Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Marriott Vacations Worldwide Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, October 18, 2012. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030, with the access code of 4564288. I would now like to turn the conference over to Jeff Hansen, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ian, and welcome, everyone, to the Marriott Vacations Worldwide Third 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, October 18, 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 in 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 third quarter 2012 earnings call. This morning, I'll share an overview of our third quarter results and provide an update on the strategies we continue to successfully execute again. I'll then turn the call over to John to review our financial results in more detail. We'll then open the call for your questions. Continuing the trend we saw in the first half of the year, total company-owned contracts sales increased 4% to $171 million in the third quarter, primarily due to another strong quarter in our core North America vacation ownership business; our contract sales increased 13%; and volume per guest, or VPG, was up 19% over the third quarter of last year. Additionally, while our owner satisfaction scores have consistently been high for our weeks-based product and even somewhat higher for our points product, we are very pleased that in the third quarter, we achieved a 97% owner services satisfaction score from our points owners, underscoring the benefits of the program and stability to meet our owners' needs. We continue to reduce our reliance on less efficient and less profitable sales channels to improve marketing and sales efficiency. By reducing sales to our accounts in these higher cost channels, we were able to focus our efforts on the locations that provide the best return. As a result of these efforts, we drove a 2.4 percentage point improvement in closing efficiency during the third quarter. These improvements, along with positive development in our cost of vacation ownership products sold contributed to a nearly 12 percentage point increase in our adjusted development margin to 20.9% in the third quarter. This is the third consecutive quarter of margin expansion since our spin-off. And with the year-to-date adjusted development margin of 15.4%,…

Thank you, Steve, and good morning to everyone on the call. We are continuing to execute against the strategies outlined almost a year ago when we spun off from Marriott International. Our sales base, VPG and development margin in our North America segment have substantially improved over last year, and we are taking steps in our other segments to move the needle there as well. In the third quarter, total company-owned contract sales increased to $171 million, $7 million or 4% higher than the third quarter of last year. Results continue to reflect the strong performance of our North America segment, where contract sales increased 13% year-over-year, partially offset by lower contract sales in our other segments. A good portion of which is a direct result of our margin expansion strategies in Luxury and Asia. In North America, we have driven 3 consecutive quarters of double-digit contract sales and VPG growth, with VPG increasing in the third quarter by 19% over last year to $3,051. But the highlight this quarter is improvement to our company development margin, which has grown from 3.5% in the third quarter last year to nearly 17% this year on an as-reported basis. Consistent with the first half of the year, revenue reportability once again negatively impacted the third quarter margins. After adjusting for reportability, total company adjusted development margin improved to 20.9% from 9% in the third quarter of last year. We have provided supplemental information on schedules A-12 through A-15 in the earnings release that illustrate the impact of revenue reportability on the development margins for the total company, as well as for North America. Growth in the company's adjusted development margin continue to be driven by improvements in both the cost of vacation ownership products and marketing and sales execution. The margin associated…

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

Three questions. First, just a little bit more on the product true-up cost. Could you just give us an idea of what a like-for-like comparison of this year versus last year on North American development margins? Obviously, with a 23.8%, had a lot of benefit from the true-up cost. Is that directly comparable to the 9.3%, or should you really subtract $12 million there to get apples-to-apples? Second question, just on Asia, just talk about your growth expectations there. Obviously, you're going to look to be a little bit more efficient. Do you think you'll grow Asia contract sales next year? And just finally, just an update on your thought and the board's thought on capital allocation.

Sure. Eli, I'll start with the first one on product cost true-up. These are normal true-ups that we do, changes in estimates. It's hard to say, you should back out the number for comparison purposes because, really, a lot of the product cost true-up relates to profit you would have recognized in previous years on product that you sold. So we had certain estimates when we recognized development margin last year. We've done better in our expectations, we'll continue to have those price increases with that information you're truing up for that previously sold inventory. So said another way, the margin you're getting now would've been -- some of that relates to previous periods. So it's hard to go back and say, "Well, X amount of this year is related to last year, and this is what it looks like on an apples-to-apples basis." I think the important takeaway is really the fact that on a go-forward basis, our product cost will be lower and our development margins -- the full year company guidance now is 14% to 15%, even though you're getting some onetime pick up here in the third quarter, we're saying that's sustainable going forward with lower product cost and higher margins, and we expect to improve over those full year results this year, next year.

So that 14% to 15% should be -- there should be improvement from that 14% to 15%? There's no one time...

That's right. We're saying that this is going to be sustainable going forward.

And Eli, this is Steve. Let me address your Asia question. I think it's important we kind of go back just for a moment and talk about kind of how we've gotten to where we are. When we first started our new points base program in Asia, which was 5 or 6 years ago now, we anticipated, starting with some off-site sales locations and selling in with on-site distribution, which, as we have already spoken about. The on-site is the much more efficient from a sales cost standpoint. Having said that, they also need it to generate with sales to begin with. That's -- it was easier to start up some off-site. So we were well on that track until kind of the bottom fell out of the economic market, at which point in time, Marriott asks us to stand down on any new development that we had in Asia. In fact, we had a hotel that we were going to convert to timeshare in that region that we ended up. We owned it. We ended up having to sell it, et cetera. So what we were left with was an imbalance of too much off-site and not enough on-site. So what we have been about for some time now is being out trying to identify new development opportunities where we will be able to establish an on-site sales presence in markets that we believe will generate substantial growth for the business. As you might imagine, it takes a little time to make that happen and we're not in a position to be able to announce something yet. So I can tell you, I think we're -- every time we have these calls, we get increasingly closer to being able to do so. So whether 2013, we'll see a material…

Our next question is from the line of Bob LaFleur from Cantor Fitzgerald.

I want to stick with this true-up for a minute. The $13 million, is that just the amount that's attributable to prior periods? Or if not, how much of it was prior period and how much of it was specific due to the sales that were made in this quarter, just so I can understand that? I have a second question after that.

Sure. Bob, it's John. Yes, most of it would be related to the prior quarters. Of the $13 million, a portion of it was the pricing. A portion of it is, we have actual cost of projects that are being completed coming in last than we originally anticipated. So like I said it, you recognize your product cost based on the best estimates you have at the time. And as those estimates change, that's when you would book this product cost true-up to essentially get to where you would've been if you were caught right from the beginning. And so it's really hard to go back and try and say, well, how much is related to any specific period but it is mostly for prior periods. There's very little pick up in the current period.

Okay. So then it's the right thing to do just to add $13 million back to the cost of sales and to get a true run rate cost of sales or...

Well, if you're going to do that, then you would have to move -- to make assumptions about spreading that $13 million back to prior years in different -- yes, for prior quarters.

Well, I understand the accounting that it's a onetime true-up, and if you guys started doing this at the dawn of time, you'd have to adjust back to the dawn of time. But from a go-forward standpoint, if all $13 million of that was attributable to periods other than this current quarter, then the run rate development margin you had in the quarter would basically just add $13 million back to the cost of goods and divide that by the revenue, right?

Sure. You can look at it that way. Like I said, I think on a go forward, what we're also saying is, because of now lower product cost that we're going to have on the projects we sell going forward, you're going to have a lower product cost related to that won't be as low as what you're seeing in the quarter because of what you're seeing is that onetime adjustment. And the other thing I mentioned was, we are being a little bit more proactive in buying back inventory on the secondary market and being opportunistic there, where we can buy product at much less than what it would cost us to build new product. And so the impact of that will also help margins going forward. So when we look ahead to next year, even on a full year basis, we have -- even with the adjustment this year, we have improvement in the development margin fairly significant off our targets of 12%. And then what I'm saying is, we'll be able to maintain and then actually improve on those margins as we go into 2013.

Well, let me ask the question another way then. So how much on a go-forward basis did your cost of sales go down, however you want, per unit of revenue? So before you were charging, let's just say, $35 for $100 of revenue, is that $35 now $34, $32,? I'm just trying to get a sense of magnitude about how much the go-forward assumption for cost of goods sold comes out?

It's probably in that. On a company-wide basis, Bob, in that, call it, 34%, here in the near-term, and obviously we're always going to look to try and get that even lower longer-term.

Okay. And then the other question I have and sort of unrelated topic is, what's going on with your tax rate? I mean, it was 60-some-odd percent after backing out the adjustments. Why is it so high? And what can you do going forward to mitigate that?

Yes, yes. In the quarter, a couple of things. You say backing out the adjustments. There is one adjustment, when you look at income before taxes for those who are listening in related to interest on our preferred, which is a dividend that runs through interest expense. So in terms of getting your effective rate, you have to add back that interest. But even with that, that's probably a couple of points. The impacts that you're seeing is on our international taxes and really relates in the quarter to the decision to shut down some of these off-site sales centers that we talked about in our Asia segment. So going into the third quarter, we were making money at profit there, because some of these onetime charges now that we're going to have, we're now going to have some losses in areas where we're shutting down at least for the near-term. As a result, there's -- even if there is a tax benefit to those losses, for GAAP you have to put a reserve on those. So you have a little bit of a true-up, if you will, on the quarter related truing up that reserve on the NOL that you now need to look at because of our change in assumptions in Asia. We'll continue to see -- I think, on an effective rate, we're going to be in the mid-40s. Now what we're doing as a new stand-alone public company is we are doing tax planning and we're looking at ways that we can utilize some of these international losses and make sure we get the benefit. If we're successful on doing that, that'll benefit us with lower effective rates going forward, but a lot of work still needs to get done in that area.

You're not thinking about buying any synthetic coal plants or anything like that, are you?

Windmills. No, nothing like -- nothing that exotic.

Been there, done that. We've got a T-shirt.

[Operator Instructions] And our next question is from the line of Chris Agnew from MKM Partners.

First question--to ask about, what do you think the appropriate level of loans, or appropriate level long-term for inventory to maintain, say, the current sales pace? And maybe just what are your expectations for spend this year on inventory?

Okay. Well, generally speaking, our goal is to get to about 2x the product cost necessary to support the annual sales. We are higher than that number today. And one of the things that John mentioned in his remarks was that we continue to bring down the inventory balance. So while I don't have a number right here in front of me, generally speaking, what we end up doing is we take more off the balance sheet than we spend in product costs. John would have some more specific numbers.

Color, I mean, if you are on our cash flow statement and you look at the change in inventory, to Steve's point, that's the difference between the noncash product costs coming off and your cash CapEx spent. So if you look on the P&L, we have product costs year-to-date of -- but it's -- I'll get you the number. But that's your noncash piece. The actual CapEx spend gets you the difference. So for the full year, we'll probably spend on development around $125 million to $135 million versus what's coming off the P&L for product cost.

Got you, got you. That makes sense. And do you have an idea in your head what that sort of development spend will be sort of edgy once you've got that inventory down to level that's more normalized?

Yes, the goal is, in real estate, you never really get the just-in-time delivery in terms of that manufacturing sense. But the goal would be that even as we get to call it a stabilization that the amount of spend that we have will approximate our actual noncash product cost when you get to that equalization. Right now, our spend is less than the actual product cost and the inventory balance is coming down. As you start to ramp up and you get to that equilibrium, it might be a little bit more or less in any given year, but our goal is that, that would approximate your product loss spend. So you're replacing your inventory as you sell it.

Got you. And then on consumer financing, you said that's stabilized and should reverse next year to grow. I think that's a little sooner than you'd previously mentioned. Just wondered what has changed there? Is it stronger sales pace or financing percentage [ph]?

It's really the low interest rate environment. When we talk about our financing profit, you have on our P&L, right? You have our financing revenues, you have the direct cost of the servicing, et cetera, cost to service those loans. That -- on that revenue less expense, you will continue to see some margin loss there like we've talked about because the notes receivable balance will continue to come down. The big difference is that when you look at the actual securitized interest expense related to those securitizations, historically, we're probably at about a 5% on the outstanding securitizations in terms of the interest rate that we pay. The deal we just did for $250 million was at, call it, 2.6%. And just given some of that -- our next securitization, some clean-up of some of our existing securitizations at, we'll hit a 10% threshold here over the next 6 to 8 months that will be able to re-securitize. We think that we're going to be replacing a lot of that, call it, 5% interest rate at something south of 3%. And so that interest rate pick-up is more -- is going to more than offset our expectations previously about the financing business. And that's where you'll start to see, after interest expense, a little bit of a pick-up, I would say, next year.

Okay, okay. But the -- like the notes receivable balance will continue to sort of come down over the next couple of years or so?

Exactly, just driven by the cost side.

And then final question on expectations for excess loan sales. Did -- I'm trying to remember what you'd said previously, but did you sort of extend the timeframe? I think you mentioned 2 to 3 years. Has there been any change there?

Not any material change at all for us. I mean, as you might imagine, when we said what we said, which was when we were doing the kind of a roadshow before we went out last fall, there were certain assumptions about what the economy was going to do in 2012 and everything else. We still feel very comfortable with the windows that we've talked about. In fact, even one of the largest parcels that we have is a parcel of land that existed in Hawaii that got listed just this past week. Some of the remaining stuff that we have listed are just a little more complex. It takes us a little more time to get them done before we put them out in the market. But I feel very encouraged by what we’re seeing, thus far, in terms of some interest levels that we obtained until we don't believe that we're making any material changes to what we've said all along.

And we have no further questions at this time.

Okay, great. Well, in sum up, hopefully you took away from all of this, but we're very pleased with the momentum we have 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 the call today, your continued interest in Marriott Vacations worldwide. And finally, to everyone on the call today and your families, enjoy your next vacation.

Thank you.

Ladies and gentlemen, this does conclude our conference for today. If you -- thank you for using AT&T, and you may now disconnect.