MARRIOTT VACATIONS WORLDWIDE Corp Q4 FY2022 Earnings Call

Thank you, Melissa, and welcome to the Marriott Vacations Worldwide Fourth Quarter 2022 Earnings Call. I am joined today by John Geller, President and Chief Executive Officer; and Tony Terry, our Executive Vice President and Chief Financial Officer. I 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 last night and the presentation that we added to our website this morning as well as our comments on this call are effective only when made 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 of our website at ir.mvwc.com. As you saw in our earnings release last night, as a result of aligning the contract terms for our Vacation Ownership sales across Marriott, Westin, and Sheraton brands last year, we recorded an additional $12 million of revenue in the fourth quarter. The schedules to our earnings release provide a reconciliation to show what our reported results would have been without this benefit. Our discussion and commentary today will refer to our results after adjusting for the alignment, including the $7 million benefit to adjusted EBITDA. With that, it's now my pleasure to turn the call over to CEO, John Geller.

Thanks, Neal. Good morning, and thank you for joining our fourth quarter earnings call. I'm happy to welcome you for the first time as CEO. The past two months have felt a lot like when I joined the company just over 13 years ago, full of potential and possibility. I've stepped into this role with a strong leadership team around me and a vision of growth ahead for us. If you've been following the travel industry, you know there is an optimistic view on leisure travel this year. In a recent survey, 77% of respondents said they are excited to travel this year, while nearly 50% of them have already begun researching trips. That said, leisure travel looks different than it did pre-pandemic. Recent research we conducted revealed that 80% of people surveyed would consider working remotely from a vacation destination as a way to extend the length of their trip, and this trend is expected to continue. So what does that mean for us? It means that more travelers than ever can visit our top destinations, stay in our spacious villas and experience the unparalleled service that our on-site resort teams deliver. With the strength we've seen in leisure travel, we've averaged nearly 90% occupancy for the year, illustrating the continued high demand for leisure accommodations. We also generated over $1.8 billion of contract sales and delivered $744 million of adjusted free cash flow in 2022. And we added over 20,000 new owners to our Vacation Ownership business while growing active interval members by 21%. This year, we expect to continue that momentum. We will build on our strategic investments in products, technology, people, and customer experiences that propel our business forward. We have dedicated and passionate teams around the world delivering unparalleled vacation experiences every day to our owners, guests, and members, and we continue to positively impact the communities in which we live and work. I'm also proud to say that we recently published our new ESG report and are formalizing a strategy to ensure we're being good stewards of the environment in which we operate and the communities we serve. One such example is the establishment of the Stephen Weisz Endowment, providing scholarships to students at the Rosen College of Hospitality Management at the University of Central Florida. Since 2020, we have hired more than 175 UCF graduates, and I'm very proud that our company was able to make this investment to support the development of future hospitality leaders while honoring the legacy of our former CEO. Now moving to our results. 2022 was a great year for Marriott Vacations, and we ended the year on a very strong note. Occupancy was 90% for the fourth quarter, with Hawaii running over 95% while Asia Pacific occupancies doubled compared to the prior year. With the strong occupancy, we grew tours by 18% on a year-over-year basis, with fourth quarter tours just below our pre-pandemic levels. As expected, VPG declined year-over-year but remained 17% higher than 2019. As a result, we grew contract sales by 12% in the fourth quarter compared to the prior year and expanded our adjusted EBITDA margin, illustrating the resiliency of our business model and the desirability of our product offerings. Last year, we successfully implemented our online booking engine for previews and continued to improve predictive modeling for our marketing campaigns. These initiatives resulted in significantly higher consumer response rates, and we ended the year with more than 200,000 preview packages in our pipeline, with roughly 1/3 of those customers having already booked their vacations for 2023. Taking a step back, when we first acquired ILG in 2018, the goal was to allow owners the ability to enjoy expanded vacation opportunities and provide direct access across our Marriott, Sheraton, and Westin Vacation Club brands. Since then, we've been working to set up the systems and technology to expand our offerings and fulfill this promise, which we achieved last year with the launch of Abound by Marriott Vacations. Looking forward through our multiyear Vacation Next program, we expect to leverage our brands and digital strategy to help unlock our growth potential. We expect this will allow us to create efficiencies in how we market, sell, and service our products resulting in top line growth, lower customer acquisition costs, and increased owner satisfaction as we make more service options available online. In our Hyatt Vacation Ownership business, we continue to make great progress integrating Legacy Welk. In January, we announced that beginning this summer, all of our Hyatt and Legacy Welk resorts and sales galleries will be rebranded Hyatt Vacation Club. Later this year, we plan to expand the vacation experiences available to Hyatt owners with a new exchange option called Beyond, allowing them to use their ownership for cruises, tours, and hotel stays. I'm also excited to announce that earlier this month, we acquired a fully entitled parcel of land in Charleston, South Carolina. Overlooking the heart of the city, we intend to develop a new Marriott branded resort by early 2025, including a new on-site sales gallery. The city of Charleston continuously ranks as one of the top owner destinations for its thriving culinary scene, easy walkability, and southern charm. Located steps from the historic Charleston City Market, this new 50-unit resort will make a great destination for our owners. In our Exchange & Third-Party Management business, interval ended the year with nearly 1.6 million members, a 21% year-over-year improvement driven by the new affiliations we signed in late 2021. Excluding the results of VRI Americas, which was sold last April, adjusted EBITDA in our Exchange & Third-Party Management business increased 11% in the quarter, driven by higher average exchange fees and increased gateways as well as increased management fees at Aqua-Aston. Before turning the call over to Tony to discuss our fourth quarter results and 2023 guidance, a number of investors have asked me what they should expect as I step into the CEO role? As you know, I've been in a senior leadership position for over a dozen years and had a significant amount of input into our objectives and strategies along the way. So in short, I remain committed to delivering the level of operational excellence that our customers expect from us. I also expect to deliver against the goals we laid out at our last Investor Day. Long term, I expect our timeshare and exchange business to remain the core of our business model while we look to add to our growth by diversifying into adjacent leisure-focused businesses where we can leverage our core capabilities. And finally, I want us to find new ways to unlock the power of data through advanced analytics to improve efficiency and drive top line growth. The opportunities that lie ahead for us are exciting, and my optimism about the long-term future has never been greater. With that, I'll turn the call over to Tony.

Thanks, John, and good morning, everyone. Today, I'm going to review our fourth quarter results, the strength of our balance sheet and liquidity position as well as our 2023 outlook. As I mentioned last quarter, earlier in the year in connection with the unification of our Marriott products and the launch of Abound by Marriott Vacations, we aligned the contract terms for the sale of Vacation Ownership interest across our Marriott brands. As a result, contract sales for our Marriott branded products are now being recognized as revenue following the expiration of the recession period, consistent with our Westin and Sheraton brands. This change resulted in the acceleration of an additional $12 million of Vacation Ownership revenue in the fourth quarter and a $7 million benefit to adjusted EBITDA. With the alignment completed, we do not expect any material impact from this going forward. Moving to our Vacation Ownership segment. Leisure travel demand remained strong in the fourth quarter and the value proposition of our Vacation Ownership product remains compelling. We capitalized on these trends in the fourth quarter, driving a 12% increase in year-over-year contract sales with tourists ending just shy of pre-pandemic levels. And excluding the $13 million impact from the hurricanes, contract sales would have grown 15%, illustrating the continued demand for our core product. With the growth in contract sales, adjusted development profit grew 13% to $126 million and margin was, again, over 31%, 500 basis points higher than 2019. In our rental business, as we expected, owner occupancy increased in the quarter compared to the prior year, and Explore cost rose as owners continue to use their remaining COVID points before they expired at the end of last year. In addition, preview packages were up substantially, which helped fuel contract sales but negatively impacted availability for renters. As a result, transient keys rented declined 10% in the fourth quarter, partially offset by a 3% increase in revenue per available key, and rental profit in our Vacation Ownership segment declined year-over-year to $15 million. The stickier parts of our Vacation Ownership business, again, performed well. Profit from our resort management business increased 10% year-over-year to $70 million, while financing profit increased 5% to $50 million. Our notes receivable portfolio also continued to perform well in the quarter, with delinquencies and defaults largely in line with levels experienced in 2019. For the fourth quarter, adjusted EBITDA in our Vacation Ownership segment grew 12%, excluding the $7 million impact from the hurricanes, with margin improving 110 basis points to nearly 35%. In our Exchange & Third-Party Management segment, active interval members increased 21% compared to the prior year, driven by the new affiliations we signed in late 2021. While as expected, average revenue per member decreased as transactions from the new accounts continued to ramp up. In our Aqua Aston business, RevPAR increased 40%, driven by improvement in Hawaii. Excluding the results of VRI Americas, adjusted EBITDA at our Exchange & Third-Party Management segment increased 11% compared to the prior year and margin increased 300 basis points to 55%. Finally, corporate G&A was largely unchanged compared to the prior year. As a result, adjusted EBITDA increased 9% year-over-year, excluding the impact of the hurricanes and margin improved by 120 basis points, demonstrating the continued demand for leisure travel and the strength of our leisure-focused business model. Moving to our balance sheet. In December, we issued $575 million of 3.25% convertible notes due 2027. The offering was significantly oversubscribed, reflecting strong demand from investors. We used the proceeds to pay down a portion of our revolver, repurchased $55 million of common stock. And in January, redeemed our 6.125% senior secured notes due 2025. As part of this issuance, we entered into a call spread transaction increasing the effective economic conversion price of the notes to over $286 per share, double where our stock was trading on the day we launched the offering. Pro forma for the note redemption, we ended the fourth quarter with $1.1 billion in liquidity, including $266 million of cash, $72 million of gross notes receivable eligible for securitization, and $749 million of available capacity under our revolver. We also had $2.8 billion of corporate debt with 92% of it fixed at an average interest rate of 3.4%. Our net debt to adjusted EBITDA ratio was 2.9x at the end of the quarter within our targeted 2.5x to 3x leverage range, and we have no corporate debt maturities until 2025. We also completed our second timeshare receivable securitization of 2022 in the fourth quarter, issuing $280 million of notes at an overall weighted average interest rate of just under 6.6%, and the 98% advance rate illustrates the market's continued belief in the strength of our owners. We also continue to return a substantial amount of cash to shareholders. In the fourth quarter, we repurchased $173 million of common stock at an average price of just under $140 per share, and our Board of Directors authorized a 16% increase in our quarterly dividend. For the year, we returned more than $800 million to shareholders, including the repurchase of more than $700 million of our common stock. Moving on to our 2023 guidance. 2022 was a very strong growth year for our company as concerns surrounding the COVID-19 pandemic began to wane and people got back on vacation. As we enter 2023, despite concerns about a potential recession, to date, we've not seen any weakness in demand in our forward bookings and are targeting 5% to 9% contract sales growth this year with VPGs continuing to normalize and tour growth largely coming from in-house and preview packages. With these higher volumes, continued low product costs, the benefit of our digital transformation efforts, and our ability to leverage fixed marketing and sales costs, we expect development margin to remain above 30% for this year. While contract sales are expected to be the primary driver of growth in the Vacation Ownership segment, rental profit is expected to increase more than 10% this year, though we do expect it to be lower in Q1 compared to the prior year due to higher owner and preview utilization. Financing profit is expected to be largely unchanged for the year, excluding the alignment benefit we recorded in 2022 as higher contract sales and increased financing propensity are expected to be offset by a higher cost of funds. For the Exchange & Third-Party Management segment, interval members are projected to remain relatively stable, and adjusted EBITDA is expected to grow 4% to 6% this year. Longer term, our strategy continues to include driving higher revenue per member, adding new affiliations and properties to the network, and expanding our platform and benefits to appeal to a broader target market. We expect to wrap up our ILG integration work this year, which will enable us to allocate more resources to focus on our Hyatt business as well as our initiatives to leverage data and advanced analytics and improve our customer self-service capabilities. These initiatives, combined with higher labor costs, could result in a 10% to 15% year-over-year increase in corporate G&A costs. As a result, we expect to generate $950 million to $1 billion in adjusted EBITDA this year, implying 6.5% year-over-year growth at the midpoint of our guidance, excluding the $51 million alignment benefit we recorded in 2022. Moving to cash flow. We generated $744 million of adjusted free cash flow in 2022 and ended the year with $500 million of excess inventory. We currently have no material new inventory commitments for 2023, though we do plan to continue repurchasing low-cost reacquired inventory as it benefits the system and lowers our product costs. We will also continue to look for opportunities to add resorts, preferably where we can leverage a new sales center, and we'll continue to do this in a capital-efficient manner where possible. We expect our adjusted free cash flow to be between $600 million and $670 million this year and for our adjusted EBITDA to free cash flow conversion ratio to be approximately 65%. We will continue to use our free cash flow for organic growth or for strategic acquisitions. In the absence of compelling acquisitions, our best use of excess free cash flow remains returning it to shareholders. In summary, the fourth quarter was a strong close to the year. As we look forward, despite the uncertain economic outlook, I believe we're in a great position to continue to benefit from the growth in leisure travel in 2023 with our products and high demand and our investments in brands and digital initiatives supporting that growth. As always, we appreciate your interest in Marriott Vacations Worldwide. And with that, we'll be happy to answer your questions.

Our first question comes from Brandt Montour with Barclays.

So just first on your contract sales guidance and the growth implied in contract sales. Just was hoping that you could break that down a little bit between tours and VPG. And what I'm getting at is the fourth quarter VPG was, like you said, 17% above 2019. And I just want you to answer the question in relation to that number, should we consider that VPG can lift up a little bit from that level? Or is that maybe the new normal because that's going to, obviously, have implications on the tour growth that you need to hit that overall contract sales growth number, if that all makes sense?

Yes. Brandt, thanks for the question. I'll give you a couple of data points here. You talked about fourth quarter VPG. We did see VPG kind of stabilize in the fourth quarter from some of the declines we had seen a little bit earlier. We would expect that VPG for the first quarter to start trending back up slightly. And then as you go through the year, we do expect not necessarily a straight line, but we'll continue to have better VPG. Now with that all said, because the first half of 2021 last year, right, that we were so strong with VPGs and the pent-up demand. On a year-over-year basis, I think we're probably going to be slightly lower on VPG, meaning your tour growth is really what's going to drive your contract sales year-over-year with slightly lower VPG is how we're thinking about it right now. But obviously, a tough comp when you look at the first half of last year for the full year. But yes, we do expect it to trend up from what we saw in the fourth quarter.

Okay. Great. And John or Tony, we look at this really strong free cash flow that you're generating and we look at your leverage, which sort of continues to go down year-over-year, and it looks like it's going to go down even further, depending on the share buyback cadence. Maybe if you could just touch on that M&A point a little bit deeper. Is there opportunity out there? Are you sitting here looking into next year thinking you're a little bit more warm on the idea of going out and maybe using that cash for M&A versus how you felt about the market 12 months ago? Any more color on that, John, would be great.

Yes, our outlook remains unchanged. We will continue to seek opportunities that align strategically. On the Vacation Ownership side, we are focusing on unbranded options where we can enhance our brand presence and upscale. As we've mentioned, the potential acquisition opportunities are limited in size and quantity, but we will persist in exploring them. We've gained valuable insights from our experiences with ILG, which have shown us how to create value by bringing in owners, expanding our brand footprint, and increasing efficiencies to provide more vacation opportunities for our owners. We will also examine possibilities for expanding our travel platform in the exchange side of the business. We’ve discussed the potential for adjacent travel businesses and will assess any viable options without pursuing offers that simply mimic existing ones. Our goal is to identify opportunities that we can effectively manage, grow, and scale, or enhance our current offerings in both the exchange and Vacation Ownership segments. We will remain opportunistic if suitable prospects arise, but otherwise, as mentioned, we plan to return excess capital to our shareholders.

Our next question comes from the line of Ben Chaiken with Credit Suisse.

I have a quick question regarding the near term and one for the longer term. If I correctly understood you, you mentioned in your prepared remarks that there is a headwind for rentals in the first quarter due to higher owner occupancy. I recall that this was a similar situation in fiscal year '22, but those rollover points were supposed to expire in January. Can you clarify why this headwind is continuing into the first quarter of 2023? Also, did you provide any quantification of this issue?

Yes. Looking back at the first quarter of 2021, we experienced Omicron and a recovery phase, which led to a lower level of owner occupancy during that time. This decrease in owner occupancy allowed us to generate better rental outcomes. Currently, we are returning to more typical owner occupancy levels, which is unrelated to point expirations. The opportunity we had last year due to Omicron contributed to better results in the first quarter. However, overall owner occupancy has not yet reached a normalized level compared to previous years. This year's first quarter reflects a return to normal owner occupancy, and we have discussed our package pipeline, which includes a significant increase in packages. We are leveraging our rental inventory in the first quarter to boost packages and contract sales, expecting this to stabilize moving forward. Additionally, we anticipate an easier comparison for rentals in the latter half of the year since last year we dealt with COVID points, which allowed us to allocate inventory that could have been rented to owners. Thus, the second half of the year should present a more favorable comparison, though we won't provide guidance on a quarterly basis. Tony mentioned that rental profits for the full year are expected to be around 10%.

I want to confirm that the COVID points expired at the end of last year, as John pointed out. Additionally, during the second half of the year, people utilized those COVID points for our Explorer Collection. As we move into this year, last year's owners were using those points more during the second half, which led to increased rental availability in the first half. However, this also meant that using the Explorer Collection later in the year resulted in higher costs, as they both occupied properties and traded for Explorer access.

I got it. That makes a lot of sense. And I guess if we just step back a little bit, how do you guys feel about your 2025 Investor Day goals on either EBITDA or contract sales? Do you feel like you get the stretch? Or is it right on target? And I ask that in the context of contract sales, for example. So if you use the midpoint of the '23 guide, as you mentioned, that 7% contract sales. And I think that would suggest a little bit of an acceleration in '24 and '25 to reach the midpoint of those Investor Day goals. So I'm just kind of curious about how you guys are thinking about the cadence over the next couple of years from here?

We are very positive about the goals we established, and nothing has changed. When you set a plan for three years, it's rarely a straightforward path. For instance, this year we may see less growth due to high interest rates impacting our financing business. However, we anticipate recovery and significant growth in the future. Regarding our contract sales, we continue to invest in technologies that will support growth, enhance efficiencies, and improve marketing efforts. We have partnered with Salesforce, and while our general and administrative expenses are increasing, this is due to our shift from building IT infrastructure in-house—where costs could be capitalized—to a reliance on software as a service, which does not qualify for capitalization under GAAP. This results in slightly higher expenses. Nonetheless, looking back at our CapEx spending, we expect it to range from $80 million to $90 million this year, down from our previous guidance of $90 million to $110 million. This adjustment doesn't alter our overall cash flow but changes the classification of expenses. Leveraging these technologies will drive growth and improve efficiency in marketing and sales, enabling us to better target customers and increase contract sales. Overall, we are optimistic about reaching the Investor Day goals we shared in June.

And Ben, one thing I'd tack on to what John said is that we did mention that we expect VPGs to normalize a little bit in 2023, that doesn't mean for the whole period through 2025 that we do that. So we do expect that to start growing again after the current year. So that's something that we look at as well, driving development margin.

Our next question comes from Chris Woronka with Deutsche Bank.

So first question, John, you mentioned in the prepared comments about a parcel of land in Charleston for development. I know it's a small thing and clearly a great market. Should we interpret this as a signal that you're more inclined to pursue additional development moving forward? Or do you feel there's a need for more inventory? Is there anything we should infer from that?

No. We're looking toward future growth in contract sales. As Tony mentioned, we still have excess inventory, which is down to about $500 million in book value. Development does take time, and we're discussing plans that extend into 2025. We would have liked to pursue a larger development in Charleston, but local restrictions limit us to a cap of 50 units. Nevertheless, I expect more opportunities will present themselves as we move forward this year. Some of these new projects, particularly those that involve ground-up development, will take a few years to come to fruition. Larger projects in Charleston, given the 50-unit cap, won't require significant capital expenditure in the next couple of years regarding inventory. However, we plan to continue our historical approach of pursuing capital-efficient deals and collaborating with partners on development. We have a solid pipeline of new destinations that will support new sales centers. It's important to keep in mind that we need to focus on delivering inventory as we approach 2025, 2026, and 2027. The $500 million of inventory sounds substantial, but given that we're depleting $300 million to $400 million from our balance sheet annually, it can diminish quickly.

And for the 50 units, that's 1.5 months of sales, if that. So that's a smaller project. We will come with a little bit of distribution, which we like. We do some business in that market already through events and whatnot, but we do look to add more distributions along with newer projects, which will help us on our contract sales growth going forward as well.

Great. As a follow-up, Tony, you mentioned that you expect finance profits to be flat year-over-year. Have you observed any changes in how much people are putting down as a down payment to counteract higher rates and maintain their payment amounts? Are there any initiatives you're implementing to ensure financing remains consistent?

Yes. I haven't seen anything different with the down payment out there. And we do have a program in place to encourage people to finance with us and to keep the financing with us for 18 months. That program has been in place. But as you're well aware, pre-COVID, we were at closer to the low 60s as a percent of financing. And through last year, we were probably in the 53%, 54% range. So we haven't gotten quite back to where we want to be. We want to be in the low 60s again because it's a profitable endeavor for us. So we want to make sure we keep that going forward. But as of right now, we are doing everything we can through sales training and also through the financing propensity program to get people to sign up for a paper. We have been keeping our interest rates pretty, pretty steady. We've upped them a little bit last year, but they don't go point-for-point increased with what you're seeing in the market in general, and that helps to people to take our financing as well.

Our next question comes from Patrick Scholes with Truist Securities.

John or Tony, I wonder if you could give a little more granularity about the growth rates in the tour packages for this year? How much are you up year-over-year, but it sounds like you are percentage-wise by whatever period that you can share?

You're talking about the tour package pipeline?

Yes. I mean in the past, you've given statistics on how much that is up versus the comparable period. I'm wondering if you can share anything similar.

Yes, this is Tony. I can tell you that our tour package pipeline ended the year about 15% higher than the previous year. We're focused on maintaining a balance between inventory and ensuring our owners can take vacations. We prioritize setting aside inventory for preview packages and renting out any excess. It’s a balancing act, and we believe we could sell more packages if we had more inventory available. We have started optimizing our package pipeline and targeting our marketing efforts towards the most profitable customers, which has improved our marketing costs related to package production.

Okay. And then a little bit follow-up on that. Let's say, as of December 31, you're up in your tour package pipeline. What would the typical lead or booking time be for somebody in the package pipeline? I'm trying to sort of think about kind of visibility.

Historically, and I mean prior to COVID, the typical lead time was around 9 to 12 months, possibly even longer for some cases. While I don't have the latest statistics, I would anticipate that due to some pent-up demand, people may not have multiple vacations planned. Previously, when we sold a package, many customers had their next vacation or even their next two vacations already booked, which led to a longer lead time. However, during COVID, people generally didn't plan multiple vacations, so they are likely purchasing these packages and activating them for vacations sooner than before. Moving forward, I expect that the lead time will return to a more normalized range of 9 to 12 months, with some variability either way.

And I think the packages we sell are generally in the 18-month range, so people do have time to activate those if they want to. And we're trying to make that more automated going forward.

Our next question comes from Shaun Kelley with Bank of America.

Just wanted to ask as we kind of drill in on the VOI sales. What's your, sort of, expectation or assumption behind existing members versus new member mix? And kind of what's the broader impact of that this year, maybe the next few years as it relates to kind of VPG versus tour flow?

Yes. Great question, Shaun. Last year, we were about 70% owners and 30% first-time buyers. As we've mentioned before, when we create packages, we usually see an increase in first-time buyers as the stores ramp up, which is beneficial. For 2023, with the introduction of the Abound program and upcoming changes on the Hyatt side, I anticipate that existing owners will be eager to learn about the new products, particularly what Abound means for their ownership while vacationing. Therefore, I expect our tour growth or capture rate of owners participating to exceed last year's levels, leading to more tours. Typically, when owners take tours, the value per guest increases significantly, which will support our goals. Regarding packages, we will maintain efforts to attract first-time buyers, although I don’t anticipate the 70-30 ratio will change much this year. However, over the next few years, our aim is to shift that ratio more towards the mid- to high 30s, although that will require time.

Very clear. And then just as my follow-up and sort of clarification was, I believe you said in the prepared remarks, it might have been in Tony's section that VOI margins or the development margins would be up year-on-year. Did I catch that correctly? And is that also reflective or impacted by this mix remaining stable?

No. I think we said that it would be above 30% on the development margin side, which is a pretty strong development margin. We've been running, I think, closer to above 31% this year. So in general, we said above 30%. That means our marketing and sales are going to be staying in line for the most part. We'll look to leverage our fixed costs on the higher contract sales that we guided. And then our product cost as a percentage will remain in pretty good shape when we look year-over-year. So we do have a lot of that low-cost reacquired inventory coming through, and we don't see that stopping for the short term.

Yes. If you reflect back to pre-COVID, we had development margins around 23%. The important point is that at 30% or above, considering the challenging comparisons for VPGs, they will likely be somewhat softer year-over-year, and we’re driving growth through tour flow. Additionally, last year our tour growth was up 30%. VPG for the full year compared to 2021 was relatively flat. With the addition of tours, it tends to occur in less efficient VPG channels. However, we've managed to maintain tour flow while aiming to minimize the impact on VPGs by becoming smarter with our marketing and the packages we offer, which helps create some balance. If we can achieve more efficiencies on the marketing and sales front, optimizing our fixed costs alongside growth while keeping product costs stable, we are optimistic about sustaining those development margins in the near future.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Geller for any final comments.

Thank you, Melissa. And thank you, everyone, for joining our call today. 2022 was a great year for our company. We generated more than $1.8 billion in contract sales, added more than 20,000 new owners in our Vacation Ownership business, grew interval membership by 21%, expanded margins across the board, and returned more than $800 million to shareholders. We also launched the Abound by Marriott Vacations and recently announced that beginning this summer, all of our Hyatt and Legacy Welk Resorts will align under the Hyatt Vacation Club brand. As we enter the new year, the outlook for our company has never been brighter. Demand for leisure travel remains robust. Occupancies are strong. VPG remains well above pre-pandemic levels, and we expect to grow contract sales by 7% this year at the midpoint of the range. We also expect to generate between $600 million and $670 million of adjusted free cash flow, which we will use to reinvest in our business or return to shareholders. To close, on behalf of all of our associates, owners, Exchange & Third-Party members, I want to thank you for your interest in our company. We hope to see you on vacation soon. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.