Greetings, and welcome to Marriott Vacations Worldwide Second Quarter 20 17 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 of Investor Relations. Jeff, you may begin.
Thank you, Rob, and welcome to the Marriott Vacations Worldwide Second Quarter 2017 Earnings Conference Call. I am joined today by Steve Yeeo and John Geller, Executive Vice President and CFO. 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 3, 2017.
And will not be updated 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 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 2nd quarter earnings call. This morning, I'll walk through our 2017 second quarter results And I'm proud to report that it is our 3rd quarter in a row, delivering mid teens contract sales growth. During the call, I'll provide an update on the drivers of this outstanding performance as well as my thoughts on how the second quarter has improved our outlook for the full year. I'll then hand the call over to John to provide a more detailed view of our results.
In the second quarter company contract sales grew almost $44,000,000 or over 26% to nearly $210,000,000. And adjusted EBITDA was $78,000,000, up 14000000 dollars or 21% from the second quarter of 2016. As I week of operating results. So our year over year growth will not be comparable as reported. Adjusting our prior year contract sales for the estimated impact of the additional week, contract sales were up over 18% versus the second quarter of 2016.
This growth was increased 22% in the quarter, including a 5.8% increase in VPG to $3579. I am pleased with this performance contract sales to these specifically our call transfer and encore programs, but also our ability to 2 or more of our rental guests while they are staying at one of our resorts. And much like the first quarter, our closing efficiency continued to improve even with higher tour flow. Increasing forty basis points in I'm also very pleased with how well Our same store sales distributions drove 12 percentage points of our growth in North America. This was the result of Our call transfer program is currently operating in all of the Marriott Branded U.
S. Call centers and the next phase of its growth began last quarter partner arrangements. Our hotel linkage agreements are expanding rapidly as well. This includes not only our new destinations, but also the expanding Marriott portfolio. Of Starwood and we anticipate even more in the near future.
And as always, we will maintain our focus on even more first time buyers as we continue to evaluate Staying in our North America segment, adjusting for the impact of the calendar shift, new destinations drove roughly 10 percentage points of our contract sales growth in the quarter. All five of our new sales centers are open and I'm very pleased with the continued ramp up of these locations. Opening in the last week of December of 2016, South Beach, our newest sales center, is in just its 2nd quarter of sales and doing very well in the busy summer season. Waikaloa, which opened in the second half of last year, is still in its first full year of sales and is continuing to build momentum with a solid start to New York and Washington, DC, which are all through their 1st year of sales, are continuing their initial success as they continue to ramp up throughout this year and into the next. Remember we anticipate that a new sales center in North America should take roughly 3 years That said, with our performance to date, highlighted by a continued strong VPG, we are confident that these new sales centers will provide a solid foundation for contract sales growth well into the future.
Turning to the build out of our new locations. With the delivery of And while not a new destination, our capital efficient expansion on Marco Island continues to move forward on schedule. With the first 36 newly constructed units delivered and open for occupancy and the remaining 112 units expected to be delivered. Throughout the remainder of the calendar change this year, contract sales grew roughly 6%. While our surface paradise property continues to ramp up slightly slower than our initial expectations, we remain excited about its longer term growth as well as the planned addition of our new property in Valley later this year.
Now let me take just a moment to provide my thoughts on our full year guidance for 2017. Our first two quarters have been outstanding with contract sales growth in the first half of the year of 17% and cumulative adjusted EBITDA of $140,000,000 comparison to prior year does Despite that tougher comparison, we have solid growth expectations from the continued ramp up of our new sales locations. This, combined with a growing pipeline of tour activations, gives us confidence that full year contract sales growth should be between 12% 16%, about 2 basis points higher than the midpoint of our previous expectation. Likewise, we would anticipate higher adjusted EBITDA growth with full year adjusted EBITDA of between $282,000,000 $292,000,000. With that, I'll turn the call over to John to provide a more detailed look at our first quarter results.
John?
Thank you Steve, and good morning, everyone. I too am very pleased with our strong 2nd quarter results. Adjusted EBITDA totaled $77,900,000. $13,700,000 or 21 percent higher than the second quarter of 2016. And contract sales after adjusting for the estimated impact the financial reporting calendar change were up over 18% to nearly $210,000,000.
As expected, all lines of business contributed to development margin grew 7 point grew 17.9 percent or $5,300,000 our rental business improved by $4,300,000 or 43.7 percent and financing margin grew 12.5 percent or $2,500,000. For the second quarter, company adjusted development margin increased $5,100,000 or 15.5 percent to $38,200,000 and adjusted development margin percentage totaled 20.4% in the quarter. As a reminder, for the full year, we continue to expect company development margin percentage of 21% or higher In our North America segment, adjusted development margin increased $5,800,000 or 17.2 percent to $39,900,000 in the 2nd quarter and our adjusted development margin percentage was 23.4%. $5,800,000 of adjusted development margin increase was driven primarily by $13,100,000 from higher contract sales volumes partially offset by 3,600,000 related to the ramp up of of higher sales reserve activity resulting solely from higher finance sales volumes compared to the prior year quarter In our financing business, revenues were up $3,900,000 in the second quarter of 2017. These results reflect $5,500,000 from higher interest income from our growing notes receivable balance partially offset by additional costs from our financing incentive program.
Our notes receivable portfolio continues to perform very well as we have seen our financing propensity rise nearly 9 percentage points to 6 3% in the second quarter with average FICO scores of our buyers at 743 and delinquency rates remaining near historic lows. Financing revenues net of related expenses were up 12 percent to $23,400,000 from the second quarter of last year. In our rental business, excluding the impact of the Surface Paradise Hotel we sold last year, rental revenues increased $11,100,000 to $84,200,000. Rental revenues net of expenses were $14,000,000, up $4,300,000 or 43.7% from the prior year. These results reflect a 17% increase in transient keys rented driven in part by the inclusion of 2 additional summer weeks due to the change in our reporting calendar.
This was partially offset by Rental occupancy in the quarter was approximately 71%, roughly 6 percentage points higher than the prior year. Results also reflect a nearly is typically less than rental revenue preview room nights to support our increasing tours, we expect this activity to be a headwind to rental margins for the remainder of the year. And while our rental business has performed well to date, when you layer in the higher preview activity and the negative impact of seasonality in the second half of the year, we do expect rental revenues net of expenses for the full year to be below the prior year. In our resort management and other services business, excluding the impact of the Surfer's Paradise Hotel, results improved $5,300,000 or 17.9 percent to $35,200,000 in the quarter. These results reflected higher fees from managing our portfolio resorts higher ancillary results and higher settlement fees.
G and A costs were up $4,200,000 in the quarter, of which roughly $2,000,000 resulted from the additional week of costs from the financial reporting calendar change. The remainder of the increase was driven by normal inflationary cost increases and higher variable compensation related expenses. Royalty fees were up $2,300,000 from the prior year second quarter. This was driven primarily by higher contract sales volumes as well as the additional week from the financial reporting calendar change. Moving to our balance sheet also had approximately $240,000,000 of gross vacation ownership notes receivable eligible for securitization dollars and available quarter was roughly $790,000,000, including $671,000,000 associated with our securitized notes receivable a $64,000,000 non interest bearing note we issued related to our capital efficient acquisition of vacation ownership units at our Waikaloa property, $48,000,000 outstanding under our revolving corporate credit facility, roughly $7,000,000 related to capital 33,000 shares for $3,900,000 during the second quarter of 2017.
And I'm happy to report that our Board of Directors has approved a increase to our share repurchase authorization of a million shares, bringing our total remaining authorization to approximately 2,000,000 shares. Now let me take just a moment on our outlook for the year. As Steve mentioned, we are raising our 2017 full year guidance for contract sales growth to 12% to 16% and adjusted EBITDA to $282,000,000 to $292,000,000. In addition, along with those changes, we expect adjusted fully diluted earnings per share to increase to a range of $5.31 to $5.52 per share. Turning to cash flow, we are also raising our expectations for adjusted free cash flow by $30,000,000 to $190,000,000
to $210,000,000 for
2017. This increase is driven not only by the higher expected adjusted EBITDA received associated with Hurricane Matthew. Our outlook includes roughly $9,000,000 of net proceeds related to our business interruption claim. As it relates to the damage at our properties we are pleased that the work to repair the damage caused by Matthew has been substantially completed and we continue to work with the same insurance provider on a property damage claim. However, the majority if not all of any monies received for that claim will be for the benefit with our new sales VPG remains solid halfway through the year and our tour activations are well ahead of the same point in 2016.
All of which gives us confidence that 2017 will be a tremendous with that, we will open up the call
you.
Our first question comes from Chris Agnew with MKM Partners. Please proceed with your question.
Good morning, Chris. Good morning. Thanks for the color. I'm just interested to hear about the You talked about the affiliation with 6 new hotels from Marriott's expanded portfolio. I'm assuming that brands like Weston.
So I'm just curious, in general, how that program works And then also, how does it relate to, I think one of your competitors is exclusive rights to a couple of their brands. And final related question, have you had discussions with Marriott International around plans for the Marriott rewards program going forward? And how do we think about the risks or opportunities as they pertain to you? Sorry, that packed a lot in there. Thanks.
It's okay. It would be a run on sentence, but anyway, we have had a, we have had linkage arrangements with Marriott Hotels virtually throughout the existence of our company. And, as Marriott has expanded its portfolio of properties through the acquisition of Starwood, we have taken advantage of that expansion by signing 6 new agreements. They're both Westin Sheraton Branded. There are hotels in Waikiki, in Waikaloa, as well as in Hilton Head.
And, the way the linkage program works is that hotel guests that are staying in those properties. Ideally, we have an opportunity to interact with them during the course of their stay. Offer them an opportunity to come here about our product, take a tour. And, if everything works well, we make a sale. That's generally how linkage programs work.
And as I mentioned on my remarks, we continue to look for further expansion, not only within the West and Sheridan portfolios, but obviously, as Marriott continues to add hotels. Relative to your question about how that impacts, another licensee in the business. I believe the exclusivity that you're referring to that ILG would have, for instance, on the Sheraton and Weston brands, pertains to the development of new timeshare properties, with those 2 brands. So, that's, I think, the differentiation that you might, you might be looking for. I'm sorry.
I lost last part of your question. Oh, Mary rewards. Yes, we've recently begun some additional discussions with Marriott, they've been in a very preliminary stages trying to understand what their objectives are in terms of trying to, move the loyalty platforms forward. As I say, it's very early in the discussion, so we really don't have much to report, except to say that we'd be going to dialogue.
Excellent. Thank you. And then one more question. I think you I'm not sure on this call, but in the last call, you talked about the new sales centers, you'd got VPG up to the similar sort of level as new resorts. So as we think about you ramping going forward, does that really then reflect what your expectations for tour flow continuing to ramp?
Or do you think there's more room for VPG to to run at your new
have the, the VPG of the new sales center number and right in front of me, I believe it's very close to what we run historically. In our existing sales centers. But we will continue to drive more tour volume into those sales centers going forward as they continue to ramp up in terms of getting to more stabilized base at the, call it, that 3rd year timeline. So, we're, again, the guidance that we provided and increasing our contract sales outlook for the remainder of this year, reflects some of what we see there. And we're, again, very encouraged by what we see.
Our next question comes from David Katz with Telsey Group. Please proceed with your question.
Hi, good morning. Good morning. Well done. Nice quarter. Thank you.
I wanted to follow-up first half of the prior question or I'm sorry, whatever place it was in the prior question about, including some Sherdens And Westens in your offering. I'd love to get just a little more specificity around Well, let me come straight at it. How does that not create some confusion, from a branding perspective either for you or with the customer, in terms of what you're offering?
Well, let me see if and clarify for you. We're not including Sheraton And Westin's in our vacation ownership offering. What the space is we are sourcing tours out of hotels, just as we source them out of Marriott Hotels, etcetera. We're sourcing tours out Sheraton Hotels And Western Hotels. I mean, Sheraton Hotels And Western Hotels are now part of their Marriott portfolio.
Just as Marriott Hotels are and, and, Ritz Carlton Hotels are, etcetera. So all we're doing is, we're selectively in markets where we have vacation ownership sales centers. We are, availing ourselves to the opportunity to source some tours so that hopefully people can become excited about, buying into our product.
And those people may or may not be Marriott rewards loyalty members or they may or may not be SPG members? That's correct. I see.
So these are hotel guests.
Understood. And so, ILG's rights are to the development of VOI in those brands, but not necessarily rights to members of those loyalty programs?
Well, you'd have to speak with ILG about their specific license agreement. I'll speak to ours, which is we have exclusive rights to the Marriott reward, members and any to any successor program to merit rewards. From a marketing perspective, that means, in terms of being able to make solicitations and marketing approaches to people, not necessarily aligned with their hotel stay. In addition to that, We also talk to Marriott Hotel guests as they stay in our Marriott Hotels where we have a linkage agreements. In a similar fashion, we're talking to guests that are staying in select share than in Westin Hotels, but we're not certainly marketing to the SPG marketing database to generate tours.
Is that helpful?
And I hope you don't mind me asking one more detail about it. If if it were turned around the other way, and they were to be marketing in, you know, a Marriott Resort in some point, whether or not those people are Marriott rewards members or otherwise would that be in your view, violating what you think are your contractual rights?
Well, David be clear with our contractual rights, we have exclusivity for marketing in the key full service Marriott Hotels and Ritz Carlton tell. So by contractual arrangement, we're the only timeshare company that can have linkage or marketing into those 4 or 5 key brands.
So by definition, the inverse scenario would be right, a violation of, of, right? That would not be in court whether you have?
Yes. Any other timeshare brand tried to marry out our contract with them. That's one of we've talked about all our different exclusivity that we have. This is another example of exclusivity we have in our licensing agreement.
Right. But your understanding is that it's not, that their exclusivity arrangement is different from yours.
You'd have to ask them what their exclusivity arrangement is. What we're telling you is we are able to market contractually into those Sheraton and West hotels.
Got it. Okay. I think we've explored this fully. Thank you very much. I'll give someone else a chance and come back
Thank you.
Our next question comes from Brad Delinca with SunTrust. Please proceed with your question.
Hey, good morning.
Good morning.
On for Patrick Scholes here. Trying to get at this from a different angle and apologize for continuing to beat this horse. But you guys bought back a few shares this quarter, but somewhat less than usual. I'm recalling you guys bought $90,000,000 back in 2Q 'sixteen. Were you blacked out for any reason?
Was it just that you're going to take up the guide? Is it fair to say you haven't repurchased anything subsequent to the quarter? Thank you.
Yeah, Brad, it's John. We do appreciate your persistence on that question. But we obviously don't talk about reasons for us being in and out of the market or if we're blacked out or not blacked out. So I'm not going to comment on that, we did and you'll see in our 10 Q, we did get back into the market in June, and bought a few shares back and as we talked about, our board has increased our authorization here going forward. But once again, we're not going to comment specifically when we're in or out of the market.
Understood. Appreciate it. Have to try. That's it for me. Thanks guys.
Yes. Thank you.
Ladies and gentlemen, we've reached the end of the Q And A you. We do have one more question. This question comes from Tyler Batory with Janney Capital Market. Please proceed with your question.
Good morning.
Good morning. Thanks for taking my question. So maybe just the last one on the linkage here between Sheridan and Weston, Is that something that was driving contract sales during the quarter or is it maybe a little bit too early for that to really have an impact on your business?
I would characterize it as very early on. The Hilton Head Westin opportunity is something that started up in call it, mid quarter. Some of these others have literally just been activated here in the last 60 days kind of thing. So that and I don't see it being particularly meaningful in terms of driving our, our increase in contract sales.
Okay, great. And then just on the same store sales growth, can you maybe talk a little bit more about what's driving that? Kind of how that's trended versus your expectations?
Yes. I mean, as you might imagine, given our initial guidance at the beginning the year of 9% to 15%. We're very pleased with what we've seen with that 17% growth in contract sales for the through the 1st 2 quarters. It's really, many of the same things that we've talked about before. It's, as we talked about, there is the addition of new sales centers, and also We had the success of our, of our new marketing programs, specifically our Encore and our call transfer programs.
They have continued to performed very well. And we're very pleased with what we see there, not only in terms of generating tour flow, but also in terms of So, you put those things together and that's what gives you the performance that we see.
Okay, great. That's all for me. Thank you.
Thank you. A question and answer session. At this point, I'd like to turn the call back to Steve Weiss for closing comments.
Thanks, Rob. We are off to our best first half performance is becoming a public company with contract sales growth even higher than our record first quarter and earnings continuing on a solid pace as well. We believe that the foundation is set not just for a great second half of twenty seventeen, but for several years to come. Thanks for joining us today. 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 have a wonderful day.