Good day, ladies and gentlemen, thank you for standing by. Welcome to the Marriott Vacations Worldwide Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, July 26, 2012. I would now like to turn the conference over to Jeff Hansen, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Alicia. Welcome to the Marriott Vacations Worldwide Second Quarter 2012 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, July 26, 2012, 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 and the schedules attached to our press release, as well as the Investor Relations page on our website at www.mvwc.com. I will now turn it over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.

Thanks, Jeff. Good morning, everyone, and thank you for joining our second quarter 2012 earnings call. This morning, I'll provide an overview of our second quarter results and update you on our strategies and initiatives that we've been executing since our spinoff. I'll then return the call over to John, who will review our financial results in more detail. Then we'll open the call up for your questions. Total gross contract sales for the company increased 3% to $168 million in the second quarter, carried by our core North American vacation ownership business. In North America, contract sales increased 10%, and volume per guest, or VPG, was up 14%, continuing the strength we saw in the first quarter. While 2 accounts are down slightly year-over-year as we focus on our most profitable sales channels, we have seen improvement in both pricing and closing efficiency. As a result, our development margin continues to increase, and we are on track to achieve our 2012 goal of over 12%. As I've said before, we believe our new points-based product is very appealing to our customers, as evidenced by the number of weeks owners who have already enrolled in the new program. Since the rollout of the program in mid-2010, more than 120,000 or approximately 1/3 of our owners who are eligible to enroll have done so, adding roughly 208,000 weeks or nearly 45% of eligible weeks in the program. This past quarter was one of our strongest quarters for enrollments since we launched this product, as we enrolled an additional 22,000 owners or 32,000 weeks into the program, due mainly to the end of the introductory enrollment pricing that was offered until the beginning of the summer. As a reminder, these enrollments further augment our recurring revenue stream in the form of additional…

Thank you, Steve, and good morning to everybody on the call this morning. Our performance in the second quarter continued to build on many of the positive themes we saw in the first quarter. North America continued to be the key driver of our results, with this segment once again generating strong year-over-year performance. Efforts continued on selling to our Luxury and European inventory. We saw better development margins and rental results continued to improve year-over-year. In the second quarter, total company contract sales increased $5 million or 3% to $168 million. These results included strong growth in North America, where contract sales increased $13 million or 10% to $141 million. This was partially offset by lower volumes, primarily in our Luxury segment, where we started transitioning to selling our remaining inventory through our North America points program, and to a lesser extent, by softer sales in Europe and the closing of certain off-site sales locations in Asia to drive margin improvement. In North America, our strong contract sales performance reflected 14% growth in VPG to nearly $3,000, driven by a 2 percentage point improvement in closing efficiency and a 3% improvement in pricing. As Steve mentioned, our tour count is down slightly from 2011, as we continue to reduce tour volumes in some of our higher-cost sales channels to drive our improving development margin. Total company reported development margin improved over 500 basis points to 11.2% from the prior year. However, similar to what we saw in the first quarter, the second quarter was impacted by revenue reportability comparisons year-over-year, which negatively impacted reported margins by roughly 200 basis points. Reportability in the quarter was impacted by certain finance sales in our North America segment, which had not yet met the down payment requirements for revenue recognition as of…

[Operator Instructions] Our first question is from the line of Eli Hackel with Goldman Sachs.

Just have 3 questions. First, can you just give a little bit more color on the decline in tours in North America? I know you're trying to go after a higher-quality customer, but does this put you in a little bit of a problem? Are you -- are there enough customers that are of high-enough quality for you to go after to, at some point, regain that tour growth? Second, just on the land sales. I know you have some going on. Can you just maybe comment on the level of interest, if it's up to where you thought it would be in terms of price or people low-balling you? Are there some serious offers out there? And then second, just on the inventory spend. What were you going to spend? And then how much would that reduce by, in your expectation, for what you're going to spend now?

Okay, Eli. This is Steve. I'll take the first 2 and we'll let John talk about the inventory side of things. On the decline of tours, to be honest, this is still some continuing work that we're doing, looking at every single marketing channel that we have and trying to understand where we get the highest yield out of these tours. We could have more tours if we wanted them. To be honest with you, as we continue to focus on margin improvement, we're deciding that where we want to put the biggest amount of emphasis is in the high-yield channels. So it's not an issue about -- could we get more tours? Yes. It's where we see the profitability coming out of those tours, which is where we're really trying to focus. Secondly, as it relates to land sales, again, we're still relatively early on in the process. We have had some meaningful interest on several of the parcels. And I would characterize how people are viewing the value of those parcels as being within reason to what we believe is the appropriate value is. As I'm sure you're aware, the sense of urgency about buying raw land today is probably not as great as it was a number of years ago, so it may take us a while to get through this. But as we've said many times, our goal here is to dispose of this land at a -- what we think is a fair value, not do something on a fire-sale basis. But I'm reasonably encouraged by what I see. As far as the inventory, John?

Yes. We had total development inventory spend, Eli. It was, if I recall, around $150 million for the year. There's probably some expense cost in that number too. That's not necessarily all capitalized. But the improvement we're getting off of that with some of the decisions we've made here in Ritz-Carlton is call it about $25 million to $30 million. So that upside is what we'll see this year. It'll also help in future years. But given where we're at in some of the existing developments, you'll get it all, not necessarily just this year.

So what would you expect over the next couple of years in terms of cash inventory spend as you go out?

Yes. I don't have the numbers. We're not providing with anything around next year yet. But when we get closer to the end of the year, we'll be able to give you a little more guidance on that.

The next question is from the line of Chris Agnew with MKM Partners.

First question. You just talked about 2Q being one of the strongest quarters, I think, for enrollment of existing members and that you'd come to the end of the introductory offer for transitioning to points. Does that have an implication for margins or VPG going forward, given that I think that, I think, that sort of upgrade activity typically carries a higher margin? Is there anything we need to be aware of? I'm not sure sort of how big that was in terms of the sales. And then just a question on Kapalua. I know you've written this off, but are there any financial implications or financial risks we need to be aware of? Is the loss of the management fee material? And is there any sort of financial liability to the Ritz-Carlton members that you might have, or any risks there?

Yes. On the -- I'll take the enrollment question here first, in terms of the impact going forward. The enrollment fee was fairly modest, call it $600. With that, our owners for enrolling got some single-use fee, what we call Plus Points. So from a revenue perspective, a lot of that enrollment fee was getting classified down in rental income as people use their Plus Points. The offset is, going forward, if we don't make that inventory available for Plus Points, we'll be able to rent it. So there should be really no impact there. I think the upside with the enrollment is the ongoing club dues that gets paid. So that runs, call it $175 a year once people enroll, and that's an annual. And so with those enrollments, that gets spread over the years. So we're still seeing the improvement in terms of revenues as well as margin. As those enrollments start to get recognized, the club dues gets recognized going forward. So I don't really see any downside on the enrollment, and there's still some upside going forward.

Yes, and let me just add to that, Chris. This is Steve. I think part of the surge, for lack of a better word, that we saw in the second quarter was really that we had already always intended to have an end date to the introductory pricing about enrollment. I think people saw -- that were kind of sitting on the fence saw that the price was going to go up materially. So that's what caused them to kind of pull the trigger in the second quarter. Having said that, we continue to enroll people every single day. After that, it's just at a higher price point. So I don't think there's going to be any meaningful impact with things such as VPG or other.

And on Kapalua Bay, we actually today have about a $10 million reserve on our books related to Kapalua Bay that should handle any other additional exposures. So we don't necessarily see any impact from a P&L perspective going forward. But as Steve mentioned in his comments, we are hopeful and active in hopefully working something out here. We've been working with the developer to work something out with the lenders that hopefully will be able to preserve the Ritz-Carlton presence there in Kapalua Bay. But no guarantees there. And we're doing our best to get to a good conclusion.

Great. And then one more question. Can you just dig into the increase on a free cash flow guidance, mostly from the cash flow from operations? And I'm guessing the securitization, but just give some more color there.

Sure, sure. If you look at where we were at before, call it $85 million to $100 million, we were expecting slightly higher financing propensity year-over-year. And what's actually happened is our financing propensity has been running a little bit lower than we anticipated, so you get more cash sales. So most -- about half of your upside in that guidance is just really the fact that we're getting more cash. Now, the securitization activity, if you look at our adjustments to free cash flow, is broken out separately. So with the lower financing propensity, we had less notes to securitize. However, based on our expectations of advance rate, we did much better on the advance rate, so we were able to make up some of the downside in terms of the securitization proceeds with a better advance rate. And then the other piece of the upside, call it as in operating activities, is our inventory spend. As I mentioned earlier, we're probably getting, call it $25 million or so of less inventory spend this year because of some of the moves we're making with the Ritz-Carlton inventory.

The next question is from the line of Tim Wengerd with Deutsche Bank.

On the rental revenues line, I'm just wondering what's the transient keys, I think you said were up 11% in the quarter. I'm just wondering, what's the main driver for owners banking their points? And it seems like the past couple of quarters, it's increased quite a bit.

Yes, there's really 2 major factors that come into play there. First of this -- which is I believe you are aware of the fact of the explorer component that we have put in place with the introduction of our North American destination club, which allows people to take their points that they might normally use to go stay at one of our resorts, and in fact convert them to another kind of vacationing opportunity. It might be a cruise, it might be a tour of Italy, it might be a Safari, wine tour, et cetera, et cetera. We have been pleasantly surprised with the number of people that have chosen to elect that option, which has in turn given us -- the way the process works, they give us their points back, we give them their vacationing opportunity, then we monetize those points through rental activity. And the great news is that the rental demand has been commensurate to what we've gotten in terms of the incremental supply. The second piece of that is, there are some people that -- one of the advantages of our program is, if you don't think you're going to be able to use all of your points for vacationing in this current year, you can choose to bank your points into next year. In the same fashion, you can also choose to borrow from next year to add the points this year for a larger vacation or a longer vacation or a different type of vacation. So when people bank their points, then that in turn gives us inventory that we can rent as well. So it's those 2 factors that have contributed to the incremental number of keys available, and in turn, how we've run it.

Okay. And then you talked about the effect of moving the -- or adding the Luxury inventory to the points program? How much will that impact lower maintenance fees in the rental segment?

Well, as we've, I think, communicated previously, the unsold maintenance fees from the Luxury inventory are approximately $15 million a year. So as we move that inventory into the North American points trust, as that inventory gets sold, which we believe will be at a faster pace than if we were continuing to sell the inventory under our traditional Ritz-Carlton sales platform, we believe it accelerates the timing by which that inventory gets sold. And then if inventory gets sold, then the unsold maintenance fee liability goes away. So we actually believe that we will see an increase in velocity of Ritz-Carlton sales, whereby the unsold land-use fees will roll off faster. Let me also add that there's 2 other meaningful advantages to taking that Ritz-Carlton inventory and putting it in the North American trust. One of the things is that we now have a lot of great destinations in the North American trust that a year before didn't exist. It's an outstanding property. So our North American points owners will have the ability to access that, albeit at a higher point value. And the other point that was made earlier is that as we move that inventory into the North American trust, it generates points, which in fact pushes back our need for capital spending to add new inventory into North American points to support our sales growth.

The only point I'd add, just on a timing perspective, Tim. If this real estate needs to be deeded into the trust, there's always real estate in there. That deeding process can take several months. And then since it is timeshare, it's a registered product. Once it gets deeded in, it needs to get registered. And you have to go to all the different states, and there's, call it another 5 or 6 months there. And then there's obviously build-completed inventory ahead of that in the trust. So we're going to move quickly to get it in. It won't be instantaneous. And our unsold maintenance fees don't go away until it's -- you really sold through the trust. So there's a little bit of a lag once we get it into the trust and it gets to the point of sale.

And, Tim, this is Steve. Let me add just one other point I neglected to mention is that -- is, of course, that beginning in the first quarter of next year, when we have the ability for our Ritz-Carlton owners to in fact exchange into our North American trust, to use that inventory, obviously, it opens up a lot more vacation destinations for them as well.

And then one other question on capital allocation. You took up your cash flow guidance. It sounds like by moving the inventory into the trust, you can sell inventory faster and that should lead to more cash flow sooner. Do you -- have you developed an outline or a plan for how you think about capital allocation? And where do share repurchases and dividends come in? How do you plan to use this extra cash that you have?

Well, I imagined that question might come forward given the very positive cash flow news that we shared with you earlier this morning. And at the risk of sounding like a broken record, I'll reiterate kind of what we said before. Clearly, the objective of our company is to try to continue to grow in a very cost-efficient and accretive way for our shareholders. As we see opportunities to spend that cash that would meet our investment criteria and give us the kind of return profile that we're looking for, that would be our first priority. If, in fact, those needs have been met and there is sufficient and excess cash to -- that we have on our balance sheet, we'll take the appropriate steps to meet with our board and talk about return of capital to our shareholders. That might take the form of dividends. It might take the form of a share repurchase. But it would certainly be far too soon for us to make that kind of assessment at this point.

And how's the acquisition pipeline? If there...

Well, I think, we continue to -- we do get phone calls, we continue to make phone calls. Obviously, it would not be prudent on our part to kind of disclose things that may be in various stages of discussion at this point in time. Rest assured if we have something to share, we'll certainly make it a point to do so even if it's before an earnings call, we'll give them something through an 8-K or whatever.

Ladies and gentlemen, that is all the time we have for questions. I will turn it back over to management for any closing remarks.

Thank you, Alicia. Well, just a kind of a sum up. We are very pleased with the momentum we've generated so far in 2012. We look forward to reporting our progress on future calls. And I want to thank you again for your participation on our call today and your continued interest in Marriott Vacations Worldwide. And finally, to everybody on the call and your families, enjoy your next vacation. Thank you very much.

Ladies and gentlemen, this does conclude this conference call. You may now disconnect, and thank you for your participation.