Marriott Vacations Worldwide Corporation Q2 FY2025 earnings call

• Leisure customers continue to prioritize vacation, and the business is well positioned as the only vacation ownership company focused on the upper upscale market with owners having a median annual income of $150,000 and over 80% without loans on their timeshare. - Second quarter had nearly 90% resort occupancy with strength in Maui, Coastal Florida, and the Caribbean (Vegas relatively weak). - Made progress on modernization initiative, on track to deliver $150 million to $200 million in run rate benefits by end of 2026 (half from revenue initiatives, half from cost savings and efficiencies). - Second quarter contract sales down less than 1%, first-time buyer sales up year-over-year, owner sales down year-over-year. - Launched and expanded revenue initiatives like expanding enhanced call transfer program, using nontraditional channels (over 13% of total contract sales in the quarter), new owner experiences campaign, and plan to use FICO score data for marketing. - Built and deployed AI-based propensity model, using advanced analytic predictive models, rolling out new sales training, and introduced refundable getaway pricing option at Interval International.

Adjusted EBITDA was $203 million in the quarter. Contract sales were down less than 1% for the quarter, with first-time buyer sales up year-over-year (fourth consecutive quarter of higher year-over-year first-time buyer sales, representing 1/3 of total contract sales in the quarter, up 200 basis points from a year ago), and owner sales down year-over-year due to lower VPG. Development profit more than doubled compared to the prior year (excluding last year's $57 million net sales reserve adjustment, development profit declined 11% year-over-year). Total company rental profit declined $7 million or 16% to $35 million. Management and exchange profit increased 3% to $98 million. Financing profit increased 7% to $53 million. Adjusted EBITDA increased 29% to $203 million, with margins improving 360 basis points.

• Maintaining full year contract sales and adjusted EBITDA guidance. - Expect product costs this year to be flat as a percent of contract sales. - Now expect rental profit to decline around $20 million to $25 million due to higher cost of rental inventory. - Expect corporate G&A to be flat to down slightly this year. - Modernization program progressing well, still expect to deliver $150 million to $200 million in run rate benefit by end of 2026. - Expect to generate $35 million in P&L benefit this year with an additional $60 million to $80 million coming next year and full run rate in 2027. - Expect adjusted free cash flow to be $270 million to $330 million this year, excluding roughly $100 million of one-time cash costs related to modernization initiatives.

• Macro economic uncertainty. - Higher defaults in Asia business (about $2.5 million in the second quarter, about 60 basis points on a contract sales basis). - Wildfire risk in Maui as seen with the recent wildfire that impacted operations.

Q: Just would love 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 intra-quarter, it 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 -- 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 catch that right?

A: Yes. July contract sales were up slightly from June. Going back to your other question, yes, June was up about 3% year-over-year. And sequentially, it clearly improved because as we had talked about, we were down 4% in April. We said that on our last call, and 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%.

Q: I believe in the prepared remarks, you mentioned a 12.5% loan loss provision is 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 the 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, like theoretically, should that show up in an improvement in loan loss provision?

A: Yes, Ben. So the 12.5% is about 0.5 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 of years, I 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 is in good shape, as we talked about, with delinquencies down to really the lowest levels in 2 years, both on a sequential and a year-over-year basis being down pretty materially 110 basis points year-over-year on the delinquencies. So we feel good about where the loan book is.

Q: 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 that -- 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?

A: Yes. I mean we felt at the midpoint of, call it, down 1.5%. That's where halfway through the year, we're still down. And 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, you had the jobs report stuff last week, things like that, that probably keep us a little bit on the -- we got to continue to move through the year and deliver on the contract sales.

Q: 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 seems to be moving in a positive direction. And I think part of the answer earlier suggested more propensity, right? But are you just being conservative in there or a bit more conservative than you were the last time we talked about it? What -- could we just elaborate a bit more?

A: Yes. David, if you say conservative, I think there is a bit of unknown. Like I was saying earlier, while delinquencies continue to trend better, and we're seeing them as low as they've been in 2 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 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.

Q: You had some positive commentary on Maui in the prepared remarks. I guess what are you seeing from a sales perspective? 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 prefire or where we are in the recovery process? Just some way to gauge.

A: Sure. Sure. Well, I'll start overall with Hawaii. Hawaii had a strong quarter year-over-year with contract sales were up VPG tours. So it is one of our brighter spots in the quarter. So that's good. I'd say on Maui, a couple of 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 versus last year. And some of the lingering stuff we have talked about, which is our owners coming in 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 repiping project at the Maui Ocean Club, which is taking units out. That will 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, happy everybody is safe out there, but did impact us. We had to close sales for the day, and there were some power outages and stuff. So something we continue to pray for the best out there. But overall, Hawaii was pretty strong in the quarter on a relative basis.