Greetings, and welcome to Marriott Vacations Worldwide Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host today, Jeff Hanson, Head of Investor Relations. Thank you. You may begin.

Thank you, Rob, and welcome, everyone, to the Marriott Vacations Worldwide Third Quarter 2018 Earnings Conference Call. I'm joined today by Steve Weisz, President and Chief Executive Officer; and John Geller, Executive Vice President and Chief Financial and Administrative Officer. 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, November 7, 2018, 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 ir.mvwc.com. I will now turn the call over to Steve Weisz, President and CEO of Marriott Vacations Worldwide.

Thanks, Jeff. Good morning, everyone, and thank you for joining our third quarter earnings call. Let me begin by taking this opportunity to publicly welcome the over 11,000 ILG associates to the MVW family. Everyone on both sides of the acquisition has worked tirelessly throughout the summer, producing a virtually seamless closing on September 1, a month earlier than initially targeted. Their efforts have continued through the fall as we're now well into our integration and longer-term transformation efforts as one company. I'm truly amazed, every day, at what our team of associates can do, and I'm very excited about what this transaction means for our company. Today, I'll walk through our performance in the third quarter, before I spend a few minutes discussing more about where we stand, as it relates to the integration of ILG. I'll then hand the call over to John to provide more detail on our results as well as our updated guidance for the full year before taking your questions. With the acquisition of ILG, we have realigned our structure to manage the business through two operating segments: Vacation Ownership and Exchange & Third-Party Management. As a result, we have realigned our reportable segments from a geographic approach to reflect these changes. Vacation Ownership includes all functions related to our branded timeshare businesses across all geographic regions. This includes not only the selling and financing of our vacation ownership inventory, but the rental and management of our properties as well. Exchange & Third-Party Management includes our world-class exchange company, Interval International, as well as the third-party management companies of Trading Places International, Vacation Resorts International and Aqua-Aston Hospitality. ILG has only been part of MVW for the month of September, therefore, we have included additional supplemental financial results, which we will refer to as…

Thank you, Steve, and good morning, everyone. I'm very pleased with what we've accomplished this quarter, not only completing the ILG acquisition in an accelerated fashion, but also generating strong third quarter results. As Steve mentioned, as a result of the acquisition of ILG, we have reorganized the business and established two new reporting segments, being Vacation Ownership and Exchange & Third-Party Management as they represent how we will manage and discuss the combined business going forward. With that as background, let me shift to our third quarter financial results. Total company adjusted EBITDA totaled $100 million, an increase of $26 million or 36% from the prior year. As Steve mentioned, the recent 2018 hurricanes, both in Hawaii and the Carolinas, impacted the company's financial results. After adjusting for the negative impact of the hurricanes, adjusted EBITDA would have totaled $105 million for the quarter. Adjusted EBITDA for our Vacation Ownership segment totaled $123 million, an increase of $28 million or 29% from the prior year. Adjusted EBITDA for the exchange in Third-Party Management segment totaled $19 million, all of which was driven by the ILG acquisition. Turning to the Vacation Ownership segment. In our development business, consolidated contract sales increased $75 million or over 36% to $279 million in the third quarter, including a $37 million increase related to the acquisition of ILG. Adjusting for the negative impact of the 2018 hurricanes and the contract sales related to the ILG business, legacy MVW contract sales would have grown by 21%. Our total development margin in the first quarter was $57 million, up $14 million or 30% to the prior year. Legacy MVW adjusted development margin was $52 million, an increase of $8 million or 17% over last year. And adjusted development margin percentage was 23.9% compared to 24.5% in…

[Operator Instructions] Our first question comes from Cameron McKnight with Crédit Suisse.

So a question in terms of what's in and what's out of EBITDA. So legacy revenues were up 16% in the quarter, but EBITDA was up 10%. Was there something below the segment line that was impacting results at the adjusted EBITDA level?

I mean, from a Vacation Ownership perspective, you should get most of that flowing down, I think, picking up the month of September for the Exchange & Third-Party Management, you're not going to see that type of growth. So that's going to weight it down a little bit.

So a mix issue; were there any, I guess, one-offs or items that we should be aware of in terms of third quarter EBITDA?

No. I mean, I think, the one thing we mentioned from a G&A perspective, just given some of our litigation that we've settled, we have been running -- which we don't adjust out of EBITDA litigation defense costs and those have been running higher year-over-year. The good news is, as we've settled some of these claims, we still have a few cases out there, but we hope that, that'll come down over time, obviously.

Okay, got it. And then...

Just the other thing, I mean, we called it out was the impact of the hurricanes, obviously, but we don't adjust that back into the EBITDA where we gave you the $5 million impact.

And was there any -- in your opinion, was there any disruption to sales at the legacy ILG in Vistana sales centers in the quarter?

As a result of the hurricanes?

Or as a result of the merger?

No. No, we haven't seen anything there of any meaningful nature. And even on the hurricane front, there was -- they had some loss of sales at Myrtle Beach. But that wasn't -- it was included in our remarks, so about $1 million.

Our next question is from Brian Dobsun [ph] with Nomura.

So I'm just wondering if we can dig into some of those long-term strategic advantages from the acquisition, particularly, revenue synergies. I guess, first, could you give a little bit more color on the low and high VPG sales channels that you mentioned earlier? And then, when do you expect to see benefit from the digital transfer program? When did testing really begin in earnest on that and so you can get a better idea of how beneficial that will be?

Yes. Let me try and take it in reverse order, just because it's top of mind. We expect the digital work with Marriott to be put into place by mid-next year. You're probably very well aware of the fact that Marriott has been going through lots of integration between the Starwood reservation platform and the Marriott reservation platform. So as you might expect, we're in the queue to get this work done. They're very committed to it. But we haven't started it yet. That's why we say mid-next year, and we're optimistic about that. With that said, once we've started, as I mentioned in my remarks, once we have -- once we're able to start digital transfer, it'll take 12 to 18 months for those tours to start to come through the house and materialize in the contract sales. On the question of what's going on with kind of rationalize the various channels to improve VPG in the Vistana businesses, they do some OPC work, off-premise contract work, which has a relatively low yield to it. And I think, you could see us trying to move out of some of those things. Enhancing linkage opportunities with the -- you may recall that when we renegotiated our license agreement with Marriott International, we essentially preempted Vistana's ability to do linkage into the former Starwood branded Sheraton and Westin properties, and so we can now turn that back on. And then, on a market-by-market basis, we'll be looking at every single thing in their tree to try to understand as we have typically done. We look for highest yield, lowest cost, all the way down to lowest yield, highest cost and we trim the tree from the bottom up. So that's what we'll be doing. It's not a simple process, nor is it one that you flip a switch and it happens overnight. But it's clearly something that we have experience doing and know -- we believe we have the talent and the team to be able to pull it off.

And when do you start implementing those changes?

Well, those changes are already afoot. We're -- we've had teams working with the VSE sales leadership team and they are beginning to identify the opportunities and then once you get that done then you have to go through some updated training for the sales teams that are on-site about how to approach it on the marketing side, but we didn't waste a lot of time after we closed on September 1 to get it going.

So the benefit could materialize in 2019 first half, you think?

Well -- that's -- as I tried to reference, there'll be some things that will be transitional and take a little longer, but everything we can try to get done to materialize in 2019, you can rest assured that we're already at it.

Our next question comes from Jared [ph] with Wolfe Research.

I want to ask you first about the full year EBITDA guidance and just understand the assumptions a little bit better. It looks like you're guiding EBITDA about $80 million to $85 million higher than the prior stand-alone that guidance. And I know you called out the $5 million for the hurricanes, you called out $4 million of synergy contribution. But is it right to assume that the difference between your prior guidance, the new guidance, call it, roughly $85 million-or-so that, that's the ILG contribution in the four month period? Or are there other areas of puts and takes that we need to consider?

There's definitely other areas of puts and takes. So you mentioned the hurricane, for example. While Michael we've said is not going to impact, we do have some continuing impact from Florence and Lane, which is probably another $2 million or $3 million in the fourth quarter, not part of the $5 million, which was the third quarter impact. We still are going to have probably some elevated litigation type expenses on the defense side as we are at trial -- are going to trial on some of these cases soon. And then -- but overall, the contribution, if you will, high-level is slightly higher than that coming from the legacy ILG business for the four months. On an -- if you annualize that, you got to remember that ILG has stronger first halves of the year in terms of where their EBITDA is on an absolute basis, so the first and second quarters are better. As we move into the fourth quarter, obviously, it's a little bit more of a shoulder season on the timeshare side as it's always been for us in terms of the EBITDA contribution. And then it's the same thing on the exchange and rental businesses, probably the weaker of the four quarters, if you will.

And of course, in the fourth quarter, also we have roughly $4 million worth of synergy savings that we'll see in the fourth quarter.

And Steve, you talked a couple of times about 2019 being a transition year. I imagine you're not prepared to give us any guidance. So maybe if you can just help us think about what that means exactly. And specifically, I'm curious how much of the $100 million cost synergies do you think can be achieved next year? And if there's anything you can share, I would be curious to know how you're thinking about contract sales growth or VPGs, tours, EBITDA, and anything you'd be willing to share.

Sure. Well, thanks. First of all, the one question on your synergies. So we believe, by the end of this year, we will have identified $25 million of run rate synergies. So that's $25 million for next year you should pretty much bake in. I would expect to see full run rate savings by the end of '19 to be in the $50 million range. So roughly half of the $100 million that we've talked about. As it relates to what we see on the top line, unfortunately, and the frustrating thing, I'm sure, for you and for us is that you'd like to think that when you've got some best practices that we've employed for years in MVW, that they're immediately translatable into the Vistana business. Unfortunately, it doesn't quite work that way. You have to reeducate your sales force. You have to get them comfortable with the new approach and everything else. So I would not be in a good position today to give you our guidance for next year. Suffice it to say that, while I referenced it in the transitional side, that some things will take longer, some things will be more immediate. And you can certainly rest assured that we are going to be doing everything in our power to drive as much top line growth next year as we possibly can. But it's -- while we have identified the opportunities, we still got to put a price to them, not in terms of prior cost to implement, but in terms of what the upside is and then the timing to get it done.

Our next question comes from Patrick Scholes with SunTrust.

Two questions for you. One, I just want to be absolutely clear on sort of apples-to-apples EBITDA guidance. Your prior for the legacy company for the year was $310 million to $325 million. What would that apples-to-apples be right now, if you were only giving the legacy guidance?

Well. Patrick, if you would adjust for the hurricane impact, both in the third quarter and the fourth quarter that I just mentioned, we would probably -- obviously, a lot of moving parts here and we're not looking at it that way. But I would say, we'd probably be towards the middle of that guidance range kind of where we thought we'd be when we started the year.

And then it looks like you've started at least dabbling back in share repurchases. How should we think about the trajectory going forward into next year?

Yes. We don't obviously comment, Patrick, when we're in and out. I think as we go into next year and we give you guidance, we'll probably give you a little bit more guidance on how we're thinking about return of capital for -- on a full year basis. But look, like we've always done, and one of the things I wanted to point out on the call was that from -- notwithstanding the new debt related to the acquisition, we're very comfortable with our leverage. We had said, we wanted to be in that kind of 2.5x leverage ratio or less. As we sit here today on a pro forma basis, we feel good about that. We've got a business that's going to generate a significant amount of free cash flow. And we're going to be opportunistic when we see a good value in the stock price.

Our next question comes from David Katz with Jefferies.

I wanted to just -- you've covered a lot of information and I appreciate all the detail. But I wanted to just go back to the cost synergy side and, essentially, follow it up. Within that cost synergies that you've identified, how much would you say of that is labor-driven versus sort of other? I don't know how much procurement there would be. But what kinds of different categories? What have you done so far to get to that $100 million number? And I am essentially, just trying to figure out what's left to do and where you'll be looking?

In the near term, a lot of the synergies are going to be redundancies at the senior management level, right, as you integrate and put the businesses together. Remember, this will take time. The size of this acquisition and integration takes a significant amount of time over the next couple of years as we work through the different layers of the organization. So the things we did originally in due diligence, obviously, we didn't have all the detailed information, because we didn't own the company yet, we went through and made high-level estimates, right? Now that we own the company, and we're digging in deeper, we see plenty of opportunities, especially, around things like centralizing activities, automating activities, consolidating IT applications to get to cost that both from overhead perspective become much cheaper to operate. So it's really just a lot of the same areas, but as we've gotten into it, we're sharpening the pencil. We also see, longer term, additional ways, but without -- it's going to include more investment to continue to automate, invest in technology, and so we'll continue to explore those things. But as you might imagine, with an undertaking of this size, there's plenty of opportunities. We're more excited than ever about the long-term value we can create here. But it's going to take some time to get to it.

And I suppose this may be a bit of a generic question, so I'll apologize for it. But has anything surprised you so far, either positively or negatively?

I would say, if anything, it's been -- we've been pleased with how things have gone. I think the receptiveness of -- on both sides of the transaction to putting these businesses together have been -- has been very good. There's always going to be, as you go through any kind of a reorganization, there is going to be some job eliminations and things like that. I think, for the most part, people certainly understand what we've done and why. And I believe we've been very appropriate in terms of how we looked at severance packages and things of that nature. And again, as the more we -- the more time we spend, the more opportunities we see here going forward. And I don't believe that discovery process is over. I believe it's -- we're probably in the, maybe, third inning of a 9-inning ballgame in that. So as we continue to kind of peel back the onion and understand what's here and go from there. And I want to make sure that it's clear, we're looking at this as a two-way street. There are some things that have been done in the ILG business that we think are very good and things that are best practices that we can apply to the legacy MVW business. So it goes both directions. And I'm excited about that as well. So I'm very bullish about where we are.

Our next question comes from Edward Engel with Macquarie Group.

Certainly a lot of moving parts, but I was just wondering if you have any sense of what may be pro forma 2018 or even trailing 12-months adjusted free cash flow or maybe just your run rate adjusted free cash flow if we kind of give you full credit for the synergies and then the full year of ILG, at least some sort of ballpark?

Yes. Since we didn't own the business, we didn't really have a calculation, if you will, for the period we didn't own it. But you can go back and look at what they put out as their guidance, probably give you a ballpark as to what the business was supposed to deliver for the year. And obviously, when you look at what we put out for the revised guidance of $235 million to $245 million -- excuse me, $255 million, a lot of that is upside in our business. In terms of the legacy MVW, I can tell you that as we've managed down our capital spend, for the four months, and once again, some of this is just timing, as I mentioned on the EBITDA side, and the way the cash comes into the legacy ILG business, they have better free cash flow in the beginning portion of the year that corresponds with the business. So while there is some pickup in our full year guidance for ILG for the four months we own it, most of the upside that you're seeing here is really related to our legacy MVW, just given the timing of their cash flows.

And then for 2019 should we expect the legacy ILG tour flow to maybe slow down and then be offset by VPG and if so, should that improve your margin outlook or at least their margin outlook?

Well, in generalities, I think you've deduced appropriately what will happen. There will be some tour volume that will go down from these kind of high-cost, low-yield channels. As we transition to the lower-cost, higher-yield channels, there may be some timing difference. But that's clearly the goal. I think that's the essence of your question, right?

Steve, there was a second part, as VPGs go up that should equate to, yes, more efficient sales and better margins.

Yes. sorry I didn't answer the second part of your...

But to Steve's point there will be -- and as we talked about, there'll be a little bit of a transition. It's hard to model that out. We'll do everything we can to manage through that with as little impact as possible. But once again, if you think about it over the long term, it's huge opportunity when you look at where their VPGs are today. And our ability -- and our proven ability to get better tours -- obviously, we have access to all the legacy -- or I should say, the Marriott relationships on the call transfer, the digital transfer, linkage that the legacy Vistana business because of our agreement with Marriott didn't have. So once again, this is a huge acquisition and there's going to be integration. But over the long term, it's huge opportunity as we put the businesses together and execute best practices across it.

In regard to that VPG bridge that you broke out earlier. Of that delta, how much is just because they have a higher mix to new owners versus just, I guess, pricing or efficiency?

Yes, it's really -- it's not that much on the mix of new owners. It's just probably a little bit on that. It really just has to do with some of the tour sourcing that they do, off-property stuff that -- once again, they were probably, I don't want to say forced to do but had to do relative to not having access to the better and higher efficient Marriott channels that we had access to. So it's really a lot of the sourcing and where they got their tours, there could be a little bit in there on the first-time buyer too. But I don't think that's meaningful.

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time I'd like to turn the call back to Steve Weisz for closing comments.

Thank you very much, Rob. We're still very early in the integration but what I've seen so far has made us excited what lies ahead with Marriott Vacation Club, Sheraton Vacation Club, Westin Vacation Club, Grand Residences by Marriott, the Ritz-Carlton Destination Club, St. Regis Residence Club and the Hyatt Residence Club. We have the best brands in Vacation Ownership and the best Exchange company in the industry with Interval International. I look forward to what we can do as a combined company and updating you on our results and direction on future calls. 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.