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Wyndham Worldwide (NYSE:WYN)

Q1 2011 Earnings Call

April 27, 2011 8:30 am ET

Executives

Stephen Holmes - Chairman, Chief Executive Officer and Chairman of Executive Committee

Margo Happer - Senior Vice President of Investor Relations

Thomas Conforti - Chief Financial Officer and Executive Vice President

Analysts

Michael Millman - Millman Research Associates

Christopher Agnew - MKM Partners LLC

Chris Woronka - Deutsche Bank AG

Joseph Greff - JP Morgan Chase & Co

Charles Scholes - FBR Capital Markets & Co.

Steven Kent - Goldman Sachs Group Inc.

Operator

Welcome to the Wyndham First Quarter 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. Thank you, you may begin.

Margo Happer

Thank you. Good morning. Thank you for joining us. With me today 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. This information 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-K filed February 22, 2011 with the SEC.

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

Stephen Holmes

Thank you, Margo. Good morning, everyone, and thanks for joining us. We are starting the year on a high note. First quarter revenues increased 7% and adjusted EBITDA increased 13%. Adjusted EPS for the quarter grew 29% and came in $0.03 above the top end of our guidance range.

These results reflect continued economic improvement in the U.S. and strong operational performance in each of our businesses. They also reflect the growing benefit from our commitment to ongoing share repurchases. Performance was strong across the company with each of our businesses delivering solid growth in adjusted EBITDA.

In the Lodging business, RevPAR [revenue per available room] was up a strong 7%, with gains in both occupancy and rates. Wyndham Exchange and Rentals delivered another great quarter. In Vacation Ownership, we saw a good growth in property management revenues and continuing improvement in delinquency and default rates in the Loan portfolio.

Free cash flow was robust in the quarter at over $1 per share. We completed our most successful timeshare securitization deal and also repurchased most of our outstanding convert and warrants, reducing our full-year diluted share count by 2 million shares.

And finally, our board authorized a $500 million increase to our share repurchase program. Overall, great results across the board.

The World Travel and Tourism Council forecast that over the next 10 years, the global travel and tourism economy will grow by 4.3% per year. This implies that travel and tourism’s share of the global economy will rise to just over 10%. We believe that, that growth will be broad-based, spanning many regions and product offerings. We are strongly positioned to benefit from that growth.

Our product portfolio is geographically and demographically diverse. The breadth of our offerings protected our results in the downturn and is now supporting our growth in the recovery. And it will continue to fuel our expansion for years to come.

Let me spend a moment on some recent announcement in our space that have generated a lot of questions from investors. The first is the announced spinoff of Marriott's Timeshare business. Over the next several months, we will all hear more about the way this transaction will be structured, and we look forward to the opportunity for investors to get more familiar with the Timeshare business.

While recent private transaction has been priced around 10x EBITDA, existing multiples ascribed to timeshare businesses of public companies are still far below the valuations that existed prior to the economic downturn.

Another recent development was the filing on March 11 by HomeAway, Inc. for the $230 million initial public offering. HomeAway is an online vacation rental company with 2010 revenues of $168 million. The vacation rentals market is a large and highly fragmented market with significant growth opportunities globally.

There are 2 operating models in this market today. First is the rent by owner or listings model. In this model, the vacation homeowner lists his or her property on a website for a listing fee. The listings company refers the potential renter back to the homeowner to inquire about availability, make the reservation and process payment.

The second model is the professionally managed model. This is primarily how our European rentals and ResortQuest businesses operate. Of course, we also list properties on the Internet and over 60% of our bookings are transacted online. We provide real-time, bookable inventory that we hand-select and annually inspect.

Homeowners provide homes to us primarily on an exclusive and commissionable basis. Unlike the listings model, the consumer rarely deals with the homeowner. We process all payments and handle customer service for their stay. When in vacations model leverages our years of expertise in sales, marketing and vacation rental operations. From check-in to check out, consumers can book with trust and confidence because Wyndham is standing behind them every step of the way.

Our acquisition of ResortQuest, combined with our leadership position in Europe, makes us the world's largest company in the professionally managed segment of this growing market. Revenues from our Vacation Rental businesses in 2010 were approximately $500 million. We have approximately 93,000 properties in 32 countries, representing over 51,000 homeowners. We are highly trusted by over 1 million families who vacation with us each year. It's an excellent base for continued growth.

The worldwide rentals market is estimated at $85 billion, and we think there's plenty of room for both models to grow. Our belief in the potential of this business is evidenced by our 3 acquisitions in this space last year. We look forward to showing both consumers and investors what we can do in this business. So while these recent events are external to Wyndham Worldwide, we think they underscore the strength and advantages of our businesses and business model.

Let me now spend a few moments to give you an update on progress in our business units in the first quarter. The Hotel group continues to focus on international expansion. Over the past 2 years, we have accelerated our international development efforts to leverage existing relationships and develop multi-unit deals. We are achieving great success.

For example, in the first quarter, we executed 2 deals in Doha, a 246-room Wyndham Grand and a 300-room Planet Hollywood, with the owner of 111 room Ramada Encore that recently opened. All 3 properties are 5-star products in great locations.

In March, we signed an agreement to develop at least 10 Super 8 hotels in Poland, with the same owner over the next 5 years. And last week, we announced the master development agreement for more than 75 new construction Microtel hotels in Canada over the next 25 years.

A principal of our partner there in Canada was part of a team that signed a master development agreement for the Super 8 brand in Canada back in 1992. They have since grown that brand's portfolio to include approximately 130 Super 8 hotels throughout every province in Canada. We look forward to the team's continued success.

Of course, a critical component of our strategy is developing the Wyndham brand. Through organic growth, acquisition and brand strategy, we have grown to over 60,000 rooms carrying the Wyndham flag, double the number that we acquired the brand in October of 2005. When you add in the timeshare units flying the Wyndham flag, the total increases to over 80,000 rooms.

We have underway a series of technology and business enhancements aimed at improving the value proposition to our hotel owners. We call these initiatives "Apollo." In our most recent project, we began an effort with our franchisees to improve the content and navigation of our websites. We look forward to launching a beta test next month on one of our brands, and will continue with additional releases throughout the year.

Now moving to Exchange and Rentals. Four weeks ago, I attended the ARDA [American Resort Development Association] Conference, which is the timeshare industry's annual trade convention. We had tremendous attendance by RCI's largest affiliates at the conference, and I was encouraged by the number of new, non-US developers that attended this year.

We had meetings with developers from India, Brazil, Asia and the Caribbean. Interest in timeshare is growing as is interest in RCI. We are very pleased to announce during the show our new and exclusive multiyear affiliations with the Anantara Vacation Club, one of Asia's premiere developers of luxury timeshare products; Palace Resorts' new Hard Rock Hotel & Casino in the Dominican Republic; and Fairmont Hotels & Resorts' luxurious Fairmont Heritage Place, recently signed an agreement with The Registry Collection.

The Registry Collection is RCI's fractional timeshare exchange program, which boasts over 180 luxury properties around the world. The highlight of the ARDA show for me was RCI's selection as the recipient of the Innovator of the Year award, for developing technologies through RCI.com that provides substantially greater transparency in the timeshare exchange business.

We built upon that success earlier this month with our recent release of RCI.com. The upgrade included the Phase 1 launch of RCI Platinum for Weeks [RCI Weeks] members, RCI TV enhancements and new tools to enable interaction with Facebook.

Now let's touch on Vacation Ownership. While the traditional timeshare model continues to perform very well, we are also excited by the progress we are making in our Asset Affiliation Model or WAAM [Wyndham Asset Affiliation Model]. March 10 marked the anniversary of our first WAAM sale. We went in from $0 to almost $70 million in gross sales in 12 months. It's a homerun for us and for developers.

WVO [Wyndham Vacation Ownership] has begun a multiyear initiative called Project Voyager, which is designed to improve our inventory and reservation systems. The goal is to get our owners on more booked vacations each and every year. Our owner satisfaction, which is extremely high, is tied to the frequency with which the user vacation ownership. And with higher satisfaction comes multiple benefits, such as higher upgrade sales, improved lead generation, increased on-time payments and most importantly, a better experience for our owners.

Through a series of technology enhancements anticipated to be complete in early 2013, we will maximize vacation planning during the booking process, enhance reservations capability and improve our website experience with greater self-service options. We will keep you apprised of additional developments with this project, which we believe will have long-term beneficial impact on our business.

Before I turn the call over to Tom, let me repeat that we are confident in the strength of our business models and our ability to execute our operating and financial growth plans to deliver shareholder value. How confident are we? We spent approximately $255 million on share repurchases so far this year, which is more than we spent on repurchases all of last year. And the board has recently increased our current program by $500 million, the largest increase in authorization since we listed on the New York Stock Exchange 5 years ago.

And now I'll turn it over to Tom to review the financials. Tom?

Thomas Conforti

Thank you, Steve. As Steve said, the first quarter was strong with adjusted earnings per share coming in 29% ahead of 2010 and $0.03 above the top end of our guidance range, due to continued business momentum, sound expense management and continued share repurchases.

Adjusted EBITDA increased 13% reflecting improve RevPAR performance, favorable loan loss trends in our Vacation Ownership business and growth in our European Rentals business. Our adjusted net income excludes the following after tax items: an $8 million benefit related to legacy items, a non-cash impairment charge of $8 million to reduce the value of an international joint venture in the Hotel business, an interest cost of $7 million related to the repurchase of the convertible notes.

Free cash flow increased to $185 million for the quarter compared with $166 million in 2010. On a per share basis, free cash flow was $1.03 for the quarter compared with $0.89 in 2010. That reflects a 16% increase in free cash flow per share.

Going forward, when I talk about free cash flow, I will express it in a "per share" term to better reflect the impact of our share repurchase program.

So to restate, we believe that cash is the great enabler of our long-term business goals and that our sustainable and growing annual free cash flow of $3.50 to $4.05 per diluted share, based on our diluted share count guidance of 173 million shares, will accelerate our growth and enhance shareholder value by supporting further investment in the business, dividends and share repurchases.

Now let's start a review with the capital markets, where we had a very busy and productive quarter with 3 well-executed transactions. First, we issued $250 million of senior unsecured notes at a coupon rate of 5.6%. We used the proceeds to repurchase a significant portion of the remaining balance of our convertible debt and the associated warrants.

The rationale was to reduce our fully diluted share count by 3 million shares on an annualized basis and reduce potential dilution as well. Our overall debt balance at quarter end was essentially unchanged from year end 2010 and well within our targeted investment grade range.

Turning to the ABS markets, last month we announced a $400 million timeshare securitization with an unprecedented advance rate of 98% and a weighted average cost of 3.7%. The transaction was oversubscribed, enabling us to increase the size of the offering. Overall, the deal produced $100 million more in cash than we had been projecting.

Securitized borrowings are shown under financing activities on the cash flow statement, so this had no impact on free cash flow, but it is a significant contributor to overall cash availability. This was great work by our treasury and WVO finance and consumer finance teams, who couldn't have done it if not for the outstanding sales effort of our sales and marketing team at WVO.

Now moving to operating performance for the quarter. Let me begin by saying that the integration of our 2010 acquisitions, Hoseasons [Hoseasons Group], the Tryp brand, ResortQuest and James Villa Holidays is going extremely well. We expect each to meet or exceed the earnings targets that were set up at acquisition. Combined, these companies will contribute over $30 million to our 2011 EBITDA. As importantly, they will each contribute meaningful growth for years to come. We are pleased with the significant progress we are making on this front.

So let's begin the segment review with both Wyndham Hotel Group. Revenues were up 3% due to improved RevPAR in the 2010 Tryp acquisition. Adjusted EBITDA was up 21%, again reflecting RevPAR improvement and lower costs. Adjusted margins improved fully 390 basis points. RevPAR was up 7.4% reflecting occupancy gains of 5.8% and rate improvement of 1.4%. We saw occupancy gains across all regions in all chain scale segments.

We're beginning to achieve rate gains in the domestic upscale and midscale segments without compromising occupancy. This bodes well for the continued recovery in the economy segment, which is 2/3 of our system.

We ended the quarter with approximately 609,600 hotel rooms worldwide. Development efforts in the quarter were robust. We terminated 12,488 rooms in the quarter, which was in line with our expectations. Consistent with our recent experience, approximately 65% of the terminated rooms were related to financial difficulties for our franchisees. So while the tide has turned and we are in the upswing of what we believe will be a multiyear lodging industry recovery, we have yet to see a significant improvement in franchisee financial health.

However, as I said on the last call, we do expect these types of terminations to moderate over time as the economy continues to recover. We also eliminated 2,766 rooms related to the impairment of an international joint venture, which I mentioned earlier.

Now our partner in the joint venture has an indirect relationship with a Libyan government investment fund. And given uncertainties related to Libyan-related entities, we recorded a write-down of the investment and eliminated the rooms for more aggregate room total, even though the contract is ongoing. The joint venture produced minimal EBITDA last year.

We opened over 12,000 rooms, our highest level of activity in any first quarter ever and the pipeline held steady. The development team delivered 160 of this quarter, up 58% compared with a year ago. Now a little over 1/3 of these new deals were internationally based, mostly in China, India and the politically-stable Middle Eastern markets.

Wyndham Exchange and Rentals had a good quarter, with the Exchange business performing in line with expectations and Rentals slightly better than expected, despite some softening in the U.K. market. Segment revenues increased to $356 million, reflecting $31 million in incremental revenues from our recent rentals acquisitions and a $2 million benefit from currency in the Exchange business.

Excluding the acquisition-related incremental revenues and the impact of foreign currency, revenues increased 8%, driven by favorable pricing and volumes at Novasol. Exchange revenues increased 3% in the quarter compared with the same period in 2010. Average members and exchange members revenues per member both reflected modest increases in the first quarter of 2011 compared with the same period last year.

The acquisition of Hoseasons, ResortQuest and James Villa Holidays contributed $25 million of incremental rental revenue during the quarter. Excluding the acquisitions, rental revenues increased 19%, reflecting a 10% increase in average net price per vacation rental and an 8% increase in transaction volume.

Overall, adjusted EBITDA for WER [Wyndham Exchange and Rentals] increased 11% in the quarter compared with the same period in 2010, primarily reflecting a higher revenue contribution from Novasol, which primarily services customers in Germany and Denmark and sound expense management.

The segment margin, excluding the acquisitions, was 28.9%, reflecting some margin improvement in both the Exchange and Rentals business. However, as expected, the mixed shift created by the acquisitions in the Rentals business resulted in an adjusted margin decline of close to 200 basis points.

Now moving on to Wyndham Vacation Ownership. This business once again delivered solid results. Revenues increased 1.4%, tours tracked to plan and volume per guests was slightly below plan as we continue to focus on new owner generation. Adjusted EBITDA in the first quarter 2011 was $96 million, compared with $82 million in the first quarter of 2010. Now this increase reflects the absence of a litigation reserve we took in the first quarter of 2010, lower loan loss provision and strong property management results.

Now the Property Management business, which produced $50 million of EBITDA in 2010, continued to produce a recurring fee-for-service revenue stream with revenues growing 10%. Consumer finance revenues were down approximately 3% due to a decrease in our contract receivables portfolio, while interest expense decreased 4%, reflecting lower interest rates on our securitized debt, partly offset by a higher average securitized debt balance.

Now remember that higher advance rates improved cash flow but decreased EBITDA, as the interest expense on securitized debt is reported above the EBITDA line.

Delinquency and default rates in the portfolio continue to improve. Write-offs during the first quarter were $85 million, down from $96 million a year ago. The provision for loan losses was $79 million, compared with $86 million in the first quarter of 2010.

On our quarterly calls, we have been expressing write-offs relative to the overall portfolio and the provision relative to gross vacation ownership interest sales. Some of you have told us that this is not how you think about these figures, so to simplify things going forward, we'll give you the absolute numbers so you can calculate the ratios that are most meaningful to you.

Moving to corporate, excluding legacy-related items, expenses increased $6 million, primarily reflecting increased information security and IT expenses. As I said on the last call, information security is an important spending priority. Like many companies, we have faced and will continue to face an increasingly aggressive threat from cyber criminals.

We are investing in our systems infrastructure and hiring additional information security staff to address this threat. We will keep you updated on our progress in this important area.

Now, let me spend a few moments on guidance. For the second quarter, we expect earnings per share of $0.53 to $0.56. As you saw from the press release, we are raising our full year EPS guidance from $2.05 to $2.15, to $2.15 to $2.25, $0.10 increase on both the lower and upper end of the range. The new EPS guidance is based on an expected diluted share count of 173 million shares, down from our original guidance of 181 million shares.

This new guidance reflects the benefits of our share repurchase program to date and our repurchase of a significant portion of the convertible notes. This guidance excludes any future share repurchases from our $0.5 billion share repurchase authorization increase. We expect to be at the high-end of our full-year EBITDA guidance of $925 million to $955 million, but are not raising our guidance range at this time.

While we are seeing good momentum in each of our businesses, there remains economic uncertainty in Europe, especially in the U.K. where austerity measures have dampened consumer confidence. In addition, as discussed, we expect higher corporate costs related to information security and other IT spending, which could somewhat offset our operating momentum.

So with all of that, I'll turn the call back to Steve.

Stephen Holmes

Thanks, Tom. In closing, I want to reiterate 4 points, then we'll open it for questions. First, the macroeconomic environment continues to improve. This is evident and can increase momentum across our businesses. Second, we continue to execute well and to meet or exceed our targets for revenues, earnings and cash flow. Third, a number of transactions in our industry will provide important independent valuation comparatives for Wyndham businesses, particularly our Timeshare business. And finally, our board approved a new larger share repurchase authorization.

With that, we'll open the line for questions. Kelly?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question or comment comes from Joe Greff from JP Morgan.

Joseph Greff - JP Morgan Chase & Co

Tom, your last comment there about what's included for buybacks in the current new 2011 full year EPS outlook, can you clarify that? It excludes future share repurchases, the new authorization, so we're assuming that you'll exhaust what the current authorization. . .

Thomas Conforti

Oh no, no. Joe, what the new guidance reflects is only that share repurchase activity that's already taking place.

Joseph Greff - JP Morgan Chase & Co

Got you, okay.

Thomas Conforti

At the end of the quarter, right? It does not include any additional shares we might repurchase with the new $0.5 billion share repurchase authorization.

Joseph Greff - JP Morgan Chase & Co

What was the absolute diluted share count at the end of the quarter?

Thomas Conforti

It was -- the absolute diluted share count on average or at the end of the quarter?

Joseph Greff - JP Morgan Chase & Co

Absolute quarter and net average.

Thomas Conforti

169, 170.

Joseph Greff - JP Morgan Chase & Co

Got you. And that's diluted, not basic?

Thomas Conforti

I think I already said.

Joseph Greff - JP Morgan Chase & Co

That is a diluted share count, not a basic share count.

Thomas Conforti

That is correct.

Joseph Greff - JP Morgan Chase & Co

Great. And good you can't say enough good things about the recent time term securitization that you did last month. Are you thinking about doing additional securitizations? And do you think the market has changed from the terms that you got last month?

Thomas Conforti

It's our intention, probably to do 2 more this year. And we're just breaking new ground all the time, Joe, and we remain highly optimistic that we'll be able to get favorable execution against our next 2, but market conditions can change but at this time, with a great track record that we've had over the last few years and just the conditions in the ABS market, they just pointed very favorable executions.

Joseph Greff - JP Morgan Chase & Co

Okay. And my final question, on the lodging side, the growth on the room side, was a bit better than what we were forecasting. Can you talk about what's going on there? Is that just a function of lower churn? Or are you seeing some initial early results from the Apollo initiatives test attempt, maybe it's a little bit too early, but if you can help us understand that, that would be helpful. Thank you.

Stephen Holmes

Hey, Joe, it's Steve. Yes, we continue, as Tom said in his note to actually see a little more churn than we'd like to see, because the franchisees continue to be under financial distress. So we were a little bit, I mean, it's in line with our expectations, but we'd like to see more and we think over time as the financial stability of our franchisees improve, we'll be able to actually accelerate. We did have a lot of openings this quarter, and we had the largest quarter we've had, so we're thrilled with that. But we'd still like to see more stability in the base, so that we'd lose less. That's the key objective of our Hotel group is focused on retention, and it's hard to retain if people can't pay us and can't fix up their properties. So that is a focus point for us.

Thomas Conforti

And Joe, it's a little too early to see the benefit of Apollo at this point. We're going to launch our first website upgrade, I think in May, if not May, June. With one of our brands, it's going to be a beta test. So too early to tell, but our business is focused on retention. It's the same old story. Our development team does an amazing job bringing rooms in, but at least at this point, we're losing more people because of the financial condition of some of our franchisees.

Operator

Our next question or comment comes from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank AG

Just a quick question on the stock buyback. You remind us again kind of how you approach that, and how we could think about that. Obviously, you're on pace to do actually over $800 million and no one expects you to do that much for the full year. But what are some of the factors that go into the timing of the repurchases?

Stephen Holmes

Thanks, Chris for the question. I'll start off and if Tom wants to add anything, he can as well. Our repurchase program is really built on the fact that we have priorities for capital allocation. The first priority is if we have transactions that could grow, attractively grow our operating business, we would like to do those. Absent those opportunities, we obviously believe our stock is undervalued, and we're actively in the market buying it. Last year we had a lot of acquisition activity, kind of more than we've had for a couple of years and kind of unusually high for us. This year, we haven't seen any acquisition activity and we've become very aggressive at buying back our stock. As we said before, we don't need to build stock up on our balance sheet. We have a $960 million revolver. We’re happy with our leverage. And in fact, as we grow our EBITDA, we could probably grow our leverage a little bit. Grow our debt level, or leverage are about the same. So priorities are the same, capital allocations story, grow the business through good, thoughtful, properly priced acquisitions and return capital to shareholders with excess capital as well.

Chris Woronka - Deutsche Bank AG

Great. And just on the WAAM program, I know we've talked a lot about it in the past. Is it something where your -- do you have capacity right now to kind of expand that, and what are some of the factors that might influence your decision as to how and when you do expand that?

Stephen Holmes

Well, there's a lot of product out there. So having access to product is I think we've said before is not an issue at all. The question is how quickly do we want to burn off our own balance sheet and what are the opportunities out there relative to markets we want to be in with product quality that we want in our system. We've indicated that 15% to 20% of our sales in timeshare will be through this WAAM product. As I've told others in the past, it could be more, it could be less. It really depends on the best deals out there. I think our shareholders are paying us to be thoughtful and to be as -- take advantage as much as possible of opportunities that exist, but to deliver the best value for all of our shareholders. So where, we could move that up or down, depending on what we see. There's plenty of product out there, but we also want to work off our balance sheet. So I don't know that I'm giving you a great, direct answer to your question, Chris, but that's because we want to retain ultimate flexibility because we feel like we know what's out there, we see what's there and we want to move quickly to take advantage of opportunities if they exist.

Chris Woronka - Deutsche Bank AG

Got it. And just finally on ResortQuest. I think you've owned that for about 6 or 7 months now, and you're kind of in the seasonally stronger period. Have you gotten done the things you wanted to in terms of some the changes you wanted to make internally? How do you feel about that kind of heading into the summer?

Stephen Holmes

We feel good about the business heading into the summer. To answer the first part of your question, have we done everything that we wanted to do? Absolutely not. There's a lot of technology improvement that we think we can bring to bear a lot of marketing, improvement that we can probably bring to bear because of our size and breadth. In fact, our leadership team from the Exchange and Rental group is down and desked-in right now with the Fort Walton Beach with the ResortQuest team going through some of those initiatives. So we still have a lot to do there. An integration, generally in my experience, takes maybe 18 to 24 months to really get to where you want it to be just because there's so much to do. And ResortQuest has so many great opportunities for us. We're thrilled with the deal and were thrilled with our opportunities, but I would say that we are not done at all with what we think we can do to bring value to that business and improve it.

Operator

Our next question or comment comes from Steven Kent from Goldman Sachs.

Steven Kent - Goldman Sachs Group Inc.

A couple of questions for you. Could you just talk about the operating leverage in the Lodging segment, just broadly, and the sustainability of it? Because it's very impressive that you can show essentially 3% or so top line growth and 21% EBITDA growth. And sort of how we should think about that over the next couple of years. And then on the Vacation Ownership side, you did note that you were seeing lower volume per guest. Can you just talk about how you're thinking about that and how the profitability for that lays out over the next couple of years? And then the final thing, just on a financing sales under WAAM, are you moving forward with that? Are you being more aggressive on providing financing to those customers as another way to enhance that business?

Thomas Conforti

That's quite a bit, Steve, let me start with question #1. So the operating leverage we think absolutely is sustainable as RevPAR recovers and we manage cost. So the formula in the first quarter was a simple one, RevPAR growth of 7% help drive operating leverage and then we had some cost -- we had tighter cost management. And there were 1 or 2 costs that we incurred, sort of extraordinary costs in 2010 first quarter, that we didn't experience. But in general, there was also cost leverage as well. So we believe that's sustainable. We expect that there's going to be a multiyear, and I think you do as well. Lodging recovery will get our fair share of that. And we'll continue to see operating leverage take place in that business unit, so definitely sustainable. The second question you had that I can recall was WVO and VPG, our volume per guest. And so you know that the nature of that business, Steve, is that there are really 2 distinct sales channels. I mean there are many sales channels, but in general, you either sell to a new person or you upgrade an existing owner. And we are making a concerted effort, a strategically important effort, to make sure that we continue to grow that new ownership base, because as you know the economics of the new owner acquisition are sort of marginal breakeven at the initial sale. But really, the nature of the business is to upgrade that first-time buyer to be a lifetime buyer of timeshare. And now on the upgrade, our margins are more like 40% to 50%. So we want to make sure that we never lose sight of the fact that the upgrade profitability will be ensured, only if we continue to bring in a steady flow of new owners. And this year, we're targeting around 25,000 to 30,000 new owners, which are important for our future growth. And so VPG declines because our tour flow mix shift has been more favorably to the new owner, who is a more expensive owner to secure than an upgrade. And so I think the VPG on an upgrade is over $3,000. The VPG on new owners is around $1,500. And so when you're doing more new owner acquisition, your VPG is bound to come down. But within upgrade and within new owner, within those distinct categories, upgrade was about the same VPG we had last year, so no deterioration in the upgrade component. And on new owners, new owner VPG actually improved somewhat, but it's that mixed shift. The third question you had was...

Stephen Holmes

Financing under WAAM. And for that one, for the financing under WAAM, Steve, the -- our goal is to maximize profit, obviously, and do the best thing for the shareholders. We are retaining flexibility to do the financings ourself and capture the spread. And it's had been with the first 4 deals we did, it was a mix of having the financing provided by the partner and us doing the financing ourselves. So will we retain more of the financings? We may retain the financings we may have the financing done by our partners. So it's, as we called it kind of in the past, it's a hybrid model. We can shift it as we feel is most advantageous to us and as the markets exist at a time.

Thomas Conforti

In past deals, we've shared in the economics of the financing by capturing the percentage of the financing income that came in. But to Steve's point, because of our unique position in raising capital, I think increasingly we want to be flexible and do it ourselves, potentially.

Steven Kent - Goldman Sachs Group Inc.

But given how compelling the ABS market is, I mean it seems like you can do it. It's very compelling economics. I guess, I'm just wondering if we should see -- if the pendulum is swinging more and more towards where you will step in and do it, given the market's receptivity to some of your financings.

Stephen Holmes

Yes, well, Steve, I would give you a rousing yes, if I hadn't lived through the last 2 years, but the volatility that we experienced, which is something that we, nor the industry had ever seen, just makes us a little more cautious. We want to retain the flexibility of being able to have partners who will take on the financing as well, so we always have that backup or that relief valve, if for some reason it becomes necessary. But you're absolutely right. If I were looking at a deal right now, we'd probably be providing the financing, not letting somebody else do it. And Steve, just going back to the VPG question for a minute that Tom answered. One way to look at it numerically, because we all love numbers, is if you look at our Table 3, it shows our tour volume and our VPG broken down by quarter. And what you'll see is that the VPG was down a little bit 2010 to 2011, and the tour flow was up, about 11%. If you go back to 2009, you'll see a similar tour flow level and now our VPG is above what it was back then. Just, so to Tom's point, that our underlying upgrade sales VPG is up, it's just more of a mix issue. You can kind of see it there in the numbers.

Operator

Our next question or comment comes from Patrick Scholes from FBR Capital Markets.

Charles Scholes - FBR Capital Markets & Co.

Could you just comment if you've seen anything noticeable from your customers as far as spending or visitation behavior in light of some higher gas prices we've seen over the past 2 months?

Stephen Holmes

Yes, we have and it's a popular question. The fact is, we went back and did a variance analysis and a comparative analysis for the last -- due to impacted to 1990 with the information we had available and there really is no correlation between our hotel activity occupancy and rate and fuel prices. There are other factors that have more correlation, for example, consumer confidence, I think was one that had more maybe GDP growth, had more correlation but there's really not much correlation. When we look at this in the last downturn, the last increase in fuel prices and what happened with our hotels, what we found is that people may change their travel patterns. If you're up in the Northeast, you might decide that you're going to Washington for vacation instead of down to Orlando, so you cut your trip shorter, but you're still staying in our product. And in fact, as people become more value-conscious, that kind of plays right into our hand because we are a value leisure play.

Operator

Our next question comes from Michael Millman from Millman Research Associates.

Michael Millman - Millman Research Associates

On the one of VPG, just to what extent can pricing or cost change the amount of new purchases? In other words, if you decided that you wanted 50,000, would there be cost there? Is it all a matter of how much you're willing to pay out? Or there's something else involved in getting new customers? In the WAAM, is there starting to be competition from others for product? And then in the acquisitions, is it basically that you've seen less? Is it basically a sign of an improved economy, and therefore there's less distress for selling?

Stephen Holmes

Okay, thanks, Mike. On the first question about VPG and what the impact is and would we think about having 50,000 new customers versus 25,000 new customers, you're correct in the fact that if we wanted to have 50,000, we could probably have 50,000. Having 50,000 new customers means our marketing costs would be higher because we're generating a new tour, and a new tour cost more than an upgrade to generate. In addition, our close rate would go down a little bit because we close higher on upgrade sales than we do on new sales. So VPG would be impacted if we went up to 50,000 new customers. We think we're at the right balance now. We think by adding 25,000, we're freshening our pool of new potential of existing owners that we will have adequate upgrade opportunities running out into the foreseeable future. So we're comfortable at that level. But we could change it around. And we have a higher new sales generation, the customer generation back when we were at $2 billion sales base, for example. On the second question about the WAAM and is there a lot of competition. There are other people who are looking at the WAAM-type model, there's other who are executing on it. The good thing is, it's like going fishing in the spring when the brooks are fully stocked. There's a lot of fish out there, so it's kind of easy to pull them in, because there's a lot of product out there. So I don't think that that's an issue for us at all, frankly. And the third one on acquisitions, and seeing less acquisitions. I wouldn't say that we're seeing less. I would probably say that 2010 was probably a little bit unusual that we get 4 deals done. The fact was there was a lot of uncertainty during the 2008, 2009 time frame, as we all know. We didn't stop working on things. We didn't stop our team from looking at opportunities. And that may have created a little bit of backlog that all got completed in 2010. But we continue to look at opportunities. We continue to be active in this arena. And again, you can't model when they're going to come out. We can't model the opportunity of when the deals are available and will happen. So I wouldn't say that we're not seeing anything or that the market is dry. It's just, we're using this opportunity, a lack of deal, deal closings to buy back more stock. Thanks.

Operator

Our next question or comment comes from Chris Agnew from MKM Partners.

Christopher Agnew - MKM Partners LLC

Thanks for the detail on the different vacation rental models. I wanted to ask you a couple of questions. Is the professionally managed model more established in Europe, where you're -- obviously you've got most of your business, when compared to the U.S. And does that have different implications for growth opportunities and maybe potential acquisition opportunities if you're thinking about both markets? And could you also clarify, you're involved in both listings in professionally managed, but the majority of the business is professionally managed? Thanks.

Stephen Holmes

Okay. Chris, it's Steve. The first question, I don't know that I would say that there's more professionally managed in Europe than the U.S. There definitely is a more organized and consolidated professionally managed presence in Europe. In the U.S., a lot of the professionally managed are done by small realtors in a market that happen to manage a couple of homes and they don't tie into any large network. In the Europe and the U.K., it is a much more organized and consolidated effort, so the businesses that we have over there has been around for decades. They basically rolled in a lot of the small people into their network, and their network provides them marketing opportunities far superior to what a local, small realtor could do. So I don't know if I looked at the landscape that I would say that there's a lot more in one market or the other. There probably is because it’s been so well organized in Europe, a larger presence of professionally managed in Europe, but there also exists professionally managed in the U.S. It's just not under an umbrella brand or brands that really presents itself other than ResortQuest. As for the second half of the question, which related to, are we a listings company or are we a professionally managed? We are professionally managed. The reason I mentioned that we still do a good bit of our product, our transactions on the Internet, is I don't want people to think that we aren’t using the Internet as a source for distribution and marketing. We absolutely do, but we don't just take a listing fee from somebody and put their product up on the market, on the Internet and then let the consumer contact the person who put it up on our listing service. We manage the product that we show on our system, which allows us to have this really good inventory, bookable inventory model, where you can go online and immediately book what you want versus going through the process of contacting the owner of the home. Again, we think there's plenty of room for both models in the market. There's a very large fragmented market and so we're excited about the growth of this market overall, and our participation in it.

Christopher Agnew - MKM Partners LLC

Great, thanks. And then if I could ask about your comments, you said some caution on full-year guidance and mentioned U.K. dampened consumer confidence. How important is the U.K. market to you? Were your comments related to anything you're seeing? Or more about what you're hearing about the sort of the broader economy. I mean, if sort of to extend that, I would've thought that vacation rental in U.K. in particular is almost an austerity friendly vacation, given that it's possibly closer to home and better value for money. So I was just wondering what your thoughts were on those topics?

Stephen Holmes

Tom, I'll take the second, you take the first question.

Thomas Conforti

We did caution, Chris, about what's going on in the U.K. market. We're getting a sense that the U.K. consumer is unsettled by all the austerity measures underway in the U.K. It's an important piece of our Rental business, although not the biggest contributor of EBITDA in our European Rental business. And so we remain cautious. In 2009, we did see the phenomenon you described, which was -- it seems like a recession friendly holiday solution for the holiday traveler in the U.K. And it may turn out to be that again this year. We just see some early signs that make us cautious about projecting that we will be the recession solution for the U.K. consumer. But, Steve?

Stephen Holmes

But also, let me be clear, we're guiding to the top end of our EBITDA range, so we are not being cautious on our overall EBITDA. We're saying we're cautious on the U.K. part of the business. So you seem to indicate that maybe it was an overall company indication, but as Tom said in his comments regarding the top end. On the second question, about U.K., let me just add one thing. The U.K. travelers, the second largest market for us to market to in Europe, the German traveler is the largest, the U.K. traveler is the second largest traveler for European travel. I agree with your comment about with the austerity measures, will that modify maybe and make the U.K. travel within the U.K. better. But it can also decrease the number of U.K. to Europe, to kind of an only Europe travelers. So we plan on both of them. So we're pretty well protected, but the fact is, the U.K. traveler may end up staying more within the U.K. versus going to Continental Europe. And that's the reason that we might see some shift there in which case we may have more product to market to the Dutch and German travelers.

Christopher Agnew - MKM Partners LLC

That makes a lot of sense.

Stephen Holmes

Okay. And it looks like, Carol, we're out of time, so we appreciate everybody being on the call and look forward to talking to you at the end of the next quarter. Enjoy your spring.

Operator

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

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