ILG
#Thank you, operator, and welcome to everyone joining us for ILG's First Quarter 2017 Earnings Conference Call.
I want to remind you that in our call today, we will discuss our outlook for future performance and other items that are not historical facts.
These forward-looking statements typically are preceded by words such as we expect, we believe, we anticipate or similar statements.
These forward-looking statements are subject to risks, assumptions and uncertainties, and our actual results may differ materially from these forward-looking statements and the views expressed today.
Some of these risks have been set forth in our first quarter 2017 press release issued earlier today, in our Form 10-K and in other periodic reports filed with the SEC.
In addition, ILG disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law.
We will also discuss certain non-GAAP measures in connection with ILG's financial performance.
I refer you to the press release posted on our website at www.iilg.com for comparable GAAP measures and full reconciliations.
And now, I'd like to turn the call over to <UNK> <UNK>, our Chairman, President and CEO.
<UNK>.
Thanks, <UNK>, and good afternoon, everyone.
Thank you for joining ILG's First Quarter 2017 Earnings Call.
We are very pleased with the results for the quarter and are well positioned to meet our goals for the year.
Revenue and adjusted EBITDA for the first quarter were $452 million and $93 million, respectively.
As anticipated, our acquisition last May of Vistana, Starwood's Vacation Ownership business, significantly contributed to the results.
We are successfully executing our VO growth strategy across our branded sales infrastructure.
While we have not opened any sales centers since the end of 2015, consolidated timeshare contract sales were $117 million, up 4% compared to 2016, assuming we had owned Vistana for the entire period.
This is in line with our expectations, given the continued tough comp from the opening of 4 sales centers and the start of sales of the Westin Nanea, Maui, in Q4 2015.
For perspective, on a pro forma basis, Q1 2016 consolidated timeshare sales were up 26% year-over-year.
For the rest of the year, we expect a strong increase in sales, reflecting the opening of new sales galleries.
In total, we will be adding 4 sales centers this year, the most significant being the galleries at the Westin Nanea and the Westin Los Cabos, both which started sales in April.
Tour flow increased 9% in the quarter, again, on a pro forma basis, primarily reflecting the success of marketing initiatives focused on new buyers.
Consequently, total consolidated timeshare sales to new buyers increased 7%, to 45%.
Volume per guest was 5% less due to the shift in the buyer mix as well as the tough comp related to inventory mix at the start of sales at Nanea.
As part of our overall strategy to grow VO sales, we plan to gradually increase sales to new buyers in a disciplined fashion.
On the exchange side, despite headwinds in the U.S. market from the continued shift in our membership mix from traditional to corporate, we added resorts in highly desirable international destinations, further strengthening our network.
In the first quarter, we expanded our footprint in South America and the Caribbean.
We also entered into exclusive multiyear club affiliation agreements with subsidiaries of 2 Chinese hospitality companies, diversifying into the shared ownership space.
In the U.S., we continue to expand our network acquisition channels beyond developers by working directly with HOAs and independent sold-out resorts.
By assisting them in recycling their inventory, we benefit our HOA clients and strengthen another conduit for Interval International's new-member flow.
Turning to our rental management business.
Aqua-Aston posted strong top line growth, driven by an 11.5% increase in RevPAR, primarily reflecting the contribution of reflagged and renovated higher-rate properties, which have come online in Hawaii since the second quarter of 2016.
Beyond our financial results, I am very pleased that 2 of our companies were recognized with the most prestigious awards at the recent ARDA conference.
Interval International received the ARDA Circle of Excellence, ACE, Customer Service Excellence Award for its industry-leading global member services centers.
The award honors organizations committed to striving for and delivering the best service.
Advanced technology, attention to customer feedback, exceptional training and development, and creative employee incentives are just some of the factors that have been instrumental in ensuring Interval's high member satisfaction and retention levels over the years.
The Westin Princeville Ocean Resort Villas received the prestigious Circle of Excellence, ACE, Community Service and Philanthropic Award for its numerous charitable efforts in support of the local community on the Hawaiian Island of Kaua'i.
In the 9 years since the resort opened, it has raised more than $400,000 for various charitable programs.
I am extremely proud of our teams for their ongoing commitment to helping others and delivering best-in-class service.
Let me now turn to the integration of Vistana.
We have developed a multi-phase plan for successfully integrating many aspects of the Hyatt Vacation Ownership and Vistana businesses.
Our implementation plans will drive value, while continuing to showcase the power of each of our brands.
Last month, we completed the first of several organizational changes that support this process.
That phase includes: creating a dedicated leadership team for our sales and marketing organizations that allows us to share best practices, leverage recruiting, training and operating processes to build an even stronger organization; developing a shared services structure for the Vacation Ownership businesses, leveraging our finance, IT, legal and HR teams to support this new organization.
These departments are beginning to share programs, standardize processes, reduce costs, increase effectiveness and become more agile as they develop expertise across our brands and growth strategies.
In addition, we are leveraging Vistana's proven development capabilities to identify the right opportunities and successfully manage the design and construction process across our platform by combining these functions under a common leadership.
While we expect these changes will result in cost reductions, the most significant benefits of the integration will come from revenue growth, speed to roll out new initiatives and operating efficiencies, as we leverage Vistana's scale for the benefit of the HVO business.
We continue to build our capabilities, always focusing on providing excellence and outstanding service to our guests and our customers and best-in-class HOA management and board support, while also working to identify additional synergies and revenue opportunities between these businesses.
We are very excited about the future of ILG as we grow the Vacation Ownership business.
These changes are early steps in evolving the organization and continuing to optimize the performance of these leading brands.
Now I'll turn the call over to Bill to take us through our financials and guidance, then I'll return to closing comments.
Bill.
Thanks, <UNK>.
Good afternoon, everyone.
Revenue and adjusted EBITDA for the quarter were $452 million and $93 million, respectively.
Our legacy business was relatively consistent with 2016, and the inclusion of Vistana drove the strong performance in the quarter.
In the 3 months ended March 31, consolidated revenue increased $266 million from the prior year period due to the acquisition.
Net income attributable to common stockholders was $44 million, double that of the comparable period in 2016, primarily due to the inclusion of Vistana.
Also contributing to the result is $5 million of tax-effected net favorable items, primarily related to FX.
Diluted EPS was $0.35 compared to $0.38, reflecting the shares issued in connection with the Vistana acquisition.
Adjusted net income, which excludes the net favorable items I just mentioned, as well as the impact of purchase accounting, and acquisition-related and restructuring costs, was $42 million compared to $24 million in 2016.
Adjusted diluted EPS was $0.33 compared to $0.41 in the prior year, again, reflecting the additional shifts.
Adjusted EBITDA increased by $39 million to $93 million, reflecting the inclusion of Vistana.
In terms of our segments, Vacation Ownership revenue increased $229 million to $281 million, principally resulting from the Vistana acquisition.
Excluding cost reimbursements, Vacation Ownership segment revenue increased $182 million to $219 million.
This reflects an increase of $101 million in sales of Vacation Ownership products and a $53 million increase in resort operations revenue.
Higher consumer financing and management fee revenue were also important contributors.
Excluding Vistana and cost reimbursements, consolidated timeshare contract sales increased 11%.
The segment revenue decreased by $1 million, driven by lower GAAP reportability of HVO sales in the quarter.
Segment adjusted EBITDA increased $27 million to $34 million due to Vistana.
Exchange and Rental segment revenue was $171 million, an increase of 28% compared to 2016.
Excluding cost reimbursements, segment revenue was $145 million, an increase of 29%.
The increase was related to the inclusion of Vistana Signature Network, or VSN.
The addition of this proprietary club drove the $27 million increase in club rental revenue and contributed to membership and transaction revenues.
Total Interval active members at quarter end were 1.8 million, consistent with 2016.
Excluding VSN cost reimbursements, segment revenue was basically in line with the prior year.
While results were unfavorably impacted by the continued shift in membership mix, this was offset largely by an 8% increase in rental management revenue due to very strong RevPAR performance at Aqua-Aston.
Adjusted EBITDA for this segment was $59 million, an increase of 26% from the prior year, principally due to the inclusion of VSN.
Net cash provided by operating activities in the first 3 months of 2017 was $88 million compared to $40 million.
The $48 million increase was principally due to net cash receipts from our operations, mainly attributable to the inclusion of Vistana, partly offset by inventory spend of $57 million in the quarter, largely due to the ongoing development activities at Westin Nanea.
Net cash used in investment activities was $22 million related to CapEx for sales galleries and resort operations as well as IT initiatives.
Free cash flow for the quarter was $54 million compared to $34 million in 2016.
As of March 31, we had $171 million in cash, including $119 million, which is held in foreign subsidiaries and $290 million of eligible unsecuritized receivables.
Our total debt, excluding securitizations, was $610 million.
Until the next securitization, we plan to continue to drive down on our revolver to fund our investment program for the year.
Since we initiated our dividend program in 2012, our dividend per share has increased 50%.
Over the last 12 months, we returned approximately $170 million, or over 80% of our free cash flow, to shareholders through dividends and buybacks.
In terms of future buybacks, as you know, the Tax Matters Agreement related to the RMP transaction restricts total buyback and share issuances for a period of 2 years following the acquisition, with the safe harbor at approximately 10% of outstanding shares at closing.
As of March 31, we repurchased approximately 5% of the outstanding shares and had $46 million available under our current buyback authorization.
With about 1 year remaining under the limitation, we want to maintain flexibility to pursue a variety of opportunities, including M&A.
Turning now to our outlook, we are reaffirming our revenue, adjusted EBITDA and free cash flow guidance as our business is performing in line with expectations.
We are on track to achieve between 10% to 15% higher consolidated timeshare contract sales, this on the back of a 15% year-over-year pro forma increase in full year 2016 compared to 2015.
We will review this annual guidance on a quarterly basis.
As we mentioned last quarter, generally, there is less seasonality in the earnings of our combined platform, but we expect the second quarter to be lighter than the third and fourth quarters.
As a reminder, beginning in the second quarter, resort operations will begin to reflect the negative impact of the carry costs on developer-owned inventory at the newly opened properties as well as a decrease in the total number of available rooms as we begin the process of converting and renovating 4 Sheraton- and Westin-flagged properties.
These conversions and renovations are key investments in strengthening our foundation for long-term growth in the Vacation Ownership space, including related club, rental, management and consumer financing revenue.
With that, I'll hand the call back to <UNK> for closing remarks.
Thanks, Bill.
As we look to the rest of 2017 and beyond, I'm going to start by referencing a recent opening of the Westin Los Cabos Resort Villas & Spa and Westin Nanea Ocean Villas.
I could not be more proud of the team which successfully opened these properties within 15 days of each other.
These world-class resorts, located in 2 of the most sought-after the beach destinations in the world, are key additions to our portfolio.
The Westin Nanea, located on North Ka'anapali Beach in Maui, is designed to be a relaxing haven with culturally inspired programs and distinctive Hawaiian experiences.
The essence of Hawaii has been carefully woven into the design elements, landscaping and guest activities throughout the property, including an on-site cultural center.
Its world-class amenities include an expansive lagoon-style swimming pool, children's beach pool and play area, oceanfront cabanas and a WestinWORKOUT fitness studio.
Expected to be completed by year-end, the resort will have 390 units and is adjacent to our 2 other highly demanded Westin VO properties.
The Westin Nanea becomes our sixth upper-upscale branded property in the Hawaiian Islands.
In Maui alone, we will have over 1,000 Vacation Ownership units by year-end.
This footprint provides significant recurring fees and embedded marketing opportunities on one of the finest beach locations in the world.
We also manage over 40 condo and hotel resorts across the islands in our Aqua-Aston rental management portfolio.
Certain of these properties are providing additional lead generation channels for our branded VO business.
Coming back across the Pacific, the Westin Los Cabos Resort Villas & Spa was carefully rebuilt to preserve the hotel's iconic design as an architectural landmark.
The 147-unit resort combines a renowned Westin wellness positioning with authentic Mexican setting.
The spa reflects the colorful artwork of the Otomi people of Central Mexico and spans more than 10,000 square feet.
The offerings include a WestinWORKOUT fitness studio, 7 treatment rooms, a spa boutique and a relaxation lounge.
Other resort amenities include several distinct dining options, multiple infinity edge pools, community grilling stations and tennis courts.
The resort introduces the Westin family program, designed to cater to the new way modern family's travel, with a reinvented kids club, reimagined family experiences and more meaningful branded amenities for young travelers.
Clearly, these emblematic new properties enhance and diversify our product offering.
From a financial perspective, they provide a strong foundation for future VOI sales and related revenue growth.
To ensure strong sales performance for these exclusive properties, our team is leveraging our comprehensive product offering and broad distribution platform.
As a reminder, we have a unique product portfolio, which enables us to offer customers significant flexibility, while optimizing our inventory pricing.
We currently sell single-site and multi-site points programs as well as weekly intervals at certain locations.
However, irrespective of their home resort or points program, owners can convert to points to use within their respective Vistana or HVO network the hotel's affiliated with their corresponding royalty program for the Interval Network.
The Westin Nanea resort, which commenced sales in the fall of 2015, is sold as a single-site points program.
Like a multi-site property point system, the structure, also offered at the Westin St.
John, allows owners significant flexibility in terms of size of unit, length of stay and prefer dates.
The difference is that the single-site characteristic appeals to customers that value and desire guaranteed access to premium destinations and are willing to pay a premium price for that guarantee.
The multi-site club offers access to an attractive array of destinations appealing to customers who value flexibility and choice, while at the same time harmonizing the inventory point value for the system.
With respect to distribution, the Westin Nanea is currently being marketed at 6 sales galleries, including a newly opened 11,000-square-foot showroom located at the resort.
The gallery opens up the stunning views of the resort amenities and Pacific Ocean and features digital technology and high-quality imagery of our products and programs.
The other centers are located at the adjacent Westin Ka'anapali Ocean Resort at the nearby Westin Maui Resort & Spa hotel and our Sheraton Hotel and Westin Princeville properties on Kaua'i, as well as at the Westin Kierland in Scottsdale.
For the Westin Los Cabos, we are launching a new product, Westin Aventuras, a multi-site points program which builds on the appeal of Mexican vacations at the Westin Vacation Club resorts.
Initially, Westin Aventuras will include the Westin Los Cabos.
Moving forward, our plan is to include available inventory from our Westin properties in Cancun as well as from other Mexican resorts thereafter.
Pending final approval of the product from the Mexican authorities anticipated this quarter, we are leveraging our newly opened sales gallery at the resort to sell our existing weeks-based Cancun property, the Westin Lagunamar Ocean Resort.
Going forward, we plan to sell Westin Aventuras at sales galleries located at the participating resorts as well as the Westin Kierland.
Another very important point with respect to the Westin Nanea and Westin Los Cabos properties is that their completion marks the turning point in our inventory sourcing model.
As we have discussed, feasibility and permitting considerations associated with these projects resulted in a front-end-loaded investment plan.
Construction on both properties will be completed by year-end.
After 2017, we anticipate additional Vacation Ownership units to be built on a capital-efficient, self-sourced, just-in-time basis.
Accordingly we expect our return on capital to significantly increase in 2018 and beyond.
In closing, I would like to highlight our unique position in the shared ownership space.
We have a portfolio of world-class and irreplaceable leisure assets, $6.7 billion of embedded sales value of inventory supported by a solid capital-efficient development plan, a diverse and complementary platform with a significant contribution of recurring and contractual revenues, and global ---+ exclusive global rights and vacation ownership to 3 of the leading upper-upscale hospitality brands.
We have a industry-leading team with extensive experience in sales, marketing, management and development of world-class resorts as well as a track record of executing on strategic opportunities and integrating companies.
We look forward to providing you more detail on the significant value-creation opportunities ahead and our clear roadmap for delivering this increased value for shareholders at our upcoming Investor Day on May 25 in New York City.
That's the end of my prepared remarks.
Operator, please open the call for questions.
No, no blackouts.
What we're looking at here is, we continue to evaluate our uses of cash.
We returned approximately $170 million over the past 12 months in the form of share buybacks and, obviously, our dividend.
So we are keeping our flexibility for a variety of opportunities, including M&A, but we look at this every quarter.
We haven't changed our guidance for that period.
Look, as part of the transaction, we entered into a Tax Matters Agreement.
The agreement contains 2-year restrictions on our ability to issue and repurchase stock as well as enter into M&A transactions, unless certain conditions to satisfy.
That 2-year period in a common time frame for these restrictions.
So they're designed to make sure that we don't jeopardize both the tax-free nature of the transaction to Starwood as well as their shareholders.
So the provision cover situations that make cause the IRS to challenge this tax-free status.
It's very technical, dependent on specifying facts and circumstances, and we continue to comply with our obligations under these ---+ under this agreement.
We don't have any answer for you on that.
Yes, we've been cultivating, obviously, the Asian market through Interval International for a long time.
China is an attractive and growing market.
Our brands have international appeal, internationally there, but in terms of these affiliations, they're regional players.
Those are the ones that have started to get into the market quite a bit these days, and we're trying to grow that platform.
Yes, it's all of the properties, after Nanea and Cabos, are going to be converted or built in terms of additional units at existing properties on a velocity ---+ sales velocity-based basis.
So we considered that the same thing as just-in-time inventory.
It's just that we're able to capture all of the development profit as well as the recurring revenue streams that flow from that resort.
So we're not building ahead in the same way that we've done Nanea and Cabos.
We are not sharing any customer data.
The salespeople and sales organization at the property level are independent.
We're talking about senior management and, we're talking about the shared services structure that are being integrated.
We've been very acquisitive over the past several years since we got spun out from IAC.
We look at every deal.
We understand every deal.
And we're looking to ---+ we view all of our options, and our objective is to maximize sustainable long-term value for shareholders, and so we look at deals.
We've done in the past, and we'll continue to look at them.
We are particularly focused on the provision's cover situations that may cause the IRS the challenge, the transaction's tax-free status, both to Starwood and its stockholders.
And while we have some information around it, we don't have all of the information.
So we have to be careful, and we have to be conservative around it.
We need to comply with our obligations under the tax management, because we don't know what the total liability could be.
We always evaluate a number of things, but I don't want to talk about specific items.
I think at least directionally, the cost of sales of that product, it's a higher-cost product.
We do blend that with other inventory that we owned, including flex- and take-backs in order to trying right margin in the mid-25s.
Yes.
Could you talk a little bit more about the decision to introduce this multi-site points product to Los Cabos and also touch on your decision not to include the rest of the Westin portfolio in some sort of a Pure Points model.
So the Mexican product is a multi-site points-based product that is going to include the Mexican properties only.
We are starting off with Cabo.
We're going to add the Cancun properties next and then another Mexican properties.
So we sell that product both in Mexico on site as well as in The United States.
It is proven a true product in that it is ---+ mimics pretty much what we've done in other pure points club.
So we're very excited about being able to launch that as soon as Mexican authorities give us the approval.
What was the other question.
Yes, your decision not to ---+ maybe you convert your entire Westin portfolio, obviously excluding Nanea and St.
John, to some sort of Pure Points model.
Well, obviously, we're looking at opportunities to do that at certain locations, but as we have today Nanea in particular, that is a premium-priced product, and people are willing to pay a premium price for it.
It really doesn't work in a Pure Points kind of structure.
We also have in St.
John single-site Pure Points club with, again, is a premium product and consumers pay a premium price for that.
They want to be guaranteed that they can go there.
And when we look at some of our other properties and some of the other plans we have just-in-time or otherwise, we're looking at an opportunity to do more with the Westin brand.
Okay, great.
And then total contract sales up 4%, obviously a good number, in line with your guidance.
Just remind us and maybe rank some of the factors that give you confidence that metric's going to accelerate meaningfully in the back half just to get to that 10% to 15% growth for the full year.
Well, based on the fact ---+ we had a strong April.
We also have sales centers that are opening.
We have a lot of units that are opening in Nanea over the year as well in Cabo.
So we feel pretty good about what we've guided to.
So we're sticking with the guidance.
Okay, great.
And then maybe a last question.
You gave some color new and upgrade sales.
Do you guys have a targeted mix for new versus upgrade over the next year or so here.
Obviously, we'd like to get to a 50-50 mix.
The question is, how many years will that take us.
So over the next few years, we hope to get to a 50-50 mix, and we think that our portfolio and the new destinations will help us get there.
Thanks, operator.
I want to thank everyone for participating on today's call and for your continued interest in ILG.
We are excited about the stellar platform we have built and look forward to seeing many of you soon in New York, and may the fourth be with you.
Operator, please conclude the call.
