Marriott Vacations Worldwide Corporation

Greetings and welcome to the Marriott Vacations Worldwide Second Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you 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 you to your host, Neil Goldner, Vice President Investor Relations. Thank you, Neil. You may begin.

Thanks, Alicia. Welcome to the Marriott Vacations Worldwide Second Quarter Earnings Call. I am joined today by John Geller, our President and Chief Executive Officer, and Jason Marino, 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 boat-looking statements under federal securities laws. The statements are subject to numerous risks and uncertainties which could cause future results to differ materially from those expressed in or implied by our comments. Boat-looking statements in the press release, as well as 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-GAF financial information. You can find a reconciliation of non-GAF financial measures in the schedules attached to our press release and on our website. With that, it is now my pleasure to turn the call over to John Geller.

Thanks, Neil. Good morning, everyone, and thank you for joining our second quarter earnings call. We delivered $203 million in adjusted EBITDA in the quarter and reiterated our full year guidance, reflecting the continued demand for leisure travel, the resilience of our business model, and the hard work of our associates around the world. The first half of the year was certainly interesting, yet despite all the external noise, leisure customers continued to prioritize vacation and our team focused on what it could control, providing great experiences for our owners, members, and guests while executing on our modernization program. Exiting the first half of the year, our business is well positioned. We're the only vacation ownership company focused solely on the upper upscale part of the market. Our owners have a median annual income of $150,000 and more than 80% of them do not have a loan on their timeshare, so we are confident they will be vacationing with us. And our exchange business includes most of the top tier names in the timeshare industry. Quickly reviewing the quarter, we delivered nearly 90% resort occupancy with strength in the quarter, which we had seen in Maui, coastal Florida, and the Caribbean, while Vegas was relatively weak. We made further progress on our modernization initiative and remain on track to deliver $150 to $200 million in run rate benefits by the end of 2026, with half coming from revenue initiatives and the other half coming from cost savings and efficiencies. As we've talked about, the second quarter started off soft, but trends improved as we progressed through the quarter. As a result, contract sales were down less than 1% for the quarter, an improvement compared to Q1. First time buyer sales were up year over year, our fourth consecutive quarter of higher year over year first time buyer sales, and I'm particularly excited about this trend as new owners tend to buy additional points over time. First time buyers represented a third of total contract sales in the quarter, up 200 basis points from a year ago, reflecting the success of our new owner strategies. Owner sales were down year over year due to lower VPGs, while owner tours were flat. As you know, late last year we announced a modernization program that we believe can deliver an incremental $150 to $200 million in adjusted EBITDA benefits on a run rate basis by the end of next year. The reason for pursuing this initiative is to speed decision making across two organizations, right size our cost structure, optimize our IT platforms, and provide the foundation to drive growth in our leisure focused business. We expect half of the benefit to come from cost savings and efficiencies, while the other half will come from revenue initiatives. And while most of the expected benefit is still ahead of us, we are making great progress. For example, during the second quarter we launched and expanded a number of revenue initiatives, including expanding our enhanced call transfer program across the Marriott system, resulting in our best package sales quarter since the pandemic. This should help drive future sales. We also increased our use of nontraditional channels through a combination of road shows, virtual tours, and other events, accounting for over 13% of our total contract sales in the quarter. We expanded our new owner experiences campaign, which contributed to higher first time buyer VPGs. We also implemented a campaign to drive additional near-term owner stays driving incremental tours. And soon we plan to start using FICO score data for marketing purposes, which should result in higher VPGs and improved credit metrics. With our data and analytics and marketing and sales teams working together, we built and developed an AI-based propensity model focusing on renters most likely to become owners, which we believe will help drive higher sales. We are also using internally developed advanced analytic predictive models to better support our sales execs, and we are also rolling out new sales training. And we introduced a refundable getaway pricing option at Interval International, which we believe will drive higher rentals and profitability over time. In total, we expect these and other revenue enhancing initiatives will help us deliver $75 million to $100 million in incremental EBITDA by the end of next year on a run rate basis. We also expect to deliver another $75 million to $100 million from cost savings and efficiencies. We expect significant savings to come from retiring legacy technology debt, which will lead to efficiencies in how we run the business, eliminating manual processes and taking costs out that are currently required to maintain these legacy systems. We also expect to deliver substantial benefits from increasing automation, lowering procurement costs, reducing overhead costs, including corporate G&A, and optimizing our organizational structure. And while not part of our expected $150 million to $200 million EBITDA benefit, early indications suggest maintenance fees on our points-based products may be flattish next year, partially due to our monetization initiatives, which enhances the overall value proposition for our owners as well as our first-time buyers. But just as important as the momentum we've built in our early successes, we're changing how things get done, increasing the speed of decision-making and driving accountability. And I'm pleased with the way our associates have embraced the new ways of working. Looking forward, occupancy is expected to remain high. Tour capture rates are increasing, and owner keys on the books for the second half of the year look strong. A majority of owner villa reservations are now being done online, and we expect that to grow further. Loan delinquencies continue to trend down, guest satisfaction scores remain strong, and we ended the quarter with nearly 270,000 packages in our pipeline, with almost 30% scheduled to take a tour in the second half of the year, providing us good tour visibility. Contract sales increased slightly in July compared to June on higher tours and stable BPGs, and the team is focused on ramping up a number of new sales initiatives scheduled to launch in August, as well as increasing investment and sales training. Looking out longer term, despite the noisy environment, leisure consumers continue to prioritize travel, and timeshare remains a great value for many of them. As the only -or-upscale player in the industry with the best collection of brands, we believe our company is uniquely positioned for long-term growth, offering a product that resonates with today's consumer that is looking for space and experiences combined with brands they trust. Despite some ups and downs, our long-term financial model hasn't changed. We think we can grow tours and BPG in the low single digits, lever our fixed costs to improve margins, and use our free cash flow to reduce leverage and buy back shares. Over time, that should result in high single digit to low double digit EPS growth, and with the bulk of our modernization benefits still ahead of us, we should be able to do better than that for the next few years. With that, I'll turn the call over to Jason to discuss our results in more detail.

Thanks, John. Today I'm going to review our second quarter results, our balance sheet and liquidity position, and our outlook for the year. Contract sales were down less than a point, with 2% higher tours offset by lower BPG. First-time buyer sales increased 6% driven by higher tours and higher BPG, while owner sales declined 4% on lower BPG. As you know, first-time buyers typically carry a lower BPG than owners, so the growth in first-time buyer sales negatively impacted BPG in the quarter. Our sales reserve was 13% of contract sales in the quarter, with delinquencies declining 50 basis points sequentially and 110 basis points year over year to the lowest levels in two years. For the full year, we expect our sales reserve to be in the .5% range. Development profit more than doubled compared to the prior year, reflecting last year's $57 million net sales reserve adjustment. Excluding that, development profit declined 11% year over year due to lower BPGs and higher marketing and sales costs, partially offset by lower product costs as a percent of revenue. Total company rental profit declined $7 million, or 16%, to $35 million driven by increased unsold maintenance fees and marketing expense, partially offset by higher ADRs. Management and exchange profit increased 3% to $98 million, with increased revenue in our vacation ownership segment partially offset by lower exchange revenue at interval. Financing profit increased 7% to $53 million. Corporate G&A was flat, excluding the $7 million of lower variable compensation related to the sales reserve adjustment last year. An adjusted EBITDA increased 29% to $203 million, with margins improving 360 basis points as we lapped last year's sales reserve adjustment. Moving to the balance sheet, we ended the quarter with leverage of 3.9 times and $800 million in liquidity. Our 0% convert matures in January next year, and we've already backstopped the majority of it with a delayed draw term loan facility, providing us optionality as we look to refinance it later this year. We were precluded from buying shares during most of the quarter, but you should expect us to be opportunistic buyers of our own shares in the future as benefits from the modern modernization are realized. Looking forward, we are maintaining our full year contract sales and adjusted EBITDA guidance. We expect product costs this year to be flat as a percent of contract sales reflecting our first half results. We now expect rental profit to decline around $20 million to $25 million due to the higher cost of rental inventory, and we also expect corporate G&A to be flat to down slightly this year. Our modernization program is progressing well, but we still expect to deliver $150 to $200 million in run rate benefit by the end of next year. For modeling purposes, we still expect to generate $35 million in P&L benefit this year with an additional $60 million to $80 million coming next year and the report run rate in 2027. Moving to cash flow, we still expect our adjusted free cash flow to be $270 million to $330 million this year, excluding roughly $100 million of one-time cash costs related to our modernization initiatives. We acquired 52 completed timeshare units in Khao Lek, Thailand for $43 million during the quarter. We still have a number of non-core assets we plan to dispose of over the next few years, which we estimate could be worth $150 million to $200 million, and our team has been working hard to monetize them. With $200 million of spending already designated to the modernization program through the end of next year, we plan to use proceeds from any asset dispositions to repurchase shares and reduce leverage. The end of the quarter with $1 billion of inventory on the balance sheet. Looking ahead, we have $310 million of inventory commitments due over the next few years, including payments for Waikiki, our second phase of Khao Lek, additional units in Bali, and a new Nashville resort, which is scheduled to open in 2027. Beyond that, we plan to restrict our inventory spending to low-cost, reacquired inventory, as well as capital-efficient arrangements where we don't pay for the inventory until we start sales, and where we can add a new sales gallery, which helps drive future sales. Our goal is to get close to the -a-half to two years of inventory on the balance sheet. So to summarize, we ended the quarter strong, and while the environment is still somewhat fluid, we remain focused on what we can control, including ensuring our owners, members, and guests have great vacation experiences while also executing on our modernization program. With that, we'll be happy to answer your questions. Alicia?

Thank you. We will now be conducting a question and answer session. If you would 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 would 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. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Ben Chackin with Mizzouho. Please proceed.

Hey, good morning. Thank you for taking my questions. Hey, good morning. Just want to dig in on contract sales for a moment. From what we can tell, just based on some of the commentary you gave last quarter and entry quarter, seems like June contract sales were positive, maybe in the low single digit range. Was there, I guess, is that correct? And then was there a, is that a sequential acceleration versus May or was it more comp-related? And then just to confirm, did you say July was better than June? Did I guess that right? Thanks.

Yeah, July contract sales were up slightly from June. Going back to your other question, yeah, June was up about 3% year over year. And sequentially, yeah, it clearly improved because as we had talked about, we were down 4% in April. We said that on our last call. We were down 3% in May, which we didn't say how much, but we had said we had gotten a little bit better. So there was some acceleration. June was a bit of an easier comp year over year. I would say that if you remember last year. That's where we saw some of the first time buyer headwinds. But net-net, good acceleration as we came through the quarter and down a little bit less than 1%.

Got it. Understood. And then I believe in the prepared remarks, you mentioned a .5% loan loss provision as the expectation for the year. Can you just remind us, how does that compare to your previous expectation and then maybe parallel to that, I believe you mentioned that maintenance fees should be flattish in 26 in part because of some of the modernization initiatives. Do you think that will show up in, I guess theoretically should that show up in an improvement in the loan loss provision? Thanks.

Yeah, Ben. So the .5% is about a half a point higher than our previous guidance, which was about 12% for the full year. The modernization and the lower maintenance fees, we certainly, if you go back a couple years, think some of the delinquencies that we had were attributable to the higher than normal inflationary increases or the higher inflation. So we do think that will help going forward. But the loan book's in good shape as we talked about with delinquencies down to really the lowest levels in two years, both on a sequential and a -over-year basis being down pretty materially 110 basis points -over-year on the delinquencies. So we feel good about where the loan book is.

Yeah, keeping the maintenance fees not flatish, just big picture that obviously helps with the value proposition, right? Maintenance fees a component of the long-term cost of prepaying or buying timeshare. So everything we can do to continue to enhance the value proposition, we think it helps from sales perspective, hopes from an owner satisfaction perspective, should have some impact, hopefully positive, on our loan loss. So it

is and will continue to be a focus.

Thank you. Our next question comes from the line of Patrick Soles with Chewer Securities. Please proceed.

Hi. Good morning. Certainly, flatish maintenance fees welcome news after I think I was up mid-teens a couple years ago, but definitely attest to the value proposition there. A couple questions. I've seen some headlines here about an expanded owner benefit, that being ability to use club points to directly book stays at thousands of hotels around the globe. Is that an earnings needle mover for you folks? Will that actually show up in EBITDA growth? How do we think about that?

It's really more optionality for our owners, Patrick. Before we had a couple hundred Marriott hotels that we offered people to use their ownership points to book into. It was a bit of a manual process. You had to call. And this really automates that, but more importantly, opens up most of the Marriott system or resorts where, like I said, it was limited. Nobody, and I've said this before, exchange options give people additional ways to vacation. They're never going to be the best value option for an owner. That's always going to be staying within our 120-ish resorts around the world because we've got to take those weeks, pay for the vacation, and then we've got to rent it to offset the cost of the owner's vacation. There's value leakage from an owner perspective, but it does give the owner just more options if they want to stay outside the vacation ownership system.

Okay, so sort of add that into the value proposition of the product. A follow-up question, and then I'll hop back into the queue. I think I heard you mentioned you were precluded from buying shares in the most recent quarter. Can you provide any color on why that was? Thank you.

Yeah, no. Like any time, there can be blackout periods for different things. So we've had them in the past. We've never publicly commented on when we're in the market, when we're not in the market. We just thought because early on in the quarter, obviously, the stock price was very low on a relative basis, and we were blacked out at that point. So going forward, we'll continue to be opportunistic, blacking out, or excuse me, buying back shares as we

look at the right opportunities.

Thank you. Our next question comes from the line of Brent Montour with Barclays. Please proceed.

Thank you very much. Good morning. Thanks for taking my question. So I wanted to circle back on the contract sales commentary earlier in the guidance, or sorry, the June-July commentary, and I think that that was pretty clear what you were saying, John, about June through July. But it did feel like trends got better. The contract guidance, contract sales growth guidance you guys gave was unchanged. Just curious if you feel any better about that guidance range, or was that just the sort of acceleration month to month that you had already sort of baked in?

Yeah, I mean, we felt at the midpoint of going down one and a half. That's where, you know, halfway through the year, we're still down. Obviously, we were down in the second quarter. So we're hoping we do better as we move through the year, but there is still some broader macro uncertainty. Obviously, the jobs report stuff last week, things like that, that probably keep us a little bit on the, you know, we've got to continue to move through the year and deliver on the contract sales.

Okay, thanks for that. And then maybe for Jason, and maybe I missed this earlier, I think you did say that loan loss provision guidance went up 50 basis points from 12 to 12.5%. I'm just trying to sort of square that against the commentary in the quarter where you said delinquencies were at a two-year low and that they got better. So why did, I guess, why did the loan loss provision go up for the year, unless I missed something there?

Yeah, so what we're seeing is a little bit of long-term trends, obviously all going in the right direction, which is great. We're happy to see, and we've been working really hard at that for obviously the last couple of years. If you look at the second quarter, we did have, we were kind of up in that 13% range due to about half of that was due to higher propensity. There's a little bit of seasonality in there. Then we did have a little bit of higher defaults in our Asia business, about two and a half million in the quarter. So not big dollars at two and a half million, but that is about 60 basis points on our contract sales basis. So just for overall context, as we expand our Asia business, that loan book right now is about 150 million on gross notes of about $3 billion. So still a relatively small portion of the overall book. So that's what we saw in the second quarter. And that informed some of the guidance going forward in the 12.5%.

And we continue to focus, as Jason mentioned, delinquencies are down there at a two-year low, which is all positive. But they're still not kind of back to where we'd like them to be. So hopefully the trends continue and if we can continue to get the delinquencies back down to more 22 level before we started seeing some of the issues, that'll give us more confidence

to take a look at the overall reserve going forward.

Thank you. Our next question comes from the line of Stephen Grablin with Morgan Stanley. Please proceed.

Hey, thanks. I just want to clarify. You made this comment about being more efficient around inventory and taking down the amount, you know, years on hand. You know, what are the implications to cost of VOI? Not just this year, but as we look maybe further out, should we be assuming that that cost of VOI actually is a percentage of, you know, contract sales will come down? Or what are some of the puts and takes to think through?

Yeah, so as we, I think you're referring maybe to the cash flow guidance came down, about 10 million on the inventory spending. I think you highlighted that in your note. And then, yeah, we've been consistent in saying that we want to get our inventory levels down to that one and a half to two years on hand. So I think all of that is consistent with our, you know, kind of how we've talked about inventory and how we think about it going forward. You know, also as we've talked about it, we do see our cost of inventory ticking up slightly over the next few years as, you know, the mix of inventory changes, incorporating some of the new inventory that we're purchasing like Waikiki and some of the projects in Asia. So that's what we see over the long term. So again, it's not going to rise very quickly, but we do see over the next three to five years, probably a slight increase in our product costs going forward. And that's pretty consistent with how we've talked about it in the past.

Got it. Okay. I thought there was maybe something new on the efficiency there. One other unrelated question. You know, Harley-Davidson just signed a partnership with KKR and PIMCO to basically sell a portion of its financing receivables for 1.75 times book and also rather than securitize, actually sell to them at a premium. I guess I'm curious, how do you think about the value, you know, of your financing receivables relative to book value and maybe the rise of private credit markets and maybe potential other opportunities to maybe be more efficient on the securitization front? Thanks.

Yeah, I'll start. Jason can add anything here as well. You know, we're always looking, you know, whether it's our financing business or anything, how do we maximize the long term value for our shareholders? So we've looked at a lot of stuff with the financing business over there and we'll continue to look at it. What I can tell you, high level, I think our securitizations are a lot more efficient than maybe what Harley-Davidson was doing. I mean, we got a 98% advance rate. And I think the real question is how you think about that is, you know, bringing in a third party, they've got to cost the capital. What's that going to cost you versus, you know, maximizing our profits on our balance sheet? And we'll continue to evaluate all those opportunities and if it makes sense from a shareholder value creation,

we would definitely take a look at it.

Thank you. Our next question comes from the line of David Katz with Jeffries. Please proceed.

Hi. Morning. Thanks for taking my question. I know this was discussed a bit earlier, but I just want to go a little farther, frankly, getting some questions and some of my own on this with respect to the 50 basis point increase on the loan loss, right? I mean, some of the other external data we see, you know, seems to be moving in a positive direction. And I think part of the answer earlier suggested, you know, more propensity, right? But are you just being conservative in there or a bit more conservative than you were, you know, the last time we talked about it? What could we just elaborate a bit more? Thank you.

Yeah. You know, David, you say conservative. I think there is a bit of unknown. Like I was saying earlier, while the Lincoln Cs continue to trend better, and, you know, we're seeing them as low as they've been in two years, they're still higher, right, than they were back in 22. We want to see continued improvement. And then I think if we get that continued improvement, then we'll look at, you know, our reserve going forward. So I don't know if you want to say that conservative. It's not really being conservative per se as much as reacting to what we're seeing and getting our delinquencies back down to where we've seen them historically.

Okay. Thank you very much.

Thank you. Our next question comes from a line of Ben Chakim with Mizuho. Please proceed.

Hey, thanks for letting me sneak back in here. You had some positive commentary on Maui in the prepared remarks. I guess what do you think from a sales perspective? You know, we haven't talked about this in a while because I don't think there's been much to share, but is there any maybe quantitative way to frame where we are versus maybe pre-fire or where we are in the recovery process, just some way to gauge? Thanks.

Sure. Well, I'll start overall with Hawaii. Hawaii had a strong quarter year over year with contract sales were up, DPG tour. So it was one of our brighter spots in the quarter. So that's good. I'd say on Maui, a couple things. I think on the transient side, occupancies were up year over year, which was good, and rate was up 8, 9%. So that was all positive on the rental side. Sales in Maui were kind of flat-verse last year. And some of the lingering stuff we've talked about, which is our owners coming back into Maui are getting better, but still kind of below where they were, as well as some of the packages. And then also we've got that re-piping project at the Maui Ocean Club, which is taking units out. That'll get wrapped up, call it first half of next year. So a bit of noise out there. And I'm happy to say there was a wildfire that occurred yesterday in Maui that was put out fairly quickly. But that risk is still out there. I'm happy everybody's safe out there. But it did impact us. We had to close sales for the day. And there were some power outages and stuff. So something where we continue to pray for the best out there. But overall, Hawaii was pretty strong in the quarter on

a relative basis.

All

right. I think that

does it for the questions. So thank you, everyone, for joining our call today. We delivered another solid quarter with strong occupancies and increased first-time buyer sales. Our modernization initiatives are taking root. And we have a lot of new plans scheduled for the second half of the year. So we are well positioned to deliver on our guidance this year. We're also making good progress on our modernization program and remain on track to deliver $150 to $200 million in incremental run rate adjusted to EBITDA by the end of next year. On behalf of all of our associates, owners, members, and guests around the world, I want to thank you for your continued interest in our company and hope to see you on vacation soon.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.