Marriott Vacations Worldwide - Q2 2023

Transcript

Operator (participant)

Greetings, welcome to the Marriott Vacations Worldwide Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations for Marriott Vacations Worldwide. Please go ahead.

Neal Goldner (VP of Investor Relations)

Thank you, Melissa, and welcome to the Marriott Vacations Worldwide second quarter 2023 earnings conference call. I am joined today by John Geller, President and Chief Executive Officer; Tony Terry, our Executive Vice President and Chief Financial Officer; Jason Marino, who will be assuming the role of CFO effective September 30th, when Tony retires. I need to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under the federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release that we issued last night, as well as our comments on this call, are effective only when made and will not be updated as actual events unfold. Throughout the call, we will make references to non-GAAP financial information. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in the schedules attached to our press release, as well as the investor relations page of our website at ir.mvwc.com. With that, it's now my pleasure to turn the call over to John Geller.

John E. Geller Jr. (President and CEO)

Thanks, Neal. Good morning, everyone, and thank you for joining our second quarter earnings call. While we were pleased to run nearly a 90% occupancy in the quarter with the high VPGs we had last year in a mixed macroeconomic environment this year, we knew coming into the quarter that comparisons were gonna be tough. As a result, we expected VPGs to be lower on a year-over-year basis, though we expected this to be offset by higher tours. However, VPGs declined more than we expected in the second quarter, and while tours did grow 4%, that was a few points below our expectations.

We believe most of the VPG difference this quarter, compared to what we expected, was a result of the changes we've discussed in the past, specifically the transition to selling Abound by Marriott Vacations at most of our legacy Vistana sales centers and the changes we've made at the legacy Welk locations. For example, despite the difficult comparison, contract sales at locations that didn't, excuse me, that didn't transition from selling a legacy Vistana product were only down 5% in the quarter, while sales at legacy Vistana locations that made the change were down double digits. On the legacy Welk side, we are aligning the business models and the sales processes, which we expect will improve our business for the long term, but resulted in double-digit sales decline in the quarter.

Despite the near-term transition impact, I remain confident that the changes we've made are the right strategic decisions that will benefit us in the future. We are also seeing changes in travel patterns, with more Americans vacationing overseas this year, which has not been fully replaced by inbound international travelers. This shift negatively impacted sales and rentals in our higher-end U.S. travel destinations like Hawaii. However, we benefited from the increase in international travel as our European and Asian contract sales grew 56%. We also continue to focus on driving new owner growth, with first-time buyers representing one-third of our contract sales this quarter, up 200 basis points from the prior year, which is good for the long-term health of the system.

In our Hyatt Vacation Ownership business, we expect to rebrand the legacy Welk Resorts later this month to align them under one unified brand, Hyatt Vacation Club. In addition, we will be adding more vacation options for our Hyatt owners, including cruises and tours, as we launch the BEYOND program in a few weeks. Moving to our exchange and third-party management segment, active members at Interval International were unchanged compared to the first quarter. Inventory utilization was very strong in the quarter, and average revenue per member increased 1% compared to the prior year. However, member deposits remained below pre-pandemic levels. In our Aqua-Aston business, revenue was lower compared to the prior year due to lower ADRs in Hawaii.

As a result, excluding cost reimbursements and VRI Americas, which we sold last April, revenue in our exchange and third-party management segment declined 4% compared to the prior year. Despite the difficult quarter, it was heartening to see our vacation ownership resorts at nearly 90% occupancy, reflecting the continued demand for leisure travel. I wanna thank our associates who have been working tirelessly to deliver exceptional vacation experiences for our owners, members, and guests. Looking forward, while I'm not satisfied with our results this quarter, we have some of the best brands in the hospitality industry in sought-after markets and an experienced management team that has successfully integrated new businesses and launched new products in the past, and I'm confident that the strategic changes we've made will provide long-term benefits.

In fact, VPG improved sequentially in June and July, even with an increase in first-time buyer mix. While we are seeing some variability in the macroeconomic environment, we still expect to grow contract sales for the full year. We also expect to grow adjusted earnings per share this year, excluding the impact of last year's alignment, reflecting the benefit of our share repurchases, and to generate between $540 million and $600 million of adjusted free cash flow, illustrating the strength of our leisure-focused business model. With that, I'll turn it over to Tony.

Tony Terry (EVP and CFO)

Thanks, John. Today, I'm going to review our second quarter results, the strength of our balance sheet and liquidity, and our 2023 outlook. Starting with our vacation ownership segment. We grew tours 4% in the second quarter to 96% of pre-pandemic levels. We also grew our package pipeline by 10% from a year ago, ending the second quarter with more than 230,000 packages. However, while we expected VPG to decline due to last year's difficult comp, it did come in lower than expected. As a result, contract sales declined 10% compared to the prior year, though they remained 17% above 2019. Adjusted development profit decreased 20% year-over-year to $118 million. Despite lower sales, adjusted development profit margin remained strong at over 30%.

While we expected rental profit to be down in the quarter, it declined more than anticipated due to lower fewer keys rented and lower than expected ADR. With the moderation of revenue per available key, we now expect rental profit could decline by $15 million-$25 million this year. In the stickier parts of our vacation ownership business, financing profit increased $3 million, excluding the $3 million sales reserve pickup on our acquired notes that we recorded this quarter. This was primarily driven by a higher average notes receivable balance and a 30 basis point increase in the weighted average coupon rate, partially offset by an increased borrowing rate. Resort management revenue increased 5% in the quarter, while profit declined $2 million due to higher labor and other costs. The profit is still expected to be up roughly 5% for the full year.

As a result, Adjusted EBITDA in our vacation ownership segment decreased 11% in the second quarter to $245 million, while margin was strong at 32%. Moving to our exchange and third-party management business, Adjusted EBITDA declined $3 million compared to the prior year, primarily due to lower ADRs at Aqua-Aston, while operating margin was 52% for the quarter. Finally, corporate G&A expense was largely unchanged compared to the prior year. As a result, total company Adjusted EBITDA declined 13% to $222 million in the quarter, and Adjusted EBITDA margin was 27%. Moving to the balance sheet.

We ended the quarter with approximately $1 billion in liquidity, including $242 million of cash, $59 million of gross notes receivable eligible for securitization, and $684 million of revolver capacity. With $3 billion of corporate debt outstanding at the end of the quarter, our net debt to Adjusted EBITDA ratio stood at 3.1 times, roughly in line with our targeted 2.5-3 times leverage range. We ended the quarter at an average interest rate of 3.6%, with no corporate debt maturities until 2025. We have a combined $550 million of interest rate hedges that mature by next April. However, after those hedges mature, our corporate debt will still be 70% fixed, with a pro forma interest rate of only 4.1%.

We ended the quarter with $2 billion of non-recourse debt related to our securitized notes receivable. In June, we renewed our warehouse facility, extending its maturity and increasing its capacity to $500 million to support future growth. Finally, the sales reserve increased $8 million year-over-year on our $2.5 billion gross originated notes portfolio. Defaults were up 50 basis points compared to the prior year, and delinquencies were up approximately 70 basis points. While delinquencies were higher than the previous year, we have seen them trend downward in the first half of 2023. Our new guidance also assumes 100-150 basis points higher sales reserves compared to last year. We continued to return excess cash to shareholders during the quarter, repurchasing $82 million of common stock and paying $26 million in dividends.

Our board of directors increased our share repurchase authorization to $600 million during the quarter, with $561 million remaining at the end of the quarter. Moving to our 2023 guidance. As you saw in last night's earnings release, we now expect contract sales to be between $1.84 billion-$1.9 billion this year. This is roughly 5% lower than our previous guidance, with the difference being driven by a mix of lower tours and lower VPG. We expect VPG to improve sequentially in the third quarter, but to be down year-over-year, while tours are expected to be up a few points compared to last year's third quarter. We still expect 2023 contract sales to increase year-over-year, reflecting the continued demand for our leisure-based products.

Despite the lower contract sales guidance, we still expect 2023 full year development margin to be around 30%, even after a slightly higher sales reserve. As I mentioned earlier, we now expect rental profit to decline this year versus being up 10% in our previous guidance, and for resort management profit to be up. We also expect financing profit to increase slightly, excluding last year's alignment benefit. We expect exchange and third-party management profit to decline $15 million-$20 million for the full year versus our previous guidance of roughly flat, due primarily to lower transactions at Interval International, as well as lower ADRs at Aqua-Aston. As a result, we now expect our 2023 Adjusted EBITDA to be between $880 million and $910 million, 8% lower than our prior guidance.

As a reminder, we also reported a $44 million alignment benefit in last year's third quarter that we do not expect to recur this year. Moving to cash flow. We have a strong balance sheet and ended the quarter with roughly $470 million of excess inventory, enough to support approximately $2.4 billion in future sales. We sold three non-core assets during the quarter, generating $14 million in total proceeds, which we exclude in the calculation of adjusted free cash flow. We also paid down $135 million of our outstanding revolver during the quarter. With the lower expected Adjusted EBITDA this year, we now expect our adjusted free cash flow to be between $540 million and $600 million.

Our capital allocation strategy remains consistent in that we continue to use our free cash flow to grow the business, and in the absence of compelling acquisitions, we believe our best use of excess free cash flow remains returning it to shareholders. As always, we appreciate your interest in Marriott Vacations Worldwide. With that, we'll be happy to answer your questions. Melissa?

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka (Analyst)

Hey, good morning, guys. Thanks.

Tony Terry (EVP and CFO)

Morning.

Chris Woronka (Analyst)

Morning. Thanks for taking the questions. Morning. I guess maybe we could drill down a little bit as you guys go back and unpack the quarter on, on the Abound. I mean, was this where you implemented it, was this just an issue of salespeople not having, you know, a lot of experience kind of selling it yet, or was it more pushback from consumers? Just trying to get a sense for, you know, what you think was...

Tony Terry (EVP and CFO)

Yeah

Chris Woronka (Analyst)

kind of a little bit off.

John E. Geller Jr. (President and CEO)

Yeah, well, you know, the, the sales folks have been well trained on, on the product. That said, yeah, when you, when you change from one product to another, right, it could take a little bit of time to get, you know, your sales pitch down and, and grooving on that. So a little bit of that. I, I think the other, is the consumer, and really an education of the consumer. You know, this is a little bit like when, you know, this was prior to us being a public, standalone company when we went from our weeks to points product in 2010, right?

The people that bought weeks were sold weeks, they were sold a specific product, and now you're rolling out a new product, which, you know, arguably is a better product in terms of options for the consumer and how they can use it in flexibility, but it takes some time. The best thing that can happen is those, you know, existing owners that bought into either the, you know, the Westin Flex or the Sheraton Flex product, they play in the Abound program, right? They start to use their ownership. They go stay at different resorts. They use different exchanges. Remember that the Abound program offers, you know, more cruise and trips and things that were already in the Marriott program. There is education slash getting the consumer to use the product.

Because, you know, we launched it, you know, call it earlier this year, a lot of those folks, you know, had already made their vacation plans, right, under their old product. There, there's just that it's gonna take a little bit of time, education, and, you know, the best is getting the Westin and the Sheraton Flex owners using the product, which just takes a little bit of time on the transition side.

Tony Terry (EVP and CFO)

Chris, one add on to that is that, you know, educating the owners means that there's something out there to talk to them about, and they are interested in new products, so that is a good source for us for tours. It gets them something to come in the door to talk to us about.

Chris Woronka (Analyst)

Okay, sure. The follow-up question is just on, on the comment towards the end of the prepared remarks on the, you know, some of the, the reserves going up. Is it possible to get a little bit more color? Is that coming from any, you know, specific or particular segment or, you know, customer type? Is there any way to kind of parse through that and say, you know, that this gives us-- gives you confidence that, that there's not gonna be a, a larger problem later? Can you, can you maybe give us a little more detail on it? Thanks.

Tony Terry (EVP and CFO)

Yeah, let me start, and then if John has anything to say, he can jump in. In total, when you start looking at our reserves, you know, we have a $2.5 billion originated notes receivable balance out there, so a pretty big portfolio. When we took a look at the quarter, you know, we had about $11 million of true-ups and defaults. Those defaults, you know, came from a lot of different places. You know, we tend to take a look at those and treat them as permanent. That's one way that we do our calculation. We don't assume that it's an acceleration of anything on our default curve. We do assume that they are permanent and they're gonna continue into the future.

We feel that we have an adequate reserve for those right now. We feel that we have increased the default rate or the sales reserve rate that we put against contract sales for the remainder of the year, and that'll get us to the right place.

Based on what we know today.

John E. Geller Jr. (President and CEO)

A couple other things, Chris, I think you know, Tony mentioned it in his remarks. Yes, while delinquencies, right, which is a, you know, potential indicator of future defaults, are up over last year, I, you know, as we said, coming out of COVID, you know, a lot of our delinquencies, if you looked at them over historical, were below, right? Though you've seen them, you've, you've seen them come up, you know, if you go back in time, those delinquencies, yes, higher than last year, but, you know, arguably more in line with some of the delinquencies we've, we've seen over time. The other key point is that the trend of those delinquencies, this year have been, have been coming down, right?

That's, that's a positive sign as a potential future indicator. To Tony's point, you know, we, in our outlook, you know, including this, you know, charge we took in the second quarter, we've got a variability range of, of some higher defaults. You know, we feel good about kind of where we're at today.

Chris Woronka (Analyst)

Okay. Very helpful. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from the line of Brandt Montour with Barclays. Please proceed with your question.

Brandt Montour (Equity Research Analyst)

Hey, everybody. Thanks for taking my questions. I, I, I do wanna talk a little bit more about Abound. Maybe we could just start with reminding us how much of the system was selling under Abound in the second quarter? How much of the... How, you know, what's the cadence of the rollout from here?

John E. Geller Jr. (President and CEO)

Sure. When you, when you talk about Abound, you know, the vast majority of the system, or the majority, I should say, is selling Abound, right? Your Marriott legacy sales centers are selling the Abound, but the core of the Abound program is the Marriott Vacation Club, right? The Abound allows the Westin and Sheraton Flex owners to come in and play in that broader Marriott exchange program. The change that we're talking about, you know, probably, I'd call it about 20%, 25% of the sales centers in the quarter were the ones that transitioned from selling a legacy Vistana brand, like the Westin Flex, right, over to selling the Marriott Vacation Club.

Those are the ones where you have owners, that's where I was trying to focus in, that bought a different product. They wanna understand the new product. The best way for them to understand it and see the benefits are actually use the product, but we're educating them. To Tony's point, it's helping drive owner capture. Owners want to come in, and as well as, you know, obviously first-time buyers and educate them on the product. All that work's going on. Now, there are some, you know, on the Sheraton Flex side, you know, we still have inventory in the Sheraton Flex, so there are certain legacy Vistana centers that haven't transitioned over yet. Those are doing, you know, kind of what we were expecting versus the broader.

It is really the ones and, you know, more broadly, we talked about the Hyatt, right? Even more so with the, the, you know, Welk legacy sales centers transitioning over. We've seen big impact there as well.

Brandt Montour (Equity Research Analyst)

Okay. You know, John, you, you likened it to the transition from weeks to points, which, which, if I recall, was a multiyear and a really, you know, a really disruptive campaign for you guys. Remember that or, you know, that, that transition had tons of positive financial implications in the back end for balance sheet management and inventory management, all those different things. Is there, you know, can you just remind us, there's meaningful benefits that are gonna come to you from Abound? When do you think... When you look out at this sort of playbook, when do you think that the benefits will start to override the disruption that you're seeing from these specific legacy brands?

John E. Geller Jr. (President and CEO)

Yeah, I, I think it'll build over time. I, you know, if you go back to the you know, the weeks to points, I would say it was a much bigger change than what's happening here, right? I know you, you're, you're looking for, this will all be behind us in, you know, 6 months or 9 months. I do think, you know, what we're, what we're gonna see is continued improvement as we, as we move forward here through this year. We obviously, based on the outlook, you know, we're not expecting it to bounce back, but like I talked about, big picture, you know, we did see VPGs improve sequentially in June and July.

I can tell you right now, you know, well, not saying, you know, one month is, is where the quarter's gonna be, but, you know, we're running VPGs that are about 5% higher than we saw in the second quarter, right? You're starting to see, you know, it won't be a straight line, you know, but you're starting to see some improvements more broadly in the VPG. We're, you know, we're hoping we, we continue to get through a lot of this and get better as, as we get through this year into, in the next. We're, we're already starting to see some, you know, some green shoots, if you will, as, as we start this transition. Once again, hard to put a, a deadline or say: Yeah, it'll all be, it'll all be back to normal.

You know, the other transition I would point to, a little bit different, was when we bought Vistana. Vistana VPGs were down 25%, right, you know, relative to Marriott. We didn't have a good sense as to how long that would take, but I think we moved pretty quickly there and probably even faster than we expected to get those VPGs up and get the benefit out of there. We've got the right leadership. You know, my point is, we've got leaders that have been through this before. They're hyper-focused on getting this right as quickly as possible, and I'm confident we're gonna get there.

Tony Terry (EVP and CFO)

Brandt, I'd add on to that, that we've probably already seen a little bit of benefit here from a balance sheet perspective of Abound.

Remember, we were selling 3 different trusts, and we're running low on inventory in the Westin Flex Trust, specifically. Had we not done the Abound program, we would have probably had to have built inventory in that trust over the last couple of years. That's 1 of the reasons why we have lower inventory spend is because we have Abound, we knew it was coming, and now we're selling 1 major trust to our customers instead of three separate.

Brandt Montour (Equity Research Analyst)

All, all helpful color. Thanks, all.

John E. Geller Jr. (President and CEO)

Yep.

Operator (participant)

Thank you. Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

David Katz (Analyst)

Hi, morning, everyone.

John E. Geller Jr. (President and CEO)

Hey, David.

David Katz (Analyst)

Hey. So, you know, a couple of things. We, you know, one, I have your analyst meeting deck open, you know, which obviously has a little bit of datedness to it, but it has some 2025 targets, and I, I suppose the assumption should be, you know, that those get pushed out, by some amount, and we'd love to get some sense about, you know, how far that could be? Coupled with that, and just listening to your comments on the last couple of questioners, you know, have we, you know, seen the worst of the pressure that, you know, is from, Abound? You know, do, do we feel like we, have the rollout of World of Hyatt, you know, under good control right at this point?

I suppose what I'm asking is, what's your, what's your degree of confidence, you know, that the guidance we have today is relatively firm versus where we might be 90 days from now, the next time we, we address it?

John E. Geller Jr. (President and CEO)

Sure. Taking the, the second part, yeah, as I said a little bit earlier, yeah, we are seeing sequential improvement. You know, that said, as we look at our guidance for the full year, we haven't assumed that we get a, a hockey stick up on sales at the legacy, you know, transition Vistana sites and the Welk sites that are transitioning. We're, we're assuming some gradual improvement, but, you know, the, the outlook we, we give you, you know, that's where we, that's where we are in, in terms of, you know, confident that we, we should achieve that for the full year based on the, the current outlook. You know, going back to the Investor Day, look, you know, we got a, we got a couple of years.

I, I think a lot of what happens in 2025 is how quickly, you know, as, as you guys have asked, we recover, and get the Abound going, because it is the right longer-term strategic decision. You know, some of these things, you know, we knew was going to have some bumps to it, right, as you transition. We talked about that. Anytime you make a transition or change to a product, the harder part is trying to predict, you know, when and, and how quickly it'll, it'll come back and get you going again. That's where, you know, like I said, we got 2 years here, so we are not giving up, you know, in terms at this point of where we're at in 2025, we'll get better clarity.

As we've also talked about, this isn't the only thing we have in the hopper. I mean, we're, we're making significant investments on the technology side. We're, we're gonna be rolling out from a marketing and sales perspective, you know, sales force out at our sites, our, our digital marketing, how we target. You got a lot of initiatives going at the same time as you're transitioning this product. You know, we'll, we'll come back at some point here and look longer term in terms of 2025, but the team's focused and we're not giving up on 2025 at this point.

David Katz (Analyst)

Understood. If I can just follow up with one more perspective in, in this direction, which is-

John E. Geller Jr. (President and CEO)

Yeah.

David Katz (Analyst)

You know, you know, you certainly, it's sort of been out and about, you know, throughout the quarter, and I'm curious whether there was some, you know, acceleration in some of these pressures as we got toward the end of the quarter and, and into and through June, or, you know, did I guess what I'm asking, did some of this, you know, sneak up in some way, or, you know, was this a, a vision and, and, you know, I'll sort of throw myself out there, you know, did I not, did I not hear it clearly enough?

John E. Geller Jr. (President and CEO)

Well, when, when we came in, into the quarter, yeah, things, things got a little bit, I think, worse in May, you know, directionally, and then we started to see improvement in June. If, if you look at, you know, kind of our miss, let's take a step back. We don't guide the second quarter. Consensus was called $250 million of EBITDA. We were coming into the quarter, probably around $241 million-$242 million on our own expectations of what we were gonna do, right? So we, we missed our own internal by about $20 million, of which development profit was about $10 million, right? Quite frankly, a lot of that was the higher sales reserve, which we didn't anticipate.

Notwithstanding the lower contract sales, we still held a development margin above 30%. The sales reserve was a bit of our miss for the quarter. The other bit of the miss was rentals. As I talked about my script, you know, we had a first quarter that was pretty good in rentals in terms of occupancy and rate. As we, as we moved into the second quarter and our outlook for the year, you, you have seen, you know, change in travel patterns. You know, you got more U.S. travelers going international, and we're seeing that impact. We have a lot of our keys, higher end Hawaii, you know, those higher end markets, you know, Florida Beach, you know, another area where we've been able to get higher ADRs, especially back in 2022.

You're seeing, you know, 3, 4 points of, of lower occupancy. Rates are down in some of those markets. Those are the other trends that kind of shifted, as we went through the second quarter, and we probably, you know, about $10 million of our miss versus our expectations in the second quarter were on the rental side of the business. As you look at the outlook, we've kind of, we've flowed through, you know, in terms of our outlook, that miss in rentals, you know, so call it another, you know, the 10 plus another 20, give or take, for the balance of the year.

You know, as we look out at these markets right now and, and what's on the books and all that, while it's strong on a, a relative basis, it, the trends are similar to what we're seeing in the second quarter. That, that's where you, where you have it. As Tony talked about, we do expect contract sales to be up, notwithstanding some of this noise here that we're having with Abound and HVO, and we're managing the development margin to be at 30%+. You know, unfortunately, these travel pattern shifts, and that's a little bit on the exchange side as well, where we haven't seen the deposits come back here through the first half of the year. We weren't forecasting for them to be back to pre, you know, pandemic levels.

We were, you know, expecting that they would improve year-over-year, and we just haven't seen that. That gets, you know, at a broader, that's travel patterns, right? People still using their weeks a little bit different coming out of COVID. We're in a little bit of that, you know, environment coming out of COVID, where, you know, the patterns have shifted a little bit, and we still expect those will continue to normalize, you know, back, you know, next year, I would expect, given the U.S. travelers going to Europe, there might be some pullback here to the U.S. as well. We're keeping an eye on all that, but that was a little bit of the, the surprise on the rental side versus what we were seeing.

Tony Terry (EVP and CFO)

David, I, I would add one other thing in there on the rental side. When you're getting into the year, and especially when you get to that second quarter, a lot of your rental costs are already fixed for the year. If you think about the inventory costs, we pay unsold maintenance fees at the beginning of the year. You look at the programs that our owners have that they use to do other excursions, you know, we get that inventory back, and we have to rent. We're not going to stop owners from, you know, participating in the Explorer program or the Bonvoy program. A lot of that cost of rentals is, is kind of fixed.

When you miss a little bit on the ADR side or on the, revenue side, a lot of that flows through to the bottom line, and that's part of what we're seeing here and why rentals saw a little bit of weakness on the bottom line.

David Katz (Analyst)

Got it. Thank you very much. Appreciate the answers.

John E. Geller Jr. (President and CEO)

Thanks, David.

Operator (participant)

Thank you. Our next question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Patrick Scholes (Analyst)

Hi, good morning.

John E. Geller Jr. (President and CEO)

Morning, Patrick.

Tony Terry (EVP and CFO)

Morning.

Patrick Scholes (Analyst)

Can you break down a little bit further, the components of the $80 million at the midpoint guidance cut? You just said roughly $20 million from rentals. It looks like, you know, there's three other items. It's the tougher comp, Abound and the Hyatt's alignment. You know, for those tougher comp, Abound and Hyatt alignment, you know, how much EBITDA taking down would you ascribe to each one of those, roughly?

John E. Geller Jr. (President and CEO)

Sure. Sure, Patrick. Yeah, rentals with the $10 million miss in the second quarter and another $20 million, right? That's about $30 million of the $80 million. The exchange, as like I said, we're not seeing the inventory deposits and the trends there. You know, call it another $20 million from there, so that's about $50 million of the $80 million. The balance, the development is the balance, call it roughly $30 million. You know, that's a combination of the lower sales, but some of the higher sales reserve I just talked about. Depending on where we come out for the year, you know, we've already got, you know, as Tony mentioned, $9 million or $10 million of additional in that $30 million, but we've given you a range on the sales reserve.

Some of it's the, the sales reserve, and then the rest would be, you know, more of the impact on the contract sales.

Patrick Scholes (Analyst)

Okay. I believe you talked about 25% of the legacy Vistana sales centers have transitioned to Abound. What's the timing on the other 75%?

John E. Geller Jr. (President and CEO)

Yeah, it's about 20%-25%. The, the remaining ones are gonna be, the, the Vistana, excuse me, the Sheraton Flex, which is probably later next year, which is really, you know, mostly sale centers in Orlando, Myrtle Beach. Then there's some, you know, where they just have a different product. They're not selling the Sheraton or Westin Flex, right? For example, in Mexico, we sell a different trust, Aventuras, so that won't transition, right? That'll continue to sell the Mexican trust. Our Westin St. John, for example, is a standalone product. Not all of them will transition because they don't sell necessarily the Westin or Sheraton Flex.

It's the Sheraton and Westin ones that'll continue to transition, and I don't know if I have that number in front of me, but probably another, you know, 30%, 40%, and then the remainder will continue to sell their existing product.

Tony Terry (EVP and CFO)

Yeah, if you think about it, it's going to be inventory driven. We do have more inventory left in the Sheraton Flex that we have to sell through. We have some of our locations still selling that old product, so that we can get through that and deplete that trust. There's always going to be some inventory trickling back, so we'll always have to keep selling it in some of our sales centers. You know, through the end of this year and probably early into next year, you should probably see more of the Sheraton sales centers shifting over.

John E. Geller Jr. (President and CEO)

The, the, the nice thing about that delay, notwithstanding, you know, the, the sales process and all that, is those owners are enrolled in the Abound program on the Sheraton Flex side, for example, Patrick. They can start using it now and getting educated and all that. That's the good thing, right? That's the, that's the piece that I mentioned before, which is not only educating, but getting your owners to use it and see the benefit of it. Yeah, I would expect, you know, time will tell here a little bit. When we go to transition, you're gonna have a much more educated owner base, about the new product.

Patrick Scholes (Analyst)

Okay. Is it safe to, I guess, assume that, that all the challenges you had out of the box with the first slug of 25% likely, at least to the degree that you saw with that first 25%, won't continue for that, the remaining 35%?

John E. Geller Jr. (President and CEO)

Yeah, I mean, that I, I think it should go smoother, right? That's, that's all I'm saying. Because that owner education piece and the ability for those Sheraton Flex owners to start using the Abound program now, seeing the benefits of it, staying at different resorts, you know, exchanging out for cruises or tours, things like that, that will help. Because that's what we saw with the Weeks Space product, right? You know, people started to enroll their weeks in the points program, use it, right, and then they wanted to buy more points, right? You know, a little bit of that is, you know, it takes a little bit of transition. My only point is, delaying the launch on the Sheraton Flex side to sell through that should be helpful, right? It should make that transition easier than starting cold.

Patrick Scholes (Analyst)

Okay. Can you remind us, you know, before you started trans- to transition into Abound, the, the legacy Vistana owners, you know, what percentage of VOI sales did that represent? You know, roughly, I get it, the, you know, COVID and the acquisition, but, but roughly.

John E. Geller Jr. (President and CEO)

30%-40%, I would say. I'm looking at Tony here.

Tony Terry (EVP and CFO)

30% or 40%. I'd have to go confirm that number for you, Patrick, but it should be in that ballpark.

John E. Geller Jr. (President and CEO)

We can go back and look at it, but I think that's, that's ballpark-ish.

Patrick Scholes (Analyst)

Okay. I am all set. Thank you.

John E. Geller Jr. (President and CEO)

All right. Thanks, Patrick.

Operator (participant)

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Geller for final comments.

John E. Geller Jr. (President and CEO)

Great. Thank you, Melissa. Thanks for everyone joining our call today. Despite the uncertain macro environment, our resorts again experienced high occupancy this quarter, illustrating the power of vacations. While I'm not satisfied with our results this quarter, that doesn't diminish my enthusiasm for the long-- for our long-term trajectory. We have some of the best brands in the hospitality business, with a portfolio of resorts that would be impossible to replicate. The improvements that we've made to our core Marriott-branded vacation ownership product, in addition to the alignments we're making on the Hyatt side, are the right strategic decisions that will propel our growth over the long term. On behalf of all of our associates, owners, members and customers around the world, I wanna thank you for your continued interest in our company and hope to see you on vacation soon.

Thank you.

Operator (participant)

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.