Q2 2019 Earnings Call
Second quarter 2000, <unk> earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference call is being recorded.
It is now my pleasure to turn the call over to your host Mr. Neal Goldner, Vice President Investor Relations. Thank you you may begin.
Thank you, Rob and welcome to the Marriott vacations worldwide second quarter earnings Conference call.
I am joined today by Steve Vice President and Chief Executive Officer, and John Geller, Executive Vice President and Chief Financial administration of administrative offer.
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.
Well I guess first 2019 and will not be updated as actual events unfold.
Throughout the call, we will make references 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 and financial information page on our website at IR Dot M Pwc Dot com.
It's now my pleasure to turn the call over to Steve White, President and Chief Executive of Medicare Marriott vacations worldwide.
Thanks, Neil Good morning, everyone and thank you for joining our second quarter earnings call.
I'm very pleased with our performance this quarter with contract sales growth being driven by both our legacy and BW and legacy Iology vacation ownership business is contributing to our 17% adjusted EBITDA growth on a combined basis.
Starting with our vacation ownership business. We previously told you that we expected our legacy and VW business to deliver relatively consistent sales growth throughout 2019.
And that the Vistana and Hyatt businesses would accelerate as the year progressed.
Our legacy MB W. segment increased contract sales, 6% in the quarter compared to the prior year North American tourists grew 3% in VPG increased 1% to $3700.
First time buyer tours increased 6%, representing approximately 45% of the total tourist taken in the quarter, highlighting our focus to grow new owners.
We also saw continued growth in our newer sales distributions, including the most recent addition to our portfolio. The Marriott vacation club pulse near Fisherman's Wharf, San Francisco, which we opened in late May.
Moving to legacy I, LG vacation ownership sales accelerated meaningfully compared to our first quarter.
We've been working very hard to integrating the business leveraging best practices in sales and marketing and shifting to more efficient marketing channels with a longer term goal to increase vistanas VPG to levels closer to that of our legacy and VW business.
And this quarter was a great example of the progress we made with tumors, increasing 2% VPG expanding mine bought more than 4% and total contract sales growing more than 6%.
The tour package pipeline increased 8% on a combined basis, including 15% growth at this data.
This was driven by double digit encore and bounced back package growth.
But what I'm. Most excited about is our continued focus on digital transformation.
Through our customer centric and data driven approach, we continue to deploy innovative pilot programs across multiple digital marketing channels with a longer term goal to drive more efficient tours and higher profitability.
Utilizing this methodology, we can increase the number is impactful programs, while minimizing the risks and time associated with unproven large scale rollouts.
During the second quarter, we launched a digital marketing pilot on Marriott Dot com and a deeper integration with the Marriott Bon voyage traveler partnership.
While still relatively small in scale, we believe digital marketing on Marriott Dot com and other online channels holds tremendous promise overtime.
Our longer term vision is to be able to make differentiated offers digitally to the customers during their booking journey when it's most appropriate for them, enabling them to buy their package and make their reservation completely online.
As we continue to evolve and enhance our product offering in the second quarter. We also announced an exciting new relationship with place pass a digital concierge service, bringing over 200000 additional leisure experiences to our owners and members through an online marketplace.
We also continued our work on enhancing our product offerings across our multiple Marriott brands as we shared with you previously we continue to evaluate the various options and our current plan is to add new enhancements in stages. Each building on the strong foundation that we offer customers today.
Over time, our goal is to develop an integrated product that leverages all of our Marriott family of brands, providing owners and potential owners and even greater array of vacation destinations and experiences from which to choose.
We remain extremely optimistic optimistic about its potential and we'll have more to say about this in our upcoming Investor day on October 4th.
Our exchange in third Party management segment also had a good quarter with exchange membership stabilizing compared to Q1 and average revenue per member increasing 3% compared to the prior year.
Interval International announced an exciting new agreement with planet fitness, taking a meaningful step and its strategic initiative to diversify beyond its traditional timeshare customer base.
Under the agreement interval, we'll leverages technology to enable more than 8 million planet fitness Black card members access to hotel cruise and conduit condominium vacations at preferential rates.
We've also added more features to the interval app to announce to enhance our our members abilities on their mobile experience, including the ability for members to deposit their weeks and enable eight improved vacation planning experience.
In our third party management business Aqua Aston welcome copper Wynn resort and club in Scottsdale to its portfolio, making their first making it their first managed resorts in Arizona.
Moving to synergies the integration of Io LG is progressing well, we're making excellent progress not only achieving the savings we promised but in fundamentally transforming how we do business.
We now expect our run rate savings to approach $60 million by year end, including $45 million to $50 million of synergies, we expect to benefit our 2019 results.
We've made real progress since closing the acquisition only 11 months ago, and we continue to target total annual run rate savings in excess of $100 million by the end of 2021.
Before I turn the call over to Jon Let me touch upon our full year outlook.
With the first half of the year behind us we've narrowed our full year contract sales growth guidance to 6% to 9%.
Implying more than 9% growth at the midpoint for the second half of the year.
This is consistent with our original guidance that growth would accelerate in the second half of the year.
We've also narrowed our full year adjusted EBITDA guidance to reflect the updated contract sales growth and higher synergy attainment, we expect this year.
Since the end of the first quarter, we've repurchased an additional 1.5 million of our shares bringing the total amount since closing the ISL G acquisition on September Onest last year to roughly 4 million shares. This represents more than 8% of the shares we had outstanding at the time of the acquisition.
In addition, the board recently increased our authorization by 4.5 million shares, bringing our current authorization to 4.7 million shares or roughly 10% of our outstanding shares.
Looking forward the fundamentals of our industry remains strong the integration of biology is progressing well and we remain very excited about the unique opportunity we have to fundamentally change how we go to market with that let me hand, the call over to John .
Thank you, Steve and good morning, everyone.
I too am very pleased with our second quarter results and how we are progressing through the year.
As we did last quarter to better highlight how the business performed we have included additional supplemental financial results in our earnings release.
This supplemental information includes 2018 financial information that combines legacy I LG second quarter 2018 results with legacy VW is results to be comparable to our current year presentation.
My comments today about growth and year over year changes referred to our results on a combined basis.
Total company adjusted EBITDA increased 17% in the quarter and grew 20% after excluding the impact of VR Euro, which we disposed of last December .
While we.
In our development business consolidated contract sales increased 6% to $386 million in the second quarter adjusted development margin, which adjusts for revenue Reportability and other charges increased 17% over last year to $86 million.
Adjusted development margin percentage was 24.2%, reflecting a 170 basis point improvement due to both lower inventory costs and more efficient marketing and sales spending.
In our financing business revenues increased 18% to $68 million in the second quarter and financing revenue net of expenses and consumer financing interest expense increased $3 million or 7%.
These results reflect increased revenue primarily from our growing notes receivable balance partially offset by higher interest expense due to a higher outstanding debt balance and a slightly higher average cost of funds.
The average FICO score of buyers, who financed with us in the quarter was 736, while delinquency rates remained near historic lows and financing propensity remains strong at 62%.
In our rental business revenues increased 6% to $40 million to $141 million in rental revenues net of expenses increased 43% to $42 million.
These results were driven by an increase in transient rate higher plus point revenues and lower inventory costs.
In our resort management and other services business revenues increased 2%, while revenues net of expenses increased 1% to $64 million.
This growth reflects higher year over year fees for managing our portfolio resorts, partially offset by higher fees earned last year for managing our asset light inventory arrangements in San Francisco and Marco Island.
Turning to the exchange in third Party management segment, adjusted EBITDA was down $2 million year over year after adjusting the prior year to exclude VR Europe .
The year over year decline was due as expected to the nonrenewal of certain contracts last year.
As Steve mentioned, we continue to work to identify new incremental revenue streams for these businesses and are encouraged about the progress to date.
Jna costs declined $15 million year over year, driven primarily by synergy savings as well as the timing of technology and other spending partially offset by normal inflationary cost increases.
As it relates to our synergy savings as Steve mentioned, we are making great progress in the second quarter, we generated $13 million of synergies, bringing total savings for the first half of 2019 to over $20 million.
With the savings achieved to date as well as what we have projected for the remainder of the year, we are increasing our target of in the year savings for 2019 to $45 million to $50 million up roughly $10 million from our previous estimate.
Moving to the balance sheet at the end of the quarter cash and cash equivalents totaled $179 million. We also had approximately a $104 million of gross vacation ownership notes receivable eligible for securitization.
Further we had roughly $516 million in available capacity under our $600 million revolving credit facility.
Our total corporate debt outstanding at the end of the quarter totaled $2.2 billion. This excludes $1.8 billion associated with our non recourse securitized notes receivable.
From a leverage perspective, assuming the companies were combined for the last four quarters and including $100 million of total synergy savings are combined debt to adjusted EBITDA ratio at the end of the quarter was 2.7 times slightly higher than our longer term target of two to two and a half times.
During the quarter, we successfully completed a $450 million note securitization at a blended rate of 2.9% and a 98% advance rate.
This is the first securitization we've completed that included the Marriott Westin and Sheraton brands and we are very pleased with the high demand for our paper as well as a favorable terms of the securitization.
Regarding our return of capital in the second quarter, we repurchased 1.1 million shares for $109 million at an average price per share of $96.36 and we also paid dividends of $20 million.
Subsequent to the end of the second quarter, we repurchased an additional 400000 shares for nearly $40 million, bringing our total capital returns year to date to more than $315 million.
Before I turn to our outlook for the year I want to provide an update on a few items first as you may recall last quarter I mentioned that we are undertaking a comprehensive review of our vacation ownership assets to determine the best strategic direction for the business.
As it relates to business interruption insurance proceeds we received another $6.5 million in the second quarter associated with the 2017 Hurricanes.
For our west in Saint John property, which is the largest claim outstanding related to the 2017 Hurricanes.
As well as for minor claims related to the 2018 storms, we continue to work with our insurance providers and expect to finalize the majority of the claims over the next several months.
This includes both our business interruption losses as well as the property damage experienced by both us and our owners associations.
While we expect to receive a good portion of the proceeds this year, our adjusted EBITDA and adjusted free cash flow guidance do not reflect the receipt of any insurance proceeds for our business interruption losses, we will continue to update you as these efforts progress.
Now, let's now, let's turn to the outlook for the year.
With year over year sales growth continuing to prove to improve as we progress through the year as our new sales center in San Francisco ramps up and we lap the impact of last year's Hurricanes and soft December .
With this top line growth, we are projecting adjusted EBITDA of $750 million to $780 million or roughly 15% year over year growth, reflecting our revised full year contract sales guidance, but also incremental synergy savings we expect to materialize this year.
For our vacation ownership segment, we are projecting continued growth from all lines of business. We expect continued strong sales growth from both our legacy VW and legacy Iology brands coming from a combination of higher tours as well as from VPG growth and development margin is expected to benefit from the turnaround of unfavorable revenue reportability that we experienced in the first half of the year.
At this time, we are projecting our develop our reported development margin for the second half of the year to be between 24, and 26%, resulting in a full year development margin of between 21 and 22%.
Financing is expected to continue to benefit from higher sales volumes as well as a relatively low interest cost on the securitized debt.
We expect that growth in our financing results for the second half of the year will be in line with what we experienced in the first half of the year.
We are planning to execute a second term securitization later this year.
With the expectation that the terms of the deal will continue to be favorable.
Rentals is expected to perform well with higher transient keys rented and higher transient rate as well as continued growth in plus point revenues resort management is expected to grow from higher management fees exchange company activity and ancillary results and DNA is expected to continue to benefit from the acceleration of some of the savings from our synergy initiatives.
For the exchange in third party management segment active members are projected to remain relatively stable compared to the first half of the year average revenue per member for the exchange company is projected to increase at slightly higher than inflation as results of programs being implemented or enhance that expand membership benefits.
Lastly, we are now targeting adjusted free cash flow of between 440 and $490 million for 2019.
More than $25 million or higher than our previous guidance using the midpoint of the range.
As we've done in the past, we will continue to identify ways to enhance our cash flow generation, while ensuring our spending continues to support future sales growth.
I look forward to updating you on our continued progress as we move throughout the year as always we appreciate your interest in Marriott vacations worldwide and with that we will open the call up for Q1 AG Rob.
Thank you.
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Our first question comes from Jared Shojaian with Wolfe Research. Please proceed with your question.
Hi, Good morning, everyone. Good morning, Thanks for taking my question.
Up can you just elaborate a little bit more on what drove the reduction to the contract sales growth guidance for the year and.
Maybe specifically is it coming from.
Legacy Mariador or Vistana I mean is this the new run rate norm as we think about looking forward to 2020 and beyond and.
Sure.
Certainly I understand your question I mean through the through the second quarter, we were at 6% year over year growth.
So if you were to do the arithmetic, if we were going to achieve the top end of our original guidance, which you may recall was 12% we would have needed to have run an 18%.
Year over year for the second half of the year.
It would be pretty sporty from our perspective.
We made a lot of changes in our sales and marketing organization over the last six to nine months and.
It takes some time to manifest of these changes into a higher efficiencies. We know that these are best practices. We're comfortable that we will see improvement overtime you saw some of that evidenced in what happened in the B C businesses.
And.
It it takes some time to put these things in place I will also say to you that.
Part of that is driven by our sales leadership.
Which is predominantly remains on the MVC business. They spent a disproportionate amount of time and the V.C. properties try to drive some of these changes so in some respect I think you'll see some of the.
The slight dip between the 10% growth we had in the first quarter for NBC down to 6% growth in the second quarter.
In the MVC business that was partly because they they were spending more time their return or eye off the ball a little bit on the MVC side. So when you simply do the arithmetic.
That 9% growth, which is what the the midpoint of the guidance going forward to to get to where we see between six to nine for the full year, we think thats very achievable and we were very confident in that and we thought it would be appropriate to.
And just you had asked appeared on the on the longer term opportunities 2020, and beyond obviously, we're going to do on our analyst day here on October October four so.
But as we've talked about the longer term opportunities to grow our very much intact and thats really leveraging a lot of the Marriott branded.
Tore channels through the legacy Vistana business in that gap in VPG. So we'll provide an update on the fourth about how we think about the longer term growth opportunities.
Okay, Great and just a follow up on that I guess, if you had to sing a long call out like the biggest delta between what you're thinking now versus what you were thinking three months ago I understand like the prior guidance would imply a much bigger ramp in the second half, it's probably not realistic, but three months ago I think kind of the assumption was that second quarter, maybe a little bit better and then second half I think still even a little bit better than what you're assuming now on.
Contract sales what would you say if you isolated what is the biggest delta between what you were thinking three months ago, what you're thinking now.
I think it was the growth of the MVC sales in the <unk> in the second quarter.
As I said, we did 10% in the first quarter.
So again, we don't attribute that to anything on the demand side per se I think it's more of an X X Acacia Executional thing.
And that's what so what drove the change.
Yes, I mean for now it's.
It's an acceleration of the 100 million or more target. If you will as Steve said, though.
We're looking real hard we've we see a lot of other potential opportunities.
Hopefully you can appreciate the size of this integration and transaction that we're undertaking here. So there is a lot of moving parts.
We see lots of opportunities in on October 4th, we'll we'll provide a little bit more detail around that and kind of what we see going forward, but.
For now, yes, it's really getting after stuff faster.
And seeing things happen, a little bit quicker than we had originally drawn up.
Okay, great. Thank you very much I'll jump back in the queue.
Thank you.
Our next question comes from David Katz with Jefferies. Please proceed with your question.
Hi, good morning.
Hi, good morning, So look I want to.
Pile on to that matter, if you don't mind with respect to the synergies since we're so focused on it and.
Just think about how.
You Ark fat synergy progress looking out beyond this year is this something that we should think about taking.
Two to three years.
And obviously.
Improvements are always ongoing but when you've sort of mapped out what you you underwrote and buying.
Making this acquisition how long is that.
How long is that curve.
Yes.
When we.
Did our plan originally.
We're trying to get everything within the first three years obviously.
We're making great progress, we expect to exit the first year here are just a little over a year at the end of 2019 at $60 million. So.
Versus our original expectations were moving quicker than we had originally anticipated and Thats why we.
I have that $10 million benefit here.
Yes, I think the hard part when you start and just looking at all the different things.
You don't know all the pieces, it's going to take until you get into it and so.
As I said before we are we're looking hard and as Steve said, we're going to do everything we can to continue to look for other opportunities over the next couple of years and we'll do everything we can to pull those forward and get them in place sooner and if as long as we have more visibility on any incremental savings over the minimum 100 million, we'll certainly share that with you. It's it's simply a matter of going through the process and some of these are some fairly significant technology implementation projects that.
For the most part of going in place this year.
But there's other things that are on the horizon that as we get a finer point on it we'll certainly share.
Got it and if I can just ask one more about that and I'll apologize im.
We're all doing a few things. This morning, if you already spoke about it but the degree to which mariachi integration, which has had some.
Challenges and bumps in the road to the degree that their integration is a gating factor in you achieving what you set out for yourself, how much of a gating factor is that.
In terms of some of the Marriotts activities and given the again the the magnitude of that acquisition, which I think you can certainly appreciate was pretty substantial.
I think the only thing that we saw was as they were transitioning on to one reservations platform between the two.
There was some.
We took a bit of a hit and some of the call transfer stuff that we were we were enjoying the on the prior to and the NBC side of things.
But that from a synergy standpoint, theres theres nothing of any material nature. There obviously, that's more on the on the tour flow and resin and the revenue side for us.
But again I don't I don't think there's any read through from marriott's challenges to come where we find ourselves in what we are trying to do and the good news. There is that that's behind US now on the on the call transfer stuff. So we're getting back to more normalized even with that.
As we talked about tour pipeline grew 8% year over year. So.
There is a lot of levers to pull with the business but.
We're excited to get that ramped getting ramped up again.
Got it that question comes up I appreciate the answer thanks, so much.
Yes. Thank you.
Our next question comes from Patrick Scholes with Suntrust. Robinson. Please proceed with your question.
Hi, good morning.
Good morning, Steve and John .
This morning, we saw.
Your big competitor Hilton Grand vacations drastically take down their back half guidance really due to lack of inventory at one single property, what would you say to investors to comfort them that one property lack of inventory is less of an issue.
For your for your organization.
Sort of.
Soon some.
Yes, Hey, Patrick.
You got to remember our product form.
It is different we sell a system product. So we sell Florida based land Trust in North America.
And people are buying into the system not specific resorts.
And so with that as we've always talked about it's a much more capital efficient model, we are going to deliver normalized free cash flow of over $400 million. This year.
It allows us to return that capital to shareholders. So we're always looking to add inventory, but that that location issue since you sell the system of resorts.
It is not a factor in terms of our business model.
Great. Thank you. Thank you for reminding us on that.
I know Wyndham has talked about seeing a 25% higher.
VPG from customers, who come from their guest rewards program do you have any.
What what how vpgs.
Well clearly the bond going customer previously Marriott rewards customer starwood preferred guest customer they they have very strong vpgs and we're very happy with that obviously, putting those two programs together into one I don't think you'll see a material change in the VPG that we'll get from the one combined program from the from the two that were separate.
But back to your other part of your question is on the whole digital side of things I mean, the the pilot that we put in place literally in June .
To begin to.
Do some work on Marriott Dot com.
It is very early stages, we are.
Reasonably encouraged by the pilot is a small pilot our intent would be that this fall as we get some of the learnings from the pilot we'll roll it out more broadly.
To the former NVC properties.
And then in the next year, we will roll it out to both the Sheraton the western properties.
But.
Again to your point.
I think I think relative to where we were in line.
I certainly hope so a lot about their business.
Except to say that I think they had they were slow to come to the game in terms of trying to penetrate the wyndham.
Loyalty program, and obviously that was a.
A centerpiece of of our program for a whole lot of years.
Okay. Thank you and then just last question I believe you have an investor day coming up in October .
Yes is it possible we could get.
Possible additional incremental revenues from from this digital marketing certainly most of US on the Street believe there is revenues, but nobody's quite sure how to model that upside at this point.
Sure Hey, Patrick.
Yes, I mean, we obviously expect at the analyst day to take you through the high level strategy, a cornerstone of future growth as we've talked about is around the digital opportunities.
We'll have our hedge head of digital and brand.
They are presenting and talking about those opportunities and obviously, we'll frame that up in terms of how we think about the longer term growth of the business and and how thats going to contribute so.
Hopefully will walk away from the day with.
A good sense of what the opportunity is in that area.
Great. Thanks, Thanks, gentlemen, looking forward to that Investor day, that's all from me.
Thank you.
Our next question is from Brandt Montour with JP Morgan. Please proceed with your question.
Hi, everyone. Thanks for taking good morning, Thanks for taking my questions.
Can you talk a little bit more about the strong quarter, you guys had when I LG.
How much of that is kind of the only to getting those brands.
On the call transfer system, and how did that business kind of come in come in versus your internal expectations.
It was it was primarily because of some better execution on the VPG side of things keep in mind call transfer or even any of the.
Encore bounce back programs. They typically manifest in tour flow as it comes in later on in time anywhere from.
12 to 18 months later, so anything that we've done there probably won't see much in terms of until 22020 or something like that so it was largely about VPG you may recall that we said over time that.
You talked about that was that we were going to make some changes and get out of some of the high cost.
Low yield distribution channels that vistana was in.
Some of the LPC places they were and they were doing a lot of two are not required kind of packages.
So we've moved those things and I think Thats, where youll see the bulk of it you might you may recall from my remarks, I said the VPG in in the Santa was up 4%.
And Thats really where most of it came from.
Got it that's helpful and then on exchange.
What what you guys do to drive that that's sort of sequential Turner I know you had.
Slightly easier comps there, but if you could just talk a little bit more about that and also.
Member count stabilized.
You said, but it was still down.
Yes year over year.
So I guess, what what happened within the quarter on the member count side that gives you some confidence that that's that's truly kind of moving in the right direction.
Interval international.
It was roughly consistent with what we saw in the first quarter. These were accounts that.
Had transitioned out in 18.
Towards the end of 18, I mean, one of them was shell vacations, which actually was acquired by Wyndham back in 2012.
And they eventually moved over to our CFO .
For obvious reasons, because that's a that's a wyndham asset.
And then there were two others SUNS will then.
I've forgotten the name of the other one.
Anyway. These work, but so that's where that's where the count of members has remained relatively stable. The the increase of the 3% is largely about a fact of trying to find some incremental wallet share out of the existing members.
By offering some additional services and some enhancements to the membership.
And as well as some price increases.
Okay. Thanks, guys.
Thank you. Thank you.
Our next question comes from Chris Woronka with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys.
Good morning.
Good morning.
Wanted to see if you could maybe you mentioned 45% of your.
Your buyers were first time buyers in the quarter, maybe can you break that down a little bit between.
Your legacy I LG and legacy.
MVC and maybe.
What do you think that can get to and how do you get there.
Well first of all it's 45% of our tour growth, it's about a third of our contract sales. So just to just to put that number in correct perspective.
As far as the breakdown between the businesses I don't have that number and we don't have the numbers what I can tell you directionally Chris is that.
The mix is more first time buyers on the legacy LG vistana business and slightly less on the marry outside but.
Not not overly meaningful I don't think in terms of the differences.
Okay great.
That's helpful. And then just kind of following up on that.
In terms of getting that VPG closing that VPG gap on on the.
On the on the Vistana side is that.
You was that more to do with.
Some of your your marketing efforts and orders that have more to do with kind of your bringing a new customer into that into the fold and just trying to get a better understanding of how the.
How the cadence of that might look depending on what drives it.
Well.
The way way you should expect us to try to attack the VPG issue on the Vistana business is really threefold.
Number one is as I mentioned earlier kind of rationalizing the.
Distribution channels, where we are sourcing customers from.
They were in a number of channels that quite frankly.
Werent delivering a very good VPG, which by definition means that you have a relatively high marketing and sales costs.
So we moved out of that.
One of the other areas.
You should see improvement is better execution.
At the sales center, where they when they sales executive is speaking with with an owner about making a purchase and we've done a lot to try to align our first day benefit grid, our pricing grid everything else is doing much the same as we do on the MPC side of things. So Thats, where you should and then the third piece is to treat and continue to try to.
Do a better job of trying to penetrate.
Kind of the the richer vein of distribution channels, where we've had a lot of success.
In the NBC side, I mean, the linkage stuff as an example, where were sourced customers that are staying in adjacent Marriott branded or in this case of Vistana Sheraton or western western branded property to Incent people to take tours and hopefully become buyers that also carries a fairly high VPG. So those are some combination of those things that we are in the midst of doing and we're starting to yield some pretty good success.
Okay very helpful. Thanks, guys.
Thank you.
Our next question is from Jared Shojaian with Wolfe Research. Please proceed with your question.
Well I think sure yes, thanks for taking my follow up.
So as we look forward to next year.
Can you just help us understand the free cash flow guidance. This year is there any reason why free cash flow next year shouldn't be growing probably similar to your EBITDA growth next year or are there some onetime impacts to this year.
And then on that same front do you think you'll have more capacity to return capital next year than you do this year.
Yes.
So couple of things.
We took the guidance up at the mid point as we talked about a lot of that really relates to the ability to push off developments spend.
Which flows through.
Our inventory spend if you will flows through our free cash flow. So if you look at our original guidance Jared I mean, the mid point of that was probably around a normalized free cash flow with the EBITDA because.
We're already we're always budgeting in are putting dollars in there to replace inventory that's being sold off the shelf. So.
Now your comment around growth, yes, I mean, but it wouldn't be your EBITDA growth number wouldn't be off the higher development spend.
Or less development spend that's generating higher free cash flow this year be more often normalized if you will.
The other thing we've talked about is we will continue to leverage excess inventory, we got some in excess inventory in the aisle GE acquisition.
So that that always can help like it is this year in a tailwind but.
Those are kind of the different levers or things you should consider in terms of year over year growth. The only thing I would add to that is and we will talk about more of this at the Investor Day is as you know we're going through.
Assessment of various assets that we acquired when we when we bought the algae business and.
There will be probably some things that will.
Agree that will probably are not strategic for us in the long term.
In terms of selling off individual parcels or things of that nature, and so you might get some bump next year from that.
Okay. Thank you so it sounds like we should assume capex picks up a little bit next year and then your inventory spending picks up a little bit next year correct me, if I'm hearing that incorrectly.
And then in terms of the second part of the question just the capacity to return capital next year I mean, if I just look at what you've done in the first half of the year and just assume that continues in the back half do you think next year is a bigger capital return year kind of similar or how would you think about that.
Yes.
Go back to the development spend once again, we'll we'll we'll look to budget kind of what we're selling off the shelf that's always the opportunity.
And a lot of the timing stuff on free cash flow from development comes from.
Our ability to do capital efficient transactions, which we've been very successful at when we expect we will continue to do it that way, which allows us to add multiple new sites flags and take that inventory down over time so.
I'm not sure I don't want to say now, we'll we'll work on our plan that development spend is going to be higher next year. At this point. So I don't want you to walk away with that we're going to do our best to manage.
From that perspective, so to Steve's point, I mean, our free cash flow doesn't.
It wouldn't include proceeds from dispositions, but that that number and we'll update you in October .
As we continue our to refine our strategy there that would be above and beyond our free cash flow number to the extent that we disposed off and we can execute.
Yes, those dispositions in the next year those proceeds would just run back to our normal funnel of excess capital.
Which.
More recently, obviously other than the ISL G acquisition has been returned back to shareholders. So.
I think there's.
As much capacity, if not more given some of those moving factors to continue to return capital like we've done this year.
Okay, great. Thank you very much.
Thank you. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. At this time I would like to turn the call back to Steve Wise for closing comments.
Thanks, very much Rob.
I am very excited with our first half performance with strong contract sales and double digit adjusted EBITDA growth.
But what I am even more excited about the opportunities we have in digital marketing and other transformational changes that will enable us to drive solid performance for many years to come.
Thank you very much for your time today I look forward to seeing many of you on our October 4th Investor Day, and finally to everyone on the call and your families enjoy your next vacation.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
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