Marriott Vacations Worldwide Corp (VAC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Marriott Vacations Worldwide third-quarter 2013 conference call. During today's presentation, all parties will be in a listen-only. Following the presentation, the conference will be open for questions. (Operator Instructions).

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

Thank you, Danielle, and welcome to the Marriott Vacations Worldwide third quarter 2013 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, October 10, 2013, 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 it over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.

Things, Jeff. good morning, everyone, and thank you for joining our third-quarter earnings call. This morning I'll discuss our results for the third quarter of 2013 which include continued growth and adjusted EBITDA and solid development margin and performance.

Given our strong year-to-date results as well as our outlook for the fourth quarter, we have increased our full-year 2013 adjusted development margin, free cash flow and EBITDA guidance. I am also pleased to announce the beginning of our Capital Returns strategy which I will discuss more in a moment. I will then turn the call over to John who will provide additional detail on our financial results after which we will open the call for your questions.

Today's announcement of our share repurchase program shows our confidence in the business model and the Company's ability to generate robust cash flows. Our balance sheet is strong and is naturally deleveraging as our EBITDA grows and our nonrecourse securitized debt is paid down through collections from the notes receivable. Further, the Company has virtually no recourse debt other than the $40 million of our subsidiary' mandatory redeemable preferred stock which is not callable until October 2016.

In addition, we anticipate generating over $150 million in cash proceeds over the next several years as we execute against our strategy of disposing of excess land and inventory.

From an investment perspective, we see strong organic growth opportunities in both our North America and Asia Pacific segments where we are targeting to add great new destinations that will provide additional sales distributions to grow our top line. Our capital efficient points model allows us to fund these new investments from our operating cash flows.

Further, we plan to explore arrangements with partners for some of these new investments which would provide asset-light opportunities to further improve cash flows.

Our free cash flow and strong balance sheet also allows us the flexibility to opportunistically pursue acquisitions of timeshare related businesses if we determine an acquisition is the strategic fit and provides appropriate returns to our shareholders. We expect this overall capital allocation strategy will result in excess capital which we would intend to return to shareholders.

Given our confidence in our long-term growth outlook and cash flow generation potential, our Board has authorized us to repurchase up to 3.5 million of our outstanding shares. We are committed to our top-line growth and margin expansion strategies in addition to a disciplined and balance capital allocation strategy.

Turning to our third-quarter results, we are pleased with our strong performance with adjusted EBITDA up $17 million over the third quarter of last year to $50 million. This was primarily achieved through stronger development margin, higher resort management and other services margin and improved bottom-line rental results.

Total Company contracts sales were down less than 2% to $168 million in the quarter reflecting improved performance in North America. This improvement was more than offset by the impact of the closure of underperforming off-site sales distributions in our Asia Pacific segment late last year as well as declining sales in Europe as we continue our strategy to sell out our remaining inventory in that segment.

In our key North America segment, contract sales were up $10 million or 6% over the third quarter of 2012 driven by better performance in our traditional vacation ownership business and higher sales from the disposition of excess residential units.

We generated $7 million of residential sales in the quarter mainly at our resort near Panama City, Florida. While these sales flow through our North American development revenue they are part of our broader strategy to dispose of excess land and inventory. With only seven more units left to be sold at this resort, we expect to sell through the remaining inventory by early next year.

In addition to these residences, we recently completed the necessary steps to begin selling 10 residents at our Ritz-Carlton property in San Francisco. We expect to dispose of these units over the next six to nine months beginning in the fourth quarter which, when combined with the sale of the remaining Panama City units, should generate up to $20 million of net cash proceeds.

Excluding these residential sales, North America contracts sales were up 2% in the quarter on a 6.6% increase in the VPG to $3,252. The improved VPG was driven by a mix of increased pricing and nearly 1 point improvement in closing efficiency. This was partially offset by tour flow which was down 4% in the quarter but represented an improvement from last quarter when tour flow was down 6%.

As I have mentioned before, we are focusing on growing our tour flow cost-effectively as we pivot to more first-time buyer tours and our longer-term goal of a 50-50 mix of new buyers to existing buyers. You should keep in mind, however, that many tours we book today will not occur until the next time a potential buyer stays at one of our resorts which may not happen for another 10 months on average.

As we look ahead to the fourth quarter, we expect tour flow excluding the 53rd week to be down roughly 4% year-over-year. As a result, we have lowered full-year contract sales growth guidance for North America to 4% to 8%. Excluding the impact of residential sales, we expect contract sales growth for North America timeshare to be between 3% to 5% for the full year. As we move into next year, we expect tour flow to continue to improve sequentially with our 2014 full-year goal of year-over-year tour growth.

In terms of development margin, we achieved strong performance during the third quarter with a total Company adjusted development margin of 20.3%, down slightly from the third quarter last year which benefited from favorable product cost true-up activity.

Our third-quarter product cost rate was higher than the 33% we have been targeting mainly as a result of the higher cost residential sales that we made in the quarter. Excluding those sales, our 34.7% product cost rate would have been closer to 32%.

Looking at the full year, including the impact of further residential sales, we still expect our full-year product cost rate to approximate 33%.

Our rental business contributed an additional $9 million to the bottom line in the third quarter. This was a result of 2 points of higher occupancy on 11% more transient keys rented and 10% higher transient rate. We continue to expect full-year rental results to be materially higher than last year but we remind you that the fourth quarter is typically the softest due to seasonality.

Our resort management and other services business continues to steadily improve, up $4 million over the third quarter of $2012 to $17 million. As has been true throughout 2013, this improvement was driven by increases in club dues and management fees as well as improvements in our ancillary operations.

Shifting to G&A, costs increased $3 million over the third quarter of 2012. Our third-quarter results benefited from $1 million of incremental savings related to our organizational and separation related efforts. However, our G&A costs also reflected normal inflationary growth, higher legal costs and incremental stand-alone public Company costs. For the full year, we anticipate our G&A costs will increase year-over-year driven mainly by inflation, the impact of the 53rd week of costs due to our fiscal reporting calendar, and higher legal and public Company costs.

However, we expect these increased cost to be partially offset by roughly $5 million of savings related to our organizational and separation related efforts.

In closing, we had a very solid third quarter and expect our performance to continue through the remainder of the year. For that reason we are increasing our adjusted EBITDA guidance by $10 million to $165 million to $175 million and raising our adjusted development margin guidance by 1 point to 18% to 19%. We are also increasing our net income and cash flow guidance which we will speak to momentarily.

With that, I will turn the call over to John to provide a more detailed look at our results and cash flow projections. John?

Thank you, Steve, and good morning to everyone on the call this morning.

Strong EBITDA growth and improved business results highlighted another great quarter this year. Our North America segment, key to our growth throughout this year, saw a $23 million increase in revenue from the sale of vacation ownership product. This was driven by higher contract sales and favorable revenue reportability year-over-year.

Contracts sales improved by $10 million over the same quarter last year to $152 million. As Steve mentioned previously, approximately $7 million of this increase was due to the sale of residential product primarily at our property in the Florida Panhandle. The sale of this inventory was part of our excess land and inventory disposition plan so we were pleased to be able to capitalize on improving real estate markets.

Excluding the impact of these residential sales, contract sales in North America improved $3 million from the third quarter of last year.

The favorable revenue reportability in the third quarter of this year had a $1 million positive effect on North America reported development margin increasing the margin by 50 basis points to 22.7%. Reportability had the opposite effect on the third quarter of 2012 negatively impacting reported development margin by $7 million and reducing the margin percentage by 3.6 percentage points. Excluding the impact of reportability in both years, development margin in the quarter was 22.2%, 60 basis points lower than the third quarter of last year.

Similar to our first three quarters of this year, we do not expect revenue reportability to have a meaningful impact on our reported fourth-quarter development margin. However, remember that favorable revenue reportability in the fourth quarter of last year had a $13 million positive effect on reported North America development margin.

The 60 basis points decline in North America adjusted development margin reflects the impact of higher product costs offset partially by improved marketing and sales costs. The impact of higher product cost true-ups in the prior year improved development margin last year by more than 8 percentage points. Our product cost rate this year continues to benefit from our inventory repurchase program. However, as Steve mentioned, our product cost rate in the quarter was negatively impacted by higher cost residential sales which raised our North America product costs rate by 3 percentage points.

Marketing and sales costs which improved 3.2 percentage points over last year benefited from higher VPG as well as the impact of the residential inventory sold in the quarter which carries lower marketing and sales costs. Excluding the impact of the residential sales, marketing and sales margin improved by 1.7 percentage points.

Rental results for the Company improved by $9 million in the third quarter compared to the prior period as we continue to better understand and estimate owner usage behavior. As we mentioned on the last call, the fourth quarter is generally a softer rental period so our expectations for full-year rental results are in the $14 million to $17 million range, a substantial improvement over the full-year 2012.

This range does not include any additional charges related to our pre-spin Marriott Rewards liability which, depending on actual redemption cost, could have a negative impact in the fourth quarter.

In our resort, management and other services business, revenue net of expenses improved $4 million to $17 million in the fourth quarter. These results reflect higher annual club dues earned in connection with our points product, higher management fees, and improved ancillary results from the disposition of a golf course and related assets at one of our Ritz-Carlton branded resorts late in 2012.

In our Asia Pacific segment, results were down $1 million from the third quarter of last year. While contracts sales were down by $8 million as a result of the closure of underperforming off-site sales centers late in 2012, these declines were offset by corresponding reductions in marketing and sales and product costs.

Turning to Europe, adjusted segment results were $6 million, flat to last year as we continue our strategy of selling out the remaining inventory in that region.

Our financing business continues to improve. Revenue net of financing expenses and consumer financing interest expense was flat to the third quarter of last year as the fall activity trends downward and interest rates in the ABS markets remain at historic lows. As we announced in August, we completed a $263 million securitization with a 95% advance rate and a blended interest rate of 2.21%, almost half a point better than the securitization we completed last summer which had been the strongest deal to date.

As of the end of the third quarter, our securitization portfolio had an average interest rate of 3.5%.

Turning to our balance sheet and liquidity position, since the end of 2012, real estate inventory balances declined $28 million to $853 million which is comprised of $390 million of finished goods, $193 million of work in process, and $270 million of land and infrastructure.

The Company's debt outstanding increased $73 million from the end of 2012 to $751 million including $747 million in nonrecourse debt associated with the securitized notes. In addition, $40 million of mandatorily redeemable preferred stock of the subsidiary was outstanding at the end of the third quarter of 2013.

Cash and cash equivalents totaled $288 million and we also had $17 million of notes receivable eligible for securitization and $196 million in available capacity under our revolving credit facility.

Our full-year adjusted free cash flow outlook continues to improve, primarily from roughly $10 million of higher projected net income, $10 million from the deferral of development CapEx and other capital spending, and $30 million of favorable working capital changes as we continue to fine-tune the timing of our working capital activity as a standalone public Company.

As a result of these changes, we are raising our outlook for adjusted free cash flow for the year, excluding the impact of organization and separation related charges and litigation settlements by $50 million to $170 million to $185 million. This guidance is approximately $40 million higher than what our free cash flow would be on a normalized basis because of the impact of certain items.

These items, which will continue to impact our free cash flow over the next few years include the pay down of the Marriott rewards pre-spin liability, the timing of inventory spend, and organizational and separation related costs. Our 2013 free cash flow on a more normalized basis could be between $135 million and $140 million.

In addition to our adjusted free cash flow guidance as a result of improve business results, we are also raising the range of our adjusted net income guidance to $81 million to $87 million, and our fully diluted earnings per share guidance to $2.21 to $2.37 for the full year.

Additionally, we are raising the range of our full-year adjusted EBITDA guidance to $165 million to $175 million and our adjusted development margin guidance to 18% to 19%.

With all that, let me close by saying we had another very strong quarter of EBITDA and development margin performance and remain optimistic about the longer-term growth potential of our business.

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

(Operator Instructions). Robert Higginbotham, SunTrust.

Good morning, guys. My first question is really around your sales and marketing dynamic, meaning your kind of VPG tour flow equation and your VPG number continues to be impressive in high single digits. You still have the challenges throughout your tour flow down. I guess what I am wondering is twofold. What are you doing differently now versus what you had been doing up to last quarter to drive tour flow?

And then as you look forward to 2014, and targeting positive tour flow growth, how should we think about the VPG opportunity? In other words, do you expect to be able to continue to improve VPG with -- and tour flow given the new paradigm, if you will?

Well, thanks, Rob. This is Steve. Let me try to take it on a couple of different fronts. As we have mentioned in previous calls, one of the things -- the dynamic that has been in place is that tours that we have generated from our existing owner base have seen a decline over the past almost six to nine months kind of thing. Basically because the bulk of the people, the bulk of the owners that we had when we converted to a points-based program in June of 2010, we have spoken to them. They have taken a tour. We have helped explain to them what the new points-based program is all about. And so by definition, they don't need to come talk to us again. And so that has started to decline.

At the same time, we have started to try to turn towards selectively turning on channels to generate new customers. You may recall that in the 2008/2009 timeframe, we as well as many of the others in our space very deliberately got out of a number of channels that were targeted at more first-time buyers largely because they were relatively inefficient to talking to your existing ownership base.

So as we continue to dial those up, we have done that very selectively and we will continue to do so, taking the learnings that we had when we went through the turn off of those programs and applying them proactively going forward.

The second thing that will happen is as we add new flags on the map we will do so, which will generate new distribution centers for us in markets that are obviously good vacation destinations, so we believe we will get additional tour generation out of that.

Relative to your question about what is going to happen with VPG growth on a percentage basis, obviously comps get to be a little bit more challenging. We have had a great run in terms of driving this up. I think most would suggest that the VPG range that we are in now in the $3,200, $3,300 range is pretty attractive. We will continue to try to drive that. We will drive that hopefully through two different methods, one of which is continuing to focus on increasing closing efficiency.

The second is there should hopefully be some natural benefit that we would get if the economy continues to improve. Obviously, there is a fairly -- as we have talked before -- there is a fairly tight correlation between closing efficiency and consumer confidence if that consumer confidence number can somehow find a way to get some traction and move north, that would benefit us as well.

Hopefully that is answering your question.

It does, but to maybe follow up on the last piece of that in terms of close rate and improvement from this point going forward, could you give us a little more color on what the drivers of that improvement could be going forward, to the extent that that is going to be your bigger margin driver?

Well, clearly some of it is as we have continued to have more and more experience selling the product, understanding what the really salient points of how customers view this new product that we have -- that is relatively new to us and the points-based product, what are the main drivers of that, we will continue to try to accentuate that every time we have a sales tour.

I would say there are some headwinds with that because as you move from the existing owners to first-time buyers, first-time buyers have a generally lower closing rate than existing owners have so we are going to have to balance those two things else. We still think there is room to grow in closing rates. I think I have reported before that we've historically kind of pre-downturn, we enjoyed closing rates in the mid teens. I see no reason why that is not infinitely achievable and hopefully higher.

So we will continue to do whatever we can to try to drive closing rates. It has an enormous impact on the leverage you get with your fixed sales and marketing costs. Every close that you have that is over and above what you have experienced before helps in your financially reported sales and marketing metric. But, that is how we're going to keep working.

Great. Let me close out by asking a larger industry question. There has been some indications of new development picking up over the recent months. What are you seeing out there in the industry? What do you think it means to you? I mean, is it a healthy thing? Maybe just a reflection of a directionally improving economy? Is the demand there to absorb it or do you expect to see pricing pressure as those properties come online?

Well, we certainly see some of the same things that you see. I would say it is very positive for the industry. You've got to put it in perspective. Many developers were -- when things turned south rather quickly, were left with a lot of built inventory that they needed to sell through before they thought about adding new inventory to their system. We find ourselves in exactly the same place. We are out -- stopping short of making any announcements -- we are active looking at new places to put a flag in the ground in markets that we are not currently represented, and I believe others are doing the same.

So I think there is a general confidence that the industry has come off the bottom, starting on its way back up. Having said that, I think it is not going to be a quick rise back to the pre-2008 levels but hopefully gradual improvement moving ahead.

Great, actually sort of live, let me ask you one more. Your sales (technical difficulty) was below trend at least over the past few quarters and below a longer-term average the third quarter being about 4.8%. Any color you can give there? Any one-time items we should consider and how should we think about that going forward?

I think we have spoken to it. Obviously the reduced tour flow being 4% down has a fairly significant impact on your overall sales. Having said that, North America was generally pretty good.

Yes, we were up about 2% this quarter. Last quarter in North America, timeshare sales were down slightly if you remember on the lower quarters, the VPG, so the trend sequentially is a little bit better in terms of North American sales because the tour flow wasn't down as much.

I was asking about your sales reserve, your (multiple speakers)? No, I'm sorry.

We missed the reserve question.

Okay.

On the bad debt allowance side, we continue to -- trends have continued to get better. I would say, while you never want to say they could get better than where we are at today, Robert, I think we are, from an historical standpoint, we are back down to where we have been probably at some of our lowest points in time, if you will. So obviously we will do everything we can to see if we can drive it lower, but I don't think there is a huge amount of opportunity for us to improve from where we are at today.

Great. I will leave it there. Thanks a lot.

Steven Kent, Goldman Sachs.

Hi, good morning. Just a couple questions actually following on Robert's questions. First off, just a little bit more on the international and the opportunity there and how we should think about it for 2014 and beyond? And then just more broadly on cost containment, how much opportunity is truly left there over the next few quarters?

Okay. Let me kind of break international down into a couple different buckets. We have already told you that Europe is not a place that we had planned to do anything other than sell through our remaining inventory so I wouldn't think about Europe as a great growth engine for us. Completely counter to that would be Asia Pacific. We believe that there are very, very positive dynamics in Asia Pacific.

Now the real question comes down to how do we try to make sure that we take the best advantage of those and I guess I would say to you that what we did was we have kind of moved from a lot of off-site distribution stuff. Now we are moving towards trying to get new resort locations that would have on-site distribution with it. That takes a while to get those deals done, and particularly doing business outside the United States has a few more wrinkles and complications to it. But I think we are moving forward rather nicely in this space.

So I think we actually think Asia Pacific has got a great growth potential for us. Then I would kind of go toward Latin America. We have said before -- we have no presence in Mexico, as an example, and there is certainly some opportunities in Mexico that would present themselves. As you get further down into the Caribbean, I think there is other places where we could look to grow.

So I think internationally aside from Europe, things look relatively rosy. It is just going to take us a while to get there. And then --?

Yes, on the cost-containment, I assume you are talking just the cost savings, the $15 million to $20 million?

Yes.

We have achieved to date since the spinoff about $8 million or so. Now some of that runs through G&A, but some of that I think as we have talked about in the past, actually hits up in the different parts of the business, so you see that through some of the margin improvement and development margin etc. We should get another, call it $2 million to $3 million over the balance of this year with the remaining piece really hitting next year.

In terms of our separation efforts related to the spinoff from MI, we are pretty far along. The last big piece here is just some of the IT items and we are working through that here as we go through the fourth quarter. And also the other piece on the IT side is just how we source resources going forward and doing things more cost effectively so that is where we will get some of the other upside going forward though.

I will say once we get through this, obviously, we are always to look for ways to drive improvements and efficiencies of the business and hopefully you have seen that in terms of what we have done over the last couple of years.

And just one final question. Maybe if you could just talk to how the Board thought about share buyback versus dividends?

Yes, we began dialogue with the Board early this year, kind of looking forward as to what we saw unfolding from a cash flow perspective and what was the needs of the cash balances we had on the balance sheet, etc. And we talked through various alternatives, the two most obvious being should we go to an annual dividend, should we go to a share buyback?

Our analysis and the conversation with the Board finally got further dialogue about it in September at our Board meeting and then we had a subsequent Board meeting just recently where we concluded that at least for now, the right answer is to go to a share buyback. It doesn't preclude us going to an annual dividend at some point in time, but we thought that the highest and best use of the cash and the greatest return to the shareholders for now was in the share buyback space.

Okay, thank you.

Chris Agnew, MKM Partners.

Thanks very much. Good morning. Maybe start off with your free cash flow. I think you mentioned there were a couple things, deferred CapEx and working capital, which benefited. How much of that is pulled forward from next year? And therefore maybe an extension to that, how do we think about free cash flow if we are heading into next year versus if your normalized pace is 135 if some of it has been pulled forward? Thank you.

Yes, in terms of pulled forward, it is really, as we have talked about in the past, more on the timing of our CapEx spend related to inventory. As we think about that, we still have excess inventory over the next couple years, our target is to get to 2 times cost of goods sold. So timing in terms of just the impact for 2014 or 2015, I think you have to look at it towards that longer-term goal rather necessarily just the impact of what it might be on next year.

So if we took it off like I said for CapEx say $10 million, that means we are getting to that 2 times inventory over the next couple years a little bit quicker. It doesn't change the end game. It is just we are getting there faster by deferring some of that inventory.

And as you think about normalized cash flow, I think the only real change we made there was on the working capital with our spinoff from Marriott and still working through what our working capital balances are once you kind of peel back some of the spinoff related items. There was a little bit of upside we saw this year. We did on a more normalized basis say that we expect our working capital to essentially be breakeven where before we thought it might be a use of cash by call it $8 million to $10 million. So on a more normalized basis, I think that is where you will see hopefully a little bit more recurring cash flow in terms of our working capital needs.

Okay, so if I think of your normalized cash flow next year, this working capital benefit to what you are guiding to it doesn't necessarily come out of next year's?

No.

Got you. Okay.

Yes, the working capital does it, like I say, the impact of the three items still as you think about next year, Chris, are the pay down of the Marriott Rewards liability which will still happen over the next couple of years, the timing of inventory spend. And so like I said, it is hard to pinpoint that to one year because we're trying to get to that targeted two years and then the last piece is a little bit on the tax side but that should normalize out, so --

This is Steve. Let me just add one other thing to you. The CapEx piece of this, we have a fairly detailed review of our CapEx expenses that goes on every single quarter, and when we see an opportunity to defer CapEx even from one quarter to another we certainly are very much inclined to do so. So you may get a little roll off from quarter 4 to quarter 1 and everything else but it is not going to be dramatic.

But obviously, every dollar of cash to us is important and if we can delay spending it, we are certainly going to do that.

Absolutely. So given your stronger free cash flow and the cash building up on your balance sheet, should you not have some recourse debt? What are your thoughts on that because both your peers and I know there is different things going on there, do have recourse debt. What are the impediments to thinking about that in the near term? Thanks.

Sure. We look at our overall corporate credit rating, we are DD- and that is where we think is -- where we want to be. I think some of our competitors' credit ratings, their overall credit rating is lower. Now that being said, I think as Steve mentioned in his comments, we are creating going forward as our EBITDA continues to grow and our securitized debt gets paid down, additional capacity potentially.

So it will be something we will continue to evaluate in terms of our target leverage, but today we feel pretty good where we are at but as the business continues to grow there is definitely an opportunity that we would have some dry powder there.

Got you. And then final question if I may, how should we think about the pace of share repurchases? Maybe ask it another way, are there any -- what is the amount of cash that you want to have on your balance sheet at any one time? Are there any working capital needs or seasonality of cash flow that would cause you to think about the pace of the potential share buybacks? Thanks.

I'll start and let John finish. There is an old saying that every long journey begins with a first step. Well, this is our first step, and it is 3.5 million shares. It is roughly 10% of our outstanding shares, so we thought that was a good place to start. I think as we continue to -- we believe we have a strong cash flow model. We don't believe that this would be a one and done kind of exercise.

Having said that, we are not going to be able to commit anything beyond that, what we have already announced. But I would have an expectation is that, as I said in my remarks, that to what degree we have met the needs of the business in terms of being able to fuel our growth and we still have excess cash on hand. There is no sense caring it around on our balance sheet so we would certainly look to return that to shareholders.

John, I will let you add any color to that --

I think you hit on most of it. I think just in terms of working capital, we do have peaks and valleys in terms of our quarterly cash flows. We look at working capital from a pure cash perspective in that on average $50 million to $75 million. But I would say, obviously, we have got a $200 million revolver that we haven't pulled down on. We have capacity.

So it's not -- from a cash flow, it is not as much of an issue and given the amount of the buyback, Chris, we have got close to $300 million of cash on the balance sheet today and obviously expect to continue to generate significant cash flow going forward. So I don't think there is any impediments in terms of the timing or how we buy the stock back.

Great. Thank you and congratulations.

Carlo Santarelli, Deutsche Bank.

Hey, guys. How are you? I was just hoping -- and I know you touched on it a little bit earlier but the $35 million change in the other working capital line, I know you mentioned some of the pull forward aspects, etc. But would you be able to provide a little color on what that is or how we should think about that number, what is in that basket?

Sure, yes, it is just the way we are targeting what our AP -- excuse me, accounts payable/receivables balance is on a normalized basis are at year end. The one unusual item with the separation from Marriott this quarter, one of the last items we have to do is get off our accounts payable system and so given the timing of that at year end, we didn't know the timing -- as we went through the year, we weren't sure of the timing of when that split was going to occur and if it could impact our accounts payable balance at year end.

Now that we are further along, there will be minimal impact year over year. So that is where most of that upside comes from. But even with the spinoff there was -- just given the timing of the spinoff over the last -- from the first year as well as last year, there were just some items that impacted the timing and cash flows at year end. I think we are kind of past all those at this point. This is probably the last piece with the separation of the accounts payable system, so we are more comfortable in terms of what that year-end net working capital balance looks like.

That's great. That's very helpful. Thank you.

Steve Altebrando, Sidoti & Company.

Good morning. Can you expand a little bit on the rental revenue? Just a couple items specifically. You had mentioned mix playing part of the strength and if you could go over a little bit what the ebbs and flows of that mix is? And then second is, and maybe if you can educate me, is the strength fueled by members or through the Marriott site?

Let me answer the second part of your question first. Any available rental inventory we have we put out through all of the Marriott distribution systems including Marriott's reservation system, all the GDS systems and everything else, so that is where it comes from. Yes, some of our owners do rent our product just for an additional vacation break or a couple of days or something like that. But the bulk of it is for nonowner rental. Let me (multiple speakers)

In terms of -- let me address on the mix side. The nature of type of inventory we have year-over-year is always changing, right? Because we get inventory from newly developed inventory that hasn't been sold yet we can rent that. And then based on also some people exchange their weeks for Marriott Rewards, things like that, so there is always a certain amount of mix in terms of -- it is not apples-to-apples year-over-year.

This year, I think we had some (inaudible) inventory that came online that we didn't have last year which is obviously Hawaii, you can get a little better rates on some of that unsold inventory. So there is always going to be a little bit in the mix.

I think what drove rental revenue better for the most part, though, was we have seen some of our owners taking advantage of our Explorer program, which allows them to use and go on nontraditional lodging type stays and with that, we get that inventory to rent. So we actually saw our rental inventory available to rent go up 10% and then we turn around and we offset the cost of providing that vacation and make a little bit of money on top of it.

So that is where you are seeing the growth and obviously rates were better a little bit because of the mix.

Okay. That's helpful. And then if you could talk a little bit about as the customer base kind of shifts towards going out towards new owners versus existing, maybe one to two years out, how you see that impacting development margins?

Well, if we do it right, which we certainly have every intention of doing, we will make this a gradual shift, not one that is dramatic in nature, and get -- and move from what historically has been the last several years the more 60/40 existing buyers to first-time buyers back down to that 50-50 mix.

Typically the way this works is that you run a higher sales and marketing cost on a first-time buyer than you do on an existing owner, obviously because you don't have to incur a marketing expense to any great degree to get the people on tour, etc. The flip side of that is a first-time buyer traditionally has a higher average contract price because existing owners are kind of topping off the tank, they are buying some additional points but may not be buying the equivalent of a full week's interest in points.

So when you kind of mix those two things together, hopefully you will not see a dramatic increase in sales and marketing costs and arguably if we can drive more first-time buyer sales and keep our sales and marketing costs on a fixed basis relatively flat, you start to see some more leverage because you get higher sales on the top line and you get better leverage on the fixed costs.

Okay. Thank you. That's helpful.

There are no further questions at this time. Please continue with any closing statements.

Okay. As you have heard, we are very pleased with our year-to-date performance and we look forward to a strong finish in 2013. We thank you once again for your participation on our call today and your continued interest in Marriott Vacations Worldwide. And finally, to everyone on the call and to your families, enjoy your next vacation. Thank you very much.

Ladies and gentlemen, this concludes the conference for today. Thank you for your participation and you may now disconnect.