Greetings and welcome to the Marriott Vacations Worldwide Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Neal Goldner, vice President, Investor Relations from Marriott Vacations Worldwide. Thank you. You may begin.

Thank you, Melissa and welcome to the Marriott Vacations Worldwide third quarter 2023 earnings conference call. I'm joined today by John Geller, 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 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, as well as our comments on this call, are effective only when made and will not be updated as actual events unfold. throughout the call, we will make reference to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release, as well as to the investor Relations page on our website at ir.mvwc.com. Before I turn the call over to John, as you saw in our earnings release last night with four vacation ownership resorts in West Maui, the wildfires had a negative impact on our results in the third quarter, despite having no physical damage to our properties. To facilitate a conversation this morning about our business, excluding the Maui wildfires impact, our discussion and commentary this morning about our consolidated results for the quarter will exclude the impact of the fires, except where noted. We added a table to our earnings release last night to illustrate the impact the wildfires by line of business to facilitate your analysis. In addition, during last year's third quarter with the launch of Abound by Marriott Vacations Worldwide, we aligned the contract terms of vacation ownership sales across our Marriott, Westin and Sheraton brands. We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands. These changes, which we refer to as the alignment, resulted in a non-recurring benefit of $44 million to last year's third quarter adjusted EBITDA to the acceleration of revenue from the sale of Marriott branded vacation ownership interest. The schedules we provided in last night's earnings release illustrate what our results would have been in prior year quarter, and year-to-date period without this benefit. During our call today, all of our discussion and commentary about year-over-year changes exclude last year's alignment benefit. With that, it's now my pleasure to turn the call over to John Geller.

Thanks, Neal. Good morning, everyone and thank you for joining our third quarter earnings call. I wanted to start the call today by reflecting on one of the most significant happenings in the third quarter, the wildfires that battered West Maui. While we did not have any physical damage to our resorts, the wildfires had a profound impact on our associates and their families with several hundred of them losing their homes. for all of our associates in Maui, our thoughts and prayers continue to be with them as they work with each other and their community to rebuild. Thanks to the hard work and dedication of our associates, we have reopened our resorts in West Maui although occupancy in October was well below normal. we are seeing reservations build for the balance of the year, though we expect it'll take until early next year until occupancy returns to more normal levels. At the same time, our focus has been on educating our owners, members and guests on respectful travel as the community rebuilds, and encouraging any visitors to explore the island and enjoy local businesses that need the support of tourism. Moving to our third quarter results. it was only a year ago when we first announced Abound. Our enthusiasm, at the time to provide owners and first-time buyers direct access to a much broader portfolio of resorts using a common currency, couldn't have been higher. Since then, thousands of owners and other customers have been introduced to Abound, and we continue to see elevated interest at our resorts with people wanting to learn more about Abound in its benefits. Despite the near-term impacts of the transition, there's no doubt in my mind that it is fundamentally a better product. for legacy Marriott owners, they are now able to…

Thanks, John. Today, I am going to review our third quarter results, the strength of our balance sheet and liquidity, our updated 2023 guidance and some early thoughts about 2024. In addition, as Neal mentioned, to facilitate a conversation this morning about our business, all of my comments will exclude the estimated impact of the Maui wildfires, except where noted. starting with our Vacation Ownership segment. Contract sales declined 4%, excluding the estimated $28 million impact of the Maui fires. at over $4,100, VPG was only down 5% year-over-year in the third quarter versus a 14% decline in the second quarter illustrating the benefits of our sales training and sharing of best practices across the organization, as well as the continued owner education about the benefits of Abound. Another encouraging sign is that our package pipeline continues to be robust and grew 10% compared to a year ago, which is a key driver of future sales. As you saw in our release last night, we recorded an additional $59 million loan loss charge in the quarter on our $2.8 billion gross notes receivables portfolio. As we discussed last quarter, we saw delinquency trends improved from earlier in the year, but they still remain above the prior year and our expectations. based on this, in the mixed macroeconomic data we have observed in 2023, we expect this to continue in the near to medium-term and we adjusted our estimate for the loan loss provision taking these factors into account. with this adjustment, we believe our consumer loan portfolio is adequately reserved. After the partial offset of approximately $10 million in cost of vacation ownership, the impact to adjusted EBITDA was $49 million, which we have not added back in our calculation of adjusted EBITDA. Rental profit declined $13 million on a…

Thank you. [Operator Instructions] Our first question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Hi. good morning, everyone.

Hey, Patrick. A number of questions here.

First one, can you help bridge your full-year guidance cut by $140 million at the midpoint? What we know is, Maui, roughly $50 million the loan loss provision another $50 million, but there's a difference there about $40 million. What is, am I thinking about that correctly, and if so, roughly what is that $40 million? Thank you.

Sure. it's really two pieces primarily. We did take contract sales down excluding Maui just given where we were in terms of mostly tour flow was off -- has been off a little bit in the third quarter, versus our expectations still continues. if you exclude Maui for the third quarter, tour flow was up about 3.5%. but we were expecting, something more in the call at 5% increase. and same thing on the VPG, on the margin, we're doing well in terms of sequential improvement, but we did expect VPG to be a little bit higher. So, based on that, kind of missing the third quarter, we ran that through. So, that was, I'll call it, roughly $50 million if you look at contract sales, what we previously got, I did, excluding Maui. We kind of based on a little bit lower than our expectations here in the third quarter and running that through from kind of the trends in the fourth quarter. That gives you probably about half of the $40 million you're talking about in terms of the impact on development profit. And then the other piece, as we've talked about in the past, just our rental business continues to do well. But relative to last year, just some of the trends and some of our markets, particularly Orlando, some of our mountain resorts. we have seen slightly softer ADRs, as well as slightly lower occupancies. So, it was really those two things. You got a couple things, plus or minus in G&A, couple million in there, plus or minus, but it's really around the rentals in the development profit.

Okay. on that first part, was some of that related to continued weakness due to the inclusion of Abound into the sales program?

I'm going to say there wasn't a little bit. but if you look at Abound, that was very positive. From the second to the third quarter at the transition sales centers, we saw about a 15% increase in VPG, where overall VPG in the quarter was up about 2% sequentially, right. So, we made really good progress and I think we'll continue to make good progress here going forward. We haven't kind of closed the gap on the pre-abound VPGs yet. And then on the Hyatt side, same thing you started to see improvement about 5% sequentially from the, call it, the Welk sales centers and changes we've made there. And with the launch of our BEYOND program and enhancements to that offering, we expect to get more traction going forward. So, just more generally, like I said, it's a couple points of tours more broadly throughout the system and VPG being a point or two below what we expected for the quarter.

Okay. let's move on now to the topic of taking the loan loss provision hits. It seems to me that it's from one or the other, or possibly a combination of just forecasting that didn't go right or has there been any material actual downturn in your customers' ability to pay their loans?

Yes.

I mean, are you seeing any challenges with paying loans or it just something didn't go right in the forecast when you sit down and do these forecasts?

Sure. yes, a little bit of background. We project future loan loss reserves based on historical loan loss reserves, right. So, we have static pools that look at the history of how loans defaulted in the past based on FICO scores and timing when they defaulted in the curve. And based on that, that static pool projects, what your loan loss reserve should be going forward. So, in any given quarter, you're always going to have some pluses and minuses, right. As we talked about last quarter and even in the first quarter a little bit, we were seeing on a kind of historical basis versus those static pools and versus last year, higher delinquencies, right. And we did take some true-ups in the first couple quarters of the year related to that. We talked about last quarter though, that those delinquencies sequentially continue to trend down. but they still remained above kind of the expectations in the static pool and prior year, right. And so, as we had a couple quarters of that, we said, look, based on these trends, let's look out and say, assuming, some higher defaults here going forward, we need to adjust the reserve. So, we took a charge, which we think now adequately reserves us, remember we've got a $2.5 billion, $2.6 billion loan portfolio. So, you're talking about a couple points here of higher reserves on that book. We think now, we're adequately reserved on that loan portfolio. and going forward, our loan loss reserve should be similar to what we've experienced prior to this quarter, which if you look at it a high level, if you look at contract sales, net of resales, probably going be in that 9.5%, plus or minus of that, that net contract sales number. And that assumes kind of a roughly 63% to 65% financing propensity, which is what we've been running historically here. So, we think this, puts us in a good spot going forward based on all the information we have and based on our best estimates today.

Okay. So, just one related follow-up question, I'm really just trying to dig down is, is there a problem with the consumer here and you do have a pretty high net worth democrat, it's 150,000 or above average household income, $1.5 million net worth sort of put you solidly upper middle class here. Is it just -- are you seeing something weak in that consumer? Because I'm not really seeing it other places -- and related to that, has there been any changes in your underwriting standards here over the last year or two?

No. no, nothing's changed in terms of how we underwrite our loans over the last five plus years. I would say, I mean, I don't know about you. I mean, put the income aside, I think, given higher inflation, higher interest rates, yes, on the margin, there's got to be impact we're seeing from a consumer. I think on the bright side, there are plenty of consumers out there that are continuing to spend on travel, right. And so, there's nothing we've seen, that says, well, it's this consumer or that consumer, but we are seeing generally, I think the consumer is a little bit more stressed now than they were a year ago. That's my general consensus on a -- from what I can see and just observe in the marketplace, but -- and that's kind of what you're seeing. You're seeing, like I said, call to a couple points, if you will, in terms of the additional charge we took here. It feels a bit on the margin, right, in terms of it, it doesn't feel like it's a broader pervasive issue by any means.

Okay. I'm sorry, one last question. Would you say where you're seeing that weakness, is it across sort of the FICO score spectrum or is it closer in the high-600s, or is it in the 800s or just all the above?

I mean, we'd see, look, FICO as we all know, there's -- the FICO score is great at some level for predicting defaults, but it doesn't take into account your balance sheet, right. It's just how you manage your consumer debt. We haven't seen one band or another we've seen generally increases across the band. So, it's not like it's specific to a lower FICO score band versus a higher FCO score band. I think, Jason, if you want to add any color there. But I haven't seen anything, where it's like specific to one band or another.

No, Patrick. I would just add that it is more pronounced at the lower FICO bands, call it the sub-700s versus the above 700s. They're all up a little bit, but the sub-700s are up.

But you to remember sub-700 for us is what percent of our loan pool?

60% of our loan pool today is above 700 FICO.

Thank you. Our next question comes from line of Brandt Montour with Barclays. Please proceed with your question.

[Technical Difficulty]

Brandt, we can't hear you.

Can you hear me? Can you hear me now?

Yes. that's better. That was all crackling.

Sorry about that.

We were about to suture.

No, I don't want that. So, just I think one question from me, or one or two questions from me. but following up on the loan loss provision, and we sort of dug in and I appreciate all the commentary. when we sit here today and you think you're well reserved for everything you can sort of see in the consumer behavior today, help us understand sort of what that assumes for the sequential behavior of the consumer from here. So, if nothing changes, then we go back to sort of 9.5% loan loss provision next quarter. If the consumer gets sequentially worse, even if it's marginal, you would have to look at taking another charge, correct. I mean, just trying to figure out if there's a little bit of cushion in there for what you think could happen from -- for the consumer from here.

Yes. and we've tried to factor in what we expect given some of the broader macro. So, yes, I would say, it's an estimate, it's our best estimate today. And it doesn't, at least in the nearer term, doesn't expect any great increase in terms of what we've kind of been seeing here over the last couple quarters. So -- but yes, going forward, I guess, depending on how -- if we did see a materially worse change and how big that was. yes, I mean, we haven't factored that in. I guess, if that's your question, we haven't assumed like a big deterioration in the broader macro environment that would drive higher defaults. But at least in the near to medium term here, we haven't necessarily assumed that you're going to have a great increase in some of the stuff we've been seeing.

Okay. That's helpful. And then back to some of the commentary you gave around the $40 million sort of, what I would sort of call core or sort of non-Maui.

Yes.

Non-LLP full-year guide down, you gave a lot of color, I mean, rental, softer ADR, softer OC, and then softer tour flow and a little bit of softer VPG ex-Abound. Good to hear that abound's getting a little bit better. if I'm sort of like adding all of those or rolling all of those comments up. I think it's -- is it fair to just say that the macro is having an impact across your business on a sequential basis? I know people are still traveling, I know there's still demand, but sequentially things have gotten a little bit worse. Is -- you're seeing the consumer pullback a little bit in terms of leisure travel?

Well, I think that's a great question. but I think sequentially, right, we've kind of seen with the improvements in Abound like we talked about VPG was up a couple points sequentially, right. The Abound was up about 15%. Hyatt was up about five. I think the non-transitioned, if you will, sales centers were generally up 1%, 2%. So, yes, it feels like it's kind of stabilized clearly versus last year like we've talked about we now realize how good last year was, like we talked about from the VPG. but more importantly, from a rental side, especially in a lot of our higher-end markets, we talked about this on the last call. Obviously, you have the Maui impact of the fires here in the third quarter. but even excluding that, what we've been seeing and we thought we'd see some firming of that, and it is stabilized if you will, a bit from the second quarter is, ADRs are down year-over-year in a lot of our markets in Hawaii and occupancy's off a couple points, right. Some of that in the higher end markets here in the U.S. as well. So, still better than '19 tough comp to last year given some of the change in travel patterns. We do expect, a lot of that U.S. higher-end traveler that went abroad, we'll probably maybe stay in the U.S. this year in some of the higher-end markets. So -- but that wasn't something we factored in, in terms of as we thought about our rentals for the full year. So, there's still on a historical basis, doing very well just year-over-year. That's where we realized today how strong last year was. but the team's working on renting rooms, pushing rates and getting occupancies up. So, we feel like it's generally stabilized if you will in that part of the business as well. Just a little bit lower than we expected.

Thank you.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Good morning, Shaun.

Hi. Thank you, everyone. Hi. good morning. Thank you for taking my question. So, I'm just trying to think through a couple of the building blocks you gave for 2024. I mean, if we just start with the provision piece, if -- excluding obviously the one-time kind of the one-time forward component, if we just run rate at this on a modestly higher level of provision, can you give us any guideposts for how we should think about, let's call it, a year-on-year headwind to either the provision dollars or I think more importantly, the -- just broad-based company EBITDA or margins as the results to just kind of accruing more for that going forward. Is that something you could help us with?

Yes, Shaun. this is Jason. I think as John mentioned, we think we're in a good place for the overall portfolio. I think as you look forward into Q4 and then into next year, we'll have a tiny headwind, I would call it, maybe 50 basis points as a percentage of contract sales, something in that neighborhood. So, I don't think it's a big change to expect for next year going forward. but John mentioned that 9.5%, 10% area for a loan loss provision on a normalized basis, assuming the low-60s propensity. I think that's a good place to think about it.

Great. Thanks for that. And then, yes, just on the financing piece, I think we're all trying to grapple with the broader rate environment. You did kind of call this out. I think one of your competitors kind of gave us a little bit of a ballpark, but give it, relative to the size of your program, again, appreciate it's early and you're probably still running through some of these numbers for your own budget purposes. but can you help any kind of guideposts or broad ranges you can give us to think about the financing headwind again, I believe that, T&L will talk about roughly $30 million on what I believe is a bit of a larger loan book than you guys have.

Yes. So, really, Shaun, it depends on where you think rates are going to go next year. We did our deal in earlier this year, and we did a print at around 5.5%. We're in the market here pre-marketing right now, and we'll be doing a deal here potentially in the short term. So, we'll see more where, where that lands, where you see where the T&L deal priced, call it a month or so ago, obviously rates have moved both in the underlying as well in the spread. So, I think that's kind of the ballpark in terms of the movement that you can expect. And then really, it just depends on what happens next year. So, your crystal ball is probably as good as ours in terms of the rate environment.

Okay. thank you very much.

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

Hi. Good morning, everyone. Thanks for taking my questions.

Good morning, David.

Good morning.

I wanted to -- good morning. I wanted to just focus on Abound a little bit from a higher level. It's good to see that it's, that it's showing some signs of improvement. but I wanted to just double back on sort of why now? What did we know about Abound going into it, that -- or or what did we think we know that, that, that didn't quite happen the way we anticipated? There obviously were some surprises with it. So, I just wanted to go back on the strategy of it, please.

Sure. yes. So David, the thing we knew going in was that as we talked about, it's a better product, right, the overall offering. And we always knew, because we've transitioned to different products before that there can be some impact. So, a part of it is educating, specifically, because the sites that we're transitioning are your legacy Vistana sites. So, think Westin and Sheraton, we've transitioned most of the Westin now; the Sheraton, because we still have inventory in the Sheraton Flex product is still selling the old product. It gets you into Abound. It's just not selling the new Marriott vacation of bound product. So, we knew, there would be some part of part of transition and there could be bumpiness. A part of it is, there's really two things that need to happen. One, those owners, who bought the Westin Flex or the legacy Westin V product [ph], that's what they bought. They bought for a certain reason and that was that product fit their traveling needs. Now, we're introducing to them a new product, right that they can enhance their traveling needs, but might be what we think is a better product, might not be a better product, or they need to experience. So, we can -- we can try and educate them. We send them a lot of information online and information. but really, the best chance is when people come in and they want to take a tour and understand it. So that part of the education process. The second piece is people actually using the product. And that's what I talked about in my comments. by the time, we launched it this year, very few people -- people had elected to use their vacation, like they always had for '23. Now, you're seeing…

Perfect. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from the line of Ryan Lambert with JPMorgan. Please proceed with your question.

Hi. thanks for taking my question. Just wanted to get kind of your view on the attractiveness of Maui longer term. Do you still find it to be an attractive market? I know it's got some kind of different dynamics with the labor market and the majority of the economy being driven by tourism and you have Lahaina that was significantly impacted. So, it's a lot different than what you might see in a kind of a Florida hurricane scenario. So just wondering, how you think about that market longer term and if your opening of Waikiki property next year has any sort of effect on that. Thank you.

Yes. No. we're still very bullish long-Term on Maui, obviously what happened in Lahaina, very tragic, but to your point in terms of the overall island versus a hurricane for example, that could come through and really do a lot more damage more broadly to an island's infrastructure like we see with some of the hurricanes in the Caribbean, it is a bit isolated. As I talked about, we've seen our occupancies come back for October. We probably ran in our five resorts there in West Maui on the vacation ownership side, call it about a 60% occupancy, which given they just kind of reopened. So, you're seeing the owner demand. we expect that to build going forward. Our resort operations is a couple percentage points down on being fully staffed right now, but we're working through some of that. I think for us, I do think you're going to see occupancies like I talked about my remarks early next year, remember we typically at our VO resorts in Maui run a 95%, 96% occupancy. So, I do expect as we get through this year into early next, we're probably going to see that where -- and Jason touched on it in his comments, we've got to look at our marketing and sales staff. We have seen some people there potentially, leave the island. We're not sure if they'll come back as we ramp back up sales here. So, we got to rebuild the marketing and sales team a little bit here. But we've got a little bit of time and the team's working hard to do that. So that's the impact. I think we'll get back to all the previous numbers and then some going forward. I haven't heard or seen anything that gives me any pause that, that Maui won't go back. and Waikiki in Hawaii in general, we are this year a little bit here since the Maui, not surprisingly, you're seeing some pickup in the other islands, just because people have traded out of going to Maui maybe to go to some of the islands here in the fourth quarter. So, we're excited about that launch. It's our first sales center in Waikiki and obviously, gives us a flag on the map in Waikiki, which we don't have. We we're out in Colina on O'ahu there. So, we're super-excited for that property open up and really believe long term and the demand for people to travel to Hawaii overall.

Great. thank you. And just wondering on your kind of forecast for impact in the 4Q, if that kind of builds in any sort of unknown-unknowns or if you feel fairly comfortable in forecasting the impact there. Thanks.

When you say unknown-unknowns, not sure exactly what that means. But it's, based on what we know today, obviously Maui you know, we've talked here about sales reserves and the fact that this reserve we took here, we feel gets us adequately reserved going forward based on everything we're seeing in the numbers today. Yes. And as I talked about, I mean, we're off to a good start here in October in terms of contract sales. If you adjust for the Maui impact in October, would be up year-over-year, right. So, the trends continue pretty good and we're hoping to continue to make progress on the rental side, which has been a bit of thorn in those side this year in terms of just our expectations on rate and occupancy. So, the setup here as we go into November and December, people want to travel. It's -- I don't want to, notwithstanding some of the broader macro, we are seeing great demand, what's on our books for the first half of the year for our resort occupancies is higher than this time last year, right. So that's the key, 85% of our sales come from people staying at our property. So, all that bodes well. And we do see improvements on to a small extent, our exchange business. we're seeing good sequential terms of tightening and exchange transactions. And we expect that hopefully as we go not through -- as we go through the fourth quarter into next year, continue to build and get growth going forward on our exchange business. So, we were optimistic about the outlook here, notwithstanding some of the broader macro.

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.

Thank you, everyone and for joining our call today. Despite the mixed economic environment, we ran 90% resort occupancy in the third quarter, excluding Maui, and we have more reservations on our books for the first half of next year than we had at the same time a year ago, illustrating our customers' desire to go on vacation. we're making good progress educating consumers about the benefits of Abound while our salespeople are getting more experience selling it. That was evident this quarter, where VPG at our sales centers that have transitioned, increased more than 15% sequentially and the enhancements we've made to our core product offering will provide growth for years to come. our international business continues to be a bright spot with sales growing more than 40% year-over-year. We expect to generate around $450 million in adjusted free cash flow this year and have already returned nearly $330 million to shareholders. We've announced two new development projects this year, Savannah, Georgia and Charleston, South Carolina, each of which will provide us with a new sales center when open. And we're looking forward to opening our new Waikiki resort late next year, which will also come with a new sales center. On behalf of our associates, owners, members and customers around the world, I want to thank you for your continued interest in our company, and hope to see you soon on vacation. Thank you.

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