Travel + Leisure Co. Navigates Challenging Economic Conditions with Resilience

Travel + Leisure Co., a global provider of hospitality services and travel products, has reported its financial results for the first nine months of 2024. Despite facing headwinds from inflationary pressures, high interest rates, and the risk of recession, the company has demonstrated resilience and adaptability in navigating these challenging economic conditions.

Strong Demand for Leisure Travel During the first nine months of 2024, Travel + Leisure Co. saw strong demand for leisure travel, which resulted in higher tours and Gross VOI (Vacation Ownership Interests) sales at its Vacation Ownership business. This segment, which includes the Wyndham Destinations business line, saw a 10.1% increase in tours and a 1.3% increase in Gross VOI sales compared to the same period in 2023.

However, the company’s Volume per Guest (VPG), a key metric that measures the efficiency of its tour selling efforts, decreased by 3.8% due to a higher mix of new owners, who generally produce lower VPGs and lower close rates. This strategic shift was made to grow the company’s pipeline of potential future owner upgrade sales.

Restructuring Initiatives Drive Improvements in Travel and Membership Segment The Travel and Membership segment, which includes the Exchange and Travel Club business lines, saw a 2.7% decrease in revenue compared to the prior year. This was primarily due to a decline in transaction revenue as a result of lower transactions, partially offset by higher revenue per transaction resulting from price increases.

Despite the revenue decrease, the Travel and Membership segment experienced an increase in net income and Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) due to cost savings realized from the strategic realignment of the segment at the end of 2023. The company implemented additional cost-saving initiatives across its segments during the third quarter of 2024, which are expected to favorably impact future results.

Loan Portfolio Challenges and Interest Rate Impacts Similar to other companies, Travel + Leisure Co. is experiencing some pressure on its loan portfolio, primarily due to an increase in delinquencies on loans with original FICO scores below 700. This has resulted in an increase in the company’s loan loss provision for the remainder of the year.

Additionally, the company has been impacted by higher interest rates, which have negatively affected its interest expense during the three and nine months ended September 30, 2024. However, the company has begun to experience improvements in the capital markets, with two term securitizations during the first nine months of the year having lower blended interest rates and higher advance rates than the securitization in the fourth quarter of 2023. Furthermore, the Federal Reserve’s recent 50-basis-point reduction in its benchmark interest rate is expected to benefit the company’s interest expense in the future.

Accor Vacation Club Acquisition and Pillar Two Regulations In March 2024, Travel + Leisure Co. acquired Accor Vacation Club for $50 million ($44 million net of cash acquired). This acquisition is expected to help the company establish a relationship with Accor to develop new timeshare products in the Asia Pacific, Middle East, Africa, and Türkiye regions, leveraging the Travel + Leisure Co. global platform.

The company is also closely monitoring the implementation of the OECD’s Pillar Two rules, which include the introduction of a global minimum tax at a rate of 15%. As of September 30, 2024, the impact of these rules on the company’s financial statements was not material, but this may change as other countries enact similar legislation and further guidance is released.

Segment Performance Travel + Leisure Co. has two reportable segments: Vacation Ownership and Travel and Membership.

Vacation Ownership Segment The Vacation Ownership segment saw a 4.1% increase in net revenues and a 4.2% increase in Adjusted EBITDA during the nine months ended September 30, 2024, compared to the same period in 2023. The net revenue increase was primarily driven by:

• A 6.8% increase in Gross VOI sales, net of Fee-for-Service sales, due to a 10.1% increase in tours, partially offset by a 3.8% decrease in VPG.
• A 9.2% increase in property management revenues due to higher management fees and reimbursable revenues.
• A 6.9% increase in consumer financing revenues due to a higher average portfolio balance.

These increases were partially offset by a 12.8% decrease in commission revenues due to the lower volume of VOI Fee-for-Service sales.

The Adjusted EBITDA increase was further impacted by:

• A 7.5% increase in marketing costs to support increased tour flow and new owner mix.
• A 7.6% increase in sales and commission expenses due to higher Gross VOI sales, net of Fee-for-Service sales.
• A 9.1% increase in property management expenses due to higher reimbursable resort operating costs and expenses.
• A 10.5% increase in consumer financing interest expense due to a higher average non-recourse debt balance and increased weighted average coupon rate.

These increases were partially offset by a 9.7% decrease in sales and commission expenses for VOI Fee-for-Service sales and a 9.1% decrease in the cost of VOIs sold due to product mix, partially offset by increased sales volume.

Travel and Membership Segment The Travel and Membership segment saw a 2.7% decrease in net revenues but a 1.5% increase in Adjusted EBITDA during the nine months ended September 30, 2024, compared to the same period in 2023. The net revenue decrease was primarily driven by a 2.4% decrease in transaction revenue due to lower transactions, partially offset by a 3.3% increase in revenue per transaction resulting from price increases.

The Adjusted EBITDA increase was primarily due to an 11.1% decrease in marketing costs and an 8.2% decrease in other operating costs, partially offset by a 4.1% increase in cost of sales due to a heavier weighting of rentals.

Liquidity and Capital Resources As of September 30, 2024, Travel + Leisure Co. had $194 million in Cash and cash equivalents and $724 million of available capacity on its $1.0 billion revolving credit facility. The company also had $3.25 billion of outstanding borrowings under its secured notes and term loan B facilities, with maturities ranging from 2025 to 2030.

The company’s Vacation Ownership business finances certain of its VOCRs (Vacation Ownership Contract Receivables) through asset-backed conduit facilities and term asset-backed securitizations, all of which are non-recourse to the company with respect to principal and interest. As of September 30, 2024, these facilities had a combined capacity of $754 million, with $385 million available.

During the first nine months of 2024, the company closed on securitization financings of $350 million and $375 million, and subsequent to the end of the quarter, it closed on an additional securitization financing of $325 million. These transactions positively impacted the company’s liquidity and reinforce its expectation that it will maintain adequate liquidity for the next year and beyond.

Capital Deployment Travel + Leisure Co. continues to focus on deploying capital for the highest possible returns, investing in select capital and technological improvements across its business. During the nine months ended September 30, 2024, the company spent $81 million on vacation ownership development projects and $58 million on capital expenditures, primarily for information technology and sales center improvement projects.

The company is also continuing its asset-light efforts in vacation ownership by seeking opportunities with financial partners to develop assets on its behalf, a strategy it refers to as “Just-in-Time.” This allows the company to optimize cash flow and Adjusted EBITDA.

Shareholder Returns In addition to investing in the business, Travel + Leisure Co. is committed to returning value to shareholders through the repurchase of common stock and the payment of dividends. During the nine months ended September 30, 2024, the company repurchased 3.8 million shares at an average price of $43.84 for a cost of $165 million. The company also paid cash dividends of $0.50 per share during the first, second, and third quarters of 2024, totaling $108 million.

Outlook and Risks While Travel + Leisure Co. continues to benefit from positive demand trends, the sustained effects of inflationary pressures, high interest rates, and the risk of recession inherently result in uncertainty in business trends and consumer behavior. The company’s Vacation Ownership business is somewhat insulated from these economic conditions, as the majority of its owners do not have loans and are less dependent on economic conditions when making travel decisions.

However, the company’s business, and particularly its Travel and Membership segment, are highly dependent on the health of the travel industry and are subject to various risks and uncertainties, including those related to acquisitions, dispositions, and strategic transactions, as well as the potential impact of adverse economic conditions, terrorism, political strife, pandemics, and natural disasters.

Overall, Travel + Leisure Co. has demonstrated its ability to navigate challenging economic conditions, leveraging its diversified business model and strategic initiatives to drive growth and shareholder value. The company remains focused on optimizing cash flow, investing in its core operations, and returning capital to shareholders, while closely monitoring and adapting to the evolving market environment.