Greetings, and welcome to Marriott Vacation Worldwide Third Quarter 20 16 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, Investor Relations. Thank you. You may begin.
Thank you, Rob, and welcome everyone to the Marriott Vacations Worldwide third quarter 2016 earnings conference call. I am joined today by Steve Weisz, 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 Throughout the call, 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.
Morning, everyone, and thank you for joining our 3rd quarter earnings call. This morning, I'll discuss our 3rd quarter performance as well as our contract sales growth for as well as our outlook taken a heavy toll on the southeastern coast of the United States. My heart goes out to the victims of this powerful storm, We are hopeful that its impacts will subside as soon as possible for those affected from Miami to the hardest hit Carolinas. As it pertains to our operations, ensuring the safety of our owners, guests and associates has been our top priority. Fortunately, Our results on the our resorts on the East Coast of Florida were reopened over the weekend, sustaining minimal damage and have begun their efforts to get back to normal operations.
For this year, the north end of the Carolinas, we have still not been able to reopen our properties in Hilton Head And Myrtle Beach. I'm very pleased to say that there are no injuries to report, but we have been closed there since the storm and are still ascertaining the extent of any damage. Presumably, there is nothing that can't be fixed and we can be back to full operations in short order. Now turning to our business results. 3rd quarter company contract sales were $169,800,000, up $10,000,000 or 6.3 percent over the third quarter of last year.
This was driven primarily by in VPG to $3371. In our growth segments of North America And Asia Pacific contract sales grew 8.3% quarter over quarter. While our contract sales growth was short of what we laid out on our last call, It is important to remember that we are in the early stages of a longer term growth strategy and the fundamentals that drove our growth this quarter continue to provide the foundation for growth in the coming year. Last quarter, we discussed 2 major initiatives that are driving our growth strategy, the first being tours from new marketing programs, namely our call transfer and universal encore programs, and secondly, new sales distributions at our 6 new locations opening this year. In addition, we had expectations that the headwinds we faced in our Latin American channels would begin to subside.
So let me walk you through our progress on each Beginning in our Latin American channels, contract sales were down slightly. While it was our best year over year performance and over a year it was just short of our expectations. While we saw growth in sales from our American regions. Going forward, we believe the positive year over year trends will continue and we will get back to more normalized sales growth. Looking at our new marketing programs, quarter contributing over $8,000,000 or 5 points of our contract sales growth.
However, while the tour growth in the quarter was strong and drove solid incremental volume. The total contract sales volumes from these programs was somewhat below our expectations due primarily to lower PPGs. It is important to note, however, the VPGs of Nissan programs was over $4000 in the quarter, well above our average in North America. As always, we are focused on optimizing VPG as our tour mix shifts, while we drive contract sales and EBITDA growth. Let me spend a few moments walking through each of our in line with our sales team in the early stages couldn't be happier with what we've seen in the short time it has been operating.
We anticipate opening the larger additional New York sales center nearby early next year and have high expectations for the sales it will produce well into the future. In mid July, we we opened our sales center in San Diego located in our property adjacent to the Gas Lamp District, like D. C. And New York, early indications are very positive as our San Diego team is off to a great start at this terrific location. In the early part of September, we announced the opening of our sales location at the Waikoloa Marriott.
This fantastic destination is just beginning to ramp up and while not benefiting our 3rd quarter, it is expected to be another solid driver of future contract sales growth as the hotel completes its renovation in January, our 112 units opened for occupancy early in second quarter of next year. In Sound Beach, We are continuing the renovation of the common areas and units on Ocean Drive and expect to open the nearby sales center at the end of this year. And finally, in Surface Paradise Australia, contract sales growth continues to build. As we move into high season for travel in this region, we are confident this location will drive continued improvement in the fourth quarter and into 2017. I'm very pleased with how these new sales locations have started.
Primarily due to the strong VPG from our new sites in North America, which at over $3100 is close to our North America third average in just their first quarter of sales. This performance gives me great confidence that our future growth strategy has a solid foundation from the five sites currently open South Beach opening at the end of this year and Valley in 2017. In addition, we are continuously searching for the next great location to grow our system of resorts. Now let me take a moment to discuss what Marriott International's completed merger with Starwood Hotels And Resorts means to us. Marriott International will continue to maintain its Marriott rewards program separate from the Starwood preferred guest program.
While it will be able to integrate certain aspects of the programs, Marriott International will maintain separate member lists for vacation ownership marketing and we continue to have our exclusive rights to market to Marriott rewards members. The exception being those customers who going forward either already were or in the future become Starwood preferred guest members and then later join Marriott rewards. We've also continued to have our exclusive rights with respect to the reservation systems, websites and call centers that support Marriott Branded Properties. As Marriott will continue to operate those separately from those used for Starwood Properties. Another key benefit to us is our increased access to silver, gold and platinum Marriott reward elite status upgrades, which will allow us to enhance the owner recognition level benefits we provide to our owners.
We look forward to continuing a long and prosperous relationship with Marriott International Nala World's largest and best hotel companies. Turning to our contract sales growth for the full year, the lower end of our initial guidance of 4% to 8%. Obviously, Hurricane Matthews has affected our sales operations several locations from mandatory evacuations, shutdowns and cancellations this past week. It is too early to know exactly what impact Matthew has had primarily at our Hilton Head And Myrtle Beach locations. However, we are focused on getting back up to speed as quickly and safely as possible and on minimizing Matthews impacts to our contract sales and rental performance in the fourth quarter.
Now let me focus on our contract sales outlook for the remainder of the year. In the third quarter, Asia Pacific and North America grew by over 8%. Driven by new contract sales in the fourth quarter. As quarters to date, contract sales were up double digits over last year. Based on this, we would expect the contract sales growth percentage in the fourth quarter to be in the mid teens.
The 2 significant drivers of this growth continued to be our new marketing programs and new sales distributions. To that end, We expect our new marketing programs and our new sales centers, which you'll recall, contributed nearly four points of growth in the third quarter, are continuing to wrap up with expectations of another 6 7 points of our 4th quarter growth. In addition, we expect our Latin America and in house channels to provide several points of additional growth to achieve our 4th quarter goal. All of this points to a solid trend through the end of the year as we are well on our way to the long term contract sales growth we've been discussing throughout the year. With that, I'll turn the call over to John to provide a more detailed look at our third quarter results and outlook for the fourth quarter.
John? Thank you, Steve, and good morning, everyone. Adjusted EBITDA totaled $50,600,000, $4,100,000 lower than the third quarter of 20 15. While these results are not adjusted for the timing EBITDA was unfavorably impacted by $12,400,000 of revenue reportability in the third quarter of 2016 a majority of which we expect will be recognized in the fourth quarter. Adjusting both years for the timing of revenue reportability, adjusted EBITDA would have been nearly the third quarter of 2015.
For the quarter, company contract sales were up 6.3 percent or $10,100,000. In our key North America and Asia Pacific segments, contract sales were up 8.3% or $12,500,000 However, this growth was offset by $2,400,000 of lower sales in our Europe segment as we continue to sell through our remaining developer inventory. Company adjusted development margin was 19.7% and North America adjusted development margin was 22%. Resort Management and Other Services margin improved $3,700,000 or nearly 14% as compared to last year. And financing margin outperformed the prior $400,000 to $29,200,000 in the 3rd quarter and adjusted development margin percentage was 22%, down 1.1 points from the prior year quarter.
While adjusted development margin was primarily from continued success of our inventory repurchase program However, that improvement was more than offset by $3,900,000 from higher sales reserve activity of which roughly half of that increase related to higher financing propensity levels and half was due to higher default activity associated with our Latin American customer $2,300,000 from higher marketing and sales costs related to the ramp up of new sales distributions and $1,300,000 from higher plus points issued. It is important to understand, however, that the majority of these higher costs are expected provide benefit to us in the future. The higher sales reserve activity was driven in part by an 18% increase in financing propensity on higher contract sales, which we expect will drive stronger financing profits in the future. The ramp up costs associated with the new sales distributions not only drove sales growth for us in this quarter, but will continue to drive incremental sales for us in the future. Our financing business, revenues net of related expenses was $18,900,000 or were up $1,300,000 or almost 8 percent from the third quarter of last year.
With our North America propensity up nearly 10 percentage points to over 62% in the 3rd quarter. With these higher financing propensity levels as well as targeted increases in contract sales in the fourth quarter, we expect significant year over year growth from this business for the full 7 points to 7.40 for the third quarter of this year. During the third quarter, we also successfully completed $259,000,000 notes receivable securitization at an interest rate of 2.28%. And a 96.5% advance rate. This transaction generated $250,000,000 of gross proceeds of which $50,000,000 was released from restricted cash in the fourth quarter as the remaining notes were sold in accordance with the terms of the securitization.
Turning to our rental business, total company rental revenues were $73,800,000, 2 $300,000 below the prior year. This reflected $2,700,000 of lower revenue and from the portion of our hotel in Australia and a 2% decrease in average transient rate. These decreases were partially offset by an increase in preview fees and a 3% increase in TransUnion Keys rented. Rental revenues net of expenses were $12,800,000 down $700,000 from the prior year. In our resort management and other services business, company results improved $3,700,000 or nearly 14% to $30,100,000 in the quarter.
Results reflected higher fees for managing our portfolio resorts improved exchange company activity and higher customer services margin. In our Asia Pacific segment, contract sales improved $4,300,000 or 62 percent quarter over quarter, driven by both improved performance at our existing sales locations as well as the continued driven mainly by improved results in our development and rental business. Turning to our return of capital to shareholders, Year to date through the end of the 3rd quarter, we have repurchased 2,800,000 shares, roughly 10% of our shares outstanding for $163,400,000 and paid quarterly dividends totaling $26,100,000. We did not repurchase any shares during the third quarter given the accelerated share repurchase agreement we entered into at the end of the second quarter which effectively accelerated third quarter repurchase activity. Moving to our balance sheet.
At the end of the quarter, cash and cash equivalents totaled $175,000,000. Our total debt outstanding at the end of the quarter totaled $815,000,000, consisting of approximately $807,000,000 of non recourse debt associated with our securitized notes. In addition, $40,000,000 of mandatory redeemable preferred stock remains outstanding, which we plan to redeem later this month. Let me turn to our adjusted to adjust for our 3rd quarter growth. In conjunction with that, we are lowering the high end of our adjusted EBITDA guidance to $266,000,000, for a new full year adjusted EBITDA guidance range of $261,000,000 to $266,000,000.
Our adjusted EBITDA in the 4th 15. So let me take a moment to provide some color around how we expect to accomplish this. First, our development business is projected to increase between 10 and $14,000,000 year over year with the projected contract sales growth in the 4th quarter and the turnaround of unfavorable revenue reportability from the 3rd quarter. Resort Management and other services is projected to provide $4,000,000 to $6,000,000 of adjusted EBITDA growth. Our financing business should provide 2 to $4,000,000 of adjusted EBITDA growth on the increasing contract sales and strong propensity levels.
We expect our rental business to outperform the prior year And lastly, our 4th quarter adjusted EBITDA should benefit from lower G and A costs relative to 2015. While we did not change the low end of our adjusted EBITDA guidance while we did not change the lower end of the adjusted EBITDA guidance range, we have increased the low tax rate dollars per share, representing 24% growth over 2015 at the midpoint of the range. This highlights the strength of our capital efficient business model, which allows us to grow and programmatically return capital to drive EPS growth. Turning to free cash flow, we continue to focus on maximizing our free cash flow and are raising our guidance from $135,000,000 to $155,000,000 to a range of $145,000,000 to $160,000,000. As we always do, we'll continue to evaluate all of our capital needs with the intent of deferring spending wherever appropriate.
In summary, we are proud of the 8.3% sales growth we achieved in North America And Asia Pacific As we begin the fourth quarter, we are excited about the positive trends that position us to deliver our best quarter as a public company. I look forward to ending the year strong in discussing our As always, we appreciate your interest in Marriott Vacations Worldwide and with that, we'll open up the call for Q And A. Rob?
Thank you. Our first question comes from Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with your question.
Couple of questions here. You talked, excuse me, in your guidance here, you're taking it down to the low end for the sales growth. And you had briefly mentioned possibly Hilton Head And Myrtle Beach impacting that, but can you give a little more specific on what locations do you think are taking that that range down. Certainly we've heard that maybe not you folks, but New York in general has been not quite as strong as one might have earlier anticipated?
Well, sure. Thank you for the question. Two things. Number 1, the lower end of the guidance of around 4% really reflects, what we think the 4th quarter will produce, which I think we said in our prepared mark should be in the mid teens of contract sales growth and just doing the arithmetic for where we were as of the end of the third quarter. That's how you get to the lower end of the 4%.
The only two sites that are currently impacted by, the storm of Matthew are our sales center on Hilton Head And On Myrtle Beach. Our current, understanding is that there is a chance that Myrtle Beach will open by this weekend. But more than likely, not because of physical structural damage, but because there are other infrastructure problems on the island, it may be towards the middle to the end of next week before Hilton Head is up and operational again. Regarding your specific question about New York, we've not seen any downside in our sales activity there. Effect of the contrary, we're very pleased with what we see thus far.
And we look forward to actually getting our larger sales that are open up, in the first quarter.
Okay. Let me just follow-up on that. I apologize if I'm being sort of redundant here. When you first have that 8% now you're 4% can you cite any specific locations that make it 4 instead of 8 right now?
Well, again, our initial guidance at the beginning of the year, was 4% to 8%. We didn't say 8%. We said if you took the midpoint of that at 6, now at 4, we're down a couple of points. In previous calls, we've talked about The surprise to us, that took place in the first quarter, whether there was a meaningful decline in our, owner reload activity, largely because we had such a strong first quarter in 2015, from owner reloads. And And so, really, the only, the only difference in our opinion is, this roughly two points drop from the midpoint.
And that's as a result of the 3rd quarter.
Okay. Next question, with Hilton Head and Myrtle Beach, being closed, do you have any type of business disruption insurance that might cover any type of shortfall there? And if so, what is the deductible on that?
Sure. Hey, Patrick, it's John. Yes, we do obviously have business interruption insurance. The deductible for the storm and you have to look at it in terms of all the projects together is $10,000,000. And so we're working on what the impact is going to be, but that covers everything from the COAs and the on-site locations out in our properties as well as marketing and sales disruptions.
And so we're still kind of penciling,
but
all that's going to be, and we'll know more here and update you here in the fourth quarter.
Okay. But in a nutshell, just to make sure I understand you're on the hook basically for the first $10,000,000, correct?
That's correct.
Okay. Moving on, I have 2 more questions. Latin American defaults, what percentage of your loans outstanding are Latin today are Latin American customers?
Let me see if we can Ballpark. Ballpark the number here, probably about, 12%, fifteen percent
Okay.
So under 15, but I think it's slightly higher than 10.
Okay. And the ones that are defaulting, what was sort of the average age of the loan outstanding? Were these you would have seen any greater default?
Yes. Let me give you a little color here just on it. It's clearly As we've talked about in prior calls, you had the foreign currency, declines against the U. S. Dollar.
Which occurred, call it early, third quarter of last year. For the most part, I think where you see higher default activity really over the last year or so, not surprisingly is related to the loans that were originated not too far before then. And so had the least amount of payments, if you will, against those loans. It's not across the board that way, but generally. The good news is, based on where we're at here at the end of the third quarter, is the overall Latin delinquencies are back in line with, call it, June of last year.
So we think we've seen the bulk of those defaults move through the pipeline, if you will, as we've gotten back. We could see some impact a little bit in the fourth quarter. We expect it to be significantly less than the $3,000,000 or so impact we saw here in the 3rd quarter. The other point I'll highlight is if you pull the Latin out with the much higher financing propensity, our defaults on the rest of the North America are 5% plus of the loans, are actually basically flat. So we've seen defaults actually on a percentage basis less on the other 85% of the loan stop portfolios performing outstanding and you hate to say it couldn't get better, but we haven't seen it much better, in terms of performance.
I think the Latin is probably behind us here as we move through the fourth quarter, but we could see a little bit of impact.
Okay. Thank you. Last question here, somewhat released recently, I would say Wyndham And Diamond have been vocal about seeing uptake in 3rd party induced default. Have you seen any similar activity for your brands?
No, no, we haven't.
Our next question comes from Benjamin Chalkin with Credit Suisse.
When looking at 4Q, it sounds like there's 2 variables for the lower guidance. You have lower VPG coming from the call transfer and ENCORE and then the impact of the hurricane, how would you rank those 2? And then any color on what is driving the lower VPG?
Well, a couple of things. Keep in mind, as I said in my remarks, the combination of the call transfer and Lancorp still ran a VPG of over $4000, which is well above our system average. The fact of the matter is one of the reasons why the third quarter VPG number came in a little less than we thought it was going to be. Was we actually expected that $4000 number to be even a little higher. With that said, it's largely a function of how we think about, the tour mix shifting, over the course of any given period of time.
So give me, give you a little perspective. So tours from new tour channels were up about 3300 tours, in total. And 2000 of those were first time buyers. So it takes a little while, for the sales team to go through the adjustment period of who they're seeing in terms of, taking tours. We think, for the most part, that education and that shift of the way the sales force performs has already taken place in the third quarter.
So again, I, I go back to what I said to Patrick in his question. The 4% number is largely arithmetic. You take where we are through three quarters and you add to a mid teens contract sales growth in the 4th quarter. That's where you get to the roughly 4% growth. The reason why we are a little bit, why we say roughly is we don't know the impact directly from what's happening in the closure of our sales center and the closure of resorts on Hilton Head And Myrtle Beach.
But, so that's probably the most uncertain thing to us right now. I believe the way in which the, the new marketing programs And the new sales centers are performing is, far more certain to us.
Yes. Just a little bit more color, because this is the second question on kind of what's changed quite frankly, our outlook for the fourth quarter hasn't changed from where we were from the third quarter of last year. So we haven't necessarily taken down. I think what what Steve articulated here is really the ramp up that coming into the third quarter, we were seeing it. It just ramped a little bit slower.
We discussed why a little bit on lower VPGs on the call transfer and encore programs, Latin probably cost us we thought that might give us about a point of growth and it was basically flat down slightly. So those were the couple of percentage points that really kind of hurt us from the ramp. But as Steve also mentioned in his prepared remarks, what we've actually seen here since we started the fourth quarter is we're on track what we expect to do. And that hasn't, like I said, changed from where we were last quarter. We got double digit growth year over year as 1st month in here.
The little bit of the wild card is really that final impact on the hurricane. So, we're doing our best try and mitigate some of that, but we'll know more, but we feel great about where we're at and the ramping And quite frankly, going into next year, we've got the foundation in place with these programs. The pipeline of tours on the, on those key marketing programs continues to build. So, that bodes well going into next year. And the new sales that we're talking about opening up.
We didn't get the benefit here in the third quarter. As we knew, from the opening of Waikoloa, but we'll start to get that Miami at the end of the year, the larger sales center in New York going into next year. So The good news is those are all doing great. And we expect that to build here as we move into next year.
Got it. It's helpful. Just to clarify 2 things. So with the customer base shifting a little bit with encore and call transfer, to your comment, are you applying that the close rate with those customers was just slightly lower than what you were expecting? And then the second part of that clarification is, are you saying that your expectations for 4Q are the same today as they were when you finished?
When you're going into 3Q? Is that what you're saying?
Yes. High level, yes.
At a high level, yes. And the close rate, again, it's not material. I'd remind everybody on the call that 1.7% drop in VPG is roughly $50. It's not a huge issue. But, clearly, they didn't perform that quite as well as we thought they were.
However, it still averaged over $4000 in VPG.
Got it. But it sounds like that's correcting itself.
So far, as John mentioned, I mean, we've already got one accounting period of results of the 4th quarter in the bank. And, we have seen those contract sales numbers and VPGs to be very reflective of what we're projecting to be in the 4th quarter.
Our next question comes from David Katz with Telsey Group. Please proceed with your question.
I, I would I think it would be helpful if you could just explain a little more about the reportability. And specifically, as I look at the, you know, page A7 in the release where you have, one of your reconciliations in a footnote about the lack of required down payment or contract sales. I'd love to I think it'd be helpful if we just got a little more color on exactly what was in there and what and how this occurred and how it slides into the back half. Please?
Yes. Hey, David, it's John. So for us, revenue reportability, quarter to quarter, it's one of the reasons we don't provide quarterly guide quite frankly, because, the GAAP accounting requires that you collect a 10% down payment and it's not just 10% of the purchase price. It includes things like recovering the value of 1st day benefit, closing costs on your loan and things like that. So, we're always adjusting incentive programs, things like that throughout the year.
Our focus and what we've done every year is from a full year perspective, we adjust the programs and the down payment requirements so that on a full year basis, the reportability, really isn't much impact, but given whatever programs we're running, higher finance propensity like we saw in the third quarter, that's where you see you can have some outsized impact. So what do we do? We like we did, and this was an issue, if you will, in terms of reportability in the third quarter of last year, we had similar things. We had introduced some new financing incentives back then. We had higher finance propensity.
We tweaked the amount of the down payment to get a little bit more, and we've already put that in place here for fourth quarter sales. So, what ends up happening we get a couple of the payments on the sales in the third quarter on the loans. We hit the reportability that hit We get the benefit of that here in the fourth quarter. And then the new sales that we're doing was slightly higher down payments to reflect the incentives the financing propensity levels, those should, for the most part, hit reportability in the 4th quarter. They won't get pushed out into the next year.
And that's how you kind of think about it. But, reportability impacts us quarter to quarter, but it can impact slightly more or less. And then we adjust for that to balance it
out. Hey, David, this is Steve. I'd add another thing
to that. And just a reminder that the way in which timeshare accounting works, you record the sales cost except for a small amount of the commission expense at the time that the contract sale is written. And so you have, there's a disconnect built into the way in which gap works that you have the cost sales and marketing costs mismatch from the revenues. So, we have a disproportionate amount of sales and marketing costs in the third quarter not matched up to reportable revenues, which will show up in the 4th quarter.
Understood. So just putting that in the context of what appears to be pretty high, confidence that the 4th quarter is going to stack up well perspective of storm impact. And similar Steve's comments about this 4th quarter setting up the way you anticipated almost a year ago, I assume baked into all of that expectation was some of this reportability fluidity for lack of a better word, was contemplated In other words, there's no fundamental change in what you were looking for in the fourth quarter. Going back as far as you've discussed it. Is that a fair statement?
Yes, I think in general, that's correct with one minor modification. Our financing propensity is actually running even because obviously you get financing revenues for a long time to come out of all this. It does affect your reportability. So, yes, I would say to you, we probably have more reportability in the fourth quarter than we had originally thought we were going to have But all the other underlying fundamentals that we've talked about in terms of building this contract sales volume and everything else has remained relatively unchanged.
Very good. Thanks very much.
At this time, I'd like to turn the call back to Steve Weisz for closing comments.
Thanks very much, Rob. The third quarter was our best quarter of contract sales growth in over a year as contract sales growth in our key North America and Asia Pacific segments were up 8% on strong tour flow from new distributions and new marketing channels. Even more positive as we enter the 4th quarter The current trend is on track I look forward to updating you on our fourth quarter performance and our outlook for 2017 on our February call. And finally, to everyone on the call and your families. Enjoy your next vacation.
This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this