Marriott Vacations Worldwide Corporation

Greetings and welcome to the Marriott Vacations Worldwide Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Neal Goldner, Vice President, Investor Relations. Thank you. You may begin.

Thank you, Michelle, and welcome to Marriott Vacations Worldwide Second Quarter Earnings Conference Call. I am joined today by Steve Wise, President and Chief Executive Officer, and John Geller, Executive Vice President and Chief Financial and Administrative Officer. I do need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause material which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued last night along with our comments in this call are effective only at the time issued and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks and the schedules attached to our press release as well as the investor relations page and the financial information page on our website. It's now my pleasure to turn the call over to Steve Wise, President and Chief Executive Officer of Marriott Vacations Worldwide. Thanks, Neal. Good morning, everyone.

Like many other companies, the COVID-19 pandemic has greatly impacted our business. Our second quarter started in a position that most of us have never had to deal with before, but slowly began to recover. As you might remember, in March we closed our vacation ownership resorts to transient renters and other guests and alerted our owners about the limited amenities they would find if they decided to take their scheduled vacation. As a result, occupancy at our resorts in April and May was in the single digits. But that's only the beginning of the story. In late May, with leisure travel leading the recovery, We started to reopen some of our resorts for renters and guest arrivals. At the beginning, resort occupancy was fairly low, but it steadily improved as we moved through June, led by our drive-to locations. For example, our Florida Beach resorts ran only 17% occupancy on Memorial Day, but were running at 65% by the end of June and remain in the mid-60% range today. Our South Carolina resorts ran 30% occupancy on Memorial Day, but were north of 70% by the end of June and are in roughly the same place now. We also saw occupancy in our mountain resorts climb throughout June, reaching as high as 75% by July 4th and are currently in the high 70s. And while clearly not drive-to markets, occupancy in our St. Thomas and St. John resorts climbed to 60% by the end of June and they're now at around 70%. However, two of our larger markets have not recovered as quickly. Orlando, which represents almost 20% of our keys, ran low single-digit occupancy at the end of May. But with the theme parks reopening, we saw a steady rebound in occupancy reaching roughly 35% by July 4th. However, due to the press reports regarding higher COVID cases in Florida, they have since weakened to around 25%. And finally, Hawaii with more than 15% of our keys remains effectively closed today except for residents of the state or those willing to self quarantine for 14 days after arrival due to state regulations. We're hoping this rule gets lifted at the end of August as currently planned, but I suspect it will depend on what happens with the virus in the key feeder markets. So while we are excited about how quickly occupancy improved in June and July, occupancies in some markets have plateaued, and we are watching the rise of COVID cases closely as it could further dampen the recovery. In May, we rolled out our enhanced telesales program, which has performed very well, delivering the majority of our $30 million of contract sales in the quarter. As occupancy at our resorts began to build in June, We reopened eight sales centers, predominantly in South Carolina and Florida. Based on the performance of those first eight sales centers, we reopened an additional 34 sales centers in July, and by the end of September, we expect nearly all of our sales centers to be reopened as long as Hawaii loosens their current restrictions. With occupancy building, propensity to tour has been encouraging, with most customers choosing to meet in person versus virtually. While tour flow is not close to pre-COVID levels, VPGs have been very strong, with tours skewed more to owners than usual. Meanwhile, the resort management and finance businesses in our vacation ownership segment reinforced the strength of our business model this quarter, generating more than $135 million of very high margin revenue. Not surprisingly, though, with occupancies in the single digits in April and May, and all of our sales centers closed until June. This wasn't enough to completely offset the softness in our development and rental businesses. The story at Interval International during the quarter was similar to what we saw in the vacation ownership business. Early on, with nearly 1,300 resorts closed or not taking new reservations, exchange and rental volumes declined substantially on a year-over-year basis. By the end of June, The number of closed resorts was around 600, and we are now down to less than 240 resorts that are yet to reopen. As you would expect, with resorts reopening, exchange transactions began to improve with volume in June growing year-over-year, assisted by some pent-up demand. As you may remember, many of Interval's members renew their membership when they transact, so with year-over-year exchanges down 12% in the quarter, It's not surprising to see membership being 4% lower than March. Looking forward, owners' confidence in travel remains relatively strong, but with COVID cases rising, as it has somewhat softened. Owners came back strong during late May and June, but have plateaued in certain markets. Exchange transaction growth has also softened somewhat from the June highs. Understandably, are concerned about a potential second virus wave which appears to be affecting their near-term willingness to travel. At the same time, according to ARTA, more than 50% of those surveyed are more likely to travel if they could cook in their unit, while nearly 70% would be willing to travel in the next six months if they could drive to their destination. With the larger square footage in our units compared to the average hotel room, The majority of which have full kitchens and more than 80% of our U.S. keys on the mainland, I believe we are well positioned vis-a-vis other companies in the hospitality industry. So where do we go from here? As of now, excluding Hawaii, owner and exchanger reservations are roughly 90% of those on the books at the same time last year, with the fourth quarter numbers improving sequentially from the third. We currently have nearly 30,000 tours scheduled for the second half of 2020, excluding Hawaii, about the same number we had at the end of April. And with very few customers opting to cancel their preview packages, our total tour pipeline is roughly the same as it was at this time last year. With the turn in business from the April lows, we've been able to bring back more than 4,000 associates from furlough, primarily in our resort operations group. But given the uncertain pace of the recovery, we have also extended furloughs for around 40% of our team to early October. As we talked about last quarter, we have lowered our inventory and other spending by roughly $300 million for this year, reduced our operating costs, improved our liquidity, and as John will discuss, closed a $375 million securitization transaction with very attractive terms just last week. We continue to actively pursue business transformation through the redesign and implementation of a more effective and efficient operating model. Since we closed on our merger with ILG nearly two years ago, we have made significant progress combining and integrating the best of both businesses while gaining new perspectives on the key success factors that will most effectively position us to lead our industry no matter what the future brings. We anticipate these operating model changes, along with other cost reduction measures, will help propel our organization forward as we continue on the path towards recovery. To summarize, with leisure travel leading the recovery, we're seeing much improved occupancies in many of our drive-to markets. We've already reopened more than half of our sales centers, and we're seeing a solid customer propensity to toward our results. by the end of this quarter we expect nearly all of the remaining sales centers to reopen. Our high margin, stickier revenue businesses performed as expected in the quarter delivering more than $150 million of revenue. We continue to actively pursue business transformational opportunities across our business through the redesign and implementation of a more effective and efficient operating model and We have gone above and beyond to help keep our associates and customers safe while making smart decisions for our shareholders to ensure that we remain in a strong financial position for the future.