MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q2 FY2022

Marriott Vacations Worldwide Corporation — Q2 2022 Form 10-Q Summary

Business context and reporting period

Marriott Vacations Worldwide is a global vacation company operating through Vacation Ownership and Exchange & Third-Party Management segments. The filing covers the unaudited three and six months ended June 30, 2022, compared with the same periods in 2021. Results include the Welk business acquired April 1, 2021, and reflect the dispositions of VRI Americas on April 29, 2022 and a Puerto Vallarta hotel on June 28, 2022.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$1.164 billion	$979 million	$2.216 billion	$1.738 billion
Net income attributable to common shareholders	$136 million	$6 million	$194 million	$(22) million
Diluted EPS	$2.97	$0.15	$4.18	$(0.52)
Adjusted EBITDA	$255 million	$164 million	$443 million	$233 million
Operating cash flow	—	—	$218 million	$148 million

Q2 revenue increased 19%, while first-half revenue increased 28%. Vacation Ownership revenue rose 24% in Q2 and 33% for the first half. Exchange & Third-Party Management revenue declined 15% in Q2 and 8% for the first half, partly because of the VRI Americas disposition and lower Interval International exchange activity.

Vacation Ownership total contract sales increased 39% to $516 million in Q2 and 52% to $919 million for the first half. Volume per guest increased 7% to $4,613 in Q2 and 5% to $4,653 for the first half.
Development profit increased to $131 million from $65 million in Q2, with margin expanding to 31.0% from 22.3%. First-half development profit was $199 million versus $79 million, with margin of 27.1% versus 17.3%.
Vacation Ownership Adjusted EBITDA increased 51% to $274 million in Q2 and 89% to $473 million for the first half. Exchange & Third-Party Management Adjusted EBITDA was $35 million in Q2 and $78 million for the first half, broadly comparable with 2021.
Rental profit increased to $38 million from $15 million in Q2 and to $70 million from a $4 million loss for the first half. Q2 resort occupancy was 90.5%, versus 85.0% in 2021.
Financing revenue increased 5% to $72 million in Q2 and 12% to $143 million for the first half. Financing propensity was 53.1% in Q2 and 51.9% for the first half, compared with 52.0% and 49.2%, respectively.
The Q2 income tax rate was 24.3%; the first-half rate was 28.1%. Consolidated net margin attributable to common shareholders was approximately 11.7% in Q2 and 8.8% for the first half.

Cash, debt and liquidity

Cash and cash equivalents were $324 million at June 30, 2022, compared with $342 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $606 million at June 30, versus $803 million at year-end.
Operating cash flow was $218 million for the first half, compared with $148 million in 2021. Investing activities provided $15 million, primarily from $93 million of disposition proceeds, while financing activities used $428 million.
Gross debt was approximately $4.7 billion, including $1.9 billion of non-recourse securitized debt, $1.1 billion of senior notes, $0.8 billion of convertible notes, $0.8 billion under the Corporate Credit Facility, $84 million of finance lease obligations and a $10 million Bali note payable.
Debt, net, was $2.748 billion and securitized debt, net, was $1.846 billion at June 30. The $230 million 2022 Convertible Notes mature September 15, 2022, and the company issued irrevocable notice to settle them in cash.
The revolving corporate credit facility was increased to $750 million and extended to March 31, 2027. The warehouse facility was subsequently increased from $350 million to $425 million and extended to July 28, 2024; it had no borrowings outstanding at June 30.
Contractual cash requirements totaled approximately $6.0 billion, including $569 million expected during the remainder of 2022. The company stated that cash, operating cash flow, securitizations and available credit facilities should be adequate for expected requirements, debt service, growth and shareholder returns.

Material changes versus the prior comparable period

Profitability improved substantially, driven by higher vacation ownership sales, stronger resort occupancy and rental activity, improved development margins, lower interest expense and the recovery from pandemic-related disruption.
Interest expense fell 34% to $57 million for the first half, primarily due to prior-year redemption activity and adoption of new convertible-debt accounting guidance.
Transaction and integration costs increased to $65 million from $48 million for the first half, including $48 million of ILG integration costs and $5 million of Welk-related costs.
The company repurchased 2.19 million shares for $312 million during the first half and paid $75 million of dividends. Approximately $160 million remained under the repurchase authorization at June 30, before a subsequent $500 million authorization announced in August.
Adoption of ASU 2020-06 increased debt by $107 million, reduced additional paid-in capital by $111 million and reduced opening retained earnings by $80 million. It also affected diluted EPS through the if-converted method.

Guidance, outlook, commentary and risks

Management expects contract sales, resort management activity, resort occupancy and interest income to remain strong through the remainder of 2022. It expects to continue emphasizing first-time buyers and financing incentives, which may increase financing propensity and interest income. Management does not expect rental operations to fully recover to pre-pandemic levels in 2022 because of reduced rental inventory availability and higher inventory carrying costs.

Beginning in August 2022, Marriott-branded vacation ownership contracts were expected to change to recognize control after expiration of the statutory rescission period, consistent with Sheraton and Westin contracts. Management expected this change to create a one-time benefit to revenue, development profit, net income and Adjusted EBITDA, but had not quantified the impact.

Key risks include renewed or prolonged COVID-19 effects, travel restrictions, changes in consumer travel demand, inflation, labor availability, supply-chain disruption, economic and credit-market volatility, rising interest rates, competition and access to capital.
Vacation ownership notes receivable totaled $2.075 billion net of reserves. First-half originations of $483 million exceeded collections of $365 million. Estimated default rates improved to 2.1% from 2.4% in the prior-year period, but credit-loss estimates remain sensitive to borrower performance.
The company had a commitment related to a Waikiki, Hawaii property. If a capital-efficient third-party arrangement was not achieved, it could be required to purchase the property for $80 million in the fourth quarter of 2022. Its reported exposure at June 30 was approximately $48 million, including a $47 million loan to the VIE.
Pending legal matters include litigation involving the St. Regis Residence Club, New York and the Ritz-Carlton Club, St. Thomas. No accrual was recorded for these matters, and the company could not estimate potential losses.
The company continues to face integration costs and execution risks from the ILG and Welk transactions, as well as risks associated with the planned Abound by Marriott Vacations program and Hyatt Vacation Club rebranding initiatives.

Most important facts for investors to verify

Confirm the company’s ability to fund the $230 million maturity of the 2022 Convertible Notes and other near-term obligations.
Monitor cash conversion, vacation ownership note originations versus collections, default rates and reserve adequacy.
Assess whether strong contract sales and occupancy persist after pandemic recovery effects and despite inflation and economic uncertainty.
Separate recurring operating performance from the $49 million of reported gains related principally to the Puerto Vallarta hotel and VRI Americas dispositions.
Evaluate the sustainability of share repurchases and dividends alongside approximately $4.7 billion of gross debt and substantial contractual obligations.
Determine the actual one-time financial impact of the August 2022 Marriott-branded revenue-recognition change.