Travel + Leisure Co
NYSE:TNL
Earnings Call Analysis
Q3-2023 Analysis
Travel + Leisure Co
In a recent earnings call, the company reported a slight decrease in Revenue for its Travel Membership segment, dropping from $183 million the previous year to $174 million this quarter, with Adjusted EBITDA also seeing a decline from $65 million to $62 million. Despite the lower figures, the company continues to demonstrate a commitment to shareholder returns, having repurchased $267 million of common stock and paid out $104 million in dividends. They managed to close their third ABS transaction valued at $300 million with favorable terms, showing a strong ability to access capital markets. The net corporate leverage ratio currently stands at 3.7x, with expectations to reduce it to below 3.5x by year-end.
Looking ahead, the company has revised its full-year adjusted EBITDA expectations, projecting a range of $890 million to $915 million, which equates to a 5% to 7% increase from 2022. The fourth-quarter adjusted EBITDA is anticipated to be between $233 million and $248 million. For their core timeshare business, they project strong sales performance and are increasing their outlook for gross realized sales for the year to $2.15 billion to $2.2 billion with a corresponding improvement in BPG (Benefit Per Guest) guidance.
Despite these positive outlooks, there are headwinds, including the impact of rising interest rates, which have influenced customer behavior within their timeshare and exchange services. The company observed a shift in behavior, with more timeshare owners returning to their home resorts rather than engaging in exchanges, a repercussion of post-COVID travel trends returning to normalcy. To address the challenges and align with the revised revenue forecasts, the company is proactively reviewing and adjusting cost structures. They are taking measures to ensure that costs correspond with revenues, which seems to be a mix of variable and fixed cost adjustments, although specifics were not provided in the call. The fourth quarter is expected to mark the trough for the Travel and Membership segment with optimism for growth in 2024, as the company aims to adapt to ongoing travel trends and recover from the impacts of the pandemic.
The company is cautiously navigating the economic landscape shaped by the rapid increase of interest rates throughout 2022 and 2023. They expect the high-interest rate environment to persist into 2024, forecasting a $30 million increase in interest expense headwinds to adjusted EBITDA for the next year, similar to the current year's impact. This anticipation of continuing high interest rates will play a significant role in their 2024 planning process, along with considerations of slower Travel and Membership growth and an updated perspective on their Vacation Ownership business performance. More detailed insights into these factors will be discussed in the first quarter of 2024.
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Hello, and welcome to the Travel & Leisure Q3 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Christopher Agnew Investor Relations. Please go ahead, sir.
Thanks, Kevin, and good morning. Before we begin, we'd like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ discussed in our SEC filings and in our earnings press release accompanying the earnings call and you can find a reconciliation of the non-GAAP financial measures discussed in today's call in the earnings press release available on our website at travelandleisureco.com/investors. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our third quarter results. And Mike Hug, our Chief Financial Officer will then provide greater detail on the quarter, our balance sheet and outlook for the rest of the year. Following our prepared remarks, we will open up the call for questions. With that, I'm pleased to turn the call over to Michael Brown.
Thanks, Chris, and thank you for joining us on our third quarter earnings call. This morning, we reported adjusted EBITDA of $248 million, a 6% increase over the prior year and adjusted diluted earnings per share of $1.54, a 20% improvement over Q3 2022. Third quarter adjusted EBITDA margin was 25% flat compared to the prior quarter and prior year. Our team delivered solid results against key performance indicators, particularly the vacation ownership business. Sales volume per guest and gross VOI sales were at the top end of expectations. As well, new owner in total tour flow increased 36% and 18% respectively, year-over-year.
In keeping with our commitment to grow our new owner base, the transaction mix increased nearly 200 basis points to 35% of sales. The provision for loan loss came in ahead of expectations at just over 18.5%, re-infirming the improvements in owner credit quality. Regarding capital allocation, we returned $98 million to shareholders in the third quarter through a combination of dividends and share repurchases, which puts us on track to reduce our outstanding shares by 10% for the full year. From the start of 2022 until the end of the most recent quarter, we have reduced our share count by 16%. Since spin, we have reduced our share count by 27 million shares or 27% of shares outstanding. Let me update you on the key performance indicators we monitor to gauge the health of our consumer. Forward resort bookings, sales volume per guest and the performance of our consumer finance portfolio. Regarding forward bookings, Q4 owner nights on the book are 7% ahead of fourth quarter 2019, reflecting a continued strong booking pace. Total owner arrivals are ahead and length of stay is 5% above the fourth quarter of 2019.
Of note, in our post-pay surveys, nearly 1 quarter of respondents were remote while staying at our resorts reinforcing the work from anywhere trend that we believe is one of the factors behind longer length of stay.
Turning to VPG. Our third quarter VPG was $3,108, above the top end of our guidance range. On an absolute basis, VPGs are healthy and reflect the strong value proposition of our product and for the full year, our outlook is improving to $3,100 to $3,150. VPG did decline $42 from the second quarter, but 90% was due to the higher new owner mix. VPG remains well above our long-term guidance range of $2,700 to $3,000. In 2023, we made a strategic decision to ramp up new owner marketing channels to continue growth of new owner tours. Year-to-date, we have had success with new owner tours, which have increased 35% over the same period in the prior year. Over 70% of this growth have come from open market channels or packaged sales. This investment positions us to achieve our long-term plan for new owner transactions to be 35% to 40% of all sales. We expect this tour pipeline to yield incremental growth over the next 12 months and grow our pipeline of future upgrade sales. Blue Thread, which is our new owner marketing channel aligned with Wyndham Hotels, continues to exceed expectations with VPG nearly 50% higher than other new owner channels. We expect Blue Thread sales to finish the year at an all-time high over $100 million. Our third key performance indicator is our consumer finance portfolio, which performed well in the quarter. Delinquencies remained below 2019 levels and our outlook for the full year loan loss provision is unchanged at 18% to 19%. At the end of the third quarter, only 10% of our portfolio had FICO below 640, and year-to-date, the average FICO score for originations is 738.
All in all, our Vacation Ownership segment continues to perform well. The continued strength in our Vacation Ownership business was challenged by headwind to the Travel and Membership segment. This segment continues to lag expectations due to lower exchange propensity and slower-than-anticipated ramp-up of Travel Clubs. Accordingly, we are making structural and operational changes to reduce its cost structure while maintaining focus on driving transactions in both exchange and travel clubs. These changes will occur prior to year-end, allowing us to enter 2024 more streamlined. Coming into this year, our expectation was that our exchange business would maintain the 2022 transaction propensity levels and that travel clubs would ramp up through the year. Instead, we experienced a decline in exchange propensity throughout the year. To put it in perspective, our exchange propensity is nearly 20% off pre-COVID levels. Mike will provide more details in a moment, but the lower expectation of Travel and membership in combination with 3Q coming in toward the lower end of our guidance is the reason for our full year reductionn -- for a reduction in full year adjusted EBITDA guidance to a range of $900 million to $915 million. As we look ahead to next year, it is worth reflecting the Travel and Membership over the last 4 quarters, had revenues of $716 million and adjusted EBITDA of $253 million with a healthy 35% adjusted EBITDA margin. The business has low capital requirements, strong returns and cash flow.
We expect that Q4 will mark the trough and revenue momentum for Travel and Membership due to a combination of stabilizing transaction propensity trends and pricing at RCI and growth in our travel clubs. On the strategic front, we acquired the rights to the Vacation Ownership business of Sports Hospitality Ventures, the hotel and resorts licensee of the Sports Illustrated brand. Our plans, including network of sports teams resorts located in popular college towns and in leisure destinations. We will be launching and managing a Vacation Ownership club under the Sports Illustrated Resorts Brand. Among the strategic goals we shared at our Investor Day was the intention to add incremental vacation ownership revenue streams under the Travel and Leisure brand. We are proud to launch this expansion with Sports Illustrated, the most celebrated name in sports with nearly 70 years of legendary content. Tuscaloosa, Alabama, home of the University of Alabama has been selected as the first college destination in the Sports Illustrated Resorts portfolio and is projected to open in late 2025. Our goal is to develop Sports Illustrated Vacation ownership inventory in a capital-efficient manner. We have several additional locations in the pipeline and more consideration after significant inbound inquiries following the Tuscaloosa announcement. We are excited by the initial representation of our strategy to add new brands to our portfolio and we look forward to sharing more with you over the coming quarters. As a reminder, it's important to remember that the prepaid nature of timeshare ownership is a key differentiator for our business model within the leisure travel industry. 80% of our owners have fully paid for their timeshare, and therefore, the choice to vacation is less dependent on economic conditions. As we have seen historically, our healthy mix of recurring and predictable revenues is one of the reasons we expect our business will continue to be resilient as we enter a more challenging economic environment. This resilience in demand among timeshare owners has been proven time and time again, most recently coming out of COVID. With that and for more detail on our performance, I would now like to hand the call over to Mike Hug.
Thanks, Michael, and good morning to everyone. As well as discussing our third quarter results, I'll provide more color on our balance sheet and cash flow as well as update our outlook for the remainder of the year. All my comments will refer to comparisons to the same period of the prior year, unless specifically stated. We reported third quarter adjusted EBITDA of $248 million and adjusted diluted earnings per share of $1.54, increases of 6% and 20%, respectively. Year-to-date, adjusted EBITDA growth is 5% and adjusted EPS growth is 16%. The adjusted EBITDA growth was achieved in spite of several headwinds in the third quarter, which include the fires in Maui, 2 hurricanes in Florida and up the East Coast of the U.S. and higher-than-anticipated healthcare expenses. Although not individually material, they amounted to $5 million and combined to push our results to the lower end of our guidance range. Vacation Ownership reported segment revenues of $812 million, an increase of 8%, while adjusted EBITDA of $203 million also increased 8%. We delivered 187,000 tours in the third quarter, representing 18% growth and VPG was $3,108 above the top end of our expectations. The Vacation Ownership segment also incurred some incremental marketing expenses in the quarter associated with the ramp-up of our tour package pipeline and opening of additional new owner marketing locations, both of which are designed to benefit our tour flow in 2024 and beyond.
Revenue in our travel membership segment was $174 million in the quarter compared to $183 million in the prior year. Adjusted EBITDA was $62 million compared to $65 million in the third quarter of 2022. Exchange member count has started to recover, but not enough to offset the reduction in transaction potentially. We expect the headwinds to exchange transaction propensity to continue into the fourth quarter. Turning to our balance sheet. Our financial position remains strong. And in the third quarter, we continued to return capital to shareholders through share repurchases and recorded dividend of $0.45 per share. Through the first 3 quarters of the year, we repurchased $267 million of common stock and paid $104 million in dividends. In October, we closed our third ABS transaction of the year, a $300 million transaction with a weighted average coupon of 6.8% and an advance rate of 92%, continuing to demonstrate our ability to access this market on a regular basis. In addition, during the quarter, we renewed our $600 million ABS condo facility and moved the maturity date to September 2025. Adjusted free cash flow was $81 million through 9 months, compared to $195 million in the same period last year. Similar to the first 6 months, this is due to higher year-over-year originations on our loan portfolio, certain other working capital items and an increase in interest payments on our corporate debt. For the full year, our expectation for free cash flow conversion from adjusted EBITDA is for it to be around 50%, with the majority of free cash flow generated in the fourth quarter. Our net corporate leverage ratio for covenant purposes was 3.7x at the end of the third quarter. We continue to expect our leverage ratio to decline by the end of the year to below 3.5x. Turning to our outlook for the rest of the year. We are reducing our expectation for full year adjusted EBITDA to range between $900 million to $915 million, a 5% to 7% increase over 2022. Our expectation for the fourth quarter is for adjusted EBITDA of between $233 million to $248 million.
With respect to Vacation Ownership, we remain confident in our core timeshare business and its ability to continue to deliver strong sales performance. We are increasing our outlook for gross VOI sales for 2023 to a range of $2.15 billion to $2.2 billion on improved VPG guidance of $3,100 to $3,150. In the Travel & Membership segment, we expect fourth quarter adjusted EBITDA to be in the range of $45 million to $50 million. Related to EPS, we are expecting our effective tax rate to be around 27% for the full year with stock-based compensation expected to be around $12 million in the fourth quarter and anticipate net interest of $62 million in the fourth quarter. Looking ahead to next year, we expect the rapid rise of interest rates in '22 and 2023 to stabilize at elevated levels in 2024. As such, our expectation is that interest expense on our asset-backed securitizations will once again be an incremental $30 million headwind to adjusted EBITDA in 2024, similar to 2023. As we continue our 2024 planning process over the next few months, we will also revisit our longer-term outlook. This will allow us to take into account the impact of the interest rate environment over the full time horizon, slower travel membership growth and the updated view of our well-performing VOI business. We'll provide more color in the first quarter of 2024. In summary, we are pleased with our third quarter performance, our continued growth in adjusted EBITDA and double-digit growth in adjusted diluted earnings per share as well as our continued return of capital to our shareholders. With that, Kevin, can you please open up the call to take questions?
[Operator Instructions] Our first question is coming from Joe Greff from JPMorgan.
Michael, you mentioned that you think travel membership is going to trough here in the fourth quarter. What gives you that confidence in both the exchange business and travel clubs? And then when you think about next year, do you look at next year as a growth year? Or is it just the rate of change is less negative next year than what it was this year?
Well, let me start with the sector one. No, we expect 2024 for the Travel and Membership segment to be a growth year for a number of different reasons. So let me jump back to the first question is.
As we went came into 2023, we expected exchange propensity to reflect pre-COVID levels. 2022 was a revenge travel year. And I think what -- the trends we saw in 2022 masked a little bit of what was happening in exchange propensity. VOI was super strong in exchange propensity with similar to pre-COVID levels. As travel normalized in 2023, the unmasking of post-COVID travel trends in VOI and COVID and exchange really came forward.
The first 2 quarters, propensity was slightly down, and I had expected the second half of this year for a rebound in recovery in that propensity rate to pre-COVID levels because that's what we saw throughout leisure travel. Instead, what we saw is more and more of owners within the timeshare industry were returning to their home resorts. It's no different within the Wyndham Travel Club and as the year progressed, instead of getting that rebound that I had forecasted that we had forecasted, it continued to dip, as I mentioned to a level that was around 20% below pre-COVID levels.
So what gives us confidence that we think Q4 is going to trough? Number 1 is we have seen a stabilization in that propensity over the last few months. So we think we have a good anchor as what the true propensity is once the revenge travel and once we've made our way through 2023 is. You've heard us refer to the fact that membership dropped about $0.5 million in RCI through COVID period. And finally, the membership is beginning to grow again, and that is absolutely happening. And then lastly, as we head into 2024, on the Travel Club side, although our transactions are flat to last year, that's taken into account the loss of one of our major clients. So absent that loss, we're actually seeing growth in our travel clubs, and we will start to lap that in the second quarter of next year. So I know that's a long answer to a lot to what's happening. But in the end, we absolutely expect, through a number of the actions A, we're taking in Q4, but also with the clear visibility of what the travel trends in should return travel and membership will return travel and membership to a growth profile in 2024.
And then you also mentioned that you're reducing costs in this business. Can you help quantify that? And how much of that is revenue dependent versus fixed costs coming out?
Well, we -- we are, as I mentioned, going to be going through that here in Q4 to make sure that our overall cost structure aligns to the revised forecast. You would expect that. And instead of being reactive to it, we've already proactively begun to look at the realities of our revenue forecast this year and make sure that our cost structure is reflected to it. We'll give you an update a bit more later in the quarter. But as is the case, we will adjust to the realities of our revenue forecast.
Next question is coming from David Katz from Jefferies.
I wanted to just focus for a minute on the SI deal. And those of us that are huge sports fans see the opportunity out there is potentially very, very large. But maybe you could help us just set our expectations as to how big an opportunity this could really be? And what your vision for it is?
Well, thanks for the question, David. And let me just -- since this is the first quarter we've been on the call, let me take a little bit of time with this answer on a number of different subjects. First of all, the overall model looks very similar to the Vacation Ownership model that we currently have with Wyndham, targeting similar margins and returns as this business grows. Three primary revenue streams, the sale of Vacation Ownership, the operations of resorts in the club and as well the financing income streams. The difference from the outset is, as today, we talked about 35% to 40% new owners on an annual basis with Wyndham. In the first year, it's 100% new owners into our system and we're excited about the opportunity because the timeshare model used to be the 2 things you have to secure are new tours and new inventory. Over the last decade, securing inventory has not been anyone's issue because people appreciate the model and wanting to do developments with timeshare companies. It's all about growing your addressable market. And the reputation of Sports Illustrated, the reach that it has in a number of different ways, not just data, social media, but also passion, there's probably not a more passionate lifestyle in America than college sports. We were excited when we signed the deal with Sports Illustrated. The day after the announcement, we became even more excited with the outreach that we received from universities around the United States, wanting us to be part of their infrastructure. So for us, it's really clear that we mentioned will be announcing over the next few months, additional locations. We're excited about the partnership with the Sports Illustrated team but we're probably most excited about the additional reach that it gives us to reach new timeshare owners. When you look at the U.S. population today, there's around 10 million timeshare owners for over 100 million households. It's safe to say that college sports will allow us to reach a lot more than that 10 million household base. And we're looking forward to get started. As I mentioned, the one in Alabama will open in later in 2025. But needless to say, we have a lot of work going on to get that up and running and eventually into pre-sales.
Now the follow-up question I wanted to ask is when we think about the Blue Thread, which you commented is running ahead of expectations. And I think your commentary was exactly the same as it was a quarter ago. One of the question is, is that accelerating, but the need of the topic is really what is it that drives that? Is it just a function of getting integrated or is larger scale, something that could drive that more? And for obvious reasons, that's a topic that's hit our brains over the past couple of months.
So just to clarify, when you say larger scale, Blue Thread is accelerating because with anything, it comes down to relationships and maximizing them. And our team tying closely into the Wyndham Hotel team has allowed us to really accelerate the strength and the performance of the Blue Thread initiative. We have continued to invest into this space, not only through our call center operations, but also outside of Blue Thread and starting to lean heavier into forward-looking package sales. So yes, scale matters, data matters and the Wyndham Hotel team has done a great job growing Wyndham Rewards, and that's benefited us. It's benefited them. And ultimately, the more Wyndham hotels grows its Wyndham Reward programs, the more opportunity we have in the Blue Thread space.
Your next question is coming from Dany Asad from Bank of America.
Just to start off, for the guidance cut for this year, can we just walk through the buckets like the different components of like what changed from last quarter?
Thanks for the question. This is Mike Hug. It's really a pretty simple walk. First of all, I touched on in my comments the fact that the third quarter was impacted by a few things that were individually immaterial, but they totaled up to $5 million, that being the fire to Hawaii, the hurricanes in Florida and the East Coast and then some higher healthcare expenses. So to get from the previous guidance to the current guidance, you have about $5 million there and the remainder about $50 million is really due to the reduction that we have in the travel membership business forecasted for the fourth quarter. So pretty easy walk down and really driven by the reduced revenue forecast on travel membership.
Got it. Okay. That's super helpful. And then when -- if we look at this year as a whole and then we turn to '24 and '25, can you just maybe walk us through like the puts and takes of kind of where free cash flow conversion from EBITDA can go kind of what drives from 1 year to the next compared to from this year?
Yes. I think the big drivers are going to be our continued securitization activity, what we're experiencing this year and the reason that cash flow weighted to the fourth quarter is build up in the receivable portfolio throughout the summer, as you guys know, the busiest time of the year. We start to get that into ABS transactions and into our conduit in the fourth quarter. That's why the cash flow this year is like always, is way towards the fourth quarter. On a long-term basis, the 2 big drivers are going to be that continued ABS market available to us. And then our inventory spend. And we've talked about inventory spend remaining below $100 million for several years into the future as we have 4 years of inventory on the balance sheet. And the other thing about Sports Illustrated is we do expect to deliver that inventory in a capital-efficient models. So the investment we'll need to make [indiscernible] from an inventory perspective shouldn't significantly impact our free cash flow conversion. But it's truly the ABS market, which remains strong to us. As you saw, we got the transaction done in October and then us being smart and keeping our inventory spending below $100 million.
Our next question is coming from Brandt Montour from Barclays.
Mike Hug, maybe you could just -- if we could dive back into that free cash flow question a little bit deeper. I'm curious on the 50% free cash flow conversion commentary. I think it's a little bit lower than what we were expecting before. So what are the dynamics that could change that? I know, obviously, there's a guide down on the Travel and Membership side, and that's probably a better sort of free cash flow business, especially if you're growing VOI and lending more as a percentage of mix. But maybe you could just talk us through the dynamics of what led to that conversion guide down.
You're exactly right as far as the free cash flow generation conversion from the Travel and Membership business is very strong. One of the reasons we continue to like the business is the great margins and free cash flow generation. But that's one of the drivers as it relates to the 50% as opposed to the range we previously talked about. And then as I mentioned in the previous answer, as we continue to grow the portfolio, there's definitely timing in terms of if you think about sales in the second half of the year, we're able to get that into those receivables into the ABS conduit, most, not all of them. And then obviously, in the first quarter of next year, and then we do the second deal, get them into the term transactions that are at a 90-plus percent advance rate. So in my mind, it's primarily timing as far as the growth in receivable portfolio. The one headwind we continue to have is on the corporate interest expense, right? That's obviously not timing. That's permanent. So with what's happened with interest rates compared to the model we have from the Investor Day, we are seeing higher interest expense. But most of it is just going to be the way we manage the portfolio and getting that into the ABS securitizations.
Okay. Great. And then my follow-up is related to something happening away from you guys. The hostile or the sort of proposal from choice to acquire Wyndham, the -- your license or -- of your brand for Blue Thread. When you look at your license contract with Wyndham, what are the stipulations within those documents? What would happen if this transaction was to go forward to your agreement?
Yes. Without going through the whole legal document, basically, any M&A would have no negative impact. Our agreements really do protect what we need to continue growing our successful and very valuable relationship with Wyndham Hotels.
Okay. So Wyndham Hotels became Wyndham Brands by choice or something like that, you would sort of grandfather in your -- you would still have access to that database?
Correct.
Your next question is from Patrick Scholes from Truist Securities.
Michael and Mike, follow-up question on the hypothetical combination of Choice plus Wyndham. It sounds like there wouldn't be any downside, but could there be potential upside from that? Certainly, Choice has a massive guest reward system. And I believe their primary color is yellow. So would it be the Blue Thread plus potentially plus the Yellow Thread at that point? Or would you just be -- or would you be just limited to the legacy Wyndham hotels?
Well, let me comment a bit more broadly because I'm not a party to those discussions. What I would say is something very similar to what I said to David earlier, is that, the key to growing vacation ownership in general is to gain more and more access to new customers and create partnerships that allow you to open up your marketing universe, not being party to any of those discussions, if that were the case, then that's beneficial. But whether it was that question or one related to any partnership, the key to growth in this space is marketing and data and new customer opportunities.
So my answer broadly is any time that occurs in the Vacation Ownership space, it has possibilities to be a positive to our VO business.
Okay. So fair to think that you would -- fair to think you would hope that you'd get access to it, but again, no guarantees. And certainly, there's blue/green in their existing contracts. So a lot of devil in the details possibly to be worked out here.
And then taking a step back, just, Michael, on sort of the high-level macro question. Your average household income, as I recall 90 for a vacation ownership buyer $90,000 to $100,000. Any discernable changes in propensity of that customer to purchase or use your product that you've noticed?
Yes. And I really appreciate that question because in a quarter like this, I think it's really important to reground ourselves on what's happening in our business. And we raised our credit quality throughout COVID. Our FICO Score 738, matches anyone in the industry. The portfolio, which I'm going to ask Mike to speak about just a second, is performing extremely well. And it's very important, in my opinion, to take away from this quarter on the Vacation Ownership business. VPGs are strong at or above the high end of our range. We raised our guidance. Our portfolio remains strong and our forward bookings are ahead of last year. The core -- the primary driver of our business for our consumer is continuing to perform consistently well and is not showing signs of weakness. Our household income is actually around 100,000 now. And I don't want the noise of the quarter related to our overall guidance to distract from the foundation of our overall Travel & Leisure business, which is an extremely consistent and well-performing VO business that did not in Q3 show signs of change in its performance or its metrics. And as we sit here almost through the month of October, nothing that's happened in the first 3 weeks of October would indicate that, that commentary has changed.
And then just touching on the portfolio a little more. First of all, a few things. We talked about the provision. Our guidance for the quarter was over 19%, and it came under 19%, which, I think, once again, shows a good performance on the portfolio. You'll notice delinquencies moved up from Q2 to Q3, but that's always the case. What was positive about that, in my opinion, is if you look at the movement from Q2 to Q3 as far as the increase, there was a loss increase we've seen since 2016 and except for in 2021 when the portfolio wasn't growing. So when you look at that increase, it's a very manageable increase, one that was actually better than we expected. And then finally, always appreciating the securitization is done because we love the free capital it generates but just as important for me, it's a proof that others also believe in the confidence of the portfolio because, in essence, that's what they're purchasing with the notes that they purchase related to the ABS transaction. So overall, I can't be happier with the portfolio performance and the big move to move from 600 to 640 and most importantly, sticking with that move when a lot of other industries had dropped down to below 640, even subprime, if you will, really has allowed us to have confidence in our portfolio and see the results that we're seeing throughout this year as far as performance.
Next question is coming from Chris Woronka from Deutsche Bank.
Thanks for all the details so far. I guess the first one for you is, Michael, I think you mentioned in the prepared comments that you stimulate these new owner tours you're going back to some of these open market channels and package sales. And I wonder if you can kind of maybe compare and contrast? I know in the past, those we're not always the best and they weren't always the most efficient or cost effective. Can you talk about why some of them might be better today than they've been historically?
Yes, absolutely. And we have stepped back into locations that we can ensure profitability in those channels. We've been very selective when your FICO band starts at 640, you need to make sure that your open market channels are performing from really day 1 but also subtle commentary, we didn't want to get too far into it today. But we -- there is an investment that we are making into our overall package pipeline. Wyndham has traditionally been an on the week to our generator, and we will remain that. It is one of the distinguishing key characteristics of our marketing model in the space but that doesn't prevent us from starting to lean in more toward a little bit more to create diversification on a package pipeline that gives us visibility as well 12 to 18 months out. So it's really being selective in what we're going into on the open marketing and starting to diversify and create incremental workflow opportunity through the investment in our -- in our package pipeline and we've already seen early signs of success in doing exactly that.
Okay. Very helpful. And then just -- so I'm not going to ask you for '24 guidance, and you've -- you've already shared with us the headwind on interest. And I guess the question is -- and there's a lot of puts and takes, obviously, that will impact what happens. But if we kind of revisit just the free cash flow generation, I mean, whatever somebody might come up with for an EBITDA estimate, you said inventory is below spend is going to continue to be below $100 million per year. I mean, is there any reason why the free cash flow conversion would be at least lower days this year, if not higher? I guess what I'm asking is, is there anything in your current thinking in terms of a placeholder for an acquisition or anything like that?
Well, I think when we think about free cash flow conversion, an acquisition would be outside the free cash flow conversion. Obviously, that's the decision we make as far as capital allocation, right, dividends, M&A and share buybacks. But overall, from a free cash flow perspective, yes, I would expect that as we move forward, we're back north of the 50% kind of that 55% is maybe even higher. Everything except for the increase in the corporate interest expense, everything else on that walk across this timing, right? You think about the receivables portfolio, if you think in the favorability and the inventory spend. So -- and with our cost of sales coming in lower this year, very, very nice cost of sales performance due to the price increases. The inventory we have on the balance sheet is even going to last longer than we expected, kind of when we came out with the model in '21. So long term, I would say no change in the view of the free cash flow conversion being 55% plus.
[Operator Instructions] Our next question is coming from Ian Zaffino from Oppenheimer.
This is Isaac Sellhausen on for Ian. I just have 2 quick ones. On the VO business, can you just touch on tour flow and the expectations for that for the remainder of the year? I guess, should that still be sort of in the double-digit range?
And then secondly, for the acquisition of the sports illustrated rights that you guys announced earlier, was that large capital commitment? Or is that something you guys haven't disclosed?
Well, let me touch on the tour flow, and then I'll hand it to Mike on the Sports Illustrated acquisition. The tour flow expectations will be both double-digit growth for Q4 and for the full year, the higher teens. So that -- our tour flow strength continues into Q4 and obviously reflected in our full year number.
And then on the acquisition of the Sports Illustrated brand, we haven't disclosed that number book, but what I would say is half of it is inventory or land that we purchased in [indiscernible] development. Now as I also mentioned, going forward, we'll find a partner that will do development for us. So I don't expect additional cash flow drag because of that. But overall, most of the acquisition costs that we paid is cash out the door that will be recovered as we sell the product.
We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.
Thank you, Kevin. We were pleased with the third quarter and in particular, the performance of our core Vacation Ownership metrics. We also executed on the first of what we expect will be several deals to grow our brand portfolio with the announcement of the Sports Illustrated Resorts portfolio. I would like to take a moment and thank our partners on that deal, Sports Hospitality Ventures, the Eastern Band of Cherokee and Authentic Brands. I also want to thank all of our associates who are working hard to deliver great vacations for our owners and guests. Thanks everyone and have a great day.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.