Welcome to the Wyndham Worldwide Q2 earnings conference call. (Operator instructions.) Today’s conference is being recorded. If you have any objections you may disconnect at this time. I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations.
Good morning. Thank you for joining us today. With us are Steve Holmes, our CEO, and Tom Conforti, 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 results expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed April 30th, 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 measure is provided in the tables to the press release and it’s available on the Investor Relations of our website at www.wyndhamworldwide.com.
Thank you, Margo. Good morning, everyone, and thanks for joining us today. As you saw from the press release we had a terrific quarter with operating results in each of the business units better than our expectations. We delivered adjusted EPS of $0.51, significantly above the high end of our $0.38 to $0.42 range, reflecting continued strength in growth across the three businesses as well as a change in our tax rate and some favorable impact of foreign currency.
When evaluating 2010 Q2 comparisons to 2009, remember that last year’s results included approximately $37 million roll-in of previously deferred time share revenue which contributed approximately $17 million in EBIDTA. Excluding that, as well as excluding the favorable net impact of foreign currency, Q2 2010 adjusted EBIDTA increased by 14%.
We continue to see improving business momentum, especially in North America which accounts for over 80% of our EBIDTA. Domestic RevPAR was flat for the quarter, turned positive in June and is stronger yet in July. This improvement is being led by occupancy gains over last year. Vacation exchange remains within our expectations and quarterly close rates and vacation ownership have never been higher.
And Europe, which has been an area of investor focus over the recent months, remains stable. These trends, coupled with continued strong execution by our businesses and a favorable tax rate give us confidence to raise our full year revenue, EBIDTA, and EPS guidance. Tom will cover the details a little bit later.
We recently completed the formal stage of what is essentially an ongoing strategic planning process. Our five main strategic initiatives remain the same, with the top three being to increase market share, grow cash flow, and rebalance our portfolio to emphasize our fee for services business. Since we established these strategic initiatives in 2009 we have remained on course and have delivered, again, each of them.
Let me highlight some of the refinements coming from our strategic planning process. In addition to our core organic growth, cash flow will continue to be an enabler for incremental growth. In that regard I am pleased to share that our free cash flow projections beyond 2010 have us in the neighborhood of $600 million to $700 million annually, instead of the $500 million to $600 million we’ve previously shared with you. This increased cash flow is the result of growth in EBIDTA, the favorable flow-through characteristics of our fee for services business models, and lower cash taxes. It will be applied to growing our business and increasing shareholder value.
Next I want to spend a few moments to update you on what WAAM, our alternative timeshare business model, will look like in the future. We have shared previously that over the next few years as we streamline our timeshare balance sheet we will limit the size of our WAAM business to approximately 15% to 20% of total vacation ownership revenue. Moreover, once our balance sheet reached our desired level we would explore expanding the WAAM business model to a higher level. As we examine the various impacts on returns, free cash flow, and EBIDTA of different levels of WAAM activity, we have concluded that WAAM should continue to be viewed as a complementary business to our traditional timeshare business.
By the way, we continue to gain traction with WAAM. Sales in Myrtle Beach, our first WAAM project, remained robust and ahead of plan. In addition we will begin sales next week on our second WAAM deal, as we become the exclusive sales and marketing agent for the sale of vacation ownership interest of up to 275 recently-constructed units at the Reunion Resort in Orlando.
Finally, I would like to spend a couple of minutes discussing our growth plans, which were a key focus during our strategic planning process. We discussed during our last quarterly call that we are expecting EBIDTA in the core business to grow at a compound annual rate of 7% to 9%. That was confirmed in the strategic planning process. If we simply keep our free cash flow on our balance sheet, EPS would grow at 12% to 14%. With a more active deployment of cash through share repurchases, additional investment in our core businesses, and acquisition of fee for service businesses, we can yield total earnings growth approaching 20%. Our management team is focused on finding the right opportunities to complement and enhance our organic growth and through the action of our board of directors we now have additional capacity to repurchase our shares.
These growth levels will be achieved while dramatically reducing our leverage ratios and enhancing our credit profile. Our specific credit objectives are to maintain a DDD- investment grade profile. As our credit profile continues to improve, we will have the opportunity to further drive earnings growth by increasing our debt while maintaining a DDD- credit rating. If you add our commitment that we made regarding our dividend policy, which is basically we said that our dividend increase would track our earnings growth, the opportunity for further improvement to total shareholder return is enhanced.
Now let me take a moment to share some current business unit highlights. The Hotel Group is making significant progress on a number of fronts. We acquired the Tryp Hotel brand from Sol Meliá Hotels and Resorts comprising license agreements for 92 hotels located throughout Europe and South America. The brand, to be renamed Tryp by Wyndham, is a select service, mid market brand catering to business and leisure travelers in center-city locations including Madrid, Barcelona, and Paris. While this acquisition increases our international platform we also plan to pursue an aggressive growth strategy in North America for this Tryp brand.
We continue to make significant progress in growing the Wyndham brand as well organically, increasing rooms 23% year-over-year. Brand openings in the Q2, 2010, were at the highest level in two years. In fact, we’ve added more rooms to the Wyndham system so far this year than we did in all of 2009. Significant additions include Wyndham hotels in San Francisco and Tampa, Florida, and Wyndham Gardens in Philadelphia and South Beach, Miami. We also signed an agreement for our first Wyndham Grand in Hawaii, a 322-room new built luxury resort.
Yesterday JD Powers released the results of its annual guest satisfaction survey, and Microtel was ranked the highest among economy chains for the 9th consecutive year. This is unprecedented for any brand in any segment. As Microtel continues to dominate the economy segment, Day’s Inn and Super 8 maintained leading potions.
As I discussed on the last call, the Hotel Group launched a series of initiatives called APOLLO, which are aimed at improving the value proposition to our hotel owners, predominantly through improved system contribution from technology enhancements. Through the Q2 we built a strong foundation organizationally and through the establishment of formalized project management processes we are preparing to deliver the many benefits that APOLLO offers over the next 12 to 18 months.
Now moving to Exchange and Rentals. RCI continued to demonstrate its ability to grow by signing more than a dozen new long–term affiliations in the quarter. RCI welcomed 15 resorts from new affiliates and added seven additional resorts from existing affiliates, bringing our year-to-date new resort affiliation total to 58 resorts. This increase further strengthens our industry-leading exchange network and reflects our commitment to offer our members the best new vacation product choices around the world.
In June, Wyndham Exchange and Rentals rolled out its latest round of RCI.com innovations, which were designed to continue to drive more transactions to the web and improve customer experience by creating first a simpler yet more robust online member search capability; second, expanding new automatic email member notification functionality on pending vacation searches to our European region; and third, continued expansion of our club ennoblement program to major club affiliates.
Developer affiliates using the new web interface have achieved significant gains in online transaction penetration rates in a matter of months. Web penetration at RCI.com was 27% in the Q2 of 2010, compared with 21% in the Q2 of 2009.
Within our rental business, the integration of Hoseasons, our recently acquired UK vacation rental company, is progressing on budget and on schedule. The Holiday Cottages Group and Hoseasons’ management teams continued to integrate their very similar businesses and have renamed their combined companies The Hoseasons Group. While this has provided tremendous engagement and buy-in from our 700 new Hoseasons associates, the name change also provides us the opportunity to leverage the well-known Hoseasons brand.
Our vacation ownership business continued to perform exceptionally well during the Q2. Having fully lapped the adjustments made in late 1008 and early 2009, our results this quarter provide a clear view into the health and stability of this business. As you may recall, I first discussed our intention to slow the growth of our vacation ownership business during our 2008 Q2 earnings call. This was months ahead of the financial crisis and the subsequent collapse of the credit markets. While our primary goal at that time was to free up more capital for investment in our fee for service businesses, we also believed that slowing growth in vacation ownership would afford us the opportunity to gain greater efficiency and improve the margins of this business. We’ve accomplished those goals in our new view of the traditional vacation ownership model, which moderates growth to streamline the balance sheet, significantly increases the ROIC of this business especially with the ABS market stabilizing.
This business continues to perform better than our expectations, illustrating our ability to execute. Please recall that occupancy levels at vacation ownership remained consistent throughout the downturn and are currently running at about 85% across our system, proving the value proposition of the product.
One final note before turning to Tom. We have a strong, resilient, predictable business and we are confident that it can deliver superior returns in good as well as in challenging economic times. And as noted in the press release this morning, our Board shares our confidence, approving an increase in the share repurchase authorization of $300 million. With approximately $90 million remaining in the previous program we have a commitment to invest directly in our company.
In addition, and as I said before, our policy is to grow our dividend at least in line with earnings, and we’ll allocate the necessary cash to achieve that objective. Finally, through prudent acquisition of fee for service businesses we’ll compound the effect of an excellent business model, further increasing EBIDTA and cash flow. We intend to use every tool available to us to grow our business and enhance shareholder value.
I’ll now turn the call over to Tom who will provide you with additional perspective and details on our results and our outlook. Tom?
Thank you, Steve. As you saw from the press release this morning as well as in recent announcements from us over the past week, we have much good news to share on this call. We beat our expectations by a wide margin, coming in $0.09 above the top end of our range. A little over $0.02 of the beat came from prudent cost management in Exchange and Rentals and an additional $0.02 from favorable foreign currency impacts. Approximately $0.04 came from a lower tax rate, reflecting our ability to utilize foreign tax credits based on certain changes we made to our tax profile.
The results of the quarter, which reflected the current utilization of cumulative credits taken in the quarter, was a 32.6% effective tax rate. We expect our full year tax rate for 2010 to be approximately 35.5%. The longer-term effects of the change will be less evident on GAAP tax basis, as we expect our tax rate next year to be close to 37.5% and then approach a more normalized rate of 39% in 2012.
Where we expect to see a meaningful and sustainable pick up is in our cash taxes, translating to approximately $100 million over the next five to seven years. This is one of the facts that led us to raise our future free cash flow guidance that Steve mentioned earlier.
Before going through the results for the quarter, let me touch upon some of our recent news. We announced the resolution with the IRS of our legacy contingent tax liability, related to periods prior to our separation from Cendant. The settlement was well within our reserve. We are paying a total of $145 million against an IRS reserve of $185 million. We will reflect this settlement and the $40 million gain in our Q3 financial statement.
In addition to settling the contingent tax liability, this agreement also settled $190 million of deferred tax liabilities related to timeshare receivables on our balance sheet. Approximately $125 million of the $145 million payment reflects an accelerated payment of this deferred tax liability. So our cash taxes over the next three to six years will be reduced by the amount of the $125 million payment and the deferred tax liability will be reduced by the $190 million, and results in an increase in shareholders’ equity. We look at the settlements of these two issues as a package settlement and a very positive development for the company.
Turning to capital markets. Earlier this week we announced an ABS deal with advanced rates and cost characteristics very close to those of deals we did prior to the economic downturn. We securitized $350 million in timeshare receivable notes at an advanced rate of 83% and an all-in yield of 4.15%. This was the first senior and subordinated deal structure in the market since 2008. The transaction was over subscribed and we don’t be happier with the execution.
In addition, in June we closed a $185 million premium yield securitization. Premium yield securitizations, which consist primarily of notes that are ineligible for the conduit due to certain borrower or loan characteristics, represent more expensive financing than normal term deals but significantly enhance our liquidity and cash flow.
Net cash from operations was approximately $557 million for the first six months of 2010, a 21% increase compared with the first half of 2009. Free cash flow, which we define as net cash from operations less CAPEX, equity investments, and development advances, increased over 32% to $486 million for the first six months, compared with $368 million for the same period in 2009. As you know, we believe that cash is the great enabler for our company and will build our growth above and beyond the growth associated with our core businesses.
We now expect our free cash flow in 2010 to be at the upper end of the $500 million to $600 million range, excluding the upcoming payment of the $145 million related to the IRS contingent tax liability. And as Steve mentioned earlier, we are now projecting steady state free cash flow of $600 million to $700 million in 2011 and beyond.
We remain committed to returning cash to shareholders, and as you saw from the press release, we have continued our share repurchases, buying 3.4 million shares through July 27th at an average price of $23.85. These actors have prompted the Board to increase our overall share repurchase authorization by $300 million.
Now moving to operating performance for the quarter, let’s begin the segment reviews starting with our Hotel Group. Revenues were up slightly while adjusted EBIDTA was flat, reflecting an increase in bad debt expense which we attribute to some lingering ripple effects of the recession. System wide RevPAR was flat ahead of our expectations for the quarter. As we expected, the economy segment return is lagging the turnaround in upscale and luxury. We have continued to see meaningful improvements in RevPAR throughout the first three weeks of July.
Domestic RevPAR for Wyndham Hotel and Resort brand was up 13% in the Q2 2010 compared with Smith Travel Data for the upscale segment of 6.9% during the same period. We ended the quarter with close to 606,800 hotel rooms worldwide. Excluding the Tryp acquisition which added approximately 13,200 rooms, system growth was flat, in line with our expectations. So far this year we’ve executed 209 new hotel contracts, which is 15% above last year. The pipeline is essentially flat, reflecting good franchise contract execution and several large Wyndham openings during the quarter. The new conversion pipeline is up 6% since December 31, 2009, with much of the momentum coming internationally, and conversion activity is consistent with last year.
Wyndham Exchange and Rentals once again delivered solid results. For the quarter, excluding the net effect of foreign currency, revenue was up 3% and adjusted EBIDTA increased 17%, primarily reflecting Hoseasons Q2 results and continued strong management by our team. Hoseasons contributed $10 million to revenue and as Steve said we’re very pleased with the integration and performance of this business. Our Exchange and Rentals management team continue to drive efficiencies in the business to reduce costs. The overall foreign currency impact in the Q2 was positive, resulting in favorable EBIDTA impact of $10 million, primarily from lower losses than 2009 on FX transactions.
Wyndham Exchange and Rentals performance drivers were consistent with our expectations, demonstrating again the stability of this business. Annual number of Exchange members and exchange revenue per member were relatively flat. Vacation rentals transactions were up and average net price per vacation rental was down, reflecting the impact of the Hoseasons acquisition.
Now moving to Wyndham vacation ownership, revenues were up 8% despite the absence of the roll-in of $37 million of deferred revenue that was a benefit in 2009. Revenue increases reflect $35 million in lower provision for a loan loss, while WAAM commissions were $8 million. EBIDTA increased 14% from the Q2 of 2009 excluding the prior year period EBIDTA benefit associated with the deferred revenue roll-in and restructuring costs. The increase reflected exceptionally strong execution and performance in the business, some of which was slightly offset by higher commission costs. We will be working to bring commissions back to historic levels in the future.
Our key performance business driver, volume per guest, was up 16% above 2009’s Q2 results, reflecting strong pricing and lower rates. Property management's revues increased 6%, primary reflecting an increase in managed units, and consumer finance revenues delivered 3%, primarily reflecting a slightly smaller receivables portfolio. We continue to make great progress in improving our cash flow and return profile in our vacation ownership business. The percent of sales financed for the quarter averaged 54%, down from 56% a year ago and 68% two years ago.
On the consumer financing front, overall delinquency and default rates in the portfolio continue to improve. Write-offs during the Q2 declined to 2.7% of the overall portfolio from 3.4% during the Q2 of 2009. The provision for loan losses was $87 million or 24% of gross DOI sales, down from 34% in the Q2 of 2009.
Now turning to guidance. As Steve mentioned and as you saw from the press release, we’re increasing revenue guidance $100 million to a new range of $3.7 billion to $4 billion. We’ve increased adjusted EBIDTA guidance $20 million to $825 million to $860 million. We are also bringing adjusted earnings per share guidance to $1.78 to $1.88 per share, reflecting a 35.5% tax rate and a share count of 186,000,000. Now note that as usual we have excluded future share repurchase assumptions from our guidance today. We expect diluted adjusted earnings per share for the Q3 of $0.60 to $0.64 per share.
Now drilling down to the business units. At the Hotel Group new RevPAR guidance is flat to a positive 3% increase, and room guidance reflecting the Tryp acquisition is now 3% to 5%. We are increasing lodging revenues slightly to a new range of $640 million to $680 million, but are keeping EBIDTA flat reflecting the higher bad debt expense in the Q2 as well as increased investment in APOLLO and IT securities.
Exchange and Rentals drivers and revenue remain unchanged, but we’re bringing up EBIDTA by $5 million, reflecting Hoseasons and continued cost management.
Finally, we’re raising vacation ownership revenues by $100 million and bringing EBIDTA up by $20 million, reflecting an increase in volume per guest to 10% to 14% and a reduction in our flow improvement by 1% to 3% from last year, which is a slight improvement from our prior guidance. We expect the provision for loan losses to be approximately 24% for the remainder of the year. NAS with that, I’ll turn the call back over to Steve.
Thanks, Tom. Before we open the line for questions I’d like to make a few concluding comments. Overall, this was a strong quarter with results above our expectations and momentum building. Based on these results and our expectations for the remainder of the year we have raised our full-year revenue, earnings, and EBIDTA guidance. Our business models generate significant free cash flow and our execution is continually strong. Our efforts to transform the business and deliver sustainable free cash flow are paying off, as we have raised our sustainable cash flow guidance for ht future. We are intrinsically focused on turning this cash into growth and giving our shareholders the benefit of the multiplier of compounding effect this creates.
With that, let’s open the line for questions. Carolyn?
Thank you. We will now begin the question-and-answer session. (Operator instructions.) Our first question or comment comes from Kevin Milota from JP Morgan. Your line is open.
Good morning, Kevin.
Kevin Milota – JP Morgan
Hey, good morning, guys. I was hoping you could give some more color on the, you’ve got that great margin performance on the vacation Exchange and Rentals side of things. Wondering how sustainable that is going forward. And also given the hard work that you guys have done in the timeshare ABS space, do you plan on accessing the market in the second half of the year?
I’ll take the first one on Exchange and Rentals and then Tom can address our financing needs, Kevin. On the Exchange and Rentals, what you’re seeing is a flow through of what we had talked about quiet awhile ago of moving the exchange and rental business to a more automated, online business. And those improvements are something that we had talked about and were planning for when we stared the process about a year and half, two years ago.
Now in addition there is some FX that’s flowing through this quarter that does have an impact and drops more margin improvement for the bottom line. But yeah, what you're seeing is a combination of those two factors. Do you want to talk on the ABS, Tom?
Sure. Kevin, you know, the last ABS transaction we completed last week was really heavily subscribed. We upsized it a bit and we got to the $350 million. We believe we’re going to probably do another transaction in the fall sometime. It most likely will be a smaller transaction than the $350 million we just completed, but we had to take advantage of what are just exceptionally positive market characteristics in terms of advance rentals and coupons that we really wanted to upsize it when the opportunity was there. But we’ll do another one in the fall.
Kevin Milota – JP Morgan
Okay, thanks a lot.
Thank you. Our next question or comment is from Bob LaFleur from Hudson Securities. Your line is open.
Bob LaFleur – Hudson Securities
Hi, good morning. I was just curious if I could get a little more color on your comments early in the call about the WAAM model as it came through the strategic review. It sounds like you, I don’t know if you tempered expectations for it but I guess there’s been a lot of enthusiasm about that as potentially a bigger part of your vacation ownership business going forward; and it sounds like that’s not the case. I was wondering kind of what happened in the strategic review that led you to that conclusion? Had anything changed from when you first proposed this? And then also if you could sort of finish that up by talking about your current inventory on the balance sheet – how much sales that gives you particularly in light of the increased revenue guidance, and also at some point do you think you might have to start building timeshare again, if at all.
Wow, a lot of questions there, Bob, this morning.
Bob, well done, dude. That’s quite a hit there.
A stream of consciousness. Well, let’s talk a little bit about the WAAM model. We had indicated that for the next four years as we’re burning though our inventory the WAAM model would probably be somewhere between 15% and 20%. So that is consistent with what we’ve said in the past. We get a lot of questions about the WAAM model because it’s new and it’s kind of an innovative product that we have that we can offer up. What we’ve been doing as we went through the strategic plan is we said “Okay, now beyond the four years, looking out five through ten, what could it conceivably look like? And should we be gearing ourselves towards 100% WAAM or 0% WAAM? What should it look like?”
And what we’re doing is we’re balancing both the return that we get on the invested capital as well as cash flow and EBIDTA generation from the traditional model and the new WAAM model. And what we think is that going forward - now going forward is five years out so we’re just trying to give people a picture because there’s been a lot of questions about it. Going five years out it could be 15% to 20% still, it could be more, it could be less. But we don’t want to make it appear that we’re going to turn the switch completely over and only do the WAAM products.
We've always said it’s probably complementary, there’s probably a hybrid approach where we’ll own some of the real estate or some of the inventory and we’ll use some WAAM. And we think that looking out five years and beyond it probably will continue to be a hybrid model and it’s probably not 100% WAAM; it’s probably something less than that and it could be somewhere around the level that we’re running at right now.
So it’s hard to predict that far out exactly what the mix will look like, but because we had questions on it we thought we’d give our latest thinking after our strategic planning process. And one of the tings that’s driving us in looking at all of this is the ROIC that we see and how that plays out beyond the next four years for that particular business unit.
Now with respect to inventory, we have about four years of inventory on the balance sheet right now, and so that, and that’s assuming a mix of you know, 15%, 20% of WAAM. And so it could be four, five years, somewhere in that range. And it really isn’t impacted by the level of sales that we’re increasing timeshare by. I don’t know if I got all the answers.
I think so. If I might just add a couple of other thoughts to what Steve just said. You know, number one we have said consistently, recently that we ‘re going to have to spend $100 million to $125-ish million each year on inventory over the next few years and that inventory investment would be adequate to get us trough 2014. So it takes us through 2014 comfortably.
Now just to touch on a point that Steve made about ROIC. We’ve been looking at the return profile of the business, balancing it against EBIDTA, and what we saw is that if we streamline our balance sheet and get our inventory levels to a much tighter level than we’ve had historically because of our growth goals for this business, that we can drive a ROIC that’s in the low 20’s, which we expect to be a dramatic improvement from how this business has been profiled historically as we’ve built up the balance sheet to chase this growth. And so the interim period, the next five years which we describe as our balance sheet streamlining period, will get us to a higher ROIC; and then we looked at various scenarios of WAAM and decided that at least at this point that the best balance of EBIDTA growth with an attractive ROIC and positive free cash flow characteristics, at this point in time, would have us as Steve said view this as a complementary source.
I want to also point out one other statement that Steve made, Bob, which is this business now will be generating our company $600 million to $700 million a year in free cash flow over the next four or five years, and beyond then we believe. And even if we were to invest a bit more in inventory in our timeshare business - let’s say we had to invest another $100 million in inventory into our timeshare business – we would still be generating $600 million to $700 million a year in free cash flow. And so you know, as Steve said, it’s too early to call for sure but we did want to kind of draw a bit of a line in the sand and suggest that this is going to be a complementary business as we go forward.
Bob LaFleur – Hudson Securities
Thank you. Our next question or comment comes from Steve Kent of Goldman Sachs. Your line is open.
Steve Kent – Goldman Sachs
Hi, good morning. Two questions. First, can you just talk about the number of members in your Exchange program that has sort of declined over the past two quarters modestly? But can you just talk about the numbers there and whether that’ll continue for awhile? And then separately can you just talk about what you’re doing on the marketing front to increase the timeshare sales volume per guest? And one of my concerns has been in the timeshare industry is that essentially you’re running out of friends and family to sell to, and whether you’re going after new consumers and how successful that’s been; and what kind of programs you have in place to sustain that.
Sure, Steve. Well, let me, I’ll take the first whack at it and then Tom can weigh in as well. I don't think that our member numbers, I mean they, I’m just looking at the press release here – down by 5000 members off a base of 3.7 million is meaningful at all. So I would say that that’s relatively flat, and that’s what we were predicting is that we’d be relatively fat. And as you know with that business, people can come and go as they want. If they sign up or in our stand membership for one year they may deiced not to sign up and then the next year they come back and they sign up.
So one of the advantages of some of the technology that we've rolled out is we think we can incite people to come back. So there's a larger base than 3.7 million people out there that own timeshares affiliated with RCI. One of our jobs is to try to entice those people and reignite them to come back can renew their RCI membership and start doing transactions with us. So I don’t think there’s anything to be read from that. I think that we’re still very confident with that number and where the member growth will go in the future.
With respect to EPS and the selling of products, I think I’ll point out two things. One is that part of the reason our commission were up this quarter was that we had more new sales because we put more focus on that and we put an incentive on that than we did last year and that was in our original forecast. So we had a little bit more commission but again, that's not a bad ting in our mind because we were driving new sales. We want to make sure that we keep that mix going. So we are focused on bringing in new customers.
We’ve got a base of I guess 850,000 members who own our product right now, so we’ve got a pretty deep pool that we can think of selling to we believe on the upgrade side. And bear in mind that about 40%, 50% of the people do upgrade, so it’s a very large population that will continue to upgrade. So we don’t see a slowdown at all. And also bear in mind, and then I'll stop and Tom can add anything he wants to add, bear in mind we have added products and we’re adding new product continually. That new product is something new and exciting for our 850,000 customers so when we added Reunion Resort in Orlando or when we add another product in Myrtle Beach for some of these other WAAM projects as well as our own projects that we’re doing, it’s giving more and more reason for people to want to travel, want to stay with us and want to buy more points.
Yeah, I don’t have much to add. I think that Steve covered a lot. I would just suggest to you, Steve, that we are fully aware of the importance of new buyers into our system. The sales force is being managed accordingly, commission structures have been altered to emphasize the value, the lifetime value of a new buyer cause we realize that that buyer is not a buyer just one time but multiple times. And so we’re very cognizant of it in the business unit as this is a key growth opportunity.
Steve Kent – Goldman Sachs
Great to hear you’re making progress on that. Thanks.
Thank you. (Operator instructions.) Our next question for comment comes from Ryan Meliker of Morgan Stanley. Your line is open.
Ryan Meliker – Morgan Stanley
Good morning, guys. Just a couple quick questions for you on vacation ownership. I think first it would be helpful if you could give us any color on where you think run rate margins are going to look like on the vacation ownership business. Obviously things have jumped around a little bit; you guys have taken a lot of costs out of the stream and margins look like they’re going to be pretty good this year. Do you think this year’s margins are going to be in line with what you would say run rate over the next several years would look like? And then the second question I had was as you know, Marriott, one of your competitors in the vacation ownership business launched a points-based program. You guys have been strong advocates of your points-based program and the value it adds to your customers. I just want to know if you have seen any impact yet on what Marriot’s doing, trying to really conform to part of your business model in timeshare. If you're seeing any impact at all yet and anything you might be doing to try to combat that would be also helpful. Thank you.
Okay, thanks, Ryan. With respect to the margin we think the margin that we’re producing right now is probably the rate that we’ll be at. We’re looking at the margin on that business is a 20% to 22% margin.
Low 20’s, yeah.
Low 20-type margin business. Most of the costs that we took out frankly was when we downsized that business during the credit crisis and took down the number of offices and sales offices we had. Now our goal over time with that as well as all the businesses is to improve margins, so basically that is a focus point because we want to continue to drive our profit and drive margins.
With respect to the second question about Marriott’s points-based system, I did hear that they had launched a points-based system. They already have one I believe internationally and with that they now are converting to a points-based system. We applaud them for it; we think points-based systems are more powerful tools. We don’t see any impact on our sales from them just like we didn’t see any impact when we were competing in a particular market and we were both selling weeks 20 years ago. It’s a bit marketplace. The sales is made on a one-on-one basis when the consumer is in front of the sales organization, so it’s not like walking down an aisle of a supermarket and deciding which cans of beans to buy. It’s a much more personalized sales approach. So we don’t see an impact from them having points now, so we are not doing anything to combat it.
We’re consistently improving our points program that we’ve had for a decade as we add improvements, enhancements to make it even more powerful and stronger for our owners. And that’s another reason that people continually are buying more and more of our products.
Ryan Meliker – Morgan Stanley
Did I hit the question, Ryan?
Ryan Meliker – Morgan Stanley
You most certainly did, thanks a lot for your help, guys.
Thank you. And our last question comes from Michael Millman with Millman Research Associates. You line is open.
Michael Millman – Millman Research Associates
Thank you. I’d like to follow up on two previous questions. Maybe you could be more specific regarding the profitability on WAAM versus traditional timeshare which you talked about return on investment rising, but WAAM return on investment would seem to be infinite. So probably talk about kind of the tail or the earnings or the cash flow. And the second, which you touched upon regarding the economics between the existing timeshare buyer and the new timeshare buyer, and maybe you can give us an idea of what is the lifetime value of a new timeshare buyer.
Okay, well I’ll take the first one and Tom can address the comment that he made about the value of a timeshare buyer over time. Profitability of WAAM versus traditional, Mike, is there’s three basic components to it that we were evaluating. One was the return on invested capital; one was the EBIDTA driven by that business; and then the third is the cash flow. And so we’re looking at all three of those when we try to look at and see what the mix of the business should be. You’re correct with the WAAM model because it’s a simple fee for service model, the ROIC is infinite. However the EBIDTA would be smaller if all we did was WAAM over a long period of time because obviously if you do pure WAAM where somebody else is providing the financing, you'll ultimately lose that interest income spread over time unless we’re incentivized to put more business towards WAAM and we’re getting a piece of that spread from our partner.
So there’s a lot of moving parts relative to how you want to evaluate it. But from a straight ROIC you’re correct – WAAM would be the best cause it’s infinite, but we think that it ends up being the best to have a mix of the business going forward. So hopefully that was clear, Mike, as to how we kind of came to that decision process.
Michael Millman – Millman Research Associates
And just give us an idea of how much of the EBIDTA comes from the finance piece versus the other pieces.
Well, we’ve said historically that from the timeshare business, the three components are from the sales and marketing, from the property management business and from the financing sources. Financing has been generally 20% to 30% of the profitability so up to 1/3 at times depending on what the actual market looks like, so that is still consistent right now for the traditional product. And Tom, do you want to address the timeshare buyers?
Yeah, so Mike, just real quickly you know, we believe that the business needs to invest in bringing in new buyers because new buyers ultimately become upgrade buyers. So the measure that we use to gauge the profitability of a buyer is what we call VPG, as you know – volume per guest. And so just to give you a sense of it, the approximate volume per guest of a front-line buyer, a first-time buyer, is around $1400, which is, we probably are break even to making slightly some money on the front-line buyer.
Now the upgrade, the in-house buyer is almost $1100 higher than that. And so you can see that the profitability formula increases significantly. So it’s important that we bring in first-time buyers which may cost us more marketing dollars to identity and a higher cost to secure for ultimately a much higher sales down the road. And I think we shared in the past around 60% of our revenue in a given year comes from these in-house, these upgrade buyers. So having a constant flow of people coming in, which may appear to be less profitable initially, translates ultimately into higher sales through upgrades.
Michael Millman – Millman Research Associates
Great. That’s very useful. Thank you.
Okay. I think, Carolyn, you said that was the last question?
We had one more person queue up if you’d like to take that question.
Chris Woronka from Deutsche Bank, your line is open.
Chris Woronka – Deutsche Bank
Hey, good morning guys. Two quick questions. One, on share buyback – you know, I’m just trying to get a sense for what, you know, what drives the timing and volume of that. If you can just remind us, I mean is it completely exclusive to an alternative set or is it price sensitive? Just your thoughts on how you go forward.
Well, I mean we haven’t, just to reiterate what we said before we don’t comment on the timing or when we’re in the market or not in the market. That’s just from a disclosure requirement of what we require. So we do not give specifics. Having said that, we have obviously been active in the market over the last couple of quarters. We anticipate utilizing our share repurchase authorization as the cash flow continues to come in. We certainly have removed one uncertainty with this IRS tax litigation that we wanted to settle, get that out of the way and behind us, so it allows us to maybe be more clear about what the cash needs will be for that piece of uncertainty that was there. But as to how we’re going to make a decision, purchase discounts and do we have a price point that we like and we don’t like – obviously we think our stock is a good buy now. We were actively out there in the Q2 and up through yesterday repurchasing. And then we’ll have to see how that plays out over the coming quarters.
Chris Woronka – Deutsche Bank
Okay, great. And the second one is on lodgings. Steve, you know, you gusty have, even though it’s early you've seen some good interest out of the WAAM program. Is it possibly you would take almost a similar approach in lodging and maybe approach some of the banks that may be involved with distressed properties? And again, with really no individual momentum from you guys primarily on the independent properties, try to bring them into the system? Is there a way to kind of leverage that same business model? Or is it a different way?
Well, we do basically, that’s our franchising and our management company model on the hotel side. We did it in the purchase of Reunion, and it’s a good option, Chirrs – that is actually a mixed-use product where there was a hotel, there is a hotel there at the Reunion Resort. We came in with our WAAM model and as a result of that we also ended up big a hotel, a Wyndham Grand hotel product into our mix. So we’re able to utilize our WAAM model to get us an additional benefit on the hotel side. But beyond that, yes – we’re constantly in talking to banks about and anybody who's in control of hotels about possibly bringing our brand to help them particularly in difficult times. The brands certainly add value and we think that they certainly help hotels that are struggling now.
Chris Woronka – Deutsche Bank
Okay, very good. T hanks. Nice quarter.
Thanks, Chris. Alright, Carolyn. Well thank you very much and thank you all for being on the call today, and we look forward to talking to you next quarter.
That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.
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