Greetings, and welcome to Marriott Vacations Worldwide Third Quarter 2018 Earnings Conference Call. At this time As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host today, Jeff Hansen, Head of Investor Relations. Thank you. You may begin.
Thank you, Rob, and welcome everyone to the Marriott Vacations Worldwide third quarter 2018 earnings conference call. I'm joined today by Steve Weis, President and Chief Executive Officer and John Geller, Executive Vice President And Chief Financial And Administrative Officer. I do need to remind everyone that many of our comments today are not historical facts and are considered forward looking statements under 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 this morning, along with our comments on this call, are effective only today November 7, 2018 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 will now turn the call over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you for joining our third quarter earnings call. Let me begin by taking this opportunity to publicly welcome the over 11,000 ILG associates to the MVW family. Everyone on both sides of the acquisition has worked tirelessly throughout the summer producing a virtually seamless closing on September 1 a month earlier than initially targeted. Their efforts have continued through the fall as we are now well into our integration and longer term transformation efforts as one company.
I am truly amazed every day at what our team of associates can do, and I'm very excited about what this transaction means for our company. Today, I'll walk through our performance in the third quarter before I spend a few minutes discussing more about where we stand as it relates to the integration of ILG. I'll then hand the call over With the acquisition of ILG, we have realigned our structure vacation ownership, and exchange in 3rd party management. As a result, we have realigned our reportable segments from a geographic approach to reflect these changes. Vacation ownership includes all functions related to our branded timeshare businesses across all geographic regions.
This includes not only the selling and financing of our vacation ownership inventory but the rental and management of our properties as well. Exchange and third party management includes our world class exchange company, Integral International, as well as the 3rd party management companies of trading places international, vacation, resorts, international, and aqua Aspen. ILG has only been part of MBW for the month of September. Therefore, we have included additional supplemental financial results which we will refer to as legacy MVW. These results exclude the month of ILG performance from the quarter for more apples to apples comparison to the prior year.
Overall, I couldn't be happier with our 3rd quarter performance from our entire team. Especially considering to adjusted EBITDA totaled $100,000,000, an improvement of 36%. In our Vacation Ownership segment, consolidated contract sales for the company totaled $279,000,000, an increase of 75000000 dollars or 36% over the third quarter of 2017. As it relates to legacy MVW, which was the primary contributor to our results in the quarter, contract sales increased 38000000 dollars or 18% to $242,000,000. Our legacy MVW results were driven by strong performance from our newer sales centers and marketing channels, which continue to drive top line growth.
Let me stay with the performance of legacy MVW for just a moment as I feel it would be helpful to you as a reflection of how we performed versus expectations. VPG and our legacy MVW North America Vacation Ownership Business was $3781, up 9% over the third quarter of last year from improved closing efficiency. Related tour growth improved almost 7%, driven by our call transfer and encore programs as well as a In addition, our results were negatively impacted by the hurricanes, which affected us in multiple locations in the third quarter. The first Hurricane Lane affected the Hawaiian Islands, while the 2nd Hurricane Florence affected the East Coast, primarily to Carolinas. We are very pleased to report that all of our impacted associates and guests made it through the storms safely.
We did, however, experienced some damage to several properties as well as mandatory evacuations, shutdowns and cancellations resulting in a loss of tours. In total, we estimate that these 2 storms impacted contract sales in the third quarter by $6,000,000, including $5,000,000 for legacy MVW. Adjusted EBITDA was negatively impacted by $5,000,000 including $3,000,000 for legacy MVW Adjusting for these impacts, our strong legacy MVW performance in the quarter would have been even better, with contract sales growth of 21% and adjusted EBITDA growth of 15%. And as I'm sure you're aware, in October, the Panhandle of Florida was severely impacted by Hurricane Michael, and our hearts and prayers go out to those who were affected. Legends Edge, our Marriott Vacation Club Resort in Panama City was directly impacted However, it does not have a sales center.
The resort did sustain some damage, but thankfully, it was not to the degree of devastation you may have seen some of which we believe will remain closed through the end of the year. Overall, we do not expect Hurricane Michael to have a material impact on our fourth quarter adjusted EBITDA results. As it pertains to the acquisition of ILG within the quarter, As I have mentioned, we have only included their performance from the closing date of September 1st. To that end, I'm pleased to say that while we only have metrics for 1 month in the quarter, consolidated contract sales in the ILG Vacation Ownership business performed well. Growing 14% over September of last year.
And in the interval international exchange business, total membership remains steady at just over 1,800,000 members. Now let me pivot to our continued integration integration of ILG and its wonderful companies into the MVW family of brands and businesses. I am very pleased with how Associates both sides have embraced the acquisition. The more we work together and learn from one another, the more opportunity we see in the combination. I view the coming together of our brands and companies as a once in a lifetime opportunity, and we are looking at the integration as just that.
A chance to make a transformational change announcing that our first About half of this comes from the natural savings that you would expect to achieve when you bring together 2 companies of our size, such as duplicate management structures, IT systems and public company costs. We have stressed that this is a minimum target and as we have had more time and ability to work with the teams on both sides and SR leadership to view this through a transformational lens, We now believe still in the review stage of many of these incremental savings opportunities and the costs associated with achieving them. We will endeavor to keep you up to date as we continue to refine our longer term strategy. Now let me shift to the top line growth opportunities, which over the longer term should prove to be the most impactful rationale for the combination of our 2 companies. With all of the Marriott license vacation ownership brands under 1 umbrella, we have opportunities to grow in new directions and with new channels that weren't possible before.
For instance, we are learning what makes a Westin vacation club buyer different from a Sheraton customer and how to enhance their loyalty across all of our Marriott brands. We now have leadership throughout for improvements in tour production and closing efficiencies across the vacation ownership business. As an example, VPG in Vistana was just under $3000 in September, well below the legacy VPG of nearly $3800 for the quarter. We view this as a great opportunity as we look at offering promotions and programs that are successful in one particular channel more broadly across the new expanded portfolio. This should improve VPG through efficiencies and best practices driving higher contract sales growth.
Perhaps what we are most looking forward to is our ability to tap into the digital marketing environment. By mid next year, we expect to launch our digital transfer program with Marriott International. Similar to our call transfer program today, digital transfer will allow users of marriott.com to receive fantastic offers and promotions linked to our products driving higher tour flow we see similar value in other social media and digital advertising platforms. Therefore, as part of our transformational view of our new company, we have created a new role reporting directly to me, the Chief Brand And Digital Strategy Officer, designed to accelerate the building of our digital capabilities. And within the Hyatt Vacation Ownership brand, we see meaningful opportunity to grow the portfolio from the 16 resort destinations we have today.
By leveraging our vacation ownership development and sales strategies. We are working closely with senior executive team on a shared vision of the future and are excited about what this brand can accomplish under our leadership. Let me walk you through our longer term strategic view of the combination. Let me help set your expectations on how we will get there. As we saw when we initially launched our call transfer program several years ago, a good portion of our tour package production does not materialize as a tour for up to 12 to 18 months after a package is sold.
So from a tour package perspective you should expect us to begin seeing and other new programs like these to begin in early 2020. Keep in mind too that 2019 will be a transitional year for us, as we will be rationalizing less efficient tour channels at Vista in order to improve our combined VPG. By utilizing best practices from both companies and shifting our focus from lower VPG channels to more efficient channels we should 2019 as a transitional year, we also expect to see more immediate impacts from other opportunities, which come from applying best practices across our sales organization and across the brands. As an example, we see an opportunity to offer our financing incentive program to something that could create a material improvement by utilizing MVW's pricing strategy that are designed to improve overall closing efficiency while enhancing the average contract value. Some of these changes are already underway and others are being evaluated for rollout in the near term, providing solid growth earlier in 2019.
As we look at We expect a solid 4th quarter with meaningful contract sales growth driven by our strong tour package programs and newer destinations with adjusted EBITDA within our updated guidance range We are excited about the including an annual run rate of roughly $25,000,000 by the end of this year. With that, let me hand the call over to John to walk through further detail on our 3rd quarter results and our expectations going forward. John?
Thank you Steve and good morning everyone. I am very pleased with what we have accomplished this quarter not only completing the ILG acquisition in an accelerated fashion but also generating strong third quarter results. As Steve mentioned, as a result of the acquisition of ILG, we have reorganized the business and established 2 new operating segments being vacation ownership and exchange and third party management as they represent how we will manage and discuss the combined business going forward. With that as background, let me shift to our 3rd quarter financial results. Total company adjusted EBITDA totaled 100 percent from the prior year.
As Steve mentioned the recent 2018 hurricanes both in Hawaii and the Carolinas impacted the company's financial results. After adjusting for the negative impact of the hurricanes, adjusted EBITDA would have totaled $105,000,000 for the quarter. Totaled $123,000,000, an increase of $28,000,000 or 29 percent from the prior year. Adjusted EBITDA for the Exchange And Third Party Management segment totaled $19,000,000, all of which was driven by the ILG acquisition. Turning to the vacation ownership segment.
In our development business, consolidated contract sales increased $75,000,000 or over 36% to $279,000,000 in the third quarter, including a $37,000,000 increase related to the acquisition of ILG. Adjusting for the negative impact of the 2018 hurricanes and the contract sales related to the ILG business, legacy MVW contract sales quarter was 57 $2,000,000, an increase of $8,000,000 or 17 percent over last year and adjusted development margin percentage was 23.9% compared to 24.5 percent in the prior year. In our financing business, revenues increased 14000000 dollars or 36%. To $48,000,000 in third quarter of 2018. Financing revenue, net of expenses and consumer financing interest expense in increased $6,000,000 or 21 percent.
Legacy MVW financing revenue, net of expenses, and consumer financing interest expense were was in line with the prior year. Legacy MVW results include a $4,000,000 increase in interest income from our growing notes receivable balance offset by $1,000,000 of additional costs from our financing incentive programs, $2,000,000 of higher interest interest expense due to the Our notes receivable portfolio continues to perform very well. The average FICO score of buyers who financed with us in the quarter was 7 36 while delinquency rates remain near historic lows and financing propensity remains strong at nearly 67%. In August, prior to our acquisition of ILG, ILG successfully completed a $293,000,000 note securitization at a blended interest rate of generating $287,000,000 of gross proceeds. As of September 30, $71,000,000 of the proceeds were included in restricted cash until we deliver the remaining notes receivable in accordance with the terms Subsequent to the end of the quarter, we sold an additional $23,000,000 of notes to the trust and we expect to sell the remaining notes and received the remaining funds of roughly $48,000,000 before the end of the year.
Rental revenues increased $20,000,000 or 30 percent to $86,000,000. Rental revenues net of expenses were $12,000,000 a 34% increase from the prior year. Legacy MVW rental revenues net of expenses were $12,000,000, a 31% increase from the prior year. These adjusted results were driven by points partially offset by higher rental expenses. In our resort management and other services business, revenues increased $21,000,000 or 31 percent and the margin increased $11,000,000 or 38 percent to $43,000,000 increased $4,000,000 or 16 percent our legacy MVW G and A costs increased $4,000,000 in the quarter, reflecting normal inflationary cost increases as well as higher technology spending legacy MVW royalty fees were $16,000,000, an increase of $1,000,000 from the third quarter of 2017 mainly driven by higher contract at the end of $1,000,000 of gross vacation ownership notes receivable eligible for securitization under our warehouse facility.
And roughly $594,000,000 facility. Our total debt outstanding at the end of the quarter was roughly $2,200,000,000 of corporate debt most of which resulted from the acquisition of ILG and $1,700,000,000 associated with $2,000,000 related to the legacy ILG senior unsecured notes assumed as part of the ILG acquisition. As a much larger and more diversified business following the acquisition of ILG, these debt levels are higher than we have historically experienced. However, on a pro form a basis, assuming the companies were combined for the last 12 months and including synergy savings of $100,000,000 we estimate that 2.5 times or less. With our new $900,000,000 of floating rate corporate debt issued as part of the ILG acquisition, as well as higher non recourse debt associated with our securitized notes receivable, we do recognize that we now have more exposure to interest rate risk in a rising interest rate environment.
However, we have already begun to take and make progress in mitigating this risk. For our variable rate corporate debt, we did swap $250,000,000 of principle for a fixed rate of roughly 5.2% over 5 years to help manage a portion of that have resulted in a roughly 50 basis point increase in our weighted average coupon rate. Given that our customers have historically been less interest rate sensitive, we have not seen any impact on our overall financing program with our financing propensity remaining above 60%. We will continue quarter, we paid outstanding common stock for $17,500,000 leaving nearly 1,300,000 shares available for repurchase under our existing share repurchase program. Let me take a moment to update you on the status of our insurance claim related to hurricanes Irma and Maria from 2017.
For both legacy MVW and legacy ILG, majority of the claims have been submitted related to both our business interruption losses as well as property damage experienced by both and our owners associations from the hurricanes. However, at this time, we do not know when the claims will be settled. As we've done in the past, our adjusted EBITDA and our adjusted free cash flow guidance do not reflect any insurance proceeds from settling these claims. We will continue to update you as these efforts progress. Now turning to our outlook for 2018, We have revised our overall full financial results from September 1 through the end of the year.
As Steve mentioned, we expect a solid 4th quarter for the company which when combined with our year to date results are expected to generate full year contract sales between $1,070,000,000 1 point $09,000,000,000 and full year adjusted EBITDA between $395,000,000 $405,000,000. While the majority of our synergy savings are expected to materialize through 2020, our current full year guidance does include roughly $4,000,000 of synergy savings. For adjusted free cash flow, we continue to manage overall inventory and other capital spending. As a result for the combined company, we are targeting adjusted free cash flow between $235,000,000 $255,000,000
for 2018.
We have delivered strong contract sales growth from solid VPG and tour growth initiatives, giving us momentum as we finish out the year. The momentum or excuse me, this momentum coupled with top line growth opportunities as we integrate the acquisition of ILG create a strong foundation to drive future appreciate your
At this time we'll be Our first question comes from Cameron McKnight with Credit Suisse. Please proceed with your question.
Good morning. Good morning. Thanks very much. So a question in terms of what's in and what's out of EBITDA? So legacy revenues were up 16% in the quarter, but EBITDA was up 10 Was there something below the segment line that was impacting results at the adjusted EBITDA level?
I mean, from a vacation ownership perspective, you should get most of that flowing down. I think picking up the month of September for the exchange and third party management you're not going to see that type of growth. So that's going to weigh it down a little bit.
Okay. Got it. So a mix issue. Were there any, I guess, one offs or or items that we should be aware of in terms of 3rd quarter EBITDA?
No, I mean, I think the one thing we mentioned from a G and A perspective, just given some of our litigation that we've settled. We have been running, which we don't adjust out of EBITDA litigation defense costs and those have been running. Higher year over year. The good news is as we've settled some of these claims, we still have a few cases out there, but we we hope that that'll come down over time obviously.
Okay. Got it. And then, sorry,
Hey, just the other day, I mean, we called it out was the impact of the hurricanes obviously, but you don't adjust that back into the EBITDA, but we gave you the $5,000,000 impact.
Okay. Perfect. And was there any in your opinion, was there any disruption to sales at the legacy ILG in Vistana? Sales centers in the quarter?
As a result of the hurricanes.
Or as a result of the merger?
No, no, we haven't seen anything there of any meaningful nature. And even on the hurricane front, there was, they had some loss sales in Myrtle Beach, but that wasn't it was included in our remarks. So about a $1,000,000.
Got it. Thanks very much. I'll jump back in the queue.
Thank you. Thanks.
Our next question is from Brian Dobson with Nomura. Please proceed with your question.
Hi, Brian. Hey, good morning. So I'm just wondering if we can dig into some of those long term strategic advantages from the acquisition, particularly revenue synergies. I guess first, could you give a little bit more color on the low and high VPG sales channels that you mentioned earlier. And then when do you expect to see benefit from the digital transfer program?
When does testing really beginning earnest on that? And so you can get a better idea of how beneficial that will be?
Let me let me try to take a reverse order just because it's top of mind. We expect the digital work with Marriott to be put into place by mid next year. You're probably very well aware of the fact that Marriott has been going through lots of integration between the Starwood reservation platform and the Marriott reservation platform. So as you might expect, we're in the queue to get this work done. They're very committed to it, but we haven't started it yet.
That's why we say mid next year and we're optimistic about that. With that said, once we started, as I mentioned in my remarks, Once we have once we're able to start digital transfer, it'll take 12 to 18 months for those tours to start come through the house and materialize into contract sales. On the question of what's going on with kind of rationalize the various channels to improve VPG in the Vistana businesses. They do some OPC work off premise contact work, which has a relatively low yield to it. And I think you can see us to try to move out of some of those things, enhancing linkage opportunities with the you may recall that when we renegotiated our license agreement with Marriott International, we essentially preempted Fistana's ability to do linkage into the former Starwood branded, Sheraton and Weston properties.
And so we can now turn that back on. And then on a market by market basis, we'll be looking at every single thing in their in their tree to try to understand as we have typically done, we look for highest yield, lowest cost, all the way down the lowest yield highest cost and we trim the tree from the bottom up. So that's what we'll be doing. It's not a simple process nor is it one that you flip a switch and it happens overnight, but it's clearly something that we have experienced doing. And And no, we believe we have the talent and the team to be able to pull it off.
That's great. And when do you start implementing those changes?
Well, those changes are already afoot. We're I mean, we're we've had teams working with the VSE sales leadership team And they're beginning to identify the opportunities. And then once you get that done, then you have to go through some updated training for the sales teams that are on-site about how to approach it in the marketing side. But we didn't waste a lot of time after we close on September 1st to get it going.
So the benefit could materialize in 2019 first half.
Well, that's as I try to reference, there will be some things that will be a transitional and take a little longer, but everything we can try to get done to materialize in 2019. You can rest assure that we're already at it.
Our next question comes from Gerard Sojanian with Wolfe Research. Please proceed with your question.
So I want to ask you first about the full year EBITDA guidance and just understand the assumptions a little bit better. It looks like you're guiding EBITDA about 80,000,000 to 85,000,000 higher than the prior standalone that guidance. And I know you called out the $5,000,000 for the hurricanes. You called out $4,000,000 of synergy contribution. But is it right to assume that, the difference between your prior guidance, the new guidance call roughly $85,000,000 or so that that's the ILG contribution in the 4 month period or are there other areas of puts and takes that we need to consider?
There's definitely other areas of puts and takes. So you mentioned the hurricane, for example. While Michael, we said it's not going to impact, we do have some continuing impact from Florence And Lane, which is probably another $2,000,000 or $3,000,000 in the 4th quarter. Not part of the $5,000,000, which was the 3rd quarter impact. We still are going to have probably some elevated litigation type expense on the defense side as we are at trial or going to trial in some of these cases soon.
And then, but overall, the contribution, if you will, high level, is slightly higher than that, coming from the legacy ILG business for the 4 months. If you if you annualize that, you got to remember that ILG has stronger first half of the year in terms of where they're EBITDA is on an absolute basis. So the 1st and second quarters are better as we move into the 4th quarter. Obviously, it's a little bit more of a shoulder season on the timeshare side as it's always been for us in terms of the EBITDA contribution. And then the same thing on the exchange and rental business.
It's probably the weaker of the 4 quarters, if you will.
And of course, in the 4th quarter also we have roughly $4,000,000 worth of synergy savings that we'll see in the 4th quarter.
All right. Thank you. That's helpful. And Steve, you talked a couple of times about 2019 being a transition year. I imagine you're not prepared to give us any guidance.
So maybe you can just help us think about what that means exactly. And specifically, I'm curious how much of the $100,000,000 cost synergies do you think can be achieved next year? And if there's anything you can share, I'd be curious to know how you're thinking about contract sales growth or VPGs, tours, EBITDA, anything you'd be willing to share?
Sure. Well, thanks. First of all, the one question on your synergies. So we believe by the end of this year, we will have identified $25,000,000 of run rate synergies. So that's $25,000,000 for next year.
You should pretty much bake in. I would expect to see full run rate savings by the end of 2019 to be in the $50,000,000 range. So roughly half of the $100,000,000 that we've talked about. As it relates to what we see on the top line, unfortunately, and the frustrating thing I'm sure for you and for us is that you'd like to think that when you've got some best practices that we've employed for years in MVW that they are immediately translatable into the Vistana business. Unfortunately, it doesn't quite work that way.
You have to re educate a sales force. You have to get them comfortable with an approach and everything else. So I would not be in a good position today to give you our guidance for next year. Suffice it to say that while I referenced to the transitional side, that some things will take longer, some things will be more immediate. And, you can certainly rest assure that we are going to be doing everything on our power to drive as much top line growth next year as we possibly can.
But it's while we've identified the opportunities, We still got to put a price to them, not in terms of cost to implement, but in terms of what the upside is and then the timing to get it done.
Great. Thank you very much.
Our next question comes from Patrick Scholes with SunTrust. Please proceed with your question.
Hi, good morning. Good morning. Good morning. Two questions for you. 1, I just wanted
to be absolutely clear on sort of the apple Apple's EBITDA guidance, your prior for the legacy company for the year was $310,000,000 to $325,000,000. What would that apples to apples be right now, if you were only giving the legacy guidance?
Well, Patrick, if you would adjust for the hurricane impact, both in the third quarter 4th quarter, that I just mentioned. We would probably obviously a lot of moving parts here. We're not looking at it that way, but I would say we'd probably be towards the middle of that guidance range, kind of where we thought we'd be when we started the year.
Okay, fair enough. I appreciate the clarification on that. And then it looks like you've started at least dabbling back in share repurchases how should we think about that trajectory going forward, into next year?
We don't obviously comment Patrick when we're in and out. I think as we go into next year and we give you guidance we'll probably give you a little bit more guidance on how we're thinking about return of capital for on a full year basis. But look, like we've always done, and one of the things I wanted to point out on the call was that from notwithstanding the new debt related to the acquisition, we're very comfortable with our leverage. We had said we wanted to be in that kind of two and a half times leverage ratio or less, as we sit here today on a pro form a basis, we feel good about that. We've got a business that's going to generate a significant amount of free cash flow and we're going to be opportunistic when we see a good value in the stock price.
Okay. Very good. That's it for me. Thank you.
Great. Thank you. Our next question comes from David Katz with Jefferies. Please proceed with your question.
I wanted to just you've covered a lot of information and I appreciate all the detail identified. How much would you say of that is labor driven, you know, versus sort of other, you know, I, I don't know how much procurement there would be, but are to get to that 100,000,000 number, and I'm real essentially just trying to figure out what's left to do and where you'll be looking.
Sure. David, it's John. In the near term, a lot of the synergies are going to be redundancies at the senior management level, right, as you integrate and put the businesses together. Remember, this will take time. The size of this acquisition in integration takes a significant amount of time over the couple of years as we work through the different layers of the organization.
So, the things we did original of the transaction to putting these business together have been, has been very good.
There's always going to be, as you go through any kind of a reorganization, there's going to be some job eliminations and things like that. I think for the most part, people certainly understand what we've done and why. And I believe we've been very appropriate in terms of how we looked at severance packages and things of that nature. And again, as the more we the more time we spend, the more opportunity we see here, going forward. And I don't believe that discovery process is over.
I believe we're probably in the maybe 30 inning of a 9 inning ballgame in that. So as we continue to to kind of peel back the onion and understand what's here and go from there. And I want to make sure that it's clear. We're looking at this as a two way street. There are some things that have been done in the ILG business that we think are are very good and things of best practices that we can apply to the legacy MVW business.
So it goes both directions. And I'm excited about that as well. So I'm very bullish about where we are. Got it. Thank you very much.
Thank you.
Our next question comes from Edward Angle with Macquarie Group. Please proceed with your question.
Hi there. Hi, how's
it going? Thank you for taking my question. Certainly a lot of moving parts but I was just wondering if you have any sense of what maybe pro form a 2018 or even trailing 12 months, adjusted free cash flow or maybe you're your run rate adjusted free cash flow if we kind of give you full credit for the synergies and then a full year of algae, at least some sort of ballpark?
Yeah, since we didn't own the business, we didn't really have a calculation, if you will, for the the period we didn't own it. But you can go back and look at what they put out as their guidance probably give you a ballpark as to what the business supposed to deliver for the year. And obviously when you look at what we put out for the revised guidance, of $2.35 to $2.45, excuse me, $2.55. A lot of that is upside in our business. In terms of the legacy MVW, I can tell you that as we've managed down our capital spend.
For the 4 months, and once again, some of this is just timing. As I mentioned on the EBITDA side, and the way the cash comes into the legacy ILG business, they have better free cash flow in the beginning portion of the year that corresponds with the business. So while there is some pickup in our full year guidance, for ILG on the for the 4 months we own it. Most of the upside that you're seeing here is really related to our legacy MVW just given the timing of their cash flows.
Expect the legacy ILG tour flow to maybe slow down and then be offset by VPG? And if so, should that improve your margin outlook or at least their margin outlook?
Well, in general, these, I think you're you've deduced appropriately, what will happen, there will be some tour volume that will go down from these kind of high cost, low yield channels. As we transition to the lower cost higher yield channels, there may be some timing difference, but, that's clearly the goal. I think that's the essence of your question, right?
It was the second part, Pete, as VPGs go up, that should equate to, yes, more efficient sales and better margins.
Yes, sorry, I didn't answer the second part.
Steve's point, there will be as we talked about, there will be a little bit of a transition. It's hard to model that out. We'll do everything we can to manage through that with his as little impact as possible. But once again, if you think about it over the long term, it's huge opportunity when you look at where their VPGs are today and our ability and our proven ability to get better tours. Obviously, we have access to all the legacy I should say that the Marriott relationships on the call transfer, the digital transfer linkage that the legacy Vistana business because of our agreement Marriott didn't have.
So once again, this is a huge acquisition and there's going to be integration, but over the long term, it's huge opportunity as we put the businesses together and execute best practices across it.
Okay. And then sorry, just one last one. In regard to that VPG bridge that you broke out earlier, of that delta, how much is just because they have a higher mix to new owners versus just, I guess, pricing or efficiency?
Yeah. It's really it's not that much on the mix of new owners. There's probably a on that. It really just has to do with some of the tour sourcing that they do off property stuff that once again, they were probably, I don't want to say forced to do, but had to do relative to not having access to the better and higher efficient Marriott channels that we had access to. So it's really a lot of the sourcing where they got their tours.
There could be a little bit in there on the first time buyer too, but I don't think that's meaningful.
Thank you.
To Steve Wise for closing comments.
Thank you very much, Rob. We're still very early in the integration. But what I've seen so far has me excited about what lies ahead with Marriott Vacation Club, Sheraton Vacation Club, Weston Vacation Club, Grand Residences by Marriott, the Ritz Carlton Destination Club, St. Regis Residence Club, and the Hyatt residence club, we have the best brands in vacation ownership and the best exchange company in the industry with interval international. I look forward to what we can do as a combined company and updating you on our results and direction on future calls.
And finally, to everyone on the call and your families enjoy your next vacation.
This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.