Wyndham Worldwide Corporation (NYSE:WYN)
Q2 2009 Earnings Call
July 29, 2009 8:30 am ET
Margo Happer – Senior Vice President Investor Relations
Steve Holmes – CEO
Gina Wilson – CFO
Joe Greff – JP Morgan
Will Truelove – UBS
Patrick Scholes – FBR Capital Markets
Chris Woronka – Deutsche Bank
Michael Millman – Millman Research Associates
(Operator Instructions) I would now like to turn the meeting over to Margo Happer.
With me today are Steve Holmes, our CEO and Gina Wilson, our CFO. Before we get started I 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 May 7, 2009, with the SEC.
We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to comparable GAAP measures is provided in the tables to the press release and is also available on the Investor Relations section of our website at www.WyndhamWorldwide.com.
As we are approaching our third anniversary as a public company and we are pleased to report that the diversified resilient business model we described three years ago has performed as we expected despite difficult economic conditions. Wyndham Worldwide delivered second quarter adjusted EPS of $0.41 at the top of our guidance. These results were achieved despite $0.04 of unfavorable net foreign currency impact and another $0.02 of higher interest expense resulting from our May 2009 debt issuances.
A combination of operating efficiencies, technology enhancements and focused cost savings delivered the strong performance in the second quarter and contributed to the over 200 basis point lift in our adjusted margins. In addition, cash from operating activities was $249 million for the quarter compared with $111 million in the second quarter of last year. Excluding any contingent liabilities our 2010 target of $500 million of total cash flow or $2.70 per share remains in place.
Let me take you through the performance of the business units beginning with the Hotel group. Revenues were down 13% and EBITDA was down 19%, primarily due to expected industry wide RevPAR declines and lower other franchise fees. Given the environment we believe our second quarter results were solid. Our worldwide and international RevPAR were down 15% and 18% respectively in constant currency. Domestic RevPAR decreased 14% from year ago compared with a 20% decline industry wide.
These results reflect overall demand weakness offset by the strength of our portfolio distribution. With almost 75% of our domestic portfolio in the economy segment, which is outperforming the industry as a whole right now, we have been able to mitigate a good bit of the industry’s pricing pressure and capture a significant share of market demand.
We believe we are also benefiting from the consumer taking shorter vacations, more often at locations on an Interstate or in small metro areas as opposed to fly to urban or resort locations. This travel pattern fits well with our domestic portfolio distribution as more than half of our properties are located in these areas.
To help our franchisees and owners manage through this environment we have put several programs in place. We’ve implemented a new call transfer program where property direct reservation calls are transferred to our professionally trained reservation agents at one of our call centers. The program has shown strong reservation conversion rates as well as higher ADRs then what is typically achieved on property.
We’re offering third party leasing options for property management system upgrades and critical FF&E items. We’ve also intensified negotiations with key suppliers to help drive savings to our franchisees. We’ve deployed a greater percentage of our advertising dollar budget online which is where we feel these dollars can make the largest impact for our franchisees and owners in this environment.
In the second quarter we opened 12,200 new rooms, down slightly from a year ago but strong in this environment. The increase in conversions from independent brands we experienced last quarter continued in the second quarter. Smith Travel Research reported a 20% RevPAR decline for independent hotels so it’s no surprise that more operators are seeking a strong brand name with access to a full scale distribution platform.
With the breadth of our brand portfolio from upscale Wyndham resorts to budget Knights Inn we can easily find the solution for most hotel owners. We are also able to offer existing franchisees options when they are looking to trade flats.
We ended the quarter with over 590,000 hotel rooms. The development pipeline includes approximately 111,000 rooms of which 41% are international and approximately 20% are Wyndham branded, reflecting strong traction and our commitment to these two important growth areas.
Over 350 owners, managers, and staff recently attended the Wyndham Hotel’s and Resort Conference at the Rio Mar in Puerto Rico where we announced that the brand’s footprint would be expanded by affiliating it with the mid-scale Extended Stay Hawthorne Suites. The affiliation is designed to reach a broader consumer base and leverage marketing, sales and training, creating a combined Wyndham brand that will encompass close to 350 hotels and over 150 vacation ownership resorts totaling 71,770 rooms and units.
We further solidified our leading position in China this quarter by surpassing 30,000 rooms and adding China Southern Airline, the largest Asian airline to our loyalty program. We’re also very excited about opening our first managed hotel in China, the 588 room five star Wyndham Xiamen hotel. We have a solid pipeline of high quality assets and a number of new initiatives that we are just getting off the ground which will continue to strengthen this brand.
Of course, focusing on quality customer service and satisfaction is always important. Just this week Microtel was ranked the highest in guest satisfaction among the economy hotel chains by JD Power for the eighth straight year. Much to our delight the Wyndham Hotels and Resort brand moved into second place in the upscale hotel segment up from ninth place in 2008.
Now turning to vacation exchange and rentals. Group RCI delivered extremely strong second quarter results and continued to innovate on the technology front, launching several new web based innovations aimed at increasing web share and reducing costs. Excluding the net effect of foreign currency impacts, Group RCI revenue was relatively flat, while continue cost reduction efforts drove a 30% increase in adjusted EBITDA. On a reported basis declines in the Euro and British Pound relative to the dollar resulted in revenue declining 11% compared with the prior year. Yet adjusted EBITDA was up 7% primarily due to these cost saving efforts.
In the Vacation Exchange business second quarter revenue was relatively flat on a constant currency basis and down 6% on a reported basis. Member growth was 3% reflecting the addition of the Disney Vacation Club earlier this year. The average number of members excluding Disney was relatively consistent with the prior year and in line with expectations, as our member retention rate for the second quarter of 2009 was 97% consistent with last year.
Growth in average members was offset by a 4% reduction in annual dues and exchange revenue per member in constant currency. The reduction in revenue per member primarily reflects the impact of clubs where members also have the option to exchange within their club network. While those clubs reduce our revenue per member metric RCI benefits from incremental subscription and other ancillary revenues earned from club members and our time share developer partners.
The decline in revenue per member was partly offset by higher transaction fees as we increased pricing for call center transactions while holding web prices constant to encourage members to transact with us on the web. RCI continues to add new developer affiliates to its network signing more than a dozen new affiliations since the end of the first quarter.
RCI was very pleased to sign multi-year agreements with Country Heights Palace Vacation Club of Malaysia whose resorts include the award winning luxurious Palace of the Golden Horses in Kuala Lumpur. Also with Fairmont Resort Properties of Canada signing up and with Sea Links Golf and Country Club one of Vietnam’s leading luxury golf resorts which became RCI’s first affiliation in Vietnam. These affiliations reflect our commitment to offer our members the best vacation options around the world.
Building on the first quarter launch of RCI TV and dramatically extended digital photography RCI took the search experience to a new level in the second quarter. RCI members can now search exchange and rental options simultaneously. Affiliate and member feedback from their online experience with these innovations has been extremely positive.
These efforts continued to increase web share with North America web rental and exchange transactions for the second quarter reaching 42% and 27% respectively, up 14% and 11% each compared with last year. This shift in transactions to the web reduced call center costs by approximately $2 million compared with the second quarter of last year.
In Group RCI’s rental business, second quarter revenues were up 5% on a constant currency basis and down 10% on a reported basis. Transaction volumes were up 2% reflecting the benefits of the Easter holiday occurring in the second quarter this year compared with the first quarter last year. With notable strength in our Landal GreenParks business.
We also saw a significant increase in rental bookings in June focused on high season summer inventory as consumers who had postponed vacation decisions finalized their plans. In constant currency average net price per rental was up 3% in the second quarter of 2009. Online share for the European rental businesses reached 53% of transactions up four points compared with the second quarter of last year.
Our European rentals businesses continued to successfully add new rental properties. Of note in the second quarter our Novasol Danish business signed an agreement to be the sole rental representative for a new 375 unit Holiday Park in Germany called Tropical Island. The park, which does not require any capital investment from Novasol or Wyndham Worldwide, will feature a water themed central facility surrounded by holiday cottages that will be available beginning in late 2010. Novasol was selected by the developer due to its strong marketing and brand presence in Northern Europe.
Looking forward, Group RCI is well positioned to deliver results within original guidance for the year. While we anticipate further benefit from cost efficiencies from our restructuring we will begin to lap savings that started in Q3 of last year. In the upcoming months we will continue to introduce new technology innovation to drive transactions to the web and reduce costs, increased efficiencies and improve customer experience.
Now let’s turn to our Vacation Ownership business which continued to perform well following significant changes to its business model at the beginning of 2009. Tour flow is tracking to plan and sales efficiencies exceeded our expectations with volume per guest up 17%. Both close rates and pricing are strong. A higher percentage of our tours are buying our product and we are now discounting. All the while we are increasing the FICO score of our buyers and requiring more cash down.
Consumers clearly understand the value proposition of our flexible point’s based time share product, especially in this environment as is evidenced by no softening in demand for time share among our targeted customers. When touring our properties visitors witness hundreds of families enjoying vacations and as our well seasoned sales professionals will tell you purchasing a time share today is about protecting future vacations and this resonates strongly at the sales table.
Our points based product provides greater flexibility then the traditional fixed week products as it enables our owners to take multiple shorter vacations at a variety of locations throughout the year. Visibility is well match current consumer behavior and our owners appear to be taking full advantage of our model. With second quarter 2009 resort occupancy running about 80% slightly higher then the second quarter 2008 even with the addition of over 650 new units since that time. Our advance reservations are also running at levels comparable to last year.
We continue to broaden our travel options and in late June we added the Wyndham Canterbury in San Francisco to our portfolio of more than 150 resorts. This 115 unit resort is located within walking distance to historic Union Square. Our robust urban portfolio now includes approximately 20 resorts in major metropolitan destinations throughout the United States, Canada and Australia and is particularly well suited to the shorter stays enabled only through a points based system.
As we continue to execute within this very challenging environment we seek to further leverage the strength and scale of our business by capitalizing on available real estate assets in the marketplace. After several months of careful analysis and development we believe we are uniquely positioned to successfully launch a fee for service time share model with little or no capital deployment on our part. Our new asset affiliation model is designed to provide a turn key solution for developers and/or banks in possession of completed unsold unused condo or hotel inventory.
WVO would use its existing sales and marketing distribution channels to sell already constructed inventory for a fee as points based Wyndham time share. Consumer loan originations that occur in conjunction with these sales will be funded by the original developer or bank in possession of the inventory or another third party.
The consumer becomes a new Wyndham time share owner and we obtain resort management contracts at these properties. With multiple deals in the pipeline we expect to announce our first applications of the model later this year. If successful, we will aggressively pursue additional opportunistic deals afforded by the market environment.
Finally, you may recall that our Wyndham Vacation Resorts brand recently launched an enhanced club product called Club Wyndham Access. The launch has been very well received by our prospective customers. This new product has many enhancements including consistent maintenance fees, ease in deeding and inventory which is completed prior to deeding to the club and sale to consumers which effectively eliminate deferred revenue.
We anticipate this will result in less complexity and volatility VOI revenue recognition and related earnings. Especially as we fully transition our Wyndham Vacation Resort sales program to Club Wyndham Access.
In summary, we are very pleased with how this business is quickly and effectively responded to the challenges of this economy. We have a number of innovations underway which are designed to fine tune the business model and drive non-capital intensive growth. We remain confident in the ability of the VOI business to perform through the balance of the year and beyond.
Now let me turn the call over to our CFO, Gina Wilson
As you saw from the press release this morning we reported second quarter adjusted earnings per share of $0.41 reflecting particularly strong results in Group RCI and continued strength in vacation ownership efficiencies against the backdrop of a difficult lodging environment. Second quarters revenues benefited from a $37 million roll in from deferred revenues under the percentage of completion method of accounting, compared with the $5 million reduction in the second quarter of 2008.
The net year over year impact was a benefit of about $20 million in EBITDA. We expect little if any impact from percent of complete deferred revenue from 2010 which will be important for you to remember as you model next year and which will make 2010 revenue and EBITDA comparisons more difficult.
As Steve mentioned overall margins were strong supported by our continued cost containment efforts which we expect will deliver savings of approximately $170 million in 2009. As I’ll elaborate in a moment, we are reiterating our guidance for 2009 revenue and adjusted EBITDA despite a volatile economic environment. Based on a significant increase in interest expense from our recent corporate borrowings we expect adjusted EPS will be in the lower half of that range.
Now let me walk you through the second quarter 2009 results in more detail. Revenue and EBITDA in the Hotel Group reflected a difficult economic and operating environment although our RevPAR performance continued to outperform the overall industry average. Lodging margins were down from last year reflecting the impact of lower franchise fees primarily driven by RevPAR declines as well as lower transfer and termination fees.
We are reducing our RevPAR guidance for 2009 down to 12% to 14% for the year. While we believe we are seeing signs of RevPAR stabilization we are seeing continued international weakness and we now expect that it will take longer for the declines to moderate. In addition, the second quarter benefited from the timing of almost $3 million in marketing expenses that we expect to reverse in the second half of the year.
Room growth continues to reflect a slower start then we expected with openings taking longer to occur. Based on this trend we expect to be at the lower end of our room growth guidance range of 3% to 6%. We’re adjusting revenue and EBITDA guidance in lodging for the full year 2009 by $50 million and $10 million respectively to a new revenue range of $670 to $710 million and an EBITDA range of $190 to $220 million.
Now turning to Vacation Exchange and Rentals. Group RCI’s reported results included $2 million pre-tax and restructuring charges. We’re now finished with restructuring activities that we started in the third quarter of last year. As Steve mentioned, excluding the net impact of foreign currency Group RCI revenues for the quarter was relatively flat while adjusted EBITDA increased 30% compared to the second quarter of 2008.
The net impact from foreign currency movements in Q2 2009 reduced reported revenues by $31 million and EBITDA by $12 million compared with the prior year. Adjusted margins improved approximately 350 basis points reflecting the restructure related savings and continued cost control. RCI benefit in the second quarter from a full quarter of these cost containment efforts and we don’t expect this trend of margin improvement to continue through the remainder of this year since we began to realize some of those savings related to cost containment in the third quarter of 2008.
Additionally, RCI’s exchange revenue benefited from members transacting earlier in the year then in prior years which was tied to the June launch of technology enhancements. We believe this pulled some transactions forward from Q3 into Q2’09. RCI’s drivers are tracking to plan and there’s no change to our guidance in this segment.
Now let’s turn to our Vacation Ownership business. Sales and EBITDA were again ahead of plan. Excluding the impact of deferred revenue margins improved approximately 200 basis points. As Steve discussed, pricing and close rates remain strong with VPG up 17% this quarter. We expect this trend to continue and are increasing our VPG guidance to 10% to 15% for the year up from our previous guidance of 5% to 10%.
We are increasing WVO’s revenue guidance by $50 million to a range of $1.75 to $2.05 billion and EBITDA guidance by $10 million to a range of $335 to $385 million. On the consumer financing front the provision for loan loss was $122 million consistent relative to gross sales plus the impact of deferred revenues since the fourth quarter of last year.
Write offs in the second quarter were at 3.43% of the loan portfolio, also relatively consistent and the securitizations continue to perform within their expected tolerances. We continue to see some good trends in the portfolio as delinquency and default rates have stabilized since the fourth quarter of last year and we’ll keep watching it closely.
We continue to make great progress in executing on our plan to generate additional cash flow within the Vacation Ownership business. During the second quarter we successfully increased our average down payment in North America to over 20% up from 12% a year ago. Cash generated at the time of sale increased 55% and we financed 56% of VOI sales in the second quarter compared to 66% in the second quarter of last year. Additionally, the weighted average FICO of our 2009 second quarter borrowers was 735 points compared to 708 in Q2 of last year.
We closed a $225 million term securitization in May. The advance rate was 54% and the coupon was 9.79%. These terms are similar to the conduit and therefore are earnings and cash flow neutral. In addition, we closed a $50 million term securitization in June with a coupon of 9%. We were pleased with the execution of both of these deals providing further evidence that the term securitization market is improving.
We also completed the renewal of our secured revolving credit facility in Australia used to support our Vacation Ownership operations in the South Pacific. This facility is appropriately sized for our current sales plans and the final advance rate and funding costs were within our expectations and reflected in our guidance.
Finally, regarding new accounting rules that may affect asset backed issuers including those in the time share industry. We’ve received a number of questions regarding the potential impact of FAS 166 and 167 which will require the consolidation most securitizations on balance sheet. Wyndham Worldwide brought its securitizations on balance sheet in 2003 and we expect absolutely no impact to our earnings and no change to our financing reporting or operations related to the proposed rules.
On the Corporate side we issued $250 million of senior unsecured notes with a coupon of 9.875% and $230 million of convertible notes with a coupon of 3.5% during the quarter. These offerings enhance our capital structure by shifting some short term maturities to mid-term maturities. We used the net proceeds to reduce the principal balance outstanding on our revolving credit facility. The net incremental GAAP expense in 2009 is approximately $25 million which will bring full year interest expense to approximately $105 million and reduce our adjusted EPS for the year by approximately $0.09.
The full year impact in 2010 will be approximately $45 million or $0.15. GAAP rules require us to recognize interest expense on the convertible securities at the effective interest rate of the senior unsecured notes which is 11% rather than the cash coupon rate. The incremental cash interest expense is approximately $15 million this year and $27 million next year.
We generated net cash from operating activities of approximately $249 million in the second quarter of 2009 compared with approximately $111 million in the prior year period. We had approximately $840 million of capacity on the corporate revolver at the end of the second quarter in 2009 compared with approximately $290 million as of 12/31/2008 reflecting the use of proceeds from the senior unsecured and convertible notes and a portion of the free cash flow to reduce to revolver balance.
We remain well within our debt covenants which require consolidated leverage ratio of less than 3.5 and an interest coverage ratio of more than 3 as defined in the debt agreement. At the end of the second quarter our consolidated leverage ratio was 2.1 and our interest coverage ratio was 25.3 so we have plenty of room on both covenants.
The tax rate for the quarter was, as expected, 44% reflecting a true up of a deferred tax asset related to our non-cash compensation from restricted stock units. We expect the full rate to be approximately 39% as the rate in the third and fourth quarters return to lower levels.
To increase transparency and give you a better understanding of the economics of our business we’ve added revenue details to table four of the press release. I’d like to take a minute to highlight one of the lines in that table, our Vacation Ownership Property Management Services, which provides ongoing management and reservation systems, resort operations, comprehensive financial services, quality assurance and more to 800,000 plus time share owners and 200 home owner associations.
This important component of Vacation Ownership business which operates on a fee for service model is a stable and predicable source of income which will account for approximately 20% of total revenues in ’09 and margin in excess of 10% for WVO.
Again, we are reiterating our 2009 revenue, EBITDA and EPS guidance ranges although based on the higher interest expense from the senior unsecured and convertible notes, weighted average shares of $181 million and the economic environment, we now expect to be in the lower half of the EPS range. We’ll post the full guidance to the website right after the call today.
In the third quarter we expect EPS of $0.53 to $0.57 assuming a $25 to $35 million benefit from the roll in of deferred revenues in Vacation Ownership and a weighted average share count of 182 million shares. We expect the fourth quarter deferred revenue in Vacation Ownership to be $40 to $50 million.
Before turning it back to Steve I want to tell you how proud I am of what Wyndham has accomplished during these last three years, especially this last year. I have enjoyed working with my colleagues here and all of our other constituents including those of you listening today. As you know, I’ll be at the company for a while longer but expect that this will be my last earnings call at Wyndham Worldwide. I look forward to following the company’s progress as a shareholder and offer my best wishes to the entire Wyndham Worldwide family and to all of you.
Now I’ll turn it back over to Steve to wrap up.
I really want to thank Gina for many contributions to Wyndham Worldwide. She was instrumental in many of our successes during the past three years including our transition to public ownership and establishing robust financial and technology platforms to support our future growth.
Now let me go ahead and answer questions some of you may have as we’ve gotten this question before. We’ve retained Chris Colder, a Specialist in CFO recruitment and we are actively engaged in the search process.
Before we open the lines to questions I’d like to make a few closing comments. While there are some modest signs of improvement in the economy and the capital markets have stabilized a bit, visibility for the economy and our business continues to be limited and there is still a lot of debate about what the eventual economic recovery will look like.
As a result we’re continuing to manage the business with a focus on efficiency, flexibility and liquidity and always with an eye towards being in the best possible position for the recovery. I believe this approach is serving us well in all of our businesses, in our Hotel Group, our value oriented hotel brands are allowing us to outperform tiers and RevPAR.
In our Group RCI business we continue to improve the customer experience and reduce transaction costs by driving more and more transactions through the web. In our Vacation Ownership business we completed two receivable financing transactions this quarter and are introducing innovations designed to fine tune the business model and drive non-capital intensive growth.
Our recent employee opinion survey results indicate that our associates are more engaged and motivated than ever. Even during this difficult economic climate our associates remain energized and proud to work for Wyndham Worldwide. Together we are focused on delivering shareholder value both in the near and long term.
With that we’ll open the line for questions.
(Operator Instructions) Your first question comes from Joe Greff – JP Morgan
Joe Greff – JP Morgan
Looking at the second quarter and seeing the nice results in volume per guest can you help us understand that a little bit better, is that concentrated in a few markets, is it geography, is it a greater percentage to repeat buyers or is it just a mix shift in that you guys are going after higher quality, more credit worthy customers?
My second question if I can have a follow up on this question here, regarding the fee for service vacation ownership business model, the asset affiliation model, can you help us understand sort of what the economic are to you broadly for the resort management contract associated with that business?
On the improved volume per guest which just as a reminder we also saw in the first quarter of this year, I think there are a number of factors contributing to it. Remember we took our sales volume down intentionally when the credit markets kind of seized up and we decided to lower our sales pace. When we did that we did have to shut down unfortunately some offices which frankly were profitable offices but which in some cases didn’t have the highest productivity. I think we’ve benefited in part by removing some of the weaker offices.
Having said that the fundamental results within same store offices is also very impressive and its up. I think is really a matter of a very focused effort to make sure the consumer’s understanding this flexible point based product we have and matching it up to exactly what they’re looking for. So we did see close rate increase which is the number of tours coming in that end up buying and we saw an increase in that as well as increase in pricing.
Both of those I think are attributable to maybe a more focused effort for the sales organization and a continuation of our ability to show the consumer how this product meets their lifestyle. That’s really fundamentally it, it’s a great execution. I think that there may be some lift due to, as you pointed out, that our FICO score increased but we’re also asking people to make larger down payments. Our down payments are in the range of 20% now and that’s a significant increase from where we were a year ago or even six months ago. I think its terrific execution at the time share business.
With respect to the fee for service model, our asset affiliation model, the way the economics work is we will work with a developer or a bank if a bank has taken over for a developer and we will become their sales and marketing arm. For that we will receive a sales and marketing fee that will cover our costs to market the tours to come in and to execute in selling the product and paying our sales force.
That will be basically our main profit center from this activity. As opposed to having revenues for the total sale of the product and the cost of the product that we’re selling we will receive a sales and marketing commission. In addition then as you point out we will have the property management of the resort as they become Wyndham vacation resorts properties. For that, the economics are very attractive, we do make a profit on that, as we pointed out, we’re breaking that out now on table four so people can see it clearly. That will be the profit that comes out of the property management side.
In addition, just a third piece of it is for the loans that are generated even if we’re not holding those loans or doing the securitizations its anticipated that we will be loan servicer. Those are owners who bought our product, we want to make sure that we maintain the relationship with them and we are set up with a just world class loan servicing operation out in Las Vegas that we will lever to service those receivables as well. So that’s kind of the third line of profit from this venture.
Your next question comes from Will Truelove – UBS
Will Truelove – UBS
My first question is regarding the GAAP franchise fee of $117 million in the second quarter. I appreciate the additional disclosure on the revenues but I couldn’t figure out by look at the lodging or some of the other breakouts exactly how you get to $117 million from the various buckets. My follow up question would be the club concept in filling time share. Will that standardize the sales process and perhaps lower your marketing expenses going forward?
We’re happy to get back with you in reconciling numbers that you have specific. Off the top of my head I think that the once piece that probably is not broken out separately that we have some other franchise fees, other fees that include the Wyndham Rewards fees that we get when we issue Wyndham Rewards points. We’ll come back with specifics if there’s anything else. My guess is its just kind of another category or miscellaneous category. It would include the Wyndham Rewards fees.
With respect to the club concept, Club Wyndham Access does provide some greater consistency in the sales process by one of the things it creates a consistent maintenance fee across the entire club. This club concept is somewhat similar to what we’ve had in World mark for quite some time, it was the way that product was designed years ago and it just makes it a little bit easier at the sales table to be selling something that always has the same maintenance fee regardless of where the product happens to be located that’s just one of the features.
I don’t know that it will necessarily reduce our marketing costs. We have a very, very focused concerted effort at driving down our marketing costs, that’s one of the opportunities that we think we will capture and that we know we’ve begun to capture by using the Wyndham brand as the umbrella brand for our time share business.
Whether it’s because we have a product that is maybe a little more consistent at the sales table or it’s because the marketing is focused by using the Wyndham brand we would try to drive down those marketing costs and we try to see some benefit. I don’t know that I’ll be able to define for you which is which.
Your next question comes from Patrick Scholes – FBR Capital Markets
Patrick Scholes – FBR Capital Markets
With all of the restructuring and downsizing in the Vacation Ownership business over the past year how should we begin to think about what 2010 EBITDA is going to look like for that segment?
We would expect to maintain the savings that we achieved through the restructuring so we would expect that our base cost of G&A and the other costs that were cut down, sales and marketing will stay down at that lower level because it’s anticipated that our sales pace will not go swelling back up to $2 billion. We’re assuming that we’re going to stay around the $1.2 billion maybe grow it more moderately going forward.
The one thing that won’t be repeated that Gina mentioned in her comments was we do have deferred revenue that we’ve recognized this year and I think for the full year it’s in the neighborhood of $170 to $190 million. That won’t be repeated next year, that revenue piece won’t be repeated next year because we’re moving to this non-deferred revenue model that we’ve developed. I think that’s probably the larger impact on 2010.
We have not yet given guidance for 2010 because we’re just not there yet, there’s not enough visibility into the future. We don’t want to be making that call right now.
Your next question comes from Chris Woronka – Deutsche Bank
Chris Woronka – Deutsche Bank
We’ve always kind of talked about how you eventually plan for a recovery in the time share business and I’m just curious as to whether this new affiliation model may be kind of replaced with some of the ground up development or the hard CapEx that you’d have to put in. If that’s true I guess the other part o the question is how much inventory you still have an maybe how much months or years of supply you think that is? Just trying to get a sense of how this is all going to balance out over maybe a three to five year period?
Three to five years is a lifetime so I’ll try to address it but I don’t know that I can show that kind of precision that far out. Our plan, which we’re still holding to, is that we’ll spend less than $100 million on inventory spend in 2010, that’s what we stated before; we’re still living to that goal. With that spend we have enough inventory to get us through 2010 and into 2011.
The asset affiliation model which is really levering somebody else’s assets and really creating an environment where there are frozen assets on the books of developers and banks where they’re having to pay the cost of carry right now by paying taxes and maintenance. We can move those assets for them and shift them from non-performing hard assets into interest paying receivables for them. That process will not require capital on our part or if it does, very little capital. There may be some amenities that we feel need to be added to make the product really work for our customer. It will be limited in its nature.
Depending on how much of our business can shift to the asset light model we’ll determine in 2011 through the future how much inventory we’re going to need to develop. We, in the past, were developing inventory to move ourselves to Club Wyndham Access and to fuel a 20% plus growth rate, as you know in 2007 and the beginning of 2008. We won’t be back there because we don’t anticipate ramping this business back up to a $2 billion business any time soon.
Our anticipation would be that we’ll continue to grow the business for efficiency, run the business for efficiency, definitely run it for cash flow and we’ll decide what that spend looks like based on how the asset affiliation model works and what we see is the future growth beyond 2011 for that business.
Chris Woronka – Deutsche Bank
On the lodging side we have talked about potential brand acquisition opportunities. Do you feel like the capital markets in your company’s liquidity are at a point now where you might be comfortable taking a look at something if it looks really attractive?
Our liquidity is terrific, as we’ve said, as Gina mentioned, we did the senior note financings that gave us a little bit more of a mid-term maturities to our debt so we’re very comfortable on the liquidity. With respect, do acquisitions make sense at this time. The fact is you can’t really try to forecast opportunity. We don’t know what will become available, when it will become available and at what price and how attractive it is.
Could we do something now? Presumably we could. I don’t think it would be a large transaction but if there was something that was of the right size for us that we thought we could really deliver at an attractive creation multiple for us and would add to our portfolio there would be nothing stopping us from doing that right now. We’re not out hunting and looking, we’re basically, as we always are in the market evaluating opportunities and looking to see how we can grow our business.
Your next question comes from Michael Millman – Millman Research Associates
Michael Millman – Millman Research Associates
More questions on time share, could you compare profitability both up front and lifetime for new customers or new acquisitions compared with existing acquisitions? Related to that, give us some idea of how much of the sales are now going to existing versus new?
The second question is when you look at some of the numbers we’re seeing that there’s very substantial benefits from the current system it looks like even though sales are down financing is up 5% income, cost of VOI is down 60%, property management fees were up 12%, ancillary revenues were up 15%. Is there very short lived or can this continue?
Let me get a little bit of clarification, the first question when you talked about new acquisitions versus existing are you talking about product that we’re acquiring or building?
Michael Millman – Millman Research Associates
No, I’m talking about the customer.
We had probably slightly more existing customer sales then new sales this quarter. I think we were just around 60% of selling to existing customers. I think the last time we reported I want to say we were around 50% or 55% so its up a little bit, not a whole lot. The cost of selling to an existing customer the profit on that is the higher profit because you don’t incur as much marketing expense. You still have marking expense but its not quite as high so that is helpful to the mix and frankly I think that may have been part of the question that Joe asked in the first question, I may not have gotten around to that part of the answer.
To the second piece which is breaking the pieces of the Vacation Ownership business and looking at it and looking at various elements of growth. There are pieces in this business model and that’s part of the reason we created table four, that I’m not sure everyone appreciated which was the very, very stable property management businesses that we have where we manage those 140 resorts around the world.
That is a profitable business for us; it’s a very stable part of our portfolio and as the time share sales component shrunk from $2 billion down to $1.2 billion that component did not shrink so it became a larger portion of the overall profitability of the time share business. That will be a larger piece going forward. Its kind of like the property management and hotel but its actually more stable because its not driven by revenue its just driven by how many units, how many resorts you’re managing.
With respect to consumer finance I think the reason that consumer finance was up is probably because the portfolio has been growing over the last several quarters and we continue to see the portfolio grow and we’re adding to it. I would expect that to moderate over time as we level off our sales at the $1.2 billion range but also as we take in more cash at the time of sale which obviously means we’re financing less a the sales table.
Michael Millman – Millman Research Associates
The property cost was down about 60% is that simply you’ve taken in the deferred revenue?
There are a couple of things in there. One its impacted by the fact that we aren’t selling as much so we took our sales pace down which is a portion of it. It’s also in part the product that’s been put into it, the different developments that we have and the assets that we put into it. Also we do, and I think we’ve walked through this before, when we have loan losses we have a recovery for the loan losses that run through our cost of sales which also impact. There are a number of factors going into it.
I think from a business perspective the way to look at it is we’re maintaining a 25% or less cost of sales when you look at it on a project by project basis which has been our target and we continue to execute on that. In an environment where product cost is basically real estate has come down and our pricing hasn’t gone down to the consumer I would expect that over time to go down if we got back in the market buying inventory. We may not be buying as much inventory due to our asset affiliation model.
I’m showing no questions at this time.
Thank you very much and thank you all for joining us today and we’re looking forward to discussing our next quarter with you on the next quarterly call. Thank you very much.
That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.
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