Marriott Vacations Worldwide Corporation: Q1 2023 Form 10-Q Summary
Business context and reporting period
Marriott Vacations Worldwide Corporation operates vacation ownership, exchange, rental, resort management and related businesses through two reportable segments: Vacation Ownership and Exchange & Third-Party Management. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1.169 billion | $1.052 billion | +11% |
| Net income attributable to common shareholders | $87 million | $58 million | +50% |
| Diluted EPS | $2.06 | $1.23 | +67% |
| Adjusted EBITDA | $203 million | $188 million | +8% |
| Adjusted EBITDA margin | 25% | 25% | Flat |
| Operating cash flow | $(50) million | $129 million | Decrease of $179 million |
| Capital expenditures | $37 million | $9 million | Increase of $28 million |
| Cash and cash equivalents | $306 million | $524 million at Dec. 31, 2022 | Decrease of $218 million |
| Cash, cash equivalents and restricted cash | $574 million | $854 million at Dec. 31, 2022 | Decrease of $280 million |
| Corporate debt, net | $3.129 billion | $3.088 billion at Dec. 31, 2022 | Increase of $41 million |
| Securitized debt, net | $1.936 billion | $1.938 billion at Dec. 31, 2022 | Broadly stable |
Revenue growth was led by Vacation Ownership, which generated $1.097 billion of revenue, up 15%. Exchange & Third-Party Management revenue declined 16% to $71 million, primarily reflecting the 2022 disposal of VRI Americas and higher wage costs.
Vacation ownership contract sales increased 10% to $444 million, while consolidated contract sales increased 10% to $434 million. Tour volume increased 18%, but volume per guest declined 7% to $4,358. Development profit increased 58% to $107 million, and development profit margin expanded to 28.5% from 21.8%.
Material changes versus the prior comparable period
- Sale of vacation ownership products increased 21% to $375 million, supported by higher contract sales, favorable revenue reportability and lower product costs.
- Vacation Ownership Adjusted EBITDA increased 15% to $229 million, while Exchange & Third-Party Management Adjusted EBITDA declined 13% to $37 million.
- Rental revenue increased 16%, but rental profit declined 19% to $25 million. Rental margin fell to 17.9% from 25.8%, primarily because of higher unsold-inventory maintenance fees and other owner-utilization costs.
- Financing revenue increased 10% to $78 million, but financing margin declined to 65.7% from 70.3% as consumer financing interest expense increased and newer securitizations carry higher rates.
- Interest expense increased 27% to $34 million because of higher borrowings, higher variable rates and interest on the 2027 convertible notes.
- General and administrative expense increased 12% to $68 million, driven by technology integration, compliance, product development, insurance and wage-related costs.
- Operating cash flow shifted to an outflow of $50 million, primarily reflecting $225 million of vacation ownership loan originations, working-capital timing, higher other-asset balances and payments related to liabilities. Loan originations exceeded collections by $64 million.
Guidance, outlook, risks and unusual items
- Management expects 2023 contract sales to exceed 2022 results and expects development profit margins for the remainder of 2023 to exceed the first-quarter level.
- Management expects average vacation ownership notes receivable and related interest income to increase during 2023 as contract sales and loan originations grow.
- Management expects financing profit margins to continue declining in 2023 because new securitizations are expected to carry higher interest rates than existing transactions.
- Management expects general and administrative expenses to increase for the remainder of 2023 because of wage increases and continued technology investment.
- Corporate debt, net of cash and equivalents, to Adjusted EBITDA was 3.1x at March 31, 2023, compared with a targeted range of 2.5x to 3.0x. Management expects to be within the target range by year-end.
- Approximately 85% of corporate debt, excluding finance leases and including hedges, was effectively fixed-rate at quarter-end. A 100-basis-point increase in benchmark rates would increase annual cash interest by approximately $2 million after hedging, assuming no Revolving Corporate Credit Facility balance.
- The Company redeemed the remaining $250 million of 2025 Notes before maturity and recorded $10 million of redemption premium and debt-issuance-cost write-offs.
- Subsequent to quarter-end, the Company securitized a $388 million pool of vacation ownership notes receivable and issued $380 million of related notes. Net proceeds were used primarily to repay Warehouse Credit Facility borrowings and for general corporate purposes.
- The Company entered into a new $80 million finance lease asset and $97 million lease liability for its Orlando headquarters upon substantial completion of construction.
- Unrecognized tax benefits were $27 million at March 31, 2023, while accrued interest and penalties were $46 million. Certain amounts are expected to be indemnified under a tax matters agreement.
- The Company faces ongoing exposure to demand volatility, inflation, rising interest rates, credit losses and defaults on vacation ownership receivables, capital-market access, competition, labor costs, technology implementation, foreign exchange, geopolitical conditions and legal proceedings.
- A St. Regis Residence Club, New York lawsuit remains pending; the Company has not accrued a liability and cannot estimate a potential loss range. Management states that it intends to defend the matter vigorously.
Important facts for investors to verify
- Reconcile the reported $50 million operating cash outflow with earnings growth and assess the sustainability of loan-originations growth relative to collections.
- Review the maturity and refinancing requirements for the $784 million Term Loan due in 2025 and the $575 million 2026 Convertible Notes.
- Monitor vacation ownership default rates, reserve assumptions and non-accrual receivables; the estimated average remaining default rate was 11.54% and non-accrual receivables totaled $154 million.
- Assess whether higher interest rates reduce financing margins and increase securitization costs as older, lower-rate transactions are replaced.
- Evaluate the effect of rental margin compression, wage inflation and continued technology-integration spending on Adjusted EBITDA.
- Confirm the company’s ability to maintain dividends and share repurchases under debt covenants and changing liquidity conditions. The Company repurchased $80 million of stock and paid $54 million of dividends during the quarter.
- Track the outcome and potential exposure from the St. Regis litigation and tax audits covering certain years from 2007 through 2020.