Wyndham Worldwide Corporation Q3 2009 Earnings Call Transcript

| About: Wyndham Worldwide (WYN)

Wyndham Worldwide Corporation (NYSE:WYN)

Q3 2009 Earnings Call

October 28, 2009 8:30 am ET


Margo Happer – Senior Vice President Investor Relations

Steve Holmes – CEO

Tom Conforti – CFO


Joseph Greff - J.P. Morgan

Steven Kent - Goldman Sachs

Patrick Scholes - Friedman, Billings, Ramsey

Michael Millman - Millman Research Associates

Ryan Meliker - Morgan Stanley


Thank you for standing by. I'd like to welcome all parties to the Wyndham Worldwide conference call. (Operator Instructions)

I would now like to turn the meeting over to Margo Happer, Senior Vice President of Investor Relations. Thank you. You may begin.

Margo Happer

Thank you, Caroline. Good morning. Thank you for joining us today. With me today are Steve Holmes, our CEO, and Tom Conforti, our new CFO.

Before I 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 August 7, 2009 with the SEC.

We will also be referring to a number of non-GAAP financial 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 thank you for joining us today.

I'm very pleased to introduce Tom Conforti, our new CFO, on this call. Tom brings a strong set of finance, strategic and general management skills to Wyndham Worldwide from world class companies like PepsiCo and Disney. These skills and his experience at successfully transforming the IHOP restaurant business to a free cash flow business model will be a great complement to our leadership team as we seek to maximize cash flow from the current operations and rebalance our business portfolio.

We continue to execute against our strategic initiatives in the third quarter, delivering adjusted EPS of $0.58 compared with guidance of $0.53 to $0.57.

Revenues were down 17% from the third quarter of 2008, primarily reflecting our plan to reduce the deployment of capital in our vacation ownership business and the recession's impact on RevPAR in our lodging business.

Year-to-date cash from operating activities, a measure of increasing importance to us, was approximately $570 million compared with $146 million in 2008.

In the worst economic environment since the Great Depression, we are raising our EBITDA guidance by $15 million and expect to come in at the top end of the new range. We expect to be in the middle of our original EPS guidance range. If you exclude the $0.09 per share of additional interest expense relating to our 2009 senior debt issuances, which was not considered when we originally issued guidance, we would be at the upper end of our EPS range.

These are outstanding results produced by the exceptional execution of our operating teams, who responded well to the macroeconomic challenges as well as the goals we set.

Tom will discuss our third quarter operating and financial results in detail, so I'd like to take a moment now to share some of the important highlights from our recently completed strategic planning sessions which will drive our direction and investments in 2010 and beyond.

We'll apply laser focus in the following areas:

First, with superior execution, we'll concentrate on maximizing free cash flow while enhancing earnings through improved operating margins. We will continue to improve our strategic focus, efficiency, accountability and execution.

Next, we will continue to rebalance the Wyndham Worldwide portfolio by increasing the contribution from fee-for-service businesses, moderating timeshare spending and growth, and exploring strategic and tuck-in acquisition opportunities in our fee-for-service businesses. We'll also increase market share by delivering our signature customer service experience "Count on Me" as well as our Wyndham Rewards program to improve guest satisfaction, which will result in repeat guest activity and support gains in market share.

And finally and very importantly, we will continue to attract, retain and develop associates across our organization as well as support and promote Wyndham Green and Wyndham Diversity initiatives. These strategies will serve as the guidepost for the overall company.

Let me switch now to review how our businesses are applying this framework to move forward. Remember that as we drive to rebalance our portfolio, about two-thirds of Wyndham Worldwide EBITDA is already driven by our fee-for-service businesses. Wyndham Exchange and Rentals contributes over half of that EBITDA stream. That group's execution has been flawless this year, with third quarter adjusted EBITDA increasing 13% excluding the net effect of foreign currency.

As we announced today, after significant and careful review of our strategic plans and with considerable input from associates and customers, including the over 30 exchange and rental brands that Group RCI operates, we have decided to rename Group RCI as Wyndham Exchange and Rentals. This new name will elevate the vacation rentals business to an appropriate level within our company given its contribution to overall company performance. We'll continue to use the RCI brand in Exchange, which will support the world's largest membership, [inaudible] and developer base in the industry.

Let me give you an overview of these two great businesses.

First, looking at the exchange business, 78% of all timeshare owners are members of exchange companies, and approximately three-fifths have participated in exchange. And RCI is the market leader. Vacation exchange generates approximately half of the segment's revenues through annual membership fees as well as steady transaction fees from timeshare inventory exchange in approximately 100 countries by our 3.8 million members. No exchange company today has more quality product in more countries than RCI, and we believe that RCI is and will remain the strongest brand in the industry. It's a fee-for-service business with modest capital requirements, high barriers to entry and a stable customer base.

The other half of the revenues in this segment are from vacation rentals, currently a European-dominated business where we are also the market leader, offering over 60,000 homes, villas, cottages and condos for rental. Our revenues are derived through commissions on rental revenues. Again, this is a fee-for-service business with low capital requirements where we have great brands, a strong network and a significant market position.

Given the size and potential of the relatively unbranded and fragmented $65 billion global rental marketplace, we believe that our well-established brands such as English Country Cottages, Novasol, Cuendet, and Landal can leverage the significant marketing, technology, operating and strategic sourcing synergies of the world's largest hospitality provider.

Wyndham Exchange and Rentals strategy is focused on two primary areas: optimizing and expanding exchange and expanding rentals.

The central initiative for optimizing and expanding exchange is RCI.com, the comprehensive online strategy that will support a number of goals - expanding online capabilities and efficiency, enhancing products and revenue per member, enhancing our affiliate value proposition, improving marketing efficiencies and member satisfaction, improving inventory management, and of course driving margin improvement.

RCI.com's success to date is clear. RCI's web share increased from 13% in the third quarter of 2008 to 23% in the third quarter of 2009. And in North America, which generates over 70% of our exchange transactions, third quarter web share increased from 17% in 2008 to 29% in 2009. We believe that RCI.com can support margin improvement of 200 to 300 basis points over the next few years.

Moving to our second area of focus, we intend to expand rentals in Europe by capitalizing on our strong base. We intend to continue to grow Landal, our Dutch park business, and expand Denmark-based Novasol. Landal recently announced the signing of two new franchise parks in Austria that will open in December of this year. This will bring the number of parks to 65 across six European countries. Novasol continued to expand its presence in Croatia, where we have gone from zero to nearly 4,000 homes in just four years.

Now I'd like to turn to the Wyndham Hotel Group, which will be a key investment area for us going forward. While it appears that the worst is behind us and we're certainly expecting industry improvement next year, we do believe there will be a significant restructuring of the lodging industry over the next 12 to 18 months. We are already seeing opportunities for brand as well as multiunit conversion packages. In this environment, we intend to leverage these and other opportunities to globally grow new rooms organically, through acquisitions, and of course by retaining every property we want to keep.

We have worked hard over the past several years to clarify our brands' positions in the market. We have made great progress in growing the Wyndham footprint, and with the acquisition of Hawthorn Suites and Microtel last year we now have a broad and deep portfolio with strong product in every category from budget to upper upscale. Our ongoing efforts have resulted in Hotel and Motel Management Magazine recently recognizing Wyndham Hotel Group as the largest hotel company in the U.S. From this powerful base, we're well positioned to grow both domestic and internationally.

Conversions are a big part of our domestic growth story and an area that we've been quite successful. Historically, 80% of our room openings have been conversions, and we believe the opportunity going forward is huge. In addition, international opportunities are very strong and promising, representing over 40% of our pipeline. We are growing our international organization, strengthening our global sales team, and continuing to increase the Wyndham Reward footprint.

We're seeing great success. For example, in the U.K. prompted awareness of Days Inn increased from 35% in 2006 to 42% in 2008, while Ramada awareness went from 58% to 68% during the same period. And we have an exceptionally strong base in China, where we are the largest U.S. hotel company, with over 30,000 rooms. According to American Express' 2010 global business travel forecast, the economy within China is expected to grow 3% to 8% in 2010.

Another objective which supports room growth is to improve the franchisee value proposition. We'll do this by increasing property revenue contribution, leveraging the use of consumer data, and enhancing the consumer experience. For example, through our revenue management services we help franchisees ensure that their hotel's inventory is available on sale on all channels and positioned competitively based on market dynamics. Year-to-date through July, franchisees using this service demonstrate RevPAR index improvements 230 basis points higher than those not in the program. Obviously, we are encouraging all of our franchisees to participate in these programs.

Now turning to Wyndham Vacation Ownership, where we are developing new ways to maintain our revenue base while maximizing free cash flow. Remember that this business includes a stable fee-for-service property management business that accounts for about 15% of segment revenues and annually contributes about $30 million in EBITDA. We have significantly transformed the other two pieces of vacation ownership this year - sales and consumer finance. As we've discussed before, we have refocused our marketing and distribution channels to efficiently target high-quality customers, resulting in an impressive 25% increase in volume per guest in the third quarter. That's led by an increase in our close rate by holding pricing steady.

In our consumer finance portfolio, we continue to make great progress in our effort to strengthen the quality of our receivables portfolio by providing financing programs that promote sales to the right customers. During the third quarter we 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 to 43% from 31%. We financed 57% of VOI sales in the third quarter this year compared with about 69% in the third quarter of last year, and the weighted average FICO of our third quarter 2009 new borrowers was 736 compared with 709 in the third quarter of last year.

Looking ahead, we believe a great opportunity exists in this business from our new fee-for-service Wyndham Asset Affiliation Model or WAAM. This model offers turnkey solutions for developers or banks in possession of newly developed, nearly completed or recently finished condo or hotel inventory. We will sell this unused or unsold inventory for a fee through our extensive distribution channels. WAAM enables us to expand our resort portfolio with little or no capital deployment while providing additional channels for new owner acquisitions and growth for our fee-for-service resort management business.

We recently signed exclusive WAAM sales and marketing agreements in Orlando and Myrtle Beach. We expect to introduce these projects to our owners next year and that the resorts will be affiliated with our points-based Club Wyndham Plus reservation system. We anticipate sales of approximately 460 recently constructed condominium-style units over the next few years. In addition, one of these projects has the possibility of a mixed use hotel under a franchise agreement as a Wyndham Grand hotel, which will leverage our brand as well as our timeshare and hotel operations.

We hope the WAAM model will become a central piece of our strategy for this business as we focus on cash generation, although it is still too early to predict ultimately how large it will be. We are uniquely equipped to execute this strategy given our scale and expertise, our points-based product structure, our extensive sales and marketing channels, our consumer financing and servicing operations, and our terrific property management expertise. I look forward to updating you on our progress over time.

Now let me turn the call over to Tom Conforti, our Chief Financial Officer.

Tom Conforti

Thanks, Steve.

I've been at Wyndham close to eight weeks now, and I'm really thrilled to be here. I'm impressed with the energy and enthusiasm of the team, and the strength of our business models, the combination of which will yield significant opportunities going forward. And I look forward to meeting and working with each of you over time.

I come out of a CFO experience where the company was transformed from a net user of capital to a generator of free cash flow. I'm a big advocate of delivering strong cash flow to drive shareholder value.

As Steve described, here at Wyndham Worldwide we're really focusing on cash flow and seeking to deploy capital for the highest possible returns. Ultimately, our business objective is to transform the cash and earnings profile of the company, primarily by rebalancing the cash streams to achieve a greater proportion of EBITDA from our fee-for-services businesses. We'll focus on generating cash earnings and improving working capital management going forward, investing it in high-return businesses such as lodging.

Now let me take you through the business unit performance, beginning with the Hotel Group.

Revenues and adjusted EBITDA were down 14% and 24%, respectively, primarily due to expected domestic industrywide RevPAR declines and lower other franchise fees.

Margins were also compressed due to increased expenses from remediation efforts on technology compliance initiatives as well as an increase in bad debt expense. The majority of our economy brand hotel owners are single property owner-operators that have been hit hard by the recession. We are working with these franchisees in a number of ways to help them through these difficult times, including extending payment terms. As a result, our reserve against these aged receivables is naturally higher. Our managed portfolio, which comprises only about 2% of our total system, is also experiencing some turmoil in this economic climate, and we have adjusted our reserves accordingly.

Domestic RevPAR decreased 16% from a year ago. Worldwide and international RevPAR declined 17% and 19%, respectively, in constant currency.

The Hotel Group continued to benefit from strong brands as well as the geographic and segment distribution of our lodging portfolio, evidenced by a 90 basis point outperformance of domestic industrywide RevPAR. We believe these results reflect market share improvement and the consumer travel shift to more frequent mini-vacations closer to home.

With the majority of our domestic properties located on the interstate or in small metro and suburban areas and almost 75% of our domestic portfolio in the economy segment, we were well positioned in this economic climate to capture occupancy and hold rate. Despite this support, the environment continues to be difficult, and we now believe RevPAR for the year could be at or slightly below our earlier guidance.

On the development front, the financing timeline has been extended and some conversion prospects are having a more difficult time extracting themselves from their existing relationships. This makes it harder to forecast the timing of property openings and will slow the new room openings for the year. Our current best view is that the number of rooms in the system at year end may be below guidance; however, we expect to still be slightly positive for the year.

We ended the quarter with approximately 591,000 hotel rooms and another 111,000 in the pipeline, including some multiunit larger deals. The number of projects breaking ground through September was consistent with last year at close to 30. During that same period we converted over 6,000 rooms from independent brands and another 16,000 rooms from competitor chains. As Steve mentioned, we continue to focus on growing our international system, although at a slower pace than we would like. Year-to-date, we've added over 10,000 rooms internationally, including 4,900 rooms in China, 2,200 in Canada, and 1,400 in the U.K.

Now moving to Wyndham Exchange and Rentals, in the third quarter both businesses within the segment continued to deliver excellent results. Excluding the net effect of foreign currency and restructuring charges recorded during the third quarter of 2008, revenue was relatively flat. And, importantly, adjusted EBITDA increased 13%, reflecting continued cost reduction efforts.

Exchange revenue in the third quarter of 2009 was flat on a constant currency basis and down 4% on a reported basis. Member growth was up 3%, reflecting the addition of the Disney Vacation Club earlier this year. Growth in the average member was offset by a 3% reduction in annual dues and Exchange revenue per member in constant currency.

The reduction in revenue per member primarily reflects the impacts of clubs such as Disney's where members also have the option to exchange within their club network. While clubs reduce our revenue per member metric, RCI, our Exchange business, benefits from higher overall revenue from the additional member subscriptions and transactions, as well as other ancillary revenues earned from our development partners. The decline was partly offset by higher transaction fees as we increased pricing earlier in the year for call center transactions while holding web prices constant to encourage members to transact on the web.

Rentals revenue in the third quarter were up 3% on a constant currency basis and down 7% on a reported basis. Transaction volumes were up 2%, reflecting strength from Landal's Green Parks in the Netherlands and Holiday Cottages in the U.K. In constant currency, average net price per rental was up 1% in the third quarter of 2009, primarily reflecting favorable yield management for member rentals.

We expect Wyndham Exchange and Rentals to deliver full year 2009 results at the higher end of guidance; however, fourth quarter year-over-year comparisons will be difficult due to one-time currency gains and cost savings in the fourth quarter of 2008, as well as a delay in the timing of certain rental expenses until the fourth quarter.

Now moving to Vacation Ownership, VOI revenues exceeded our expectations in the third quarter. As Steve mentioned, sales efficiencies were once again up significantly, reflecting the resizing of the business with volume per guest up 25% from the third quarter of 2008. [Inaudible] rates are strong and transaction sizes remain stable. We expect Vacation Ownership to end the year with approximately $400 million in adjusted EBITDA, exceeding the top end of our guidance range.

On the Consumer Financing front, the provision for loan loss was $117 million, consistent since the fourth quarter of last year. Write-offs in the third quarter were at 3.38% of the loan portfolio, also relatively consistent, and the securitizations continue to perform within their expected [inaudible]. We continue to see some good trends in the portfolio as delinquency and default rates remain consistent with those experienced at the end of last year.

We are very pleased with the recent renewal of our conduit as well as the closing in September and October of two term securitizations totaling $350 million. The conduit has a capacity of $600 million, which is ample for our ongoing sales plans. The spread is approximately 100 basis points less than our prior facility, with lower upfront fees and a comparable advance rate of approximately 51%. We are particularly encouraged by the improving pricing and terms we achieved on these transactions, which reflects the quality of the underlying loans, our strong history in the asset-backed market, and continued recovery in the market.

Now remember that our securitizations are currently recorded on our balance sheet and have been so since 2003, so unlike others in the industry we expect no impact from FAS 166 and 167 in January 2010 relating to our securitizations.

Moving on to the corporate front, I want to spend a moment on what will be a significant area of concentration for the company and for me as CFO as we seek to rebalance our portfolio. We will be placing greater emphasis on managing free cash flow, which we define as operating cash flow less CapEx and development advances. This means that as we move forward our management teams will increasingly focus their attention on the major components of this metric - cash earnings, CapEx, and working capital management.

For the nine months ended September 30, 2009, free cash flow totaled $455 million compared with an outflow of $1 million last year. Excluding any contingent liabilities, we expect free cash flow of approximately $500 million in 2009 and approximately $500 to $600 million in 2010.

We had approximately $850 million of capacity on the corporate revolver at the end of the third quarter in 2009 compared with approximately $290 million as of year end 2008.

The convertible debt balance increased to $309 million from $253 million last quarter, reflecting the increased value of the conversion feature, driven by the strong increase in our stock price. The value of the conversion feature will continue to fluctuate with our stock price. As you may recall, we purchased a call option to protect the company from an increase in the value in this convertible debt; therefore, the increase in debt, up to $20.16 share price, will not result in any incremental cash payment or dilution.

Turning our attention to the remainder of the year, as you saw from the press release, we expect fourth quarter adjusted earnings per share of $0.35 to $0.38, which puts full year adjusted EPS at $1.75 to $1.78, slightly higher than our prior commentary. Fourth quarter assumptions include approximately $20 to $25 million of EBITDA benefit from deferred revenue and diluted shares of approximately 184 million.

In addition, we are raising the 2009 EBITDA guidance by $15 million. We now expect depreciation and amortization to be approximately $180 million for the year based on current project timing compared with $175 million in our prior guidance.

As you saw from the press release, our preliminary outlook for 2010 indicates that revenues and EBITDA will be approximately equal to 2009 guidance ranges with RevPAR assumed to decline by zero to 3% and flat gross VOI sales in our timeshare business. Keep in mind that 2009 EBITDA has benefited by about $90 million from percentage of completion deferred revenue, which will be absent next year. Also we expect interest expense of approximately $130 to $140 million, reflecting higher interest expense related to the 2009 senior notes and lower capitalized interest, consistent with our resulted vacation ownership spending.

With that, I'd like to turn it back to Steve.

Steve Holmes

Thanks, Tom.

Before we open the line for your questions, I'd like to make a few closing comments.

Across our businesses we are seeing that leisure travelers are traveling and they're staying at our properties. We believe the overall economic environment is improving, but the strength and course of the recovery are still very uncertain. For example, we see occupancy rates stabilizing in the hotel industry. We're cautiously optimistic regarding our European rental business, where summer travel was strong. European travelers are booking, although later than in years past. And at our timeshare resorts, systemwide occupancies were up 1.5% to 83.8% during the third quarter of 2009 despite the addition of almost 500 units over the past year.

Our resized vacation ownership business is operating more efficiently, with a greater focus on only the most qualified and creditworthy sales prospects. Our unique points-based product, sold in varying increments, fits well with current family travel preferences - multiple shorter vacations closer to home. And then, while there have been some industry reports about softer consumer demand for timeshare, we have held our pricing steady and improved our close rates.

This is a transformational time. In this environment, superior execution is our central strategy and, as Tom mentioned, this will enable us to drive continued strong cash flow and increase the contribution of our fee-for-service businesses.

We're leveraging and growing the strong Wyndham brand and enhancing our customer service culture throughout our company. In this process we will be guided by Wyndham Worldwide's mission statement, which is to be the leader in travel accommodations, welcoming our guests to iconic brands and vacation destinations through our signature "Count on Me" service.

With the success we're seeing in all of these efforts, I'm confident that Wyndham Worldwide is well positioned to capitalize on an economic recovery and to deliver shareholder value both in the near and long term.

And with that, Caroline, we'll open the line for questions.

Question-and-Answer Session


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

Joseph Greff - J.P. Morgan

A question for you on the RCI margin. You mentioned you expect 200 to 300 basis points of improvement over the next few years. Can you just sort of help us understand relative to what - I mean, I guess my question's more direct - Wyndham Exchange and Rentals had north of 30% EBITDA margins; is that what you're looking for to improve upon or is that the level that you're looking to get to on a sustainable basis?

And then my second question is with regard to the WAAM initiative. How much revenue contribution or EBITDA contribution do you anticipate from this initiative in 2010?

Steve Holmes

Okay, taking the questions, I'll take them in reverse order.

On the WAAM question, we are looking for minimal contribution in 2010. The product that we've already signed up for we're going to need to put through our registration process, and that registration process will take us into the beginning part of the year. So it's not going to be a huge contributor in 2010. If successful, which we certainly hoping this program will be, you'll see more of this grow in 2011 and 2012.

As to your first question, which related to the RCI margin question, the margin in the third quarter, that is one of our higher margin quarters that you're looking at, and our average for the year in that business is probably around 25% or so. We're looking for the 200 to 300 basis points to be incremental to that average of 25% margin that we've been running in that business.

And as you know, we've been talking about this initiative for awhile. I think we've already captured some improvement, so this is additional improvement that we're looking to get.


Your next question comes from Steven Kent - Goldman Sachs.

Steven Kent - Goldman Sachs

Steve, could you just talk about tuck-in acquisitions and what you meant by that? Given your multiple, it seems like maybe share buybacks would be on the list and maybe more importantly debt paydown, so I was a little puzzled by the idea of tuck-in.

And then strategically, can you just talk a little bit more about Wyndham and changing the name, what the reaction is and does that basically put you out of business with pursuing any hotel companies who would want to use you as an exchange company?

And sorry, just to be clear on the tuck-in, size of tuck-ins - what does that really mean?

Steve Holmes

Okay. Thanks, Steve.

On the tuck-in - and let me address the second part of that first question first, which is reducing debt and share buyback - we're not eliminating that as an option for us. Obviously, we are paying down debt; that's been a central focus of ours. We still have a buyback program that's in place, although we haven't been executing on it because we've been cautious with balance sheet and have not been buying back shares recently.

What the strategic tuck-in was addressing was the growth of that segment of our business. So if we're looking at where we will deploy capital to grow businesses inorganically, we would expect to focus on the Hotel segment.

So that's what we were saying about tuck-in acquisitions. It's not to the exclusion of other uses of capital, and obviously we want to pay down debt and we want to do what we can to improve our share price to the shareholders.

The size of the tuck-in acquisitions can be varied, and I don't want to put a bracket on a number because I don't want to have one that's $5 million over it and somebody say gee, you're doing bigger deals than you said you were going to do. I would consider a tuck-in acquisition to be like the Microtel-Hawthorn Suite deal that we recently did. That's a deal that was around $100 million, was an accretive deal for us and will be a terrific add-in going forward.

So we're looking at those type of tuck-in acquisitions, but you really can't project opportunities so I don't know exactly what will be available and what we'll be able to cut a good deal on because obviously we've been very disciplined only to do positive transactions for us.

With respect to the second question on the Group RCI being renamed Wyndham Exchange and Rental, that we don't think will have any impact on your question, which is other hotel companies. Obviously, we've got some terrific hotel companies who are affiliated with Group RCI right now.

The RCI business will retain its name within the exchange marketplace and will continue to be the leader of exchange with great companies like Disney and Hilton as part of our portfolio. The Wyndham Exchange and Rental renaming was really meant to make sure that the world knows, including the investment community, that we've got this incredibly great business that some people think is just associated with the timeshare business.

But the fact is, it also has a terrific rental business over in Europe which is extremely well managed, great brand names, terrific presence in the marketplace, and has performed incredibly well. I don't know that there's many companies - I probably couldn't find any within the travel industry - that on an FX-neutral basis have actually increased from 2008 to 2009. This business has, and we're not sure people actually appreciate what's there. In addition, we are expanding the rental side of the business. It's already grown to half of that business, and we thought it was appropriate to give it the umbrella name of Wyndham.


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

Patrick Scholes - Friedman, Billings, Ramsey

Can I get a little more color on the trends in the RCI business of customers booking online versus calling in? I know you've been working hard to improve that. Where does that stand right now?

Tom Conforti

The increase has been pretty dramatic. We went from 13% web activity on RCI.com last year in the third quarter to 23% in the third quarter of this year. And in North America, which is our biggest part of the company, the biggest part of our Exchange business, we increased from 17% to 29% in 2008 third quarter to 2009 third quarter. So it has been dramatic. And the website, which is actually going to have a new skin put on it mid-November, has been very well received by the consumer community, and I welcome all of you to go online at RCI.com and see what we have available.

Patrick Scholes - Friedman, Billings, Ramsey

Do you think with customers continuing to migrate online that'll be where most of the margin increase in that segment will come from?

Tom Conforti


Patrick Scholes - Friedman, Billings, Ramsey

Just one other question on a different topic here. There's been a lot press and chatter on one of your competitors not giving in to demands from an OTA. What are your thoughts on demands that OTAs are asking for right now, such as last room availability, 25% net rate and three-year terms? Do you think they're starting to overstep their bounds given that we're starting to see a bit of recovery on the hotel side?

Steve Holmes

Well, Patrick, as you probably expect, I'm not going to comment on what others negotiate or what's going on in the marketplace with the OTAs versus our competitors. We have a very good relationship with the OTAs. We work very closely with them. And beyond that, I don't know that there's much that I can comment on because it doesn't really relate to us; it relates to others.

Patrick Scholes - Friedman, Billings, Ramsey

Do you have a master agreement right now with Expedia?

Steve Holmes

Yes, we do.


(Operator Instructions) Your next question comes from Michael Millman - Millman Research Associates.

Michael Millman - Millman Research Associates

Regarding primarily timeshare, can you talk about how you're sourcing or where you're sourcing the customers so that you're getting an increase in volume per guest - to what extent are those existing, to what extent are you unearthing new customers?

And the other question is regarding RCI. Can you talk about, for you and for the industry generally, what is the growth in members or is there growth in members?

Steve Holmes

Okay, taking the first question on the timeshare sourcing, we sell to both our existing as well as new customers, Mike, and that's been a constant for us over the years. We always have a mix of that. Most recently the mix of what we call our in-house or upgrade sales has been a little bit higher as a percentage than it was last year or the year before, but we continue also to focus on new members. Obviously, it's important that we bring new people into the fold. So it's both sources.

The reason that the quality of the buying customer is better, frankly, is that we've more closely refined our marketing for those new customers. We've refined it. We've cut out some of the marketing programs that we had that previously generated lower FICO score customers, and that was all part of the restructuring and the reposition of this business that we did at the end of last year and grew it into this year. So it's really being selective on our marketing channel, and the marketing channels generally drive the quality of the buyer coming to the table.

We also then don't sell to certain FICO score customers or we don't offer the same financing, I should say, to those customers. We're happy to sell to them, but their cash portion will be more or it'll be an all-cash sale because we limit the credit that we're providing to the customers based on the scoring that we have.

Tom Conforti

And, Mike, if I might add, we also closed some of our underperforming sales offices as part of the restructuring effort. So that, combined with the superior execution that Steve described and a more targeted marketing effort, those have been the drivers behind the VPG increase.

Steve Holmes

And on the RCI side, Mike, we aren't looking at large customer growth in RCI. Obviously, we are driven by the number of new people who buy timeshares. The timeshare industry as a whole has contracted somewhat, so we would not expect to see as many new members.

There are, though, two things that I would say will be kind of positives for that business. The first is that with this RCI.com technology that we've rolled out and the kind of customer reaction we're seeing to it, we do expect to see an uptick in the number of active members at RCI. We haven't quantified this yet because we're still introducing this new product to the marketplace, but we think people who in the past maybe wanted to do it online, were forced to do it by call center, maybe were defaulting to go back to their home resort or just were not as actively involved in that planning process for their vacation. So we think we'll reignite people to be interested.

The second thing is that despite the fact that we may not have new member growth, we do expect to see efficiency. And, again, that efficiency or margin improvement should come through the new mechanisms we have for providing this service to the customer, namely RCI.com.


(Operator Instructions) Your next question comes from Ryan Meliker - Morgan Stanley.

Ryan Meliker - Morgan Stanley

I just had a quick question regarding the lodging business. I know you don't have a lot of detail on the corporate rate negotiations right now. I just wanted to get some color on whether you've seen an uptick in RFP requests. Basically I'm trying to get to whether we're seeing any type of trade down from some other brands in the full-service products to some of your limited-service product at the corporate travel level? Any color would great.

Steve Holmes

Okay, Ryan. Well, we are not a huge corporate travel provider. We don't do a lot of meetings and planning business other than in our Wyndham brand, so we probably are not as good a barometer as others are for that.

So because of that, I would default more to the general trending that we're seeing in the industry, which is the RevPAR declines at the upscale, upper upscale luxury segment have been more dramatic than those at the economy and mid-scale sectors, and that's in part because there's probably more of a leisure focus - in our business there certainly is - a leisure focus in the economy and the mid-scale sectors, but also I think there's just what some people call that trading down that people do; there may be some of that trading down going on.

As I've told others, we don't ask somebody when they come and do a Super 8 if they wanted to stay at a different hotel before. We book them a room and give them a great experience, so we don't know if they've traded down or made a different decision. But we can only look at our performance versus our competitors and, where we stand, our declines have not been as dramatic. So that would tend to make me feel that we probably have seen some trading down going on.

Ryan Meliker - Morgan Stanley

You're not seeing an uptick in RFP requests from corporations?

Steve Holmes

Again, we're not big enough in that for us to really be a barometer for it, Ryan, unfortunately. I probably am not the right person to answer that question for you.


Thank you, and at this time I'm showing no further questions. Thank you, I'd like to turn it back over to the speakers for closing comments.

Steve Holmes

All right, well, thank you very much, Caroline, and we appreciate everybody's attendance and questions and look forward to talking to you on our next quarterly call. Thank you.


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

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