ILG Reports Third Quarter 2017 Results

ILG (Nasdaq: ILG) today announced results for the third quarter ended September 30, 2017.

“The magnitude and back-to-back timing of the recent hurricanes were indeed a test to our operations. However, I could not be more proud of the response from the entire ILG family, from the tireless work by the teams at the impacted resorts, to the outpouring of donations from associates across the globe,” said Craig M. Nash, chairman, president, and CEO of ILG. “Although these unforeseen events negatively impact our results in the short term, we are well-positioned to continue to execute on our strategic plan. Despite the hurricanes, we delivered strong growth in the quarter. Consolidated revenue and adjusted EBITDA were up 7% and 9% respectively, largely driven by a 9% increase in consolidated timeshare contract sales.”

THIRD QUARTER HIGHLIGHTS

• Consolidated revenue increased 7% to $446 million
  • Consolidated timeshare contract sales were higher by $10 million, or 9%
• Net income attributable to common stockholders was $29 million
  • Earnings before income taxes and noncontrolling interests was $47 million, an increase of $17 million, or 57%
  • Adjusted net income* was $35 million
  • Diluted EPS was $0.23 and adjusted diluted EPS* was $0.28
  • Adjusted EBITDA* was $87 million, an increase of $7 million, or 9%
• Excluding the estimated impact of the hurricanes, our results would have been the following:
  • Consolidated revenue of $451 million, an increase of $33 million, or 8%
  • Consolidated timeshare contract sales of $121 million, up $14 million, or 13%
  • Net income attributable to common stockholders and adjusted net income of $33 million and $37 million, respectively
  • Adjusted EBITDA of $90 million, up $10 million, or 13%
  • Diluted EPS and adjusted diluted EPS of $0.26 and $0.30, respectively
• After $179 million of inventory spend, net cash from operating activities for the nine months was $158 million
  • Free cash flow* was $249 million
  • We issued $325 million asset-backed notes in a securitization
• ILG paid $56 million in dividends and repurchased 1.1 million shares for approximately $28 million, returning a total of $84 million to shareholders in the nine months ended September 30, 2017

* “Adjusted net income”, “Adjusted diluted EPS”, “Adjusted EBITDA” and “Free Cash Flow” are non-GAAP measures as defined by the U.S. Securities and Exchange Commission (the “SEC”). Please see “Presentation of Financial Information,” “Glossary of Terms” and “Reconciliations of Non-GAAP Measures” below for an explanation of non-GAAP measures used throughout this release.

Hurricane Impact

In September 2017, Hurricanes Irma and Maria affected several Vistana and HVO resorts and sales centers, as well as nearly 300 properties within the Interval Network or managed by VRI or Aqua-Aston Hospitality. In particular, resorts in Florida, the U.S. Virgin Islands, St. Maarten, and Puerto Rico were in the path of these storms. Many of the resorts were only affected for a short period; however, The Westin St. John Resort Villas in the U.S. Virgin Islands and Hyatt Residence Club Dorado, Hacienda del Mar, in Puerto Rico remain closed, as do many Interval Network properties on the hardest-hit islands. Three Hyatt Residence Club resorts and our HVO sales center located in Key West were closed for several weeks but re-opened in late October. ILG continues to evaluate the projected reopening of our St. John and Puerto Rico resorts. Additionally, in late August The Westin Los Cabos Resort Villas & Spa sustained some damage due to Tropical Storm Lidia and operations at the Hyatt Residence Club San Antonio were negatively impacted by Hurricane Harvey.

In response to the devastating losses caused by the hurricanes, we created the ILG Relief Fund, a non-profit corporation, for the purpose of providing need-based financial grants to help ensure safe living conditions for associates after a natural or civic disaster, a large-scale act of displacement, a community crisis, or other unexpected event. The fund consists of $500,000 from ILG, plus contributions from our associates, owners and partners.

The company estimates the following impact from the hurricanes in the third quarter:

Third quarter consolidated operating results

Consolidated revenue was $446 million up 7% over the prior year. Excluding the estimated impact of the hurricanes, consolidated revenue was up 8% to $451 million.

Excluding cost reimbursements, consolidated revenue increased by $25 million to $355 million primarily due to higher sales of vacation ownership products.

Net income attributable to common stockholders was $29 million. Excluding the estimated impact of the hurricanes, net income would have been $33 million, 3% higher than the prior year.

The prior year was positively impacted by the non-taxable gain on the purchase recorded in that year in connection with the Vistana acquisition. This non-cash gain was not subject to tax and caused our effective tax rate to decrease to 16% for the third quarter of 2016. As a result, the reported year-over-year comparisons of non-operating items do not adequately reflect the relative performance for the quarter. To make the information more comparable, we have included selected information calculated using a normalized effective tax rate of 35% for the third quarter of 2016.

Adjusted net income was $35 million and excluding the estimated impact of the hurricanes would have been $37 million, compared to $49 million in 2016. Using a normalized tax rate for 2016, adjusted net income would have been $31 million dollars in the comparable period.

Diluted earnings per share (EPS) was $0.23 compared to $0.25, primarily reflecting the favorable tax impact in 2016 resulting from the gain on purchase.

Adjusted diluted EPS was $0.28, and adjusted for the hurricanes would have been $0.30, compared to $0.39 in 2016. Using a normalized tax rate for 2016, adjusted diluted EPS would have been $0.24 in the comparable period.

Adjusted EBITDA increased by $7 million, or 9%, to $87 million. Excluding the estimated impact of the hurricane, adjusted EBITDA was up 13%, to $90 million.

Business segment results

Vacation Ownership

Despite the impact of the hurricanes, Vacation Ownership segment revenue, excluding cost reimbursements, increased $24 million, or 12%, driven primarily by $22 million of higher sales of vacation ownership products. The latter was due primarily to higher consolidated timeshare contract sales largely attributable to a 9% increase in tour flow, driven by our recently-opened sales centers in Maui and Los Cabos, as well as a 3% increase in average transaction price due to sales mix, driven particularly by sales of The Westin Nanea. Vacation ownership sales also benefitted from the application of percentage of completion accounting upon the receipt of certificates of occupancy for The Westin St. John in the third quarter, as well as higher GAAP reportability of recognized sales compared to last year.

Overall cost of sales, excluding cost reimbursements, in the quarter was relatively consistent with the prior year. However, the quarter’s results reflect the following activity:

• A decrease in cost of sales of vacation ownership products driven by a favorable $9 million product cost true-up from the realization of development cost savings related to The Westin Nanea Ocean Villas. Cost of sales also reflects a change in presentation, in 2017, of certain HVO expenses to cost of rental and ancillary services as part of our continued integration of that business with Vistana from a financial reporting perspective;
• An increase in cost of rental and ancillary services as a result of the aforementioned change in presentation, as well as incremental costs associated with the newly-opened Westin Nanea Ocean Villas and Westin Los Cabos Resort Villas and Spa;
• An increase in cost of consumer financing primarily driven by a full quarter of interest expense pertaining to the term securitization transaction issued on September 20, 2016, as well as higher credit card fees in the quarter.

Gross margin for this segment, excluding cost reimbursements, increased 524 basis points to 60% in the quarter.

Vacation Ownership segment operating income was higher by $11 million compared to the prior year, driven by higher sales of vacation ownership products, together with lower associated cost of sales largely as a result of the product cost true-up described above. These favorable items were partly offset by hurricane-related charges and expenses such as a net $4 million inventory impairment charge related to The Westin St. John, as well as our contribution to the ILG Relief Fund.

Adjusted EBITDA for the segment increased by $10 million, or 30%, to $43 million.

Exchange and Rental

Exchange and Rental segment revenue was $151 million, in-line with the prior year. Slight increases in club rental revenues, membership and ancillary, were offset by modest decreases in rental management revenues and other revenues.

Total Interval Network active members and average revenue per member at quarter end were relatively consistent with the prior year, at 1.8 million and $46.47, respectively.

Gross margin for the Exchange and Rental segment in the period, excluding cost reimbursements, decreased 291 basis points to 66% when compared to the prior year, driven by an increase of $4 million in cost of sales of rental and ancillary services largely attributable incremental costs associated with the two resorts opened earlier this year. Operating income for the segment was $32 million, $4 million lower than the prior year, reflecting these higher costs.

Exchange and Rental adjusted EBITDA was $44 million.

CAPITAL RESOURCES AND LIQUIDITY

As of September 30, 2017, cash and cash equivalents totaled $211 million, compared to $126 million on December 31, 2016.

The principal amount outstanding of long-term corporate debt as of September 30, 2017 was $521 million consisting of $350 million 5.625% Senior Notes and $171 million drawn under our revolving credit facility. ILG had $415 million available on its revolving credit facility, net of outstanding letters of credit as of September 30, 2017. The revolver may be increased by $100 million under certain conditions.

Net cash provided by operating activities, which includes $179 million of inventory spend, was $158 million compared to $74 million in 2016. The inventory spend was primarily associated with investments in ongoing development activities at The Westin Nanea Ocean Villas, Sheraton Steamboat Resort Villas, The Westin Desert Willow Villas and the Hyatt Residence Club San Antonio. Excluding inventory spend, net cash provided by operating activities would have been $337 million.

Net cash used in investment activities was $79 million reflecting capital expenditures related to investments in sales galleries and other resort operation assets, as well as IT initiatives.

On September 22, 2017, we completed a term securitization transaction involving the issuance of $325 million of asset backed notes. The notes are backed by vacation ownership loans from both Vistana Signature Experiences and Hyatt Vacation Ownership and have an overall weighted average coupon of 2.43%. The advance rate for this transaction was approximately 97%. Of the $325 million in proceeds from the transaction, $65 million is being held in escrow to purchase additional vacation ownership loans, including the redemption of the outstanding balance on Vistana’s 2011 securitization or, if not used for said purpose, returned to the investors. The remainder was used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general corporate purposes.

Net cash provided by financing activities was $2 million, reflecting net amounts received from the $325 million securitization, largely offset by use of securitization proceeds, payments on securitized debt, cash dividend payments and stock repurchases.

Free cash flow (defined below) for the nine months ended September 30, 2017 was $249 million compared to $345 million in 2016. This primarily reflects higher repayments related to the September 2016 securitization, lower net proceeds from the 2017 securitization, higher inventory spend and capital expenditures, partly offset by higher cash provided by operating activities.

Dividends and stock repurchases

In the first nine months of 2017, ILG paid $56 million, or $0.45 cents per share in dividends. In November 2017, our Board of Directors declared a $0.15 per share dividend payable December 19, 2017 to shareholders of record on December 5, 2017.

In the third quarter we repurchased 950,000 shares for $25 million dollars, or an average share price of $26.19. In the first nine months we repurchased a total of 1.1 million shares, for $28 million dollars.

BUSINESS OUTLOOK AND GUIDANCE

Prior to the hurricanes, we were on-track to meet our goals for the full year 2017. However, we are updating our outlook to reflect their estimated impact on the third and fourth quarters, detailed below.

The table below compares our current guidance with our previous guidance. See the 2017 Outlook table for reconciliations of the non-GAAP financial measures in our full year 2017 guidance to the following expected GAAP results:

In 2017 we expect our effective tax rate to be approximately 36%, absent the impact of any subsequent discrete items or other items that may cause volatility in the rate.

PRESENTATION OF FINANCIAL INFORMATION

ILG management believes that the presentation of non-generally accepted accounting principles (non-GAAP) financial measures, including, among others, EBITDA, adjusted EBITDA, adjusted net income, adjusted basic and diluted EPS, free cash flow and constant currency, serves to enhance the understanding of ILG’s performance. These non-GAAP financial measures should be considered in addition to and not as substitutes for, or superior to, measures of financial performance and liquidity prepared in accordance with generally accepted accounting principles (GAAP). In addition, adjusted EBITDA (with certain different adjustments) is used to calculate compliance with certain financial covenants in ILG’s credit agreement and indenture. Management believes that these non-GAAP measures improve the transparency of our disclosures, provide meaningful presentations of our results from our business operations and liquidity excluding the impact of certain items not related to our core business operations and improve the period to period comparability of results from business operations. These measures may also be useful in comparing our results to those of other companies; however, our calculations may differ from the calculations of these measures used by other companies. More information about the non-GAAP financial measures, including reconciliations of historical GAAP results to the non-GAAP measures, is available in the financial tables that accompany this press release.

CONFERENCE CALL

Investors and analysts may participate in the live conference call by dialing (844) 832-7221 (toll-free domestic) or (973) 638-3062 (international); Conference ID: 8399229. Please register at least 10 minutes before the conference call begins. A replay of the call will be available for 7 days via telephone starting approximately two hours after the call ends. The replay can be accessed at (855) 859-2056 (toll-free domestic) or (404) 537-3406 (international); Conference ID: 8399229. The webcast will be archived on ILG’s website for 90 days after the call. A transcript of the call will also be available on the website.

ABOUT ILG

ILG (Nasdaq: ILG) is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt®, Sheraton®, and Westin® brands in vacation ownership. The company offers its owners, members, and guests access to an array of benefits and services, as well as world-class destinations through its international portfolio of resorts and clubs. ILG’s operating businesses include Aqua-Aston Hospitality, Hyatt Vacation Ownership, Interval International, Trading Places International, Vacation Resorts International, VRI Europe, and Vistana Signature Experiences. Through its subsidiaries, ILG independently owns and manages the Hyatt Residence Club program and uses the Hyatt Vacation Ownership name and other Hyatt® marks under license from affiliates of Hyatt Hotels Corporation. In addition, ILG’s Vistana Signature Experiences, Inc. is the exclusive provider of vacation ownership for the Sheraton and Westin brands and uses related trademarks under license from Starwood Hotels & Resorts Worldwide, LLC. Headquartered in Miami, Florida, ILG has offices in 15 countries and more than 10,000 associates. For more information, visit www.ilg.com.