Wyndham Worldwide Corporation Q4 2008 Earnings Call Transcript

| About: Wyndham Worldwide (WYN)

Wyndham Worldwide Corporation (NYSE:WYN)

Q4 2008 Earnings Call

February 13, 2009 8:30 am ET


Margo Happer - SVP of Investor Relations

Steve Holmes - CEO

Gina Wilson - CFO


Joseph Greff - J.P. Morgan

Steve Kent - Goldman Sachs

William Truelove - UBS

Chris Woronka - Deutsche Bank

Patrick Scholes - Friedman, Billings, Ramsey

Michael Millman - Soleil-Millman Research Associates

Leon Cooperman - Omega Advisors

[Matt Mickel - Eva Evans Investors]


(Operator Instructions)

I would now like to introduce Margo Happer, Senior Vice President of Investor Relations. Ma'am, you may begin.

Margo Happer

Thank you, [Tanya].

Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO, and Gina Wilson, our CFO.

Before we get started, I just want to remind you that our remarks today contain forward-looking information that is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed November 10, 2008 with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to the comparable GAAP measure is provided in the tables to the press release and is available on the Investor Relations section of our website at WyndhamWorldwide.com.


Steve Holmes

Thanks, Margo. Good morning, everyone, and thanks for joining us today.

Difficult years such as 2008 test a company's business model and strategy as well as the capabilities and adaptability of its employees and management team. Overall, I believe Wyndham Worldwide handled this test quite well.

For the year, revenues were up in our Hotel and Vacation Exchange and Rental businesses and down modestly in Vacation Ownership as we expected, which reflects our reconciliation efforts in that business. We have rebalanced our business mix, reduced our need to access the ABS market, and made meaningful expense reductions. In a year when so many companies across a variety of industries are facing doubts about the viability of their business models, we think Wyndham Worldwide's 2008 performance stands out.

During the fourth quarter we continued to restructure our operations to reflect the realities of the current marketplace and incurred restructuring charges of $73 million. When we complete our previously announced restructuring work in the first quarter of 2009, we will have incurred $110 to $125 million of restructuring charges that will save us approximately $160 to $180 million annually.

In addition, as we mentioned in our last quarterly call, in the fourth quarter we were required to writedown our timeshare goodwill and various other assets that resulted in non-cash charges of approximately $1.4 billion. In the process of brining up liquidity in our foreign operations we incurred $24 million of currency conversion losses related to the transfer of cash from Venezuela. And finally, we recognized the net benefit from $14 million of legacy adjustments.

Excluding these special charges, the strength of our operating results showed through. Adjusted fourth quarter EBITDA and EPS increased 5% and 2% respectively over 2007. Our operating results increased over prior year despite our decision to decrease the sales pace at our timeshare business, an increase in the loan loss provision for our consumer finance portfolio, which Gina will discuss in a few minutes, and the extremely difficult economic environment with clear pressure on RevPAR in the hotel industry. These impressive results would not have been possible without the proactive efforts to control costs and drive efficiency by our team and the strength of our fee-for-service business models.

Despite these positive results, the outlook for the hospitality industry remains challenged as we enter 2009. We have issued revised guidance this morning that reflects continuing pressure on some of our revenue drivers, the implementation of our decision to reduce the size of our timeshare business, and significant pressure from the strengthening of the U.S. dollar on our international earnings. These pressures resulted in less than a 5% reduction from our previously provided adjusted EBITDA guidance range, again, a testament to the resiliency of our business models.

Before I run through the performance for the business units, I would like to take a moment to address another announcement we issued this morning. We announced the intention to commence an equity drawdown program of up to $200 million. While the credit markets have shown some signs of life, we feel it is prudent to strengthen our balance sheet and free up some additional availability under our credit lines. We certainly would prefer not to issue equity at these low prices, but the volatility in the credit markets is not comforting and we want to retain the strength to take advantage of opportunities as they will undoubtedly become available during this dramatic downturn for our industry.

Now I'll turn to the performance of the business units, beginning with the Hotel Group, which delivered both revenue and adjusted EBITDA growth for the full year 2008. Full year revenues were up 4% and adjusted EBITDA was up 7%. Worldwide RevPAR was down slightly, helped by a larger contribution from international RevPAR, which held up well for most of the year.

We delivered on the EBITDA guidance we provided back in December 2007 despite declining RevPARs because we grew our system size. We were able to implement revenue generating initiatives both on and off property, as well as cost containment efforts. This drove a nice increase in our adjusted franchising margin to about 80%.

Fourth quarter revenue declined 3%, while adjusted EBITDA was up 10% from the fourth quarter of 2007.

Given the deteriorating economic environment in 2008, I'm pleased with these results. Nevertheless, 2009 will be a challenging year. Some industry experts are now predicting RevPAR declines in excess of 10% domestically. While our current guidance reflects these most recent predictions, we will continue to adjust our business model to accommodate the uncertain global economic environment while prudently maintaining the infrastructure and business engine needed to take advantage of growth opportunities when they present themselves later this year and next, particularly for our management company and our flagship Wyndham Hotels and Resorts brand.

We made significant strides that have helped fortify margins in this environment and will support increased growth when the economy begins to recover. For example, we've ramped up our development efforts despite the downturn. We executed 185 new contracts in the fourth quarter. Our pipeline remains strong, with almost 111,000 rooms, up 5% from a year ago. Over 42% of our pipeline is international. That's up from about 39% a year ago.

Last quarter I said that we were going to provide our properties with enhanced revenue management services to ensure they are well positioned to maximize their fair market share. To date we have rolled out this service to over 1,100 hotels and expect to roll it out to another 1,700 hotels by the end of 2009. Results to date of those properties using these services has been very positive, with measurable increases in RevPAR.

Additionally, our e-commerce channels grow year-over-year, and we continue to implement important enhancements that are driven by consumer usage and insights. Customers who come to one of our websites will enjoy an even better customer experience. We believe that even in these tough times we need to invest in this important distribution channel.

And finally, our loyalty program, Wyndham Rewards. It continues to expand in North America and internationally, where we recently launched Wyndham Rewards in 18 new countries across Europe. We have the largest loyalty program in the industry, with over 6,000 participating hotels. Our members can now redeem their points across all of our businesses so they can stay in hotels, vacation rentals, and even use points to pay timeshare maintenance fees. This is another significant competitive advantage as we lever our scale and product diversity with our customers.

Let me give you a little bit more color on our development activities. In the fourth quarter of 2008 we opened over 19,000 rooms, including our first two Wyndham Garden Hotels in New York City. One is the newly constructed 224-room Wyndham Garden Hotel Midtown Convention Center that's on 36th Street, and the other is the all-new 124-room Wyndham Garden Hotel Manhattan Chelsea West on 24th Street. These are two exceptional hotels that have received rave reviews from guests and media alike.

Super 8 also opened its 2,100th property, an all new construction hotel in Monterey, Tennessee, and we opened 16 hotels in China, bringing our total number of properties up to 171 open, with another 105 in the pipeline, further cementing our position as the U.S. hotel company with the most properties in China.

Overall system size reached 593,000 rooms, up 8% compared to a year ago. We exceeded 7,000 properties for the first time. This reflects both the 19,000 rooms we opened and an improved retention rate on expiring franchisee contracts. We grew the international portfolio 15% in 2008, an important component of our growth strategy that we've spoken about.

Before I move on the Vacation Exchange and Rental business, I would like to take a moment to welcome the Hotel Group's new President and CEO, Eric Danziger. Eric, who started on December 1, has more than 30 years of experience in the hotel industry, including previous roles with Wyndham, Doubletree, Starwood, Carlson Hotels, and many others. He has a proven track record of growth and success in key management roles. With his strong track record of successfully managing hotels and growing brands domestically and internationally, along with his palpable passion for the business, I couldn't be more pleased to have Eric at the helm of our Hotel Group.

Now turning to Vacation Exchange and Rentals, Group RCI continues to deliver to plan despite a tough operating environment. For the full year revenues grew 3% to $1.3 billion. After adjusting for restructuring charges, asset impairments, and the currency conversion losses to get the money out of Venezuela that I spoke about before, full year EBITDA was up 8% and within our December 2007 guidance range. Fourth quarter revenues and adjusted EBITDA were down 11% and up 13% respectively, reflecting great cost controls and favorable impacts in hedging activities.

In the Vacation Exchange business, fourth quarter revenue per member was lower, driven by a slowdown in exchange transactions. We believe that member transactions reflect reduced vacation travel, members postponing bookings of longer-range vacations, and members returning to their home resort, where an RCI exchange is not required.

While member growth held up in 2008, we expect a slowdown in organic member growth in 2009 as timeshare developers reduce their sales and marketing programs. To offset this trend, RCI continues to add upscale and quality affiliations around the globe. RCI was proud to announce that the Disney Vacation Club, one of the world's most innovative and fastest-growing brands in the vacation ownership industry, entered into an exclusive multi-year affiliation relationship with RCI. The addition of Disney Vacation Club adds more than 135,000 member families and nine high-quality resorts to RCI's global exchange network.

RCI has enhanced its marketing messages in response to the current environment and launched renewal campaigns and promotions to drive transactions. 2009 marks the 35th anniversary of the RCI exchange business, and we are rolling out a series of sales and marketing celebrations around the event, including a deposit and exchange campaign and the first-ever RCI WebTV programming, that will be showcased next month at ARDA, which is the industry's largest annual conference.

RCI also continues to expand and leverage technology in the fourth quarter to improve member experience and move transaction processing to the web. To drive more transactions online, RCI rolled out a price increase for call center exchange transactions while holding prices constant on the web. The new search technology and pricing initiatives have already resulted in increased web transactions. For instance, in our North American region, web transactions reached 25% in January, up from 17% last year.

In Group RCI's rental business, fourth quarter revenues were down 10%, reflecting declines in both transactions and currency impacts on average net price per vacation rental. The decline in transaction was driven by softness in the U.S. member rental market, which was impacted by lower member interest in additional vacations. In addition, our Danish and U.K. cottage rental businesses also experienced weakness due to reduced bookings of 2009 vacations. Landal, our Dutch [inaudible] business, showed continued strength and grew transactions during the quarter. Given the fourth quarter's softness in advanced bookings for 2009 vacations, our European rental teams have launched targeted promotional campaigns around Easter, school breaks, and the summer.

Now let's turn to our vacation ownership business. In early December we announced a plan to reduce our need to access the term securitization markets by significantly reducing the size and scope of our Vacation Ownership business. We are well into executing our plans to reduce our development spend, eliminating our most costly marketing platforms, and closing our selected sales offices around the country. As a result of these measures, this business is expected to reduce its annual gross VOI sales by roughly 40% from 2008 levels to approximately $1.2 billion in 2009.

For the year, WVO revenues were down 6% to $2.3 billion and adjusted EBITDA was down 5% to $366 million. Fourth quarter revenue and adjusted EBITDA were down 15% and 8%, respectively. Reported EBITDA for this business for the fourth quarter and full year reflects a $1.3 billion non-cash goodwill impairment charge.

Resizing our Vacation Ownership business will significantly reduce costs and capital needs while enhancing cash flow. It's important to point out that, although the credit markets should eventually return to a more normalized condition and while we will continue to pursue additional term securitizations, we will not return to growing the timeshare business at the rapid double-digit rates we've seen in recent years. Rather, the future growth of this business will be tempered by our focus on cash flow generation and margin improvement.

We will focus an even greater effort on prospective buyers already within our reach, namely, our industry leading base of more than 830,000 existing owners who represent our lowest cost and highest efficiency tour prospects. Our points-based product has long helped fuel our success in owner upgrades, and we're confident in our ability to optimize the sale channel in 2009 and well beyond.

So in summary, we feel very good about the strategic shift we made in our Vacation Ownership business. These past few months have been difficult for many of our associates at WVO, but our people have remained focused and committed through these changes and our results for the quarter demonstrate the extraordinary ability of this team to adapt and evolve to meet the challenges of this environment.

As you may recall, we actually initiated the resizing of our Vacation Ownership business at the beginning of the fourth quarter by closing 12 sales offices and implementing higher tour qualification standards. This resulted in a year-over-year decline in tour flow and related gross VOI sales revenues of 10% and 12% respectively for the quarter. Fourth quarter sales efficiencies were also slightly lower than last year, and we attribute this mainly to the disruptive working environment resulting from our restructuring activities. And, as Gina will tell you, we saw improved efficiencies in January.

Despite the pressure on consumers in the economy, our resort occupancy and advanced reservation remains strong and in line with last year's levels. Consumers are still buying timeshare products and owners are actively using their timeshare vacations.

Now let me turn the call over to Gina, our CFO.

Gina Wilson

Thanks, Steve. As you saw from the release today, excluding special items we ended the quarter and the year ahead of our expectations. In fact, we ended the year less than 5% below our original EBITDA and EPS guidance range issued in October of 2007. We're very pleased with that performance given the challenges the industry has faced this year, particularly in the fourth quarter.

Now let me walk you through our 2008 results in a little more detail, give you a look at what we're seeing so far this year, and detail our 2009 full year guidance.

As Steve mentioned, the Hotel Group delivered both revenue and adjusted EBITDA growth over 2007. For the full year, revenues increased 4% to $753 million. Excluding $16 million in impairment charges and $4 million in restructuring, full year 2008 adjusted EBITDA increased 7% from 2007. Fourth quarter adjusted EBITDA was $54 million, excluding the $16 million in impairment charges, up 10% from 2007.

These are remarkable achievements considering the impact the economy is having on the entire hotel industry. These results include our July acquisition of Microtel and Hawthorn. More importantly, these results demonstrate both the resilience of our fee-driven business model and the proactive and strategic financial management that's at the core of our company's DNA.

Worldwide RevPAR for the fourth quarter of 2008 was down 6.4% in constant currency or 6.2% including currency. Domestic RevPAR decreased 9.3%, while international RevPAR decreased 1.6% in constant dollars.

Franchising margin for 2008 improved over 500 basis points to 80%, and while we don't expect to continue operating our business at 80% plus margins for the long term, these results reflect the flexibility of our cost structure in very tough economic times and our ability to take meaningful and timely action that flows through to the bottom line.

As Steve mentioned, the pipeline is strong, with almost 111,000 rooms. 55% of that total pipeline is new construction, with almost 20% of the new construction pipeline already in the ground.

The Wyndham brand makes up close to 19% of the total pipeline, with over 70% being new construction deals, of which 60% of the scheduled openings in the next 12 months already have secured financing and almost a quarter are already in the ground. And with 45% of our pipeline being conversions, it generally takes minimal franchisee capital to bring those properties from the pipeline into open and operating status.

Moving to 2009, January RevPAR comparisons versus the prior year were consistent with December. Taking that information into account as well as industry projections and our expected mix of domestic and international properties for the full year, we expect our RevPAR to decline 6% to 10% worldwide, system size to increase 3% to 6%, revenues to be $720 to $760 million, and adjusted EBITDA of $200 to $230 million.

Now turning to Vacation Exchange and Rentals, excluding special items and the net impact of foreign currency, Group RCI full year revenue grew by $25 million or 2%, with adjusted EBITDA up $10 million or 3% compared to 2007. For the fourth quarter, excluding special items, revenue was $250 million, down 11%, and adjusted EBITDA was $63 million, up 13% compared to the fourth quarter of 2007. The special items for the quarter totaled $67 million pre-tax and included a restructuring expense of $7 million related to our previously announced plans to reduce costs, primarily in the international exchange businesses.

Asset impairments of $36 million related to businesses in the EMEA region, where Group RCI reassessed its strategic direction resulting in updated business valuations. And currency conversion losses of $24 million related to the transfer of cash from our Venezuela business for access by our broader international operations. The strength of the U.S. dollar in the fourth quarter of 2008 reduced revenue by $22 million; however, EBITDA benefited by $10 million, primarily due to gains related to our hedging contracts.

January trends continue to be below prior year, but are in line with our expectations. In Exchange we're seeing stable trends in North America behind enhanced marketing. Some of our Rental businesses in Europe are seeing resiliency and performing well. In January, revenue for our Holiday Cottages group in the U.K. is running ahead of the prior year. Holiday Cottages has also made significant progress in driving consumers to our online channel, where the number of online bookings in January increased from 50% to 65% of all bookings compared to the prior year.

Looking to 2009, we expect average numbers of members to grow between 1% and 4%, annual dues and Exchange revenue per member to be down 6% to 10% based on lower expected transactions and a stronger dollar, flat Vacation Rental transactions, and average net price per Vacation Rental down 4% to 7%, reflecting that stronger dollar. We expect Vacation Exchange and Rental revenues of $1.05 to $1.15 billion and adjusted EBITDA of $260 to $290 million.

Note that the RCI guidance ranges include a significant negative impact from the strengthening of the U.S. dollar as measured on January 31, 2009 compared to 2008 levels. As you know, RCI operates in about 100 countries with many currencies. One thing that's unusual about the current environment is the magnitude and extent of the strengthening of the dollar against nearly every foreign currency. For example, a 10% change in the dollar would result in an $8 million impact on RCI's full year 2009 EBITDA. If RCI guidance was presented on a constant currency basis compared to 2008 results, the revenue range would be increased by approximately $135 million and EBITDA would be increased by approximately $55 million.

Now let's turn to the Vacation Ownership business. As Steve said, the Vacation Ownership team is doing a great job implementing the December plan and the business is tracking to our expectations. We have adjusted our marketing programs and closed over 50 sales offices, which will reduce our 2009 tour flow 40% to 50% compared to 2008 levels. We are finishing our existing construction projects, which, combined with our completed inventory, will give us enough product to meet our reduced sales expectations as we look out into 2009 and 2010.

We've tightened credit standards to increase average FICO scores and have aligned our commission programs to drive higher down payments, which over time will continue to improve the overall strength of the consumer finance portfolio.

The business is responding well to these changes. Booking rates and occupancy levels at our properties are consistent with last year, which is particularly impressive when you consider that the number of units has increased 9% January '08 to January '09. On the sales front, January volume per guest, which is a blend of close rates and price, was up 14% compared to the prior year and tour flow is tracking to plan.

Despite our intention slowdown in late 2008, we maintained gross VOI, tour flow and volume per guest in 2008 at levels close to those achieved in 2007. Our January sales are tracking to plan and we continue to believe that the timeshare product is a good fit for a broad portion of the American public, who continue to plan vacations with their family and friends. In the near term, those vacations may be closer to home or fewer days or less extravagant.

Our product, which is truly points based rather than fixed weeks, provides customers flexibility in this environment to match price to their budget. And our top-notch sales force can sell this product remotely or from the actual resort location, giving us a broad distribution network which enables us to connect with consumers in the many places where Americans continue to travel.

In the fourth quarter, we increased the provision for loan loss to $136 million, up from $84 million in the prior year. Write-offs in the fourth quarter were about 3.27% of loan portfolio, which was up from third quarter, and we felt it was prudent to increase the provision and boost that reserve. For 2009 we expect that full year write-offs and the provision will be consistent with 2008 levels. We expect the efforts that we've made and continue to make to improve the portfolio will partially offset continued pressure in this general credit environment. Also remember that we take back the points associated with defaulted loans and sell them at current prices, so the underlying asset is not lost to us.

At year end we had 8 term securitizations with total outstanding of $1.3 billion, plus our old and new conduits, with combined debt outstanding of $558 million. These securitizations continue to perform within their expected tolerances.

With regard to 2009 Vacation Ownership outlook, we expect gross VOI sales to be down 40%, tours down 40% to 50%, and volume per guest to increase 5% to 10%. This is down slightly from what we told you December due to increasing down payment requirements. GAAP revenues should be between $1.7 to $2 billion, down about $200 million from what we told you in December, again, reflecting higher provision for loan loss and somewhat lower volume per guest, as I just mentioned. And we expect adjusted EBITDA of $325 to $375 million.

On the corporate side, our teams continue to be focused on controlling G&A expenses across the board. These corporate associates, along with their colleagues in the operating businesses, have maintained an intense focus on cost and cash mobilization which enabled us to end the year with $291 million of capacity on our corporate revolver. Some of this favorability was due to timing differences in payments. We remain well within our debt covenants, which require a consolidated leverage ratio of less than 3.5 and an interest coverage ratio of more than 3, as defined in the debt agreements. At year end, the leverage ratio was 2.2 and our interest coverage ratio was just over 20 times.

You'll notice as you analyze fourth quarter reported results that we have a small tax provision despite the pre-tax loss due to differences in the tax treatment for some of the special items in the quarter, the most significant being minimal or no tax benefit for the goodwill and other impairment charges and the currency conversion losses.

Our corporate guidance for 2009 includes revenue of $3.5 to $3.9 billion, corporate costs of $55 to $65 million, adjusted EBITDA of $760 to $810 million, depreciation and amortization of $185 to $195 million, net interest expense of $80 to $90 million, slightly lower than our original guidance based on lower benchmarks and updated projections of the timing of our spending. We expect a tax rate of approximately 39%, which brings us to an EPS range of $1.61 to $1.85 per share based on a share count of 179 million shares.

And again, just to give you a sense of the foreign exchange impact, assuming constant currency at RCI versus 2008, that EPS range would have been $180 to $204.

2009 guidance assumes a benefit from the roll in of deferred Vacation Ownership revenues of $175 to $200 million, and we expect to spend $130 to $150 million in CapEx, plus $175 to $225 million in timeshare development. We expect EPS of $0.35 to $0.40 in the first quarter assuming a $65 to $75 million benefit from the roll in of deferred revenue. Excluded from that guidance is between $30 and $45 million of restructuring costs, of which about $25 to $35 million is cash.

And now I'll turn it back to Steve to wrap it up.

Steve Holmes

Thanks, Gina.

And we put a lot of numbers out there. Let me just hit a couple of them that I think we may have misspoke on.

The RevPAR for the fourth quarter on a constant currency basis was down 6.4%. It was actually 9.2%, including the currency impact.

And our interest coverage ratio is about 2.1 times.

Okay, before we open to some questions I'd like to close with a few other key points. First, considering the severity of the economic environment and its impact on our industry, I think Wyndham Worldwide's 2008 performance held up quite well.

Second, we have a flexible business model and a highly adaptable management team. You saw this in the significant actions we took last year to rebalance our business portfolio, reduce our reliance on the securitization market, and lower costs.

Third, as we look at our economic environment that continues to weaken in 2009, our concentration in mid-scale and economy hotel brands position us well with both hotel owners and customers.

And finally, given the steps we have taken and continue to take, we are positioned to generate significant long-term shareholder value.

With that, I'll turn it over for some questions. Tanya?

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question comes from Joseph Greff - J.P. Morgan.

Joseph Greff - J.P. Morgan

The 8-K filing after the earnings release this morning of the $200 million equity sales program, can you just talk a little bit - I guess potential use of proceeds and, I guess, the bigger question, like why now?

Steve Holmes

Thanks for the question, Joe, and I thought that might be the first question out of the block.

Why now is a great question. We would prefer not to issue equity at these prices, obviously. This is not what we think is a very good value on the stock right now; it should be quite a bit higher. Having said that, the markets are very unpredictable, as we all know, and we don't know what the movement will look like in the next quarter, in the next week, in the next month. And for us to not inform you that this was our intent and then just pop out with something later when we didn't have a chance to get on the phone and talk about it didn't seem to be very prudent.

We think that, as you know, we are on negative outlook from the agencies. We're on the bottom of investment grade. We'd like to retain that liquidity if we can. We think there are going to be enormous opportunities in our industry during 2009, and we just frankly want to be positioned to take advantage of those opportunities. There's not a lot of offense going on right now within any business and we're not being offensive in our efforts, but we think there will be openings in 2009 to be a little bit more offensive and we want to be positioned to take advantage of that.

So why now? Well, we just want to make sure that we're clear with what our intent is. We'd prefer not to do it now, but we also can't predict what the ABS markets, what the credit markets in general will look like in the coming weeks, months and the rest of the year.

Joseph Greff - J.P. Morgan

If we exclude the equity sales program, by the end of this year, where do you see gross debt, net debt being?

Steve Holmes

Well, we think our revolver will be about the same as it was at the end of 2007 and so it's roughly equivalent.

Gina Wilson

A lot of that has to do, Joe, with what actually happens with securitizations between now and the end of the year. Depending on which of the different models we look at, we could have less availability on the line by maybe $100 million. But again, it depends very much on how the ABS markets perform.

Joseph Greff - J.P. Morgan

And you'd mentioned that January volumes per guest were up 14% in VOI. Can you talk about that specifically? Is that geography? Is that a certain price point or product? Can you just give us, I guess, some amplification on that? That seems like a good way to start this year.

Steve Holmes

It is and we're pleased that the performance has been as good as it was at the sales offices.

We don't report monthly VPG trending, Joe, as you know. We report it quarterly. The fact is that you can have swings in months depending on travel patterns, depending on where holidays fall. So it's a very encouraging sign. We're not suggesting that that's going to continue throughout the year.

But it goes to the fact, frankly, and the reason we brought it up on the call, that the timeshare business is not dead. The timeshare business is not on the canvas. People still want to buy timeshares. They're coming in. They're interested in the product. And the fact is our sales force does a phenomenonal job matching our product with the needs and the wants of the consumer. So we really just wanted to show that there's still a lot of strength in that market.

But it was broad, Joe. It was anywhere from Branson to Williamsburg to any of our locations.


Your next question comes from Steve Kent - Goldman Sachs.

Steve Kent - Goldman Sachs

First, could you just talk about Venezuela? I didn't even know you really had operations there. I want to understand what was going on there.

Also to Joe's question about the $200 million offering, yesterday Marriott talked about their securitization market and issues and at one point even Arne Sorenson said he might be willing to even sell these at a lower rate. Why not go there rather than hitting the equity market?

Steve Holmes

First, to the Venezuela question, Steve, and thanks for the question, we have been in the Venezuela market for as almost as long as we've owned RCI - or for as long as we've owned RCI  and we used to have a relatively large processing operation in Venezuela. And so over the years we had accumulated cash in the market and we have been looking to find a way to redomicile the cash back to the rest of our international operations, you know, bring it into our system.

Unfortunately, getting cash - and this isn't just unique to us; it's a matter of anybody who's doing business in Venezuela, I believe - getting cash out has a fairly high conversion cost, it has a fairly high tax, for lack of a better word, to repatriate the cash.

We had not done it because we were hoping the situation would improve; however, when you look at the environment right now, liquidity is king. We said, you know what? If we want to access that cash and use it in operations, we're going to have to pay the tax it looks like. Things had not improved over the last couple of years and there's no line of vision that tells us it's going to improve, so we decided to go ahead and move the cash out and take the hit for it. But it's cash that had accumulated there over the years for quite awhile.

With respect to the offering and Arne's comments on his call about the securitization market, we think that there will be some life to the securitization market. Similar to what I'm told Arne mentioned yesterday about being in the midst of discussions on transactions, likewise we are in the midst of discussions on transactions to do securitizations. However, we don't want to just bet on that happening, and we also don't yet know what those terms will be. I can tell you this much  they're not going to be as good as they were in 2007 or the beginning of 2008.

So, again, we're just being cautious. I think we're being prudent. We're trying to communicate completely as to what we're doing. We've said continually that we're going to run this business for the long term, and we want to position ourselves to grow the business. I think 2009, as I said before, will present itself with numerous opportunities for us. I don't want to be sitting here not able to take advantage of those opportunities. And that's simply the rationale for doing it.

Steve Kent - Goldman Sachs

How should we handle the share count? I don't know if you mentioned, is it in your own EPS forecast?

Steve Holmes

No. Just like the buyback programs, we didn't build them into the forecasting. And it really will depend on timing and pricing at the time if and when we decide to pull the trigger. And we'll update people quarterly on what our activity has been, obviously.


Your next question comes from William Truelove - UBS.

William Truelove - UBS

Can you talk about the growth in the portfolio of your lodging properties from a domestic versus international perspective?

Steve Holmes

Sure. Well, as I think I said in the script, our international grew - I'm trying to remember what the number was that I just mentioned in the script - but both markets grew, the bottom line, both markets grew. International as a percentage increase grew more because it's off a lower base, obviously. I'm just looking to see if we have the breakdown in number of rooms for that. I'll come back to you with the answer on specifics, but both of the markets grew, international and domestic.

William Truelove - UBS

What's the environment like, though? I mean, given the deterioration in lodging globally, not just regionally, is the pace that you're seeing on the margin changing internationally versus domestically? I assume nobody wants to build a new hotel in the U.S. How about in Asia and whatnot?

Steve Holmes

Well, actually, Will, I'll take exception with that last comment.

It's not necessarily true that people don't want to build new hotels in the U.S. We every week are celebrating groundbreakings of new hotels that are being built in the U.S. Now, they're not 900-room hotels in major markets. It may be a 58-room hotel in Texas, Super 8 in Texas, but remember, our market is quite different. We deal with a lot of hotels that are smaller in size that still quality for SBA loans and that take advantage of local and regional lending capacity. So we do still see construction going on. As I said, every week we see new construction.

I think that you'll see a slowdown in the end of 2009 and 2010 on the big projects if things don't get better, clearly. But we'll still continue to do conversions, which is a large portion of our growth, and we'll continue to see the new construction, I believe, on these smaller projects.

Gina Wilson

Our next question comes from Chris Woronka - Deutsche Bank.

Chris Woronka - Deutsche Bank

So if you could just maybe talk a little bit about, if at all, how the consumer financing behavior has changed given your kind of resizing of the business. Are you seeing fewer folks finance with you because of the tighter terms or any kind of color on how you expect that to change?

Steve Holmes

Sure. Well, a couple of things. One is we are forcing some change by requiring more in the way of down payments so, as a percentage of a sale that is financed, you're going to see a lower percentage of that sale financed.

With respect to what we've seen so far through the fourth quarter and into January, we haven't see a real difference in the percentage of people who finance with us, so we haven't seen a real significant change at all in the percentage of people who finance. However, you're going to see more cash coming in on the sales because we're requiring more down payment. That's really as much our doing, I think, as frankly people coming in and wanting to put down more. Obviously, our movement towards requiring more down payment's impacting that.

And going back to, I think it was Will's point, on growth, I just had something handed to me. We are now at international room [count], about 19% of our total versus 17% a year ago. So obviously there's a shift more to the international market on a proportional basis.


Your next question comes from Patrick Scholes - Friedman, Billings, Ramsey.

Patrick Scholes - Friedman, Billings, Ramsey

A question for you on the $112 million earned in the fourth quarter in consumer finance. What was your EBITDA number on consumer finance?

Gina Wilson

I think we've said in the past, Patrick, we don't take EBITDA all the way down to the consumer finance part of the business anymore than we do for the property management. And I think we've said in the past that you can think about the consumer finance being 20% to 30% of the profitability of that segment.

Patrick Scholes - Friedman, Billings, Ramsey

Additionally, I didn't see in the press release any section on cash flow from operation or free cash flow. What was cash flow from operations in the fourth quarter?

Steve Holmes

Cash flow from operations, well, we'll be filing the K shortly and you'll see all the details, and I think we'll ask you to wait to then to get the details.


Your next question comes from Michael Millman - Soleil-Millman Research Associates

Michael Millman - Soleil-Millman Research Associates

On the Hotel, can you explain what seems to be an anomaly, I think, fourth quarter RevPAR down some 9% or so and yet the EBITDA was up about, I think you said 10% or $10 million?

And secondly on the Hotel, the national hotels, do they generate the same profitability, the same fees, as the domestic?

Steve Holmes

Hitting the last one on international operations, the dynamic in international operations is that RevPAR is generally a little bit higher than it is with our U.S. operations and royalty is generally a little bit lower, the percentage of royalty rate that we charge. So net-net, it works out to about the same per hotel that we bring on or per room that we bring on. So the dynamic is somewhat similar.

In the past we've gone more for master licensing internationally, which had a lower production per room. We are moving more towards the direct franchising, the managed model, so we should be able to move that up internationally. But it's roughly the same.

The first question on the Hotel, it really was a matter of two things, one, our cost containment efforts. And again, I applaud the management team for the steps they took to prepare. We went through this process really throughout 2008 of containing costs, hiring freezes and others to try to hold down our costs, and we also were cautious on our spend in marketing, so there may be some marketing timing spend that goes into that, but that's just an element of cost containment.

Michael Millman - Soleil-Millman Research Associates

On the timeshare, I guess two questions. One is can you give us some idea of what the recurring revenue and earnings are from timeshare?

And secondly, yesterday Marriott said that they were bringing down their percentage to 50% of consumer financing. Can you talk about why you're not trying to do some of those same things?

Steve Holmes

Well, taking the last on first, on consumer finance, we probably will see, as I said, we will see a decline. We haven't declared a target of what we're trying to get to right now because we're going through a pretty dramatic shift to drive down our, you know, the amount of cash that we bring in. Right now we're probably - we were about 65% last year. We're probably closer to 60% now. Are we going to get down to 50%? I don't want to handicap whether or not that's a target for us, but clearly we've put a higher focus on getting more cash upfront.

As for the question about the recurring revenues, we have a series of recurring revenue streams, one being the management fees that we receive in, another one being the interest that we receive on our consumer portfolio. So those pieces together, I can come back to you with detail on.

Gina Wilson

A couple hundred million dollars.

Steve Holmes

Yes, it's a couple hundred million. But we'll get back to you with more specifics.

Michael Millman - Soleil-Millman Research Associates

How's that couple hundred million translate to the bottom line?

Steve Holmes

Well, the management fee does not contribute a huge amount to our bottom line. The consumer finance income, it's a question of really what our spread is. As we answered the question before, I think that Patrick asked, we don't break down the consumer finance or the property management pieces separately, but in total it's probably, between the two of them, about $800 million - rather than a couple hundred million dollars - probably $800 million in total, probably $400 million on each.

So we could apply - you can assume various costs associated with consumer finance based on where interest rates are at the time, but hopefully that gets you kind of where you're asking.


(Operator Instructions) Your next question comes from Leon Cooperman - Omega Advisors.

Leon Cooperman - Omega Advisors

I've got to be very calm and I've got to be very careful because I happen to like you guys. You're very available and you do a good job of investor communications.

I think this potential equity offering is about as dumb as anything I've ever seen. I'm sitting in Boca Raton, quasi-vacation, but I think in 2006, 2007 and for part of 2008, we spent over $800 million buying back stock starting, I think, the price was around $30. And we thought it was an attractive decision for the shareholders because we thought the business value was in excess of $30, I would guess, right? That's why we bought it at $30.

And here we're sitting here, giving earnings guidance - I missed part of the call, I apologize, but basically I think that we said something about guidance around $1.60 or something like that. And so we have a stock that's sub $6 and you take off an underwriting discount, so we're prepared to sell stock at 15% of what we bought it back at 3.5 or 4 times earnings? It's ridiculous.

So my recommendation is, since you have a collection of fine assets that you're very positive on and there are other people in this business, that we should investigate the sale of the company because we will get a much higher price for the shareholders, create much more value for the shareholders, than engaging in equity issuance. And if it's not feasible in this environment to sell the company to a stronger financial partner, then we should basically sell off assets at 60% or 70% of what they're worth to basically get ourselves in a financial position where we don't have to sell equity at 20% of what it's worth.

So I would really implore you to reconsider what you're saying here because you're portraying yourself as a distressed credit, and I don't think we're a distressed credit. Who goes out in a good business and sells stock at 3.5 times earnings or 4 times earnings?

So I'm at a loss to understand what you're doing here.

Steve Holmes

All right. Well, you know, Lee, we always enjoy the dialogue and obviously we enjoy your point of view as well.

The fact is that we are not a distressed credit. We're sitting here with an investment grade rating. We feel that we've got strong business models. However, we know that the strength to take advantage of opportunity in 2009 will be driven by liquidity and access to capital, and we do not feel sitting here right now that we can predict well enough where the credit markets will be or what our access to credit markets will be to assume that we'll be able to get adequate access if we wanted to take advantage of opportunities.

So, again, we're doing this. As I said - you probably missed the beginning - I would prefer not to do this. I would prefer not to issue equity at these prices. I totally agree with you that it's a ridiculously cheap price that we're looking at right now, but I also have to balance where we stand with our ratings and where we see ourselves in 2009 with our potential for liquidity.

We've said a number of times that we're basically cash flow neutral for 2009 as we ramp down the timeshare business and then we become more cash flow generative in 2010. But I think 2009 will be a year that presents a lot of opportunities.

Leon Cooperman - Omega Advisors

Sorry to interrupt you, but you cannot earn the return relative to the cost of capital that you're accepting by selling stock at 3 times earnings. It just doesn't work. So [break in audio]

Steve Holmes

Did you finish that question, Lee? Lee? Okay.


One moment, please.

Steve Holmes

Okay. Well, I think the gist of Lee's question, it's a question of - are you there, Lee?


Mr. Cooperman?

Leon Cooperman - Omega Advisors

Yes. Can you hear me?

Steve Holmes

Sorry, Lee. You got cut off there.

Leon Cooperman - Omega Advisors

Steve, can you hear me?

Steve Holmes

Yes, I can hear you now.

Leon Cooperman - Omega Advisors

We'll do this offline, but in all honesty, it's not mathematically plausible that you could sell stock at 25% cost of capital or thereabouts and make a good rate of return on the money, okay? A better alternative, it seems to me, would be to consider a more dramatic cutback in capital expansion in this difficult environment, selling off assets for 80% of what they're worth as opposed to selling equity for a quarter of what it's worth.

The question you have to ask yourself is, did the business value decline as much as the stock prices declined? Because at the end of the day you don't want to look a year from now, having bought stock back at $30 and issued stock at $5 or $6 and then see business stabilize and improve in 2010. I mean, it's ridiculous. I would actually investigate the sale of the entire company as an alternative to selling $200 million worth of stock at ridiculous prices.

But I don't want to monopolize the call. That's just a view. I'll take this up with you offline.

Steve Holmes

All right. Well, I appreciate your point of view, Lee.


Your last question comes from [Matt Mickel - Eva Evans Investors].

Matt Mickel - Eva Evans Investors

I just had a question regarding how to think about cash flow going forward, particularly working capital. In the past, obviously, that's been a big use of cash as you guys have developed your timeshare revenue. If you start scaling back the development, how can we start looking at working capital? Would that potentially be a source of cash going forward, maybe, in 2010?

Steve Holmes

Exactly. In 2010 and beyond, as we ramp down the investment in some of our timeshare development, we will start to generate more cash flow. And it's just 2009 is kind of a crossover period, and 2010 and beyond is where you'll start seeing some more cash flow generation.

So I guess that was our last question. I guess we've run out of time here. Tanya, thank you very much for hosting the call, and thank you all for joining us. We look forward to these calls and we look forward to all your feedback and we'll speak to you next quarter. Thanks very much.

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