Greetings, welcome to Marriott Vacations Worldwide fourth quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. 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 fourth quarter 2017 earnings conference call. I am 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, February 27, 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 ir.mvwc.com. I will now turn the call over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, thank you for joining our fourth quarter earnings call. As I'm sure you've seen in our press release we issued earlier this morning, we have a lot to discuss today, starting with our performance for the full year and the fourth quarter of 2017. After that, I'll walk through the highlights of recent amendments to some of our agreements with Marriott International and how they will positively affect our 2018 results, as well as the future benefits that will accrue to us over time. I'll then hand the call over to John to provide a more detailed review of our 2017 results and our outlook for 2018. This will include a deeper dive into the new revenue recognition standard that will begin affecting our results in 2018 and the recently enacted tax reform.
In the fourth quarter, company contract sales were $201 million, and adjusted EBITDA was $76 million. Excuse me, $66 million. As we have mentioned throughout the year, the calendar change we implemented at the beginning of 2017 has impacted comparability to the prior year. This impact was most pronounced in our fourth quarter, when it resulted in 20 fewer days than the fourth quarter of 2016. Adjusting for this calendar change to provide a more meaningful comparison, contract sales improved 5%. Further adjusting for the negative impacts from Hurricanes Irma and Maria, primarily at our resorts in Marco Island, Florida and Saint Thomas, contract sales in the quarter would have improved 9%. The impact of Hurricane Irma delayed the expected delivery of 116 units at our resort on Marco Island well into the first quarter of 2018.
In Saint Thomas, our Marriott Vacation Club property just recently reopened, along with a smaller temporary on-site sales center. Even with these impacts throughout the fourth quarter, VPG remained strong at $3,518, down slightly to the prior year, and sales to first-time buyers, adjusted for the calendar change, continued to grow double digits, improving 13% over the fourth quarter of 2016. For the full year, contract sales improved almost 11% to $803 million, and adjusted EBITDA was $280 million. This performance underscores our strategy for top-line sales growth through new destinations and marketing channels, as well as the strength of our business model to deliver strong bottom-line results. VPG for the full year was $3,565, a 3% increase over 2016. A solid result, especially when combined with a 12% increase in tour flow, including over 15% growth in tours to first-time buyers.
We are very pleased with the success of our call transfer, encore, and linkage programs as these programs continue to grow tours and drive first-time buyers. Additionally, our new sales centers are ramping up well, driving over half of our tour growth in 2017. Even with the increase in tours, our future tour package pipeline continued to build, ending the year with nearly 10% more packages than we had at the end of 2016. As I have mentioned many times before, we are always looking for new destinations with strong on-site sales potential to drive future growth. Our new property in Bali opened for occupancy during the fourth quarter and is expected to begin sales in the second quarter. I'm very pleased to announce that in late January, we entered into a contract to purchase a property in San Francisco with a third-party asset-light partner.
Located in the heart of the iconic Fisherman's Wharf area, this 233-unit property will be converted to our brand standards by our asset-light partner over the next year. We expect to rebrand this property as a Marriott Vacation Club Pulse sometime in early 2019, and to begin sales soon thereafter. We are very excited to have these new destinations in our portfolio and to see how they can contribute to our future sales growth. Let me pivot to the amendments to several of our key agreements with Marriott International that we announced in our press release this morning. It's no secret that Marriott wants to combine their two world-class loyalty programs, Marriott Rewards and Starwood Preferred Guest, into one program as soon as possible.
Over the last few months, we have worked with Marriott towards mutually beneficial changes to our arrangements. I could not be more pleased with the end result. I feel strongly that these changes provide tremendous value for our shareholders. With that said, let me highlight some of the material changes to our agreements with Marriott. As I've mentioned many times, our license agreement provides exclusive rights for us to access Marriott Rewards and Marriott's reservation platforms. It also provides exclusivity to the Marriott, JW Marriott, Renaissance, Courtyard, and The Ritz-Carlton brands for timeshare marketing throughout the remaining 73-year term of our license agreement, as well as multiple extension periods. We have agreed to a limited exception to our exclusive rights, which will allow Marriott to launch a powerful single loyalty program and reservation platform. This will allow us the right to market to Marriott's 110 million loyalty members.
It will also permit Marriott's other timeshare licensee access to the combined loyalty program and reservation platform. You may ask why would we agree to this limited exception? I'm very pleased to lay out the many reasons, starting with some immediate benefits which will flow through to the bottom line in 2018. First, our base royalty fee will be reduced by $3 million annually. We expect to receive an additional $15 million to $17 million from incremental annual co-marketing funds associated with Marriott's new credit card agreements. Additionally, we will receive a reduction in the cost of Marriott Rewards points derived from the savings Marriott has told us it is passing on to its owners. Marriott has assured us that we will see these cost savings in the next two years, and both we and Marriott expect we will benefit from these lower costs well beyond this timeframe.
In total, we estimate that the combined value of all these benefits could be up to $18 million to $20 million on an annualized basis. We also expect additional benefits from the new combined loyalty program, which we should begin to realize over the next several years. We have been part of Marriott Rewards for decades and have benefited from this program as it has grown and matured. We also recognize that we stand to benefit greatly from the new combined loyalty program as it welcomes the millions of additional members from the SPG program. We greatly value these new members, as they will soon be experiencing the combined Marriott-branded program. These are very loyal travelers from a legacy Starwood platform that consists primarily of full-service hotels, and we are excited to show them what our industry-leading points-based system of resorts can offer in vacation ownership.
As we look longer term, we have also added and enhanced other rights within the Marriott International umbrella, primarily by solidifying our exclusive rights to linkage opportunities, call transfer, and digital marketing. As it relates to additional linkage opportunities, we already have exclusive rights to market timeshare products in certain Marriott-branded hotels. By virtue of these new agreements, we have broadened our linkage marketing exclusivity to include the Autograph Collection, Gaylord, and Delta Hotels, and within the legacy Starwood full-service brands, our exclusivity now extends to Le Méridien, Tribute Portfolio, W Hotels, and The Luxury Collection brands. Our exclusivity also extends to the Sheraton, Westin, and St. Regis branded hotels. However, we have agreed to a limited exception that will allow Marriott's other timeshare licensee the ability to market at properties within these three full-service brands. Let me focus on enhancements related to Marriott's call transfer program.
As you know, we launched call transfer with Marriott back in 2015 and have seen tremendous sales growth from this program over the past few years. Going forward, we have extended the term of our agreement and have expanded our exclusivity as we will become the only timeshare partner for any call transfer activity within the legacy Starwood call centers. In addition, we will have exclusive rights to be the timeshare partner for digital marketing programs that we and Marriott will begin testing. It's important to note that all these exclusivity provisions are specific to us and extend for the life of our license agreement, whether or not we maintain active call transfer or digital marketing arrangements with Marriott. Lastly, we are working with Marriott's credit card partners to design specific timeshare-related offers within their newly enhanced branded credit card programs.
All of this is obviously a very favorable outcome from productive negotiations with Marriott. With the benefit of this negotiation and of the Marriott-Starwood combination, we expect the immediate contributions to our bottom line will total $18 million to $20 million on an annualized basis. Even more impactful will be our ability to market to Marriott's 110 million loyalty members, as well as future sales generated through enhanced exclusivity in our linkage, call transfer, and digital marketing channels. While we expect these new sales to ramp up over the next three to four years, we could see annual contract sales contribution of $100 million to $150 million from these programs by 2021. As it relates to contract sales, let me provide my thoughts on our 2018 guidance.
As I mentioned earlier, the impacts from Hurricanes Irma and Maria have continued into 2018, primarily at St. Thomas and on Marco Island, which we expect will result in more than two points of headwinds to our annual contract sales growth for the full year. We have just recently resumed sales in St. Thomas, albeit at a smaller on-site sales office, and we expect to open the new units on Marco Island very soon. While we do not provide quarterly guidance, you can assume that the majority of these headwinds should be felt earlier in the year, affecting our first quarter contract sales growth.
Having said that, we expect solid full-year contract sales growth of 7%-12% over 2017, driven by continued ramp-up of our newest call centers, including our new sales location in Bali in Q2, as well as growth from our call transfer, encore, and linkage programs. Let me hand the call over to John to walk through the further detail on our 2017 performance, the revenue recognition and tax reform items I mentioned earlier, and how all of these items affect our 2018 adjusted EBITDA, net income, and free cash flow guidance. John?
Thanks, Steve, and good morning, everyone. I too am very pleased with how we performed in 2017. For the full year, contract sales totaled $803 million, 11% above the prior year, adjusted EBITDA totaled $280 million, $19 million or 7% over 2016, both in line with guidance provided on our last earnings call. For the fourth quarter, contract sales were $201 million, driven primarily by $181 million of sales in our key North America segment, adjusted EBITDA totaled $66 million in the quarter. Our development business generated $35 million in the fourth quarter, driven by strong contract sales performance resulting from the continued ramp-up of our newest sales distributions, as well as the continued growth from our marketing programs, namely our Call Transfer, Encore, and Hotel Linkage programs. Our financing business continues to perform well, contributing $23 million in the fourth quarter.
Higher full-year contract sales, along with the strong financing propensity, drove an increasing notes receivable balance. Our notes receivable portfolio continues to perform very well. Average FICO scores of buyers who financed with us in the quarter were 744. Delinquency rates continue to remain near historic lows. Our resort management and other services business generated $35 million in the quarter. Results continue to reflect strong performance from management fees, exchange company activity, and ancillary results. Our rental business contributed $3 million in the fourth quarter. Our rental results continued to be impacted by the use of more of our rental inventory to support Call Transfer and Encore packages, which are generally at lower rates than transient rentals.
We also continue to have additional rental inventory from owners banking their points, as well as taking advantage of other exchange options like the Explorer Collection, highlighting just some of the strengths of our flexible points program. Going forward, we expect to continue to use a greater proportion of our rental inventory to fulfill preview packages, resulting in lower rental revenues while driving our contract sales growth and development margin. Lastly, income taxes for the full year 2017 were actually a $1 million benefit. As you might expect, this was driven by the Tax Cuts and Jobs Act of 2017, which required us to revalue our deferred tax assets and liabilities using the lower corporate income tax rate. This change generated a benefit of roughly $65 million in the fourth quarter.
In addition, income taxes for the year also benefited from a net positive change in foreign valuation allowances, as well as from certain foreign income tax rate changes. Moving to our balance sheet. At the end of the quarter, cash and cash equivalents totaled $409 million. We also had approximately $150 million of gross vacation ownership notes receivable eligible for securitization under our $250 million warehouse credit facility. We had roughly $245 million in available debt capacity under our $250 million revolving credit facility. Our total net debt outstanding at the end of the year was roughly $1.1 billion, consisting primarily of $835 million associated with our non-recourse securitized notes receivable, $193 million associated with our convertible notes, and $61 million related to a non-interest-bearing note payable in connection with our inventory acquisition in Waikoloa.
In 2017, we generated adjusted free cash flow of $253 million, delivering nearly $30 million above the high end of our previous guidance range. Roughly half of the upside came from our ability to defer development spending into 2018, and the other half from favorable working capital activity. Lastly, as it relates to our return of capital in 2017, we returned $126 million to our shareholders through the repurchase of 768,000 shares for $88 million and $38 million in dividends paid. Before I turn to our outlook for 2018, I want to highlight a few items that are included in our 2018 guidance. First, let me start with the amendments to some of our agreements with Marriott International.
Steve highlighted the tremendous benefits we expect to receive from these enhancements, I share his excitement about the opportunities this will provide to us, both immediately and to a greater extent over the longer term. Beginning in 2018, we will benefit directly from the reduced royalty fee, lower cost of Marriott Rewards points from Marriott, where that Marriott is providing to its owners, and from incremental co-marketing funds being provided to us from Marriott's enhanced credit card agreements. We estimate the benefit from these amendments to total between $18 and $20 million on an annualized basis. Given the timing of when the amendments were finalized in 2018, the positive impact included in our 2018 outlook is between $11 and $12 million.
Over the longer term, we are very excited about the additional benefits we expect to receive from marketing to Marriott's 110 million loyalty members and from our exclusive and significantly expanded rights as a result of the amendments. Many of the benefits, however, will require time for ramp-up before they are fully realized. These enhanced benefits also include an expansion of our call transfer marketing program to the Legacy Starwood reservation call centers and solidifies us as Marriott's only timeshare partner for call transfer access throughout the life of our license agreement. As we have mentioned in the past, tours from this program can take time to arrive, sometimes 12 to 18 months. Further, the timing of the rollout is dependent on Marriott integrating its reservation platforms, which isn't expected until later this year or early next year.
While we expect material long-term contract sales growth from this expanded program, the benefit will take several years to fully ramp up. Regarding our linkage marketing program, the amendments provide us with the benefit of being the exclusive timeshare partner to market our products into 14 full-service Marriott International and former Starwood Hotel brands. We are currently in the process of evaluating new linkage opportunities, we expect to begin adding additional linkage locations later this year. Finally is our exclusive right to be Marriott's timeshare partner for certain digital marketing programs, including marriott.com. We will soon begin working with Marriott on developing new digital programs, which we expect to start testing in 2019. However, similar to call transfer, these programs will take several years to fully ramp up. Another important item impacting our 2018 outlook is the benefit of the Tax Cuts and Jobs Act of 2017.
While the 2017 benefit we received from revaluing our deferred tax assets and liabilities was one time in nature, we do expect significant financial benefits in the future as well. As a result of this new legislation, including the impact of the reduction in the federal corporate income tax rate, our 2018 outlook includes a $29 million-$32 million benefit to adjusted net income and a $47 million-$51 million benefit to adjusted free cash flow. While we expect the benefit of this new legislation to continue into future years as well, it's important to note that roughly half of the free cash flow benefit in 2018 relates to our ability to accelerate the use of certain AMT credits. The third significant item impacting our projections for 2018 relates to the new revenue recognition accounting standard that we adopted effective January 1st, 2018.
In connection with implementing this new standard, we will see changes that will have an impact to our bottom line, as well as reclassification of certain revenues and related expenses to other financial statement lines. For today, I will just highlight the items that will have the most significant impact to our bottom line. First, prior to adopting this standard, we generally recognized revenue for the sale of vacation ownership products when the contract was out of its statutory rescission period. However, we will now defer revenue recognition until the contract is actually closed. While this has no impact on cash flow, we estimate this change in timing will result in a lag in revenue recognition of roughly 30-40 days.
Second, we have revised our methodology used for calculating the asset or liability associated with an owner's ability to bank or borrow their vacation ownership points, eliminating the need to record an asset or liability related to these elections. This change also has no impact on cash flow. For 2018, we estimate that these changes will result in a negative $4 million-$5 million non-cash impact to our adjusted EBITDA. When we begin reporting under this new accounting standard in 2018, we will restate our 2016 and 2017 financial information with the cumulative one-time impact being recorded to retained earnings as of the beginning of 2016. To help demonstrate the impact of the adoption of this standard on our historical results, we have included additional schedules for your reference with our earnings release issued this morning. Let's move ahead to our outlook for 2018.
That include the items I just discussed. Steve mentioned that we are targeting contract sales growth of between 7%-12%, despite the more than two-point negative impact to our 2018 contract sales from the 2017 hurricanes. With that contract sales growth, we expect 2018 adjusted EBITDA of between $310 million-$325 million. This is despite roughly $7 million of negative adjusted EBITDA impact to 2018 from the ongoing impact from last year's hurricanes and about $5 million of higher technology project costs to grow our customer-facing digital platforms. Despite these headwinds, if you exclude the non-cash impact of implementing the new revenue recognition standard on both years, our adjusted EBITDA guidance would reflect a growth of nearly 15% year-over-year. Lastly, we continue to focus on maximizing cash flow.
With our top-line contract sales growth of 7%-12%, we expect to deliver adjusted free cash flow for 2018 of $185 million-$215 million. As we've done in the past, we will continue to identify ways to enhance cash flow generation for 2018. We finished the year strong with our newest destinations continuing to grow and our marketing programs continuing to drive strong tour flow. We are very excited about our significantly enhanced benefits from the amendments to our agreements with Marriott International, which we expect to provide strong growth opportunities for years to come. As always, we appreciate your interest in Marriott Vacations Worldwide. With that, we will open the call up for Q&A. Operator?
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with your question.
Good morning, Patrick.
Questions here. First, from a big picture, certainly you're getting some cash benefits from the changes and also some exclusive rights. I wonder what you may be giving up, and it seems to me, and tell me if I'm correct or incorrect here, but you allow Interval to also market to the combined loyalty programs. Is that a fair bottom-line assumption?
Yes, it is.
Okay, good. Just wanted to be clear on that. Then, when you noted in the press release a limited exception, is that the main limited exception, the Interval marketing to the combined loyalty programs?
Yes. Just to be clear, it's access to the loyalty programs and access to the reservation system, the combined system in both cases. That is the extent of the limited exception that we're making.
Okay.
Yes. Just to highlight, Patrick, on the loyalty program, it'll be a relative, call it a jump ball, if you will, for direct marketing into that program with their other licensee. However, if you look at the makeup of the legacy systems, the Starwood platform has a lot more full-service hotels, roughly 70%-80% of their nights versus Marriott, which I think is more like 30% or 40%. When you look at the members and the demographic, we feel really good that net-net, notwithstanding we're giving up some marketing into the old legacy that we like our odds here on net-net being a winner in terms of getting additional sales on that direct marketing when all's said and done.
Okay. How much of your tour flow or sales do come through that direct marketing?
We don't disclose that number specifically. I think the thing you got to remember is there's actually the ability to use the database, the member list to do marketing. More broadly, what we've always said is it's really the loyalty that the program provides and our ability to touch those loyalty members when they're staying at hotels from a linkage perspective. When they call to make a reservation, whether that's on the phone or in the future with marriott.com as we work on new programs there, you got to look at it very holistically. Yes, there's some direct benefit for being able to make calls to people, but it's really getting people when they're on vacation, like we've always said. From a bigger umbrella perspective, it's a significant amount of sales generation when you look at it from that perspective.
Okay. That does it for the moment. Thank you very much.
Great.
Thanks, Patrick. Our next question is from Edward Engel with Macquarie. Please proceed with your question.
Good morning.
Hi. Good morning. Thanks for taking my question. Just a quick one. Expected cash tax rate for 2018 and 2019?
Cash tax rate. We'll have to get back to you. I just don't have that number right in front of me. We'll continue to benefit, obviously, from our installment methods that we've been using historically. We can get you that number. It'll be obviously less than our effective rate.
Okay, thank you. If I think about the sales centers which opened in 2016, in terms of ramping those, I guess, which inning do you think we are in terms of those ramping?
Well, in general, I think we've said all along it takes call it three years to get a sales center to be fully stabilized. On average, we're about halfway through that cycle, maybe a little bit more. We are very pleased with what we have seen thus far. As you might imagine, some are a little less than we thought, some are meaningfully higher than we thought. On balance, we're very pleased with where we see it. Like I said, we're about call it halfway to maybe almost two-thirds of the way through.
Okay, great. Thank you.
Hey, Edward, just to get back on the effective cash rate. Call it roughly 24%. We'll have a lower cash rate here in 2018 because as I mentioned in my remarks, we do have some AMT tax credits which I think under the new legislation are general business credits. Because of the change in the legislation, we're able to take advantage of most of those here in 2018. If you normalize for that, it's more in that probably 23%-24%.
Great. Thank you. Then lastly, with, I guess, both you and the other franchisee with access to the combined loyalty program, are there any guardrails in place that could maybe limit your ability to mine as effectively as you have?
No, not at all. Obviously, Marriott will have to make sure that there is appropriate access. We certainly do not envision under the terms of our agreement to have any less access than we had to Marriott Rewards members. As John mentioned, clearly now with having the access to the former Starwood Preferred Guest members, once these programs are consolidated towards the end of this year, we actually think that's a particular amount of upside for us going forward given the demographic of that customer and how it lines up with how we typically target people.
Terrific. Thank you so much.
Thank you.
As a reminder, if you'd like to ask a question, please press *1 on your telephone keypad. One moment please while we poll for questions. Ladies and gentlemen, we've reached the end of the question and answer session. I'd like to turn the call back to Steve Weisz for closing comments.
Thank you, Rob. 2017 was a tremendous year of performance for us as we saw double-digit growth in tour flow and contract sales while we continued to build momentum in sales to first-time buyers. Equally as important, we have worked closely with Marriott International to support their planned merger of their two world-class loyalty programs while laying the groundwork for our future growth for many years to come. I'm excited about the opportunities that lie ahead from everything we have talked about today, and I look forward to reporting on our success in future calls. 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, we thank you for your participation.