Greetings, and welcome to Marriott Vacations Worldwide Second Quarter 2018 Earnings Conference Call. At this time, As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, Jeff Hansen, Vice President, Investor Relations. Thank you. You may begin.
Thank you, Rob, and welcome everyone to the Marriott Vacations Worldwide Second Quarter 2018 Earnings Conference Call. I'm joined today by Steve Weisz, 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, August 2, 2018 and will not be updated as actual events unfold.
Throughout the call, 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 on our website at ir. Mvwc.com. I will now turn the call over to Steve Weis, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you for joining our second quarter earnings call. It's been an active summer for us as we continue to achieve the many milestones required to close on our acquisition of ILG, which we expect to complete later this month. Before I step through our progress as it relates to the transaction let me take a few minutes to provide some background on our performance in the quarter much of which we released last week. Then I'll hand the call over to John to share additional detail about the quarter, after which we will be happy to take your questions.
In the second quarter, company contract sales were $233,000,000, up more than 8% over the second quarter of last year. Adjusted EBITDA was $76,000,000, a decrease of almost $8,000,000 over the second quarter of 2017. This stemmed from expected revenue reportability impacts, which John will speak to in more detail in a moment. In North America, contract sale improved 8%, driven by a 3% improvement in VPG to $3672, and a 5% increase improving 5% over the second quarter of last year. As we mentioned last quarter, we are substantially past the impacts from last year's hurricanes opening our new units on Marco Island and a temporary sales center on St.
Thomas during the first quarter. With that said, is important to keep in mind will continue to impact our ability to generate sales there, and we expect it will deliver less than half the volume generated under normal operations for the full year. Adjusting for these hurricane related impacts, we believe 2nd quarter total company contract sales would have improved 10% over the second quarter of last improved over last year, driven primarily by growth Our pipeline for these package tours remains very strong, up more than 14% over last year. Even more importantly, activated from these programs in the second half of twenty eighteen are up over 19% compared to last year. Given us giving us confidence in our ability to drive the top line growth.
As it relates to our newer sales centers, have opened since 2016, I'm very pleased with how they are performing. While they each have their own pace of sales growth, as a Additionally, we continue to look San Francisco, which we plan to sales were up 19% over the second quarter of last year. I am pleased to report that our sales center in Valley opened in the second quarter and while very early is off to a good start. And our location in Surface Paradise is ramping up well as it begins its 3rd year of sales. As is expected at this stage of our growth as well as
the
remain focused on growing our presence in this region through new destinations. This includes our 2nd location in Valley, which is progressing towards an expected completion early in 2020. These new destinations and potential future destinations will drive top line growth and improve results from increased scale. Now let me from last year's hurricanes behind us and our first sales center in Valley now open. We are pleased with our performance in the first half of the year and are poised to drive even more continue to provide solid incremental contract sales growth and activations in our tour package pipeline in the 3rd fourth quarter of this year continue to grow.
Additionally, we will face an easier comparison to which negatively impacted contract sales by over $20,000,000. When we put all of this together, It highlights in our full our integration planning efforts. The last significant closing scheduled for August 28 for both the ILG and MVW shareholders. Assuming all other remaining conditions are satisfied, we expect together the plans necessary for us to start on day 1 as a newly combined company designed to drive future growth and shareholder value. As you can probably imagine, shifting the closing up by roughly a month from our initial expectations has caused the same amount of effort to be put into a shorter amount of time.
This has not diminished our focus, however, which is to create a transformational change to our businesses to drive shareholder value by combining 2 of the premier vacation ownership and hospitality companies in the world. Upon closing, we will have the rights to market and sell vacation ownership under 7 Upper Upscale and luxury vacation brands with 100 and 10 locations worldwide and 650,000 owners. In addition to this, we will serve almost 2,000,000 exchange members around the world through the premier exchange network of interval international. And last, but by no means least, we will manage over 200 properties across the globe through VRI trading places in our National and Aqua Aston. As a combined company, on a pro form a basis, we expect to generate more than $4,000,000,000 of total revenues and adjusted EBITDA of over $750,000,000, including $75,000,000 in synergies creating a global leader our industry.
We are hard at work on plans to achieve our synergy goals including plans to take advantage of top line growth opportunities which we believe are the most compelling reasons for bringing our 2 companies together. From broader linkage opportunities as well as an ability to maximize tumor generation from our call transfer and encore programs. Driving continued growth in the digital marketing and opportunities that lie ahead for the combined company, which we expect to be a driver of our long term growth. To repeat a comment I made after our announcement last quarter, for all of these reasons, I just laid out and more. We see our further detail on
strong second quarter results, adjusted EBITDA totaled $76,000,000 and reflects year over year growth from our resort management financing and rental businesses. Contract sales grew by 8 collected lower year over year results due As I mentioned on our last earnings call, with the adoption of the new revenue recognition accounting standard this year, we now recognize development revenue when contracts sales are closed, which ends up deferring revenue from when it was previously recognized by roughly 35 days. In 2018 in our 2018 second quarter, while we did benefit from the recognition of revenue deferred from the first quarter, That benefit was more than offset by a higher deferral in the second quarter as contract sales in the last 35 days of second quarter were stronger than at the end of the first quarter, resulting in $3,000,000 of unfavorable revenue reportability. In contrast, in our second quarter last year, we had $7,000,000 of favorable revenue reportability as last year benefited from higher unclosed contracts at the end of dollars in the second quarter, driven by an 8% increase in sales in our North America segment and a 19% increase in our Asia Pacific segment. As Steve mentioned, the 2017 hurricanes continued to have a negative impact on our 2nd quarter performance, adjusting for that estimated impact total company and North America contract sales would have each grown nearly 10%.
Our development quarter was $39,000,000 new reportability in both years, adjusted development margin was $42,000,000 $3,000,000 less than last year, and adjusted development margin percentage was 20% compared to 23% in the prior year. The margin decline in the quarter was driven primarily by a 230 basis point increase in product costs resulting from a higher mix of new inventory being sold. While our development exacted the benefit from a lower product cost, reflecting a higher mix of required inventory being sold, as well as from higher sales and revenue reportability, which allows us to leverage our fixed marketing and sales costs. As a result, we expect total company development margin to be in excess of 20% for the full year. In our financing business Revenues increased $3,000,000 or 10 percent to $36,000,000 in the second quarter of 2018.
Financing revenue net of expenses and consumer financing interest expense increased $2,000,000 or 11 percent. This reflects a $4,000,000 increase in interest income from our growing notes receivable balance partially offset by additional costs from financing incentive programs. Our notes receivable portfolio continues to perform very well. The average FICO score of buyers who financed with us in the quarter was 739, while delinquency rates remained near historic lows and financing propensity remained strong at nearly 63%. During the quarter, we successfully completed a $436,000,000 note securitization at a blended interest rate The transaction generated $423,000,000 of gross proceeds.
As of June 30 $106,000,000 in terms of $5,000,000. We expect to sell the remaining notes and receive the remaining funds of $51,000,000 by the end of September. In our rental business, rental revenues increased 5000000 dollars or 8% to $75,000,000. Rental revenues net of expenses were $12,000,000, a 2% increase from the prior year. These results reflect a 2% increase in rate and a 1% increase in transient keys rented.
This was partially offset by $2,000,000 of higher unsold maintenance fees and a 1% increase in preview room nights as we continue to dedicate more rental inventory for our tour package arrivals. With our growing tour package pipeline this activity will continue to grow for the foreseeable future impacting our rental margins while driving contract sales or 8% and resort management and other services margin improved $4,000,000 or 12% to $37,000,000 in the quarter. These results were driven by higher fees for managing our portfolio resorts and higher internal exchange company activity. G and A costs were $3,000,000 in the quarter reflecting normal inflationary cost increases as well as higher technology spending and higher litigation related expenses. Royalty fees were down portion of our royalty fee resulting from the amendments to our license agreement with Marriott International in the first quarter of 2018 partially offset by a higher $48,000,000.
We also had approximately $40,000,000 of gross vacation ownership's notes receivable eligible for securitization and roughly $248,000,000 in available debt capacity under our $250,000,000 revolving credit facility. Our total net debt outstanding at the end of the $100,000,000 associated with our non recourse securitized notes receivable and $196,000,000 associated with our convertible notes. Now turning to our outlook for 2018. As Steve mentioned, given what we've achieved year to date, in considering an easier year over year comparison in the second half of the year from the 2017 hurricanes. Are reaffirming our full year 2018 guidance for contract sales growth of 7% to 12%.
With respect to adjusted EBITDA based on our full year contract sales growth projections, including double digit growth expected the second half of twenty eighteen development margin expansion that we are expecting in the second half of the year from the turnaround unfavorable revenue reportability, lower cost inventory being sold and from the benefit of marketing and sales cost efficiencies, as well as the realization of the benefits from the amended agreements with Marriott International, we continue to expect that we will generate adjusted EBITDA of between $310,000,000 $325,000,000. Lastly, given lower projected inventory spending well as higher than expected proceeds from $200,000,000 to $230,000,000 for the full year 2018. And as we've done in the past, We will continue to identify further ways to maximize cash flow in 2018 by deferring inventory and CapEx spending when possible. Let me take a moment to update you on the status of We are pleased to say with the exception of the Ritz Carlton Club Resort in St. Thomas which is expected to open in the fourth quarter of 2018.
We also continue to work as well as property damage experienced by both us and our owners associations from the hurricanes. I should note our adjusted EBITDA and adjusted free cash flow guidance do not reflect the receipt of any insurance proceeds for our business interruption losses. We will continue to update you as these efforts progress. As Steve mentioned, we're making great progress towards meeting the conditions to close on the ILG transaction with the key remaining condition to close being the approvals by the shareholders of both MVW and ILG. We've been working on debt financing to fund of BA2 and BB with stable outlooks from Moody's and S and P respectively.
With a targeted closing date of August 31, 2018, associates from both companies continue to work hard to not only ensure day 1 readiness for the new organization but also to complete planning for the longer term integration of the 2 businesses. Lots of work to get done, but in a very exciting time. We started the year with on tour flow and VPG remains strong even with our continued focus on growing first time buyers. As a result, we continue to feel comp that 2018 will be a great year for us. As always, we appreciate your interest in Marriott Vacations Worldwide.
And with that, we will open the
session. Our first question is from Cameron McKnight with Credit Suisse. Please proceed with your question.
Hi, good morning, and thanks very much. A question maybe for John or perhaps Steve, a few quarters ago, you gave commentary on the contribution to sales growth from the new assets able to give us an update in terms of what those newer assets are contributing to contract sales growth?
Yeah. So I assume this is Steve. I assume you're referring to our new our new sales center So on a percentage basis of the 8 points, roughly half of that call it 4 points, is because of the new
that you've been indication in terms of how those linkage agreements are contributing?
I think it's still relatively early on some of the new stuff that we've added. And as you might imagine, as we've been sorting through the integration efforts with ILG, etcetera, we've kind of throttled back a bit on getting out aggressively signing up linkage agreements until such time as this gets closed. But, we're still very encouraged not only about what the potential holds there for us, but also about what in the various markets where we want to add additional tour flow generation from people that are in market at the time. So we're very encouraged by that. We just haven't had much of a chance to do a great deal more it takes a while from the time that you make the initial contact.
We first have to go through Marriott to get their approval to do it. And then we have to work with local hotel ownership to negotiate a presence, get it contracted, etcetera. So it just takes a little while to get them put together.
Understood. Thanks very much. Thank you.
Our next question comes from Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with question.
Good morning, Patrick. Hi, good morning, gentlemen. That $75,000,000 of interval synergies how you feel about that now? Is that going to be beatable?
Well, yes, and we've said all along, as you'll recall that we said it's a minimum of 75. As we've gotten more visibility into it, we feel increasingly positive about not only our ability to make that number, but to exceed that number. As you might imagine, now with kind of 30 days less of runtime between now and getting the closing in place, we're still trying to get more visibility in a shorter amount of time. But we feel very good about it. And I would underscore once again, while cost savings are certainly something that you hope to produce as a result of this acquisition with the real upside for us that we see is on the revenue side.
Is it fair to think that perhaps the revenue side of it could eclipse the the cost savings side? I mean, is that
That would be my expectation. Having said that, we're still kind of working through the various areas in terms of not only what the opportunity is, but how to go after them in sequence to get the biggest bang for the buck.
Okay. And then timeline of when that's going to be up and running?
Well, yes, I think, I may have reported even in the call. A lot of this has to do with Marriott's ability to turn their attention to it. As I think you probably have heard, they have a August 18th date to combine the 2 loyalty programs they're right in the midst of trying to figure out, they're not only figuring out, but they're executing on the system side of things on the loyalty side, then thing they have to do is just try to find a way to combine the 2 reservation platforms. We've been told, and we've known this for some time. That they Marriott is very committed to turning to this, but it will have to fall in sequence behind their priority of getting the reservation system.
So Our expectation is that we'll start to begin to focus on this more probably in the first quarter of next year and then we'll see how long it takes to produce it.
Okay. And then last question, I might have actually asked this last earnings call, but on the interval 20 interval what they laid out in their 2020 projections due to the conversion of those hotels? Do those projections continue to be on track?
Yeah. Obviously, we haven't closed on the transaction yet, Patrick. So, once Once we do, obviously, we'll be updating you on kind of the outlook of how we're thinking about a lot of the interval stuff. So, but today, we're not prepared to comment on that.
Okay, fair enough. Thank you.
Thank you.
Our next question comes from Edward Angle with Macquarie Group. Please proceed with your question.
Into the digital marketing opportunity, have you put any more thought into potentially quantifying that opportunity and in the long run, do you think it could be potentially as big as maybe the merit awards, SBG, loyalty program merger?
Well, let me try to separate the two pieces. Clearly, and let me start with the second one as the 2 loyalty programs have come together and as this merger gets closed, then we'll have the ability to market to not only, the, the Merit rewards members, but also to these SPG members. And we think that obviously, is a very important, generator of potential tours for us and Ergo sales. So we're very encouraged about that. As far as the digital marketing opportunities, let me just remind you what that is.
Today, we have a call transfer program in place, which means when somebody calls one of the marriott's reservation centers and they want to book a hotel room for an almost say whatever. They're given the opportunity to understand about a value vacation opportunity with Marriott Vacations, call that a mini vac And that call gets transferred to us. And if we do our job right, we interest them in booking a tour and hopefully then a sale thereafter. All the digital marketing piece of that on the reservation side is taking that same concept applying it to people that are booking on the digital analog to a Marriott call center call it Marriott dot com. Marriott.com is a very, very important viable retail website.
So the ability to actually get to people there, which we adhere to 4 have not had the ability to do and give them the same kind of opportunity to engage with us about booking a tour is also is really what this is all about. So given obviously the way the world has worked, more and more people are now booking their hotel reservations online versus booking them over the phone. We have every expectation that this will be as good or better than the call transfer program we've been successful with the last couple of years.
And then I guess what makes this opportunity different than maybe just an umbrella marketing strategy, which traditionally hasn't really worked in the timeshare industry?
Well, first of all, you've got loyal Marriott and now cast that umbrella larger because it's not only the traditional Marriott customers through the various Marriott brands, but all the former Starwood brands that are now in this umbrella. So 30 brands of loyal customers that are engaging in commerce with the hotel company. So, and we know that loyal customers have a tendency to have a stronger affinity to accept one of our offers than people that we would go abroad. But we've never been active, so to speak, and kind of a broad net marketing campaigns trying to ferret out people, by doing radio TV print advertising, things of that nature. So we think this just as the call transfer program has been successful for us.
We think this digital version of that will be equally or better in terms of volume.
Great. Thanks. And then just a quick house keeping, when the ILG acquisition closes, are you still expecting, 3 turns of net leverage or with incremental securitizations? Could that be a bit lower?
Well, the three times, when you say net leverage, that's excluding securitization debt. So that'll be the,
the recent cash flows you've gotten though?
The I'm sorry, the what about the recent cash flow?
The cash flows that you've gotten from the securitizations.
Does that answer your question? Yes, those are all fact those are all factored into our outlook, our cash that we knew we'd have generated by closing. To use, in terms of the additional debt we needed to raise. So it's not a meaningful difference on a net leverage basis, we'll probably be south of just of three times, but not much at closing. Obviously, as we've talked about, our goal will be to need to pay that down a little bit, with excess cash flow to get to more of a 2 to 2.5 times which I think gives us more flexibility in the future too for other growth opportunities and giving us more flexibility just longer term with our balance sheet.
Okay. Thanks. And then just one last one. Have you ever given what percent of your tours or your sales come from the call transfer?
No, we've not disclosed that. Thank you. Great, thanks.
Ladies and gentlemen, we've reached the end of the question and answer session. At this time, I'd like to turn the call back to Steve Weisz for closing comments.
Thank you, Rob. Our performance for the first half of the year provided the foundation for a solid 2018. Contract sales are on pace for a strong second half. We are very close to closing on our acquisition of ILG. We have a lot to do in a short time to ensure a successful close at the end of August, but I have tremendous confidence in the teams on both sides to accomplish what needs to get done.
I look forward to what the future will bring and to updating you on future calls as a combined company. And finally, to everyone on the call and your families, enjoy next vacation.
This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.