Travel Leisure Co.

Good morning and welcome to the fourth quarter and full year 2020 earnings conference call for Travel and Leisure Co., formerly Wyndham Destination. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your touch-tone phone. If you would like to withdraw your question, please press the pound key on your telephone keypad. And a reminder, ladies and gentlemen, this conference call is being recorded. If you do not agree with these terms, please disconnect at this time. Thank you. I would now like to turn the call over to Chris Agnew. Please go ahead.

Thank you, Ashley. Good morning and welcome to Travel and Leisure's fourth quarter and full year 2020 earnings conference call. 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.travelandleisureco.com. This morning, Michael Brown... our President and Chief Executive Officer, will provide an overview of our fourth quarter and 2020 full-year 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, we'll 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, and welcome to our first earnings call as Travel and Leisure. Earlier this morning, we were pleased to report fourth quarter adjusted EBITDA of $148 million and adjusted EPS of 32 cents. Last year was full of unprecedented challenges for the travel industry, yet the strength of leisure travel demand combined with our resilient business model enabled us to achieve positive adjusted free cash flow for the full year. Indeed, after reopening at the end of the second quarter, we were able to deliver a strong second half of 2020 with adjusted EBITDA margins over 20%. The combination of our recurring earnings streams, the resilience of our owners, our competitive resort footprint, and the early actions we took to reduce costs and maximize cash flows all contributed to our strong performance in 2020. Let me transition to some of the highlights from last year. For the full year, we generated revenue of $2.2 billion and adjusted EBITDA of $259 million. As a reminder, adjusted EBITDA includes a $157 million negative impact for increased defaults due to COVID. The end of the first quarter and the majority of the second quarter were significantly impacted by suspended resort operations due to stay-at-home orders in 42 states. By the end of June, 85% of our U.S. resorts and 56% of our sales locations had reopened. As we looked ahead to the eventual rebound in leisure travel, we made a number of operational changes to put us in a stronger position for the recovery. In the vacation ownership business, we elevated the FICO qualification threshold from 600 to 640, improving tour quality, which results in better performance in the portfolio. We also pared back underperforming marketing locations and programs. We reimagined our check-in process, innovated the on-site experience with RFID wristbands to increase engagement with our guests, and went live with our new Club Wyndham website in May. We also launched virtual sales and virtual contract closings. Both have been well-received, and we plan to expand both programs in 2021. Cost savings helped buffer a softer top line in our travel and membership segments. This segment, which is primarily RCI, achieved 40% adjusted EBITDA margins in the second half, compared to 37% in the prior year. Revenue per member also improved in both the third and fourth quarters, down just 19% and 13% over the prior year, which were noteworthy improvements compared to the second quarter, which was down 37% over the prior year. And on a consolidated basis, we reduced our annualized 2020 operating cost base by approximately $225 million, $60 million of which will become permanent G&A savings. And we reduced inventory and operating capital expenditure by over $125 million. In a year when many global lodging and leisure companies were net users of cash, we maintained a strong balance sheet as we generated positive adjusted free cash flow of $35 million for the full year. We had 1.6 billion of liquidity at year end and finished the year with 3 billion of corporate debt. We were also able to maintain a quarterly dividend, which is currently 30 cents per share, demonstrating our confidence in the resilience of our business. The strength of our balance sheet and our business allowed us to be productive and execute several strategic initiatives toward achieving our goal to expand into the broader leisure travel market. We successfully unveiled Panorama Mid-Year, and we acquired the Travel and Leisure brand in early 2021. We are excited about both of these businesses and the momentum they will drive into 2021 and beyond. Let me share with you the rationale behind our acquisition of the Travel and Leisure brand and content and its existing businesses. First, our mission is to put the world on vacation, and by renaming our corporate entity, it allows us to demonstrate an increased breadth of marketing services we will provide going forward. The acquisition of Travel and Leisure allows us to express that direction with one of the most trusted and iconic names in the leisure travel space. Second, it reinforces our strategic direction to expand beyond the timeshare space. The overall North American leisure market is more than tenfold larger than the timeshare market. The travel and leisure acquisition, fueled by our technology platform, allows us to expand by offering new products and services to a much larger market. As part of the acquisition, we acquired two subscription travel clubs with a combined 60,000 members. We plan to grow these travel clubs as we launch new products this summer. Third, this facilitates our ability to offer timeshare services to other travel brands in addition to Wyndham. Our strength lies in sales and marketing, hospitality, and our ability to access the financial markets to support consumer lending. We believe there are strong travel brands that could operate under their name but benefit from our services. The renaming of our corporate entity will reduce the obstacle of overcoming issues of brand conflict. To recap, our company now has three business lines. Wyndham Destinations, our core timeshare business, which is committed to the Wyndham brand and growing our relationship with Wyndham Hotels and the Wyndham Rewards Program. Panorama, including the RCI exchange business and the ARN technology platform, focused on growing B2B travel solutions with partners. And the Travel and Leisure Group, which will focus on its booking platform, subscription-based travel services, and its licensing business. We look forward to sharing more with you in the coming quarters, and as an investor day, we are planning, whether in person or virtually, for September 10th in New York City. Let me now move to our outlook. We are already seeing the positive trends in 2021, providing us with optimism about a strong recovery and leisure travel. Post-pandemic, consumer travel sentiment is back to the highs last seen in October. And as daily COVID infections continue to decrease, we only see this trend improving. With that said, we remain mindful of uncertainties in the first half of the year. The state of the pandemic and the success of the vaccine rollout remain critical to consumer travel sentiment and the easing of travel restrictions. COVID daily infections were still elevated in January, and our performance in January, with California still closed, was very much like December. January is normally a seasonally slow month, so the impact will be less pronounced. February has seen some improvement, and we anticipate that momentum will continue into March. Although it is our intention to return to full-year guidance, in the short term, we will be providing quarterly guidance. For the first quarter, we expect tours to be down 50%. gross VOI sales to be approximately $210 to $220 million, and VPG to be 30% above the prior year. Overall, we anticipate adjusted EBITDA in the range of $95 million to $110 million in the first quarter. With that, I would like to hand the call over to our Chief Financial Officer, Mike Hugg. Mike.

Thanks, Michael. Good morning, everyone, and thank you for joining us today. I will discuss our fourth quarter results and provide you with more color on our balance sheet, liquidity position, and cash flow. My comments will be primarily focused on our adjusted results in year-over-year comparisons. We reported fourth quarter adjusted EBITDA of $148 million and adjusted earnings per share of $0.32 compared to adjusted EBITDA of $265 million and adjusted EPS of $1.58 one year ago. During the quarter, $20 million of COVID-related charges were added back to total company adjusted EBITDA, with the largest item being $12 million of lease-related restructuring charges. In the fourth quarter, vacation ownership reported revenue of $512 million, with gross VOI sales of $281 million and adjusted EBITDA of $115 million. Tours declined 64% in the quarter compared to the prior year, with travel restrictions in California and Hawaii a headwind to our previous expectations. New owner tours were down more sharply as these tour sources are expected to recover more slowly than existing owner tours, which were 48% lower than the prior year. BPG increased 24% to $2,938, benefiting from improved new owner close rates and a higher mix of sales to existing owners. Our underlying portfolio continues to perform well with delinquencies lower year over year, driven in part by deferral programs, a more mature portfolio from reduced originations, and improved quality of new originations due to changes we've made in our underlying standards. Requests for deferrals have continued to trend down since the second quarter, and now active permits represent just 1% of loans outstanding, down from 6% at the peak. As we have known previously, as owners come off deferral, we are seeing the majority of them return to making payments. In the fourth quarter, we released $20 million of the $225 million receivables reserve we took back in the first quarter due to continued strong performance of the portfolio, resulting in a $13 million benefit suggested EBITDA. We remain comfortable with the overall analysis on our receivables portfolio, considering the continuing uncertainty around the pandemic and its economic impact. Revenue in our travel membership segment, which includes Panorama, as well as travel leisure groups starting the first quarter of 2021, was $135 million in the fourth quarter compared to $181 million in the prior year. Travel and membership fourth quarter adjusted EBITDA was $49 million, down just 11% compared to $55 million in the prior year. Strong cost control and a sequential improvement in revenue per member trends helped margin improve to 36%, up from 30% in the prior year. Average number of members in the segment decreased 6%, and we expect that trend to continue in 2021. We do see a lot of sales for the industry, particularly in new owner channels, are not generating enough new owners to offset the normal trend of members. We expect this decline to moderate in the back half of 2021. As travel membership continues to evolve beyond its traditional focus on the timeshare industry and into servicing the broader travel club market, the exchange-focused KPIs we had previously been reporting will become less relevant to the overall business. As such, in 2021, we will disclose new transaction-based drivers. Net transactions for this segment declined 29% in the fourth quarter due to an increase in cancellations and lower gross bookings at ARNs. which has a shorter booking window than the exchange business. However, we are continuing to see positive travel trends in exchange as December's gross bookings were in line with the prior year. The different gross booking patterns in exchange and ARN are a good indicator of how our members feel about travel right now. Although they are cautious in the short term, they are looking to return to travel in the near future. Turning to our balance sheet, As of December 31st, we had $1.2 billion of cash and cash equivalents with corporate debt at $4.2 billion, which excluded $2.2 billion of non-recourse debt related to our securitized receivables. Our net leverage for covenant purposes at the end of the quarter was 5.4 times. Two turns below our 7.5 times covenant. We paid our fourth quarter dividend of $0.30 per share on December 30th, and we will recommend a first quarter dividend of $0.30 per share for approval by our Board of Directors in March as we remain committed to returning capital to shareholders. As Michael mentioned, we acquired the Travel and Leisure brand in early January. We paid $35 million in cash at closing, and the traveling payments of $65 million will be completed by June 2024. The acquisition is expected to be neutral to earnings in the first year as we invest in marketing programs to grow the business and accrete it in the second year. As noted previously, we are not providing full-year guidance at this time. However, we do want to share some thoughts on our outlook for full-year free cash flow. We expect 2021 free cash flow to be below our historic free cash flow conversion range of between 50% and 60% of adjusted ETA, reduce net interest income, Fewer unsecuritized receivables on our balance sheet as of January 31, 2021, combined with higher corporate interest expense as a percent of adjusted EBITDA, as well as the timing of some working capital items, are behind a temporary reduction. We expect 2022 pre-cash flows to move closer to our historical levels. First quarter pre-cash flow will be a significant use of cash due to the timing of inventory spending and working capital payments. as well as fewer eligible receivables for our first ABS transaction of the year than has historically been the case due to the lower level of DOI sales in the second half of 2020. In summary, we are pleased with our results for the fourth quarter and full year 2020 and look forward to the continued recovery of leisure travel throughout 2021. With that, Ashley, can you please open up the call to take questions?