Marriott Vacations Worldwide Reports Third Quarter Financial Results

Marriott Vacations Worldwide Corporation (NYSE: VAC) today reported third quarter financial results and updated its guidance for the full year 2017.

Due to the change in the company’s financial reporting calendar beginning in 2017, the third quarter of 2017 included the period from July 1, 2017 through September 30, 2017 (92 days) compared to the 2016 third quarter, which included the period from June 18, 2016 through September 9, 2016 (84 days). Prior year results have not been restated for the change in the company’s reporting calendar.

During the third quarter of 2017, over 20 of the company’s properties in its North America segment were negatively impacted by one or both of Hurricane Irma and Hurricane Maria (the “Hurricanes”). As a result of the mandatory evacuations, shutdowns and cancellations of reservations and scheduled tours resulting from the Hurricanes, the company’s sales operations at several of its locations, primarily those located on St. Thomas (USVI) and on Marco Islandand Singer Island in Florida, were adversely impacted along with rental and ancillary operations.

Third Quarter 2017 Highlights:

• Net income was $40.8 million, or $1.47 fully diluted earnings per share (“EPS”), compared to net income of $26.8 million, or $0.97 fully diluted EPS, in the third quarter of 2016.
• Adjusted net income was $39.0 million, compared to adjusted net income of $26.6 million in the third quarter of 2016, an increase of 47 percent. Adjusted fully diluted EPS was $1.41, compared to adjusted fully diluted EPS of $0.96 in the third quarter of 2016, an increase of 47 percent.
  • The company estimates that the Hurricanes negatively impacted adjusted net income and adjusted fully diluted EPS by $1.1 million, and $0.04, respectively, in the third quarter. Excluding that impact, adjusted net income and adjusted fully diluted EPS would have totaled $40.1 million, and $1.45, respectively.
• Adjusted EBITDA totaled $74.0 million, an increase of $23.3 million, or 46 percent, year-over-year.
  • The company estimates that the Hurricanes negatively impacted adjusted EBITDA by approximately $3.3 million in the third quarter. Excluding that impact, adjusted EBITDA would have totaled approximately $77.3 million in the third quarter, an increase of 53 percent.
• Total company vacation ownership contract sales were $198.5 million, an increase of $28.6 million, or 17 percent, compared to the prior year period. North America vacation ownership contract sales were $179.2 million, an increase of $28.3 million, or 19 percent, compared to the prior year period.
  • Excluding the estimated impact of the change in the company’s financial reporting calendar, total company and North America vacation ownership contract sales would have increased 6 percent and 8 percent, respectively, compared to the prior year period.
  • The company estimates that the Hurricanes negatively impacted contract sales by approximately $12 millionin the third quarter. Excluding that impact, as well as the impact of the change in the financial reporting calendar, total company and North America vacation ownership contract sales would have grown by approximately 13 percent and 15 percent, respectively, over the prior year period.
• North America VPG totaled $3,482, a 3 percent increase from the third quarter of 2016. North America tours increased 18 percent year-over-year.
  • Excluding the estimated impact of the change in the company’s financial reporting calendar, tours would have increased 7 percent compared to the prior year period.
  • In addition, the company estimates that the Hurricanes negatively impacted tour growth by approximately 6.5 percentage points. Excluding that impact, as well as the impact of the change in the financial reporting calendar, tours would have increased 13 percent over the prior year period.
• During the third quarter of 2017, the company repurchased 695,885 shares of its common stock for $79 million.

“I am very pleased with our continued contract sales and adjusted EBITDA growth in the third quarter of 2017.  While obviously impacted by the hurricanes in the Caribbean and southeastern U.S., our business continues to grow from the ramp-up of our new locations, as well as from marketing programs that continue to grow our tour flow,” said Stephen P. Weisz, president and chief executive officer. “Excluding the adverse impacts from the hurricanes, our expectations for contract sales, adjusted EBITDA, and adjusted free cash flow remain on target for the full year.  On a more personal level, I could not be more proud of how our entire company came through the many challenges we faced in the quarter.  Our associates survived historic storms and unexplainable tragedies by displaying their unending flexibility, tenacity, and perseverance to help each other, their communities, and our guests.”

Non-GAAP financial measures, such as adjusted net income, adjusted EBITDA, adjusted fully diluted earnings per share, adjusted free cash flow, and adjusted development margin are reconciled and adjustments are shown and described in further detail on pages A-1 through A-14 of the Financial Schedules that follow.

Third Quarter 2017 Results

As a result of the change in the company’s financial reporting calendar, financial results for the third quarter 2017 include the impact of eight additional days of operations.

Company Results

Third quarter 2017 company net income was $40.8 million, a $14.0 million increase from the third quarter of 2016. Excluding the impact of the provision for income taxes, these results were driven by $20.0 million of higher development margin, $6.5 million of higher gains and other income, $4.0 million of higher financing revenues net of expenses and consumer financing interest expense, $1.8 million of higher resort management and other services revenues net of expenses, and $0.2 million of lower acquisition costs, partially offset by $4.5 million of higher general and administrative costs, $2.7 million of lower rental revenues net of expenses, $2.0 million of higher litigation settlement costs, $0.6 million of higher royalty fees, and $0.4 million of higher interest expense.

Total company vacation ownership contract sales were $198.5 million, $28.6 million, or 17 percent, higher than the third quarter of 2016. These results were driven by $28.3 million of higher contract sales in the company’s North Americasegment and $1.4 million of higher contract sales in the company’s Asia Pacific segment, partially offset by $1.0 millionof lower contract sales in the company’s Europe segment. Excluding the estimated impact of the change in the company’s financial reporting calendar, total company vacation ownership contract sales would have increased 6 percent, compared to the prior year period. In addition, the company estimates that the Hurricanes negatively impacted contract sales by approximately $12 million in the third quarter. Excluding that impact, as well as the impact of the change in the financial reporting calendar, contract sales would have grown by approximately 13 percent over the prior year period.

Development margin was $37.2 million, a $20.0 million increase from the third quarter of 2016. Development margin percentage was 20.6 percent compared to 13.1 percent in the prior year quarter. The increase in development margin reflected $13.1 million related to favorable revenue reportability year-over-year, $5.5 million from higher contract sales volumes net of expenses, $4.5 million from lower product costs, and $3.4 million from lower sales reserve activity, partially offset by $6.5 million of higher marketing and sales costs including costs to ramp-up the company’s newest sales distributions. Adjusted development margin percentage, which excludes the impact of revenue reportability and other charges, was 21.3 percent in the third quarter of 2017 compared to 19.7 percent in the third quarter of 2016. The company estimates that the Hurricanes negatively impacted adjusted development margin by 0.5 percentage points in the third quarter of 2017.

Rental revenues totaled $81.2 million, a $7.4 million increase from the third quarter of 2016. Rental revenues net of expenses were $10.1 million, a $2.7 million decrease from the third quarter of 2016. The company estimates that the Hurricanes impacted rental revenues net of expenses by roughly $1.5 million in the third quarter of 2017.

Resort management and other services revenues totaled $76.9 million, a $6.7 million increase from the third quarter of 2016. Resort management and other services revenues, net of expenses, totaled $32.2 million, a $1.8 million, or 6 percent, increase from the third quarter of 2016.

Financing revenues totaled $34.7 million, a $5.6 million increase from the third quarter of 2016. Financing revenues, net of expenses and consumer financing interest expense, were $23.1 million, a $4.0 million, or 21 percent, increase from the third quarter of 2016.

Gains and other income totaled $7.0 million in the third quarter of 2017 including $8.7 million in net insurance proceeds related to the settlement of business interruption insurance claims arising from Hurricane Matthew, partially offset by a charge of $1.7 million associated with the estimated property damage insurance deductibles and impairment of property and equipment at several of our resorts that were impacted by the 2017 Hurricanes.

Net income was $40.8 million, compared to net income of $26.8 million in the third quarter of 2016, an increase of $14.0 million, or 52 percent. Adjusted net income was $39.0 million, compared to adjusted net income of $26.6 million in the third quarter of 2016, an increase of 47 percent. Adjusted EBITDA was $74.0 million, a $23.3 million, or 46 percent, increase from $50.6 million in the third quarter of 2016. The company estimates that the Hurricanes negatively impacted adjusted net income and adjusted EBITDA by approximately $1.1 million and $3.3 million, respectively, in the third quarter. Excluding that impact, adjusted net income and adjusted EBITDA would have totaled approximately $40.1 million and $77.3 million, respectively, in the third quarter of 2017.

Segment Results

North America

North America vacation ownership contract sales were $179.2 million, an increase of $28.3 million, or 19 percent, from the prior year period, reflecting higher sales from existing sales centers driven by the success of our new marketing programs, as well as the continued ramp-up of the company’s newest sales distributions. VPG increased 3 percent to $3,482 in the third quarter of 2017 from the third quarter of 2016. Total tours in the third quarter of 2017 increased 18 percent, reflecting a 23 percent increase in first time buyer tours and a 15 percent increase in owner tours. Excluding the estimated impact of the change in the company’s financial reporting calendar, vacation ownership contract sales and tours would have increased 8 percent and 7 percent, respectively, compared to the prior year period. In addition, the company estimates that the Hurricanes negatively impacted contract sales by approximately $12 million and tour growth by roughly 6.5 percentage points in the third quarter. Excluding that impact, as well as the impact of the change in the financial reporting calendar, contract sales and tours would have grown by approximately 15 percent and 13 percent, respectively, over the prior year period.

Third quarter 2017 North America segment financial results were $103.9 million, an increase of $21.6 million from the third quarter of 2016. The increase was driven primarily by $20.4 million of higher development margin, $5.4 million of higher financing revenues, $1.7 million of higher resort management and other services revenues net of expenses, $0.9 million of lower royalty fees, and $0.1 million of lower acquisition costs, partially offset by $3.0 million of lower rental revenues net of expenses, $2.0 million of higher litigation settlement costs and $1.7 million of lower gains and other income.

Development margin was $38.7 million, a $20.4 million increase from the third quarter of 2016. Development margin percentage was 23.7 percent compared to 15.8 percent in the prior year quarter. The increase in development margin reflected $11.8 million related to favorable revenue reportability year-over-year, $5.9 million from higher contract sales volumes net of expenses, $4.4 million from lower product costs, $2.8 million from lower sales reserve activity, and $0.5 million from favorable product cost true-up activity year-over-year, partially offset by $5.1 million of higher marketing and sales costs including costs to ramp-up the company’s newest sales distributions. Adjusted development margin percentage, which excludes the impact of revenue reportability and other charges, was 24.4 percent in the third quarter of 2017, compared to 22.0 percent in the third quarter of 2016. The company estimates that the Hurricanes negatively impacted adjusted development margin by 0.3 percentage points in the third quarter of 2017.

Asia Pacific

Total vacation ownership contract sales in the segment were $12.6 million, an increase of $1.4 million, or 13 percent, from the third quarter of 2016, due primarily to the opening of the newest sales distribution in Surfers Paradise, Australia in the second quarter of 2016. Segment financial results were a loss of $0.5 million, a $1.7 million decrease from the third quarter of 2016. Excluding the estimated impact of the change in the company’s financial reporting calendar, vacation ownership contract sales would have decreased 1 percent compared to the prior year period.

Europe

Third quarter 2017 contract sales were $6.7 million, a decrease of $1.0 million, or 13 percent, from the third quarter of 2016. Segment financial results were $6.8 million, an increase of $2.2 million, or 49 percent, from the third quarter of 2016. Excluding the estimated impact of the change in the company’s financial reporting calendar, vacation ownership contract sales would have decreased 17 percent compared to the prior year period.

Share Repurchase Program and Dividends

During the third quarter of 2017, the company repurchased 695,885 shares of its common stock for $79 million, bringing the total amount returned to shareholders, including nearly $29 million of dividends, to nearly $112 million for the first three quarters of 2017.

Balance Sheet and Liquidity

On September 30, 2017, cash and cash equivalents totaled $440.1 million. Since the beginning of the year, real estate inventory balances increased $22.3 million to $730.5 million, including $390.4 million of finished goods, $2.0 million of work-in-progress, and $338.1 million of land and infrastructure. The company had $1.2 billion in debt outstanding at the end of the third quarter, an increase of $416.0 million from year-end 2016, consisting primarily of $895.4 million of debt related to our securitized notes receivable.

During the third quarter of 2017, the company completed the securitization of a pool of $360.8 million of vacation ownership notes receivable at a blended borrowing rate of 2.51 percent and an advance rate of 97 percent. In connection with the securitization, investors purchased in a private placement $350.0 million in vacation ownership loan backed notes.

During the third quarter of 2017, the company issued $230.0 million of 1.50% convertible senior notes due 2022. In connection with the offering of the convertible notes, the company also entered into privately-negotiated convertible hedge and warrant transactions. Taken together, the convertible note hedges and the warrants are generally expected to reduce the potential dilution to the company’s common stock (or, in the event the conversion is settled in cash, to reduce the company’s cash payment obligation) in the event that at the time of conversion the company’s stock price exceeds the conversion price under the convertible notes and to effectively increase the overall conversion price from $148.19 (or a conversion premium of 30 percent) to $176.68 per share (or a conversion premium of 55 percent).

As of September 30, 2017, the company had approximately $245.4 million in available capacity under its revolving credit facility after taking into account outstanding letters of credit, and approximately $47.6 million of gross vacation ownership notes receivable eligible for securitization.

Fiscal Year Change

The table below shows the number of days for each reporting period in 2017 and 2016:

Full Year Impact of the Hurricanes

While many of the company’s properties and sales centers impacted by the Hurricanes were fully or partially open by the end of September, two properties and a sales center on St. Thomas remain closed and the company is not currently in a position to predict when they will reopen. Further, while some of the properties were fully or partially open, many of the operations will continue to ramp-up throughout the fourth quarter of 2017, and potentially into 2018. At this time, the company estimates the following impacts from the Hurricanes on its financial results as shown on page A-14 of the Financial Schedules.

Outlook (reflecting the adverse impact of the Hurricanes)

Pages A-1 through A-14 of the Financial Schedules reconcile the non-GAAP financial measures set forth below to the following full year 2017 expected GAAP results:

The company has updated its guidance for the full year 2017 for changes primarily related to the adverse impact of the Hurricanes as well as for changes in shares outstanding and to increase its adjusted free cash flow guidance.

About Marriott Vacations Worldwide Corporation

Marriott Vacations Worldwide Corporation is a leading global pure-play vacation ownership company, offering a diverse portfolio of quality products, programs and management expertise with over 65 resorts. Its brands include Marriott Vacation Club, The Ritz-Carlton Destination Club and Grand Residences by Marriott. Since entering the industry in 1984 as part of Marriott International, Inc., the company earned its position as a leader and innovator in vacation ownership products. The company preserves high standards of excellence in serving its customers, investors and associates while maintaining a long-term relationship with Marriott International. For more information, please visit www.marriottvacationsworldwide.com.