Greetings, and welcome to Marriott Vacation Worldwide First 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, Mr. Jeff Hansen, Vice President of Investor Relations. Thank you.
You may begin.
Thank you, Rob, and welcome, everyone. The Marriott Vacations Worldwide first 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 call, are effective only today, April 28, 2016 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 Wise, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you for joining
our first quarter earnings call. This morning, I'll walk through our first quarter results and provide an up on our top line growth initiatives, which give us the call over to John to provide a more detailed review of our first quarter and his thoughts on our full year before opening the call to your questions. As we indicated on our year end call from the tough comparison to last year's channels. Remember, in our first quarter of 2015, we adjusted our owner recognition levels or what we call ORLs, increasing the benefits at higher levels of ownership. And approximately 1.5 points of improvement in owner closing efficiency over the first quarter of 2014.
As a result, 1st quarter vacation ownership contract sales last year were up almost $16,000,000 or over 11% driven mainly by the improved sales metrics to existing owners. Shifting to the current year, in first quarter of 2016, North America timeshare contract sales were approximately $140,000,000, down $16,000,000 from the first quarter of 2015. $2,500,000 of this decline occurred in our Latin America sales channels as we continue to experience headwinds from the strong U. S. Dollar.
This decrease, however, was less than the year over year declines we saw in the Latin American sales channels in the 3rd fourth quarters of last year. The remaining contract sales declined primarily resulted from almost 7% fewer owner tours in the quarter and lower owner closing efficiency as we did not have a lift from We made significant progress on our plans to open new sales centers, which will grow our total number of site based sales centers by over 30%. To provide the level of leadership needed at these locations, we obviously look first to our own internal pool of talent, as our existing leadership provides the magnitude of these changes Partially offsetting the decline in sales to existing owners, we began to gain traction generating more sales from first time buyers. As our first time buyer VPG was up almost 4.5% and first time buyer tours were up 1% quarter over quarter. This highlights the improved performance in the quarter from our new marketing channels, namely our call transfer and encore programs.
And we are equally excited about their potential for the remainder of the year as tour activations for the rest of 2016 or over 25% higher than increasing more than team and beyond. The other side of our growth strategy relates to our 6 new sales centers opening throughout the year. On that note, I am pleased to announce that we just recently launched our sales efforts at our surface Paradise property on the Gold Coast of Australia. We are excited about what that location can do in our Asia Pacific segment as it ramps up its sales performance over the next several years. In addition, we have just recently opened a temporary sales center in Washington, DC, while we complete the construction for our permanent sales gallery.
We've also launched a small sales operation in New York at our new property on Thirty Seventh Street in Midtown Hatton, while we complete our permanent on-site location early in the third quarter. Further, we are also finalizing the plans for an additional larger New York sales location, which will be in close proximity to our property and should be in operation by the end of the year. And in San Diego, we are on track to launch sales at our new on-site location early in the third quarter with the delivery of the 1st phase of renovated units there. I'd like to owner of the hotel for a capital efficient acquisition, 112 Bedroom Timeshare Units upon their conversion by the owner, is targeted for July of 2017. In addition, we have begun construction on a permanent sales center at the property expect to start sales on the big island in September of this year.
And finally as we announced in February, We have added a expect to be in sales by the end of the year at this exciting new location. Now, allow me to shift gears just a bit as I'm excited to with you about a new brand extension to the Marriott Vacation Club family. As you may have seen this announced yesterday, we unveiled Marriott Vacation Club Pulse a new type of product offering for our owners and a direct answer to the call from customers for more destinations in metropolitan areas. Marification Club Falls is being launched at our new city destinations in New York, San Diego, Washington, DC, and South Beach as well as the Custom House, our existing property in the Center of Boston. At Mary Vacation Club Paul's properties, the experiences experience focuses on the destination itself and all these properties are located in the heart of the action.
To find out more, I encourage you to go to our website and follow the Marriott Vacation Club pulse link to check our latest States. Now, let me take a moment to emphasize our confidence on our full year sales guidance. As I mentioned, our first quarter contract sales faced a tough comparison to 2015. However, underlying this performance with the signs that our new programs are working. 1st time buyer tours improved.
New tour package sales are ahead of expectations. And 2 activations are well ahead of where we were at this point last year. We've begun sales with our new properties on Australia, Washington, DC and New York and have 3 more locations beginning sales over the coming months. Lastly, while we expect on a year over year basis at the beginning of third quarter. Taking all of this into account, we expect a very strong second half to the year, and we remain confident we will achieve 4 to 8% contract sales growth for the full year.
Shifting to the bottom line, our resort management and other services business was up $1,600,000, almost 7% over last year. And our financing business, which had been a headwind in the past, continued to improve as financing results were up $1,000,000 to the prior year. When you consider these improvements combined with our expectations for full year contract sales, we are equally confident that we remain on track to produce adjusted EBITDA of between $261,000,000 $276,000,000. With that, I'll turn the call over to John to provide a more detailed look at our first results and outlook for 2016. John?
Thank you, Steve, and good morning, everyone. As adjusted EBITDA totaled $51,600,000, $8,600,000 below the first quarter of 2015. While we saw continued growth in our For the first quarter, adjusted development margin was down roughly $10,000,000 of which nearly 9,000,000 the decline was in our North America segment as a result of lower contract sales to existing owners in the quarter. North America adjusted development margin was product cost continues to be a great year over year, driven primarily from our product cost benefit was more than offset by higher marketing and sales costs as the lower contract sales impacted our ability to leverage our fixed marketing and sales costs. In addition, our variable marketing and sales costs were impacted by higher spending related to our investment in future tours, primarily in our call transfer and encore programs as well as pre opening costs associated the startup of new sales distributions.
Second half of this year and beyond. In the company's financing business, revenue net of related expenses was $19,200,000, up $1,100,000 or 6 percent from the first quarter of last year. The program we launched last year to help drive financing propensity has continued to and our purchasers remain very credit worthy as we've seen a 16 point increase in FICO scores to 744 this quarter as compared to 7 sales in 2016, as portion of the surface Paradise hotel that we expect to sell, total company rental revenues were $78,000,000, approximately $2,000,000 higher than the prior year. This increase includes roughly prior to their conversion to However, this increase was offset by a reduction in transient keys rented as we were making more keys available for preview room night in support of our call transfer the revenue increase was offset Excluding the results of operations for the portion of the surface Paradise hotel that we expect to sell, company results improved $1,600,000 or 7% in the first quarter to nearly $24,000,000. Results reflected higher fees from managing our portfolio of resorts higher ancillary profits and improved exchange company activity.
In our Asia Pacific segment, contract sales improved almost 9% quarter over quarter. Total adjusted results were $1,000,000, down $2,500,000 from the prior year as first quarter results last year benefited from $1,100,000 of favorable product cost true up activity and our first quarter this year was negatively impacted by roughly $800,000 in preopening expenses associated with our new sales location in Australia. In addition, representing our 1st in the first quarter of 2019. Roughly $2,000,000 of this increase related to technology spend in the quarter as we continue to enhance our infrastructure. As we mentioned on our year end call, dating our current web platforms Turning to our return of capital to shareholders, we returned nearly $91,000,000 in first quarter of 2016 including repurchasing nearly 1,300,000 shares of our common stock for $73,000,000.
Shifting to our balance sheet at the end of the quarter, cash and cash equivalents totaled nearly $107,000,000 and we had approximately $102,000,000 of gross vacation ownership notes receivable eligible for securitization in our warehouse credit facility. The company's total gross debt outstanding at the end of the quarter totaled $699,000,000, all but roughly $11,000,000 which is non recourse debt associated with securitized notes. In addition, $40,000,000 of mandatory redeemable preferred stock remains outstanding which we expect to redeem in contract sales outlook, more specifically, the pace we are expecting for the remainder of 2016. The second quarter has continued to experience headwinds related to last year's owner recognition changes that we have discussed as the impact of that program ran through the end of April last year. And Latin America continues to sell against a strong US dollar.
As a result, we expect As we move into the third quarter, we expect our Latin American headwinds to subside as we lap last year's declines Additionally, we expect contract sales the impact of new sales distributions coming online. For this reason, we expect contract sales growth of 4% to 8% for the full year. We expect development margin to is expected to be as higher contract sales allow us to leverage the fixed portion of our marketing and sales costs and lower product costs offset higher variable marketing and sales costs similar to what we experienced in the first quarter. With this improvement in development margin and the continued improvement in our other lines of business, we are reaffirming our adjusted EBITDA guidance of $261,000,000 to $276,000,000. Turning to free cash flow we maintain our expectations for adjusted free cash flow of between $135,000,000 $155,000,000.
As we mentioned on our last earnings call, while slightly below normalized level, this range includes $35,000,000 continue to evaluate all of our capital needs as we progress through the year with the intent of delaying spending wherever possible. Also, while not included in our free cash flow calculation or guidance for 2016, we are well underway with negotiations regarding sale of the downside surface Paradise property as well as the bulk sale of our remaining units at the Ritz Carlton Club And Residences in San Francisco. Combined, we expect these transactions could generate over $60,000,000 of additional cash flow this year. I continue to be excited As always, we appreciate your interest in Mirror Applications Worldwide. And with that, we will open the call up for Q And A.
Rob?
Thank you. A confirmation Our first question is from Chris Agnew with MKM Partners.
Thanks very much. Good morning. Thank you for that color. Express obviously expressed very strong, expecting very strong second half, VOI sales and confidence in 4% to 8% growth. Can I ask, is your confidence, say, in the midpoint the same as when you initiated guidance back in February given the first quarter that we just saw?
I would say so. I mean, I'll be the first to tell you that the first quarter was maybe a little softer than we'd originally anticipated. However, That's balanced out by the continued strength that we see in terms of booking and activating tours for the balance of the year plus the progress we're making on the new sales centers. So, yeah, I don't, I wouldn't characterize our confidence in that forty eight number as being markedly different from when we first announced it.
Okay. Thanks. And then have I think if I'm reading it right, there was no increase in your provision for loan loss from a year over year perspective. Have you seen any increase in default activity and then any third party sponsor defaults?
Chris, it's John to answer the second part of your question. No, We haven't seen any of that. First part of your question, we've actually, as a percentage of finance sales, our bad debt allowance, I think, is down slightly. So it's improved year over year. I mean, what you're seeing I talked about is your actual finance sales is up about 15 percentage points year over year.
And so, but the rate we're actually providing us continue to improve. Our core portfolio continues to perform very well. Where we've seen a little bit on the edges, not surprisingly would be with some of the Latin American paper just given some of the foreign currency, but that's in that overall number. So net net the overall portfolio continues to perform very well.
Got you. And the sales that you talked about an additional potential $60,000,000 buy in. Is are you more or less expecting that by the end of this year or is it just the timing around or just give us a little more color on what needs to happen for those cells?
I'm assuming your references to the disposition. Correct.
Yes, sorry.
On surface paradise, we are very close. We have a few minor conditions precedent that have to be satisfied before we can close that sale. So, we're not prepared to announce that yet. But we I expect you'll probably hear from us in the not too distant future that that sale has concluded. And we are well along the way about selling that, making that bulk sale at our Ritz Carlton And Residence property in San Francisco.
On a collective basis between the 2, it's between $60,000,000 $70,000,000 worth of proceeds.
So, I mean, Chris, we feel good about it. I'd have to say, I mean, until they're done, they're done, right? So there's always some risk, but we feel very good to Steve's point. Thanks.
And one more question, sorry, just still so much time.
Okay.
But in terms of thinking about how these new cell centers ramp, because obviously I think you've said some of them you've temporary facility moving to a larger facility. But what should did they ramp over a couple of years? Or is it 6 months? How do you think about sales centers
and clearly for us, and I would argue probably for the rest of the industry. When you open up a new sales center, I mean, you're starting from dead stop. And you're trying to move forward as further compounded by the fact that as I indicated that, both in New York and in Washington, we've got temporary sales centers that we've kind of put together. And as the permanents are finished here in the next couple of months, It'll take several years for any new sales center to reach, kind of its, stabilized run rate. But that's all been factored into our guidance about how we think about the contract sales unfolding as well as the EBITDA for the balance of the year.
Excellent. Thank you.
Thank you.
Our next question comes from Stephen Kent with Goldman Please proceed with your question.
Good morning, Steve.
Hi, good morning. Just to follow on that question about Washington and New York City, what are some of the early indicators that these it will be robust for you. And what I the reason I'm asking is because my recollection is the Boston property did very well. And that was relatively new. And I think that was almost 10 years ago, maybe when you rolled that out.
So what are some of the early indicators that would say this city focus is moving in the right direction? And then, commentary on LatAm business, how that's holding up that was an issue more last year, but I wanted to see if that was still an issue for this year.
Yes. Well, 1st of all, actually, it's kind of hard for me to put this in perspective, having been here 20 years, but actually Boston Custom House. Probably started sales 15 years ago, even. And keep in mind at that point in time, we were selling a site based product. We weren't selling our program, etcetera.
The thing you gain by opening up a sales center, that is in conjunction with inventory that you have in a marketplace. Is that you get the benefit of obviously, any in house marketing that you can do to those units where you can, in fact, talk to people that are either renting the unit or people that are there on either a usage or exchange about buying more points within our That's the first point. The second point is also gives you an opportunity to talk to that, people that live in that destination. New York City market as an example, the Washington market, both very vibrant, very wealthy markets, that we can market to. And we can get people to come a presentation from us there.
So we are, I mean, there's nothing in life is guaranteed, and certainly we can't guarantee that these will be you know, home runs, we have every reason to believe that they'll be very successful. And that's the way we've underwritten these products. As far as Latin, I'll let John talk about talk about that.
Sure. Obviously, Steve, the foreign currency hasn't necessarily improved much versus the U. S. Dollar. When you look at it from an overall basis for mid year last year.
I think what we're seeing is, and we talked about this even early on, over time, some of those fluctuations become the new normal and people within those markets to the extent they want to travel and do things. They're going to have to come to terms with what's happened with the foreign currency. We obviously target a more fluid buyer probably people that have more means in terms of buying our product, given our price point. So I think we're seeing, we said in the script, we're seeing the year over year decline, notwithstanding not much improvement in the foreign currency exchange rates, getting less, which is positive. But it's obviously still a headwind.
We'll be a headwind here in the second quarter, in terms of even a stay where they're at. It won't be until really third quarter, where we get some benefit from that easier comp for the balance of the year.
Okay. Thank you.
Our next question comes from Patrick Schulis with SunTrust. Please proceed with your question.
Hi Patrick.
Hey, good morning guys. This is actually Brad on for Pat. Just a quick one. With Marriott buying Starwood, is there any chance there's change to the way that sales leads are going to be distributed? Any chance you get start with leads or any changes otherwise?
Appreciate it.
Well, first of all, I guess you would find it not uncommon for me to say that we really don't comment on third party M and A kind of activity. However, I will also say that, we'll look forward to, dialogue with Marriott about how, the terms of our license agreement and that of, what would be Vistana's signature experiences lines up with them as the licensor and, understand what the impact will have on all IOP programs.
Got it. Appreciate it.
Thank you.
There are no further questions at this time. At this point, I'd like to turn the call back over to Stephen Wise for closing comments.
First quarter of 2016 was the turning point of our growth strategy. As we began opening new sales centers with more to come and we continue to ramp up our first time buyer tour production across all of our current sites. I'm excited about the remainder of the year and look forward to updating you on our performance on future calls. Enjoy your next vacation.
This concludes today's teleconference. Thank you for your participation. You may disconnect