Travel & Leisure Co. Q3 FY2024 earnings call

• Recognized associates' efforts during Hurricanes Helene and Milton, and wildfires in California. - Third quarter results show solid execution with strong volume per guest, 24.4% adjusted EBITDA margin, over $150 million of adjusted free cash flow, and adjusted EBITDA of $242 million above guidance midpoint. - Vacation Ownership business has good momentum with VPG consistently above $3,000 and new owner mix in mid-to-high 30s. Accor Vacation Club integration is ahead of schedule. - Travel & Membership segment in transformation, focusing on higher-margin transactions with EBITDA just above guidance high end.

Vacation Ownership: Revenues increased 2% with gross VOI sales of $606 million. Tours were up over 4% and new owner tours up 9%. Travel & Membership: Adjusted EBITDA was flat on a 3% decline in revenue.

• Fourth quarter adjusted EBITDA overall forecast $240 million to $260 million, in line with full-year guidance. - Travel & Membership segment expected adjusted EBITDA $45 million to $50 million for Q4. - Secured $325 million in third ABS transaction at 5.2% rate, best in over 2 years, expecting interest rate headwinds to flatten and turn to tailwind.

• Impact of hurricanes, wildfires, and infrastructure issues on resorts and tour volumes. - Macro-economic uncertainties affecting consumer demand. - Potential pressure on cost of sales as new inventory develops over time.

Q: Can you guys maybe touch upon what you're seeing on the lower end consumer or anything you're seeing there? I know you kind of have been focused on taking up FICO scores I guess we haven't really seen the recession or anything like that. Is there -- what are you now thinking of FICO scores as far as like is there a chance to maybe lower them again to grow volumes? Or are you kind of sitting here still with higher FICO scores? And maybe any other comments there?

A: Yes, sure. Thanks for the question, Ian. So as far as the lowering consumer, that's really -- as we talked about last quarter, where we're seeing most of the pressure in the portfolio. I don't expect that on the new owner side, we'll adjust our FICO in the near term. We're very happy with the credit quality we're generating. We're -- when we look at how the portfolio performed, it performed how we expected in the quarter, delinquencies that usually get worse from Q2 to Q3 did move in that direction unfavorably but not as unfavorable as they usually do. So that's why we feel the portfolio has kind of stabilized, if you will, as far as how it's moving. We're happy with that trend. So very happy with the quality we're generating. On the owner side, that's really where we had the opportunity. Keep in mind, FICO is a [indiscernible] instrument, right? I mean there's a lot of things that determine how people pay. So for example, if we had an owner who has a 630 FICO has been paying for 8 years and reduced their loan balance from $15,000 down to $2,000, never missed a payment on their loans or the dues using the product, then you might think about because you have other data, go ahead and marking that owner but we're comfortable with that owner because they're on auto pay and things like that. So that's what we're trying to do is use more data other than just FICO where we had that data primarily on the owner side to drive incremental tour flow. But pretty happy with how the portfolio performed. Obviously, the ABS transaction was another great execution with the best terms we've gotten in over 2 years. So overall, the business is solid. VPG is another indicator of the consumer, we're at the high end of our range for the quarter. So consumer seems pretty steady, watching the low end like we always are. And because of that, especially on the new owners side, I don't see us moving below that 640.

Q: So I was hoping we could firstly drill down on the close rates a little bit, right? And I know that those would naturally kind of be lower as you intentionally kind of focused on more of a higher new owner mix. But I'm curious, if someone when a new would be first timer comes in takes the tour doesn't buy. Is there any feedback you're collecting or research you're doing what are the top few reasons they're giving? Is it cost or something else? And has that, in your view, changed much in the past few years?

A: Well, let's just touch on that. As the year has progressed, we haven't seen much modulation in our close rates between owners and new owners. They go up and down every quarter a little bit but there's nothing that's really stood out to us as it relates to close rates. And especially given how our VPG has held up, it's really a reflection of consistent close rates throughout this year. What I would say as far as consumer feedback is -- we -- our close rates were higher about 2 years ago as we came out of COVID. And as hotel rates really rose, the value that we've always presented that is inherent in owning a timeshare was as apparent as it's ever been. As we've moved further away from COVID and close rates have come back to where they've sort of consistently stayed but noticeably above pre-COVID. It's really an affordability and value equation that we see in the consumer and what they're evaluating today, again, with higher close rates than we had pre-COVID is that more space, really good value and high flexibility in their ownership. And the way that we like to really measure that is retention and 7 out of 8 of our owners have fully paid off their timeshare loan. And we have a 98% retention rate on those consumers. So it's a bit expanded explanation but it really comes -- there needs to be value, flexibility and affordability at the sales table. And that's what's led to our increased close rate since pre-COVID along with a stronger consumer FICO wise.