MARRIOTT VACATIONS WORLDWIDE Corp Q3 FY2023 Earnings Call

Greetings and welcome to the Marriott Vacations Worldwide Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I would now like to turn the conference over to your host, Mr. Neal Goldner, Vice President, Investor Relations from Marriott Vacations Worldwide. Thank you. You may begin.

Thank you, Melissa, and welcome to the Marriott Vacations Worldwide third quarter 2023 earnings conference call. I'm joined today by John Geller, President and Chief Executive Officer, and Jason Marino, 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, 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 reference 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 on the Investor Relations page on our website at ir.mvwc.com. Before I turn the call over to John, as you saw in our earnings release last night, with four vacation ownership resorts in West Maui, the wildfires had a negative impact on our results in the third quarter, despite having no physical damage to our properties. To facilitate a conversation this morning about our business, excluding the Maui wildfires impact, our discussion and commentary this morning about our consolidated results for the quarter will exclude the impact of the fires, except where noted. We added a table to our earnings release last night to illustrate the impact of the wildfires by line of business to facilitate your analysis. In addition, during last year's third quarter, with the launch of Abound by Marriott Vacations Worldwide, we aligned the contract terms of vacation ownership sales across our Marriott, Westin, and Sheraton brands. We also aligned and combined our accounting methodologies for the reserve on vacation ownership notes receivable for these brands. These changes, which we refer to as the alignment, resulted in a non-recurring benefit of $44 million to last year's third quarter adjusted EBITDA due to the acceleration of revenue from the sale of Marriott branded vacation ownership interest. The schedules we provided in last night's earnings release illustrate what our results would have been in the prior year quarter and year-to-date period without this benefit. During our call today, all of our discussion and commentary about year-over-year changes exclude last year's alignment benefit. With that, it's now my pleasure to turn the call over to John Geller.

Thanks, Neal. Good morning, everyone, and thank you for joining our third quarter earnings call. I wanted to start the call today by reflecting on one of the most significant happenings in the third quarter, the wildfires that battered West Maui. While we did not have any physical damage to our resorts, the wildfires had a profound impact on our associates and their families, with several hundred of them losing their homes. For all of our associates in Maui, our thoughts and prayers continue to be with them as they work with each other and their community to rebuild. Thanks to the hard work and dedication of our associates, we have reopened our resorts in West Maui, although occupancy in October was well below normal. We are seeing reservations build for the balance of the year, though we expect it'll take until early next year until occupancy returns to more normal levels. At the same time, our focus has been on educating our owners, members, and guests on respectful travel as the community rebuilds, and encouraging any visitors to explore the island and enjoy local businesses that need the support of tourism. Moving to our third quarter results, it was only a year ago when we first announced Abound. Our enthusiasm at the time to provide owners and first-time buyers direct access to a much broader portfolio of resorts using a common currency couldn't have been higher. Since then, thousands of owners and other customers have been introduced to Abound, and we continue to see elevated interest at our resorts with people wanting to learn more about Abound and its benefits. Despite the near-term impacts of the transition, I have no doubt that it is fundamentally a better product. For legacy Marriott owners, they are now able to book directly into any of our Sheraton and Westin resorts using their points. And for legacy Sheraton and Westin owners, who previously had access to a more limited system of resorts, they can now book directly into any of the more than 90 Marriott branded vacation ownership resorts around the world using a common currency. In addition, legacy Sheraton and Westin owners now have a much more robust selection of vacation options to choose from, with the new access to thousands of other vacation alternatives using their points from hotel stays and cruises to sporting events, Broadway plays, and more. Over the past year, we've been working hard educating consumers about the benefits of Abound, and our salespeople are getting more experience selling it. We have also seen three times the number of legacy Vistana owners elect to use the Abound program this year compared to last, which will allow more owners to experience the benefits firsthand. This was evident in our results this quarter, where VPG for sites that transitioned increased more than 15% sequentially from the second quarter. In our legacy wealth business, the changes we've made helped drive a 5% sequential VPG improvement. As a result, total company VPG improved 2% sequentially from the second quarter despite the impact of the Maui fires. We also formally launched the Hyatt Vacation Club brand during the third quarter, bringing our 22 former Hyatt Residence Club and Legacy-Welk resort properties under a single brand. With the launch of the new BEYOND program, Hyatt Vacation Club owners now have access to more travel offerings, including cruises and vacation experiences, which will help drive higher owner satisfaction and incremental tours. Our international business continues to provide strong growth, with contract sales across Europe and Asia Pacific growing 42% year-over-year. However, with more U.S. consumers traveling abroad this year, this has negatively impacted our North America results. We continue to focus on driving sales of new owners, with first-time buyers representing half of our tours in the quarter and a third of our contract sales, which is good for the long-term health of the system. On the development front, we acquired a property in Savannah, Georgia, which we intend to convert into a 73-unit Western Vacation Club. Savannah consistently ranks as a top tourism destination for our owners. This resort will also add new sales centers in the market when it opens in a few years. In our exchange and third-party management segment, our interval business performed in line with expectations this quarter, and active members were down slightly year-over-year while revenue per member increased. Looking forward, travel demand continues to revert to historical patterns, and economic conditions are mixed with consumers starting to feel the impact of higher interest rates and inflation. At the same time, the changes we've made in our Marriott branded vacation ownership business with the launch of Abound, as well as those to our legacy wealth business are encouraging. VPG improved 2% from the second quarter and we're up 17% above 2019 Q3 levels, even with the Maui fires impacting our results, reflecting the benefits of our team's hard work. Taking the longer view, our business is fundamentally sound with long-term growth opportunities. We have some of the best brands in the vacation ownership industry, each with its own expansion potential. We're making smart investments in digital technologies to enable more self-service by our owners and members. We're leveraging data to make the right offers to the right people at the right time while streamlining processes to lower costs across our organization. We also have a substantial amount of high-margin recurring revenue streams that reduce our exposure to economic cycles and times like this, and we generate substantial free cash flow year-in, year-out. At our current stock price, I can't think of a better use of that cash except to return it to shareholders. With that, I'll turn it over to Jason to discuss our results.

Thanks, John. Today, I am going to review our third quarter results, the strength of our balance sheet and liquidity, our updated 2023 guidance, and some early thoughts about 2024. In addition, as Neal mentioned, to facilitate a conversation this morning about our business, all of my comments will exclude the estimated impact of the Maui wildfires, except where noted. Starting with our Vacation Ownership segment, contract sales declined 4%, excluding the estimated $28 million impact of the Maui fires. At over $4,100, VPG was only down 5% year-over-year in the third quarter versus a 14% decline in the second quarter, illustrating the benefits of our sales training and sharing of best practices across the organization, as well as the continued owner education about the benefits of Abound. Another encouraging sign is that our package pipeline continues to be robust and grew 10% compared to a year ago, which is a key driver of future sales. As you saw in our release last night, we recorded an additional $59 million loan loss charge in the quarter on our $2.8 billion gross notes receivables portfolio. As we discussed last quarter, we saw delinquency trends improve from earlier in the year, but they still remain above the prior year and our expectations. Based on this and the mixed macroeconomic data we have observed in 2023, we expect this to continue in the near to medium term, and we adjusted our estimate for the loan loss provision considering these factors. With this adjustment, we believe our consumer loan portfolio is adequately reserved. After the partial offset of approximately $10 million in cost of vacation ownership, the impact on adjusted EBITDA was $49 million, which we have not added back in our calculation of adjusted EBITDA. Rental profit declined $13 million on a year-over-year basis, primarily due to lower RevPAC in Orlando and our mountain locations, as well as higher inventory holding costs. Finally, financing profit increased 3% year-over-year and resort management profit grew 8%, reflecting the recurring nature of these high-margin revenue streams. As a result, adjusted EBITDA in our Vacation Ownership segment would have decreased 24% year-over-year to $195 million in the third quarter, excluding the estimated impact of Maui. Moving to our exchange and third-party management business, adjusted EBITDA declined $8 million compared to the prior year, driven by fewer exchange transactions at Interval International and lower RevPAR at Aqua-Aston, while operating margin was just over 50% for the quarter. As a result, total company adjusted EBITDA would have declined to $174 million in the quarter. Moving to the balance sheet, we ended the quarter with approximately $1 billion in liquidity and a net debt to adjusted EBITDA ratio of 3.5 times. Our balance sheet remains in good shape with no corporate debt maturities until Q3 2025 when our variable rate term loan B matures, and after our $300 million of interest rate hedges mature in April, our corporate debt will still be 70% fixed with an interest rate of only 4.2% at today's underlying rates. We repurchased $86 million of common stock in the quarter, bringing our year-to-date total repurchases to almost $250 million with $476 million remaining in our repurchase authorization. Moving on to our 2023 guidance, as you saw in our release last night, we now expect our adjusted EBITDA to be between $745 million and $765 million, including an estimated $50 million to $55 million impact from the Maui fires and the $49 million net decrease from the increased loan loss provision. For the fourth quarter, we expect adjusted EBITDA to be between $170 million and $190 million, including an estimated $26 million to $31 million impact from the Maui wildfires. We now expect full-year contract sales to be between $1.75 billion and $1.77 billion this year, after an estimated $60 million to $65 million impact of the Maui fires, and for development margin to be around 27% after the 300-basis point impact of the extra loan loss provision. For the fourth quarter, we expect contract sales to be between $425 million and $445 million after an estimated $32 million to $37 million impact from the Maui fires. We expect resort management profit to increase more than $5 million year-over-year in the fourth quarter, and for financing profit to be down slightly due to continued higher interest rates in the ABS market. In addition, we expect rental profit to decline slightly year-over-year due to lower RevPAR and higher operating costs as one approximately $5 million estimated impact of the Maui wildfires. In our exchange and third-party management business, we expect profit to decline roughly $5 million in the fourth quarter, due primarily to lower transactions at Interval International and lower RevPAR at Aqua-Aston. As a reminder, we reported a $7 million alignment benefit to adjusted EBITDA in last year's fourth quarter that will not recur this year. Moving to cash flow, we ended the quarter with approximately $430 million of excess inventory, enough to support more than $2 billion in future sales. However, with the lower expected adjusted EBITDA this year, we now expect our adjusted free cash flow to be between $430 million and $460 million this year. Finally, while we are still working on our 2024 plans, we wanted to provide a little color for next year. We expect revenues and contract sales to grow despite having to rebuild a portion of our marketing and sales team in Maui. However, there are two parts of our vacation ownership business where we expect profit to decline year-over-year due to cost pressures. We expect maintenance fees to owners to increase in the mid-teens next year due to inflationary pressures, labor materials, and insurance costs. This will result in higher inventory costs in our rental business, which we do not expect to be offset by increased revenue. In our finance business, we expect continued higher interest rates in the ABS market to negatively impact our financing profit. In addition, the return of variable compensation expenses will negatively impact G&A expenses next year. We will be able to provide more clarity when we report earnings in February, when we will also have more information about the recovery in Maui. As always, we appreciate your interest in Marriott Vacations Worldwide, and we'll be happy to answer any questions you may have now.

Thank you. Our first question comes from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Hi. Good morning, everyone. First one, can you help bridge your full-year guidance cut by $140 million at the midpoint? What we know is Maui, roughly $50 million, the loan loss provision another $50 million, but there's a difference there of about $40 million. What is, am I thinking about that correctly, and if so, roughly what is that $40 million? Thank you.

Sure. There are mainly two factors at play. We did reduce contract sales excluding Maui due to lower tour flow, which has been below our expectations in the third quarter. When we exclude Maui, tour flow was up approximately 3.5%, while we had anticipated a 5% increase. The same applies to VPG; while we are seeing sequential improvements in margins, we had hoped for a higher VPG. This shortfall in the third quarter is expected to lead to a decline of around $50 million in contract sales relative to our earlier expectations, excluding Maui. This accounts for about half of the $40 million you mentioned regarding its impact on development profit. Additionally, our rental business is performing well, but compared to last year, certain markets like Orlando and some of our mountain resorts are showing slightly lower average daily rates and occupancies. So, those two factors primarily influenced our results, along with some minor fluctuations in general and administrative expenses.

Okay. On that first part, was some of that related to continued weakness due to the inclusion of Abound into the sales program?

I'm going to say there wasn't a little bit. But if you look at Abound, that was very positive. From the second to the third quarter at the transition sales centers, we saw about a 15% increase in VPG, where overall VPG in the quarter was up about 2% sequentially. We made really good progress and I think we'll continue to make good progress here going forward. We haven't kind of closed the gap on the pre-Abound VPGs yet. And then on the Hyatt side, same thing, you started to see improvement about 5% sequentially from the, call it, the Welk sales centers and changes we've made there. And with the launch of our BEYOND program and enhancements to that offering, we expect to get more traction going forward. So, just more generally, like I said, it's a couple points of tours more broadly throughout the system and VPG being a point or two below what we expected for the quarter.

Okay. Let's move on now to the topic of taking the loan loss provision hits. It seems to me that it's from one or the other, or possibly a combination of just forecasting that didn't go right or has there been any material actual downturn in your customers' ability to pay their loans?

Yes.

I mean, are you seeing any challenges with paying loans or is it just something didn't go right in the forecast when you sit down and do these forecasts?

Sure. Yes, a little bit of background. We project future loan loss reserves based on historical loan loss reserves, right. So, we have static pools that look at the history of how loans defaulted in the past based on FICO scores and timing when they defaulted in the curve. Based on that, that static pool projects what your loan loss reserve should be going forward. So, in any given quarter, you're always going to have some pluses and minuses, right. As we talked about last quarter and even in the first quarter a little bit, we were seeing on a kind of historical basis versus those static pools and versus last year, higher delinquencies. And we did take some true-ups in the first couple quarters of the year related to that. We talked about last quarter though, that those delinquencies sequentially continue to trend down, but they still remained above kind of the expectations in the static pool and prior year, right. And so, as we had a couple quarters of that, we said, look, based on these trends, let's look out and say, assuming some higher defaults going forward, we need to adjust the reserve. So, we took a charge, which we think now adequately reserves us. Remember, we've got a $2.5 billion, $2.6 billion loan portfolio. You're talking about a couple points here of higher reserves on that book. We think now, we're adequately reserved on that loan portfolio. And going forward, our loan loss reserve should be similar to what we've experienced prior to this quarter, which if you look at it at a high level, if you look at contract sales, net of resales, it's probably going to be in that 9.5%, plus or minus of that net contract sales number. And that assumes a roughly 63% to 65% financing propensity, which is what we've been running historically here. So, we think this puts us in a good spot going forward based on all the information we have and based on our best estimates today.

I have a follow-up question. Is there an issue with the consumer, given that you cater to a demographic with a high net worth, specifically households with an average income of $150,000 and a net worth of around $1.5 million? Are you noticing any weaknesses in that segment? I'm not observing similar trends elsewhere. Additionally, have there been any changes in your underwriting standards over the past year or two?

No, nothing has changed in how we underwrite our loans over the past five years. While we may not have data on income specifically, the conditions of higher inflation and interest rates are likely impacting consumers marginally. On a positive note, many consumers continue to spend on travel. We haven't identified specific issues with any particular group of consumers, but overall, consumers appear to be under more stress than they were a year ago. That's my general observation based on market trends. The additional charge we've taken recently seems limited and does not indicate a widespread issue.

Okay. I'm sorry, one last question. Would you say where you're seeing that weakness is it across sort of the FICO score spectrum or is it closer in the high-600s, or is it in the 800s or just all the above?

The FICO score is useful for predicting defaults to some extent, but it doesn't consider your overall financial situation; it mainly reflects how you handle consumer debt. We've generally observed increases across all FICO score ranges, so it's not limited to just lower or higher score bands. Jason, if you have any additional insights, feel free to share. However, I haven't noticed anything specific to one score range over another.

No, Patrick. I would just add that it is more pronounced at the lower FICO bands, call it the sub-700s versus the above 700s. They're all up a little bit, but the sub-700s are up.

Thank you. Our next question comes from the line of Brandt Montour with Barclays. Please proceed with your question.

I think, Jason, if you want to elaborate on that. But I haven't noticed anything that specifically relates to one band or another. No, Patrick. I would just add that it is more noticeable at the lower FICO bands, particularly those below 700 compared to those above 700. They are all experiencing a slight increase, but the bands below 700 are seeing a more significant rise. Thank you. Our next question comes from Brandt Montour with Barclays. Please go ahead with your question.

Brandt, we can't hear you.

Can you hear me? Can you hear me now?

Yes, that’s better. That was all crackling.

Sorry about that.

We were about to cut you.

No, I don't want that. So, just I think one question from me, or one or two questions from me. But following up on the loan loss provision, and we sort of dug in and I appreciate all the commentary. When we sit here today and you think you're well reserved for everything you can sort of see in the consumer behavior today, help us understand sort of what that assumes for the sequential behavior of the consumer from here. So, if nothing changes, then we go back to sort of 9.5% loan loss provision next quarter. If the consumer gets sequentially worse, even if it's marginal, you would have to look at taking another charge, correct? I mean, just trying to figure out if there's a little bit of cushion in there for what you think could happen for the consumer from here.

Yes, we have taken into account our expectations based on the broader macroeconomic conditions. This is our current best estimate, and it does not anticipate any significant increase in what we've observed over the past few quarters in the near term. Looking ahead, if there were a substantial negative change in the macro environment, we would need to reassess. However, we have not included any major downturn in our assumptions. For the near to medium term, we are not expecting a significant uptick in the trends we have been seeing.

Okay, that's helpful. Regarding the $40 million reduction in the core or non-Maui full-year guidance, you've provided a lot of insight about softer rental rates, lower average daily rates, decreased occupancy, weaker tour flow, and a slight decline in VPG excluding Abound. It's encouraging to hear that Abound is improving. If we consider all these aspects together, is it accurate to say that the macroeconomic environment is negatively impacting your business on a sequential basis? I understand that people are still traveling and there remains demand, but it seems that conditions have slightly worsened sequentially. Are you observing a consumer pullback in leisure travel?

I appreciate the question. Sequentially, we've observed improvements in Abound, with VPG increasing a couple of points and Abound up about 15%. Hyatt increased by about five, and the non-transitioned sales centers were generally up 1% to 2%. It seems like things have stabilized compared to last year, which, as we discussed, was a strong year for us. On the rental side, particularly in our higher-end markets, we noted the Maui impact from the fires in the third quarter. Excluding that, we've seen some stabilization from the second quarter, though ADRs are down year-over-year in many of our Hawaiian markets, and occupancy has dropped a couple of points, including in some higher-end U.S. markets. It's still better than 2019, but last year presents a tough comparison due to changes in travel patterns. We anticipate that many high-end travelers who usually go abroad might choose to stay in the U.S. this year, particularly in higher-end markets. However, we did not incorporate this possibility into our full-year rental expectations. Historically, we're performing well on a year-over-year basis, but we're aware of how exceptional last year was. Our team is focused on renting rooms, optimizing rates, and improving occupancy, and we feel that part of the business has generally stabilized, although it's slightly below our expectations.

Thank you.

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Thank you, everyone. Good morning, and I appreciate your time. I have a question regarding the building blocks you've outlined for 2024. Focusing on the provision aspect, excluding the one-time forward component, if we maintain a slightly increased provision rate, could you provide any guidance on how we should consider the year-over-year impact on provision amounts or, more significantly, on overall company EBITDA or margins as we prepare for more accumulation moving forward? Can you assist with that?

Yes, Shaun. This is Jason. I think as John mentioned, we think we're in a good place for the overall portfolio. I think as you look forward into Q4 and then into next year, we'll have a tiny headwind, I would call it, maybe 50 basis points as a percentage of contract sales, something in that neighborhood. So, I don't think it's a big change to expect for next year going forward. But John mentioned that 9.5%, 10% area for a loan loss provision on a normalized basis, assuming the low-60s propensity. I think that's a good place to think about it.

Great. Thanks for that. And then, yes, just on the financing piece, I think we're all trying to grapple with the broader rate environment. You did kind of call this out. I think one of your competitors kind of gave us a little bit of a ballpark, but give it, relative to the size of your program, again, appreciate it's early and you're probably still running through some of these numbers for your own budget purposes. But can you help any kind of guideposts or broad ranges you can give us to think about the financing headwind again? I believe that, T&L will talk about roughly $30 million on what I believe is a bit of a larger loan book than you guys have.

Yes. So, really, Shaun, it depends on where you think rates are going to go next year. We did our deal earlier this year, and we did a print at around 5.5%. We're in the market here pre-marketing right now, and we'll be doing a deal here potentially in the short term. So, we'll see more where, where that lands, where you see where the T&L deal priced, call it a month or so ago, obviously rates have moved both in the underlying as well in the spread. So, I think that's kind of the ballpark in terms of the movement that you can expect. And then really, it just depends on what happens next year. So, your crystal ball is probably as good as ours in terms of the rate environment.

Thank you. Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Hi. Good morning, everyone. Thanks for taking my questions.

Good morning, David.

Good morning.

I wanted to say good morning and focus on Abound from a higher level. It's encouraging to see some signs of improvement. However, I would like to revisit the question of why this is happening now and what we understood about Abound initially that did not unfold as we expected. There were certainly some unexpected developments, so I would like to revisit the strategy behind it, please.

Sure. Yes. David, we anticipated that this would be a better overall product offering. We were aware, based on previous product transitions, that there might be some impact. Part of this involves educating our customers, particularly those at the legacy Vistana sites like Westin and Sheraton. Most of the Westin products have transitioned, but the Sheraton still has inventory in the Sheraton Flex product, which is still selling the old product. While it connects to Abound, it's not promoting the new Marriott vacation Abound product. We expected some challenges during this transition. There are two key elements to consider. First, the owners who purchased the Westin Flex or legacy Westin V products chose them for specific reasons that matched their travel preferences. Now, we're introducing a new product that could enhance their travel experience, but they need to understand its benefits. We attempt to educate them by providing online resources, but the best approach is when they come in for a tour to learn more. The second factor is encouraging people to actually use the product. This year, very few had opted to use their vacations as usual, but we've noticed that about three to three and a half times more are choosing the Abound program for 2024 compared to the legacy Westin and Sheraton. Additionally, selling this product involves a different approach. The Westin product was marketed based on its unique features, and now we have a new sales team that requires training and retraining to gain confidence in selling the updated product. We did everything we could to minimize any disruption, particularly regarding lower VPGs. While the impact was somewhat greater than we expected, we are beginning to see a positive recovery in the third quarter. Although we're not entirely back to pre-Abound launch VPG levels, we are nearing them overall. Our VPGs in October were roughly the same as last year, which may have been a tougher comparison. Current trends appear very positive, and it will take some time to encourage the legacy Vistana owners to fully embrace the Abound program.

Thank you. Our next question comes from the line of Ryan Lambert with JPMorgan. Please proceed with your question.

Hi. Thanks for taking my question. Just wanted to get kind of your view on the attractiveness of Maui longer term. Do you still find it to be an attractive market? I know it's got some kind of different dynamics with the labor market and the majority of the economy being driven by tourism, and you have Lahaina that was significantly impacted. So, it's a lot different than what you might see in a kind of a Florida hurricane scenario. So just wondering, how you think about that market longer term and if your opening of the Waikiki property next year has any sort of effect on that. Thank you.

Yes, we remain very optimistic about Maui in the long term. The situation in Lahaina is undoubtedly tragic. In terms of the overall island, it is somewhat isolated compared to the more widespread damage seen during hurricanes in the Caribbean. Our occupancy rates for October at our five resorts in West Maui have reached approximately 60% since they just reopened. There is clear demand from owners, and we anticipate this will continue to grow. Our resort operations are currently slightly understaffed, but we are addressing that. Looking ahead, we expect occupancy rates to improve, especially since our VO resorts in Maui typically achieve 95% to 96% occupancy. As we move from this year into early next year, we foresee returning to those levels. We have noticed some staff departures from the island, and we will need to monitor if they return as sales ramp up. Overall, I am confident we will return to previous performance levels, if not exceed them. Additionally, while there has been some decline in Waikiki this year due to the situation in Maui, we are seeing increased interest in other islands as travelers choose different destinations. We are excited about our new sales center in Waikiki, which marks our presence there and enhances our footprint in Hawaii. We firmly believe in the long-term demand for travel to Hawaii as a whole. I’m not exactly sure what you mean by unknown-unknowns. However, based on our current knowledge, we’ve discussed the sales reserves related to Maui. We believe the reserve we established will sufficiently cover our needs moving forward as we assess the current numbers. We’ve had a solid start in October regarding contract sales. If we exclude the impact of Maui, we would see an increase year-over-year. The trends look promising, and we aim to make progress in the rental area, which has been a challenge this year in terms of rates and occupancy expectations. As we approach November and December, there is a strong desire to travel. Despite some broader economic factors, demand for bookings in the first half of the year for our resorts is higher than it was at this time last year. It’s important to note that 85% of our sales come from guests staying at our properties, which is promising. We also see improvements in our exchange business, with a positive trend in exchange transactions. We are hopeful that as we move through the fourth quarter and into next year, we will continue to see growth in our exchange business. Therefore, we are optimistic about the outlook, regardless of the wider economic context. Thank you, everyone, for joining our call today. Despite the mixed economic environment, we ran 90% resort occupancy in the third quarter, excluding Maui, and we have more reservations on our books for the first half of next year than we had at the same time a year ago, illustrating our customers' desire to go on vacation. We're making good progress educating consumers about the benefits of Abound while our salespeople are getting more experience selling it. That was evident this quarter, where VPG at our sales centers that have transitioned increased more than 15% sequentially and the enhancements we've made to our core product offering will provide growth for years to come. Our international business continues to be a bright spot with sales growing more than 40% year-over-year. We expect to generate around $450 million in adjusted free cash flow this year and have already returned nearly $330 million to shareholders. We've announced two new development projects this year, Savannah, Georgia, and Charleston, South Carolina, each of which will provide us with a new sales center when open. And we're looking forward to opening our new Waikiki resort late next year, which will also come with a new sales center. On behalf of our associates, owners, members, and customers around the world, I want to thank you for your continued interest in our company and hope to see you soon on vacation. Thank you.

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