Marriott Vacations Worldwide Corp (VAC) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Marriott Vacations Worldwide first quarter 2014 earnings conference call on the 29th of April, 2014.

I will hand the conference over to Jeff Hansen. Go ahead, sir.

I would like to welcome to everyone to the Marriott Vacations Worldwide first quarter 2014 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 the comments on this call, are effective only today, April 29 2014, 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 Weisz, President and CEO of Marriott Vacations Worldwide.

Thanks, Jeff. Good morning, everyone. Thank you for joining our first quarter earnings call. This morning, I will discuss the results for the first quarter of 2014 then turn the call over to John to provide a more detailed view of our first quarter performance.

We will then open the call for your questions. Before I begin, let me take just a moment and comment on an important milestone for our company as April 17 marked our 30th anniversary. It's hard to believe that 30 years ago Marriott International purchased three properties on Hilton Head becoming the first lodging branded time share company in the industry.

Today we stand on our own as a public company and industry leader with over 60 resorts, more than 400,000 owner families and almost 10,000 associates across the globe. I am proud of our 30 year history and excited what the next 30 years will bring. We have started 2014 as expected, ahead of 2013 in adjusted EBITDA, VPG and adjusted development margin.

Keep in mind, the first quarter was a tough comparison to last year due to the fact that our busy New Year's week fell into 2013 as a result of our financial reporting calendar. Additionally, the harsh winter impacted our North America segment and our Asia-Pacific segment results were affected by the political unrest in Thailand, which hindered sales in our Phuket sales gallery. That being said, we are on track and confident in our full-year 2014 outlook.

Total company contract sales were $162 million, up $6 million over the prior year. This was due to $6 million in residential sales in San Francisco. VPG continues to this upward trend at proving 6.5% to almost $3,500 driven by higher pricing and improved closing efficiency. This rate of growth is impressive in it-self but even more so considering VPG last year grew 11% over the first quarter of 2012.

Our company adjusted development margin improved over 200 basis points to 19.8%. This was mainly from more efficient marketing and sales spending and higher VPG. As I mentioned before, continued improvement in VPG and development margin allows us to invest in new buyer tours in a manner that controls costs while driving future top line growth. Tour flow in North America was down almost 5% from the first quarter of 2013, slightly behind expectations that we communicated last quarter.

However, we are seeing signs that our recently implemented programs are starting to gain attractions. It's important to remember that tours generated today may not arrive at our sales galleries for another 9 to 12 months on average. To that end, our tour program development and expected production of new buyer tours is on track and we expect to see those benefits begin to manifest themselves later this year.

As I mentioned, our first quarter was impacted by the harsh winter in the US; however, we remain confident that our tour flow will provide sequential improvement as we move through the year. Our rental business was flat through the first quarter of last year but keep in mind that 2014 was impacted by more than just the weather. Our first quarter this year did not include the New Year's week, which was included in the first quarter last year negatively impacting this year's results by approximately $2 million.

Taking into account those impacts, we view flat rental results year-over-year as a solid outcome and we expect rental results for the full year to improve over 2013. Shifting to our resort management and other services business, results improved by $2 million over last year to $18 million. These results were driven by increased club dues and additional management fees as well as improvements in our ancillary operations.

In G&A, costs increased $1 million over last year primarily due to legal fees related to on-going litigation and normal inflationary growth partially offset by additional savings from our organization and separation related efforts. In our Asia-Pacific segment, the continued political unrest sustemming from recent elections in Thailand impacted sales at our Phuket sales gallery. In addition, we are keeping a close eye on new regulations in Singapore that went into effect April 1, which are impacting our ability to take deposits on contract signing.

We have already adjusted our processes to mitigate the anticipated impacts of the new legislation and will evaluate any additional changes as appropriate. We remain focused on development opportunities in the region with on-side sales and will provide strong growth for us in the future.

Turning to our disposition efforts as a reminder, during the first quarter, we completed the sale of a golf course and adjacent land in Orlando for an estimated total gain of $2 million in net cash proceeds of $22 million. And we continue to see strong interest in our remaining $120million to $160 million of excess planned in inventory. For example, we just signed a contract to sell the remaining land and associated golf courses at our Kauai Lagoon property for $60 million.

We typically would not disclose a contract at this stage as the buyer has a six-month due diligence period. However, we are required to do so due to the materiality of the contract. I want to emphasize while signing a purchase and sale agreement is a positive development, anything can happen during this period and this sale is by no means final.

Regarding our capital allocation strategy, we have continued to repurchase shares throughout the year with over 730,000 shares of our common stock purchase in the first quarter and almost 1.5 million shares repurchased to date, representing over 50% of our current board authorization. In total, we have returned over $75 million to shareholders since late last October. 2014 has begun with a solid quarter that we expect to build upon throughout the remainder of the year.

To that end, we are diligently working on our strategies and sourcing first-time buyers and adding new destinations. I am optimistic in our outlook for the company and look forward to updating you in future quarters. With that, I will turn the call over to John to provide a more detailed look at our first quarter results, John.

Thank you, Steve. Good morning, everyone. We delivered solid performance in the first quarter with adjusted EBITDA of $40 million, up $1 million over the first quarter of 2013, despite a tough comparison to last year.

Our improvement was driven by our development margin, which was up $4 million year over year. Our rental business performed well despite some minor headwinds and resort management and other services improved as expected. This was offset slightly by lower financing results and higher G&A costs.

While we do not adjust EBITDA for the impact of revenue reportability it did negatively impact performance in the quarter $3 million, which we expect to realize through the remainder of the year. In North America, adjusted segment results were $81 million, an improvement of $4 million over the first quarter of last year. Development margin was the primary contributor to this improvement growing $5 million over the same quarter in 2013 to $27 million.

Adjusted development margin percentage improved 3.2 percentage points to 22%. This improvement was driven by marketing and sales costs, which improved 200 basis points over last year, product costs that improved 40 basis points and slightly lower sales reserve activity. The improvement in marketing and sales cost reflected the lower cost associated with residential sales.

Excluding the impact of residential sales, marketing and sales costs improved by 60 basis points driven by stronger VPG, which benefited from almost one full point of higher closing efficiency. While one point of closing efficiency improvement has historically resulted in greater margin improvement, new tour production requires up front spending. Despite this investment, we were successful in increasing margins while covering the costs associated with generating future tours. North America product costs, excluding the impact of the residential sales, improved 180 basis points over last year driven by lower costs of inventory from our repurchase program.

Last quarter, we guided full year 2014 total company product costs of between 31% to 32%. Based on current trends in our core time share business, we believe that we will finish the year toward the lower end of that range. In our rental business, results in North America improved $1 million over last year driven by roughly 2 points of improvement in both transient occupancy and rate.

We were facing a tough comparison though to start 2014 without the typical high performing New Year's week, which was included as the 53rd week in the 2013 fiscal calendar. Despite this, total company results were flat to the prior year quarter. In addition, we continue to better understand our owner usage behavior allowing us to improve forecasted rental availability and in turn our overall rental results.

In our resort management and other services business, revenue, net of expenses in North America, improved $2 million to $18 million in the quarter. As we make progress in our dispositions, particularly at Kauai Lagoons, there could be meaningful upside to our ancillary operations in future years. Remember though, even with a signed purchase agreement there is always risk in completing these transactions.

In our Asia-Pacific segment, results were $1 million down from $3 million in the first quarter of 2013. This was primarily driven by lower sales and rental results from the challenges Steve discussed earlier. As we grow this segment through new destinations with strong on-site sales, our Asia-Pacific results will be more diversified and less effected by localized issues.

Turning to Europe, contract sales improved $5 million to $9 million in the quarter due to improved sales from our middle east sales activities and our 47 Park Street property in London. Adjusted segment results were $1 million, flat compared to the first quarter of last year due to the higher mix of London sales, which come with a higher product cost. Our strategy in this segment of selling out our remaining developer inventory remains on track.

Shifting to our financing business, revenue net of related expenses was down $1 million compared to the first quarter of last year. In the quarter, our notes receivable balance declined faster than we originated new notes. However, financing propensity improved 2 points over the first quarter of last year to 42%.

Since we have been enjoying historically high spreads in the ABS markets, we are continuously evaluating programs to improve our propensity. Keep in mind, some of these programs could affect revenue reportability in the near term; however, they should not affect reportability for the full year. We also expect propensity to naturally improve as we begin seeing more first-time buyers later this year. As historically, first-time buyers have a higher tendency to finance their purchase.

Turning to the balance sheet and liquidity position, since the end of 2013, real estate inventory balances declined another $20 million to $844 million. The company's total debt outstanding decreased $81 million from the end of 2013 to $597 million including $593 million in non-recourse debt associated with the securitized notes. In addition, $40 million in mandatory re-redeemable preferred stock of a subsidiary remained outstanding.

At the end of the first quarter, cash and cash equivalents totaled $159 million. We also had approximately $145 million of notes receivable eligible for securitization and $197 million in available capacity under our revolving credit facility.

Shifting to our guidance, we are increasing the lower end of the guidance range for adjusted free cash flow by $10 million resulting in a new range of $145 million to $160 million. As a reminder, our adjusted free cash flow does not include proceeds from dispositions. We have also updated our earnings per share guidance to reflect share repurchase activity through April 28 and based on our first quarter company performance and our expectations for the remainder of the year, are reaffirming our remaining guidance.

Our first quarter improved over last year in all of our key metrics. VPG up 6.5%, development margin improved over 200 basis points to 19.8% and EBITDA improved a $1 million to $40 million. In addition, we continued our share repurchase program and as of today have repurchased over 4% of our outstanding shares.

Looking forward, we are encouraged by what we are seeing. Our new buyer tours are gaining traction and consumer confidence has been trending upward. I am confident in our full year guidance and I look forward to reporting on our progress in future quarters. As always, we appreciate your interests in Marriott Vacations Worldwide and with that, we will now open the call up for Q and A. Operator.

Thank you, sir. (Operator Instructions).

First call comes from Robert Higginbotham from SunTrust. Please go ahead.

Good morning, Rob.

Good morning, guys. A few questions on the contracted land sale. Could you help us with what the use of proceeds would be from that? Presumably, it would go toward your share repurchase program? I want to get a sense of how it would change the cadence of that?

I would tell you that the current share repurchase program, we had already anticipated that in our cash flow prognostications for between now and the end of the first quarter of 2015. If and when this sale comes to pass, we will obviously try to understand the best use of those proceeds and how we might choose to do that.

Just reaffirm our capital allocation strategy, we first look to use cash as a way of growing the business, either through M&A, acquisitions of new properties, et cetera.

In the absence of having any need for that petty cash, that we certainly look to as ways to distribute that cash back to our shareholders. I suspect, as this comes to pass, if it comes to pass then we will have that discussion with our board and try to figure out where to go from there.

Okay. On the impact that it will have to your resort management and other profitability, if the sale, I should say, is complete, should we expect to still see the ancillary piece of that business segment still be negative or be closer to break even or maybe even marginally positive?

I think the simple answer is, today, we do operate that ancillary business and those golf courses at a loss. So, obviously, if we complete this sale, that loss would go away.

So, at the worst case, it will be break even. I don't anticipate any reason to think that our ancillary profits from that location would go up but it certainly would reduce the loss.

Got it. One more question on the rental side of the business, you pointed to the calendar shift of New Year's eve negatively impacting rental.

Could you help me better understand if that was a negative impact to the quarter on rate or was it a negative impact to keys? I'm trying to get a sense of where you are in your progression of more available keys out there?

Specific to that week, it's actually both rate and occupancy as you might imagine. That week is a very popular week for people to travel to all sorts of destinations in our portfolio, whether it be to warm weather climes with beach locations, which generally has very high rates or into the west in our ski locations. By not having that week in there, that's what we got hit on both sides. Again, this is kind of a one time anomaly.

We hit this every four years based on -- four or five years, I guess, based on the 13 period reporting calendar. It's one thing that hit us this year.

So, could you quantify it all what the impact to keys and rate?

I don't know that I have that specific information. I can tell you our estimate is that it costs about $2 million.

Okay, got it. Okay. I will leave it at that. Thanks so much.

Thank you.

Thank you. The next question comes from Chris Agnew for MKM Partners. Please go ahead.

Hi Chris.

Thanks very much. Good morning. First of all, on tour flow can you give us some sense of the cadence through the year. I know you talked previously about tour flow turning positive in the second half.

Could we see it turn positive in the third quarter and just some of the background drivers there? Thank you.

You may recall when we talked before, we mentioned that starting mid-2013, we started to turn our attention towards more first-time buyers and tour generation, in that area. As I said in my remarks, it takes 9 to 12 months on average between the time you actually schedule a tour before that tour arrives.

That is largely a function of the fact that many people have already completed their vacation plans for the later half of 2013 and the first part of 2014. So, I would expect without any degree of precision here that we will start to see more first-time buyers start to show up late in the second quarter and then into the third and hopefully accelerating even further into the fourth quarter.

Thank you. And then if I could shift to North American development margin. A couple of questions stemming from that.

First of all, did I hear right from all the numbers provided that the residential sales impacted the North American development margin, that you reported 22% by about 150 basis points. Related to that, when do you anticipate completing the residential sales?

And then the final subject around just thinking about the development margin in general, last year you had a steady sequential improvement through the year. What, if any, seasonal variations should we keep in mind this year with respect to the progression of the development margin? Thanks a lot.

I will answer one part of this. This is Steve. We have four home owner residential units in San Francisco remaining to be sold. We hope that will be completed between now and the end of the year. Now, I will turn it to John to answer the more pesky questions on the details.

On the development margin, the impact of residential sales, the total margin was really not impacted. The margin on the residential sales in total was similar to what we saw in time share. What we were talking about, Chris, is the impact was different.

Those residential sales have a lower marketing and sales cost in terms of the marketing and the commission piece of that. So, those bring down your marketing and sales costs. However, they have a higher product cost. Net-net you are still getting back to that 22% margin for the business line. But we wanted to highlight that from a marketing and sales perspective you were getting an unfair pickup in terms of how we look at the marketing and sales margin.

In terms of your last question, you know, from a seasonality, I don't think you will see much in that regard. I think what could impact reported development margin as I mentioned in my remarks, as we run different financing programs, you could have reportability that would impact the reported margins; however, as you are aware, we do provide an adjusted development margin to take out the impacted reportability. Short of that, there shouldn't be too much from a seasonality.

Thanks. And just to follow-up to that, normally the reportability evens itself out through the end of the year. Given the impact of new owner sales accelerating later through the year, do you think that will still happen or could there be some lag over into next year.

I think as we said new owner sales or first time buyer sales, they tend to have a higher financing propensity as typically a much higher average contract price for our business. And as a result they rely on financing a little bit more. So, that will help the general trends of financing propensity.

In terms of the reportability, unless we are running some specific program to try and increase our propensity, that's what would impact the timing from the revenue reportability. To your point, for the full year, the programs we run will come back by the end of the year. It won't have a full year impact on our reported development margin.

Great, thanks. Then final small point, can you explain the change in disclosure around consumer financing interest expense and who or what drove that change? It confused me a little in terms of, it didn't appear to be material at all? Thanks.

Chris, could you expand when you say the disclosure?

You had a -- there was a note around adjusted EBITDA --

Oh.

-- in your press release, talking about consumer financing interest expense.

We break it out now and show it up in operating results as a separate line item. It's just a classification. It ultimately gets us to an EBITDA definition, which is after consumer financing. Previously, we used the terminology adjusted EBITDA to get to that EBITDA after consumer financing expense. Now we are including it in the definition of our EBITDA.

Excellent. Is there a particular reason why you are changing this?

No, just to simplify it from a nomenclature in terms of how we talk about EBITDA.

Okay. That makes sense. Thanks.

Thank you, the next question comes from Stephen Kent from Goldman Sachs.

Good morning, Steve.

Good morning. Two questions, one on pace of buybacks, should we expect a steady 35 to 40 per quarter? Are you more opportunistic? What factors are going to influence that over the next couple of quarters.

On VPG, is there a -- how good are you or how can you model that or can you forecast that at a steady pace? Is there more volatility there than maybe [to the eye] expect as you try an balance that quarter to quarter?

Sure. I will take the buy back question here. I think you have seen since we started the program, which is a little over six months ago, we have been in the market consistently buying it back and that's our expectation going forward.

With that said, I would say from a strategy perspective, to the extent we see a dip in the stock price, as you might expect, we are more aggressive in buying shares back on certain days. So, but, we like the price of the stock. We think it's a bargain and we will continue to buy it back going forward here.

Then on the VPG, Steve, there is some seasonality in VPG. So, think of it this way, first quarter in particular when either high demand destinations in the sun or ski typically takes a higher number of points to be able to vacation during that time period. Oftentimes people will, when they visit one of our sales galleries, they will make a decision to buy because they want to come back at that time. As a result, you have higher contract average number of points sold so the VPG gets a little higher.

In the summertime you have a similar effect in the some of our summer locations. Less so, in some of the shoulder seasons. And, then, so we have that kind of as a given.

Then you have to factor in what we try to do at all times, which is share best practices across our sales force about new ways of presenting the product to potential owners and increase our efficiency of our sales force. So, there is some variability that is a little more difficult to forecast. The seasonality piece is easier for us to understand.

Thank you.

Thank you. The next question comes from Steve Altebrando from Sidoti & Company. Go ahead.

Good morning. Can you provide a breakdown of pricing versus volume for VOI sales?

Sure. Our average price was up in the quarter about 5% give or take. And we talked about closing efficiency was about a point improvement. Those were the two key metrics there.

Okay. And then could you remind me the tax basis on the remainder of the excess real estate and how significant or how much of that excess real estate is generating an operating loss for you?

Yes, I mean in terms of the second part of the question, we've talked about -- there is probably -- especially with the real estate that has a golf course component like we have in Kauai and one of our other locations, then you take all the other carrying costs, you probably have $8 million to $10 million of embedded losses currently in our P&L related to that excess land. As we talked about, as you sell through some of this, Kauai, for example, where you have a golf course and you have some ancillary losses associated with that, that is potential upside.

In terms of the tax basis, I think in most cases, our tax basis is probably close to book basis on these assets. So, not much of a differential there.

Okay. That's helpful. Thank you.

Thank you. There appear to be no further questions. Please continue.

Okay. Well, if I can leave you with anything from our call today, it is that our first quarter performance was solid and was certainly in line with our expectations. We look forward to reporting our continued progress throughout the year.

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

Thank you. This concludes the Marriott Vacations Worldwide first-quarter 2014 earnings call. Thank you for participating. You may now disconnect.