ILG
#Thank you, operator, and welcome to everyone joining us today for Interval Leisure Group's third-quarter 2015 earnings conference call.
I want to remind you that on 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 not been set forth in our third-quarter 2015 press release issued earlier today, in our 2014 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 performance.
I refer you to our press release posted on our website at www.iilg.com for comparable GAAP measures and full reconciliations.
In connection with the proposed merger between a fully owned subsidiary of ILG and Vistana, ILG intends to file with the SEC a registration statement on Form S-4 containing a proxy statement prospectus ---+ which we urge you to read, along with other relevant documents filed with the SEC.
Because they will contain important information about the proposed merger.
And now I'd like to turn the call over to <UNK> <UNK>, our Chairman, President and CEO.
<UNK>.
Thanks, <UNK>, and good afternoon to everyone.
Thank you for joining us for today's discussion of Interval Leisure Group's third-quarter 2015 results.
Before we get into the specifics for the quarter, I'd like to first discuss our Vistana transaction.
As you all know, on October 28, we announced an agreement to acquire Vistana Signature Experiences, the vacation ownership business of Starwood Hotels & Resorts Worldwide.
This transformational combination will create a leading, integrated, shared-ownership Company that has the scale, financial strength and product portfolio to excel, and drive value for shareholders and clients alike.
Together, we will have an expansive portfolio of approximately 200 managed vacation ownership resorts, encompassing over 500,000 owners and more than 11,000 employees.
With an even more diverse offering of leading properties and broader geographic reach, ILG will be stronger than ever, both financially and in our ability to thrive in a rapidly evolving industry.
We have posted supplemental materials about the transaction on our website, and I will say more about the acquisition later in the call.
So let me first review our results for the quarter.
ILG reported both top-line and adjusted EBITDA growth in the third quarter.
Total consolidated revenue was $174 million, an increase of almost in 19% year over year, and up 11.7% excluding pass-through revenue.
Adjusted EBITDA increased nearly 7% in constant currency, to $47.4 million.
Our Exchange and Rental segment revenue was $124.9 million, an increase of 3.9% from the comparable period last year.
This increase is attributable in large part to their branded membership and exchange business at the Hyatt Residence Club, acquired October 2014, as well as a 5% increase in rental management revenue earned from Aqua-Aston.
In our Vacation Ownership segment, third-quarter revenue was $49.2 million, up 85.7% from the prior year.
This substantial increase reflects the inclusion of Vacation Ownership sales and financing, pass-through and management fee revenue related to the Hyatt Vacation Ownership acquisition.
The management fee increase was partially offset by the foreign currency impact of translating results of our European Vacation Ownership management business into US dollars.
On a constant currency basis, total revenue and revenue excluding pass-throughs for this segment would of been up 94% and 67%, respectively, for the quarter.
Now, I'll provide some highlights related to our Exchange and Rental segment.
Vacation ownership resort development is increasing.
In fact, several prominent affiliated developers have new projects in progress, and our efforts to bring on new members and inventory from developers and HOAs continued to benefit the Interval Network.
The member retention rates remains at 90%, and new members entering the system from developer point-of-sale increased over 16% compared to the prior year.
During the third quarter, we added 20 resorts to the Interval international network, including two resorts representing two different brands offered by Mexico-based Grupo Vidanta, a leading developer of luxury properties in Latin America.
Our network now has a total of eight Grupo Vidanta resorts, with more than 900 units, including Grand Luxxe, Grand Bliss, and The Bliss properties.
We also added properties in Brazil, Barbados, Ecuador and Italy, as we continue to target exciting exchange step nations around the world.
In October, we announced that a subsidiary of Tropicana Entertainment selected Interval to serve as its exclusive vacation exchange and benefits provider as it launches timeshare sales at the Tropicana Aruba Resort & Casino.
We are delighted to have been selected as Tropicana's exchange partner for their entrance into the timeshare arena.
Rental management revenue earned for managed hotel and condominium resort properties at Aqua-Aston increased by 5% in the period, and combined RevPAR was in line with the prior year.
On a Hawaii-only basis, RevPAR increased 1.1%.
While Waikiki market continued to face challenges, Maui and Hawaii performed particularly well this quarter, with RevPAR increases of 11.3% and 6.9%, respectively.
Moving on to the Vacation Ownership segment, during the quarter, VRI signed management agreements for properties in North Carolina and Vancouver British Columbia, and continues to be a steady contributor.
VRI Europe has also performed well, although it was impacted by the appreciation of the dollar and against the euro and the British pound.
In fact, VRI Europe's adjusted EBITDA is up about 8% on a constant currency basis, both for the third quarter and the nine months ended September 30.
With regard to Hyatt Vacation Ownership, total net contract sales for the third quarter increased 16.4% from last year, driven by our Maui sales operation.
Overall, VPG was $3,374, and the average transaction price was $32,500.
Hyatt Residence Club carries a stellar brand and is a tremendous platform for growth, as evidenced by 42.9% and 35.1% increases in Maui net contract sales, respectively, for the third quarter and nine months.
However, performance at the consolidated properties has not met our expectations.
Consequently, we recently added an SVP of Sales and Local Marketing with nearly 25 years of branded vacation ownership experience, to lead our efforts in rebuilding the sales and marketing infrastructure at these properties.
These initiatives will include incorporating more experienced personnel in sales and marketing at the site levels, as well as investing in additional marketing channels.
We believe that these are smart strategic investments, which we are confident will drive meaningful improvement, and ultimately, substantial growth in this business.
However, these investments for the future will have some impact on us in the near-term.
<UNK> will address this point as he walks you through the guidance for the remainder of the year.
As we have mentioned previously, HVO sales are predominately to new buyers, which represented over 75% of contract sales for the quarter, and over 78% year to date.
We would expect a higher percentage of sales to existing customers over time, as we ramp up activity at the consolidated properties and prepare for the rollout of the Pure Points Club at the end of 2016.
After <UNK> walks you through the financials, I'll describe in more detail our plans to grow the business going forward.
<UNK>.
Thank you, <UNK>.
Good afternoon, everyone.
As you know, all of our comparable results reflect the inclusion of the Hyatt Vacation Ownership businesses.
For the third quarter of 2015, consolidated revenue was $174 million, a year-over-year increase of 18.7%.
Excluding pass-throughs, consolidated revenue was up 11.7%.
Currency fluctuations continued to impact our business, although not as adversely as in previous quarters.
On a constant currency basis, consolidated revenue increased 20.4% to $176.7 million, and excluding pass-throughs, increased by $16.9 million or 13.9%.
In constant currency, diluted EPS was $0.34, and adjusted EBITDA was $47.4 million, up 6.7% from the prior year.
Looking at our segments, Exchange and Rental revenue increased by 3.9% to $124.9 million.
Excluding pass-throughs, segment revenue was up 1.6%.
This increase is due to incremental revenue attributable to our Hyatt Residence Club business, which drove an increase of $2 million in other revenue.
Our rental business reported a 5% increase in revenue over the prior year.
Pass-through revenue of $23.7 million in the quarter was higher by $3.1 million, attributable to incremental property management contracts and an increase in employee-related costs.
At quarter end, Interval Network membership count was flat year over year, and consisted of approximately 58% traditional memberships, compared with 59% in the prior year.
Total transaction revenue of $46.7 million was relatively consistent with the prior-year figures, while membership fee revenue of $31.3 million and the average revenue per member of $43.83 declined to 2.1% at 1.7%, respectively, compared to the prior year.
On a constant currency basis, average revenue per member was down slightly from last year.
With regard to our vacation rental business, we had 754,000 billable room nights, relatively flat from last year.
Rental management revenue increased 5%, and RevPAR was $123.86, consistent with last year's third quarter.
Hawaii-only RevPAR increased 1.1% to $128.48 in the quarter.
Driven by a 3.8% increase in ADR, it was partially offset by a 2.6% decrease in occupancy compared to the prior year.
As mentioned previously, we've re-cast the prior-year RevPAR figures, due to change in industry reporting standards and other calculation adjustments.
The Vacation Ownership segment contributed revenue of $49.2 million versus $26.5 million for the third quarter of 2014.
The 85.7% increase reflects $9 million of Vacation Ownership sales and financing revenue, and $10 million in pass-throughs entirely related to the HVO acquisition, as well as $3.69 in management fee revenue.
On a constant currency basis, total revenue for this segment would have been $51.3 million, up 94%, and revenue excluding pass-throughs would have been $36.9 million, up 67%.
Sales and financing revenue excludes the contribution from our unconsolidated joint venture in Maui, which added $1.3 million to the third quarter's adjusted EBITDA.
Consolidated gross profit for the third quarter was $98.4 million, an increase of 12.2% from 2014.
Consolidated gross margin contracted to 56.6%, primarily due to increased contribution from the lower-margin Vacation Ownership segment.
Selling and marketing expense increased $3.3 million or 22.5% compared to the prior year, due to the costs associated with our HVO sales and marketing efforts.
General and administrative expenses increased $8 million, primarily due to the inclusion of HVO in our results.
Third-quarter depreciation and amortization was $7.9 million, up $1.3 million, which was primarily due to the HVO acquisition.
Interest expense was $6.49, up $4.9 million from last year, related to the funding of the acquisition, and a higher interest rate on the $350 million of senior notes issued in April.
Net income attributable to common stockholders through the third quarter was $19.1 million, a decrease of 10.3% from last year, driven by higher interest expense.
Adjusted net income and adjusted diluted earnings per share in constant currency were $19.5 million and $0.34, respectively.
The incremental after-tax interest expense related to senior notes negatively impacted adjusted diluted EPS by $0.06.
Excluding this incremental interest expense, and in constant currency, adjusted diluted EPS would of been $0.40.
In constant currency, consolidated adjusted EBITDA for the quarter was $47.4 million, up 6.7% from the prior-year period.
This consists of $39.4 million from Exchange and Rental, up 1.5%, and $7.9 million from Vacation Ownership, up 43.2%, compared to the third quarter of 2014.
On the balance sheet, as of September 30, we had $101.4 million of cash and cash equivalents, of which $72.4 million is held by foreign subsidiaries.
Net cash provided by operating activities increased to $135.4 million in the nine-month period, from $91.5 million last year.
This increase was principally due to higher net cash receipts from the addition of HVO operations, lower income tax payments of $14.2 million, and lower net payments of $11 million made in connection with long-term agreements.
Net cash used in investing activities for the first nine months of 2015 was $13.5 million, primarily related to capital expenditures, mostly for IT initiatives.
This compares to $15 million in the prior year.
Free cash flow for the first nine months of 2015 increased by 58.2% to $122.1 million.
During the third quarter, ILG paid $6.9 million or $0.12 per share in dividends.
The next dividend payment of $0.12 per share will be on December 16 to shareholders of record as of December 2.
As you recall, we completed a 144A offering of $350 million of 5 5/8% senior notes due in 2023.
Interest is paid semi-annually in arrears on April 15 and October 15.
Borrowings outstanding under the revolving credit facility amounted to $75 million as of September 30, with approximately $520 million available to be drawn.
As you begin to think about next quarter, I want to remind you that the fourth quarter of 2014 included recognition of all pre-construction sales on our Maui joint venture, totaling approximately $4 million in adjusted EBITDA.
In addition, that quarter was adversely impacted by $1.5 million in purchase accounting adjustments.
Turning to our guidance for full-year 2015, as <UNK> mentioned, we are taking steps to overhaul HVO sales and marketing efforts at the consolidated properties.
Consequently, we are adjusting the top end of the guidance range we had previously provided.
We currently expect that revenue will be between $690 million and $700 million, and that adjusted EBITDA for the year will be between $182 million and $186 million.
At the same time, we are increasing our cash flow guidance to a range of $105 million to $115 million, resulting primarily from a decrease in projected 2015 CapEx.
The revised range for CapEx is 3% to 3.5% of consolidated revenue.
It is important to note that ILG's fourth-quarter cash flow is traditionally lower, from a seasonality standpoint.
Additionally, there are a number payments to be made in Q4, including interest on our bonds.
As you look at the forecast, please keep in mind that ILG has been adversely impacted by $9 million in revenue and $3.1 million in adjusted EBITDA year to date, as a consequence of currency translation.
In addition, purchase accounting has negatively affected adjusted EBITDA by about $1 million so far this year.
I'll now hand the call back to <UNK> for some closing remarks.
Thanks, <UNK>.
Overall, we've made progress growing our business and strengthening our balance sheet in 2015.
As you know, the recession and resulting consolidation of the industry materially changed the shared ownership landscape over the past five years, and we have been in the process of redefining ILG's position in this evolving market.
We believe we are taking the necessary steps to position the Company for a meaningful increase in both the top and bottom lines.
We are a stronger Company today, with a clear path to sustainable long-term growth.
This is something that we could not have said five years ago.
This brings us to our Vistana acquisition.
While we will be providing additional information in the Form S-4 expected to be filed in December, I will now walk you through the supplemental set of slides I mentioned earlier.
Let me start by spending a moment discussing how we got here and where we intend to go.
We have been steadfast in our strategic initiatives to drive growth.
First, grow revenue, adjusted EBITDA and cash flow.
Second, achieve strategic diversification.
And third, optimize our organizational structure.
Our acquisitions of Hyatt Vacation Ownership and now Vistana support each of these objectives.
The Vistana transaction makes a great deal of sense financially, strategically and as a platform for long-term organic growth, enhancing our attractiveness as an investment opportunity for our stockholders.
Now specific to the slides, as you will see on slide 4, this combination gives us an even stronger platform to drive significant shareholder value creation.
With the acquisition of Vistana, ILG will be anchored by a more flexible financial profile and multiple robust growth engines.
And we will be strongly positioned to capitalize on emerging trends in the industry.
By any measure, we are creating a stronger, more competitive Company.
We will have the global master licenses in vacation ownership for Westin, Sheraton and Hyatt, three of the top upper-upscale brands in hospitality.
We will have improved scale, global reach, assets, inventory, and sales and marketing infrastructure to support increased growth.
And this will be complemented by an enhanced financial profile, with a strong balance sheet and substantial free cash flow from recurring fee-for-service revenues, such as management fees and exchange and club revenues.
In addition, although we already have a strong dividend policy, we will continue to evaluate additional opportunities to return capital to shareholders over the long term.
Following this acquisition, ILG's revenue streams will be even more diversified.
And while we continue to focus on asset license fee for service business lines, the Vistana acquisition will enable us to immediately capitalize on revenue and profit growth opportunities.
Additionally, it's important to remember that this will not be a patchwork of businesses.
There are significant strategic benefits to the transaction, including substantial achievable cost and revenue synergies.
Through the combination and seamless integration of ILG and Vistana, we expect to achieve approximately $21 million in annual synergies three years from closing, and approximately $26 million in year five.
These will come from a combination of ILG's global corporate infrastructure and proved utilization of the standing inventory through existing ILG channels, and increased penetration of membership programs to Vistana customers.
Furthermore, the combined Company will be naturally leaner through normal-course attrition efficiencies and rent consolidations.
Slide 5 gives further detail on the value of the key assets included in the Vistana transaction.
An important component of the value is in the net unsecured [ties] receivable, totaling $415 million as of September 30, 2015, which we believe can be quickly securitized to obtain approximately $375 million in cash, based on a 90% advance rate.
Cash from securitized receivables is expected to be the primary source of financing the plan developments.
Future development will be executed in a capital-efficient manner, using pre-construction sales and phased construction.
Near-term growth will be generated primarily from sales produced by approximately $240 million of inventory in high-quality resorts with proven track records.
This includes the commencement of Nanea, the third phase of the Westin Kaanapali Ocean Resort, which recently started sales.
As many of you are aware, we are also receiving five resort hotels in world-class destinations valued at approximately $200 million, which we intend to convert to timeshare properties.
For future development, Vistana currently has $30 million of land in exciting destinations.
Sales will be conducted through 14 existing sale centers, with six more to be added over the next three years.
I would like to point out that in 2006, Vistana generated $739 million in VOI sales.
Slide 6 highlights the approximately $5.5 billion in expected sales value of Vistana's embedded inventory.
You heard this number when we announced the deal, but I want to shed some additional light here.
The sales are expected to be generated from the inventory on hand and embedded in Vistana's completed projects, estimated at $1.2 billion, as well as expansions of existing resorts and those currently in development, such as Nanea, estimated at $3.1 billion.
Sales from conversions of the five transferred hotel properties ---+ the Westins in Cancun, Puerto Vallarta and Los Cabos, and Sheratons in [Hawaii] and Steamboat Springs ---+ are estimated at $1.3 billion.
Turning to slides 7 and 8, you can see here some new financial detail about Vistana, beyond what we disclosed when we first announced the transaction.
What these numbers show makes it even more clear that we are not just acquiring a great portfolio of high-end resorts, we are gaining a business that delivers and is poised to achieve even greater financial performance moving forward.
Modified adjusted 2015 EBITDA is forecasted between $140 million to $145 million, based on 8% to 10% contract sales growth and increased ADR and occupancy in resort operations.
Said 8 shows two scenarios, one based on Vistana's 2015 expected growth rate, and another based on a higher growth rate fueled by the embedded $5.5 billion in potential sales I recently mentioned, and the six new distributional points to be added over the next three years.
In 2018, these scenarios would result in approximately $185 million to $220 million of modified adjusted EBITDA, which includes targeted synergies.
So you can see why we're so excited about this business combination and the opportunities that lie ahead for ILG.
The transaction, which is expected to close in the second quarter of 2016, will fortify our foundation for long-term sustainable growth, anchored by a strong pipeline of new resorts and future phase opportunities.
With that, operator, please open the call for questions.
Hi, <UNK>.
Well, definitely no cap and no collar in terms of valuation.
If they take a look at these assets and some of the numbers that we have we've posted today, and I think you can come to a valuation that is, indeed, something that we feel is very good.
I think if you take a look at what we are expecting moving forward and you add ---+ if you have $415 million of unsecuritized receivables, you've got $200 million value for the properties that are being transferred, and you've got a whole host of other assets that are on the balance sheet.
I think you can come to a conclusion that it was the kind of deal that makes sense.
So we're talking about the consolidated properties.
The Maui joint venture, we have a strong sales team and very robust marketing channels.
And so if you see how much the sales have gone up year over year, we've got 42.9% for the quarter, and 35.1% year-to-date Maui increases.
But the consolidated properties, we need to invest in people and marketing channels, and that's what we're doing.
We brought in a very experienced SVP of Sales and Local Marketing.
We're investing in people and in marketing channels.
And we believe it's just a bump in the road, and that we will ---+ with the right kind of focus, like has happened in Maui ---+ we will be able to bring that business around very well.
The $5.5 billion in expected sales value does not include the additional land that I mentioned, with the $30 million.
And yes, we will.
The Vistana team has not really focused on fee-for-service deals traditionally, but it's something that we're going to look at moving forward.
I think there's the opportunity there with the sales and marketing distribution platform that they have.
But the $5.5 billion in expected sales value is something that we're looking at, developing ourselves on the basis of that it's a capital-efficient kind of deployment, with projects that are additional phases of existing projects, conversions of properties, as well as inventory that's already built.
The Hyatt Pure Points Club is projected to be launched at the end of 2016.
Sheraton has a similar program that they rolled out not that long ago.
So it's quite similar to that.
And it is Hyatt-only that we're talking about.
Were not talking about the Maui project.
So we could envision having a Pure Points club for some kinds of inventory, but yet having the home-week preference that we have in Maui for other kinds of destinations.
That's what Westin has today.
In terms of fee-for-service, we will look at that.
Clearly there's opportunities to do a variety of kind of capital-light structures, whether it's just-in-time inventory, or whether it's fee-for-service.
You have to take a look at where is your most accretive transaction, where can you drive in the best return on your money, as well as absolute EBITDA contribution.
And you've got to measure of those things at once and make decisions around it.
But clearly we are open to all kinds of structures, and have had people reaching out to us for discussions around it as well.
Thank you.
Well, I hope you can see why we are so excited about the future of ILG.
I want to thank you for your questions and participation on today's call.
We appreciate your continued interest in ILG, and look forward to seeing you soon.
Operator, please conclude the call.
