Greetings, and welcome to the Marriott Vacations Worldwide Second Quarter 2015 Earnings Call. At this time all participants are in a listen only mode. A question and answer session will follow the presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.
Jeff Hansen, vice president of investor relations. Thank you. You may begin.
Thank you, Diego, and welcome to the Marriott Vacations Worldwide second quarter 2015 earnings conference call. I'm 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 law. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results 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, July 23 2015 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 refer to in our remarks in the schedules attached to our press release, as well as the Investor Relations page on our website at ir. Mv wc.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 2nd quarter earnings call. Our 2nd quarter performance was a continuation of what you have come to expect from us over past several years. Our key metrics have continued to improve and our portfolio continues to expand with new destinations fueling our longer term growth strategy. So let me spend a few minutes providing color on how we achieved our results.
Then I'm going to hand the call over to John to provide more detailed around those results and other areas of our financials. Adjusted EBITDA in the second quarter was $58,000,000 an increase of 1,000,000 excluding residential, increased $1,300,000, a 1% increase over prior year to $166,000,000. This was driven by our key growth segments $6,000,000 or roughly 4%, offset by $4,000,000 of lower contract sales in our Europe segment. BPG improved slightly to $3404 and tours again maintained their string of year over year improvement, up 1.2% over the second quarter of 2014 as we continue to drive tour flow through programs designed to increase time buyer tours as well as to encourage our owners to increase their point levels. 1 of those programs, which we've talked about before, is the call transfer program with Marriott International.
To date, we have seen very positive sales metrics from these transfers and our work now revolves around expanding this program to increase our sales opportunities going forward. Additionally, we have had success building our future tour growth with our Encore program, which allows someone who is not ready to purchase at the time of the tour to buy a future vacation at one of our resorts. If they choose to purchase when they return for a vacation, that pre spending is applied toward their purchase. This is a very successful program programs continue to ramp up. The tours themselves may not happen for another 6 to 12 months.
I would think the important takeaway this quarter is that line metrics continue to improve and our strategy remains on track to drive our top line through improved same store tour flow. And eventually new sales distributions. Shifting to our resort management and results were nearly $29,000,000, a $2,000,000 or 8% improvement over the second quarter of last year. These results reflect improved ancillary operations and higher fees earned from our exchange company and for managing our portfolio of resorts. Our rental business continued its strong performance this year as 2nd quarter results improved $4,000,000 to almost $11,000,000.
Nearly a 60% improvement quarter over quarter. This was due to a 4% improvement in transient rate combined with a higher number of keys available to rent, primarily from the opening of 2 new faces of units in Palm Desert and in Los Vegas midway through 2014. In Europe, segment results were $3,000,000, down $2,000,000 from the second quarter of 20 14. We have seen our performance decline climate in this region. Our strategy in this segment remains, however, to sell through our remaining developer inventory, while continuing to operate our world class resorts in the U.
K, France, and Spain. In our Asia Pacific segment, adjusted results were just over $1,000,000 roughly flat to the will provide strong on-site new destinations. For those of you that have not yet listened to our yesterday presentation, you may have missed the announcement of planned purchase in the Marriott Surfer's Paradise Hotel on the Gold Coast of Australia. Our intent is to convert several floors of inventory to sell this vacation ownership and sell the remaining hotel and amenities within the next year. We believe this new location will be a wonderful addition to our portfolio in the Asia Pacific region, and expect it will provide top line growth as well as more opportunity for our owners to utilize their vacation ownership.
As it relates to Waikaloa on the big island of Hawaii, we are continuing to pursue a more capital efficient acquisition of the inventory and the units are renovated the first takedown of inventory targeted for early 2016. On Marco Island, 3rd party has begun construction on the remaining towers of our resort, which we will acquire beginning in 2017 and in San Diego, we expect to begin renovations toward the end of the year with the delivery of renovated units beginning in mid-twenty 16. As I'm sure most of you are aware from our press release earlier this month, we've announced another exciting new destination in our portfolio. Having recently closed on 71 units in the iconic Mayflower Hotel in the heart of Washington, D. C.
Beginning next week, Our owners will have access to this both a new destination for our owners as well as another important new sales distribution for us beginning next year. We are at the halfway point of the year, and I'm very pleased with the improvements we've achieved over 2014. Year today, North American vacation ownership contract sales are up 7.3%. VPG and tours have improved 2.73 0.2%, respectively, and total company adjusted EBITDA of $115,000,000 We've continued to improve in all of our key areas and are on course to deliver against our full year guidance. In looking ahead at the second half of the year, as we have mentioned before, we expect headwinds in the marketing and sales costs from our new sales centers and tour programs which continue to ramp up.
However, this is reflected in our guidance. I am optimistic about our ability to continue to produce solid results including adjusted EBITDA and turn the call over to John to provide a more detailed look at our second quarter results and outlook for the remainder of the year. John?
Thank you, Steve, and good morning, everyone. The second quarter was another strong quarter of positive results, in line with our expectations with adjusted EBITDA coming in at nearly $58,000,000, an increase of $1,000,000 year over year. Adjusted development margin was 21% for the company, in line with our full year target of 21% to 22% And for North America, adjusted development margin was 23%. BPG continued to grow reaching $3404 the second quarter and rental margin continued to perform well, up $4,000,000 year over year. Contract sales in our North America segment increased $5,000,000 or 3.4 percent to $151,000,000, driven by continued growth in both tour volume and VPG, which grew at 1.2% and 6 10ths of percent, respectively.
BTG growth in the 2nd quarter reflected improved closing efficiency and higher pricing, offset partially by a decline in the average number of points purchase. The decline in points purchase was a result of an increase in tours and sales to existing owners in the current period, which we have lower average points per contract. This increase was driven by enhancements to our owner recognition levels that we introduced earlier this year that carried over into the second quarter. Adjusted development margin in the quarter was $32,000,000, down $3,000,000 year over year. 2nd quarter adjusted development margin percentage was once again strong at 23%.
However, this quarter's margin percentage was down roughly 3 30 quarter. The remaining 240 basis points of decline related to sales and marketing expenses As you tour volumes, particularly as it related to new buyer tours. In the second quarter of 2015, roughly half of year and into 2016. The remaining variance was due to the timing of certain marketing and sales related program cost as compared to margin to be between 21% 22%. In our financing business, revenue net of related expense was $17,000,000, down $1,700,000 from the second quarter of 2014.
Receivable balance continues to decline faster than we are originating notes receivable balance to begin growing towards implement programs to help drive financing propensity higher than the roughly 40% that we have been averaging in recent years. In fact, in the second quarter, financing propensity increased three percentage points from the second quarter of the prior year. Executing our traditional notes receivable securitization during the third quarter. Given the current strength of the ABS market and the quality of our vacation ownership note receivable portfolio, we anticipate excess spread similar to our recent deals. Pivoting to our outlook, we are reaffirming our previous $5,000,000 to $200,000,000.
This increase relates mainly to a combination of development capital spending deferrals and reductions we have been able to achieve. Looking to the remainder of the year, we do have approximately $25,000,000 of additional pipeline spending assumed in our guidance. However, depending on the timing of executing any of these potential new deals, it may be deferred into 2016. We will update you further on this spend next quarter. One last item as it relates to our adjusted free cash flow guidance is impact of the operating hotel we committed to acquire in Surface Paradise Australia.
As Steve mentioned, our intent is to convert amenities within the next 6 to 12 months. While the portion of the purchase price related to the vacation ownership inventory is included in our adjusted free cash flow sum for 2015, we have excluded the portion related to the downsized hotel given our intent to dispose of this asset in the near future. Shifting out to our return of capital to our shareholders, we paid our 2nd quarterly dividend on July 2nd totaling roughly $8,000,000 We also repurchased roughly $15,000,000 of our shares. This brings our year to date cumulative share repurchases through the end of the second quarter to $6,000,000 for a total of nearly 818,000 shares. Our repurchase activity in the quarter was impacted by the timing repurchase program that we entered into late Turning to our $6.99.
Keep in mind this does not include the 1st quarter purchase of the Ho Ellen, San Diego as it is included in property and equipment until it is converted to inventory. However, even if this were included, real estate inventory balances would still have declined more than $20,000,000 from finished inventory, which represents less than 2 years of contract sales based on our current growth projections. The company's total gross debt outstanding decrease $143,000,000 from the end of 2014 to $568,000,000, all $3,000,000 of which is non recourse debt associated with securitized notes. In addition, $40,000,000 of mandatory redeemable preferred stock remains outstanding. At the end of the quarter, cash and cash equivalents totaled $251,000,000, We also had $207,000,000 of notes receivable available for securitization in our warehouse credit facility $197,000,000 in available capacity under a revolving credit facility.
Our second quarter performance has kept us on track to our 2015 guidance. Adjusted EBITDA was equal to that of our record first quarter and our free cash flow generation continues to produce solid results. I am pleased with where we stand at the midpoint of the year and I look forward to updating you on our performance going forward. As always, we appreciate your interest in Marriott Vacations Worldwide. And with that, we will open the call up for Q And A.
Diego.
Thank you. You. One moment please while we poll for questions. Thank you. Our first question comes from Steven Kent with Goldman Sachs.
Please state your question.
Good morning, Steve.
Good morning. A couple of questions for you. First off, the VPG number, which gets a lot of focus from us and investors, always shows some amount of volatility. And I just wanted to know Just review again, it sounded like there was a mix issue. Can you talk a little bit more about that and what drove the trends there.
I just I know you've talked to it, but I still don't understand it. And then maybe most importantly, how do you measure yourself, your team and your executives, do you measure yourself on tour flow on sales on VPG? How are you compensated? And how should we start to think about so many of these variables that are going to be moving around. And then one other thing, which I don't think you talked to today, but I know you've talked to us in the past about is the ability to recycle or capture inventory from some of your existing owners and what initiatives do you have on that front?
Okay. Let me kind of in a reverse run. This is Steve. Let me kind of address 2 things. First of all, how do we how do we measure, performance, compensate people within the organization, etcetera?
Clearly, within the sales and marketing organization, which is obviously where the question is centered around. They're based on, several are based on total volume and they're based on costs. At the end of the day, VPG is a quick way of looking at how you manage cost going forward. Obviously, if your VPG or the amount of volume that we get per tour goes up, given the fixed cost nature of many of the tours. Then, as a result, you get better gearing effect and better leverage.
And therefore, your costs go down. So that's the way in which they're looked at. More broadly, the entire management organization is looked at from a development margin standpoint point as one of the metrics that we focus on as a way of judging annual performance targets, etcetera. As far as the question about what what's going on in terms of what's driving VPG. Keep in mind that there are several different ways you think about this.
Most importantly is probably the mix of tours that you get between existing owners and first time buyers. As I think we've said, set before, first time buyers have a tendency owners have the converse. They have a lower average contract, but a higher VPG. And the determinant factor in both of those things is closing efficiency. Or the rate or the percentage of which you close.
It's just how it all mixes together, to be honest, Steve, in this particular period. The other thing I'd point out is that while the BPG of only 6 10ths of a percent growth in the quarter, It's on top of 5% growth last year in the 2nd quarter and 8% growth in the second quarter of 2013. And year to date, our VPG is up 2.7%. When we started the year, we said we thought VPG growth would roughly be in line with inflation I think we're right on target to where we thought it would be. There'll be some ebbs and flows on a quarter to quarter basis, but I don't think it's of a material nature that one quarter is up or down.
I mean, you may recall that in the first quarter, except for other substantial.
And then I think on the last question, Steve, you had this on recycling inventory. We'll probably buyback, whether that's through COA defaults, which is a pretty low per of the inventory we buyback, but more opportunistically in terms of owners that are looking to sell their time share, call it, we'll spend $50,000,000 to $60,000,000 this year. And that'll be at a product cost when we resell it significantly less than call it the 29, 30% product cost that you see in our P and L from a system wide perspective. So, I think that seems about right. Obviously, as we continue to grow and the system continues to grow, I mean, it might increase, but not necessarily greater than a of the growth in the system, if you will.
So, I mean, that's how we think about recycling that inventory.
Thank you. Our next question comes from Christopher Agnew with MPM Partners. Please state your question.
Hi, Chris.
Thanks very much. Good morning. Wanted to ask about rental income you had a strong quarter. And I think you talked about benefiting from opening 2 new phases. So can you just help me think through how those new phases impact the outlook for the rest of the year?
And then, would it be, is it fair to assume as you continue to add additional phases over the next couple of years that you'll likely get a similar benefit, when those are open.
Yeah. So the first part of your question is obviously we opened the 3rd tower in Las Vegas and the 2nd in the 9th phase of our project in Shadow Ridge, late in the second quarter, early third quarter of last year. So, as we start to get towards the end of this year, there'll be more comparability between available inventory in the system than what there was. In the 1st 2 quarters of the year because that didn't exist in the 1st 2 quarters in 2014. Having said all that, As we continue to add new projects, new phases, etcetera, there comes unsold developer inventory that we put on the shelf and rent.
And I think as you saw in our Investor Day, we saw that we was, you know, some very meaningful improvement in what we think the revenue results will be on a going forward basis. The one caveat in all that is when you have unsold developer inventory, you do have an offset in the rental P and L, which is for unsold maintenance fees are attached to every single week, whether it's sold to an owner or whether we own. But on a net basis, we believe that there will be improvement in the rental margin going forward.
Got it. Thanks. And Going back to VPG a little bit, I mean, I don't know how big, the ENCORE program is, but I know you called out the that that has higher VPG. Is that something that's, I don't know if you give us some sort of context on on the size of it, but is that gonna be a driver of, proven mix going forward?
Well, we're very we're very pleased with the production of on core packages And what that really translates to, Chris, is that there is, someone takes a tour today for whatever reason they choose not to purchase. We give them an opportunity to come back for another vacation with the notion, as I mentioned in my remarks, that should they choose to buy when they return, then we take the cost of that package and we net it against their purchase price. That line of potential tours coming from those on core packages continues to grow. The one downside is we don't know exactly when people will choose to plan their vacation. So we don't we can't exactly say, well, we know that this person who bought today will tour, you know, in 6 weeks or whatever is.
But we're very encouraged by that. While we won't, we don't disclose the premium that we get in VPG of Oncor packages, let me just say to you that it is materially higher than what we see on a general average basis, keeping in mind that some on core package stores are included in our quarterly VPG announcement anyway.
Okay. Got it. Thanks. And then final question. And apologize if I missed this.
But, John, can you recap just around the accelerated share repurchase program? I'm not sure I missed your point there. Sure.
Yeah. Right at the end of the first quarter, we did a accelerated share repurchase of about $30,000,000. And those programs have a tail on them, right, with the counterparty to buy those shares back. Typically, they don't take the full period of time. This one went out the full 60 days.
So for all intents and purposes, we were really out of the open market buying even after the window opened up. Until late May. So the, call it, the $15,000,000 that we bought back in the quarter was really the last month of the second quarter. So I think you got to look at it like the $30,000,000 ASR that we did pull forward, I think, from a timing. That's why from a a year to date, we're at, call it, $66,000,000.
We've returned another $16,000,000 in our 2 dividends. So on a full year run rate basis, I mean, you're looking at, we're on track to return over 160,000,000 dollars, $170,000,000 dollars based on the current run rate. So I wouldn't over read too much and was our point in the, in the buyback activity in the quarter.
Okay. Perfect. Thank you.
Thank you.
Our next question comes from Bob Blitzler with JMPC Securities. Please state your question.
Hey, Bob.
Hello. Question about the margins. John, you talked about the upward drift in sales and marketing as a percentage of revenues being related to ramping up your tour generation. Just wanted to kind of talk about that going forward because it seems to me as you start adding these new properties to inventory and start building new sales centers, you're going to have some additional upward pressure on that before the sales sort of catch up with the cost. So I'm just wondering if you could talk about the the dynamics going forward of sales and marketing?
Sure. No. And Bob, this is something we've been talking about. We've been successful over the last year as we've been ramping up the tour flow. We've had good VPG growth and that's helped as Steve described how you're more cost effect in terms of marketing and sales with better VPG.
But the guidance we gave for the full year, the 'twenty one to 'twenty two, assume not only this investment, but also, there's going to be, as we've talked about, startup costs related to the new sales centers, we'll articulate those. That really wasn't a big impact here in the second quarter, but that is going to be some of the headwinds for the full year as we move to start to open those late this year, early next year. But to Steve's point in his comments, we've included that in 21% to 22% guidance for the year. So, it's something we said we're going to continue to try and maximize, but on the flip side, if we start to grow the top line and drive top line sales growth, we'll drive the overall development margin in terms of growth. But it's always that balance.
Are those additional costs related to sort of ramping up the tour flow? Were they sort of one time in nature does that recede a little bit once you kinda hit a pace, or is that something that's gonna be consistently in that number going forward?
Go ahead.
Yes. Clearly, as we have continued to ramp things up, on a comparable basis, to same time last year, yeah, we were we're spending more energy, more effort, and there are no more costs in trying to dial those things up, particularly to things like, the call transfer program that we did with Marriott, which didn't really pick up enough steam until, you know, last summer, and then it began to grow further as we got into this year, etcetera. There will reach a point of equilibrium, I believe, where the cost going on and the cost coming off will more than will kind of offset each other. So I think it's more of a We've gone from having limited new growth opportunity over the last several years of opening up new sales centers, etcetera. To kind of getting into the growth business once again.
So there is some attendant related startup activity goes along with that, but I think you'll start to see it level
Well, and you also get the tours start showing up in the sales associated, which once again allows us to leverage the fixed four of our marketing and sales costs and drive margin.
Okay. Thanks. And one quick follow-up on COGS this quarter. You you're up, looks like, 50 basis points, company wide and 90 basis points in North America. Was that the comp to the true up last year, or was there just a mix issue?
What's what's going on with COGS this quarter?
Yeah. It was the product cost true up. That was about 90 basis points in North America. So last year had a benefit, if you will, versus this year.
Ladies and gentlemen, there are no further questions at this time. I'll turn the conference call back to management for closing remarks. Thank you.
Thank you very much for your question. And for your attention. Let me just close by saying we've had a solid first half of the year. I look forward to reporting on our continuous as we progress through the remainder of 2015. Thank you for your participation on the call today and your continued interest in Mary Vacations worldwide.
And finally, to everyone on the call and your families, enjoy your next vacation. Thank you.
Thank you. This concludes today's conference call. All parties may disconnect. Have a good day.