Greetings, and welcome to Marriott Vacations Worldwide 4th Quarter 2017 Earnings Conference Call. At this time As a reminder, this conference is being recorded. 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 4th 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 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 Weis, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you for joining our 4th 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 fourth quarter of 2017. After that, I'll walk through 2018 results as well as the future benefits that will accrue to us over time. I'll then hand the call over 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 tax reform. In the 4th quarter, company contract sales were $201,000,000 and adjusted EBITDA was $76,000,000. $66,000,000. As we have mentioned throughout the year, the calendar change we implemented at the beginning of 2017 has impacted comparability 2016. Adjusting for this calendar change to provide a more meaningful comparison, contract sales improved 5%.
Further adjusting for the negative impacts from the hurricanes Irma and Maria, primarily at our resorts in Marco Island, Florida and St. Thomas, contract sales in the on Markle Island well into the first quarter of 2018. In St. 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 $3518, 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 $80,000,000. This performance underscores our strategy for top line sales growth through new destinations and marketing channels as well as the strength 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 Additionally, our new sales and even with 10% more packages than we the quarter and is expected to contract to purchase 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 Now 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 2 world class loyalty programs, Marriott rewards and Starwood preferred guests into one program as soon as possible. Over the last few months, we have worked with Marriott towards mutually beneficial changes to our arrangements and 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 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 time share 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 110,000,000 loyalty members. It will also permit Marriott's other timeshare licensee access to the combined loyalty program and reservation platform. May ask why will we agree to this limited exception? I'm very pleased to lay out the many reasons starting with some immediate which will flow through to and we expect units.
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 costs well beyond this timeframe. In total, we estimate that the combined value of all these benefits could be up to $18,000,000 to $20,000,000 on an annualized basis. We also expect additional benefits from 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 at 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. Further, as we look longer term, we have also added an enhanced other right 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 La Merdian, Tribute Portfolio W Hotels And the Luxury Collection Brands. Our exclusivity also extends to the Sheraton West 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 3 full service brands.
Now 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 time share partner for any call 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 for or digital marketing arrangements with Marriott. And 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 $18,000,000 to $20,000,000 on an annualized basis. And even more impactful will be our future sales generated through enhanced exclusivity in our linkage call transfer and digital marketing channels. While we attribution of $100,000,000 to $150,000,000 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 Markle Island, which we expect result in more than 2 points of headwinds to our annual contract sales growth for the full year. We have just recently resumed sales in Saint Thomas albeit at a smaller on-site sales office and we expect to open the new units on Marco Island very soon. So while we do not 1st quarter contract sales growth. Having said that, we expect solid full year contract sales growth of 7% to 12% over 2017, driven by continued ramp up of our newest call centers, including our new sales location in Valley in Q2 as well as growth 17 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 $803,000,000 11% above the prior year and adjusted EBITDA totaled $280,000,000 $19,000,000 or 7 percent over 2016, both in line with guidance provided on our last earnings call. For the fourth quarter, contract sales were $201,000,000, sales in our key North America segment and adjusted EBITDA totaled $66,000,000 in the quarter. Our development business generated $35,000,000 in the 4th quarter driven by strong contract sales performance resulting from the continued ramp up namely our call transfer, encore and hotel linkage programs.
Our financing business continues to perform well contributing $23,000,000 in the 4th quarter. Higher full year contract sales along with a strong financing propensity drove an increasing notes receivable balance. And our notes receivable portfolio continues to perform very well. Average FICO scores of buyers who financed with us in the quarter were 744 and delinquency rates continue to remain near historic lows. Our resort management and other services business generated $35,000,000 in the quarter.
Results continue to reflect strong performance from management fees, exchange company activity and ancillary results. And our rental business contributed $3,000,000 in the 4th quarter. Our rental results continued to be impact the
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We also continue to 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 $1,000,000 benefit As you tax assets and liabilities using the lower corporate income tax rate. This change generated a benefit of roughly $65,000,000 in fourth quarter. In addition, income taxes for the year also benefited from a net positive change and 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 $409,000,000. We also had approximately $150,000,000 of gross vacation ownership notes receivable eligible for securitization under our $250,000,000 warehouse credit facility. Further, we had roughly $245,000,000 in available debt capacity under our $250,000,000 revolving credit facility. Our total net debt outstanding consisting primarily of $835,000,000 associated with our non recourse securitized notes receivable $193,000,000 associated with our convertible notes and $61,000,000 related to a non interest bearing note payable in connection with our $3,000,000, delivering nearly $30,000,000 above the high end of our previous guidance range, roughly half of the up side came from our ability to deferred 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 $126,000,000 to our shareholders through the repurchase of 768,000 shares for $88,000,000 $38,000,000 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 benefit we expect to receive from these enhancements and 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 enhanced credit card agreements.
We estimate the benefit from these amendments to total between $18,000,201,000,000 on an annualized basis. Given the timing of when $11,000,000 $12,000,000. Over the longer term, we are very excited about the additional benefit we expect to receive significantly expanded rights as a result of the amendments. Many of the benefits however, will require time to 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. So 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 time share 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 and 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 of the reduction in the federal corporate income tax $47,000,000 benefit to adjusted free cash flow. While we expect the benefit of these new legislation to continue into future years as well, it's important to note that roughly half of the free cash flow benefit in 20 18 relates to our ability to accelerate the use of certain AMT credits And the 3rd significant item impacting our projections for 2018 relates to the new revenue recognition accounting standard that we adopted effective January 1, 2018.
In connection with implementing this new standard, we will see changes that will have an impact 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 recognize revenue for the sale of vacation ownership products when the contract was out While this has no impact of roughly 30 to 40 days. 2nd, 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 election This change also has will result in a negative $4,000,000 to $5,000,000 noncash impact to our adjusted EBITDA. When we begin reporting under this new accounting standard in 2018, we will restate our 2 1006 and 2017 financial information with the cumulative one time impact being recorded to retained earnings as of the beginning of 20 16 to help demonstrate the impact of this adoption or 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. Now let's move ahead to our outlook for 2018.
Include the items I just discussed. Steve mentioned that we are targeting contract sales growth of between 7% 12% despite the more than 2 point negative impact to our 2018 contract sales from the 2017 hurricanes with With that contract sales growth, we expect 2018 adjusted EBITDA of between $310,000,000 $325,000,000, This is despite roughly $7,000,000 of negative adjusted EBITDA impact to 2018 from the ongoing impact to grow our standard on both years, our adjusted EBITDA guidance would reflect a growth of nearly 15% year over year. Lastly, we continue to focus we expect to deliver adjusted free cash 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 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 And with that, we will open the call up for Q And A.
Questions. Our first question is from Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with your question.
Good morning, Patrick.
Questions here. First, so from a big picture, certainly you're getting some cash benefits from the changes and also some exclusive rights. Wonder what you may be giving up and it seems to me and tell me if I'm correct or incorrect here, But you give up or you allow interval to also market to the combined loyalty programs. Is that a fair bottom line assumption?
Yes, it is.
Okay. Good. I just wanted to be clear on that. And then Is that when you noted in the press release limited exception, is that the main limited exception, being interval marketing to the combined loyalty programs?
Yes, it's, 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 Okay.
Yes. And just to highlight Patrick on the loyalty program, it'll be a relative call to 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% to 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, not withstanding, 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 said and done.
Okay. And 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. But 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, while with Marriott.com as we work on new programs there, that's really you got to look at it very whole 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, So from a bigger umbrella perspective, it's a significant amount of sales generation when you look at it from that from that perspective.
Our next question is from Edward Angle with Macquarie. Please proceed with your question.
Thanks for taking my question. Just a quick one. Expected cash tax rate for 2018 2019?
Cash tax rate, I would we'll have to get back to you. I just don't have that number right in front of me, but We'll continue to benefit obviously from our installment methods that we've been using historically. But we can get you that number. It'll be obviously less than our effective rate.
Okay. Thank you. And then if I think about the sales centers, which opened in 2016, in terms of ramping those, I guess, what, 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, 3 years get a sales center to be fully stabilized. We're about 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.
But on balance, we're very pleased with where we see it. And I say, we're, like I said, we're about call it halfway to maybe almost 2 thirds of the way through.
Hey, Edward, just to get back on the effective cash rate, call it roughly 24 percent after 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 or general business credits. But because of the change in the legislation, we're able to take advantage of most of those here in 2018. So if you normalize for that, it's more than that probably 23%, 24%.
Great. Thank you. And then lastly, with I guess both you and the other franchisee with access to the combined loyalty program, are there any guardrails in place maybe limit your ability to mine as effectively as you have? No.
Not at all. Obviously, Marriott, have to make sure that there is appropriate access. We certainly do not envision under the terms of our agreement have any less access that we had to marry rewards members. And 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
Ladies and gentlemen, we've reached the end of the question and answer session. I'd like to turn the call back to Steve Weiss 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 continue 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 true 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 everything we have talked about today and I look forward to reporting on our success in 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.