Marriott Vacations Worldwide Corp (VAC) 2016 Q1 法說會逐字稿

Greetings and welcome to Marriott Vacation Worldwide first quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, Mr. Jeff Hansen, Vice President of Investor Relations. Thank you, you may begin.

Thank you Rob. Welcome everyone to the Marriott Vacations Worldwide first quarter 2016 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, April 28th, 2016. 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'll walk through our first quarter results and provide an update on our top line growth initiatives, which give us confidence that we will achieve our full year guidance. I will then turn the call over to John, to provide a more detailed review of our first quarter, and his thoughts on our full year before opening the call to your questions.

As we indicated on our year end call at the end of February, first quarter contract sales in North America faced several challenges, stemming primarily from the tough comparison to last year's strong first quarter results, as well as the weakness we have experienced in our Latin American sales channels. Remember in our first quarter of 2015, we adjusted our owner recognition levels, or what we call ORLs, increasing the benefits at higher levels of ownership. This helped drive a 7% increase in owner tours, and approximately 1.5 points of improvement in owner closing efficiency over the first quarter of 2014. As a result, first quarter vacation ownership contract sales last year were up almost $16 million, over 11%, driven mainly by the improved sales metrics to existing owners.

Shifting to the current year, in the first quarter of 2016, North America time share contract sales were approximately $140 million, down $16 million from the first quarter of 2015. $2.5 million of this decline occurred in our Latin American sales channels, as we continued to experience headwind from the strong US dollar. This decrease, however, was less than the year-over-year declines we saw in the Latin American sales channels in the third and fourth quarters of last year. The remaining contract sales declined primarily resulting from almost 7% fewer owner tours in the quarter, and a lower owner closing efficiency, as we did not have a lift from the new changes to the ORL program as we did last year.

In the first quarter, we made significant progress on our plans to open new sales centers, which will grow our total number of site-based sales centers by over 30%. To provide the level of leadership needed at these locations, we obviously looked first to our own internal pool of talent, as our existing leadership provides the best opportunity for each of our new sales centers to be successful as quickly as possible. The magnitude of these changes can create short term disruptions to our existing sales centers.

Partially offsetting the decline in sales to existing owners, we began to gain traction generating more sales from first time buyers. As our first time buyer BPG was up almost 4.5%, and first time buyer tours were up 1% quarter-over-quarter. This highlights the improved performance in the quarter from our new marketing channels, namely our call transfer and Encore programs. And we are equally excited about their potential for the remainder of the year, as tour activations for the rest of 2016 are over 25% higher than at the same time last year. In addition, our tour pipeline continues to ramp up, increasing more than 5,000 packages from the fourth quarter of last year. But this positive new momentum in tours is just one part of our story for 2016 and beyond.

The other side of our growth strategy relates to six new sales centers opening throughout the year. On that note, I am pleased to announce that we just recently launched our sales efforts at our Surfers Paradise property on the Gold Coast of Australia. We're excited what that location can do in our Asia Pacific segment, as it ramps up its sales performance over the next several years. In addition, we have just recently opened a temporary sales center in Washington DC, while we complete the construction for our permanent sales gallery. We have also launched a small sales operation in New York at our new property on 37th Street in midtown Manhattan, while we complete our permanent on site location early in the third quarter, with the delivery of the first phase of renovated units there.

I would like to provide an update on our transaction at the Waikoloa Marriott, we reached an agreement several weeks ago with the owner of the hotel, for a capital efficient acquisition of 112 1 and 2 bedroom timeshare units, on their conversation by the owner, which is targeting for July of 2017. In addition, we have begun construction on a permanent sales center of the property, and expect to start sales on the Big Island in September of this year. And finally, as we announced in February, we have added a new location in South Beach to our portfolio. We are currently in the final stages of securing space for our sales center, expect to be in sales by the end of the year at this exciting new location.

Now allow me to shift gears just a bit, as I am excited to talk with you about a new brand extension to the Marriott Vacation Club family. As you may have seen this announced yesterday, we unveiled Marriott Vacation Club Pulse, a new type of product offering for our owners, and a direct answer to the call from customers for more destinations in metropolitan areas. Marriott Vacation Club Pulse is being launched at our new city destinations in New York, San Diego, Washington DC, and South Beach, as well as the Custom House, our existing property in the center of Boston. At Marriott Vacation Club Pulse properties, the experience focuses on the destination itself, and all of these properties are located in the heart of the action. To find out more, I encourage you to go to our website and follow the Marriott Vacation Club Pulse link to check out the latest updates.

Now let me take a moment to emphasize our confidence in our full year sales guidance. As I mentioned, our first quarter contract sales faced a tough comparison to 2015. However, underlying this performance were the signs that our new programs are working. First time buyer tours improved, new tour package sales are ahead of expectations, and two activations are well ahead of where we were at this point last year. We have begun sales at our new properties in Australia, Washington DC, and New York, and have three more locations beginning sales over the coming months.

Lastly, while we expect to continue to face challenges in our Latin America sales channels in the second quarter, we begin to lap this impact on a year-over-year basis at the beginning of the third quarter. Taking all this into account, we expect a very strong second half to the year, and we remain confident we will achieve 4% to 8% contract sales growth for the full year. Shifting to the bottom line, our resort management and other resort businesses was up $1.6 million, almost 7% over last year. And our financing business which had been a headwind in the past continued to improve, as financing results were up $1 million to the prior year. When you consider these improvements, combined with our expectations for full year contract sales, we are equally confident that we remain on track to produce adjusted EBITDA of between $261 million and $276 million. With that, I'll turn the call over to John, to provide a more detailed look at our first quarter results and outlook for 2016. John.

Thank you Steve. Good morning everyone. Adjusted EBITDA totaled $51.6 million, $8.6 million below the first quarter of 2015. While we saw continued growth in our financing and resort management businesses, as expected we did see a decline in our development business year-over-year. For the first quarter, adjusted development margin was down roughly $10 million, of which nearly $9 million of the decline was in our North America segment, as a result of lower contract sales to existing owners in the quarter. North America adjusted development margin was 20.6% in the quarter, down over 3 points from the prior year.

Product costs continues to be a great story for us, favorably impacting development margin by roughly 3 percentage points year-over-year, driven primarily from the continued strength of our inventory repurchase program. However, our product cost benefit was more than offset by higher marketing and sales costs, as the lower contract sales impacted our ability to leverage our fixed marketing and sales costs. In addition, our variable marketing and sales costs were impacted by higher spending related to our investment in future tours, primarily in our call transfer and Encore programs, as well as pre-opening costs associated with the start-up of new sales distributions.

It's important to remember these higher variable costs will drive future contract sales growth for us in the second half of this year and beyond. In the Company's financing business, revenue, net of related expenses was $19.2 million, up $1.1 million, or 6% from the first quarter of last year. The program we launched last year to help drive financing propensity has continued to be successful with our North America propensity up 15 basis points to 57%. And our purchasers remain very creditworthy, as we have seen a 16-point increase in FICO scores to 744 this quarter, as compared to 728 in the prior year. With these higher financing propensity levels, as well as expected growth in contract sales in 2016, we expect year-over-year growth to continue to build in our financing business as we progress through the year.

Shifting to our rental business, excluding the results of operations for the portion of the Surfers Paradise Hotel that we expect to sell, total Company rental revenues were $78 million, approximately $2 million higher than the prior year. This increase includes roughly $1.4 million from the properties we are operating prior to their conversion to time share, as well as higher plus point revenues. Transient rate was up slightly. However, this increase was offset by a reduction in transient keys rented, as we were making more keys available for preview room nights in support of our call transfer and Encore programs.

Rental revenues net of expenses were relatively flat to the prior year, as the revenue increase was offset by higher operating expenses in the quarter. In our resort management and other services business, excluding the results of operations for the portion of the Surfers Paradise hotel that we expect to sell, Company results improved $1.6 million, or 7% in the first quarter to nearly $24 million. Results reflected higher fees for managing our portfolio results, higher ancillary profits, and improved exchange Company activity.

In our Asia Pacific segment, contract sales improved almost 9% quarter-over-quarter. Total adjusted results were $1 million, down $2.5 million from the prior year, as first quarter results last year benefited from $1.1 million of favorable product cost true-up activity, and our first quarter this year was negatively impacted by roughly $800,000 in pre-opening expenses associated with our new sales location in Australia. In addition, at the end of the first quarter, we opened our first ever sales location in Australia. Representing our first new location in Asia Pacific in seven years.

General and Administrative expenses were $25.3 million in the first quarter of 2016. A $2.5 million increase over last year. Roughly $2 million of this increase related to technology spend in the quarter, as we continue to enhance our infrastructure. As we mentioned on our year end call, we expect to have incremental spending related to enhancing our owner facing technology and updating our current web platforms through 2017. This incremental spend is included in our full year guidance.

Turning to our return of capital to shareholders, we returned nearly $91 million in the first quarter of 2016, including repurchasing nearly 1.3 million shares of our common stock for $73 million. Shifting to our balance sheet, at the end of the quarter, cash and cash equivalents totalled nearly $107 million. We had approximately $102 million of gross vacation ownership notes receivable eligible for securitization in our warehouse credit facility. The Company's total gross debt outstanding at the end of the quarter totalled $699 million, all but roughly $11 million of which is non-recourse debt associated with securitized notes. In addition, $40 million of mandatorily redeemable preferred stock remains outstanding, which we expect to redeem in October of this year.

Now let me spend just a moment on our contract sales outlook. More specifically the pace we are expecting for the remainder of 2016. The second quarter has continued to experience headwinds related to last year's owner recognition changes that we have discussed, as the impact of that program ran through the end of April last year. And Latin America continues to sell against a strong US dollar. As a result, we expect overall contract sales to be flat to up slightly in the second quarter as compared to last year. As we move into the third quarter, we expect our Latin American headwinds to subside as we lap last year's declines. Additionally we expect contract sales growth to ramp up as we move through the second half of the year, from higher tour volumes and the impact of new sales distributions coming online. For this reason, we expect contract sales growth of 4% to 8% for the full year.

We expect development margin to follow a similar improvement track. As a result, our second quarter development margin percentage is expected to be lower than last year. As we move through the second half of the year, we expect development margin to continue to improve, as higher contract sales allow us to leverage the fixed portion of our marketing and sales costs, and lower product costs offset higher variable marketing and sales costs, similar to what we experienced in the first quarter. With this improvement in development margin and the continued improvement in our other lines of business, we are reaffirming our adjusted EBITDA guidance of $261 million to $276 million.

Turning to free cash flow, we maintain our expectations for adjusted free cash flow of between $135 million and $155 million. As we mentioned on last our last earnings call, while slightly below normalized level, this range includes approximately $35 million of development capital spending deferred from last year. However, as we always do, we will continue to evaluate all of our capital needs as we progress through the year, with the intent of delaying spending wherever possible. Also, while not included in our free cash flow calculation or guidance for 2016, we are well underway with negotiations regarding the sale of the Downside Surfers Paradise property, as well as the bulk sale of our remaining units at the Ritz-Carlton Club and residences in San Francisco. Combined, we expect these transactions could generate over $60 million of additional cash flow this year. I continue to be excited about the growth opportunities that lie ahead, and I look forward to sharing our achievements with you in future quarters. As always, we appreciate your interest in Marriott Vacations Worldwide. And with that, we will open the call up for Q&A. Rob.

Thank you. At this time, we'll be conducting a question and answer session. (Operator Instructions). One moment please while we poll for questions. First question is from Chris Agnew with MKM Partners.

Good morning Chris.

Thanks very much, good morning. Thank you for that color, those expressed a very strong, expecting a very strong second half. Confidence in 4% to 8% growth. Can I ask is your confidence in the mid-point the same as when you initiated guidance back in February, given the first quarter we just saw?

I would say so. I'll be the first to tell you that the first quarter was maybe a little softer than we had originally anticipated. However, that is balanced out by the continued strength in terms of booking and activating tours for the balance of the year, plus the progress we're making on the new sales centers. Yes, I wouldn't characterize our competence in that 4% to 8% number as being markedly different from when we first announced it.

Thanks. I think if I'm reading it right, there is no increase in your provision for loan loss from a year-over-year perspective, have you seen any increase in default activity, any third-party sponsored defaults?

Chris, to answer the second part of your question, no. We haven't seen any of that. First part of your question, we have actually, as a percentage of finance sales, our bad debt allowance is down slightly. Sorry, it's improved year-over-year. And then what you are seeing as I talked about is your actual finance sales is up about 15 percentage points year-over-year. But the rate we're actually providing has continued to improve. Our core portfolio continues to perform very well. Where we have seen a little bit on the edges, not surprisingly would be with some of the Latin American paper, just given some of the foreign currency. That's in that overall number. Net/net, the overall portfolio continues to perform very well.

Got you. The sales that you talked about, the additional potential $60 million, are you more or less expecting that by the end of this year? Is it just the timing around just give us a little bit more color on what needs to happen for those sales?

I'm assuming your reference is to the dispositions, correct?

Yes, sorry.

On Surfers Paradise, we are very close. We have a few minor kind of conditions precedent that have to be satisfied before we can close that sale. So we're not prepared to announce that yet. But I expect you'll probably hear from us in the not too distant future that sale has concluded. We are well along the way about making that bulk sale at our Ritz-Carlton and residence property in San Francisco. On a collective basis between the two. it's between $60 million and $70 million worth of proceeds.

Chris, we feel good about it. I would have to say, until they're done, they're not done, right? There's always some risk. We feel very good to Steve's point.

Thanks. One more question, sorry to steal so much time. In terms of thinking about how these new sale centers ramp. Obviously you said some of them are a temporary facility and moving to larger facility. Do they ramp over a couple of years? Or is it six months? How do you think about sale centers?

I would argue probably for the rest of the industry, when you open up a new sale center, you're starting from a dead stop. And you're trying to move forward and further compounded by the fact that as I indicated, that both in New York and in Washington, we have got temporary sales centers that we have put together. As the permanents are finished here in the next couple of months. It will take several years for any new sales center to reach kind of its stabilized run rate. But that has all been factored into our guidance, about how we think about the contract sales unfolding, as well as the EBITDA for the balance of the year.

Excellent. Thank you.

Thank you.

Our next from Steven Kent with Goldman Sachs. Please proceed with your question.

Good morning, Steve.

Hi. Good morning. Just to follow on that last question about Washington and New York City, what are some of the early indicators that these markets will be robust for you? And the reason I'm asking is because my recollection is, the Boston property did very well, and that was relatively new. I think that was almost ten years ago maybe when you rolled that out. What are some of the early indicators that would say this city focus is moving in the right direction? And then commentary on LatAm business, how that is holding up, that was an issue more last year, but I wanted to see if that was still an issue for this year?

Yes. First of all, actually, it's kind of hard for me to put this in perspective having been here 20 years. Actual, Boston Custom House probably started sales 15 years ago even. Keep in mind at that point in time we were selling a site-based product, not our points program, et cetera. The thing you gain by opening up a sales center that is in conjunction with inventory that you have in a marketplace, is that you get the benefit of obviously any in-house marketing that you can do to those units where you can talk to people that are either renting the unit, or people that are there on either a usage or exchange about buying more points within our system. That's the first point.

The second point is it also gives you an opportunity to talk to that people that live in that destination, New York City market as an example, Washington market, both very vibrant, very wealthy markets, that we can market to. We can get people to come and take a presentation from us there. I mean, nothing in life is guaranteed. Certainly we can't guarantee that these will be home runs. We have every reason to believe that they'll be very successful. That's the way we have underwritten these products. As far as Latin, I'll let John talk about that.

Sure, obviously, Steve, the foreign currency hasn't necessarily improved much versus the US dollar. When you look at it from an overall basis from mid-year last year. I think what we're seeing is, we talked about this early on, over time, some of those fluctuations become the new normal. And people within those markets to the extent they want to travel and do things, they're going to have to come to terms with what has happened with the foreign currency. We obviously target a more fluent buyer, probably people that have more means in terms of buying our product, given our price point. So I think we're seeing as we said in the script, we're seeing the year-over-year decline, notwithstanding not much improvement in the foreign currency exchange rates getting less. Which is positive. But it's obviously still a headwind. It will be a headwind here in the second quarter in terms of even if things stay where they're at. It won't be until the third quarter where we get some benefit from that easier comp for the balance of the year.

Okay. Thank you.

Thank you.

Our next question comes from Patrick Scholes with SunTrust. Please proceed with your question.

Hi, Patrick.

Good morning, guys. It's actually Brad on for Pat. Just a quick one. With Marriott buying Starwood, is there any chance there's a change to the way sales leads are going to be distributed? Any chance start with leads, or any changes otherwise? Appreciate it.

Well, first of all, I guess you would find it not uncommon for me to say that will we really don't comment on third party M&A activity, however, I will also say that we'll look forward to dialogue with Marriott, about how the terms of our licence agreement, and that of what would be the signature experience lines up with them as the licensor. And understand what the impact will have on the loyalty programs.

Got it, appreciate it.

Thank you.

There are no further questions at this time. At this point I would like to turn the call back over to Stephen Weisz for closing comments.

First quarter of 2016 was the turning point of our growth strategy, as we began opening new sales centres with more to come. We continued to ramp up our first time buyer tour production across all of our current sites. I'm excited about the remainder of the year, and look forward to updating you on our performance on future calls. And finally to everyone on the call and your families, enjoy your next vacation. Thank you.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.