Marriott Vacations Worldwide Corp (VAC) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Marriott Vacations Worldwide fourth-quarter and full-year 2011 earnings conference call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session with instructions provided. (Operator Instructions).

I would like to remind everyone this conference is being recorded today Thursday, March 15, 2012 at 10 a.m. Eastern time.

I would now like to turn the conference over to Mr. Jeff Hansen, Vice President Investor Relations. Please go ahead, sir.

Thank you and welcome to the Marriott Vacations Worldwide fourth-quarter 2011 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 March 15, 2012, 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 on our remarks and the schedules attached to our press release as well as the investor relations page on our website at www.MVWC.com.

I will now turn it over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.

Thanks, Jeff. Good morning everyone and thank you for joining our fourth-quarter and full-year 2011 earnings call, our first as an independent company.

This morning I will provide a brief review of our 2011 results and an update on the initiatives we discussed during our Analyst Day and investor road show late last fall. I will then turn the call over to John to review our detailed 2011 financial results and our full-year 2012 outlook. We will then open the call for your questions.

For those of you who may not be familiar with Marriott Vacations Worldwide, we are the leading and largest pure play vacation ownership company in the world with a loyal and highly satisfied owner and member base. With exclusive rights to the Marriott and Ritz-Carlton brands, we manage a total of 64 resorts in the US, the Caribbean, Europe and Asia and have roughly 420,000 owners and members who entrust their vacations to us every year.

To start off, I think it's important that I review our strategy. Number one, we expect to drive profitable sales growth by reducing our marketing and sales and overhead costs, and improving topline sales and other revenue streams. As we institutionalize our stand-alone company capabilities, we believe we will realize associated cost savings as we continue to transition certain support services from Marriott International by the end of 2013, if not sooner.

Second, we are focused on accelerating cash flow through the disposition of excess land, as well as reducing our inventory levels, primarily in the luxury segment. Both of these measures are also expected to reduce our operating costs. Lastly, we will seek out growth opportunities to expand and diversify our other recurring revenue streams.

2011 was a transformational year as Marriott Vacations Worldwide became a separate public company through our spinoff from Marriott International in November. I would like to take this opportunity to thank our incredibly talented associates for their hard work and dedication to completing this transaction, while maintaining an unwavering focus on our owners and on our operations. It was a monumental companywide effort, and I am deeply appreciative to our team for their exceptional accomplishments.

During 2011, we drove revenue growth and improved our sales efficiency while continuing to improve our cost structure. We also were successful in monetizing excess inventory, which reduced our unsold maintenance fees and related carrying costs. And 2012 will be our first full year of independence after having been a division of Marriott since 1984. We are very much looking forward to taking advantage of the new opportunities the spinoff affords us.

We have diversified revenue streams comprised of four distinct components of our business, including the sales of vacation ownership products, resort management, rentals, and financing. In 2011, just under 50% of our $1.3 billion in revenue excluding cost reimbursements was generated from the sale of vacation ownership products. Our other revenue streams, including $63 million in recurring management fees, as well as other services, financing and rentals, made up the balance of our revenue last year.

Our business is grouped into four segments -- North America, Luxury, Europe and Asia Pacific. I am going to focus on our North American segment, and John will provide more detail on this and our other segments in just a moment.

In North America, we introduced our points-based vacation ownership product, Marriott Vacation Club Destinations, in mid-2010 to provide owners with greater flexibility and vacation choices throughout our network of destinations and exchange options. This transition has materially enhanced the owner experience and allows us to more efficiently deploy our capital to develop resorts going forward.

By example, we expect to have only three or four projects under construction in any given year to fulfill sales, versus 15 to 20 under the former weeks-based model. In addition to this, we firmly believe we offer one of the most flexible and competitive points programs in the industry.

When we launched Marriott Vacation Club Destinations, we initially focused our sales efforts on existing owners to educate them on the benefits of the new points product and to encourage their enrollment into the new program. We did this not only to encourage their annual contribution of their weeks into the point system, but also to allow them to build on their current ownership by purchasing points to supplement their existing usage.

Additionally, as we have continually stated, our owners are historically some of our best salespeople through referrals of their family and friends. The response has been overwhelmingly positive. As of the end of 2011, almost 92,000 or nearly 25% of our weeks-based owners have enrolled in the points program, representing more than 167,000 weeks.

The fourth quarter also represented a shift of focus from existing owners back to new buyers, as evidenced by a 4 percentage point increase in new buyers versus existing owners over the fourth quarter of 2010. An important metric we will call out today and we expect to continue to report on is volume per guest or VPG. VPG is calculated by dividing total on-site sales volume by the number of sales tours. This measures our effectiveness in selling to guests that tour at our resorts.

It is a solid indicator of how efficient we are at selling, as it combines how many guests actually buy or what we call closing efficiency with the sales volume per contract. As we expected, the launch of points in mid-2010 saw a decline in VPG as sales were focused on existing owners who had a lower minimum purchase requirement.

However, during 2011, VPG began to increase, up 4% to over $2500, underscoring the improvement in our sales efficiency and shift of focus to new buyers. However, while VPG increased in 2011, the Company's total gross contract sales of $676 million came in shy of our original guidance range of $685 million to $695 million. This was probably due to the fourth-quarter 2011 North America contract sales coming in flat year-over-year, which was below our expectations due to weaker than anticipated holiday season sales.

In addition, during that quarter we were testing a number of sales initiatives, including new purchase minimums and price adjustments that impacted our fourth-quarter performance. With the insights these fourth-quarter initiatives provided, I'm pleased to report that we expect first-quarter contract sales to be up 4% to 6% year over year, even with some softness in our international segments as you can imagine with the current economic state overseas.

In North America, contract sales and VPG are up over 10% thus far this year in the first quarter compared to last year at this time. While we believe these encouraging friends are positive indicators for the balance of 2012, please understand that we do not have any better knowledge of future macroeconomic conditions than you do, so let's call it cautiously optimistic.

In addition to driving topline growth, we continue to put great focus on improving our cost structure. We instituted a significant restructuring in 2008, and we continue today to take costs out of the business to support our long-term margin expansion goals. At the corporate level, we are focused on optimizing our cost structure for a business of our size, and are in the process of realizing business processes to support this critical objective. The work is already underway, and we expect to see meaningful cost reductions in these areas starting in 2013.

We ended 2011 within our guidance range, generating adjusted EBITDA on a pro forma basis of $96 million, assuming we were a stand-alone public company for the entire year. With strong momentum and contract sales and VPG so far in the first quarter, coupled with the progress we are making on the cost reduction front, we believe we are well-positioned to generate 4% to 8% annual growth in total contract sales, and 20% to 30% growth in adjusted EBITDA, resulting in 2012 adjusted EBITDA of $115 million to $125 million.

With that said, I will turn the call over to John.

Thanks, Steve, and good morning, everyone. As you were able to see this morning in our release, we have provided our 2010 and 2011 results on an adjusted pro forma basis. Remember, for 2010 and 2011, our actual results are as a division of Marriott International until our spinoff on November 21, 2011. Therefore, our pro forma results for both years reflect full-year royalty fees to Marriott International, full-year interest payments on our warehouse and revolving credit facilities, and a full year of dividends on the preferred stock as if we were a stand-alone company since January 1, 2010.

In addition, we also adjusted for certain non-cash impairment and other charges, including costs related to the spinoff, severance charges related to optimizing our cost structure, and legal charges for a more meaningful comparison of our year-over-year operating results. Therefore, my focus today will be on these adjusted pro forma results.

Both our 2011 topline and pro forma adjusted EBITDA results were in line with the guidance we provided at our Analyst Day in October. Total revenues were $1.6 billion, including $331 million in cost reimbursements. Our gross full-year contract sales of $676 million were short of guidance of $685 million to $695 million. However, we were able to mitigate some of the impact from lower sales as we outperformed in our rental business, and G&A costs came in lower as we continued to drive cost out of the business.

As a result, we generated $96 million in pro forma adjusted EBITDA in 2011, which was within the range of $95 million to $105 million that we shared back in October. And our adjusted EBITDA margin of 7.2% was also in line with our expected range.

We discussed a number of strategic initiatives at our Analyst Day, one of which was margin improvement primarily in our sales vacation ownership products net of related product costs and marketing and sales expenses. We refer to this as our development margin. Our development margin adjusted for the charges I described earlier was 9.3%, within our guided targets of 9% to 13%, and we are committed to returning to a development margin in the 18% to 20% range over the next several years.

Adjusted development margin in 2011 was $59 million or $10 million higher than 2010, with the revenue impact from lower contract sales offset by lower cost of vacation ownership products, as well as $10 million of favorable revenue reportability. This relates to revenue associated with contract sales that were made late in 2010, that due to GAAP down-payment requirements were not able to be reported until 2011.

As we mentioned at our Analyst Day, this revenue is not a matter of if it will be recognized, only a matter of when, but it can make year-over-year comparisons challenging.

We also laid out opportunities to improve rental margin, as rental revenue after rental expenses was a loss of $8 million in 2011 compared to a loss of $7 million in 2010. These losses are primarily related to our unsold maintenance fees in the Luxury segment, which are negatively impacting the profitability of our consolidated rental business. We normally monetize our unsold maintenance fee obligation through rentals.

In our North American segment, rental revenue net of expenses was $12 million in 2011. Our Luxury product, however, has limited rental ability on a site by site basis. Unsold luxury maintenance fees in 2011 totaled $16 million. Our goal in the next one to two years is to reduce our Luxury inventory in an effort to significantly lower the unsold maintenance fees.

We have already taken several steps in that direction. First, through the bulk sale of 17 units in remaining parcels of land at our Lake Tahoe project, generating gross sales proceeds of $18 million while reducing annual unsold maintenance fees by $3 million.

Additionally, we are in the process of deeding a substantial amount of inventory in one of our luxury resorts into the North America points program. This affords our North America points owners a luxury offering previously unavailable to them through the points program. This will not change the brand or operations of the resort itself, but once sold will reduce unsold luxury maintenance fees in the future.

Resort management and other services net of expenses was $40 million or $5 million higher than 2010. Resort management fees, our most stable and recurring cash flow, totaled $63 million in 2011. This continues to be a growing and profitable business that we will build upon as an independent company.

The balance of the resort management and other service revenues totaled $175 million. In aggregate, this revenue stream increased 5% over 2010. We continue to see opportunities to drive additional revenue growth as we increase our exchange club fee revenue with every new and existing owner we enroll into the points program. We will also look for additional ways to grow our exchange business through our Explorer program and other affiliations.

Turning to financing. Revenues net of expenses declined $21 million or 10% year over year to $141 million, primarily due to lower interest income on a declining notes receivable portfolio. In turn, interest expense related note securitizations decreased $9 million. As a reminder, we've seen a runoff of the portfolio as loans continue to amortize from prior years faster than the pace at which we are originating new loans. We expect this trend to level off in the next two to three years. We continue to expect financing propensity in the 40% to 45% range, consistent with what we experienced in 2011.

Our adjusted G&A was $75 million or $6 million lower than 2010, because of lower management bonuses and lower expenses from our continued focus on improving margins.

Turning to our segment results, let me dive a little bit deeper into North America where overall adjusted segment results were lower by $18 million. This was primarily due to $19 million of lower financing revenue and $7 million in lower revenues from the sale of vacation ownership products net of expenses.

These declines were partially offset by $8 million of additional resort management and other services revenue net of expenses, due to $6 million of higher fees related to our new exchange business and $2 million of higher management fees.

In our Asia-Pacific segment, contract sales increased $2 million year over year. However, adjusted segment results were $21 million lower in 2011. This is a direct result of a $21 million gain on the sale of an operating hotel during 2010. Taking this into account, adjusted segment results were flat year over year.

In the Luxury and Europe segments, we saw a 14% decline in combined contract sales year over year. However, despite this decline we were able to drive a combined $26 million improvement in these segments' adjusted financial results due to $16 million of higher development margin which benefited from $9 million of lower sales and marketing costs and $10 million from lower sales reserve and favorable revenue reportability.

In addition, we had $4 million of higher combined rental revenues net of expenses, and a $2 million gain in the fourth quarter of 2011 from the sale of the 17 units in remaining undeveloped parcels of land at our Lake Tahoe project.

I should note our strategies from these segments have not changed. We intend to sell out of the existing European inventory and sell down the Luxury inventory to a more stabilized level, and we will continue to focus on further improvements in their overall performance in 2012.

Turning to our liquidity position. With the timing of the spinoff, we did not complete a securitization in 2011, but instead entered into a $300 million non-recourse warehouse credit facility in the third quarter. At the end of 2011, we had $118 million drawn on the facility. We have seen very positive trends in the ABS market so far in 2012, and our team has been actively preparing to meet with investors with the expectation of executing a securitization later this year.

In terms of our other liquidity, we started 2012 with $110 million of cash and cash equivalents, and $200 million in available capacity under our revolver. In addition, at the end of 2011, we had sellable notes receivable of $41 million, which could have generated another $30 million of cash flow to the extent we needed to draw down from the warehouse facility.

For 2012, we expect adjusted free cash flow of $85 million to $100 million, taking into account net activity related to our securitizations and our warehouse facility.

In addition, we are focused on our strategy to accelerate cash flow through the monetization of excess undeveloped land and inventory over the next three years, with total estimated proceeds of $150 million to $200 million. Any dispositions in 2012 would be upside to our adjusted free cash flow guidance.

To answer the inevitable question of our priorities as it relates to how we intend to use our cash, let me reiterate our strategy as we laid it out in October. As we are now towards the end of our first full quarter as an independent company, we will look for opportunities to grow our business that will provide appropriate returns to our shareholders. I want to stress that we are focused on increasing our return on invested capital and creating shareholder value, and that will drive our capital allocation decisions.

Now turning to our guidance for 2012. On February 8, we published our 2012 adjusted EBITDA guidance of $115 million to $125 million. While we recognize that many of you may have drawn a comparison to our Analyst Day scenarios and assumed flattish sales growth from 2011, we thought it would be important to highlight that our 2012 expectations assume growth of 4% to 8% in total gross contract sales, and further improvements in our other revenue streams.

Lastly, as Steve mentioned, our year-to-date first-quarter contract sales in our North America segment are very encouraging in terms of the progress we are making toward achieving the goals we have laid out.

As always, we appreciate your interest in Marriott Vacations Worldwide. And with that, we will now open the call up for Q&A. Luke?

Thank you. (Operator Instructions). Chris Agnew, MKM Partners.

Thank you very much. Good morning. I am just wondering if you can comment on expectations for the pace of contract sales through 2012. Any sort of particular variance we should watch out for on a quarterly basis?

And then I guess linked to that are there any quarters -- or trying to think about the impact from reportability issues next year -- I am sorry this year -- whether there is anything we should be sensitive to and is that just difficult to forecast?

Chris, this is Steve. I will take the kind of seasonality question which I think is the first part of your question and I will let John talk about reportability.

Typically speaking in the timeshare business at least as we have experienced it, the second and third quarter are generally stronger than the first and fourth quarter. In all the years we have been at it, that is just pretty much what we have seen largely based on the distribution of physically where you find the resorts and where we talk to customers. As you might imagine as you get into kind of the Easter season and things like that in the second quarter, you have got a lot of people who are traveling in the Sun Belt and the like and you are also kind of in the heart of the ski season in our mountain resorts.

And of course then you have the traditional vacation period when people are on vacation particularly in North America here during the summer time. John, do you want to talk about reportability?

Sure. This is John Geller. Yes, a couple of things to consider on reportability. One, what historically has been the most significant impact was on percentage of complete so now we are selling completed projects, so that should not be impactful at all going forward. For us it is really about our financed sales and that has to do with the GAAP down payment. I know we have talked about this a little bit in the past.

We would expect on a quarter-to-quarter basis there could be some variability and it is difficult just given some of the financing promotions or things that we might be running at the end of any given quarter. But -- so it is difficult to predict but I would say on an annual basis it should kind of work its way out with some variability within the quarters.

Got you. Thanks. Then can I ask about the excess land? Can you give us some color on what you are doing currently doing to monetize that sort of the level of interest? And can you give us an idea of where the majority of the land is located?

Sure. Again, this is Steve. The bulk of the land that we have available for sale is either beachfront here either in North America or in the Caribbean. There is also some land available in Hawaii. And those are the -- and quite frankly it is pretty great real estate.

We have engaged in conversations and in some cases already under contract with certain brokers to help represent us on these sales and we have a fairly high confidence level that we will be able to get some transactions done here in the next couple of years.

As you might imagine, there is not a lot of great comps out there over the last couple of years because it is certainly not been a seller's market for real estate. However, we've already kicked up some interest on a few things that we will see if it ultimately translates into a purchase agreement but we feel pretty good about where things are.

The only thing I would add is where in the past we have probably seen a lot of folks more lowballing on some of the offers, we are starting to see some serious buyers out there and some better values. So to Steve's point, we are optimistic we will be able to start to move some of this. As we've said all along, we are not in a buy or sell mode. We are going to make sure we maximize the cash proceeds we get out of all this land.

Thanks. Could I ask one last question on your financing propensity?

Sure.

Given the favorable spreads at the moment, why would you not look to raise that higher?

Sure. The short answer is we typically securitize about once a year based on our current volumes. Historically that has been a couple of times a year but based on where we are at, we are looking at probably an annual securitization. So if I knew today every note I originated, I could securitize a year from now at the spreads and the rates where the market is today, I absolutely would do financing all day long. I think the balance is just from managing your balance sheet and potential risk.

So we think for us given us as a new company here in that 40% to 45% maybe a 50% financing propensity is right for us just given the managing, the profit side and the balance sheet side but we always are evaluating that and we will be opportunistic where we can.

Chris, this is Steve. Let me just add to that if I might. It is important that you understand that unless someone's FICO score is below our underwriting threshold, we don't decline financing to any customer. The fact of the matter is if you look at kind of the demographic profile of our customer, they generally come into a sales presentation with numerous means to be able to in fact pay for their purchase.

Where we have in the past had higher financing propensity is when we have actually done things to kind of artificially stimulate people to take our financing. That is the one thing we haven't gotten back into. As I say, I think as John mentioned if all of a sudden you started to see the securitization market be very stable for a very long term with high advance rates and everything else, we might contemplate a little bit more of that. We certainly are attracted to the returns on the financing business. It is just we don't want to get stuck with a lot of paper on our balance sheet.

Great. Thank you.

Eli Hackel, Goldman Sachs.

Good morning. Thank you. Just three questions. Just going back to the land sales and I will ask them all up front, can you just give us an up-to-date on the net of what you expect to sell? I think late last year it was $150 million to $200 million. Is it still in that range?

The second question is just on the development margin clearly there is a lot of room to run here. Do you think it's going to be more -- is it going to be a straight line up from that 9% to 18% or 20% or will it take a little bit to ramp as you get -- takes a while to get the point's inventory through the system or the week's inventory through the system until you get to that cheaper point inventory?

And then just on the contract sales growth for 2012, is it possible to break out a little bit the growth by segment? Clearly if you are winding down luxury and Europe a little bit, do you expect slower growth there or do you think the pace will be the same? Just a little bit more color on contract sales by segment would be great. Thank you.

Okay. Eli, it is John Geller, good morning. In terms of the land sales, what we said I think in the fall was $150 million to $200 million. That is still the case so we expect over the next couple of years to generate somewhere in that range.

Secondly, your question on developed margin, yes, I think the way to think about this a little bit is you have to think about it by segment. We finished up at the low end of our guidance as I mentioned down in the 9% and it is clearly not going to be just a straight line up. I think in terms of the development margin, we are seeing improvement and we are really driving North America and that is obviously helping with the points program.

Steve mentioned we are off to a terrific start year to date. First quarter, we are up over 10% year-over-year so we are starting to see some good traction there. Obviously that is the biggest part of our business so as we improve the margins there, it clearly is going to help the overall company margin.

There is some downside as you touched on, we are winding down Europe in terms of sales so because of that, that is going to put some downward pressure here over the next couple of years from a Europe perspective. If anything, on the luxury side, there is still some noise in there. So once we work through some of that on call it the next couple of years and with the improvement on the North America side, that is where we will get back to that high teen, 18% to 20% I mentioned.

Eli, on the contract sales question, if you look at our '11 results, I mean more than three quarters of our sales came out of North America which obviously that is kind of the mother lode so to speak of where the bulk of our activity is.

As John mentioned and reminded everybody that both in Europe and in luxury, we in fact are winding ourselves down from previous sales levels just because we are trying to sell out of that inventory. So I think you won't see the kind of growth in those two segments.

And Asia-Pacific is one where we think it is an outstanding market for the future. We are a little bit kind of a conundrum because we have very limited distribution of our physical resort product in Asia-Pacific. It is largely in Thailand only. We are about to add some product in Macau which will help that.

As we continue to add more product over time, we would open up new distribution locations and then therefore you would see new organic sales growth. But I think what you should really focus on would be that three quarters of our sales coming out of North America with the kind of guidance that we have already given you.

Okay, that is very helpful. Thank you very much.

Fred Lowrance, Avondale Partners.

Good morning. Thank you guys for taking my call. I know you said it, John, but I missed it. I am just looking to walk through from my contract sales down to the revenue line on the sales vacation ownership product. So if you could just walk me back through what your reportability was and obviously then I can back into what your sales reserve was. I don't think that was in the release.

Yes, overall, the 2011 contract sales of 658 was the Company-owned. We had $36 million of sales reserve and then favorable reportability across the company of about $12 million. That gets you to the 634.

Okay. And just second question, I know what you guys presented back at your Investor Day, it was not guidance for 2012. But if I were to look at those sensitivities on a 48% contract sales growth base, I come up with a little bit higher range for EBITDA. So I'm wondering if you'd just sort of walk us through maybe why we end up toward the lower in or just below what those sensitivities would have told us?

So if you go back to the Analyst Day, we had given that zero kind of flat sales up five, up 10. So we today guided up four, up eight. So if you just extrapolate that, that is probably more up four would be call it $125 million of adjusted EBITDA and up eight would be $134 million give or take just to kind of put it on apples-to-apples. And so we on that four to eight said $115 million to $125 million. So at both the high and the low-end there is about a $10 million gap.

There is really two things driving that. One as we mentioned, we missed the contract sales for 2011. We came in under our forecast. That is about a $15 million difference in terms of revenue. And if you put product cost and then the variable portion of marketing and sales cost, you are probably losing $6 million to $7 million of margin there just on your starting at a lower point to begin with.

And then from a G&A perspective as we fine-tuned G&A as a stand-alone public company, there is probably $2 million, $3 million of additional G&A costs that when we pulled that together, we hadn't identified.

All right, thank you. That is it for me.

Bob LaFleur, Cantor Fitzgerald.

Good morning, guys. A couple of questions. One, you talked about the developer paid maintenance fees for the luxury segment. Can you give us that number for the overall company? And then maybe walk us through how that draws down over the next couple of years? And then I've got another question on reportability afterwards.

For 2011, that number for the whole company was about $65 million. I think the way to think about that we told you, $16 million of that was for luxury. It is probably going to take a couple of years to bring that down. A lot of that is how successful we are on obviously selling that luxury inventory. We talked about what we were doing with one of the projects and making it available through our (inaudible) points program and so we are going to be active to try and get that down as much as possible.

There is probably a little bit more if you think about Europe and Asia, we are in a pretty low point anyway in terms of inventory so the maintenance fees there aren't as significant so it is really North America.

There is a little bit more of rundown of excess inventory in our North America that will continue to bring that down. I think the big difference there as we mentioned in North America, we typically are able to rent that inventory and make some money. So it is not a direct -- hey those costs went down. In some cases, you potentially could lose a little margin on that unsold maintenance fees in North America so it is not a direct correlation.

So it sounds like if it was 65 overall, 16 for luxury and you got excess inventory there, it sounds like sort of the run rate on that is about $50 million a year in sort of a steady-state given the normal load of inventory you cover or is that overstating it?

I would probably call it in the $40 million to $50 million range.

Okay.

But again back to John's point, while we have unsold maintenance fees in many cases except in luxury as an example, we can monetize that inventory and so we get rental income as an offset.

Okay. And then on a sales reserve, it looks like there was about 5.5% of contract sales. Is that a pretty decent number to use going forward or is that going to continue to come down as the consumer settles out and the default rates and delinquency rates come in?

It is probably still directionally pretty good. We continue to see improvement in our delinquencies year-over-year and defaults. Some of that gets baked into the curves as that performance improves and you look at what you expect to happen into the future. So that is probably still a pretty good run rate for now. If things were to get considerably better, we could maybe bring it down and obviously if things go the other way, it could go up a little bit.

Okay. Forgive me, I just thought of one extra one I wanted to ask you guys. On the management fees, how does that grow over time? Obviously you have some incentives to keep costs down to keep maintenance fees down for your customers but that obviously would keep your maintenance fees down as well but you also have unit growth. So what's sort of a realistic growth rate to think of your management fee business growing over time?

I think the best way to think about it, Bob, is every time we sell a new timeshare owner or even an existing timeshare owner more inventory or more points, it comes with an initial maintenance fee. And to your point, yes, we have a fiduciary responsibility to our condominium associations and ergo the owners to make sure that we are operating these resorts as efficiently as possible but because you get normal installation we pass through things like higher utility costs, higher insurance costs and things like that, you are going to get -- our maintenance fee generally speaking is 10% of the annual maintenance fee and so every time we sell a new interest, we get more management fees.

So it sort of sounds like it is kind of sales volume plus inflation is a good proxy, right?

That is right.

Thank you, guys.

(Operator Instructions). Tim Wengerd, Deutsche Bank.

Good morning. I was just trying to think about the long-term level of inventory that you need now as you switch to the points program. And I guess what is the right amount of inventory? I know you had close to $1 billion at the end of the third quarter. Long-term, what is the right level for say $700 million of contract sales?

Probably the way to think about it instead of an actual dollar volume, although you can do the arithmetic, is the number of years inventory. And let me give you -- it is a little bit of inside baseball here but let me try to walk you through it.

For our North American points program, we can only put completed inventory with a certificate of occupancy into the Florida-based land trust which is the fundamental underlying element of this points-based program. It takes a while once you complete building it to get it through registration process, to get notice of use rights and ultimately get it into a salable position within the trust.

So our working assumption is that somewhere between a year to a year and a half of inventory is probably what we are going to be needing on a continual basis and that is kind of what we planned for.

Is a year to a year and a half completed and in the trust and ready to go? Is that --?

A year to year and a half completed some of which will get into the trust, I will give you one other element -- into the trust ready to go, 100% registered and everything else, our ultimate goal is six to nine months. What I was trying to get to was you have got some completed inventory that is going through the registration process, getting into the trust before it is available for sale. So on average you are about a year to a year and a half in the trust, ready to go, registered everything else six to nine months is the ultimate goal.

I think just to kind of add on in total work in process and all of that because you have stuff coming in and out probably 1.5 to 2 times inventory is probably a good way to think about it on a little bit higher level.

Okay, that is helpful. For your cash flow guidance for '12, how much -- I guess how much real estate inventory spending does that include?

It is about $150 million or so, a little bit more than what we actually spent in 2011. Now our product costs will be higher -- non-cash piece that runs through your EBITDA that gets added back net net, you will generate fairly close to the same amount of positive development inventory cash flow year-over-year.

Okay, and then thinking about '13 and beyond and what we talked about for inventory levels, should -- that 150, that should go down?

What will drive as we get into the say '13 and '14 obviously will be sales pace and selling more and sales paces going up, I would expect that to go up and continue to go up over time. The goal if you remember if you think about EBITDA is running through your EBITDA or your net income is your product cost which is non-cash. That is the amount that is coming off your books and what we have talked about is the actual cash we are going to spend versus what is coming off our balance sheet will continue to go down here over the next couple of years.

We saw that a little over $100 million for 2011. We'll probably see a similar pace here for 2012 and then I think as you get further in the out years once again depending on pace and how sales are going, you will continue to see that come down. But at some point over the next few years, it will get fairly close and the idea is because of the points-based model and the capital efficiency where we are only going to have a handful of resorts under active development, we will be able to manage that cash outflow with the non-cash product cost coming off the books on a more normalized basis in the future. Does that make sense?

Yes. That makes sense. Also does your cash flow guidance include a reduction of the Marriott rewards liability in the year?

Yes.

I guess how much of a reduction or what do you expect to pay on that in '12?

The way that works is the actuals are based on actual redemptions so we have obviously a lot of history based on people and how they redeem their points. We probably expect $60 million to $70 million or maybe a little bit more of actual net redemptions. And then remember the cash flow also assumes that any new point issuances beginning here in 2012 we pay for as we go and that is in the cash flow too.

Okay, that is helpful and I know you talked a little bit about beating -- or putting some more luxury into the points program and that would help reduce the owner-funded maintenance fees. How much of a reduction do you think you can create this year?

We are not going to -- given what Steve just talked about by the time you actually deeded into the trust and get it registered, there is a run rate. So to the extent we are successful getting it in this year we will start to see the benefit next year. We are still doing a lot of diligence around all of the projects and what we want to put in so we will know more on that and we will be able to talk a little bit better in the future but you won't see any real significant benefit on that this year.

Okay, all right. That is it for me. Thank you.

There are no further questions at this time. Please continue.

Thank you, Lou. We are thrilled to have completed our spinoff and we are very excited about the opportunities that lie ahead now that we are an independent company. As you have heard, we are optimistic about the outlook for 2012. We look forward to reporting our progress on future calls.

Thank you for your participation on our call today and your continued interest in Marriott Vacations Worldwide. And finally to everybody on the call and your families, enjoy your next vacation. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and you may now disconnect your lines.