Greetings, and welcome to Marriott Vacations Worldwide First Quarter 2018 Earnings Conference Call. At this As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Jeff Hansen, Vice President, Investor Relations. Thank you.
You may begin.
Thank you, Rob. Welcome to the Marriott Vacations Worldwide first 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, May 3, 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 Investor Relations page on our website at dotmvwc.com. I 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 first quarter earnings call. Earlier this week, we announced that we have agreed to acquire ILG, a leading provider of premier vacation experiences with over 40 properties and more than 250,000 owners in its Vistana signature experiences and Hyatt vacation ownership portfolios. This is in addition to their world class exchange networks that comprise nearly 2,000,000 members in over 3200 Resorts worldwide. We are excited about this transaction and are turning our attention to integration planning in advance of the closing, which we are targeting for the end of the third quarter this year.
We'll offer some more comments on this transaction shortly, but first I'll walk through our performance in the first quarter and our expectations for the full year. John will then provide a more detailed look at our performance, including continued color on the recent revenue recognition changes, which went into effect at the beginning of recognition changes, which provides company contract sales were $204,000,000, up 2% over the first quarter of last year and adjusted EBITDA was $63,000,000 up 17% over 2017. In North America, contract sales were up just over 2% as expected, and VPG in the quarter was one of our best as a public company improving to $3728. Additionally, Tours to first time buyers continued to grow, improving almost 5% over the first quarter of last year. As it relates to our contract sales performance, there were a couple of headwinds that we had anticipated in the quarter which were impacting our growth early in the year.
First, in St. Thomas, our Vacation Club property remained closed until mid February due to the continued impact from the hurricanes in 2007 team. And while the resort opened in hotel, which had previously housed our sales center, is not expected to reopen until 2020. The lack of hotel linkage tours and the smaller on-site sales center will continue to impact our ability to generate sales, delivering less than half of and generated under normal operations. Additionally, at the end of the quarter, we opened 116 new units on Markle Island adding incremental tour generation by more than doubling several months of delays.
We estimate that these combined opening delays impacted our first quarter contract sales growth by more than 3 percentage points. Lastly, as it relates to first quarter headwinds, it's important to note that with a change to our reporting calendar last year, The first quarter of 2018 had 2 less days, equal to roughly 2 percentage points of negative impact. Excluding the impact of all of these headwinds, With that said, let me walk through a few items that will impact the cadence of sales growth as we move through the year starting with the impact of the 2017 hurricanes. Impacted in the first quarter of 2018 are now open. And while St.
Thomas is ramping back up without the linkage channel from the adjacent hotel, we expect to had on our operations reach much farther than these two properties as it forced the closure of several sales centers ranging from the Caribbean throughout Florida and up affected our contract sales performance in the second half of twenty seventeen by more than $20,000,000. So as we lap this impact, the overall comparison to Tour flow from our encore and call transfer programs grew 8% over the same time last year. Even more importantly, at the end of the first quarter, Our package pipeline from these tours is up 13% year over year and activated tours with an anticipated 2018 arrival date are up over 12%. This is a very positive indicator of our ability to generate contract sales growth from these important channels as we move throughout the year. With respect to hotel linkage agreements, we remain focused on adding new arrangements arrangements with Marriott and Legacy Starwood branded hotels.
To that end, I'm happy to report that we've reached signed a linkage agreement at the 12 100 Room Sheridan Hotel in San Diego and expect to have several more signed in other locations in the coming months. Fueling our ability to drive 16. Sales volume from of these distributions growth will continue as we move through the year. Staying with our newest distributions, let me take a moment to talk about destinations we plan to have open end sales in the near term. In our Asia Pacific segment, we are looking forward to opening our Valley sales center later in the second quarter, providing incremental sales growth.
This new property combined with new tour generation from marketing channels across the Asia Pacific region should provide additional growth in the second half of the year. In North America, in the Fisherman's Wharf District of San Francisco in the early part of 2019. As always, we continue look to add new
for full
of our sales strategy. And that we have new sales centers coming online soon, which combined with a strong pipeline of tours already on the books for the remainder of the year, and a second to 12%. I'd like to take just a moment to reflect on our ILG announcement. As I said, we are extremely excited about this transaction, which will provide us with significantly enhanced marketing potential and opportunities to drive sales growth and shareholder value creation. We appreciate the positive response As we discussed on our conference call on Monday, when we combine with ILG, we will have 7 upper upscale and luxury brands, with over 100 vacation ownership properties around the world.
Together, we will have access to 100,000,000 members in the Marriott rewards Starwood preferred guest and Ritz Carlton rewards loyalty programs for our 6 Marriott Vacation Ownership brands. And access to almost ownership business. We have shared our expectations that we will achieve a minimum of $75,000,000 in annual cost savings within the 1st 2 years. We view this as as we believe we will be able to find significant operational efficiencies and revenue opportunities through our integration efforts. Additionally, as we've mentioned, the transaction will be accretive to shareholders in the 1st full year following the closing.
To be clear, while we have not provided any estimate for the referenced revenue opportunities, we feel very strongly that they are substantial and in fact will be will prove to be one of the longer term benefits of this transaction. We see tremendous potential from the combination of the Marriott Vacation Club Brands with Vistana's signature experiences, not only from the additional linkage opportunities this will provide, but also from our ability to maximize tour generation from our call growth potential of the digital transfer opportunity we will begin soon with Marriott. The additional marketing opportunities of our combined company creates even more ability is strategically and financially compelling for many reasons. In summary, we are excited about what we can achieve with IL G and we see this combination as a clear win for shareholders, owners and our associates. Now let me hand the call over to John to walk through further detail on the revenue recognition changes and our first quarter results.
John?
Thank you Steve, and good morning, everyone. I am very pleased with which is 9000000 dollars or 17% higher than the first quarter of 2017. As I mentioned on our last earnings call, we adopted the new revenue recognition accounting standard at the beginning of 2018. With the adoption of stand the impact to the prior year, we have included additional schedules in our earnings release to reconcile restated information for each quarter in 2017 to our previously reported financial results. One of the major changes from adopting this standard is the timing of when revenue from the sale of vacation ownership products gets recognized.
Previously, we recognized this revenue when the contract was out of its statutory rescission period and we had received a minimum ten 10% down payment. However, with the new guidance, we now defer revenue recognition until the contract is actually closed We estimate that this change defers revenue previously recognized in the last 30 to 40 days of the quarter to the following quarter. Therefore, when we have higher contract sales in the last 30 to 40 days of a quarter that in a previous quarter, our results will be impacted by unfavorable revenue reportability. And this is exactly what we experienced in the first quarter of 2018 with our adjusted EBITDA being negatively impacted roughly $8,000,000 from the deferral of revenue. Contract sales from the fourth quarter of 2017 that were recognized as revenue in this year's first quarter included sales between Thanksgiving Christmas, a slower than normal sales period due to the season.
However, the revenue being deferred out of the first quarter includes the spring break Easter seasons which generate much this revenue reportability, adjusted EBITDA in the first quarter of 2018 would have been roughly $71,000,000. In our development business, contract sales were up 2% to nearly $204,000,000 in the first quarter, driven by a 2% increase in contract sales As Steve mentioned, the 2017 hurricanes continue to have a negative impact on our first quarter performance. Adjusting for the estimated impact as well as for the 2017 first quarter having 2 more days of sales due to our finance reporting calendar change last year, total company and North America contract sales would have grown by more than 6% and nearly 7% respectively. Our development margin in the first quarter was $22,000,000, flat to the prior year. Adjusting year and adjusted development margin percentage was 16% compared to 18% in the prior year.
The margin decline in the quarter resulted primarily from higher marketing and sales costs driven by our increased investment in tour packages the cost of grown our activated tour pipeline with 2018 arrivals by more than 12% affecting our development margin today, while driving future contract sales growth. With of 20% for the full to $35,000,000 in the first 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 from our growing notes receivable balance partially off set by additional costs from our 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 7.40, while delinquency rates remained near historic lows financing propensity remains strong at nearly 62%.
In our rental business, rental revenues increased $7,000,000 or 10 percent to $74,000,000. Rental revenues net of expenses were $18,000,000, up $4,000,000 or 31% from the prior year. These results reflect a 3% increase in transient rate and a 2% increase in transient keys rented. Partially offsetting these favorable results was a 10% increase in preview room nights as we continue to dedicate more rental inventory for tour package arrivals. With our growing tour package pipeline, this activity will continue to grow for the foreseeable future impacting rental margins while driving contract sales growth.
In our resort management and other services business, results improved $2,000,000 or 8% to $32,000,000 in the quarter. These results were driven by higher fees from managing our portfolio results resorts as well as higher exchange company activity and ancillary results. G and A costs were up $2,000,000 in the quarter reflecting higher litigation related quarter of 2018, driven partially by a favorable mix of inventory sold as well as from a reduction in the fixed portion of the royalty fee resulting from the amendments to our As you may recall, we estimated the impact of the amended agreements with Marriott International to be a for 2018, coming from lower royalty fees, reduced Marriott reward costs, and increased co marketing funds associated with Marriott International's credit card arrangements, with less than $3,000,000 being recognized in the 1st quarter The majority of the benefit will flow through our financial cash equivalents totaled $324,000,000. We also had approximately $267,000,000 of gross vacation ownership notes receivable eligible for securitization and roughly $244,000,000 in available debt capacity under our $250,000,000 revolving credit facility. Our total debt outstanding at the end of the associated with our non recourse securitized notes receivable $194,000,000 associated with our convertible notes and $61,000,000 related to a non interest bearing note payable in connection with our inventory acquisition in Waikaloa.
Now turning back to our outlook for 2018. As Steve mentioned, we began the year with continued headwinds from last year's hurricanes, However, our affected sites have reopened and are starting to ramp back up. Our newest sales centers continue to drive sales growth and our Bali sales is opening soon. Taking these items into consideration as well as our rapidly growing tour pipeline, our expanding hotel linkage agreements and an easier year over year comparison in the second half of the year, we 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 and the development margin expansion that we are expecting through the year and the realization of the remaining benefits of between $310,000,000 $325,000,000.
Lastly, we expect to deliver 185 $215,000,000 of adjusted free cash flow. As we've done in the past, we will continue to identify ways to maximize cash flow generation in 2018 by deferring We started the year with low and our VPG has remained strong even with our continuing focus on growing first time buyer tours. As a result, we feel confident 2018 will be a great year for us. As always, we appreciate your interest in Marriott Vacations Worldwide And with that, we will open up the call for Q
you.
Our first question is from Brian Dobson with Nomura. Please proceed with your question.
So you outlined a few of the opportunities for revenue synergies. As you're thinking about those, which ones do you think you might tackle first offering the biggest opportunity? And what kind of timetable do you expect in terms of reviewing ILG and assessing best practices?
Thanks very much for the question. First of all, as you might imagine, through due diligence, we were able to get through, kind of the top level review and we have some ideas along the way. I'll share some of those with you. As far as specific timing, we're still a little early on in that. But as you might imagine, we'll get to that as quickly as we possibly can post closing.
So here's a couple of obvious things. Obviously, linkage opportunities, which today we have an exclusivity on the vacation ownership space. As soon as the businesses are combined, that exclusivity will now include everything under the Mastana Signature variances area, which really gives us exclusive marketing rights in the 15 of the Marriott lodging brands. If you think about call transfer once again where we have an exclusive, we will certainly add the Westin and Vacation locations from the BSE portfolio into the call transfer program. And then the other thing that we're probably as as excited, if not more excited about the rather than call transfer is the whole digital idea.
Keep in mind what that is. This is essentially taking the digital analog to call transfer where people were calling into a reservation center to either make or change a reservation where we eventually see if we can, speak with them about scheduling a tour. Which you now do it in the digital space where, as you well know, the Marriott website is one of the top ten web sites in the world as it exists today before you combine it with the Starwood platform, etcetera. And so we think as more and more people transact with Marriott in a digital space that we'll get the benefit of that coming to us in terms of the effective without a different word, the effectiveness of digital call transfer versus physical call transfer. So we see those things.
I mean, there's some other things that we see kind of right on the top of the line. We think we can actually have some influence to grow financing propensity between the businesses. We've had some great success in our portfolio by virtue of some of the things that we've done later. We think there are some ways in which we can continue to grow revenues that way. Those are just some examples.
And obviously, we're going to continue to work hard on trying to quantify as much of this as we can between now and the time of closing, which we hope to be at the call the end of September. But that's that's the approach we're going to take.
Our next question is from Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with your question.
Good morning, Patrick.
All right. A couple of questions here. I'm wondering if you can talk a little bit on international demand transit you're seeing of late. Certainly, we've been hearing this earning season from the hotel owners and operators that they're noticing a pickup in inbound international. Are you seeing anything similar?
Nothing that I would point to with any significance, our the reality is when our resort portfolio and we run close to 90% occupancy across the system, If anything, what we're going to see, if there's additional demand there, it gives us a little more pricing power, but I can't call out to you and certainly we can follow-up with you further, if there's anything that we can see further, but nothing has jumped off the page at us as being a and point of difference.
Okay. Thank you. Moving on, there's been a maybe we're a bit of chatter out there about what it makes sense for RCI and then the interval exchange network to combine. And maybe perhaps dating myself here, but I recall quite a few years ago that CUC and Sendan had to spin those spin out II due to antitrust issues. Do you think antitrust issues would be an issue today given the changes in that that part of the industry in the last 15 to 20 years?
I certainly don't have a lot of purview as to what how the might think about that. Let's just say that at this point in time, we have no plans to spin off the interval in National Business or combine it. But, I guess all things are possible.
Okay. Okay. Fair enough. Then, lastly, going back to revenue opportunities with the acquisition. One thing I think about is you folks have grown your inventory repurchase program considerably.
And it's a little bit of an unknown what's going on with interval with them, I'm wondering how your repurchase program compares to intervals? And We think ours is
a little bit more robust than what we see in the the ILG space. And we think the volumes that we put through the our repurchase program is a little higher than what we see in the allergy side. There may be opportunities there. And obviously one of the benefits of that is it allows people that have been very happy owners, an exit path half that we think is appropriate, plus it allows us to recycle some inventory at a very reasonable inventory cost.
Yes. I mean, to be fair, Patrick, we've talked about this before. The points product that we have really enables that to be very effective in reselling it because we put it into the points product and sell it. And Historically, they've sold more of a weak space product. They've gone to the points, which actually will help facilitate that, but they to Steve's point, I don't sure they've done a lot of that.
And as we've talked about, because with the weak space, when you repurchase those, the you don't have certainty to get that into the system and resell it. So folks that sell weak space product have a much harder time, efficiently recycle selling that, that weak space product.
Okay. Thank you. And then a last question for now. A large part of the interval ILG story was all the inventory for sale coming up in the next couple of years, certainly they had a massive amount. With this acquisition, and that large amount of inventory, does that change how you think about your or the legacy Mary authentications spend on inventory the next couple of years?
Yes. One of the nice benefits that we get, which is never captured in anybody's EBITDA multiple is ILGs made significant investments in their inventory pipeline and have a I believe it's 700, 800 of completed units, down they have obviously down in Cabo, their NeneA project. So that's great for us because that's a lot of good inventory. We don't need to go out. I think over time Patrick, we would look to do a very similar model like we do today, which is we're looking to add new flags, add new sales distributions and time the spending of our inventory to replace what we're selling off the shelf each year.
And so that strategy long term In the near term, we're going to have the opportunity because there's a lot of great locations they've built to look at near term opportunity on our inventory spend. So obviously, we'll be updating you on that as our plans to get a little bit clear and we determine what we're doing.
Hey, Patrick, this is Steve. I want to make sure I didn't give anybody, including the wrong impression on interval in our national. We have no plans to sell or spin off that business. I mean, to be honest, you took me a little bit surprised because when you mentioned that there was chatter out there about RCI and II coming together, I'll be honest, that's the absolute first time I've ever heard that. So I want to make sure that everybody understands that we put great value on the interval business and we think it's a very attractive business with great cash flow profile and a relatively low CapEx profile to it.
And so we're we have no intentions to move in that direction.
Okay. Thank you, Steve. I think you've made that crystal clear and I appreciate it.
Thank you.
That's all
for me. Thank you.
Thanks, Patrick.
Our next question is from Edward Angle with Macquarie Group. Please proceed with your question.
Hi, good morning. Thank you. Good morning. Thank you for taking my question. On the tour flow side, you maybe highlight how many basis points of growth the hurricanes in the calendar comparison may be shaved off?
Yeah, I think from a, I don't have those specifics. We can clearly get it. When you talk about the hurricane impact, first quarter from a sales perspective, it's roughly three points of our growth. And as we talked about in Steve's comments, We've got the St. Thomas 1, albeit a much smaller sales center without the linkage from the hotel, the the used to be a Marriott next door that's being rebuilt.
It's ramping back up, but it's not going to get obviously back to a normalized sales pace this year. Obviously, we need the hotel and the linkage there. So that'll abate obviously as we move through the year. And then the in total, the other piece we talked about was Marco Island. So once again, with all the new units we added down there, which just opened that obviously drives our in house tour flow and will drive tours in Marco, which as we go through the year, year over year, we'll get, call it, a point or 2 of growth there.
So I don't have those are more of the sales numbers, not the tours, but you could probably back into that with the average VPG.
Okay. And then if I kind of if I adjust the tour flow growth that's still kind of below where you've been kind of tracking over the past several quarters. Is there anything to keep in mind that's maybe limited or slow that growth?
No. Once again, I think there's some go back to the seasonal stuff from a package tour. As Steve mentioned, we were up but not as much as we're projecting for the balance of the year. In the first quarter, we have much higher owner occupancy at our resort. So we have less available to house tour packages.
So you'll have some seasonality in that, but as we mentioned, we've seen those package tours on the books that have actually gone and booked their reservations. And obviously we'll see more of those get booked here over the course of the year. Kind of in the year for the year bookings. We're already at, call it, 12% plus, and we would expect those to continue to grow. So tour flow will ramp as you go through the year.
So there can always be some little bit of seasonal like on the tour packages, that could impact you from quarter to quarter.
Okay. That's super helpful. And then if I think about your prior comments about the $100,000,000 to $150,000,000 incremental contract sales from the merit rewards and SBG combination. And then if I actually think about ILG's 2020 plans for 8 $600,000,000 to $800,000,000 contract sales. With the combination, is there any opportunity to maybe come at the high end of those kind of goals and maybe exceed them?
Yeah, I mean, obviously that'll be our plan. As Steve mentioned, you got all the call transfer that will were going to get now. As we talked about on our year end call, we won't start call transfer into the legacy Starwood reservation. Centers until after Marriott gets that stuff combined, which we're hoping is kind of our early part of next year. So then we'll start generating those tours.
Obviously, that'll help. But the big upside in terms of the numbers we gave you at year end, I think is on
the digital side, as Steve talked about, and you look at the Marriott dot com site, which obviously hasn't been combined with the Starwood Hotel site yet, but on a stand alone, that's a top 10 commercial website in terms of bookings And now you're going to put those 2 together and our ability to offer packages, etcetera. We really think that longer term, Once again, that'll really help to drive not only our tour flow, but there'll be enough there that we can we can also use that in the legacy Vistana piece. So just one other reminder, as you start loading, as you start taking advantage of digital call for lack of a better word or the combination of the call transfer with the combined program. It takes a while once you actually book the package for that package to come through the house. So there'll be a little bit of a lag in there just so that from a modeling and expectation standpoint, that even though we have high hopes that all this will be ready to go call it in the first quarter of next year.
We'll begin to get volume coming through it, but we won't start seeing people come through the house for tours until later in 2019 into 2020.
Okay. That's helpful. And then I guess lastly, kind of going back to, your inventory spend plans relative to now having IOG in the system. Does that offer an opportunity to maybe reduce legacy, merit vacations inventory spend for at least the near
I'm sorry, tour spend?
No, inventory spend.
Just inventory spend. Yeah, like I said, that we're going to be working on that in terms of our longer term integration plans and how we're going to position products which will obviously drive our inventory needs. But what I'd say on a combined basis, as I mentioned, the ILG and the inventory they've built out, we're in a good spot there and maybe potentially the ability to leverage some of that inventory as we think about our Marriott because we under our combined for the Marriott license brands those are all that's all on the table, if you will, in terms of how we think about that inventory. So, we definitely need to do that work here. And obviously we'll be back with more updates as we progress through and talk about all the great opportunities that this combination we think brings for us.
Great. That's all I have today and congrats on the quarter.
Thank you.
Turn the call
are performing very well and our businesses are producing great results. With all of this as a backdrop, I'm even more excited about what lies ahead. As we target closing on the acquisition of ILG by the end of September, 2018 should be a transformational year for Marriott Vacations Worldwide and I'm looking forward to what we can achieve. Thank you for your time today and I look forward to updating you on our progress on these many fronts in the coming quarter. 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