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Wyndham Worldwide Corporation (NYSE:WYN)

Q1 2010 Earnings Call

February 10, 2010 8:30 a.m. ET

Executives

Margo Happer – SVP, IR

Steve Holmes – CEO

Tom Conforti – CFO

Analysts

Joe Greff - JPMorgan

Chris Woronka - Deutsche Bank

Patrick Scholes - FBR Capital Markets

Steve Kent - Goldman Sachs

Operator

Welcome to the Wyndham Worldwide first quarter earnings conference call. (Operator Instructions) I would now like to turn the call over to Margo Happer, Senior Vice President of Investor Relations.

Margo Happer

Good morning and thank you for joining us. With me today are Steve Holmes, our CEO; and Tom Conforti, 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 results are discussed in detail in our Form 10-K filed February 19, 2010, with the SEC.

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

Steve?

Steve Holmes

As you saw from the press release, we had a terrific quarter with each of the businesses performing at or ahead of plan. We delivered adjusted EPS of $0.34 above the high end of our $0.27 to $0.32 range.

Remember that we are comparing with first quarter 2009 which benefited from a roll in of $67 million of previously deferred vacation ownership revenues and approximately $31 million of associated EBITDA. Considering that headwind, first quarter 2009 comparisons are especially impressive. Excluding the 2009 roll in of deferred revenues and the favorable impact of foreign exchange, adjusted EBITDA increased by almost 20%.

Our continued strong execution and the momentum of the business give us confidence to raise our revenue, EBITDA and EPS guidance for the year.

Much of the upside is being driven by vacation ownership. As you know, beginning in the third quarter of 2008, we underwent a substantial restructuring to rightsize the vacation ownership business. We closed lower margin sales offices and cut less efficient marketing programs. Our focus is to optimize cash flow and efficiency rather than double-digit top-line growth.

The magnitude of the change was driven by the upheaval in the capital markets and our desire to be masters of our destiny by reducing our reliance on the ABS market. But the strategic intent, which we outlined in late 2007, was driven by our desire to focus more investment in our fee-for-service businesses.

The results are impressive. We had the best timeshare business in the world before the downturn, and the business we have today is even better. It's more profitable, more resilient, and it generates more cash. We have dramatically improved the quality of the consumer loans that we underwrite, resulting in a stronger portfolio. And we've made operational changes that simplify the accounting by eliminating the deferred revenue that make tracking the business difficult for some investors.

On this exceptionally strong base, we are building an add-on business model that will further improve the return profile of the business. Combine this with our fantastic fee-for-service business models, and I think you'll agree that Wyndham Worldwide is well positioned for growth.

In addition, the overall economy is clearly improving. The decline in RevPAR is moderating. And despite with the doomsday profits predicted, leisure travelers are active. The credit in ABS markets also continued to improve.

Throughout the downturn, we've proved the resiliency of our business models as well as our ability to execute. And we are confident that we'll capture more than our fair share of the recovery.

But we're more than a recovery story. We transformed our businesses to generate free cash flow in a sustainable range of $500 million to $600 million annually or about $3 per share per year. That's at least $2.5 billion of free cash flow over the next five years, and we are committed to using that cash to drive shareholder value.

We will return a portion directly to shareholders through increased dividends, and we'll use the remainder to supplement our earnings per share growth by first investing in the businesses for organic growth; second, making acquisitions of fee-for-service businesses in our industries; and finally, repurchasing stock, which is already underway.

Now I'd like to discuss the progress we're making in our strategic initiatives, starting with the Hotel Group. Our vision is to be the world's leading hotel company in size, customer value and performance. We believe that strong, well-supported brands and highly-motivated franchisees are a key to achieving our vision.

As I mentioned last quarter, we are sharpening our focus on execution to take this business to the next level. Similar to our efforts to transform the Exchange business over the last few years with RCI.com, the Hotel Group is launching a series of strategic initiatives, which we refer collectively to as Apollo, with the goal of driving incremental revenue to our franchisees and strengthening the value of our brands.

We will launch our first four missions in the near term, which involve: number one, improving the overall content of our hotel brands across all channels; number two, improving consumer conversion on our brand websites by enhancing navigation, content, rate availability and technology; three, enhancing and consolidating our reservation system; and four, optimizing rate information for our hotel owners through all distribution channels. I look forward to updating you on our progress as we proceed over the next 18 months.

We're seeing substantial momentum in the Wyndham brand, gaining great traction, especially in critical major urban and key destination markets. Overall, we've increased the number of rooms by over 16%, adding 12 properties over the past year. We opened 1,115 Wyndham rooms in the first quarter.

In addition, we recently signed an agreement for the 1,011-room Parc 55 Hotel in San Francisco, which converts today to a Wyndham Hotel. Located near Union Square, this hotel and other recent announcements signify a resurgent presence of the Wyndham brand in major center-city markets.

The Wyndham Parc 55 recently completed a $30 million top-to-bottom renovation and redesigned that included upgrades for all guest rooms, a reconfiguration of the lobby and front desk and expansion of the hotel's meeting and events facilities to 30,000 square feet. We're thrilled to have this hotel in our Wyndham family.

And on April 13, we opened a newly constructed 280-room Wyndham Hotel located on 26th Street in New York City.

Internationally, we continued our expansion in Mexico with the opening of the 198-room Wyndham Casa Grande Monterrey and executed a three-hotel deal in China. Other notable international findings include four new Ramada franchise agreements in China, our fourth management agreement in Bangkok and four new Ramada franchise agreements in India.

And we continue to in accolades here in the U.S. in the economy segment. Super 8 and Days Inn were recently named two of the top 10 most popular franchises on CNNMoney.com.

Moving to Wyndham Exchange and Rentals, the business continues to increase EBITDA through superior execution and the strength in the segment's two phenomenal business models. These models are characterized by great brands, strong distribution networks and significant market positions with loyal customer bases and high barriers to entry. From a financial perspective, these businesses are substantially fee-for-service revenue streams with modest capital requirements.

Last month, I attended timeshare's annual convention known as the ARDA Conference. It was clear to me and I think to everyone there that RCI continues to be the leader in the timeshare exchange industry. Year-after-year, RCI proves its leadership by providing the most innovative technology, marketing and product solutions to both timeshare developers and consumers.

The 2010 event was no exception. At ARDA, RCI further expanded its reputation as a technology leader with another first in the timeshare industry by announcing its debut into the mobile marketing world of two new apps, the RCI TV application and the RCI SnapBook application. Both are available for free download at the Apple app store.

In addition, for the first time in its history, RCI launched a premium membership product, RCI Points Platinum, which will begin sales in June and has already attracted several large developers who have signed up to offer this to their existing owners. Priced as a premium to RCI Points, RCI Points Platinum will offer a plethora of lifestyle benefits, including last minute upgrades for larger units, along with a first look at specialty premium inventory.

Coming off of a very successful 2009, RCI celebrated the affiliation of more than 100 resorts added last year, including a new affiliation agreement with Fiesta Hotel Group that welcomes five properties from the Grand Palladium Travel Club to RCI's global network and the affiliation of two resorts with SkiStar, one of the one of the Nordic region's strongest hospitality brands.

Already this year, RCI renewed its 17-year affiliation and relationship with Hilton Grand Vacations, which includes 50 affiliated resorts and more than 150,000 members. And additionally, RCI renewed its affiliation with Bluegreen Vacations, which includes 45 affiliated resorts and more than 180,000 members.

Last month, we announced RCI's newest agreement with InnSeason Resorts, one of the most world-known vacation brands in the New England with seven properties in the region. And just last week, RCI announced nine new resort affiliations across Indonesia, Malaysia and Vietnam at its 2010 Asia Leisure Real Estates Symposium where over 100 of RCI's Asian affiliates and industry leaders gathered to network and discuss growth opportunities within this important part of RCI's world.

Our European rental businesses delivered solid results once again, supported by the newest member of the Wyndham Worldwide family of brands, Hoseasons, one of the U.K.'s most recognized holiday brands. We closed this strategic acquisition on March 1 and the integration is moving along on schedule and according to plan.

Hoseasons is an excellent strategic fit with its fee-for-service model, strong U.K. brand presence and the additional skill that it provides to our U.K. cottage rental business. It offers a wide range of holiday offerings in over 15,000 lodges, cottages, villas, caravans and boats across seven European countries.

The addition of Hoseasons to our existing portfolio of exceptional vacation brands expands our wide range of holiday rental expenses in Europe from caravans to castles.

Turning to Wyndham vacation ownership who again had an extremely strong quarter with gross VOI sales of 10% and volume per guest up over 25%. As I discussed earlier, these results reflect the benefit of the transformational changes we've put in place over the last 18 months. The business is more efficient and has dramatically improved its cash flow profile.

Our performance in 2009, which continued into the first quarter of this year, demonstrated the resiliency in this business model in difficult economic times, and I believe we've proven that it's a highly manageable, predictable business. So we are excited about the sound fundamentals of our business model in good times and in bad, and I'm confident that this business will continue to deliver superior results both in the short and the long term.

We've spoken before about our new fee-for-service Wyndham Asset Affiliation Model or what we call WAAM. As a reminder, 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 as timeshare points 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 acquisition and growth for our fee-for-service resort management business.

As you may now, we began selling our first Wyndham asset affiliation product in Myrtle Beach in March, and sales are ahead of plan. The sales force is enthusiastic about the product offering and so are our customers.

In fact, average transactions on these sales are running perfectly comparative to our traditional inventory, indicating a seamless transition into our product mix. In short, our customers describe the same value to new resorts enabled by Wyndham as those which we would otherwise develop in finance ourselves.

We are building a solid runway to allow this part of the business to take off once we work through the bulk of the inventory on our balance sheet. With approximately three years of inventory on our balance sheet and with an additional investment of $100 million to $125 million each year over the next three years, we believe we have sufficient inventory for the next four to five years. At the end of that period, we would like to see the asset affiliation model contributing a meaningful portion of our timeshare revenue.

Over the next five years, sales from the asset affiliation may augment growth somewhat, but would largely be a trade-off with the company-sourced inventory. It is at the end of the period when this inventory will provide its greatest benefit and that it would significantly alter the return profile of the business.

Over the long term, we would expect EBITDA growth in vacation ownership in the mid-single digits with an improving return profile. Also, let me remind you that this will include opportunities to grow property management as it fits well with our fee-for-service strategy.

Before I turn over the call over to our CFO, Tom Conforti, let me say how proud I am of our continued strong results, which demonstrate great business models and committed teams of talented individuals delivering superior execution. We will maintain our sharp focus on maximizing cash flow to drive shareholder value.

We are about to enter our annual strategic planning process where we will be identifying many of the opportunities to grow the business both organically and inorganically. Since we've established quite clearly the sustainable cash profiles of business, our management team's focus now would be on how to best deploy that cash to maximize growth.

I will give you additional perspective on our thoughts about growth and how you should expect a clear picture from us over the next three to six months.

Now, I'll turn over the call over to Tom to go through our results and outlook in more detail.

Tom Conforti

Let me begin by echoing Steve's observations regarding the strong execution and ongoing transformation of our company. First quarter revenues and adjusted EBITDA were relatively flat, a significant achievement given the benefit in the first quarter 2009 from the roll in of deferred revenue and associated EBITDA in our vacation ownership business.

Now I'm going to come back to detailed quarter results in a bit, but first I'd like to follow-up on Steve's point about our growth prospects. As Steve said on the last call, cash is the great enabler. So the critical, strategic question is, what effect will all this cash have on the growth profile of our company?

We've been working through some hypothetical, what we believe, realistic per share growth scenarios for the next several years. We start with organic growth, which we project at mid-single digits. If we apply the available free cash flow to either share repurchase or acquisition of fee-for-service businesses, we find that the contribution to overall company growth is equal to or greater than the growth from our base business.

The growth contribution above baseline growth we estimate could add approximately 700 basis points of growth, yielding overall growth of 12 to 15%. We will be working on solidifying our growth plan during our upcoming strategic planning process and will share our more detailed course with you in the upcoming months.

So let's shift now to look at capital markets' activity in quarter one. We completed a number of transactions including refinancing some debt well ahead of schedule, locking in reasonable rates and pushing out some maturities. We believe these actions strengthened our balance sheet and improved our liquidity position in overall investment grade credit profile.

We issued $250 of ten-year senior unsecured notes at a rate of 7.38%, and renewed our revolver at a level of $950 million. We were over seven times oversubscribed on the senior unsecured notes, demonstrating strong investor interest. And 18 banks participated in the revolver renewal, again, underscoring the banking community's confidence in our company.

We used a portion of the senior notes proceeds to repay and terminate our Australian credit facility, with the remainder applied to retiring the $300 million term loan. Now the balance of the term loan was repaid with new revolver borrowings, and as a result, we ended the quarter with $199 million drawn on the new facility.

We incurred early extinguishment fees of approximately $10 million after tax, and we expect to incur approximately $45 million pre-tax in additional interest expense annually as a result of these transactions.

Our outstanding debt levels were unchanged. Our adjusted debt to EBITDA ratio is three times. We have no significant near term maturities, we have abundant liquidity, and we have significant room under our covenants. Overall, we have an investment grade profile.

We also completed a term securitization transaction involving the issuance of $300 million of investment-grade asset-backed notes. The single A rated vacation ownership loan backed notes carries an advance rate of 72.25%, and a coupon of 4.48%, reflecting significant improvement in the asset-backed securities market over the past year, as well as Wyndham's elevated position in the market.

Net cash from operations was approximately $205 million in the first quarter 2010, relatively flat compared to the first quarter of 2009.

Free cash flow, which we define as net cash from operations less CapEx, equity investments and development advances, increased over 7% to $166 million in the quarter compared with $155 million during the first quarter of 2009.

Our transformational actions have put us solidly on track in our base business to sustain annual free cash flow of $500 million to $600 million over the next several years, excluding cash payments of course related to contingent tax liabilities. That's $2.65 to $3.17 per share this year.

We believe that cash is the great enabler and will fuel our growth above and beyond the benefits of the economic recovery. As we look to acquire fee-for-service businesses in our core lodging and exchange and rental segments over time, our free cash flow target could be augmented in the future.

In addition, we are committed to returning cash to shareholders. In the first quarter, we trebled our dividend. Our overall dividend policy calls for growth in the dividend to at least mirror earnings growth. And as you saw from the press release, we have resumed share repurchases at a pace consistent with our activity prior to the downturn, purchasing 1.2 million shares through April 27 at an average price of $25.10.

Now moving to segment performance, let's begin with the hotel group. Revenue declined $10 million, reflecting moderating but continued pressure on RevPAR, which was partially offset in EBITDA by disciplined expense management.

System wide RevPAR declined 6.8% compared with our first quarter guidance of 10% to 13% decline. Now in constant currency, RevPAR declined 8.7% compared to the first quarter. We are cautiously optimistic that we have seen the worse of the RevPAR declines.

We ended the quarter with approximately 593,300 hotel rooms worldwide, opening over 9,300 rooms in the quarter and terminating approximately 13,700 rooms. Over 20% of the terminations, or 3,145 rooms were related to the exploration of a low-margin contract for ungranted affiliated rooms, which we chose not to renew.

Now as we discussed on the last call, our ability to reach our long-term room growth rate of 2% to 4% requires that we make retaining the right rooms a top priority, and we are making progress in this area. We've implemented an early warning intervention program that routes termination notices to a special retention group, which has helped us reduce our attrition rate for the quarter.

System growth trends are improving from last year's first quarter, and the pipeline is holding up well from the end of last year, with approximately 106,500 rooms. We saw an increase in new construction activity domestically in the first quarter, with 13 contract executions in 2010, compared with only eight during the same period in 2009.

Overall, the new construction pipeline increased 4% based on rooms, since the end of 2009, with over 60% of the increase coming from the Wyndham brand, another indication of accelerating brand momentum. While we believe it's too early to call it a trend, these signs are nonetheless encouraging.

Wyndham Exchange and Rentals once again delivered excellent results. For the quarter, excluding the net effect of foreign currency, revenue was flat, and adjusted EBITDA increased 3%, primarily reflecting Hoseasons March results, and continued cost reduction programs.

Exchange revenues in the first quarter of 2010 were flat on a constant currency basis, and up two percent on a reported basis. Now prior to detailing these results, I must call your attention to a change in our Exchange and Rentals drivers, to better reflect revenues in the two pieces of our business.

Specifically, RCI-member related rentals are now captured in the exchange drivers, whereas we used to include those revenues in the rental drivers. We believe this presentation better captures the full value of RCI members, and aligns with exchange peer practices. So with this realignment, our vacation rentals and average fee for vacation rental drivers will be focused on our European rentals business.

Now looking at the drivers; the average number of members was consistent with the first quarter of 2009. Exchange revenue per member in constant currency was also flat compared with the first quarter of 2009, and up 4% on a reported basis.

Higher exchange in member-related rental transaction fees were offset by lower exchange in rental transactions, subscription fees, and travel services. By the way, web penetration for rci.com was 29% in quarter one 2010, compared to 20% in the first quarter of 2009.

Rental revenues in the first quarter were up 2% on a constant currency basis and up 9% on a reported basis. The acquisition of Hoseasons in March contributed $3 million of incremental revenues.

Excluding the impact of the Hoseasons acquisition, transaction volumes in the first quarter of 2010 were consistent with the first quarter of 2009, reflecting higher volumes at our Novasol business, offset by a decline in volumes at our Landal GreenParks business.

In constant currency, and excluding the impact of the Hoseasons acquisition, average net price per rental was up 1% in the first quarter of 2010, primarily reflecting a favorable impact of higher commissions on new properties added to our network in 2010 by our U.K. cottages business.

Now moving to Wyndham Vacation Ownership, revenues were down 4%, and adjusted EBIDTA was up 4%, reflecting the absence of the previously mentioned roll-in of $67 million in deferred revenue. That was the benefit in 2009. This was substantially offset by exceptionally strong execution and performance in the business, resulting in a 71% increase in adjusted EBIDTA, excluding the 2009 deferred revenue benefit and restructuring from 2009 results.

Close rates remain stable, and transaction sizes and pricing are strong. Tours were down 10% year-over-year, slightly better than planned, and VPG, which increased 25% significantly exceeded our plan.

Our strong sales efficiencies reflect our ongoing focus on tour quality, as we continue to refine the database to target only the most qualified prospects as well as the efforts of the best sales team in the industry. It's important to note that we expect VPG growth to moderate as we move through the year and further adjust our tour mix to include greater frontline tour flow to support the long-term growth of the business.

Property management revenues increased 10%, and merely reflecting a higher number of managed units. Consumer finance revenues declined 4%, primarily reflecting a reduction in the size of our receivables portfolio, while consumer finance interest expense declined 25%, reflecting a decline in average borrowings and improved rates on our most recent securitization transactions.

As you know, we're transforming this business and continuing to make great progress in terms of improving cash flow and our return profile. The percent of sales financed through the quarter averaged 54%, down from 58% a year ago, and 64% two years ago.

On the consumer financing front, we saw significant improvement in the first quarter in write-offs, which declined to a rate of 2.8% of the overall portfolio from 3.4% during quarter 1 of 2009. Overall, delinquency and default rates in the portfolio continue to improve.

Considering these and other factors, the provision for loan losses was $86 million, or 28% of gross realized sales, down from 31% on a similar basis from the first quarter 2009.

And note, as we continue to write higher quality loans, and as the economy begins to stabilize, the earnings upside from lowering provisioning could be significant over the next 18 months. We gained approximately $8 million in full year EBITDA to every 100 basis point decline in the provision, as a percent of gross realized sales.

Now turning to guidance, as Steve mentioned and as you saw from the press release, we're bringing up the bottom of our revenue guidance slightly with a new range of 3.6 to $3.9 billion. We've increased adjusted EBITDA guidance to 805 to $840 million, up from the previous guidance of 775 to 825.

Adjusted interest expense based on the new capital structure is expected to be 135 to $145 million. And we are increasing our adjusted earnings per share guidance to $1.56 to $1.71 per share.

We expect diluted adjusted earnings per share for the second quarter of $0.38 to $0.42. Remember that second quarter 2009 results benefited from a roll-in of deferrred revenue of $37 million resulting in $17 millions of additional EBITDA.

At the hotel group, our current desk view is that RevPAR could be flat or down slightly at the upper end of the guidance that we provided in February. Bear in mind that some of the immediate turnaround in industry RevPAR is through the luxury in upper upscale segments, which are typically the first to show positive growth coming out of the downturn.

We primarily operate in the economy in mid-scale without food and beverage segments, which are historically more resilient in a declining RevPAR environment, but slow to improve in an increasing RevPAR environment.

Travel patterns during spring break were encouraging, and if this trend carries over to the summer months when we derive 30% of our annual royalties, we are optimistic that we could se an improvement in our full year RevPAR performance. However, for now we are leaving hotel guidance unchanged.

Exchange in rentals revenue and EBITDA guidance remain unchanged. However, we are updating the driver guidance based on the new methodology which moves RCI member related revenues to the exchange drivers, And the whole season's acquisition, which excluding the acquisition-related cost, will be accretive.

Aside from these changes, our underlying assumptions for the business remain unchanged. Taking the methodology change and the acquisition into account, the new driver guidance is first in exchange. We expect the average number of members as well as exchange revenue per member to be flat

However, in rentals, we expect transactions to increase 20% to 23%, and average net price for vacation rental to decrease 12% to 15%, primarily reflecting increased volumes at lower rental yields for our new Hoseasons business.

As Steve mentioned, the guidance increase overall is due to strong vacation ownership performance, and we are upping our revenue guidance to $1.8 billion to $2 billion, and EBITDA guidance to $380 million $405 million. Tour guidance remains unchanged, and VPG guidance will be increased by 100 basis points to a range of 6% to 9% growth. We also expect continued improvements in the loan lost provision.

Finally, we continue to make very good progress on the resolution of our legacy contingent liability for taxes related to periods prior to our separation from Cendant. We are in active settlement discussions with the IOS, and those discussions are progressing well. We expect any settlement to be within our reserve amount of $274 million, and the vast majority of this issue to be resolved no later than the third quarter and possibly before.

With that, I'll turn the call back to Steve.

Stephen Holmes

Thanks, Tom. Before we open the line for questions, I would like to make a few concluding comments. Overall, this was a strong quarter across all three of our business units. We have robust business models, and our associates are executing our business strategies extraordinarily well.

The economic environment is showing signs of improvement. In addition, we're seeing tangible evidence of the transformation of our business in the form of strong free cash-flow, which we're deploying to build shareholder value, both directly and indirectly.

We have tripled our dividend and reactivated our share repurchase program. We will invest in our strong businesses to achieve strong organic growth, and we will look for acquisitions in our fee-for-service businesses that will fuel additional cash and more growth. And as Tom mentioned, we've raised our guidance.

In short, we're delivering on our commitments to shareholders, and we will continue to work hard to do so each and every day.

With that, let's open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joe Greff with JPMorgan.

Joe Greff - JPMorgan

With respect to your outlook on vacation ownership, you mentioned you altered your loan loss provision outlook; I believe, quarter ago was 28% of growth sales. What is that going forward for the rest of the year? I know you mentioned 28% in 1Q.

Tom Conforti

I don't think we've guidance on loan loss provisions, Joe. And so we just see real positive signs and expect that that number will improve as we go through the next three quarters.

Joe Greff - JPMorgan

So if we look at the vacation ownership EBITDA guidance, the upside there is really coming from that. That I guess clarifies that it's entirely the additional upside. And then how much of that is WAAM contribution that you may not have had in the guidance before?

Tom Conforti

It's a mix of VPG increase and improvement in loan loss. One of the things that I think our company is seeing in our hotel business as an economy-scale brand that recovers a little slower than some of the upper upscale and luxury brands. But within our timeshare business, we have this loan loss provision as you know, Joe that is influenced by the direction of the economy.

And as the economy improves and the ground beneath us gets more solid, then our belief is that the loan loss provision will improve. And we shared that for every 100-basis points of improvement in loan loss, its $8 million of EBITDA. So that's a big swing factor, and we're constantly assessing where we should be with that loan loss provision.

Joseph Greff - JPMorgan

And then Steve, talking about the Wyndham asset affiliation model, can you talk about how many additional deals beyond what you have at Myrtle Beach and Orlando or kind of in your WAAM pipeline?

Steve Holmes

Sure, Joe. There's a tremendous pipeline out there. We do a triage on the pipeline by determining where we would like product, what the quality of the product looks like, and the partner that we would be entering into, to know that they'd be able to provide financing to the end-consumer. We have dozens in the pipeline.

I think this year it's probably safe to say that we'll probably see three of four more get executed. We may only start selling one or two more because we want to continue to work down our balance sheet. But there's a lot of product out there available.

Operator

Your next question comes from Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank

Steve, I was hoping we'd talk a little bit about the time share business. And it looks like things are kind of getting better, maybe a little bit faster than you thought there. Are you guys operationally geared to handle that increased demand? I know you have the inventory, but do you have the sale for some things like that to accelerate things a little bit?

Steve Holmes

Well Chris, as we articulated before, our goal is not to ramp that business back up to a strong double-digit grower. We've done that before, we know we can do it, but what we're really managing that business for is to maximize cash flow and maximize efficiency. And that's why you see in the results for this quarter, 25% in volume (progress) is phenomenal.

I mean the sales force did a remarkable job. Now between marketing and sales, they delivered more than we thought they could for the quarter.

The first quarter is always a heavily in-house quarter because you don't have as many people out traveling for summer vacation. So you tend to see more in-house sales, and the over-exceed would be more easily achieved maybe in the first quarter versus let's say the third quarter, when you've got the summer months included. But we do not plan on ramping that business up back to double-digit growers.

So to answer your question, we don't have the sales force sitting on the sidelines waiting to launch in. There's a lot of sales people out on the street, we could probably ramp that up. But that's not our goal. Our goal is to continue to improve the efficiency of the business and to produce cash flow. And on those two areas, that business is in A++.

Chris Woronka - Deutsche Bank

Then on the lodging kind of the Apollo program, can you just maybe share a few thoughts there in terms of will that mean more voluntary removal initially and then hopefully more units on the backend and what's your financial limit there? Is there any at all in terms of CapEx or investment in the brands?

Steve Holmes

Well, our financial commitment is to develop the backbone that will provide these additional features to the franchisees. So our commitment to it is complete. It's also within the numbers that we've guided people towards. We've been working on this project for some time, and now we're coming publicly. So it's been in the work. It's been in our planning. So within the CapEx numbers, we've shown you it includes the launch of our Apollo initiative this year.

As to the franchise community, hopefully it'll increase the franchise community, because our value proposition will even be stronger to prospective franchisees as well as existing franchisees. This is not a process that will eliminate people. This is a process that hopefully will bring more in. And importantly, as Tom said I think in the last quarter, retention is key. We're very focused on increasing our retention rate. Keeping somebody on is easier than having to go on and find a new hotel.

Operator

(Operator Instructions) Our next question comes from Patrick Scholes with FBR Capital Markets.

Patrick Scholes - FBR Capital Markets

Now with the timeshare sales intentionally slowing, it looks like generally timeshare property management is becoming a larger part of that business. I'm wondering if you can give me a little color on what sort of margins that you're getting on that type of business and typically how long are your contracts for your timeshare property management.

Steve Holmes

Well, the contracts, they're not long, long-term contracts with the property management on the timeshare side like they are on the hotel side. The contracts can be one year. They can be three years. They can be five years. The key is though that we generally keep those contracts from year to year to year.

There is very little loss rate in our contracts, none that I can think of recently, on the timeshare side. So the length of the contract is not as critical as the fact that we've got good relationships and good books for those properties. And some can go as long as 10 years, but they're generally shorter term. The other part of the question was the margin.

Tom Conforti

Patrick, this is the ultimate fee-for-service business. It's a cost-plus business. And so we basically take 10% or so above cost. So this is a business that is the type of business structurally that we love, no CapEx and it's a fee-for-service business, because we're providing the homeowners a service. And that's around 10%.

Patrick Scholes - FBR Capital Markets

Is that 10% margin that you're taking?

Tom Conforti

Yes, it's actually 10% markup.

Patrick Scholes - FBR Capital Markets

Okay, not margin, but markup, okay. And then just one other question. Just now that your balance sheet about three times and you're buying back some shares, what level of debt to EBITDA are you comfortable with?

Steve Holmes

We like where we are. We believe we already have an investment-grade profile, all measures, points of that. Internally, we like to keep it in the low-3s. And so when we reported that we're at three times adjusted EBITDA for the quarter, that's about where we'd like to be, maybe a little higher, but in that ballpark of 3 to low-3s.

Operator

Our next question comes from Steve Kent with Goldman Sachs. You may ask your question.

Steve Kent - Goldman Sachs

Tom, maybe you could talk to, or Steve talk to, this 700 basis points of increased growth in acquisitions and how do you that given the parameters of wanting to still buy back stock, still make them relatively small tuck-in acquisitions? How do you achieve that over the next couple of years, or maybe I misunderstood something?

Tom Conforti

Yes, Steve, I really wanted to specify these are per share growth targets. So we have the two levers. We basically did a reasonably simple exercise and said we're solidly brought into the fact that we're going to generate between $500 million and $600 million a year baseline in free cash flow. So the question is what do you do with the free cash flow?

And so in one scenario, we made certain assumptions about share price appreciation and assumed that all of that cash would be used to buy back. This is again a hypothetical exercise. All of that cash would be used to buy back stock at various levels over the next five years. So we came out to sort of the incremental per share growth of x.

And then we made an assumption that said if took all of that same cash flow and, as another side of the equation, we purchase EBITDA what we consider to be a reasonable target multiple, we came out with another growth number.

Now the likely scenario is going to be a hybrid scenario where we buy back stocks and we buy EBITDA over time. And so we basically went through that exercise and came out with that number of around 700 basis points of growth on a per share basis.

Steve Holmes

It wasn't 700 basis points just for acquisitions.

Steve Kent - Goldman Sachs

So it's by using a combination of making some acquisitions, buying back stocks, that's how you got incremental 700 basis points more.

Tom Conforti

I think that's an important exercise to start, because we've spent last few months establishing the cash statement and now we're trying to translate that cash into what we're going to do with it. And initially, it was sort of a broad application of the cash that said about 700 basis points of growth on a per share basis would come about because of that.

Steve Kent - Goldman Sachs

Just one more thing on that issue of making acquisitions, I always struggle with this because your multiple is 7 times or so 2011, which is a reasonably low multiple. So how do you make accretive acquisitions if you are trading at 7?

Steve Holmes

I couldn't agree with you more that 7 or below multiple, Steve, so I appreciate you saying that. The fact is though that we make acquisitions and we make them better by our business model. So for example, the Hoseasons transaction may have appeared to be based to what they were earning, higher multiple.

But in our hand, it ended up being an accretive deal because of the synergies and the infrastructure that we can bring to bear. And that is frankly how we have done a lot of our deals over the years, whether it was Hawthorn Suites or Microtel. We've continually brought in deals and made them better by our management, our infrastructure.

Operator

(Operator Instructions) And at this time, I'm showing no further questions. I'll turn the call back over to Steve Holmes.

Steve Holmes

Okay. Well, thank you very much everyone for spending time with us this morning and have a great day.

Operator

Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

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