Jeff Hansen – VP, IR Steve Weisz – President and CEO John Geller – EVP and CFO.

Steven Kent – Goldman Sachs Chris Agnew – MKM Partners Stephen Altebrando – Sidoti & Company Bob LaFleur – JMP Securities.

Greetings and welcome to the Marriott Vacations Worldwide Third Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host today, Mr. Jeff Hansen, Vice President, Investor Relations. Thank you, Mr. Hansen. You may begin..

Thank you, and welcome to the Marriott Vacations Worldwide third 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 comments on this call, are effective only today, October 16, 2014, and will not be updated as actual events unfold. Throughout the call, we will make reference 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, and good morning, everyone, and thank you for joining our third quarter earnings call. This morning, I'm pleased to discuss our performance in the third quarter as well as the continuing implementation of our strategy to return capital to our shareholders.

I will then turn the call over to John to provide more detail on our segment results and an outlook for the remainder of the year. We will then open the call for your questions. Results for the third quarter reflected a continuation of the trends we have seen over the past several quarters.

Adjusted EBITDA improved 8% to $54 million, driven primarily by improvements in our rental and resort management businesses. Total company contract sales, excluding residential increased $6 million or 3% to $167 million in the third quarter.

VPG improved 6.9% over the third quarter of last year, marking the twelfth consecutive quarter of VPG improvement since we became a public company in November 2011. Since then, VPG has increased by 40%, a truly remarkable improvement underscoring the success of our sales and marketing initiatives.

The third quarter VPG improvement is 6.9% to $3,477 so is due primarily to an increase in the average number of points purchased per contract as well as higher pricing and a slight improvement in closing efficiency.

These gains were partially offset by reduced tour flow, which was below the prior year period by roughly 4%, primarily due to the fewer owner tours as our owners are choosing shorter stays at our resorts and utilizing our Explorer program to try new vacation experiences.

While we continue to develop programs to drive owner tours, we also remain focused on new programs to help increase first time buyer tours and in turn fuel overall tour growth.

Due to the extended ramp up period for these marketing programs, we expect the fourth quarter tour flow this year to be roughly flat compared to the fourth quarter of 2013 excluding the impact of the extra week last year.

In addition, in the first quarter of next year, we will further expand several of our marketing programs intended to generate first time buyer tours that will lead to future tour growth.

While we have experienced some near-term volatility in our tour flow, incremental tour generation is only one of the tools that we use to generate longer term contract sales growth. Another is VPG growth, which we have consistently demonstrated, and which has also helped drive our improvement in development margin.

New resort destinations with on-site sales distributions can also generate growth by driving first time buyers as well as adding excitement to our existing owner base. It is important to point out that our focus in all three of these areas gives us confidence we will drive our tour top line growth in future years.

Shifting to our resort management and other services businesses, results improved $3 million or 15% over the third quarter of last year to $23 million, continuing the trend we have seen throughout the year. Results in the quarter reflected higher fees earned from our exchange company and for managing our portfolio of resorts.

In our rental business, results improvement $3 million to a total of $11 million in the quarter. While revenues were flat, results reflected lower costs associated with the inventory for rent. In our Asia Pacific segment as we have said before, growth depends on new destinations with strong on-site sales potential.

In support of our targeted growth in this area, we have created a new managing director position based in the region to lead this segment.

The strong development and global operations experience working previously for both our company and Marriott International, I'm confident our new managing director will be a catalyst for the strong future growth we expect from our Asia Pacific segment.

As it relates to our inventory in this segment due primarily to operational and regulatory constraints that effect our ability to sell our 18 units in Macau through our Asia points program, we have decided to sell the units as unbranded whole ownership residential units instead.

We expect to generate gross sale proceeds of approximately $30 million from the sale of the Macau units, which we intend to reinvest in new time share destinations in the region with strong on-site sales distributions.

As it relates to our excess land and inventory, we are pleased with our progress on disposing of the significant portion of these assets. Subsequent to the end of the third quarter, we completed the sales of a parcel of land located adjacent to our Disneyland, Paris property for approximately $3 million.

As we mentioned previously, we also signed an agreement to sell our property at Kauai Lagoons, and we continue to work through the due diligence process. Additionally, we have signed a purchase and sale agreement to sell excess land and inventory as well as a golf course at our property in Abaco.

While the due diligence process continues on both of these efforts, I must continue to emphasize that until these sales are closed, there is a risk that we will not complete these transactions. Turning to our capital allocation strategy, we remained focused on generating strong cash flow and optimizing our balance sheet.

As we have shared in the past, our strategy for the deployment of that cash is unchanged. First, we look for opportunities to reinvest in our business in ways that meet our strategic needs and requirements; and second, we seek to return excess capital to shareholders.

We implemented our share repurchase program just one year ago, and since then, we have repurchased nearly 3.4 million shares of the 3.5 million shares originally authorized at an average prize of $55.23 per share. This represents almost 10% of our shares outstanding at that time.

With the Board’s initial authorization effectively exhausted and given our strong cash position and cash flow outlook, I'm pleased to announce that our Board of Directors has authorized us to re-purchase an additional 3.4 million shares representing approximately 10% of our shares currently outstanding.

Our share repurchase program has been just the first step in the implementation of our capital allocation strategy. To that end, I'm also pleased to announce that our Board of Directors declared our first quarterly dividend of $0.25 per share payable on November 12 to holders of shares as of October 28.

Going forward, we will consider increasing our dividend based on the company's earnings and performance, while taking into account our future free cash flow generation and investment needs. With that, I will turn the call over to John to provide a more detailed look at our third quarter results and outlook for the remainder of the year.

John?.

Thank you, Steve and good morning, everyone. We experienced another quarter of solid performance as adjusted EBITDA was up $4 million to $54 million over the third quarter of last year. This was primarily driven by continued improvement in our resort management and other services business as well as improved results in our rental business.

While we do not adjust EBITDA for the impact of revenue reportability like we do for development margin,. I want to reportability did negatively impact performance in the quarter by $2 million. Contract sales in North America, excluding residential improved 2% driven by improved VPG, which was up 6.9%.

While the VPG improvement was partially due to increased pricing and closing efficiency, we also saw more than 3% improvement in average points purchased per contract.

In North America, adjusted segments results improved $2 million over the third quarter of 2013 to $89 million and adjusted development margin was $35 million, a $3 million increase over last year.

Adjusted development margin improved by 3.3 percentage points driven by over 4 percentage points of improvement product cost, offset by 0.1 increases in marketing and sales cost. The improvement in product cost was primarily driven by the mix of inventory sold, which resulted partially from the success of our inventory repurchase program.

Our marketing and sales cost were up slightly in the quarter in part from an increasing cost associated with programs intended to generate future new buyer tours. We have been investing in these programs for almost a year, with their cost partially offsetting the efficiencies gained in development margin from higher VPG.

As Steve mentioned earlier, we are ramping up several of our marketing programs going forward, but even with this additional investment we expect our full year marketing and sales cost to be in line with last year.

With continued improvement in product cost, we expect full year North America development margin to be at the higher end of our guidance range of 23% to 24% an improvement of roughly 200 basis points over last year. Shifting to our rental business, results in our North America segment improved $1 million over last year to $8 million.

This was primarily driven by 3% increase in key rented and lower cost of inventory available for rent. Based on these current trends and our expectations for the fourth quarter, we expect our total company rental results for the full year to be roughly $23 million to $25 million. Exceeding our 2013 results by approximately $13 million to $15 million.

Turning to our resort management and other services business results improved $4 million to $22 million in our North America segment. This was primarily driven by $2 million in improved change company fees and an additional $1 million of management fees.

In our Asia Pacific segment results for $1 million an improvement from flat results in third quarter of last year. With new leadership located in the region and the cash we expect to generate from the sale of Macau units, we are excited about our future opportunities for growth.

In our Europe segment, adjusted results were flat compared to the third quarter of last year, as we remain on strategy. Which is to sell out of our developer inventory and continue to operate our world class resorts in this region? In our financing business, revenue net related expenses was $19 million down $1 million from the third quarter, 2013.

While the trend has been that our notes receivables balance continues to decline faster than we are originating new notes, we expect this trend to stabilize in 2015, as our top line sales volume continues to grow. Staying on this topic, subsequent to the end of the third quarter.

We completed a $250 million note securitization with a 96% advance rate that resulted in $240 million of gross proceeds to the company. Let me take a moment to discuss the impact of our rising interest rate environment on this securitization, a topic which generates many questions.

Since last year's securitization, we have seen the underlying benchmark interest rate increased by roughly 60 basis points. However, there has been an offsetting tightening in the credit spreads of approximately 50 basis points. So the overall borrowing rate has only increased slightly from 2.21% last year to 2.29% this year.

Additionally, we have made some changes to our lending programs which are resulted in a higher weighted average coupon on our notes. All of these factors combined to generate an excess spread of 1,046 basis point, 11 basis point stronger than we achieved last year. Turning to our balance sheet and liquidity position, since the beginning of the year.

Real estate inventory balances declined another $70 million to $794 million. This includes $446 million of finished inventory representing just over two years of contract sales at our current pace.

The company's total debt outstanding decreased $140 million from the end of 2013 to $538 million including $534 million in non-recourse debt associated with our securitized notes. In addition, $40 million of mandatorily redeemable preferred stock remains outstanding. At the end of the third quarter, cash and cash equivalence totaled to $146 million.

We also had a $197 million in available capacity under our revolving credit facility. As a reminder, these balances do not include the impact of our recent securitization which occurred subsequent to the end of the third quarter.

Taking into account the execution of our securitization which was stronger than anticipated earlier in the year and other improvements in our operational activities. We are increasing our 2014 adjusted free cash flow guidance by $40 million resulting in a new range of $230 million to $245 million.

As a reminder, our guidance assumes we will spend $30 million to $40 million for the acquisition of inventory at new destinations before the end of this year. However, to the extent this spending is deferred into next year, it could have an impact on free cash flow in 2015. I'm pleased with our success in the third quarter, VPG continues to improve.

We are booking new buyers tour ahead of schedule and free cash flow continues to grow. To that end, we expect to return even more capital to our shareholders, to the recently declared dividend and the improved increase in our share repurchase authorization.

Our dispositions remain on track to produce even more cash flow and we expect adjusted EBIT to be at the higher end of our $190 million to $200 million range. We have performed well, through three quarters this year and I look forward to providing an update on the full year and our thoughts on 2015 on our next call.

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

Thank you. (Operator Instructions). Our first question comes from Steven Kent with Goldman Sachs. Please proceed with your question..

Good morning, Steve..

Hi, good morning. Just a couple of questions. First, I don't know if you have mentioned what percentage of sales are from new versus existing and what's the trend and maybe you could also comment.

I think, Steve you made some comments early on about owner tours and I don't know, if they were slowing, but there were some comment there which I didn't completely understand..

Sure, let me see if I can clarify. Last year, we had roughly 60% of our sales come from existing owners buying additional interest in our products. That number is down slightly like 1, 1.5 and ergo the remaining portion of that is for first time buyers. So I think of it now is 58.5% of owner tours versus 41.5% of first time buyers.

We have said for some time now that our goal is to try to get back to a more historical view of roughly 50-50 mix of existing owners versus first-time buyers, but I have also said it will take us some time to get there. Regarding your question about clarification on owner tours. This is been a trend for the year so far.

What we are finding is, there are owners while they still visit our resorts. They often times visit for a shorter length of the stay. You may recall with the institution of our points program back in 2010, people that elected points as an additional use options for their ownership and now have the ability to stay for less than seven days at a time.

They want to stay three or four days at one place and go for three days someplace else. They can certainly do that because they're on site for a shorter period of time. Sometimes, owners are reluctant to sign up to take a time share tour, which does take a portion of their vacation experience.

So we see that happening, the other thing is happening of course is because of the popularity of our explorer options, which allow people to take vacations that are not directly affiliated with our resorts things like cruises or tours or the like.

We also see that take a break to be rather substantial, which is great news from our owners’ perspective, because they appreciate the added variety of our product, but as a result it makes generating owner tours a little bit more difficult.

We pivoted early on to try to generate more first time buyers; our tour generation for first time buyers has been quite good.

What the reality is, however, is it takes anywhere from 9 months to 12 months from the time you book a tour for that tour to actually be on site and to actually take the tour and hopefully become an owner with us, and don’t know if that's helpful or not..

No, that was helpful Steven. Just acquisitions, you talked on and off about that in the past. Especially about getting maybe in some of the middle level price points.

Can you give us an update there and whether that's something that is on the front burner?.

Yes, well clearly acquisitions is clearly on the front burner for us.

We have been spending quite a bit of time in a number of the markets that we have identified as wanting to have additions to the portfolio of places like New York and San Diego, Miami, Big Island, Hawaii, Mexico, obviously Asia Pacific and so we have been spending a lot of time there trying to find the right opportunity.

At the same time, we have been having discussions with numerous parties about being potential asset life partners that we feel relatively confident about our ability to do an asset-like transaction in virtually any of those markets that we talked about, but we just don't have a deal to announce at this point in time relative to the moderate tier we have looked There have been a few candidates out there that we have looked at, and even after spending some time on some of these opportunities, we have concluded that at this point in time we haven't seen anything yet.

However, we continue to look and be interested in this space, and if we see the right thing come along that meets our strategic objectives as well as obviously our investment metric, we would certainly be prepared to pull the trigger..

Okay, thank you..

Thank you..

Thanks, Steve..

Our next question comes from Chris Agnew with MKM Partners. Please proceed with your question..

Hi, Chris..

Thanks very much. Good morning..

Good morning..

Wanted to come back to owner tours. I think you had been expecting a little bit of sequential improvement in tour flow, not a sequential decline.

Had some of the initiatives that you started earlier in the year understanding and given that we understand that takes six to 12 months to impact, were some of those initiatives less than successful, just so can you give us a little more color on the sequential decline?.

Happily. Actually just the opposite, they've not only met our expectations, they have actually exceeded it except for one thing. We thought, it was going to be more of six to 12 months, and now it looks like it's more like nine to 12 months, before people actually take their vacation, and when you stop to think about it, it actually makes some sense.

People oftentimes, when you're able to generate a first-time buyer booking, they may be in the process of enjoying an existing vacation elsewhere, which means they're not going to queue up to take another vacation in six months.

We had hope that that would be -- come a little sooner, but it's just taking longer, but I actually, we have been very pleased with what's been happening in terms of tour generation. It's just the timing of when that tour comes through the house that has missed our expectations a bit..

Got you, so that said should we expect sequential improvement going forward as we head through 2015?.

Absolutely..

Got it and on free cash flow. I know you outlined, you've raised your guidance and you outlined the inventory spend could move that even higher, if you don't spend the cash, but thinking about your normalized free cash flow which you outlined of, kind of $150 million.

If there is some pull forward in this year that will cause normalized free cash flow to be lower next year and what are the different moving pieces there. Thanks..

Yes, I mean we obviously have not put anything out for 2015. I think, what we talked about at least for 2014 and 2015 historically is been the fact that, you saw some moving parts with the inventory burning down and giving us some benefit on the flipsides.

You have the pay down of the pre-spin Marriott rewards liability and that those should kind offset. Obviously for 2014, we have executed better than that and we have been able to your point deferred some of that inventory spend.

So we will get back to you in the next quarter in terms of the outlook for next year, but we are still thinking that overall free cash flow should approximate, what our normalized free cash flow should be for next year, but we are still working through the, bits and pieces of that, so..

Got you and the Marriott reward liability that is, that's going to be settled up and finalized in 2016, can you just remind us some?.

Yes, we will continue through the end of 2015 payoff the redemptions as they come in, so remember we pay based on kind of actual redemption cost for that pre-spin liability, so we will pay down through actual and then whatever is left over, we have a contractual agreement with Marriott and calculate that liability and that will get cleaned up in the first quarter of 2016..

Excellent, thank you..

Our next question comes from Bardford [ph] [indiscernible] with SunTrust. Please proceed with your question..

Hi, it's Brad [indiscernible] on with Patrick Scholes..

Good morning..

Good morning. Wanted to ask you guys, on the inventory side obviously there is and last time you talked about a possible asset like deal, that could offset, is that something that could still be done in the needed time frame and then my second question is just on the balance sheet.

I know there is been some talk about corporate level debt, is there been any more talk about that?.

I will take the asset like question.

As I think, our reference to previously, we are parting work on trying to identify some new project opportunities and I would expect that in the very near future, we will able to announce something not only in terms of the new development opportunity but also in terms of dealing with an asset like partner, having said that.

We don't have, I certainly wish I could have announced today, but I expect in the very near future, you're going to hear about that..

And on the corporate debt fees, I think about as I've talked about in the past given our performance and how the rating agencies look at us and potentially have some excess debt capacity.

We will continue to look to optimize the balance sheet, just like we've done on the asset side to-date in terms of burning down inventory and returning cash to shareholders on that front, but longer term.

We are going to do everything we can, to make sure we've got the right balance sheet that also gives us flexibility to be opportunistic on deals at the same time too..

Thank you..

Thank you..

Our next question comes from Stephen Altebrando with Sidoti & Company. Please proceed with your question..

Hi Steve..

Hi, good morning. Thank you. Just wanted to get your latest high level thoughts on development margin. Do you feel like, you have come a long way, obviously you feel like you're bumping against the ceiling going forward or are you kind of rethinking the ceiling based on the recycling program..

You know, I don't know that there is a ceiling on development margin. I think for some practicalities here. I mean, we have obviously made a lot of progress in product cost.

We've made a lot of progress in sales and marketing cost and the question is, how high is high and I think we don't really know that to be true or what the answer to that is, but I would expect that on the product cost, you know call it 30% in that range. I suspect, we are probably at or near optimization and product cost.

It can move a little bit, but I don't think it was going to be a substantial movement there. Sales and marketing cost, I think clearly as you add more top line sales, you get good leverage and good gearing effect on your fixed sales and marketing cost and variable cost obviously moved with the volume.

And they could come down, now having said all that. Well, one thing we have to be mindful of is, as we move to first time buyers. VPG's from the first time buyers, have a tendency to be slightly lower than our existing owner VPG's as largely because of the closing efficiency percentage issued on the first time buyers.

So you sometimes run a slightly higher sales and marketing cost.

I mean, our goal is going to be continue to try to drive that development margin as high as it can be, I think I have said on a couple of different calls so far this year, that I would caution that, don't put a straight line on the improvement that we have made over the last couple of years in development margin because I think, it's impractical to think, it's going to move quite at that pace, but we are going to keep working hard at it..

Okay, that's helpful and then, is there material operating losses being run through the P&L from the two properties under contract, whether it's Hawaii and Avica [ph]..

Yes, they're for both of those they both have golf courses associated with them, so their operating loss is associated with the golf courses and then, obviously there is carrying costs. There are large partials of land, you know real taxes things like that.

So you probably have call it $8 million or so give or take of losses that would essentially go away..

Okay and then, how about Ritz Carlton inventory in terms of operating losses, currently..

Yes, we still have call it about $10 million of unsold maintenance fees related to Ritz Carlton.

We are working through selling that inventory off, but I think as you're aware they're unfortunately is a lot of rental offset, we get on those carried cost, one the Marriott and so, it's still going to be another call it, couple of years till we finally move those unsold maintenance fees, get those out of the P&L..

Okay, thanks very much..

Thank you..

Our last question comes from Bob LaFleur with JMP Securities. Please proceed with your question..

Hi, Bob..

How are you?.

Well, fine.

How are you?.

I'm outstanding and improving, as they say..

Good..

Anyhow, my question is can you give us a little more background on the Macau situation, [indiscernible] for those proceeds and how you see them being deployed, are there other opportunity to Macau is that just a bad market for time share? And then a second unrelated question, could you just review sort of the fixed and variable components of the marketing, so we can get a sense order of magnitude?.

Yes, so let's go to Macau first. Macau is, we bought 18 units in a condominium building in Macau several years ago and in the interim since we purchased Macau, there were some changes to the local laws that made it problematic for us to be able to sell these units through our Asia point stress.

Now what was happening was, we were still aligned our owners to visit there and stay there, but we couldn't put them into the point stress because of the chains and the law.

As you might imagine, Macau is a little bit different than trying to do business in North America because the influence of the government on how business works there and so as a result, what we found was the best answer was, rather than try to fight City Hall so to speak and try to get a variance to their ruling.

We decided the better thing to do was to simply take those units because they were not in the Asia point stress and dispose them on a whole ownership basis. The market for ownership condominiums in Macau is still quite vibrant and so we don't think, we are going to have a difficult time moving that.

The proceeds from that will be about $30 million, as we have said all along. Our goal is to grow additional presence in Asia Pacific through new resorts, we will use that $30 million help fuel that growth. So that's how we are going to use that cash.

As it relates to sales and marketing cost, even think of it roughly half and half, half variable, half fixed. So on a mid-40% sales and marketing cost from the portability standpoint. I think of 22-22 some kind of thing..

Okay and then the deploying those $30 million of proceeds, is that related to that project you seem really excited to announce, what just can't do it yet or is that something totally separate and further off in the future?.

I think there is a very, very likely candidate in the Asia Pacific region that I had also said, I think it is a very likely candidate or two in North America. Now the question, which one gets to the finish line first..

Alright. Thanks, guys..

At this time, I would like to turn the call back over to management for closing comments..

Well, with most of 2014 behind us. I'm very pleased with what we have accomplished at this point in the year. We are achieving our strategies of driving performance across our businesses and returning capital to shareholders and I would look forward to reporting on a results in the future.

As always, I thank you for your participation on our call today and your continued interest in Marriott Vacations Worldwide and finally to everyone on the call and your families, enjoy your next vacation. Thank you very much..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation..