Greetings, and welcome to Marriott Vacations Third Quarter 2015 Earnings Call. At this time, As a reminder, this conference is being recorded. It is now my pleasure to over to your host, Jeff Hansen, Vice President of Investor Relations. You may begin.
Thank you, Rob, and welcome everyone to the Marriott Vacations Worldwide third quarter 2015 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 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 and will not be updated information.
You can find a reconciliation attached to our press release, as well as the Investor Relations page on our website at ir. Mvwc.com. 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 3rd quarter earnings call. Adjusted EBITDA was $52,000,000 in the quarter $2,000,000 below the 3rd quarter of last year. $9,000,000. While contract sales were negatively impacted by a stronger U.
S. Dollar that affected certain sales locations. Our 3rd quarter performance highlights strength of our diverse lines of business. Results in our resort management business were up over $3,000,000 compared to last year and our rental business improved by more than $2,000,000 year over year. However, this performance was offset by $9,000,000 all of which we expect to turn around in the fourth quarter.
In addition, results reflect lower contract sales volumes and higher marketing and sales program costs. Let me take a few moments to provide some insights into our 3rd quarter results. I will then turn the call over to John's provide more detail into our performance. $60,000,000, a $7,000,000 decrease from last year. This consisted of decreases of $1,000,000 in each of our euro Asia Pacific segments and $5,000,000 in our North American segment.
In North America, BPG was down roughly 1% to 3400 and $28 and tours were also down about 1%. However, these headlines do not tell the full story. To better understand the drivers of our as well as sales to Japanese customers at our resort on Oahu, we have seen the impact of weakening foreign currencies again the U. S. Dollar.
In fact, contract sales through these channels were down by over $7,000,000 in the quarter, primarily in our Latin America sales channel. While the results from these channels are impacting year of our annual sales volumes. Looking at our remaining North American business, if you exclude the channel specifically impacted a stronger U. S. Dollar.
Contract sales improved $2,000,000 and PPG improved 1.9% year over year. Further, while not easily quantifiable, we also experienced headwinds associated with hurricane activity in certain locations as well as term strategies to grow contract sales. We view this as a 2 pronged approach. 1st, to grow tours through the ramp up of certain marketing programs and second, to grow our top line sales through new sales locations at exciting new destinations. As it relates to our new marketing efforts, early last year we began to deliver focused effort to invest pipeline of tours.
Such programs include our all transfer program with Marriott International and our enhanced ENCORE program, both of which I described last quarter. We are very optimistic about these programs given the tremendous growth we have seen in our tour pipeline since these efforts began. Our pipeline tours through these 2 new programs alone has grown by almost 20,000 packages when compared to $400. This pipeline represents over $60,000,000 in potential future contract sales volumes. As it relates to our strategy to grow contract sales through new sales centers at new destinations, in Washington, D.
C, our owners are already enjoying access our Marriott Vacation Club units at and we expect the sales center at the Mayflower to open in the middle of next year. In California, we've begun the conversion of 2 sixty four units at our operating hotel San Diego, with the 1st phase of these units, along with a new sales center expected to be delivered in the middle of next year. Hawaii, we continue to have discussions for potential capital efficient structures as we move toward closing on the purchase of 246 hotel rooms at the Waikalo area the Big Island of Hawaii. We intend to convert these hotel rooms into 112 timeshare units and also plan to convert a portion of the hotel meeting space into our sales center. Assuming this transaction closes as scheduled, we expect to begin sales in the first half of next year.
And in our Asia Pacific segment, work is underway on the conversion of several floors of the Surfer's Paradise Marriott Resort in Australia as well as a permanent sales Now let me shift to the performance of our other lines of business beginning with the Resort Management And Other Services business where results improved $3,000,000 or 14 percent quarter over quarter to over $26,000,000. These results reflect improved ancillary operations and higher fees earned from our exchange company and from managing our portfolio of resorts. Our rental business continues to perform well, third quarter results improved more than $2,000,000 to over $13,000,000. Before I turn the call over to John, let me provide my thoughts on our outlook for the fourth quarter and then provide some key takeaways. For the fourth quarter, we do expect the headwinds created by the strong U.
S. Dollar to continue impacting contract sales. However, Given the turnaround of the unfavorable revenue reportability from the third quarter, we expect development margin to be up year over year We also expect begin growing year over year. With these expectations for the business, we are optimistic for 20 fifteen's full year results and as such. We expect 2015 adjusted EBITDA to be towards the high end of the 222 $232,000,000 team given the success of the marketing programs in place, the strong tour pipeline already generated, and the ramp up of the new sales distributions.
We are confident as we move into the new year that we will be able to grow top line sales volumes and bottom adjusted EBITDA as well as generate strong adjusted free cash flow. I remain optimistic in the strength of this business look forward to closing out another successful year. With that, I'll turn the call over to John to provide more detail around the quarter and our outlook for the remainder of the year. John?
Thank you Steve and good morning everyone. Adjusted EBITDA totaled $52,000,000 14. While these results are not adjusted for the adjusted EBITDA by nearly $7,000,000 in the third quarter, all of which we expect to turn around in the 4th quarter. Adjusting both years for the impact of revenue reportability, adjusted EBITDA would have been nearly $59,000,000 in the third quarter of 20 15, a $2,000,000 or 3 percent increase from $57,000,000 in the third quarter of 2014. For the quarter, company adjusted development margin was 21.2% and North America adjusted development margin was 23.1%.
Rental margin outperformed the prior year by $2,500,000 and our resort management and other services business improved over $3,000,000 as compared to last down 5,000,000 American sales channels as well as sales to Japanese customers at our resort on Oahu. North America adjusted development margin in the third quarter was $31,000,000 and 3rd quarter adjusted development margin percentage was once again strong at 23.1%. Excluding the impact of residential sales in the prior year, this quarter's margin percentage was down 250 basis points from the third quarter of 2014. Driven by a 50 basis point increase in product cost, which was impacted by the mix of inventory sold and by a 200 basis point increase in marketing and incremental tour volumes, particularly as it relates to new buyer tours. While many of these tours have not yet materialized on-site, as Steve mentioned, resulting from the new rollout of new In the company's financing business, revenue net of related expenses was $17,500,000, down $1,000,000 from the third quarter of last year.
For those of you not familiar with our trends over the last several years, our financing margin has been decreasing as our notes receivable portfolio has been declining and implement programs to help drive financing propensity higher than the 40% to 45% that we've been averaging over the last few years. I'm happy to say that In fact, our North America propensity reached 53%, 9 points higher than the third quarter of last year, with our gross notes receivable balance increasing from the end of the second quarter, we expect that for the first time since becoming a public company, we will quarter, we successfully completed a $264,000,000 note securitization at an interest rate of 2.56 percent and a 96 point $1,000,000 is expected to be released from restricted cash in the 4th quarter as the remaining notes are sold in accordance with the terms of the curitization. Shifting to our rental business, total company rental revenues were up $10,000,000, primarily driven by a 6% increase in transient key rented $4,000,000 from revenue associated with hotels we currently own in San Diego and Australia and higher plus point revenue. Rental revenues net of expenses remained strong, up nearly $2,500,000 over last year to $13,000,000.
In our resort management and other services business, company results improved $3,000,000 in the 3rd quarter to 26,000,000 dollars. Results reflected higher ancillary profits as well as higher fees for managing our portfolio of resorts and improved exchange company activity. In our Asia segment, adjusted results were breakeven compared to $1,000,000 in the prior year third quarter. We are working on the conversion of several floors of the Surfer's Paradise Hotel on the Gold Coast in Australia and expect to sell the remaining portion of that downsized hotel to a third party within the next year. Our strategy in Asia Pacific region remains the same to continue to find new destinations with strong on-site sales to generate future top line In Europe, our strategy remains the same to sell through our remaining developer inventory as efficiently as possible.
In the third quarter, segment results were $6,000,000, down $1,500,000, mainly driven by lower contract sales and development margin not surprising given our strategy for this segment as well as the current economic climate in the region. Shifting now to our return of capital to shareholders, We paid our quarterly dividend on October 8th of roughly $8,000,000 and also repurchased roughly $40,000,000 of outstanding shares in the quarter. Year to date, we have returned $24,000,000 of dividends. With respect to our share repurchase program, we have been out of the market since the middle of August, However, we intend to get back into the market next week. And I'm pleased to say that our Board of Directors also increased our share repurchase authorization find additional 2,000,000 shares, bringing our total authorization to 3,600,000 shares.
To to our balance sheet from the beginning of 2015, real estate inventory balances declined $52,000,000 to 716,000,000 including $352,000,000 of finished inventory, which represents less than 2 years of contract sales based on our $69,000,000 course debt associated with securitized notes. In addition, $40,000,000 of mandatory redeemable preferred stock remains outstanding. At the end of the quarter, restricted cash related to our recent securitization, which we expect to be released in the fourth quarter. So let me close with my thoughts about related to flat to slightly below prior year in fourth quarter, bringing full year contract sales guidance to a range of flat to up 2%. Even with this 21% to 22% guidance range previously provided.
As it relates to our 4th quarter EBITDA, we expect development margin outperformed prior year given the turnaround of revenue reportability from the third quarter. In addition, we expect our other lines of business to contribute to year costs. In our resort management business, we expect that our stable recurring fee stream will continue to provide year over year growth and we expect our financing business which has declined over the past few years we will deliver adjusted EBITDA $75,000,000 to $200,000,000 $20,000,000 of unidentified inventory spending. However, depending on the timing of executing potential new deals, this spending may be deferred into 2016. I am proud of what we've accomplished to date and I look forward to wrapping up another strong year.
As always, we appreciate your interest in very off vacations worldwide. And with that, we will open up the call for Q And A. Rob?
Thank you. At this time, we'll be conducting a question Our first question comes from the line of Patrick Scholes with SunTrust. Please Steve with your question.
Hi. Good morning. Can you hear me okay? Yes, certainly can.
Yes, just one question. I'm a little confused on or one area, excuse me, I'm confused on, is reconciling taking down your contract sales, I would say, quite significantly yet EBITDA is going to be a bit higher. Is there VPG changes to your VPG? I'm sorry, changes here, sorry, your loan loss provision, impacting why that may be?
No. Loan loss provision, I think, was fairly flat on a gross dollar basis year over work outside of the development margin, continued outperformance. Rentals did well, the management business. And as I talked out, we and we talked about this briefly, I think, in the second quarter, we had rolled out some revised financing programs And we have seen a pickup a little bit sooner than we expected on some of the financing propensity, which now we financing profit, which had been negative every quarter really since we've been a public company to really start to turn and provide some upside as we start to move to the fourth quarter. So, I think when you have the outperformance in the third quarter, continued outperformance in those other lines of business the 4th, even with some of the softness that we talked about in the Latin sales channel, which was most of the impact there you saw, I mean, if you look at just in third quarter, if you go back and look at currencies in both Mexico, Colombia, as well as Brazil, you saw a decline against U.
S. Dollar in those currencies of anywhere between 15% 40% in the quarter. So that was a little bit of a surprise. I mean, we we deal with foreign currency all the time that had some real near term impact. As we said, we think that'll have some impact as we move into the fourth quarter, but Over time, that becomes if it doesn't move back the other way, and I think in the 4th quarter, we've seen it come back the other way slightly from a currency, it hasn't made up where it's at, but that becomes a little bit of the new normal and that'll stabilize at some point here too.
So, that's really the near term impact.
Our next question comes from Chris Agnes with MKM Partners. Please proceed with your question.
Hi, Chris.
Thanks very much. Good morning. Good morning. Maybe a little bit of follow-up to that. I think you said, I just want to confirm the last 10% of sales were from Latin America.
If you include Japan, what's the mix? And then maybe you said Mexico, Colombia, Brazil. Is that in order, the source of demand from Latin America? And a third one on the same topic, headwind continues in the fourth quarter, but presumably it'll also continue into 'sixteen. As in Brazil, in particular, the economy's challenged as well as currency impacts.
What are your thoughts around offsetting that weakness in demand? Can you do that from domestically? And what are you trying to do to mitigate some of that weakness? Thanks.
Yes. A lot of stuff in there. So let me ahead on some of these. Yeah, I mean, the devaluation of the yen was really, I mean, that's we've had some headwinds all year on that, because that you haven't seen that move as much here this year. It was really in fourth quarter of last year.
So that was a couple of $1,000,000 probably, Patrick, in quarter. I don't have the overall piece of that. We did say Latin was historically has been about 10% of our sales. I think that's 2 of them. What was the question?
Well, just if you could maybe the sources of demand from Latin America. You'd mentioned Mexico Colombia, Brazil. I was just wondering it was that in order of It
would be predominantly Mexico, Brazil and then Colombia in that order of the 3 those are not the only three markets that we participate in in Latin America. Those are the ones, that have the biggest fluctuations in terms of local currency versus the U. S. Dollar. And it depends on market.
For instance, Brazil is a huge source market, in the Central Florida area, as an example, So it does vary. But again, I think the other question was, well, what are you going to do offset, some of the shortfalls assuming that the, the currency situation doesn't correct itself in the short term. And the simple answer there is, obviously, as we talked about, by dialing up things on, tour generation for first time buyers through our call program with Marriott, the increased, success of our, our, our encore program, we're gonna Encore program. Those are both very positive, trends going forward for new tour generation. And so on top of that, as we open up these new sales centers, they will be generating new demand, new new source markets that we've not been in before.
So that's what gives us confidence going forward. Clearly, while we would certainly like the way of a magic wand to be able to correct the currency problems that exist in the Latin countries, or even in Japan, which is to a much lesser degree, what we experienced in Latin America. We can't do that. So, how do we turn on some other channels? How do we stimulate growth in other areas to offset that?
That is the Got you.
And then maybe if just thinking about 16, will tour flow and VPG be challenged as long as LatAm remains a headwind. If I'm thinking about first half of 'sixteen, is that something we should be, prepared for?
Well, I, we obviously haven't gotten around to providing 2016 guidance yet. I would expect that what we will guide will be that, our top line sales volume and contract sales will go up would expect that our VPG will go up and we'll get that from a couple of different places. Clearly, same store volume just by the per virtue of price increases we should get in. This is what we talked about in our investor day. It should go up, call it, roughly inflation.
The additional tours that we have been loading in throughout the course of this year and we'll continue to do so between now and the end of the year for 2016 will certainly help. And then you start to bring on the new sales distribution centers in the early to middle of next year. I think all of those things kind of come together to give you confidence that our top line sales volumes in terms of contract sales will continue to go
up. Great. Thank
you. That was helpful. Thank you.
Our next question comes from the line of Stephen Kent with Goldman Sachs. Please proceed with your question.
Good morning, Steve. Hi, good morning. Can you hear me okay?
Yes, absolutely.
Okay. So just a couple of things. Maybe you could give us update on a couple of the new marketing programs that you were rolling out in past couple of quarters. Which ones have worked the best and which ones, do you need to maybe take another look at? And then just new versus existing, can you give us a sense for how those, sales either new customers or existing customers are playing out?
Sure. So, I would say pretty much on an equal basis, both our call transfer program with Marriott and our our new enhanced, universal ENCORE program, have both contributed very meaningfully to that 20,000 tour increase over what we saw same time last year. When you think about where those customers come from, clearly from the transfer program can't say 100%. But I would say a vast majority of those customers will be first time buyers. They will be new to us, we haven't talked to before, that will come through and take a tour and hopefully, make a purchase.
On the universal encore program, I think that'll be a mix between, first time buyers that came through and decided not to buy on their tour, but want to come back and take another bite at the apple and some existing customers that, for whatever reason, our owners, they say, yeah, I want to buy some more. I just us by some more right now. So, that would be the balance that I would see. But I would tell you both of those programs, that we began work on late last year, have really performed very well for us. Having said that, we can you to look at other things as we always do as ways to continue to grow more contract sales, more tour flow and more top line, and we'll continue to tinker around with some stuff.
But as far as those two programs are concerned, we're very pleased with how they're operating today.
And I think Steve, the other question, the mix, it still hasn't moved too much. It's still about sixty-forty first time. Or excuse me, existing owners versus first time buyers. As Steve mentioned, as more of those tour, that tour pipeline we talked about at 20,000, Plus, as I start to show up, we will continue to expect that trend to get close, we'll start moving towards the fifty-fifty.
Okay. Thanks. Thank you. Our
next question comes from the line of Bob Lafflour with JMP Securities. Please proceed with your question.
Hi, Bob.
Hi guys. Could you talk a little bit about the reportability issue? Why the number was so high this quarter? What specific type of reportability issue is that So I'll start with that one.
Sure. It's similar to issues we've had in the past, Bob, in terms of what impacts reportability you have, just the timing of sales, so stuff that could be in rescission at the end of the quarter, given your normal 10 day rescission period. So it's in your contract sales. It's just the rescission period hasn't cleared yet. So there's a portion of that.
And probably the other, the other piece is, I talked our new financing incentives we're running. With that, there's down payment requirements when you have finance contracts. And what can happen is when we when that ramps up a little bit quicker than we were expecting, that could have some near impact, once the payments start, those will come that defer all those sales once they start making their principal and payments here in the fourth quarter will come back and be recognized. So, we tweaked the down payment requirements to minimize that impact and like we've said, all along, you always are going to have some impact quarter to quarter. We had a little bit more with the financing really this time.
But on a year over year basis, typically we'll get the programs tweaked and operating, right, in terms of minimizing the impact in any given year. And that's our goal for this year.
So that's primarily incentivizing people to take financing as opposed to incentivizing people to make the purchase of the time share itself?
Yes. I mean, we've tried to without getting into the details of our program, we've just tried to make it a little bit more favorable in terms of the financing options we offer So we're seeing a pickup in that. Now at the end of the day, is that a the deciding factor in terms of sales. It's hard to put a direct correlation on that, but, we have, obviously, in the overall sales even pulling out the foreign currency, the 3rd quarter sales were up, as Steve mentioned, couple couple, couple of $1,000,000. Most of that was on VPG.
So, and we expect, as we look at the fourth quarter, similar type impact, I think core North America sales centers will show higher BBG, hopefully, slightly better on the tour side. And we'll do our best to manage the Latin and some of the downside there, but that's going to be some of that headwind. And then Steve hit on that. But I think like I tried to say in my earlier comments, I think even if foreign currency doesn't move back the other way dramatically, It does become a little bit of a new normal over time and that becomes what people in channel I have to live with in terms of buying. So, hopefully that gives you a little bit more color there.
Hey, Bob, just circling back the reportability thing. Think of the, think of it as a 2 step dance. We talked to someone about purchasing, with us, signing a contract to purchase points from us. There are certain incentives associated with that. Then we talk to them about how they want to pay for it, whether they want to pay in cash.
And as I think you know, our customer demographic is pretty well equipped to be able to make a cash purchase. We do, in fact, and we spend time earlier this year designing some incentive programs to get people to take our financing, which as you know, is fairly lucrative for the business. And that's what we put them in. So there's really 2 different incentives, one for the sale, one for the financing. At the end of the day, and we believe that it's right for the business in terms of the bottom line to approach it in both of those fashions.
And, again. Reportability is a tough thing. I certainly understand that. I think the takeaway should be that, the sales are going to be there. The financial reporting sales are going to be there.
It's just a when do they report? In this case, they didn't show up 3, they'll show up in 4. And that's, again, one of the things that leads us to, be very confident in coming out and saying that we think that we're going to end the year at the end of our guidance from an adjusted EBITDA standpoint.
What's the tip so with a typical financing incentive what's the typical lag between closing the sales then and recording the sales? Do they need to make 1 mortgage payment, 3 mortgage payments? What's what kind of a lag period are we talking here?
It obviously depends. The goal is that it's not more than a couple of payments, Bob. Yeah, the sale closes, and then once again, we can, we had to work on tweaking the down payment requirements ultimately, the goal would be that there would be very little impact or no payments, but you're always going to have a little bit of fluctuation in terms of that, but it's not a lot
Okay. And on a different topic, you said you were out of the repurchase market since mid August. Is that your typical blackout window or is there something else that had you out of the market?
No, our typical back out period would be when our quarter closes. So it was a little bit earlier than that. Obviously, I'm not going to get into specifics, but I can give you the generic. Obviously, there's all business and other legal reasons that we always look at our repurchase program and when we can and cannot be in the market. But, as I mentioned on the call, we'll be back in, we expect to be back in early next week.
Okay. And then my last question, which I guess is sort of a bigger picture question. Obviously, the stock is doing very poorly today. And there's a lot of focus about sort of the sustainability of consumer demand for time share. Consumers keep buying time share, given the other alternatives that are available to them.
And it always seems like in the space, there's either a problem with tours, there's a problem with VPG. How do you convince people that this 20,000 next tours you put into your pipeline. They're going to have a good propensity to buy time share and that this is a long term viable consumer product. As opposed to something where we're constantly struggling to get these things sold every quarter. And always for the 2nd quarter in a row, we're dealing with sort of a post earning sell off related to perceived softness in consumer demand for timeshare?
Let me see if I can address I will remind you by the way that, our third quarter 'fourteen comparable was a 6.9% increase in fee So it wasn't like we were up against some sort of a soft comp. But having said all that, our universal encore program, generates a very high VPG and closing rate higher than our numerical average. So we feel very good about that. And, while still relatively young, our, call transfer program tours, those few that have come the house. We are also very encouraged by what we see there.
So I would say to you that, I mean, you heard us say we are relatively bullish about what those 20,000 tours mean for us going forward. I would say to you that we wouldn't just throw that out in the capital a fashion. We were very thoughtful about that because we believe that, and in fact, they will be a substantial impetus for, top line growth for next
What I would just make to add to Steve's is, closing efficiency, actually was up year over year. So, we still see the folks that were getting in there, the likelihood of them buying out obviously is a little bit better than it was last So, the trends are right. The underlying business performed okay in the third quarter as we talked about in North America with with sales up a couple of $1,000,000. And that's the core part of the business. So, as Steve has talked about, we've got confidences growing the tour pipeline with new sales centers as well as the programs.
We feel very, very confident in terms of the longer growth prospect and the top line growth. And it was really, as we talked about, a lot of the foreign currency impact here in the near term in the quarter.
There are no
further questions. At this time, I'd like to turn the call back over to Steve Weisz for closing comments.
Thank you very much, Rob. I'm pleased to say that we're poised to produce strongest earnings year yet. I'm excited about what lies ahead. Despite near term headwinds from the stronger U. S.
Dollar, our development margin remains strong. Our rentals and resort management businesses are performing at a high level. Our financing business is beginning to grow. And we have a growing tour pipeline generated from the strength of our new marketing programs. In 2016, we will begin to experience growth Asia Pacific region.
I look forward to reporting on strong final quarter to 2015 to you and more of which you can expect from us in the future. Thank you for your participation on our call today and your continued interest in verifications worldwide. And finally, to everyone on the call and your family enjoy your
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