Bigger may take some time to be better for Marriott Vacations Worldwide (NYSE:VAC). The upside of its acquisition of fellow resort and time-share giant ILG in November 2018 has manifested as an appreciable boost to market share and a doubling of revenue. But as first-quarter 2019 earnings results released on May 7 demonstrate, the downside is a temporary drag on earnings, which we'll discuss in detail below. In the following discussion, note that all comparable numbers refer to the prior-year quarter.
Marriott Vacations Worldwide earnings: The raw numbers
|Metric||Q1 2019||Q1 2018||Year-Over-Year Growth|
|Revenue||$1.06 billion||$0.57 billion||86%|
|Net income||$24 million||$36 million||(33.3%)|
What happened with Marriott Vacations Worldwide this quarter?
- Vacation ownership contract sales increased 74% to $354 million due to the ILG merger. Legacy Marriott Vacations contract sales increased by 10%, while ILG legacy contract sales inched up 1%, for consolidated growth of 5%.
- Resort management and other services revenue jumped 79% to $125 million, and rose 5% on a combined basis. Similarly, rental revenue nearly doubled to $147 million, while improving 4% on a combined basis (net of rental expenses).
- Financing revenue climbed 12% on a combined basis to $45 million net of expenses.
- Operating income rose 71% to $91 million. However, as is shown in the table above, net earnings fell significantly. This was due primarily to ongoing ILG acquisition costs, which reached $34 million during the current quarter, and interest expense of $26 million on acquisition-related debt.
- At the quarter's end, Marriott Vacations held a debt-to-EBITDA ratio of 6.3 times. As I explained last year, the company will have a highly leveraged balance sheet for some time to come due to the ample borrowings used to finance the ILG purchase.
- The company reported that it had achieved run-rate synergies of $40 million related to the ILG merger during the quarter. Management expects to reach $50 million in run-rate cost savings by the year-end, and still expects to achieve more than $100 million in annual synergies within three years.
What management had to say
During the company's earnings conference call, CEO Steve Weisz noted that robust growth in legacy Marriott Vacations business would be offset by lower legacy ILG revenue in the first half of the year. Weisz observed that the organization is currently implementing Marriott Vacation Worldwide's revenue strategies across the ILG legacy Hyatt and Vistana time-share businesses. Some of the relatively depressed contract sales levels in the ILG time-share business resulted from deliberate action in the first quarter, as Weisz explains below:
For example, we significantly modified a legacy Vistana financing program for buyers with FICO scores below 600. While the program previously generated incremental contract sales, the average delinquency rate on those sales was significantly higher than the rest of the portfolio.
We modified the program to continue sales to these buyers but requiring a significantly higher cash down payment. We estimate that this program change alone accounted for roughly one-third of the decline in VPG [value per guest; a measure of sales efficiency in the time-share industry] in the quarter. While negatively impacting the top line, we believe this change is in the best interest of the company longer term. We continue our work [to] grow Vistana's contract sales in VPG over time to levels closer to those achieved by Marriott Vacation Club as we focus on best practices in more efficient and profitable marketing channels.
During the call, Weisz described several other measures to improve ILG contract revenue, including aligning pricing and sales incentive programs to Marriott Vacation standards.
Management lowered its 2019 earnings outlook due to its estimate of future spending tied to ongoing ILG integration efforts. Marriott Vacations Worldwide now expects full-year revenue to land between $219 million and $233 million, against a previous range of $243 million to $257 million. Diluted earnings per share (EPS) are anticipated to fall between $4.76 and $5.07 in 2019, versus last quarter's guidance of $5.21 to $5.52.
Since significant integration costs are removed in adjusted numbers, Marriott Vacations' full-year adjusted EPS has seen a slighter revision, from $7.23 to $7.83 to a new range of $7.33 to $7.94. Whether via reported or adjusted numbers, however, it's clear that the organization has a few quarters of escalated costs ahead before it can truly optimize the impact of the ILG transaction.