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spk01: Greetings and welcome to the Marriott Vacations Worldwide fourth quarter 2022 earnings call. At this time, all participants are in 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, Mr. Neil Goldner, Vice President and Best Relations for Marriott Vacations Worldwide. Thank you. You may begin.
spk03: Thank you, Melissa, and welcome to the Marrification's Worldwide Fourth Quarter 2022 Earnings Call. I am joined today by John Geller, President and Chief Executive Officer, and Tony Terry, our Executive Vice 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 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 that we added to our website this morning, as well as our comments in 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 and schedules attached to our press release as well as the investor relations page of our website at ir.mvwc.com. As you saw in our earnings release last night, as a result of aligning the contract terms for our vacation ownership sales across Marriott, Westin, and Sheridan brands last year, we recorded an additional $12 million of revenue in the fourth quarter. The schedules to our earnings release provide a reconciliation to show what our reported results would have been without this benefit. Our discussion and commentary today will refer to our results after adjusting for the alignment, including the $7 million benefit to adjusted EBITDA. With that, it's now my pleasure to turn the call over to CEO John Geller.
spk09: Thanks, Neil. Good morning, and thank you for joining our fourth quarter earnings call. I'm happy to welcome you for the first time as CEO. The past two months have felt a lot like when I joined the company just over 13 years ago, full of potential and possibility. I've stepped into this role with a strong leadership team around me and a vision of growth ahead for us. If you've been following the travel industry, you know there's an optimistic view on leisure travel this year. In a recent survey, 77% of respondents said they're excited to travel this year, while nearly 50% of them have already begun researching trips. That said, leisure travel looks different than it did pre-pandemic. Recent research we conducted revealed that 80% of people surveyed would consider working remotely from a vacation destination as a way to extend the length of their trip, and this trend is expected to continue. So what does that mean for us? It means that more travelers than ever can visit our top destinations, stay in our spacious villas, and experience the unparalleled service that our on-site resort teams deliver. With the strength we've seen In leisure travel, we've averaged nearly 90% occupancy for the year, illustrating the continued high demand for leisure accommodations. We also generated over $1.8 billion of contract sales and delivered $744 million of adjusted free cash flow in 2022. And we added over 20,000 new owners to our vacation ownership business, while growing active interval members by 21%. This year, we expect to continue that momentum. We will build on our strategic investments in products, technology, people, and customer experiences that propel our business forward. We have dedicated and passionate teams around the world delivering unparalleled vacation experiences every day to our owners, guests, and members, and we continue to positively impact the communities in which we live and work. I'm also proud to say that we recently published our new ESG report and are formalizing a strategy to ensure we're being good stewards to the environment in which we operate and the communities we serve. One such example is the establishment of the Stephen Wise Endowment, providing scholarships to students at the Rosen College of Hospitality Management at the University of Central Florida. Since 2020, we have hired more than 175 UCF graduates, and I'm very proud that our company was able to make this investment to support the development of future hospitality leaders while honoring the legacy of our former CEO. Now moving to our results. 2022 was a great year for Marriott Vacations, and we ended the year on a very strong note. Occupancy was 90% for the fourth quarter, with Hawaii running over 95%. while Asia Pacific occupancies doubled compared to the prior year. With the strong occupancy, we grew tours by 18% on a year-over-year basis, with fourth quarter tours just below our pre-pandemic levels. As expected, VPG declined year-over-year, but remained 17% higher than 2019. As a result, we grew contract sales by 12% in the fourth quarter compared to the prior year, and expanded our adjusted EBITDA margin, illustrating the resiliency of our business model and the desirability of our product offerings. Last year, we successfully implemented our online booking engine for previews and continued to improve predictive modeling for our marketing campaigns. These initiatives resulted in significantly higher consumer response rates, and we ended the year with more than 200,000 preview packages in our pipeline. with roughly one-third of those customers having already booked their vacations for 2023. Taking a step back, when we first acquired ILG in 2018, the goal was to allow owners the ability to enjoy expanded vacation opportunities and provide direct access across our Marriott, Sheraton, and Westin Vacation Club brands. Since then, we've been working to set up the systems and technology to expand our offerings and fulfill this promise, which we achieved last year with the launch of Abound by Marriott Vacations. Looking forward to our multi-year Vacation Next program, we expect to leverage our brands and digital strategy to help unlock our growth potential. We expect this will allow us to create efficiencies in how we market, sell, and service our products, resulting in top-line growth lower customer acquisition costs, and increased owner satisfaction as we make more service options available online. In our Hyatt vacation ownership business, we continue to make great progress integrating Legacy Welk. In January, we announced that beginning this summer, all of our Hyatt and Legacy Welk resorts and sales galleries will be rebranded Hyatt Vacation Club. Later this year, we plan to expand the vacation experiences available to Hyatt owners with a new exchange option called Beyond, allowing them to use their ownership for cruises, tours, and hotel stays. I'm also excited to announce that earlier this month we acquired a fully entitled parcel of land in Charleston, South Carolina. Overlooking the heart of the city, we intend to develop a new Marriott-branded resort by early 2025, including a new on-site sales gallery. The city of Charleston continuously ranks as one of the top owner destinations for its thriving culinary scene, easy walkability, and southern charm. Located steps from the historic Charleston City Market, this new 50-unit resort will make a great destination for our owners. In our exchange and third-party management business, Interval ended the year with nearly 1.6 million members, a 21% year-over-year improvement driven by the new affiliations we signed in late 2021. Excluding the results of VRI Americas, which was sold last April, adjusted EBITDA in our exchange and third-party management business increased 11% in the quarter, driven by higher average exchange fees and increased getaways, as well as increased management fees at Aqua Aston. Before turning the call over to Tony to discuss our fourth quarter results in 2023 guidance, a number of investors have asked me what they should expect as I step into the CEO role. As you know, I've been in a senior leadership position for over a dozen years and had a significant amount of input into our objectives and strategies along the way. So in short, I remain committed to delivering the level of operational excellence that our customers expect from us. I also expect to deliver against the goals we laid out at our last investor day. Long-term, I expect our timeshare and exchange business to remain the core of our business model while we look to add to our growth by diversifying into adjacent leisure-focused businesses where we can leverage our core capabilities. And finally, I want us to find new ways to unlock the power of data through advanced analytics to improve efficiency and drive top-line growth. The opportunities that lie ahead for us are exciting, and my optimism about the long-term future has never been greater. With that, I'll turn the call over to Tony.
spk02: Thanks, John, and good morning, everyone. Today I'm going to review our fourth quarter results, the strength of our balance sheet and liquidity position, as well as our 2023 outlook. As I mentioned last quarter, earlier in the year, in connection with the unification of our Marriott products and the launch of Abound by Marriott Vacations, we aligned the contract terms for the sale of vacation ownership interest across our Marriott brands. As a result, contract sales for our Marriott branded products are now being recognized as revenue following the expiration of the rescission period consistent with our Westin and Sheridan brands. This change resulted in the acceleration of an additional $12 million of vacation ownership revenue in the fourth quarter and a $7 million benefit to adjusted EBITDA. With the alignment completed, we do not expect any material impact from this going forward. Moving to our vacation ownership segment. Leisure travel demand remains strong in the fourth quarter, and the value proposition of our vacation ownership product remains compelling. We capitalized on these trends in the fourth quarter, driving a 12 percent increase in year-over-year contract sales, with tours ending just shy of pre-pandemic levels. and excluding the $13 million impact from the hurricanes, contract sales would have grown 15%, illustrating the continued demand for our core product. With the growth in contract sales, adjusted development profit grew 13% to $126 million, and margin was again over 31%, 500 basis points higher than 2019. In our rental business, as we expected, Owner occupancy increased in the quarter compared to the prior year and explorer cost rose as owners continued to use their remaining COVID points before they expired at the end of last year. In addition, preview packages were up substantially, which helped fuel contract sales but negatively impacted availability for renters. As a result, transient keys rented declined 10% in the fourth quarter partially offset by a 3% increase in revenue per available key, and rental profit in our vacation ownership segment declined year over year to $15 million. The stickier parts of our vacation ownership business again performed well. Profit from our resort management business increased 10% year over year to $70 million, while financing profit increased 5% to $50 million. Our notes receivable portfolio also continued to perform well in the quarter, with delinquencies and defaults largely in line with levels experienced in 2019. For the fourth quarter, adjusted EBITDA in our vacation ownership segment grew 12%, excluding the $7 million impact from the hurricanes, with margin improving 110 basis points to nearly 35%. In our exchange and third-party management segment, active interval members increased 21% compared to the prior year driven by the new affiliations we signed in late 2021. While as expected, average revenue per member decreased as transactions from the new accounts continued to ramp up. In our outcast in business, RevPAR increased 40% driven by improvement in Hawaii, excluding the results of VRI Americas adjusted EBITDA at our exchange and third-party management segment increased 11% compared to the prior year, and margin increased 300 basis points to 55%. Finally, corporate G&A was largely unchanged compared to the prior year. As a result, adjusted EBITDA increased 9% year-over-year, excluding the impact of the hurricanes, and margin improved by 120 basis points demonstrating the continued demand for leisure travel and the strength of our leisure-focused business model. Moving to our balance sheet. In December, we issued $575 million of three and a quarter percent convertible notes due 2027. The offering was significantly oversubscribed, reflecting strong demand from investors. We used the proceeds to pay down a portion of our revolver repurchased $55 million of common stock, and in January redeemed our six and an eighth percent senior secured notes due 2025. As part of this issuance, we entered into a call spread transaction, increasing the effective economic conversion price of the notes to over $286 per share, double where our stock was trading on the day we launched the offering. Proforma for the note redemption we ended the fourth quarter with $1.1 billion in liquidity, including $266 million of cash, $72 million of gross notes receivable eligible for securitization, and $749 million of available capacity under our revolver. We also had $2.8 billion of corporate debt, with 92% of it fixed at an average interest rate of 3.4%. Our net debt to adjusted EBITDA ratio was 2.9 times at the end of the quarter within our targeted 2.5 to 3 times leverage range, and we have no corporate debt maturities until 2025. We also completed our second timeshare receivable securitization of 2022 in the fourth quarter, issuing $280 million of notes at an overall weighted average interest rate of just under 6.6%. And the 98 percent advance rate illustrates the market's continued belief in the strength of our owners. We also continue to return a substantial amount of cash to shareholders. In the fourth quarter, we repurchased $173 million of common stock at an average price of just under $140 per share. And our board of directors authorized a 16 percent increase in our quarterly dividend. For the year, we returned more than $800 million to shareholders, including the repurchase of more than $700 million of our common stock. Moving on to our 2023 guidance. 2022 was a very strong growth year for our company as concerns surrounding the COVID-19 pandemic began to wane and people got back on vacation. As we entered 2023, despite concerns about a potential recession. To date, we have not seen any weakness in demand in our forward bookings and are targeting 5 to 9 percent contract sales growth this year, with VPGs continuing to normalize and tour growth largely coming from in-house and preview packages. With these higher volumes, continued low product costs, the benefit of our digital transformation efforts and our ability to leverage fixed marketing and sales costs, we expect development margin to remain above 30 percent for this year. While contract sales are expected to be the primary driver of growth in the vacation ownership segment, rental profit is expected to increase more than 10 percent this year, though we do expect it to be lower in Q1 compared to the prior year due to higher owner and preview utilization. Financing profit is expected to be largely unchanged for the year, excluding the alignment benefit we recorded in 2022, as higher contract sales and increased financing propensity are expected to be offset by a higher cost of funds. For the exchange and third-party management segment, interval members are projected to remain relatively stable, and adjusted EBITDA is expected to grow 4% to 6% this year. Longer term, our strategy continues to include driving higher revenue per member, adding new affiliations and properties to the network, and expanding our platform and benefits to appeal to a broader target market. We expect to wrap up our ILG integration work this year, which will enable us to allocate more resources to focus on our Hyatt business as well as our initiatives to leverage data and advanced analytics and improve our customer self-service capabilities. These initiatives, combined with higher labor costs, could result in a 10 to 15 percent year-over-year increase in corporate G&A costs. As a result, we expect to generate $950 million to $1 billion in adjusted EBITDA this year, implying 6.5% year-over-year growth at the midpoint of our guidance, excluding the $51 million alignment benefit we recorded in 2022. Moving to cash flow. We generated $744 million of adjusted free cash flow in 2022 and ended the year with $500 million of excess inventory. We currently have no material new inventory commitments for 2023 though we do plan to continue repurchasing low-cost, required inventory as it benefits the system and lowers our product costs. We will also continue to look for opportunities to add resorts, preferably where we can leverage a new sales center, and we'll continue to do this in a capital-efficient manner where possible. We expect our adjusted free cash flow to be between $600 and $670 million this year, and for our adjusted EBITDA to free cash flow conversion ratio to be approximately 65%. We will continue to use our free cash flow for organic growth or for strategic acquisitions. In the absence of compelling acquisitions, our best use of excess free cash flow remains returning it to shareholders. In summary, the fourth quarter was a strong close to the year. As we look forward, despite... the uncertain economic outlook, I believe we're in a great position to continue to benefit from the growth and leisure travel in 2023 with our products in high demand and our investments in brands and digital initiatives supporting that growth. As always, we appreciate your interest in Merit Vacations Worldwide, and with that, we'll be happy to answer your questions. Melissa?
spk01: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Brant Montour with Barclays. Please proceed with your question.
spk06: Hey, everybody. Good morning. Thanks for taking my question. So just first on your contract sales guidance and the growth implied in contract sales, just was hoping that you could break that down a little bit between tours and BPG. And what I'm getting at is, you know, the fourth quarter BPG was, like you said, 17% above 19. And I just want you to answer the question in relation to that number. Should we consider that BPG can lift sales? up a little bit from that level, or is that maybe the new normal? Because that's going to obviously have implication on the tour growth that you need to hit that overall contract sales growth number, if that all makes sense.
spk09: Yeah. Hey, Brent. Thanks for the question. I'll give you a couple of data points here. You talk about fourth quarter VPG. We did see VPG kind of stabilized in the fourth quarter from some of the declines we had seen a little bit earlier. We would expect you know, that VPG for the first quarter to start trending back up slightly. And then as you go through the year, we do expect, you know, not necessarily a straight line, but we'll continue to have better VPG. Now, with that all said, because the first half of 21 last year, right, were so strong with VPGs and the pent-up demand, On a year-over-year basis, I think we're probably going to be slightly lower on VPG, meaning your tour growth is really what's going to drive your contract sales year-over-year, with slightly lower VPG is how we're thinking about it right now. But obviously a tough comp when you look at the first half of last year for the full year. But, yeah, we do expect it to trend up from what we saw in the fourth quarter.
spk06: Okay, great. Thanks. And John or Tony, you know, we look at, you know, this really strong free cash flow that you're generating and we look at your leverage, which sort of continues to go down year over year and looks like it's going to go down even further depending on the share buyback cadence. Maybe if you could just touch on that M&A point a little bit deeper, is there a opportunity out there are you sitting here looking into next year thinking you're a little bit more warmer on the idea of going out and maybe using that cash for for M&A versus how you felt about the market 12 months ago any more color on that John would be great yeah our views haven't changed we're going to continue to look at opportunities
spk09: that once again go back to, you know, is it right strategic fit, right? And if it's on the vacation ownership side, is it, you know, unbranded, something where we can leverage our brands up or upscale? And as we've talked about, those opportunities from an acquisition perspective are not big in size and not big in the number of those. So, but we'll continue to look at that opportunity. I think we've, learned a lot, first with the ILG, and now as we work through WELC, that, you know, you can really create value by bringing in the owners and adding flags to the map and, you know, driving efficiencies and creating, you know, more opportunities for your owners to go on vacation. So, we're going to continue to look at that. And then, you know, even on the exchange side of the business, we're going to look at opportunities there to expand our travel platform. We've talked about you know, adjacent travel type businesses. And we're going to continue to see if there's something there. We're not, you know, we're not going to do something that's a me too from an offering. We're going to look for stuff that really in either, you know, we can run and grow and build into scale, leveraging our core capabilities. or potentially enhance the offerings we're making today, whether that's on the exchange side of the business or the VO side of the business. So we'll be opportunistic there if we see the right things. But short of that, like we've said, we'll return excess capital back to shareholders.
spk06: Excellent. Thanks so much.
spk01: Thank you. Our next question comes from the line. I've been taken with Credit Suisse, please proceed with your question.
spk04: Hey, good morning. One just quick near term and one longer term. So I think if I heard you correctly, I think you mentioned in the prepared remarks a 1Q rentals headwind from higher owner occupancy. My understanding is that that was an issue, not an issue, but that was a dynamic in FY22 as well. But those rollover points would expire in FY22. January. So can we open that up slightly? Like why is that headwind persisting into 1Q23? And did you quantify that at all? Sorry.
spk09: Thanks. Yeah. So if you go back, it's really more of a Q121, right? So you had Omicron and coming in the recovery, you you had less owner occupancy in general in the first quarter of 21. And with that, less owner occupancy allowed us to drive better rentals, right? And now you're back to more normalized owner occupancy. And it has nothing to do with the point expiration. It was just really the opportunity from Omicron last first quarter, but also just At the time, just owner occupancies in general hadn't gotten back to a normalized first quarter level. So first quarter last year gave you a little bit better outcome there. First quarter this year, you're just back to more normalized owner occupancy. And we talked about our package pipeline. we've got much higher packages. We're using our rental inventory in the first quarter to drive packages and contract sales. So that will normalize, right? We have an easier comp for rentals in the second half of the year as last year, as we talked about, we did have all of those COVID points and we were arguably making you know, inventory we could otherwise rent available for owners because that was related to prior year usage with the COVID points. So second year or second half of the year, much easier comp. And that's where I think, you know, now we're not going to guide quarter to quarter. For the full year, Tony talked about rental profits being up 10%.
spk02: And on that, you know, I just said that we do confirm that, you know, those COVID points did expire at the end of last year, as John mentioned. And the other dynamic you have happening in the second half of the year is that people use those COVID points also to use our Explorer collection. And now as we get into this year, The owners last year were using those points towards the second half of the year a little more, so we had a little more rental availability in the first half, like John mentioned, but that means that if they were using the COVID points in the second half of the year a little bit more, it was a little bit higher cost on the Explorer costs as well because not only did they occupy, but they also traded for Explorer as well.
spk04: I got it. That makes a lot of sense. Thanks for all the color. And I guess if we just step back a little bit, how do you guys feel about your 2025 investor day goals on either EBITDA or contract sales? Do you feel like it's a stretch or is it right on target? And I ask that in the context of contract sales, for example. So if you use the midpoint of the 23 guide, as you mentioned, that's 7% contract sales. And I think that would suggest a little bit of an acceleration in 24 and 25 to reach the midpoint of those investor day goals. So I'm just kind of curious about how you guys are thinking about the cadence over the next couple of years from here. Thanks.
spk09: Yeah, we feel great about the goals we laid out. Nothing's changed. Obviously, when you lay out any plan and you're given kind of three years, it's never necessarily a straight line, right? Like that your growth each year, it's going to, you know, some years might be a little bit less. For example, this year, because, you know, we didn't necessarily have interest rates on the financing side. Last June going is high, right? So not as much growth or really no growth when you look at our financing business this year. But we expect that'll turn around over the time and we'll get substantial growth as we go through there. So that's an example. But on the contract sales side, same thing. We continue. And Tony talked about our G&A being a little bit higher. We're continuing to invest, right, in technologies that are going to help us drive contract sales, growth, higher BPGs, efficiencies, marketing. And, you know, as we've talked about in the past, we've partnered with Salesforce. And so the difference being a little bit, because I know people ask about the higher G&A costs, the difference being is historically on the IT side, we were more of a build shop, meaning we built the IT, right, and Therefore, under GAAP, you capitalized it and depreciated it, right? So that came out of your free cash flow in CapEx, if you will. As we've transformed the business over the last couple of years, and you think about where we want to go, we want to partner and use more software as a service, like Salesforce. The difference from an accounting perspective is less of those costs from an IT perspective don't qualify for capitalization under GAAP. So because of that, right, you have, you know, slightly higher expense. But even if you go back to the investor day, what I'd point out is if you look at our CapEx spend, it's 90 to $110 million a year over the four-year period. And this year, right, and it's going to be lower. I mean, we're guiding 80 to 90, right? So it's really a right, you know, left hand, right hand type thing in terms of it doesn't impact your cash flow per se, but the nuances of where it might run through are a little bit different. But with that and leveraging that type of technology, that's going to unlock the growth and create more opportunities going forward to get more efficient on the marketing and sales side and and better target customers and drive those contract sales. So we're excited to move forward here. And I guess to go back just to answer the first part of your question, yeah, we feel very good about the investor day numbers that we laid out back in June.
spk02: And, Ben, one thing I'd tack on to what John said is that we did, you know, mention that we expect VPGs to normalize a little bit in 2023. That doesn't mean for the whole period through 2025 that it would do that. So we do expect, you know, that to start growing again after the current year. So that's something that we'd look at as well, driving development margin.
spk04: That's very helpful. Thank you.
spk01: Thank you. Ladies and gentlemen, just as a reminder, we'd like to ask you to keep to one question and one follow-up so that we allow for as many questions as possible. Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.
spk08: Hey, good morning, guys. Morning. So, morning. So, first question, John, you mentioned the prepared comments. a land parcel in Charleston for development. I know it's a small thing and obviously a great market is that, should we read anything into that in terms of, you know, you're, you're more willing or, or wanting to do a little bit more development going forward, or you, you think you need inventory or just, you know, is there anything we should extrapolate from that?
spk09: No, I'm just that, you know, we're, We're looking out over the future with contract sales growth, and as Tony hit on, we do have excess inventory still. That's down to about $500 million of book value. So, you know, development takes time, right? So, as we talked about, you know, that's in 2025. We probably would have loved to do, you know, a bigger Charleston development, but there's local limitations in terms of, how big and kind of that 50-unit cap there. So it's going to be a great property. I would expect you're going to hear more opportunities and things as we go forward this year. Now, like I said, some of that stuff, if it's ground-up development, it's going to take a few years to get to. And I would expect if they're bigger projects, You know, Charleston at 50 units isn't going to be that much CapEx here over the next couple years in terms of inventory CapEx. But, you know, we'll look like to do what we've done historically is do some capital efficient deals, work with partners on development. So, we've got a good pipeline of things we're looking at and new destinations that'll bring those new sales centers. So, but we got to be thinking about delivering inventory as we get out in 25, 26, 27. Because that $500 million, while it sounds like a lot when you're burning $300 million, $400 million off your balance sheet each year, right, you'll burn through that pretty quick.
spk02: And that's pretty true. The 50 units, that's a month and a half of sales, if that, so that's a smaller project. We'll come with a little bit of distribution, which we like. We do some business in that market already through events and whatnot, but we do look to add more distributions along with newer projects which will help us on our contract sales growth going forward as well.
spk08: Great. Thanks. And then just as a follow-up, Tony, I think you mentioned flat finance profits year over year is the expectation. Have you seen any change in people putting more or less down as a down payment to try to offset higher rates and kind of keep the payments same? Or is there anything you guys are doing to encourage that to make sure that the financing propensity stays level?
spk02: Yeah, I haven't seen anything different with the down payment out there. And we do have a program in place to encourage people to finance with us and to keep the financing with us for 18 months. That program has been in place. But as you're well aware, pre-COVID, we were at closer to the low 60s as a percent of financing. And through last year, we were probably in the 53%, 54% range. So we haven't gotten quite back to where we want to be. We want to be in that low 60s again because it's a profitable endeavor for us. So we want to make sure we keep that going forward. But as of right now, we are doing everything we can through sales training and also through the financing propensity program to get people to sign up for our paper.
spk08: Okay, great. Thanks, guys.
spk02: We have been keeping our interest rates pretty steady. We've upped them a little bit last year, but they don't go point-for-point increased with what you're seeing in the market in general, and that helps to encourage people to take our financing as well. Great. Thanks, guys. Thanks, Chris. Thank you.
spk01: Thank you. Our next question comes from the line of Patrick Schultz with Truist Securities. Please proceed with your question.
spk05: Hi, good morning, everyone. Good morning. John or Tony, I wonder if you could give a little more granularity about the growth rates in the tour packages for this year. You know, how much are you up, you know, year over year, which sounds like you are, you know, percentage wise by, you know, whatever period that you can share.
spk09: You're talking about the tour package pipeline?
spk05: In the past, you've given statistics on how much that is up versus the comparable period. I'm wondering if you can share anything similar.
spk02: Tony, I can tell you that our tour package pipeline, we ended the year maybe 15% or so higher than we did the previous year for our package pipeline. We're in a place, though, if you look at it, you know, it's always a balance between inventory. And the first thing we want to do is make sure that our owners get on vacation. Then you want to put packages into the inventory that we do get through our different options that the owners can do, including Bonvoy Trade Explorer and our developer-owned inventory. So we want to make sure that we put that inventory aside for preview packages and then rent the excess, right? And that's what we always do with our inventory. So it starts to become this balance game. And ultimately, we believe we could sell more packages if we had more inventory to put those packages in. So we've actually started optimizing our package pipeline and really, you know, stratifying the customers that we're marketing to and going after the, I guess, the most profitable customers. And it's really helped us in our marketing cost within that package pipeline production cost. Okay.
spk05: And then a little bit follow-up on that. Let's say as of December 31st, you're up, you know, in your tour package pipeline. What would the typical lead or booking time be for somebody, you know, in the package pipeline area? Trying to sort of think about, you know, kind of visibility.
spk09: Yeah, you know, historically, and I mean that more pre-COVID, it was probably more 9, 12 months, maybe even a little bit longer for some. I don't have current stats, but I would expect because of some of the pent-up demand and people, you know, not having – because remember what we used to talk about on that, Patrick, right, is we'd sell somebody a package. Well, a lot of these people buying packages, they have their next vacation or maybe their next two vacations on the books, right? So they're looking out a little bit farther. I think, you know, what's probably happened during COVID is – People didn't have multiple vacations, right, planned coming out, and they're buying these packages, and they're probably activating them and getting on vacation a little bit sooner. But I would expect on a more normalized basis, you know, that kind of 9 to 12 months, maybe a little bit longer, maybe a little bit less, but that's probably how to think about that activation and getting people on vacation.
spk02: And I think the packages we sell are generally in the 18-month range, so people do have time to activate those if they want to. and we're trying to make that more automated going forward.
spk05: Okay. I appreciate the call. Thank you. Thanks, Patrick.
spk02: Thank you.
spk01: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Sean Kelly with Bank of America. Please proceed with your question.
spk00: Hi. Good morning, everyone. Thank you for taking my question. Just wanted to ask as we kind of drill in on the VOI sales, what's your sort of expectation or assumption behind, you know, existing members versus new member mix? And kind of what's the broader impact of that, you know, this year, maybe the next few years as it relates to kind of VPG versus Torflow? Thanks.
spk09: Yeah, great question, Sean. So for last year, for the full year, we were about 70% owners, 30% first-time buyers. Strategically, as we've always talked about, when we do these packages and all those stores are ramping up, they typically are more first-time buyers, which is going to help. What I'd say for 23 is with the launch of the Abound program and more on the Hyatt side later this year with some of the changes we're making there, the consequences of that are owners want to come in and talk about the new products, right? Understand, well, what is this abound? What does it mean for my ownership when they're on vacation? So I would expect our tour growth or what we like to call to our capture rate of owners that are staying to be higher than it was last year, right? Drive more tours that way. And Typically, when owners tour, they have a much higher VPG, and so that's going to help us here. As we talked about on the package side, you know, we're selling the packages, we're going to continue to drive first-time buyer, but I'm not sure that 70-30 is going to move much as we think about 2023. But over the next couple years, the goal is going to continue to be, you know, to kind of push that more to the mid to high 30s, but it's going to take some time.
spk00: Very clear. Thanks. And then just a As my follow-up and sort of clarification was, I believe you said in the prepared remarks, might have been in Tony's section, that VOI margins or the development margins would be up year-on-year. Did I catch that correctly? And is that also reflective or impacted by this mix remaining stable?
spk02: No, I think we said that it would be above 30% on the development margin side, which is a pretty strong development margin. We've been running I think closer to above 31% this year. So in general, we said above 30%. That means our marketing and sales jobs are going to be staying in line for the most part. We'll look to leverage our fixed costs on the higher contract sales that we guided. And then our product cost as a percentage will remain in pretty good shape when you look year over year. So we do have a lot of that low-cost required inventory coming through, and we don't see that stopping for the short term.
spk09: Yeah, I think, Sean, when you think about it, if you go back pre-COVID, you know, we were running 23, you know, ish development margins. So, you know, the key here is that, you know, at 30 or above, right, we're, you know, notwithstanding, as I mentioned earlier, given the tough comp on VPGs, they'll, you know, most likely be a little softer year over year, and we're driving the growth through tour flow. So, Remember, too, as we add tours, and our tour growth last year was up 30%, yet VPG for the full year versus 21 was fairly flat. When you think about that, when you're adding the tours, you're adding tours as you grow those more likely in less efficient VPG channels. That's the balance that we've been able to drive TourFlow, and we expect to drive it again this year, but minimize the impact on VPGs by getting and continuing to get smarter on our marketing and the packages and the things that we're offering so that you get some offset there. And if we're able to do all that, more efficiencies on the marketing and sales side, leveraging some of our fixed costs on marketing and sales with the growth, And then maintaining our product cost, we feel good about keeping that development margin up there for the foreseeable future.
spk00: Great. Thank you very much.
spk09: Thank you.
spk01: Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Geller for any final comments.
spk09: Thank you, Melissa. And thank you, everyone, for joining our call today. 2022 was a great year for our company. We generated more than $1.8 billion in contract sales, added more than 20,000 new owners in our vacation ownership business, grew interval membership by 21%, expanded margins across the board, and returned more than $800 million to shareholders. We also launched the Abound by Marriott Vacations and recently announced that beginning this summer, all of our Hyatt and Legacy Wealth Resorts will align under the Hyatt Vacation Club brand. As we enter the new year, the outlook for our company has never been brighter. Demand for leisure travel remains robust, occupancies are strong, VPG remains well above pre-pandemic levels, and we expect to grow contract sales by 7% this year at the midpoint of the range. We also expect to generate between $600 and $670 million of adjusted free cash flow, which we will use to reinvest in our business or return to shareholders. To close, on behalf of all of our associates, owners, exchange, and third-party members, I want to thank you for your interest in our company. We hope to see you on vacation soon. Thank you.
spk01: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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