Greetings. Welcome to the Marriott Vacations of Worldwide First Quarter 2015 Earnings Call. At this time, all participants are in a listen only As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Jeff Hansen. Vice President, Investor Relations.
Thank you, Mr. Hansen. You may now begin.
Thank you, Rob, and welcome to the Marriott Vacation Worldwide first 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 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 30, 20 15 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 Weis, President and CEO of Marriott Vacations Worldwide.
Thanks, Jeff. Good morning, everyone, and thank you joining our first quarter earnings call. If you've seen our earnings release this morning, then you know that we are very pleased with our performance to start year. With that said, let me spend a moment providing some color around how we achieved such a great quarter. Then I'll hand the call over to John to provide more details around our results and outlook.
Adjusted EBITDA in the first quarter was $57,500,000, a 17,000,000 or dollar or 43 percent increase over the first quarter of 2014. This was driven by improvements in virtually every area of the business. Total company contract sales, excluding residential, increased almost $15,000,000 or 9.5 percent quarter over quarter to 100 and $70,000,000. VPG improved 4.7 percent over the first quarter of 2014 to $3,006.40. However, even more importantly, VPG was actually outpaced by growth in tour flow, which improved by over 5%.
Tour flow in the quarter was helped by enhancements we announced to our owner recognition levels which created a near term incentive for owner recognition levels are like most customer loyalty programs, wherein our owners have additional benefits and offerings depending on many points they own. Our overall strategy remains to increase our tours and sales to first time buyers. To that end, We saw traction in our first time buyer tours in the first quarter and are continuing to ramp up our new owner tour programs throughout the year. Shifting to our resort management and other services business, results improved dollars. Results in the quarter reflected improved ancillary operations and higher fees earned from our exchange company and from managing our portfolio of stores.
Another big driver of our first quarter performance was our rental business where results improved $9,000,000 to $16,000,000 in quarter. This was due primarily to increased keys available for rent and higher transient rates combined with a lower cost of inventory. The increase in keys available this quarter stemmed from the opening of 2 additional phases of inventory after the first quarter of last year. You may recall, in May of 2014, we opened new units at our Shadow Ridge product, property in Palm Desert and in late June, we opened the Third Tower of our Grand Chateau property in Las Vegas. Remember, our rental business is different from lodging in that our inventory is not consistent year over year, so quarters can fluctuate with the addition of new faces and destinations.
In addition to the increased keys available to rent, we were also able to achieve higher than expected occupancy and transient rates in Hawaii and the Caribbean. For those reasons, we expect full by the completion of the sale of all 18 units at our former Macau location. This sale provided $28,000,000 of residential contract sales and $6,000,000 results were $3,500,000, an increase of $2,000,000 from the first quarter of 2014. As it pertains dollars. Front partial in the hotel district in Cancun, as well as unfinished units in our Ritz Carlton Club and residences in San Francisco.
Let me give you a quick update on our new destinations we announced last quarter. We are continuing to move forward we are having ongoing discussions with third parties regarding asset light transactions at both Waikaloa and Miami. As both are planned to close late this year, I look forward to updating you on their progress in later quarters as we begin to ramp up sales centers in these new destinations. We have come out of the gate firing on all cylinders, achieving and exceeding our expectations. So with that said, let me walk you through how do about the remainder of the year and our full year outlook.
We expect contract sales growth guidance range of 4% to 7%. So after flowing through the outperformance in the first quarter, we are increasing our full year contract sales growth outlook to 5% to our half of the year should see some increased pressure on our marketing and sales costs as we prepare for the opening of our new sales centers early next year. To that end, we do contract sales and in our rental results. We are increasing our full year adjusted EBITDA range by $7,000,000 to 2 22 to $232,000,000. Before I turn the call over to John, let me shift your focus for a moment to talk our Investor Day at the New York Stock Exchange on May 15th.
I'm excited about having this opportunity to discuss strategies when we meet with but exceeded them. Looking forward, we have no plans to sit back and relax, but have already set our sights on new destinations and new ways to grow our business well into the future. To tell you company leadership to scenarios for future top line growth. We welcome your attendance and your questions for the team and look forward to seeing everyone there in May. With that, I'll turn the call over to John to provide a more detailed look at our first quarter results and outlook for the remainder of the year.
John?
Thank you, Steve, and good morning, everyone. Like Steve, I am also very pleased with what we've accomplished to start off 2015. We generated adjusted EBITDA of $57,500,000, an increase of over $17,000,000 year year as we saw improvements in our development, rentals and resort management businesses. Total company contracts sales grew $36,000,000 or 23 percent to $198,000,000 in the first quarter of 2015. And after excluding residential dollars, driven mainly by 0.6% in the first quarter of 2015, a 180 basis point improvement from 19.8% in the prior year quarter.
Looking specifically at North America, the vacation ownership contract sales increased 11% to $156,000,000 in the quarter, driven by solid VPG and tour growth. VPG increased reflecting strong last year. Poor volumes continued to increase to increased roughly 170 basis points to 23.7 percent. Product costs decreased 300 basis points team. About half of this improvement resulted from residential sales in the prior year first quarter, which carried a higher product cost.
The remaining improvement call it 130 basis points resulted from sales of our lower cost inventory associated with our inventory repurchase program. Marketing and sales as last year's first quarter was favorably impacted by residential sales. Excluding the impact of those residential sales, marketing and sales costs actually improved slightly year over year, demonstrating our continued ability to leverage our fixed costs despite continued investments in programs to drive incremental tour flow. Turning to our rental business. The company results were very strong in the first quarter contributing 6 $19,000,000 to our results, a $9,000,000 increase from the first quarter of 2014.
Results reflected not only strong top line performance with transient keys rented up 10% and transient rate up 6% debt but also lower inventory costs due to a favorable mix of inventory for rent. And other services business, company results improved over $3,000,000 in the quarter, 18% higher than the first quarter of last year. Performance in the first quarter reflected Lagoons and Abaco in the fourth quarter of 2014. In addition, results also reflected higher revenues from managing our portfolio, down $1,000,000 from the first quarter of 2014. As we've said before, our notes receivable balance continues to decline than we are originating new notes.
However, we do expect this trend to stabilize in our notes receivable balance to begin growing towards an additional $51,000,000 of our outstanding shares during the first quarter. Turning to our balance sheet from the beginning of 2015, real estate inventory balances declined another $48,000,000 $720,000,000. Keep in mind, this does not include the purchase of a hotel in San Diego, which is included in property and equipment until it is converted to inventory. However, even if this were included, real estate inventory balances would have been roughly flat to the beginning of the year. The $720,000,000 balance includes $361,000,000 of finished inventory which represents less than 2 years of contract sales based on our current growth projections.
The company's total gross debt outstanding decreased $79,000,000 from the end of 2014 to $633,000,000, all the $3,000,000 of which is non recourse debt associated with securitized notes. In addition, $40,000,000 of mandatorily repeatable preferred stock remains outstanding. At the end of the first quarter, cash and cash equivalents totaled $272,000,000 and we had $94,000,000 of notes receivable available for securitization. And $197,000,000 in available capacity under our revolving credit facility. As Steve spoke about our full year adjusted EBITDA to $222,000,000 to $232,000,000, we are increasing our guidance range for free cash flow $10,000,000 to adjusted EBITDA as well as minor changes to our cash taxes.
Additionally, we continue to make progress on our Waikaloa and Miami Beach transactions. And as a reminder, these are expected to be asset light in our free cash flow assumptions. Our goal as always is to optimize free cash flow We are proud of what we have accomplished to start off 2015 with continued improvements in all of our key metrics. Adjusted EBITDA was up $18,000,000 in the quarter and adjusted development margin continued to improve up 180 basis points over the prior year first quarter. As always, we appreciate your interest in Marriott Vacations Worldwide and we look forward to sharing more great information with you at our Investor Day on the morning May 15th at the New York Stock Exchange.
And with that, we will open up the call for Q And A. Rob?
Thank you. Thank you. Our first question is coming from the line of Stephen Kent, Goldman Sachs. Please proceed with your questions.
Good morning, Steve.
Hey, good morning. Couple of questions. There was a recent press article noting the Marriott Vacation Club had acquired something in Australia. Can you just talk about that and maybe your broader thoughts for exploring opportunities more and more outside of North America? And then, the recent asset light announcements made so far show you're making progress there.
Can you just talk about how the takedown will be structured and what to think about over the next couple of years?
Sure. I'll take the first one. I'll ask John to part. As you might imagine, we don't comment on speculation of things that you see in the media. Obviously, if we have something to report, we'll certainly be very forthcoming with our answer on something like that.
Our strategy in Asia Pacific remain the same as we've articulated before as we're looking for new destinations in exciting locations, that will have an on-site sales presence. We are suing several different options in that space. But at this point in time, we don't have anything definitive to report. And John, you want to talk about
Sure. On the asset light, obviously the one we've officially completed was Marco Island and building out that resort. We structured that to start taking those units down beginning in early 2017. And we'll take a little bit down over the next couple of years. And in terms of Miami, where we're working on that, the idea would be we would take in our free cash flow guidance assumes we take a portion of that inventory down this year.
And then we'll structure that as well as any other asset light deals we do to give the greatest flexibility going forward to continue to add new flags, new destinations, and allow us to take that inventory down over time so that we're not putting excess inventory on the balance sheet.
Then maybe could you just talk about your rental business? We don't talk about often, but you've really shown some improvement in the operating profit production. Are there certain programs that are helping you achieve better results. You've spoken about Ritz Carlton costs going away, but are there other levers to pull on that business?
Yes, Steve. I think, you think of that in kind of 2 perspectives. 1 is on the top line revenue side. And, as we have, been able to put our destination club in place and has really gotten a lot of traction. Keep in mind that when, our owners decide that they want to, use their vacation club points for something other than seeing in one of our resorts, whether they want to take a cruise or they want to take a tour or go to the masters or whatever, they give us back those points for the year, we turn around and take them into the open market and we rent them.
So that ties the revenue side of things. If it all works right, we actually make a little bit in the arbitrage between the what we rent it for and what we have to pay for the cost fulfill the particular thing that they ask for whether it be the cruise or for the trip. Secondly, as we have worked down through the inventory line that was on the balance sheet, each one of those pieces of inventory that was unsold carried an unsold maintenance fee that we had pay. You may recall that at the time of the spin, those unsold maintenance fees were in the neighborhood of $60,000,000. They have come down rather as we've worked down the inventory balance.
So we also have that working in our favor. Last but not least, over the last couple of years, obviously, economic environment and the lodging side in terms of rentals with ADRs and RevPAR has increased. So we've gotten some fit there.
Thanks very much.
Thank you.
Our next question is from the line of Christopher Agnew with MKM Please go ahead with your question.
First question on tour flow. And interesting to see, very strong turnaround. Now how much did the enhancement program benefit in the first quarter? Does that program extend through the rest of the year? And if it doesn't, as it rolls off, what should our expectations be for tour flow?
I know it was negative last year and you have these new initiatives to drive new owner tours.
Yes. Thank you. The, as we have communicated now for some time, we've been on a mission to try to increase our tour flow. I think as we discussed. When the downturn came in the, you know, 'eight, 'nine time frame, we very deliberately, closed down some distribution centers, and thereby reduce tour flow, etcetera.
And now we have been selectively turning on new channels, and source markets. Been doing it very deliberately, to try to make sure that we're doing it in the most cost effective manner that we can. It's, it's be difficult in the first quarter to say that x percentage points of the tour flow improvement was because of the change in owner recognition levels. Although, if we had to take swag. I would say it's in the couple of point range.
But it's you don't know who would have shown up in your tours from our owners, have we not done the owner recognition level change, that we don't ask that question or we think it appropriate? We are going to continue build our new buyer tour programs throughout the year. I think we signaled, last year, it would be sequential improvement. And we're seeing that We have a call transfer program in place with Marriott, which is producing great results for us. We continue to open up selective new sites for distribution, some of which we have previously closed down.
Again, we're doing it very modestly in an effort to try to do it cost effectively.
Excellent. Just a follow on that. Is the owner recognition program? Is that set to extend or is that kind of one time in particular promotion in the first quarter?
No, it's a great question. I'm sorry. I should have answered that. No, the program officially kicks off tomorrow. On May 1st.
What we obviously did was we communicated to our existing owners that, there would some changes coming. We actually gave them a little bit of incentive to, to sign up early to try to expand the number of points that they have so that they could reach 1 of the 5 different levels in the program that they might aspire to. But the program will remain in place, from now, for quite some time. It might suggest a change at some point in time in the future, although we don't anticipate it. But, no, it's, it's very viable.
It's not kind of one and done thing, push this. We do have, 5 different levels in the program. And, depending on where people see themselves in the various, perks, we expect it to be very successful for us.
Excellent. Excellent. That makes sense.
Thank you. And then, on the the strong rental business in the quarter, you talked about the increase in transitory Keys and that related to bringing in new inventory last year. And so that can create lumpiness. Is it fair? Is it right to think that as you work through that inventory that the key is available, from that sort of bump higher sort of kind of erode, so the growth rate should fade.
And then as you bring on new you could see we could see another pulp from time to time?
Yes. I think you kind of answered your question there as you went through it. But yes, mean, clearly as that inventory gets put into the system and is sold through, that's less maintenance fee for us, but less keys that, therefore, we have the ability to read. But as you bring on the next phase of inventory and depending on the size, you got to remember as we talked about Vegas, was the entire tower 200 plus units. So that was a big slug of inventory.
Typically, I'm not saying that won't happen again. You're probably not going to see that much inventory come online in 1 quarter as we've talked about, especially as we structure these asset light deals. We'll bring them on in slightly smaller pieces. So, but yeah, to your point, you could always have a little bit of lumpiness depending on year over year and when inventory comes online.
Chris, Chris, I could add to that. Keep in mind that even as that inventory gets sold, some people will choose to occupy. Some people will choose to take one alternative vacationing options that I discussed earlier. So it isn't necessarily it's once it's sold, it's out of the rental pool. In all likelihood, we'll get a meaningful amount of in the rental pool at one point in time or another.
Got you. Got you. No, that was good color on just the pacing of Vegas. And a big chunk. Final question, just you're sitting there with a nice large cash balance.
How do you think about that? Is that more of a function of how you think about pacing your share buybacks, or is it more a function of what do you want to keep as dry powder for M and A and asset acquisitions. And I'm thinking that you're sort of increasingly looking to do things on a in a more, I guess, capital efficient manner. So I don't know if that has a bearing. Thanks.
Yes. No, it is a little bit about pacing. Obviously, given our float and how much volume trades We are somewhat limited in terms of how much we can buy back over a certain period of time. So that cash balance I think has continued to come down over the last year as we continue to redeploy that. But as we've talked about, we're always looking for strategic acquisitions.
If you're talking inventory, the goal there, right, on the inventory is to even lower than it is today and be more efficient in terms of how we spend that now. In any given quarter or year, you might spend a little bit more and a little bit in terms of the inventory acquisition. So what you're really talking about with the excess powder is the strategic offer opportunities. And we'll continue to look at those. But as we've said, they've got to make strategic sense and they also got to be, at the right price and get the right returns for But we clearly don't look at it like we need to sit with $270,000,000 of cash on the balance sheet.
And I think I've talked about in the past a working capital balance for us is probably more in the $50,000,000 to $75,000,000 of cash given some of the high point and low points during the year, if you think about what's permanently invested in the business. But with that too, we're also creating excess deck capacity like we talked about before. So in the interim too, that gives us some dry powder if the right opportunity came along.
Excellent. Thank you very much.
The next question is from the line of Harry Curtis with Nomura. Please proceed with your question.
Hello?
Mr. Curtis, your line is open for questions. A gentleman appears we've lost a Mister Curtis's line. K. Gentlemen, at this time, we have no additional questions.
Thank you, Rob. Well, as we said earlier, we're off to a great start. We're focused on continuing to drive that performance throughout the year. I'm obviously very pleased with the quarter. However, I am equally pleased with the longer term views and business strategies we'll be discussing at our Investor Day.
On May 15th in New York. I'm hopeful that you can join us either in person or on our webcast and look forward to seeing you there. Thank you for your participation on our call today and your continued interest in Marriott Vacations Worldwide. And finally, to everyone on the