Greetings. Welcome to Marriott Vacations Worldwide Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Neal Goldner, Vice President of Investor Relations. Thank you. You may begin

Thank you, Sherry, and welcome to the Marriott Vacations Worldwide Third Quarter 2020 Earnings Conference Call. I am joined today by Steve Weisz, President and Chief Executive Officer; and John Geller, Executive Vice President and Chief Financial and Administrative Officer.

Thanks, Neal. And good morning, everyone. Excuse me. For some time now, we've been telling investors that we have a resilient business model. Looking at the performance of our stickier resort management, financing, and exchange membership revenues this quarter, coupled with the recovery in contract sales, rentals and exchange transactions, I believe we took a significant step forward improving our point. Following the challenging second quarter, when COVID was still new to many of us, our third quarter saw significant improvements in both our vacation ownership and exchange businesses with revenues and margins delivering meaningful improvements, compared to the second quarter. While we still have a long way to go before we fully recover, the third quarter was a major next step in that journey. So let me start with our vacation ownership business. Ever since the start of the pandemic, we have believed a typical timeshare unit with much larger square footage than the average hotel room and more amenities such as full kitchens and laundry facilities, coupled with the prepaid nature of our offering, positioned us to lead the recovery in the lodging sector. I think our third quarter resort occupancies are proof of that. In fact, not only did we see strong occupancies across many of our drive-to resorts, we also saw occupancies at a number of short-haul fly-to locations as well. To give you a few examples, occupancy at our Florida Beach resorts averaged in the mid-60% range in July and improved to around 70% for September.

Thanks, Steve, and good morning, everyone. Today, I'm going to review our third quarter results, the recovery we've continued to see across our business, our expanded cost saving initiatives and the overall strength of our balance sheet and our liquidity position. Our third quarter results reflect a strong sequential improvement from the second quarter, illustrating the resiliency of our business with resort occupancies, contract sales, and exchange revenue all improving from the second quarter. As a result, we reported $35 million of adjusted EBITDA for the third quarter, once again demonstrating the strength of our leisure-focused business model. Looking first at our vacation ownership business, our stickier resort management and financing businesses, once again, provided a strong contribution to our results this quarter, enabling our Vacation Ownership segment to deliver $28 million of adjusted EBITDA. As we mentioned on our last call, we reopened eight sales centers in June, followed by an additional 40 sales centers over the course of the third quarter. As Steve discussed, occupancies were strong in many of our drive-to and fly-to resorts during the quarter. But with Hawaii practically closed to non-resident visitors throughout the quarter and occupancy at Orlando being much lower than normal towards decline nearly 70% with owners representing 75% of the total tours this quarter, compared to just under 50% at the same time last year. VPG was up 13% despite a tougher comp because of the Hawaii closures. Excluding Hawaii, North America VPG was up nearly 30% year-over-year. We delivered total contract sales of $140 million, down 64% year-over-year, but up substantially from the second quarter. And even with the lower contract sales, we were still able to deliver a 5% adjusted development margin through our aggressive cost management efforts. Our Resort Management business generated $55 million of profit in the quarter, 12% lower than the prior year as the 4% increase in our stickier, high-margin management fee revenues was offset by a decline in ancillary profit as a result of lower occupancies and limited operations at many outlets.

Our first question is from Ben Chaiken with Crédit Suisse. Please proceed.

Good morning, Ben.

Hey. How is it going? Thanks for taking my question. I guess on the cost savings side of things, you mentioned these costs will not come back with volume. So, I think, just to confirm, your – does that imply that you don't need 2019 levels of demand either to get these? And then, just number two, on timing I think you were saying completion by the end of 2021, were you saying all in or runrate by the end of 2021? Thanks.

Sure. Yes. No, these – you're right. We are looking at it, if you go back to, yes, 2019 volumes, they would be on those cost reductions. So permanent in nature, we can get back to the volumes that we had in 2019 with permanent cost savings, leveraging technology, doing things more efficiently, there is a lot of initiatives in there. In terms of the timing, we obviously took a pause here on a lot of these initiatives to preserve cash flow and with people being out on furlough and reduced workweeks we are starting to ramp those up. We see a path forward. Our goal is still to try and get, as a runrate, the full $200 million or more runrate by the end of next year, but we'll continue to update you. The good news is there is, we see a path forward to $200 plus million, and we're still trying to get there by next year. But obviously, there is a lot of work that we need to get done

Got you. I appreciate it. And then, I guess, in the slide that you mentioned three buckets, I think marketing, technology, and IT infrastructure. Is there any more color on any of those buckets that you're able to provide at this point?

No. I mean, you look at it high-level. I mean we were back at the beginning of the year with the $125 million or more. Obviously, the – or more, we were working on a lot of things internally and we saw a path forward even back then for probably another $25 million to $30 million of synergies around some of the same things that were in the $125 million, right? So, a lot of it, the common theme is, where can you leverage technology and drive more efficiencies? So, and that's really across the board, whether it's on the back of the house, some of the F&A stuff, clearly, in our IT area and how we support the business going forward. But even on the operations side within marketing and sales and really challenging, not only our marketing approach and how we can leverage technology to be more efficient, but also org design, things like that. So it's probably a list of 40-plus projects. A lot of them in the couple of million dollar range here and there. But, there - like I said, there is a way to get there, and we are going to move as quickly as we can.

Got you. I appreciate it. Thanks a lot.

Thank you.

Our next question is from Jared Shojaian with Wolfe Research. Please proceed.

Hi, Jared.

Hi. Good morning everyone. Good morning.

Hi.

Can you give us the contract sales change by month in the quarter and for October? And is it your expectation based on what you're seeing, what's on the books that November and December will look better than October? And I realize there is some seasonality there. So I am referring more to the year-over-year change.

Yes. I don't have a sequencing here in front of us, Jared. We could certainly get that to you. So, I'll have Neal follow-up with you on that. So, what causes – I think the essence of your question is, what causes the $140 million we ran in Q3 to become between $160 million and $185 million in Q4, right?

That's fair. Yes, I think the genesis of the question was, was that as well as just trying to understand with rising COVID cases here too, if you have seen that sequential improvement continue throughout October into November and December, as well, just based on what you're seeing on the books?

October exceeded our internal forecast by not an insignificant amount, which gives us some level of confidence. I mean, obviously, the one thing that none of us has any visibility into is, if there is a huge spike in cases, if there is a meaningful cutback in travel or local government regulations, et cetera, I think all bets are off and I would say that for not only our business, but lots of businesses. But what we've done is, we've taken the October results. We have then looked at future bookings in terms of not only occupancies, but also tour arrivals for November and December. And we have tried to factor in what we think penetration rate would be on occupancy for in-house tours, as well as those package tours. We've applied a VPG number to them and we've come up with what we believe is – while it's not an insignificant 15% to almost 30% improvement in contract sales in the fourth quarter. Keep in mind, in October we only had two weeks of Hawaii being open and even that, it took them a while to get ramped up. So, I would think there is some strength in Hawaii that we should see come through to help that number. In addition, as I reported, as you look at the back-end of the year here in Orlando, we see some numbers improving here as well. So, you put all those things together, throw them in the sausage grinder and that's what comes out of the other end in terms of our forecast.

Yes. And just on the seasonality, it's typically in the fourth quarter, we would have a little bit of seasonality. Typically, November is a little bit softer and we obviously have the holidays around Thanksgiving and year-end. So - but it's not a normal fourth quarter, right? We are in a recovery period. To Steve's point, we are looking at occupancies, which generally in some resorts could be increasing sequentially, specifically as we talked about Hawaii and Orlando versus a normal fourth quarter. And the other phenomenon, and it's more anecdotal, but I've heard of people that, up in the Northeast, where kids are doing school remotely, they are working remotely. People are coming down to Orlando, doing things remotely and then, going to the parks and taking advantage of that. So, it isn't a normal quarter, which also makes it very hard. Steve walked you through how we kind of pulled it together. But it's going to obviously depend on people continuing to travel and go on vacation.

Great. Thank you for that. And then, I want to ask a question just on Hawaii and I appreciate all the helpful commentary and stats that you've provided. And it does seem like Hawaii is slowly starting to improve nicely here sequentially. Is it your expectation that, maybe by the first quarter, Hawaii looks a lot more like some of your other beachfront mountain kind of resorts where you are a lot closer to prior peak volume levels on occupancy? And then, I guess, also on Hawaii and the Rental segment in particular, Rentals were a pretty good story here in the quarter sequentially. Does Hawaii have an outsized impact on rentals? Or should I assume that the contract sales mix for Hawaii is pretty similar on the Rental side?

Yes. The broad answer to your question is, we sure hope so. Keep in mind, even when Hawaii reopened their doors on October 15, you had to have a negative COVID test within three days prior to arrival. So that does put some dampening effect on people even going there as we speak. We hope that that restriction will be further relaxed. I mean Hawaii has always been a very, very popular vacation destination amongst our owner groups as well as exchangers. So – and it runs a very high annual occupancy, that means the good news about Hawaii is there is very little seasonality impact. So, I have every reason to expect that as soon as people get comfortable about getting on an airplane and as I reported in my remarks, I mean, we've already seen some of that, particularly in the kind of the short-haul stuff that Hawaii will come back in full force that should benefit not only contract sales. Obviously, all of our ancillary businesses at the resorts and clearly, on the rental business although as owners occupy more inventory in Hawaii, the amount of rental inventory that we have available is somewhat limited. When we do have it, it comes at a very nice average daily rate.

Okay. Thank you very much.

Thanks, Jared.

Our next question is from Brian Dobson with Jefferies. Please proceed.

Hi, Brian.

Hey. Good morning.

Hey, Brian.

So, I think the industry has learned a lot from this downturn. And as you are looking out over the next few years, how do you see the business evolving and changing? Do you think there is room for a shorter duration product? And what kind of role can digital marketing play? How will that expand over the next couple of years when you're thinking about it?

Yes, I've always been of a belief and I've been on record with this at conferences and things like that that a shorter-term product is something that is in the future on a more prevalent basis across the business. Keep in mind, with us, because we have a points-based product, if somebody wants to go spend one night at one of our resorts, they can do that. And you don't have to buy a full one week equivalent of a number of points to become a member with us. So in essence, we have a short-term product availability. We don't market it quite that way, but we clearly think that there is something – and when you say shorter term, I think the other thing is, we saw a lifetime product and I think what you are referring to is somebody says, well, I only want to buy it for five years or seven years or ten years. There are certain accounting rule things that have to get over the hurdle on all that. But I do believe eventually that that's in the future for the industry. So, the industry continues to evolve just as it did from when I used to sell fixed-week, fixed-unit kind of stuff to where we find ourselves today. I think the industry will continue to move in a direction where there will be. Think of it this way, a short-term product could be a kind of an entry point for people and then, once people get to like it, which our evidence has shown once people buy it, they like it a lot. Then they would eventually transition into more of a lifetime product. I am sorry, the second half of your question was what?

Just on digital marketing.

On digital, yes, I think one of the advantages, kind of in a perverse way, that we saw with being able to better utilize some of our digital tools was in things something as simple as having real-time notification aspects for our owners about changes in local municipality rules and regulations about what people had to do when they came to one of our resorts, et cetera. And so, I mean, if you had to rely on kind of the more traditional approaches that the industry has used, and whether it's been in telephone calls or printed materials, et cetera, it would have taken forever and a day to get to our ownership group with these changes. And here, you are able to do it rather instantaneously and very broadly in a very inexpensive way. One of the things we saw and I think you may recall, we said on our second quarter call that, we had, in an interim period when our resort sales centers were closed, we had dialed up a - excuse expression that's upon. We had dialed up a - an enhanced phone outreach program to owners. That proved to be relatively successful for us. I think that's another meaningful tool in our tool belt to be able to use going forward. And I think, when you're looking out, as you are well aware, marketing costs in this business are not insignificant. And I think as we can continue to go down the path of generating interest and tour flow through digital channels, it will be much more cost-effective than some of the traditional ways we've approached it. So, I am very encouraged by what I see there. And I believe it's – while the pandemic may have caused us to get at some stuff earlier than we had anticipated, I think that's – in the end, it's a good step forward.

Great. Thanks very much.

Thank you.

Our next question is from Brandt Montour with JPMorgan. Please proceed.

Good morning, Brandt.

Good morning everyone. Hey, good morning. Thanks for taking my questions. Just going back to one of Jared's questions and maybe asking another way, what is embedded in the $160 million to $185 million for Hawaii, at least qualitatively?

We don't – well, I appreciate your question and why your answer asking it, we don't disclose market-by-market kind of forward-thinking sales forecast, except to say the following: we believe that Hawaii will meaningfully outperform Q3. I think that kind of goes without saying, given the fact that there was virtually no volume in Q3 out of Hawaii. But I am not going to give you a specific number.

Yes. No, that's why I said it could be a qualitative answer. I mean I think some of your peers have said that contribution from Hawaii would be low, even though it's open just because of how slow the ramp would be. So, I was curious if you guys were penciling in a fair amount of ramp in there. But that's a fine answer.

Yes, I, let me just - let me just add, I think if you look at our representation of our product, and what it means to us in terms of sales, I think, we probably have a – with the exception of maybe of Hilton Grand Vacations, we probably have a higher concentration of product and sales volume out of Hawaii than some of the others do. So, I think it will be meaningful. Will it be equivalent to what we traditionally run in Hawaii in the fourth quarter? Absolutely not. And that for all the reasons we talked about before. But I think – I mean we are hoping and you saw that the range is $160 million to $185 million, that's little larger of a range than we would typically put out there and some of it's because of the kind of the unknown factor of just how quickly some of this stuff will come back up. But we think it's going to be material and helpful.

Got it. That's helpful. I appreciate that. And then, second question would be on just a clarification and a follow-up. So the bookings, I think you gave a booking stat at 93% of usual business would be is on the books. I guess the real question I have is, for the next three quarters, how much – for the whole system, how many – how much bookings you have on the books versus a year ago? And then, the second part of that question is, I think, I know the answer, but just can you touch on cancellations in very, very near term? If you're seeing anything that maybe related to the virus prevalence. Others have said they haven't seen the same uptick in cancellations similar to the early summer. But I just want to make sure if you have anything.

Yes. I'll answer the second part of your question first. We're not seeing any material impact from short-term cancellations, because of the virus. I won't say there aren't any, but they are not significant in nature. The number I gave you the 93% number was looking at the fourth quarter numbers for owners and exchangers versus where we found ourselves at the same time last year looking at the same two categories. We have not disclosed what we think the first half of the year is going to look like. And I think as we get closer to the end of the year, we'll have better visibility in that. I will tell you, just anecdotally, that obviously, bookings are up. But I am not going to give you a specific number.

Okay. Thanks very much guys. Good luck. I appreciate.

Thank you.

Our next question is from Chris Woronka with Deutsche Bank. Please proceed.

Hi, Chris.

Hey. Good morning guys. I don't know how much color you can or want to give us on this. But, as we think about kind of going forward on sales center efficiency and productivity, is there any way to gauge – do you think you are going to have fewer salespeople per sales centers? Is there any way to kind of gauge volume per salesperson or any other kind of metric?

Yes. The way in which we staff our sales centers is based on what we project to be our tour volume on any day, week, or month. What you hope for is that, you can continue to improve our closing efficiency, which makes you obviously, you get better efficiency out of your – out of the total tour volume that comes to you, which would equate to maybe fewer number of salespeople. But, I think, you may recall that we talked about some of the efforts we were putting forward in the Vistana business to try and improve our operations there and we were clearly making very good progress in that before the pandemic hit. Obviously, when we shut everything down at the end of April and then started to dial backup this summer, we didn't have the full benefit of being able to do the rest of that, but that work continues on. But I wouldn't – unless we can get to a point where – and this is all hung up in state licensing regulations and everything else. And so, unless you get to a point where existing buyers can conveniently buy a product digitally without having to talk to a salesperson, and there is broker laws and all that, that we really getting in the way of all this. I don't see that there is going to be any meaningful impact on the number of salespeople. And we continue in our quest to try to get more first-time buyers. First-time buyers, by definition, want to come see the resort, experience it. Kick the tires and so, you need people there to be able to have that dialogue as well. I mean, I'll just give you a statistic for what it's worth. Even in October, when the bulk of the occupancy that we've had has been to our existing owners, even in October, the first-time buyers were almost 28% of our tours and about 21% of our volume. And so, I hope I am answering your question. But I don't see a sea change there about sales executives and the need for them in our sales centers.

Okay. Yes. No, I appreciate all that detail. And then, follow-up is, are you seeing any big changes in terms of what people are looking to buy when they come? Are they looking for – to buy enough points for a larger unit or a different location closer to home? Further away from home? Is it too early to tell if there is any big seismic shifts on buyer behavior?

No. We haven't seen anything in terms of a major shift in buyer behavior. Keep in mind that, particularly, over the summer, the bulk of the people we've been talking to are, as I said, our existing owners that are back at our resorts. They typically have a lower purchase annual – for their contract because they are simply adding points to a portfolio. But for the first-time buyers, the numbers are not materially different in any way, shape or form from what we've seen prior to the virus. And typically, I think you know this that, over a period of the first five years, the average sale going in is about $30,000 and over the next five years, typically that somebody will generally buy another $20,000 worth of the product. And so, we haven't seen any change in that. Probably too soon to see anything of this significant nature, but we wouldn't anticipate it.

Okay. Very helpful. Thanks guys.

Thank you.

Our next question is from Patrick Scholes with SunTrust. Please proceed.

Hi, Patrick.

Good morning everyone. It looks like you are generating some significant or it’s not insignificant cash flow in the back half of the year here. How are you thinking about allocation of that cash flow going forward? Thank you.

Hey, Patrick, yes. I mean, nothing has changed in our thinking. I think, if anything, just the recovery, the resiliency, we still feel good about our long-term leverage targets and all that. Obviously, we have a restriction on returning capital here while the covenant relief we have on our revolver is in place, which we can opt out early depending on the recovery. But that's at least through the first quarter. But I think as cash flow continues to come back, we obviously have excess liquidity now. We expect, assuming there isn't another shutdown here that we will generate cash flow going forward here just even at these levels. So, we are in a great spot. And when the time is right, we'll always continue to look to reinvest money to grow the business. And if there is acquisition opportunities, things like that, that have the right returns and the right strategic fit, that's something we are going to look at. And then, short of that, I would expect we'll get back to the dividend and buying back shares.

Okay. Thank you.

Alright.

And our next question is from David Katz with Jefferies. Please proceed.

Hey, David.

Hi. Good morning, everyone. I think our questions have been asked and answered, particularly the prior one about capital allocation. So I'll give someone else a chance. Thanks very much.

Okay. Thank you. Have a good day.

That is all the questions we do have for today. I would like to turn the conference back over to management for closing remarks.

Thank you very much, Sherry, and thank you to everyone for joining today's call. As I've said in the past, people like to vacation, especially timeshare owners and that's what our business is all about. I think the recovery we delivered this quarter is evidence of that. In the midst of a global pandemic, our vacation ownership business delivered sequentially higher occupancies, increased revenues and $140 million of contract sales this quarter while our Interval International Exchange business improved its EBITDA margin by a 180 basis points on a year-over-year basis. And maybe the best example is our expectation to deliver at least $130 million of cash flow in the second half of this year. We've also increased our synergy and cost savings goal of $200 million, a $75 million increase from our previous goal. Looking towards the fourth quarter, Orlando continues to gradually improve, Hawaii has reopened its stores to travelers and we expect system-wide occupancies to continue to improve. As a result, we expect contract sales to grow by roughly 15% to 30% in the fourth quarter, compared to the third. As always, thank you for your interest in Marriott Vacations Worldwide. Take care of yourselves. And finally, to everyone on the call and your families, stay safe and enjoy your next vacation.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.