So while there could be a little bit in one sales center versus another, it was pretty much kind of across the system that you saw that just high-level general softness and closing efficiencies.
Right. You mentioned at the outset that you have a master plan effectively for modernization. That could be an opportunity. I mean, it is an opportunity for margin enhancement. Maybe give us an update on where you are in that and where the savings are going to come from, not only now, going forward.
Yeah. Yeah. So yeah, we've targeted $150 million-$200 million, called it incremental EBITDA, just normal growth that we expect to get over the next couple of years with the idea that $150 million-$200 million run rate will be in place by the end of next year. We came out this year and our original guidance, we said this year should have called $15 million-$25 million. As we've gotten into the program and have been able to accelerate initiatives, we took that up to about $35 million this year, which also pulled forward more savings and revenue opportunities next year from what we originally said. The teams are working hard to do more, right? Like I said, as important as getting the revenue growth and the efficiencies, it's also about changing our culture on how work gets done, the agility.
We're already starting to refill the pipeline of future opportunities and things like that. While we talk about the program in terms of two years, the idea is we kind of, I call it muscle, build that agility and muscle and how the organization moves quickly, how we hold outcomes and accountability and deliver on that and really change the speed at which we move going forward.
One of the other areas that you had some improvement on was the cost of VOI to start the year. Maybe talk about what changed there. Was that more efficient buying or are there tools that are going to drive a sustainably lower cost of VOI?
Yeah.
Yeah. So it's really two things as we think about just not just the first quarter, but the rest of the year and then the out year. For a number of years now, we've talked about slowly increasing our cost of VOI, which we sometimes call product cost, just as we look at the mix of how much is repurchased inventory that we're recycling from owners as well as the cost of new inventory. Where we sit today in the first quarter, we were a little bit lower, and that really had to do with the mix of the product that we sell. We try to sell owners kind of what they want. We have Sheraton, we have Westin, we've got Marriott owners, and they all have slightly different product costs within them.
As the mix of customers changes, that has some impact on it. Then as we thought about the rest of the year, as we brought our contract sales guidance down, the mix of the inventory that we'll sell, more repurchased inventory this year. It is really just that mix of product that we'll sell this year as we move forward.
Does that mean that next year we should be assuming that maybe that goes up, but it is going to be coming at the same time that these other initiatives kind of fully kick in?
Yeah. I don't think it really impacts next year. As you go forward, next year, we'll have a different set of assumptions, and we were going to have the higher product cost next year anyway. I don't think it really does anything on an absolute basis to the plan for next year. As we've talked about it over the last few years, the last couple of years, we've guided towards having this higher product cost over time. Each and every year, as we get into our repurchase programs and tweak those on the margin to try and continue to drive lower costs on the repurchase side, we've been able to offset some of that increase that we've been foreshadowing for a number of years. This is really just a continuation of those efforts.
Is that more purchasing of existing inventory, meaning just recaptured inventory relative to new inventory? How do you think about the right inventory level and the right mix of inventory?
Yeah. It's a lot of that continuation of that. If you go back over the last 15 years, we've done a lot of good things on the product cost side from that repurchase inventory, whether it's the deals that we strike with our COAs because the COAs are responsible for the maintenance fee delinquencies and defaults in terms of that's their bad debt. We repurchase that inventory from COA. We've adjusted our pricing to them. As we exercise the right of first refusal on inventory that trades in the secondary market, we've gotten involved in that. We're always looking to do the best that we can for the company as well as the owners on that side in terms of letting folks out.
Makes sense. Maybe thinking about the credit book, mentioned last quarter that delinquencies improved despite everything that was going on in the macro. I think some of that follows some initiatives that were put in place. Perhaps talk to how you're getting delinquencies to kind of buck that trend. Is there further opportunity there to improve the credit book and the portfolio?
Yeah. So we're always working to enhance our collection procedures and things like that. I think one of the bigger drivers that really we associated with the delinquency rises in delinquencies over the last couple of years was really the increases in the maintenance fees that we had in 2023 as well as 2024. We had almost a 25% collective increase for the two years combined. It was really important for us to keep those maintenance fee increases for 2025 down to more of that historical low single-digit number. We achieved that being in the low 3% for our points-based products. We think that had definitely something to do with the performance. We know from owners calling us up about maintenance fees, those calls are down about 30% year- over- year.
Then in addition, more proactive outreach, email campaigns, making it easier for folks to pay online as we talk about the modernization and better technology. A lot of the tools that are available in the market, we have also implemented over the last nine months as the delinquencies rose. We feel really good. Year-end is always our highest delinquency quarter. There is some seasonality in terms of delinquencies. The year-over-year improvement through the quarter and into April continued to get better as well. Delinquencies right now are approximately where we were in 2023. We have kind of gone through that peak of 2024, and we are back down, and we feel good about it. Also, as it relates to the overall loan book, we have increased our reserve percentage about two percentage points on a balance sheet basis versus where we were two years ago.
We're continuing to reserve at a higher percentage, but we feel pretty comfortable with the portfolio as it currently stands.
Just a couple of follow-ups on that. One, the delinquencies that you did see last year and then the improvement this year, is that specific to certain geographies or customer types or even within the brands?
As we think about it, we did see more stress with the lower FICO score bands, as you might expect, but there is nothing really geographical to really point to. It was really more FICO band oriented than it was anything else.
From a brand perspective, we've seen improvements across all the different brands as well. Those have come down pretty consistently across brands.
On a delinquency basis, correct?
Correct.
Your FICO scores then by brand, there is a lot of mix that is happening. If we look independently at those, have they improved as well? How should that inform us of where your provision should go?
Yeah. We do. We use FICO as a primary indicator of credit risk. Our overall FICOs for originations, not first-time buyers, but originations is about 735. That's up a little bit over the last several years. The most improvement that we've had has really been on the shared and consumer. When we acquired ILG in 2018, we really focused on eliminating some of the lower quality channels like OPC and things like that. We have moved the FICO scores up since we acquired ILG in 2018. It is up about 10 points or so in that front.
Have you changed what % needs to be put down, or are you seeing any change in what people are willing to put down?
No. Our product has largely always been a 10% down product. We do drive for higher down payments, but generally, it's a 10% down requirement to purchase for financing.
Got it. If folks have questions, I'll go out to the audience. I've got a couple others. People need their caffeine pickup in the afternoon. One of the, it's a smaller portion of your business, maybe a good free cash flow business, is the exchange third party. What are the major initiatives and changes that you're implementing or contemplating to shore up the trajectory of the top of the bottom line in that business?
Yeah. At a high level, it is about a little bit more about wallet share. Our overall member count in that business has been pretty steady over the last couple of years. I think, Steven, as you know, as timeshares on the vacation ownership side have changed and more people like us on the branded side expand their club offerings, fewer people are exchanging, right? They are more of those playing in their own corporate club versus that kind of week-for-week exchange. For us, it is how do we continue to get owners to deposit time and market and do those types of things. From a wallet share perspective, we offer Getaway Vacations, which are rentals with third parties where we have inventory and things like that. It is enhancing those offerings. For example, those have typically been non-refundable.
We are going to expand that offering to have a refundable offering. Those are things that if it is non-refundable, you might be like, "Well, I'm not going to book that." If I got a refundable opportunity, and all the stats would say typically 80% of the refundable stuff will stick, right? You have some optionality. We got a lot of legacy systems there that we got when we bought Interval. It is about enhancing that, more dynamic pricing in terms of what is going on. It is very kind of static and manual right now in terms of how we adjust offerings on the rental side. It is about we have got this 1.6 million members, right? Can you bring different offerings besides pure exchange? That is where we have got some real opportunity to add that over time.
Let's change gears and look at capital allocation and your free cash flow. One, just give us a sense of where free cash flow conversion has been and where it should be longer term.
Yeah. So historically, our free cash flow conversion has been really well north of the 50% mark, 55%-60%. There was a couple of years there during COVID when we really coming out of COVID had really high VPGs, and inventory spending was lower that I think we achieved 70% one year. This year, it'll be kind of in that low 40% range. That's driven by a couple of things. We do have a little bit higher inventory spend on a relative basis. As you think about how we think about inventory over cycles, we always think over the long term, you're to have a little bit of growth in the business. You need to grow your inventory relative to your cost of product each and every year. Inventory is not—we're not selling widgets. We're selling physical units and resorts.
The development is a little bit more than bite-sized sometimes. We are always planning at three to five years out. As you go back in time, we had expected to have a little bit higher contract sales, so our inventory spending is a little bit higher. During COVID, we had contracted to buy a property in Waikiki that somebody was developing, a third party was developing. Now we are acquiring that a few years later. We do our best to modulate that and keep that consistent with our product cost as we go forward. If you look back over the last 15 years, most years, we have had really positive inventory cash flows from inventory. Longer term, we do think it will be slightly negative. Right now, we are sitting with about three years of inventory on our balance sheet.
That's a little bit more than we would like. We'll work to get that down to two years. There is a little bit of embedded tailwind there over the next several years from a cash flow perspective as we work our way through some of these commitments. Obviously, we have the repurchase program, which is running about $80 million-$90 million a year as well.
You sold some non-core assets recently. I guess, are there other opportunities for that? Do you think about how you allocate that capital different than what's generated from the internal business?
We do not include it in our free cash flow, right, as we talk about it.
Understood.
Yeah, in the near term, as you mentioned, we got about $150 million-$200 million of, I'll call, the biggest one being the Sheraton Kauai Hotel that can't be converted to timeshare. It generates EBITDA. It's good. We are not a long-term owner of hotels. We have had to work through some of the agreements there. It's on a ground lease. It's taken a little bit longer since we bought ILG to sell that. That's the biggest opportunity. Waikiki, there's a retail component of that. We do not need to own that retail. We have got a parking garage in San Francisco and just things as part of those projects that are accessed.
In the near term, what we've talked about is we've got to call it $200 million plus or minus of investment related to getting these modernization benefits of $150 million-$200 million is really to kind of offset some of that here in the near term from an overall cash flow perspective.
Makes sense. We're almost out of time, but I've got more of a hypothetical question. It's going to be, I always throw these ones out at you. I guess if I think about, you said you're not a long-term owner of hotels and resorts. Theoretically, you could recapture and you would own all of your properties eventually.
The trust will own.
Correct. Your trust will own.[crosstalk]
Yeah. The owners own a beneficial interest in that trust. At the end of the day, they still own real estate, but maybe not a week specific.
I guess I'm getting at the value of your stock, the enterprise value of your stock should probably be in some way, shape, or form tied to the value of that underlying property, meaning how many rooms do you have again?
24,000 villas, I believe.
24,000 villas. That's rooms, individual rooms, roughly.
Yeah. Two hundred [crosstalk] on average. Yeah.
Typical hotel development, how much does that cost per key?
Probably a million per key now today to rebuild that. To your point, we're in locations like.
Expensive discount to NAV right there.
Yeah. West Maui. We've got a couple of Westins, a Marriott, and a Hyatt. And there's no new timeshare going into West Maui and Ka'anapali Beach where we're at, right? So in a lot of locations, there's no new product coming online, especially from a timeshare perspective. So yeah, you got a lot of opportunity.
Could you, I guess, because it's in the trust, you can't theoretically carve out an individual asset if you were to recapture almost an entire asset?
Okay.
That was my thoughts. My thoughts for the day. We're right at the end here. Please join me in thanking Marriott Vacations team for all the thoughts. Thanks, guys.
Thank you.
Thank you. [crosstalk]
You're going to need 24,000. I mean.[crosstalk]
Some are talking about.[crosstalk]
Some might be a lot more than a million a key, but.
Yeah.
I mean, you think about Newport Coast, a bit of that property, 750 keys in Newport. Good luck.
You just.