Travel + Leisure Co.

Good morning and welcome to the second quarter 2021 earnings conference call for Travel and Leisure Co., formerly Wyndham Destinations. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press the star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. As a reminder, ladies and gentlemen, this conference is being recorded. If you Thank you. I would now like to turn the call over to Chris Agnew. Please go ahead.

Thank you, Brittany. Good morning and welcome. Before we begin, we'd like to remind you that our discussions this morning 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 you can find a reconciliation of the non-GAAP financial measures discussed in today's call in our earnings press release available on our website at investor.travelandleisurecode.com. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our second quarter results, and Mike Hugg, our Chief Financial Officer, will then provide greater detail on the quarter, our balance sheet, and liquidity position. Following these remarks will be available to respond to your questions. With that, I'm pleased to turn the call over to Michael Brown. Thank you, Chris. Good morning, everyone, and thank you for joining us today. As you saw from our release this morning, leisure travel returned significantly last quarter, which led to our very strong second quarter results. We reported second quarter adjusted EBITDA of $193 million and adjusted diluted EPS from continuing operations of 88 cents. As vaccination rates climb and domestic travel restrictions are lifted, leisure travel demand is increasing, and we are fully participating in the recovery. Adjusted EBITDA margin in the quarter was 24.2%, 30 basis points below the second quarter of 2019. We were able to achieve this margin despite a $26 million net interest income headwind due to a reduction in our consumer finance portfolio. To put in perspective the strength of our second quarter recovery, if we equalize the 2021 portfolio size to 2019 and exclude the COVID reserve release, adjusted EBITDA margin would have been approximately 25.3%, 80 basis points higher than the 24.5 in the second quarter of 2019. Changes we made during 2020, including the upgrading of tour quality and the structural cost reductions are two key factors driving the underlying improvement of margins. The strength and resiliency of our business from consumer demand to cash flow generation to a fortified balance sheet has been on full display over the past year. In 2020, our adjusted free cash flow remained positive and allowed us to maintain a meaningful dividend throughout the crisis. As performance continues to improve, we look forward to returning to a regular cadence of capital return to shareholders. Specifically on consumer demand, owner booking trends continue to be above 2019, and the average owner booking window is now 126 days out, an encouraging sign as it is now above 2019 levels. Net vacation ownership reservations for the second half of 2021 and the first of 2022 are 6% and 5% respectively ahead of 2019. California, Florida, and Hawaii are seeing some of the strongest growth in bookings. We are optimistic about the remainder of the year, but we are keeping a careful eye on the spread of the Delta variant. Persistence in the variant spread and the reintroduction of domestic travel restrictions could impact our outlook. During the second quarter, both vacation ownership as well as travel and membership exceeded our internal expectations. Although we observed the initial signs of a leisure travel rebound at the end of the first quarter, the rebound emerged earlier and faster than we projected. In the second quarter, we benefited from trends we expected to materialize in the second half of 2021. Gross VOI sales were $383 million, ahead of our $355 to $365 million guidance range. This was an increase of 62% from the first quarter, driven by improved close rates and BPGs that were 30% higher than 2019. As well, our BPG increase reflected a 30% mix of new owner transactions, about 400 basis points above our new owner mix expectation. Wyndham Destinations, our vacation ownership division, is the core of our enterprise, and we are fully committed to growing our vacation ownership business at or above historical levels. How will we do this? We have a large untapped pipeline of future upgrade sales, and we will continue to leverage our partnership with Wyndham Hotels and Resorts and its loyalty program, Wyndham Rewards. Additionally, with the acquisition and rebranding to Travel and Leisure, we also have the opportunity to launch new Vacation Club brands in the vacation ownership space. Travel and Membership, which includes RCI and Panorama Travel Solutions, or PTS, also exceeded expectations, with revenue just 6% lower than Q2 2019 when normalized for acquisitions and divestitures. Adjusted EBITDA margin was 37% compared to 32% in 2019. RCI remains the core business and primary driver of EBITDA in this segment, and we are squarely focused on elevating RCI's growth by offering a broader array of travel services to its 3.6 million members. PTS is our newly launched B2B offering that specializes in designing and operating travel membership programs. PTS made progress in the quarter, announcing an agreement with the National Association of Realtors, America's largest trade association with 1.4 million members. We expect deals like this to fuel transaction velocity as we continue to focus on increasing premium memberships through revenue sharing agreements by actively marketing our travel solutions under partner brands. Last but certainly not least, we continue to work toward the full launch of our Travel and Leisure Club in September. The club launch was one of the primary reasons we purchased Travel and Leisure. The combination of the macro demand for subscription products, the absence of product in the leisure travel space, and our ability to offer curated, exclusive travel offerings inside the club makes us excited for the upcoming launch. Before turning the call over to Mike, I want to share our expectation for the rest of this year as we return to providing full-year guidance. We expect tours of $440,000 to $450,000. VPG around $3,000, and gross VOI sales of approximately $1.4 to $1.5 billion. Based on these sales, we would expect net interest income to be between $315 and $320 million. Overall, we anticipate adjusted EBITDA in the range of $720 to $735 million for the full year and adjusted earnings per share of $3.20 to $3.30. For the third quarter, we anticipate VOI sales will be in a range of $450 to $470 million. I'd like to point out that our full-year guidance reflects an average expected portfolio size of $2.8 to $2.9 billion over the last six months of this year, with net interest income our most notable headwind to retracing the pre-COVID EBITDA levels. Projected third quarter VOI sales would represent an 18% to 23% sequential increase from the second quarter, and as a result, we believe third quarter adjusted EBITDA will range between $200 to $210 million. With that, I would like to hand the call over to our Chief Financial Officer, Mike Cudd. Mike?

Thanks, Michael. Good morning, everyone, and thank you for joining us today. Thank you. I will discuss our second quarter results and provide you with more color on our balance sheet, equity position, and cash flow. My comments will be primarily focused on our adjusted results. We reported the total company's second quarter adjusted EBITDA of $193 million and adjusted dividend earnings per share of $0.88, compared to $16 million and a loss of $1.11 one year ago, respectively. In the second quarter, the vacation ownership segment reported revenue of $599 million, gross VLI sales of $383 million, and adjusted EBITDA of $133 million. BPG of $3,151 was 30% higher than the pre-pandemic second quarter of 2019, benefiting from owner mix and improved tour quality. Tours were 53% lower than 2019 as a result of our very deliberate decision to focus our new owner marketing efforts on higher quality tours. These efforts resulted in a new owner VPG increase in the second quarter of 2021 compared to 2019 and were contributing factors to our strong second quarter margin. We expect the focus on quality to also benefit us over the long term as it should continue to yield a stronger portfolio. In the second quarter, we released $26 million of the COVID-specific reserve we recorded in March 2020 due to continued strong performance of the portfolio, resulting in a $16 million benefit to adjusted EBITDA. To update you on the COVID-related reserve, we originally recorded a provision of $225 million. Including the reverse on the second quarter, we have reversed a total of $46 million, and since the reserve was established, we have charged off $85 million at default against it. At the end of the quarter, our total reserve as a percentage of gross vacation ownership contract receivables was 19.8%, compared to 25% at the end of the first quarter of 2020 when we put the COVID-related reserve in place, and compared to 19.3% at the end of 2019. Revenue in our travel membership segment was $204 million in the second quarter, compared to $106 million in the prior year. Travel and membership second quarter adjusted EBITDA was $75 million, an increase of 114% compared to last year's $35 million. Travel and membership net transactions in the second quarter were $524,000, four and a half times higher than the same period last year, with growth in all geographies. The largest improvements were North American exchanges and our non-exchange business lines, which were fueled by the strong domestic travel recovery we are seeing in the U.S. We continue to be pleased with the growth of Travel Memberships non-exchange business, which accounted for 40% of total transactions in the quarter. Turning to our balance sheet, our corporate net debt at the end of June was $3.1 million, and our leverage rate was 4.7 times. We continue to remain focused on reducing our leverage, and with continued EBITDA growth, we expect to see the leverage rate decline to below 4.25 times by the end of the year. Throughout the pandemic, we have demonstrated our commitment to return capital to our shareholders. We paid our second core dividend of $0.30 per share on June 30th, and we'll recommend a third core dividend of $0.30 per share for approval by our board of directors in August. Now let me add some color to a couple of items in our model that drove our 2021 outlook that was discussed by Michael and how those factors will impact us in 2022. Based on our view for VOI sales for the second half of the year, we can now estimate those headwinds we will face next year from lower net interest income at our vacation ownership business and lower membership fees at our exchange business. As we enter 2022, both of these resilient parts to our business will have been impacted by sales running well below its growth levels for nearly two years. And this has a compounding impact that is worth highlighting to better understand what our baseline adjusted EBITDA should be. With our portfolio down to $3 billion from $4 billion at the end of 2019, net interest income will be up to $120 million lower in 2022 than in 2019. At RCI, with our member base down from lower new enrollments, adjusted EBITDA could be impacted up to $50 million when compared to 2019. It is important to understand these headwinds as we think about 2022. Finally, on free cash flow, we expect 2021 adjusted free cash flow conversion to be 25% to 30% of adjusted EBITDA. The reduction from our historical conversion rates of 55% to 60% is expected to be temporary due to reduced net interest income from consumer financing, higher corporate interest expense as a percentage of adjusted EBITDA, and the timing of working capital. We expect 2022 free cash flow conversion to move closer to our historical target range. In summary, we are very pleased with our performance as we emerge from the pandemic and look forward to seeing many of you in person at our investor day in September. With that, Brittany, can you please open up the call to take questions?