Marriott Vacation Club International March 12, 2009
Forward Looking Statements The 2009 Outlook contained in this presentation includes forward-looking statements within the meaning of federal securities laws, including trends for contract sales, profits, costs, spending, and note securitizations; and similar statements concerning anticipated future events and expectations that are not historical facts. We caution you that these statements are not guarantees of future performance and are subject to numerous risks and uncertainties, including the depth and duration of the current recession in the timeshare industry and the economy generally; continued volatility in the credit and securitization markets; supply and demand changes for vacation ownership and condominiums, and other risk factors identified in our most recent annual report on Form 10-K; any of which could cause actual results to differ materially from those expressed in or implied by the statements herein. These statements are made as of March 12, 2009, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Vision and Mission Long-Term Vision: To be the preferred provider of vacation ownership and personalized vacation experiences. Mission: Deliver unforgettable experiences that make vacation dreams come true.
Successful Performance Segment Revenue ($ in millions) $2,100 $1,800 $1,500 $1,200 $900 $600 $300 $0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Note: Revenues, as reported. Beginning in 1998, reimbursed costs are reflected gross under Emerging Issues Task Force Issue No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. Beginning in 2006, revenues include note sale gains or losses.
2008 Product Distribution
Marriott Brand Consistency and quality Trust Broad distribution opportunities Marriott Rewards 50% of timeshare owners are members at time of purchase Depth of exchange opportunities is a key differentiator Incentives for purchase, reload/referral, resale
Home Resort How Do Marriott Vacation Club Owners Use The Product? Other Marriott Vacation Club property Exchange for Marriott Rewards points Sub-total External Third Party Exchange Other Note: Other includes rentals and breakage. 2008 33% 31% 20% 84% 9% 7% 100% 2007 30% 28% 22% 80% 11% 9% 100%
Owner-Driven Sales 2008 Timeshare Contract Sales From Owner Referrals 19% From Existing Owners (reloads) 39% New Customers 42% $1.08 Billion Note: Only includes timeshare interval contract sales. Does not include fractional and residential contract sales.
Full Year 2008 Results Marriott Vacation Club Customer Satisfaction Actual Target Overall 89% 89% Sales/Marketing 88% 88% Resort Operations 86% 86% Owner Services 93% 92%
2008 Performance
Adjusted Contract Sales Mix 1 2008 Residential 5% Fractional 4% Timeshare 91% $1.2 Billion Timeshare Fractional Residential 1 Does not include impact of $115M of contract sales reversal in 2008.
($ in millions) Revenues Base management fees Timeshare sales and services Cost reimbursements Total 2008 Timeshare Segment Results As Reported $42 1,423 285 1,750 Operating costs and expenses Timeshare - direct 1,334 Reimbursed costs 285 Restructuring costs 28 General, administrative and other 111 Total 1,758 Operating income Equity in earnings/minority interest Timeshare Segment Results (8) 36 $28 Restructuring Costs & Other Charges 1 $ - 61-61 3 - (28) - (25) 86 7 $93 As Adjusted** $42 1,484 285 1,811 1,337 285-111 1,733 78 43 $121 1 Includes severance, write-off of capitalized development costs, facilities exit costs, and other charges related to hedge ineffectiveness, valuation of residual interests, contract cancellation allowances, and inventory write-downs. **Denotes a non-gaap financial measure.
Timeshare Segment 2006-2008 Net Cash Flow from Operations ($ in millions) 2008 2007 2006 Timeshare segment results $28 $306 $280 Depreciation and amortization 46 39 40 Timeshare activity, net Timeshare segment development in excess of cost of sales (299) (55) (83) Note activity Financially reportable sales less than (in excess of) closed sales Other cash inflows (outflows) Total timeshare activity, net (258) 126 33 (398) (49) (16) (35) (155) (65) 61 (17) (104) Net working capital changes, minority interest, and other Net cash provided (used) by operating activities (21) ($345) (52) $138 (8) $208
Inventory on the Books Of the $2 billion of inventory on the Balance Sheet at year end 2008, only 37% represented completed inventory (units / intervals). And, of the completed inventory, over 80% related to our core timeshare product. Inventory Completed Inventory Land and infrastructure for future phases 37% Completed Inventory 37% Work in process 26% Timeshare 81% $2 Billion Residential 6% Fractional 13%
($ in millions) Timeshare Segment Financing Profits $160 $140 $140 $129 $120 $108 $100 $88 $89 $80 $60 $64 $40 $20 $0 2003 2004 2005 2006 2007 2008 As Adjusted 1** Note: Financing profits include interest income, accretion, and gains on notes sold, net of costs of financing. 1 Does not include impact of $44M of charges related to hedge ineffectiveness and valuation of residual interests. **Denotes a non-gaap financial measure.
Timeshare Financing ($ in millions) Volume $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 2003 2004 2005 2006 2007 2008 Propensity to Finance 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Timeshare Loan Volume Timeshare Propensity to Finance
Customer / Loan Profile Quality loan applicants Median income of $125,000 Credit score average of 740 Average purchase price - $30,000 Typical down payment - 15% to 20% Typical borrowing rate - 13.0% to 13.5% No prepayment penalties Convenient & easy Low payments ($300 per month) Auto bill pay
Average Annual Delinquencies 12% 10% 8% 6% 4% 2% 0% 2001 2002 2003 2004 2005 2006 2007 2008 Delinquency: 30+ days over-due
Moving forward from 2008.
Response to Economic Conditions in 2008 Took immediate action to mitigate volume declines Significant headcount reductions Closed / scaled back sales centers and call centers Terminated three leases Eliminated least effective marketing channels Eliminated new development Significantly reduced inventory spending Eliminated financing incentives
Response to Economic Conditions in 2009 Match inventory to sales pace and limit pipeline Margin improvement Maximize effort to sell timeshare notes and reduce financing propensity Optimize underwriting criteria Transition to a points-based Destination Club for fractional products Sell-out remaining residential products
2009 Outlook Earnings guidance for timeshare segment not provided Current sales trends could produce contract sales of $800M Segment profit could total $45M Timeshare Sales and Services, net could total $70M Reducing G&A costs Further reducing gross inventory spending Two note securitizations assumed in 2009 Targeting to be self-funding in 2009
Q1 Note Securitization Update Completed commercial paper conduit deal for approximately $205 million of gross proceeds in the first quarter of 2009 Advance rate of 72% Cash flow from the trust will be paid entirely to the holder of the Notes for the next 12 to 24 months; thereafter, Marriott expects to begin receiving its return on its residual interest. Average credit score of approximately 740 Non-recourse
Conclusion Committed to product quality and consistency Strong synergies with Marriott Lodging Expertise in the business Strong understanding of customers and effective sales process Responsive to economic climate to maximize cash flow Strong business over the long term
Segment Information, Contract Sales and Non- GAAP Financial Measures
Segment Information Segment Information Segment Results. Management evaluates the performance of our segments, including our Timeshare segment, based primarily on the results of the segment without allocating corporate expenses, interest expense, or indirect general, administrative, and other expenses. We do allocate interest income associated with Timeshare segment notes to our Timeshare segment results because financing sales is an integral part of that segment s business. Because note sales are an integral part of the Timeshare segment, we also include note sale gains or losses in our Timeshare segment results. We also allocate other gains or losses as well as equity in earnings or losses from our joint ventures and divisional general, administrative, and other expenses to each of our segments. Timeshare Segment Cash Provided By Operating Activities. Timeshare segment cash provided by operating activities is evaluated by management because it represents the cash we have available from Timeshare segment operations which could be utilized in our Timeshare segment business or for other company-wide purposes such as for debt service requirements, opportunistic investments, share repurchases and other purposes.
Contract Sales Contract Sales 2008 Timeshare Adjusted Contract Sales. Management evaluates contract sales that exclude the impact of other charges because that statistic allows for period-over-period comparisons of our on-going contract sales before material charges. The other charges included contract cancellation allowances of $18 million that impacted company contract sales and $97 million that impacted joint venture contract sales. 2008 Adjusted Contract Sales: Adjustments As Reported Restructuring As Adjusted 53 Weeks Ended Costs & Other 53 Weeks Ended January 2, 2009 Charges January 2, 2009 Contract Sales Company: Timeshare $ 1,081 $ - $ 1,081 Fractional 35 2 37 Residential 10 16 26 Total company 1,126 18 1,144 Joint ventures: Timeshare - - - Fractional (6) 21 15 Residential (44) 76 32 Total joint ventures (50) 97 47 Total contract sales, including joint ventures $ 1,076 $ 115 $ 1,191
Non-GAAP Financial Measures Non-GAAP Financial Measures In this presentation we report certain financial measures that are not prescribed or authorized by United States generally accepted accounting principles ( GAAP ). We discuss management s reasons for reporting these non-gaap measures below, and the slides in this presentation reconcile the most directly comparable GAAP measure to each non-gaap measure (identified by a double asterisk) that we refer to. Although management evaluates and presents these non-gaap measures for the reasons described below, please be aware that these non-gaap measures are not alternatives to revenue, operating income, Timeshare segment results or any other comparable operating measure prescribed by GAAP. In addition, these non-gaap financial measures may be calculated and/or presented differently than measures with the same or similar names that are reported by other companies, and as a result, the non-gaap measures we report may not be comparable to those reported by others. 2008 Timeshare Segment Results as Adjusted. Management evaluates non-gaap measures that exclude the impact of restructuring costs and other charges incurred in the 2008 fourth quarter because that non-gaap measure allows for period-over-period comparison of our on-going core operations before material charges. This non-gaap measure also facilitates management s comparison of results from our on-going operations before material charges with results from other timeshare companies. During the latter part of 2008 and particularly the fourth quarter, we experienced a significant decline in demand for hotel rooms both domestically and internationally due, in part, to the failures and near failures of several large financial service companies and the dramatic downturn in the economy. Our capital intensive Timeshare business was also hurt by the downturn in market conditions and particularly, the significant deterioration in the credit markets, which resulted in our decision not to complete a note sale in the fourth quarter of 2008. These declines resulted in the cancellation of development projects and reduced timeshare contract sales. We responded by implementing various cost saving measures across our Timeshare segment, which resulted in fourth quarter 2008 restructuring costs of $28 million and other charges of $65 million. These restructuring costs and other charges included severance charges, write-off of capitalized development costs, facilities exit costs, contract cancellation allowances, inventory write-downs, and charges associated with the valuation of Timeshare residual interests and hedge ineffectiveness. For additional information regarding these restructuring costs and other charges, see our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on February 12, 2009. 2008 Timeshare Segment Financing Profit as Adjusted. Other charges noted above totaling $65 million include charges of $44 million associated with the valuation of Timeshare residual interests and hedge ineffectiveness which impacted financing profit. Management evaluates financing profit excluding the $44 million of other charges for the reasons noted above.
Non-GAAP Financial Measure Reconciliation Non-GAAP Financial Measures 2008 Adjusted Financing Profit: Adjustments As Reported Restructuring As Adjusted 53 Weeks Ended Costs & Other 53 Weeks Ended January 2, 2009 Charges January 2, 2009 ** Timeshare Segment Financing Profit Timeshare Segment Financing Profit $ 45 $ 44 $ 89 ** Denotes non-gaap financial measures. Please see previous page for additional information about our reasons for providing these alternative financial measures and the limitations on their use.