Greetings, and welcome to Marriott Vacations Worldwide 4th Quarter 2016 Earnings Conference Call. At this time 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, Rob, and welcome everyone to the Marriott Vacations Worldwide 4th quarter 2016 earnings conference call. I'm joined today by Steve Weis, President and CEO 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, February 23, 2017 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, and thank you for joining our 4th quarter earnings call. This morning, I'll spend a few moments on our 2016 results, focusing on our outstanding 4th quarter performance highlighted by our contract sales and adjusted EBITDA growth. I'll then walk through how we expect In the fourth quarter, company contract sales were $234,300,000, up almost 15% and adjusted EBITDA was $95,000,000, an increase of almost since becoming a public company. These results would have been even more impressive if not for the impact from Hurricane Matthew which hit the East Coast in October of last year.
For us, the majority of the impact was felt primarily in two locations, Hilton Head Island and Myrtle Beach. Both of which were shut down for about 3 weeks. Adjusting for the tours missed at these locations, our tour flow would have been up over 7% in the quarter. We estimate these lost tours represent $8,000,000 in additional contract sales volume equating to roughly $3,600,000 of adjusted EBITDA. After considering this impact, contract sales growth in In North America, contract sales grew 14.9%, driven by a 12.7% improvement in VPG to $3563 and a 3.4 percent improvement in tour flow.
VPG growth benefited from a higher price per contract and a 1.3. Improvement in closing efficiency as well as a slightly easier comparison to the prior year. These improvements highlight the success of our growth strategy primarily related to new sales locations and new marketing channels. As it relates to our new destinations, we have opened 5 new sales centers in North America since last spring. Most recently Waikaloa in September and our South Beach location in late December.
Most impactful though were our locations which opened earlier in the year in New York Washington, DC and San Diego, which have contributed significantly to the top line in just a short amount of time. Our growth in the quarter was also driven by Both owner and first time buyer tour flow improved over last year as we are continuing to enhance our existing marketing channels and promotions. In the quarter sales to first time buyers were up over 7% compared to the fourth quarter of 2015. This was not only driven by the success of these programs, but also our day to day efforts to increase tours from our transient renters as well as through our hotel linkage programs aimed at first time buyers. Shifting to Asia Pacific segment, contract sales improved by over 50% in fourth quarter.
This was primarily due to the continued ramp up of our new location in surface Paradise Australia, which opened in the spring of 2016. We are excited about the growth that this destination brings and are equally excited for our new location in Valley we are actively looking for even more opportunities to add to our Asia Pacific portfolio to broaden our footprint in this important region and to continue to drive future sales growth. On that note, let me shift our thoughts to our thoughts for 2017 and how the strong performance from the fourth quarter is expected to continue throughout this year. We expect to generate 9% to 15% contract sales growth this year, as our top line growth strategy continues to accelerate. Our new sales centers are expected to continue to In addition, our 2nd largest sales center in New York opened in late January and is off to a great start.
Our sales center in South Beach opened at the end of December and in Asia Pacific, we are on track to open our Valley sales location later this year. As we said over the last year, a new sales center takes roughly 2 to 3 years to realize its full potential. And as a reminder, all of our new locations are in their 1st year. Once they ramp up to their stabilized annual sales potential, we expect these seven locations will drive upwards of $200,000,000 of annual contract sales volume. For that reason, we expect 2017 to be a strong growth year as these new sites progress toward that goal.
Growth in our same store environment remains a solid contributor as well. As we continue to focus on ramping up our new marketing channels with solid expectations for continued improvement in both our call transfer and universal Encore program. We already have 25% more tours from these programs on the books for this year than we had the beginning of 2016. And remember, throughout the year, we will continue to optimize VPG as we drive this tour growth. Before I hand things over to John, I'd like to take a step back and reflect on how we got here.
Back in May of 2015, we held an Analyst Day in New York. To lay out our find just the right resort destination with strong on-site sales potential. And likewise, new tour programs can take time to grow and optimize. Today, less than 2 years later, I'm very proud of what we've accomplished. Transformational year for us as we began to realize the growth strategy we laid out at that Analyst Day.
6 new destinations are open and growing rapidly. And our tour pipeline is as strong as ever, thanks to our new marketing program providing incremental growth to our solid base of tour generation. But just as important, we've been able to drive this growth with a capital efficient business model, which has allowed us to return over $200,000,000 of capital to our shareholders in the year. And we expect to generate another $160,000,000 to $180,000,000 of adjusted free cash flow in 2017. I couldn't be more With that, I'll turn the call over to John to provide a more detailed look at our fourth quarter results and outlook for the year.
John?
Thank you, Steve, and good morning, everyone. I couldn't be more pleased adjusted EBITDA totaled $95,000,000, $21,500,000 higher than the fourth quarter of 2015. As a reminder, we don't adjust our results for we were impacted by $12,000,000 of unfavorable revenue reportability. While we did see $6,400,000 of reportability come back in the fourth quarter, It was a couple of $1,000,000 below our expectations. However, we do expect to get the benefit in future quarters.
Our fourth quarter contract sales and adjusted EBITDA reflect the best quarterly performance since becoming a public company just over 5 years ago. And I'm happy to say that all parts of the business contributed to our improvement in adjusted EBITDA. Development margin grew $9,800,000 financing margin was higher by $1,700,000. Our resort management business grew by $7,300,000 And lastly, our results benefited from $4,100,000 of lower G and A costs resulting from cost saving initiatives well as lower variable compensation related expenses. Company adjusted development margin increased $9,300,000 to $47,400,000 and adjusted development margin percentage grew 2.2 points to 22.3 percent.
In our North America segment, adjusted development percent, an increase of 2.7 points from the fourth quarter of 2015. This increase reflected a 390 basis point improvement from product costs, primarily from the continued success of our inventory repurchase program partially offset by 120 basis point increase in marketing and sales costs resulting primarily from continued ramp up costs associated with our new sales distributions. In our financing business revenues net of related expenses were $24,300,000 up $1,700,000 or almost 8% from the fourth quarter of last year. These results reflect the impact of our growing notes receivable balance resulting from both higher contract sales volumes as well as increased financing propensity levels. In the fourth quarter, financing propensity increased five percentage points to 62% and for the full year, financing propensity increased 10 point to roughly 60%.
Our notes receivable portfolio also continues to perform well as delinquency rates are currently near historic lows and the average FICO scores of our In our rental business, excluding the impact of the surfer's Paradise hotels sold in 2016, total company rental revenues were 80 $2,900,000 and rental revenues net of expenses were $13,800,000, up slightly from the prior year. Rental occupancy increased 2.3 percentage points, offset by a 1.8% decline in transient rental rate and the impact of an almost 20% increase in room nights utilized to fulfill our call transfer and universal encore tour arrivals. In addition, the fourth quarter of 2015 benefited from roughly $2,000,000 related to the final cleanup payment of the pre spin Marriott rewards liability. In our resort management and other services business, excluding the impact of the surfer paradise hotels sold in 2016, results improved $7,300,000 or 21 percent to $42,300,000 in the quarter. These results reflected higher fees from managing our portfolio of resorts and improved exchange company activity from the addition of points programs.
In 2016, we generated adjusted free cash flow of $159,000,000 right at the top end of our guidance range highlighting of capital to shareholders throughout the year, including payment of quarterly dividends totaling $34,200,000 and the repurchase of nearly 3,000,000 shares of our common stock for $177,800,000 or an average price per share of $63 $9. Moving to our balance sheet. At the end of the quarter, cash and cash equivalents totaled $147,100,000. We also had approximately $103,000,000 of gross vacation ownership notes receivable eligible for securitization and $197,000,000 in available debt capacity under our $200,000,000 revolving credit facility. During the quarter, we redeemed the $40,000,000 $400,000, all but $8,000,000 of which is non recourse debt associated with securitized notes.
Lastly before I shift to 2017, let me take a moment to update you on the status of our insurance claim related to Hurricane Matthew. Steve walked you through the high level impacts of this powerful storm, which we estimate negatively impacted sales by $8,000,000 and adjusted EBITDA by approximately 3,600,000 few months covering our business interruption losses as well as property damage, mainly experienced by our owners associations. We expect any insurance reimbursement for this claim to reporting adjusted EBITDA, we are not including any potential insurance reimbursement in our 2017 guidance. Now let me turn to our outlook for 2017. The new sales distributions we talked about throughout 2016 are all open, including South Beach and the additional larger location in New York.
The next location we plan to open later this year is our new property in Bali. Our universal on core and call transfer programs continue to grow, driving year over year improvement in VPG and first time buyers. So with all of this in place and based on what we have seen to date in 2017, we expect our company contract sales to grow 9% to 15% for the full year. Shifting to adjusted EBITDA, we expect 2017 adjusted EBITDA of between $276,000,000 $291,000,000, which represents a growth of over $22,000,000 at the midpoint of the range. The majority of this growth should come from development margin driven by higher contract sales.
In our resort management and other services business results should continue their steady growth as we increase our stable and recurring management fee and exchange company revenues. In our financing business, we expect results to improve year over year due to the benefit of our slightly higher financing propensity on higher contract sales. And we expect our rental results to be roughly flat as we continue to utilize our inventory to fulfill marketing package activations to drive future contract sales. This growth will be as well as other costs necessary to support the growth of our business. As always we will continue to be mindful of our spending manage our costs wherever possible to drive strong earnings Our capital efficient business model should allow us to drive top line growth while still delivering adjusted free cash flow for 2017 of between $160,000,000 $180,000,000.
When thinking about the quarterly spreads of our results in 2017 remember that we have changed from a 13 period reporting calendar to a 12 month reporting calendar beginning in 2017. This means we have roughly 1 additional week of financial results in each of the first three quarters with the offset coming in the 4th quarter. While we will not be restating our quarterly 2016 financial results to mirror the 2017 reporting, We expect to We finished the year with one of our strongest quarters to date as a public company with our new distributions open and growing and our in the year and tour activations are well ahead of this same point in 2016, all of which gives us confidence that 2017 will be a tremendous year for us. As always, we appreciate your interest in Mirrorifications worldwide. And with that, we will open the call up for Q And A.
Rob?
For questions. Our first question is from Chris Agnew with MKM Partners. Please proceed with your question.
Thanks very much. Good morning.
Good morning.
First question, and I think maybe a little bit difficult. The your contract sales growth, EBITDA growth and free cash flow, I mean, there's last year you had noisy comps, you're also you're ramping the sales centers. Can you help us a little bit, particularly with the change in your reporting calendar, think about the cadence through the year? And I don't know if there's different answers for those three line items I'm thinking about.
Yes. Chris, it's Sean. I think as you think about EBITDA or the earnings front, you are going to have an extra week, if you will, in the 1st 3 quarters of earnings. Since we didn't close the books last year on those calendar quarterly dates, it's hard for us to really restate what those are going to be. So you'd have to think about it as really that, about an extra week of earnings.
We'll try and help you out on the calls, but it's hard to kind of estimate what that would be. And then you're going to have 3 weeks less, if you will, in the fourth quarter because you're making it up. So obviously for the full year, it'll balance back out. From a contract sales, We will try that we obviously don't provide guidance. We will be able to give comparable contract sales growth.
We'll actually have the extra week for for actual reporting, but because our systems will allow us to kind of capture that extra week in the first three quarters and vice versa in the fourth quarter, we should be able to give you some comparable growth metrics there. I mean, as you think about contract sales for the year, I mean, we expect strong growth in all quarters in terms of growth as you think about our guidance, obviously we probably have slightly easier comps in the first half of the year as the new sales centers were opening and then start to ramp, the comps will get a little bit more difficult as we move through the year.
Yes. And Chris, let me this is Steve. Let me see if I can add to that. You'll recall in the, particularly in the first quarter of 2015, that was, we were disappointed with with what we put on the board in terms of contract sales growth on a year over year basis. So that becomes a, did I say 15, sorry, should have said 16 get my ears screwed up.
And, we, and so, we do have an easier comp in the first quarter than we had last year plus, we hadn't opened any new sales centers in the first quarter of last year. Obviously, those sales centers are now open now with that in mind, some, have a little longer in the tooth than others. For instance, we opened our DC sales center, call it, April, and then we added those others as they came through the year. But like Waikaloa, and as I mentioned, even in South Beach, which the last week of December. That certainly wouldn't have helped at all.
So we've got those things happening. And as a result. So, and of course, when you put almost 15% on the board for the fourth quarter of 'sixteen, that becomes a little tougher comp to go after. So kind of summing it up, I would say that the first half of the year on a percentage growth basis may be a little stronger than the second half. But it still all comes out in the wash that the 9% to 15% that we've given you as our guidance.
Okay. Thank you. And then, just thinking about, you've now net cash in your balance sheet and arguably that suboptimal business model should support a turn or at least of debt. And then another year of strong free cash flow, can you walk us through what thoughts around uses of cash? I mean, with continued buybacks, at what point do you run into have to think about stock liquidity considerations.
And then you've talked for a number of years, I mean, this is linked about M And A. What are your latest thoughts around opportunities around M And A?
Sure. I think our thinking around capital allocation, Chris, hasn't changed. I mean, 1st and foremost, we're always looking to use excess cash flow to grow continue to return capital to shareholders like we have. In terms of liquidity, we've obviously repurchased a significant amount of our shares since we started our capital return program a few years back. If anything, liquidity is even higher, market cap continues to grow.
So Obviously, something we'll keep an eye on, but the company is much larger. We see more liquidity today in terms of volume than we did before we started actually repurchasing share. So I haven't seen that, and I don't see it here, in the near term being an issue. I'll let Steve get the second.
On the M and A front, I mean, we're going to sound a bit like a broken record here, but, it's only because it's how we feel. We always continue to look at various opportunities that present themselves. As I've mentioned before, we have taken a deep dive into several different opportunities, but for whatever reason, didn't actually consummate any kind of a deal. We will continue to do that. As John mentioned, our 1st and foremost, we should use our cash to find ways to grow the business either organically or through some sort of M and A kind of activity.
Absent that, then we believe that, there's no, there's no credit given to us for carrying around cash on our balance sheet. So we will return that to shareholders.
Our next question comes from Patrick Scales with SunTrust Robinson. Please proceed with your question.
Want to check on something. I had in my notes here that your prior guidance was for $20,000,000 per the 7 per sales center, per new sales center. I mean, I believe on the call, you, said, now seven locations, $200,000,000 per year, which equates to $28,000,000. Are you taking that expectation up? No, actually, Patrick, it's simply a function of The $20,000,000 plus or minus was kind of a simple average, some are lower, some are higher.
Obviously, the addition of a second sales center in New York City, which we believe will be a better than average, helps drive that average north But, no, we're not making any meaningful change to the kind of the simple arithmetic of roughly $20,000,000 to sales center. Okay. That's it.
Our next question comes from David Katz with Telsey Group.
Hi. Good morning, all. So I wanted to ask kind of a bigger picture or longer term strategic question, which is, you know, we've gone through, let's say, the past 4, 6 quarters where we've added a bunch of sales centers, and now we're going to, you know, reap the the benefits of those. How are you thinking longer term about when you might start to encounter another, you know, wave of spending followed by, you know, is there any rhythm to it? Or how are you thinking about, you know, or are we thinking about adding 1 or 2 here or there?
At a time as we move along, paint us a picture, if you would.
Sure. David, I mean, I think I may have said this one time before. We really didn't strategically plan to add 6 new locations in 1 year. By virtue of the way, which deals came together and the timing of saying that kind of all kind of be created, the, the perfect storm of opportunity of having to open 6 in 1 year. Ideally, we'd like to add 1, 2, 3 kind of on a yearly basis, we have a very active development pipeline that we continue to look at, both in North America and in the Asia Pacific region.
And I would expect us to continue to add along those lines. Unfortunately, one of the things that happens with deals is you can't always control the exact timing of same. So you could have a situation where some things kind of, bunch up together, but that's certainly not our intent.
Understood. Now my other question is, and we'll probably ask this many more times as will everyone else, your dealings with Marriott are obviously a fundamental aspect of your business, have you had any discussions or observed any changes or altered any strategies with respect to how you're dealing with Marriott since the closing of their deal. And is there any updated thought we can have as it relates to the loyalty program and your access to it.
Well, as you might imagine, we have an ongoing along with Marriott as our licensor. And we continue to have very good relationships with them. Obviously, there are deep ties between our management team and those in Bethesda because of the long tenure that we enjoy here with our staff and that we were all part of Marriott before that. As you may recall, even last fall, we worked with Marriott to help them in their desires to try to link the 2 frequency programs together, that being Merrick rewards and Starwood preferred guests to allow some ability to have people take their earning experience in each program and apply them as separately are going across the system. So that needed some, some help from us to help make that happen.
In some of our exclusivity arrangements that we have on the loyalty program side. Having said all that, you know, Arnie Sorensen has been very forthcoming when he has said the intent is over time is to eventually blend these 2 programs into one program. And we will continue to work collaboratively with them to try to make sure that they can get to where we want to that they want to get to and we can preserve the value that we have in our license agreement.
Right. And if I can just follow that up, I mean, I, I appreciate all of that. But but where is it, you know, where is it that you would like to get to. I mean, obviously, you would like to I assume you would like to have rights to the entire, you know, combined loyalty program And presumably Vistana would say the same thing, right? I assume we Is that correct or?
Well, no, I think you've articulated our position, clearly. And quite frankly, by virtue of our life agreement. That's what's stated in our license agreement that we have exclusively space to the merit rewards program or its successor program. With that said, I can't speak for ILG, and what their intentions are. I know they have, some, some rights to the SPG program.
But I'm uncertain, to be honest, as to whether or not they have any continuing rights in the event that the SBG program is no longer viable or available. So, with all that said, we're going to do everything we can to try to make sure that we can be helpful to Marriott and what they do, but we're not going to give up anything of value on our end.
Ladies and gentlemen, we have reached the end of the question and answer session.
Thanks very much, Rob. So, let me close by repeating my excitement for how we ended the year with the strongest quarter over quarter contract sales growth and EBITDA performance we've had as a public company. And more importantly, the momentum that we have carried into 2017. Certainly like what I've seen so far this year and look forward to discussing our results on future calls. And finally, to everyone on the call and your families.
Enjoy your next vacation. Thank you very much.
This concludes today's teleconference. May disconnect your lines at this time. Thank you for your participation and have a great day.