Marriott Vacations Worldwide Corporation

Greetings and welcome to Marriott Vacations Worldwide Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are on a listen-only mode. A 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. I would now like to turn the conference over to your host, Neal Goldner. Thank you. You may begin.

Thank you, Rob, and welcome to the Marriott Vacations Worldwide Fourth Quarter 2020 Earnings Call. I am joined today by Steve Wise, Chief Executive Officer, and John Geller, President and Chief Financial Officer. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under the federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings. 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 and the presentation we added to our website this morning as well as our comments on this call are effective only when made 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 in the schedules attached to our press release, as well as the investor relations page of our website at ir.mvwc.com. It's now my pleasure to turn the call over to our CEO, Steve Wise.

Thanks, Neal. Good morning, everyone, and thank you for joining our fourth quarter call. Before we get started... Thank you very much. are not easy to come by. Bill Marriott once again showed our industry his wisdom in selecting Arnie to be the only person to be CEO that did not have Marriott as the last name, and he chose wisely. But I'd like to take just a moment to reflect on Arnie the person. I had the good pleasure to be able to work as both a colleague of Arnie's as well as having him as a boss for a short period of time before our spinoff in 2011. 2011, excuse me. Not only was Arnie a good friend of mine, but he was a good friend of our business. His unique understanding of the timeshare business and the connectedness that it had with the core lodging business helped to frame his recommendation to create two separate public companies as a way to unlock considerable value for the Marriott shareholders. Now, almost 10 years later, I believe that history has shown that to be an outstanding decision for the shareholders of both of our companies. I ask you to join me and all the members of our team here at Marriott Vacations Worldwide when I say, thank you, Arnie. Godspeed. You will be missed, but surely not forgotten. Thank you for allowing me the opportunity to express my thoughts, and now I'll proceed on to our call. What a difference a year makes. It was just one year ago when we reported double-digit, fourth-quarter, year-over-year contract sales growth, and we were talking about the resiliency of our business model. One month later, we closed all of our sales centers and recommended that owners not come to our resorts due to the pandemic, even going so far as to cancel transient rental bookings. But once government restrictions started to lift, occupancies quickly returned, beginning first in our drive-to markets, but expanding as the year went on, illustrating timeshare owners' desire to get back on vacation. As a result, we ended the fourth quarter at nearly 70% North America occupancy. Our higher margin resort management, financing, and exchange membership businesses proved their resiliency last year with that revenue declining only 2% despite the global pandemic. We also ended the year with more liquidity than we had at the end of the second quarter, further illustrating the strength of our leisure-focused business model. Sitting here today, I'm extremely optimistic about the continued recovery in our business. Occupancies in a number of our drive-to and fly markets are holding up well. And as more and more people get vaccinated, I expect some of the pent-up demand to continue to manifest itself. In fact, reservations on the books for the second half of the year are currently 8% higher than they were at the same time in 2019. So while the recovery most likely won't be linear, and government actions could pause it in some markets, I do expect our business to continue to improve as we move throughout the year. We announced in January the pending acquisition of Welk Resorts, one of the largest remaining independent timeshare operators, which we expect to close early in the second quarter. Welk operates a portfolio of eight upper upscale vacation ownership resorts, primarily on the West Coast, with approximately 1,400 keys, more than 55,000 owners, and over three years of built inventory. These resorts will be a great addition to our portfolio, and we intend to rebrand all of the Welk resorts as Hyatt Residence Club once we've obtained the necessary approvals. This will dramatically increase our Hyatt footprint while providing us substantial future growth opportunities. Through a combination of margin improvement and sales growth, we expect the acquisition to generate between $60 and $70 million in adjusted EBITDA by 2024, if not sooner, making this both a very attractive financial transaction as well as a great strategic one. So let's talk about our fourth quarter results starting with our vacation ownership business. While 2020 was certainly challenging for the entire travel and hospitality industry, being completely leisure focused was certainly a better segment to be in. And being in the timeshare business with our much larger square footage units and amenities, coupled with the prepaid nature of our offering, was clearly a more attractive option for our owners and guests, as evidenced by our strong occupancies in many of our locations. To give you a few examples, occupancy at our Florida beach resorts averaged in the mid 70% range during the quarter, including nearly 80% for the month of December. Our South Carolina resorts ran in the low 70% occupancy range during the quarter. Our Colorado and Park City Mountain resorts averaged nearly 75% occupancy. and our Aruba resorts ran over 60% in November and December, while our U.S. Virgin Island resorts ran over 70% during the quarter. Even some of our larger markets that had previously lagged the recovery continued to improve during the quarter. For example, Orlando, which represents more than 20% of our North America keys, averaged about 50% occupancy during the quarter, roughly double the occupancy we ran in quarter three. Thank you for joining us. and North America VPG was up 17% excluding Hawaii. We continue to benefit from a higher mix of existing owners as well as higher promotional activity. As a result, we increased contract sales by 27% sequentially from the third quarter despite the increased government restrictions in California and Kauai in December. Thank you for joining us. Our interval international business also continued its recovery during the fourth quarter, with interval exchange transactions increasing 17% on a year-over-year basis, reflecting members' desire to travel as well as from pent-up demand. Before turning the call over to John, I want to talk about synergies. As you might remember, we increased our synergy target to at least $200 million back in November. These are permanent savings that will not return with volume and will help us drive substantial margin improvement going forward. We made a lot of progress in the fourth quarter, and by the end of 2020, approximately $135 million of these synergies have been achieved on a run rate basis, getting us closer to our target. So let's talk about where we go from here. In late January, we reopened the California sales centers that we closed in December. That still leaves Kauai and a handful of smaller sales centers that haven't reopened yet. But, with most of our major locations up and running, we expect to continue to grow contract sales sequentially in the first quarter. We end the year with a tour pipeline of more than 165,000 sold packages, with more than 30% of those already activated. That means more than 50,000 customers have already booked their vacation and related tour for 2021, and we expect that number to grow as the year progresses. We're also ramping up our package pipeline engine after curtailing it last year, which will add future tours. We were very pleased with the sequential recovery at interval last year, with exchange transactions growing nicely in the second half of the year. One of Interval's corporate customers has decided not to renew its affiliation going forward, choosing only to offer its owner's membership in its own internal exchange program instead. It's important to note that only a portion of these 165,000 members are active Interval users, and we have been marketing to them since mid last year. We've already retained a high percentage of those who have been active users, reflecting the breadth of Interval's offerings. So we expect the bottom line impact on our business going forward will be largely immaterial. Finally, a recent survey showed that one-third of American travelers have begun planning and booking trips specifically in anticipation of vaccines being available. Searches on the Marriott Vacation Club on our website show a rising interest in getting back on vacation, with January searches for keywords such as book and make a reservation Thank you for joining us. With that, I'll turn the call over to John.