Welcome to the Wyndham Worldwide First Quarter Earnings Conference Call. [Operator Instructions] Also the call 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. Ma'am, you may begin.
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 just 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-Q filed April 29, 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 our Investor Relations website at wyndhamworldwide.com. Steve?
Thanks, Margo, and good morning, everyone. I'm pleased to report we had another great quarter as we continue to execute our operating and capital deployment plans. Second quarter revenues increased 13%, and adjusted EBITDA was up 17%. Adjusted EPS for the quarter grew 25% and came in $0.08 above the top end of our guidance range. Each of our businesses delivered growth in adjusted EBITDA and performed ahead of plan with particular strength this quarter in lodging and vacation ownership. This strong performance and further visibility into the second half of the year is allowing us to raise our guidance for 2011. Tom will go through the details in a few minutes. In addition, free cash flow is robust in the first half of the year coming in at $3.42 per share. We continue to implement our capital deployment strategy in a disciplined fashion to drive value for our shareholders. In the second quarter, we invested $200 million in share repurchases and July to date, we invested another $50 million. So far this year, we have spent nearly $425 million on share repurchases. Our weighted average diluted share count is down by $17 million from a year ago. This contributed $0.06 of earnings in the second quarter compared with last year. Our results this quarter, combined with our confidence in the short-term and long-term growth and cash flow potential of our businesses, convince us that share repurchase is a very solid investment. Having said that, our first priority is the continued investment in our business to drive earnings growth and increase cash flow in the years to come. Our baseline sustainable free cash flow guidance of $600 million to $700 million a year assumes continuing investment in existing growth projects such as Apollo and our hotel business, RCI.com and our vacation exchange business and voyager and our vacation ownership business.
We also continue to selectively evaluate potential acquisitions, which we will only pursue if they are strategically compelling and earnings accretive. Now moving to our business unit review. The Wyndham Hotel Group had a great quarter, exceeding our expectations with almost a 10% increase in RevPAR. Most significantly, we are seeing rate improvement across all chain scale segments in the U.S. The lodging recovery is continuing, and I believe we are exceptionally well positioned to capture more than our fair share of that recovery. The development environment is improving, but financing still remains tight. Developers are looking to diversify the composition and geographic reach of their portfolios to include economy and mid-scale properties outside major city centers, which is where the majority of our brands are positioned. And of course, the conversion market is always important in a tight credit environment. Both of these dynamics work to our benefit. We have a well seasoned development team able to capture opportunities both new build and conversion. We are the world's largest hotel franchisor based on a number of hotels with over 7,200 properties, which translates to almost 613,000 rooms in our system. We offer individual franchisees as well as multi-property developers a strong network of market-leading brands. Our brands cover every segment, and we have a broad geographic reach. As we have discussed before, we are strengthening this exceptional base through a series of technology and business enhancements we call Apollo aimed at further improving the value proposition to our hotel owners. We recently began an effort with our franchisees to improve the content and navigation of our websites. We launched our first beta test with the Baymont brand in June. Our early results are encouraging. Response times improved threefold, and conversions were up 30%. In another hotel group highlight, J.D. Power and Associates recently released the results of its annual guest satisfaction survey. For the 10th consecutive year, Microtel leads the economy/budget segment. In fact, Wyndham Hotel Group's economy/budget brands took the first 3 positions in the segment.
Now moving to Wyndham Exchange and Rentals. From a rental industry perspective, we were pleased with the enthusiasm of investors over the recent HomeAway IPO. As a reminder, there are 2 operating models in the vacation rentals market. First, there's a rent-by-owner or listings model used by HomeAway and others. In this model, the vacation homeowner lists his or her property on a website for a listing fee. The listing company refers the potential renter back to the homeowner to inquire about availability, make the reservation and then process the payment. The second model is the professionally managed model. This is primarily how our business operates at Wyndham Vacation Rentals. Approximately 60% of our bookings are transacted online. We, rather than the homeowner, control the inventory. We have uploaded in our system on a live and realtime basis. We hand-select and inspect the inventory. Homeowners provide homes to us primarily on an exclusive basis. We process the payments and handle the customer service. And unlike the listings model, the consumer rarely deals with the homeowner. We are the world's largest company in this professionally managed segment of this growing market. We expect 2011 revenues from our vacation rental business to be over $700 million and transactions to exceed 1.3 million. We have approximately 93,000 properties in 32 countries, representing over 51,000 homeowners. We have tremendous scale, which we continue to expand. Integration of our most recent acquisitions, James Villa Holidays and ResortQuest, is progressing very well with both businesses ahead of our earnings expectations. We are making great progress on integrating our systems and leveraging best practices in the inventory distribution strategies across all of our businesses. We are also the market leader in the exchange industry. While tempered growth in the timeshare industry has produced some headwinds for our exchange business, we have been able to drive growth through innovation resulting in a stable high free cash flow business. Through the end of 2010, our migration to online transactions has improved our exchange margin by over 130 basis points. The enhanced online experience also increases the overall value proposition to our members through greater flexibility, functionality and better online content. Online transactions in the second quarter of 2011 were 38% of total transactions, compared with 27% in the second quarter of 2010.
Now let's discuss the segment that's been receiving a lot of investor attention, vacation ownership. We had great response through an initiative Tom started about a year ago in repackaging this story. We recently had the management team out on the road, and the feedback has been overwhelmingly positive. We're happy for the investor acknowledgment because we knew this timeshare business is a great business, and we also know that we have the best timeshare business in the world. Wyndham Vacation Ownership is a highly evolved and highly adaptable business model, resulting from years of innovation and operational excellence. With approximately 815,000 owners, 21,000 units and 160 resorts, we have the scale to fully leverage market opportunities such as WAAM, our asset-light model. Our owners have been investing in our points-based products for more than 20 years. They know it, they love it, and they buy more. Our points products offer owners a diverse range of vacation experiences, including CLUB WYNDHAM Access and Presidential Reserve in both resorts and urban locations. We have a seasoned team of sales professionals, and we have an execution-based culture led by an exceptional management team. They have met or exceeded our expectations quarter after quarter even during the economic downturn. The fruit is really in the numbers. Over the past 5 years, which everyone would agree, was pretty tumultuous, volume per guest is up approximately 50%. Adjusted EBITDA is up approximately 45%, and the EBITDA margin has increased by over 750 basis points.
Let me transition now to a broader Wyndham Worldwide story. We recently completed our annual strategic reviews. Our 5 main strategic initiatives remain the same with the top 3 being to growth cash flow, rebalance our portfolio to emphasize our fee-for-service businesses and increase market share. Since we established these strategic initiatives in 2009, we have remained on course and have delivered against each of them. And we continue to find and pursue new opportunities for growth that are consistent with these initiatives. For example, the distressed real estate market has created a great opportunity for Wyndham Vacation Ownership to acquire high-quality inventory at very attractive prices and drive improved margins. In addition to our asset-light opportunities, we're shifting a portion of our existing development budget to the purchase of inventory in a distressed real estate market. This initiative supports our strategy of optimizing the capital deployed to the vacation ownership business, while extending the tail of the inventory already on our balance sheet. In addition, we are exploring a new concept, WAAM 2.0, which is a hybrid asset-light solution. Under the WAAM 2.0 concept, we will sell third-party inventory for a commission, but we'll finance the receivables. This will enable us to take advantage of the great spreads and high advance rates that we as a company are best able to realize. Within Wyndham Exchange and Rentals, we continue to innovate RCI to drive margin as well as member and developer satisfaction. The Vacation Rental team is laser focused on building out the U.S. rental platform. We'll do this by applying our best-in-class strategies to grow organically and with small tuck-in acquisitions. In Wyndham Hotel Group, in addition to important initiatives to drive our core U.S. business such as Apollo, we are pursuing an aggressive growth strategy around the world. For example, we are the largest U.S. hotel company in China with over 50,000 rooms. We expect to double that number in the next 5 years, and our long-term vision is to have a footprint in China that rivals our presence in the U.S. And in key U.S. states, we are planning to -- cities rather -- we are planning to invest approximately $200 million in mezzanine and other financing over the next several years to support the growth of the Wyndham Hotel and Resorts brand. This entire strategic framework is consistent with our target of generating baseline free cash flow of at least $600 million to $700 million a year. This is approximately $3.50 to $4.10 per share based on our diluted share count guidance for 2011. I'm very optimistic about the future at Wyndham Worldwide and look forward to updating you as we execute these strategies.
Before I turn the call over to Tom, I want to note a significant milestone. Next week, we will celebrate the 5-year anniversary of our listing on the New York Stock Exchange. At that time, nobody anticipated that a few years later, we all would experience the worst economic downturn since the Great Depression. What we did know was that we had great businesses, great people and great potential. We are proud of what we have accomplished during this period. Between dividends and share repurchase, we have returned nearly $1.7 billion to our shareholders over the past 5 years. The cumulative impact of our share repurchase activity over this period has been a 17% reduction in our share count. This, combined with our growth, has driven significant increases in key metrics on a per share basis
Just to put a few numbers around it, revenues are up 38%. Adjusted EBITDA is up 87%, impressive results. With all 3 of these businesses in great shape and the economy continuing to recover, we're even more optimistic about what we can do over the next 5 years. Tom?
Thanks, Steve. Our second quarter results reflect continued momentum and execution across our businesses and our ongoing commitment to return cash to shareholders. Adjusted EBITDA increased 17%, and adjusted earnings per share increased 25% compared with the second quarter of 2010. These results reflect improved RevPAR performance and lower bad debt expense at the Wyndham Hotel Group, growth in our Wyndham Vacation Exchange and Rentals business, higher sales and a reduction in the loan loss provision at Wyndham Vacation Ownership, and the meaningful impact of our ongoing share repurchase program. We came in $0.08 above the top end of our guidance range. Each business performed better than our expectations. In addition, there was some benefit about $0.03, primarily in lodging, from the timing of expenses in the quarter which we'll give back in the second half of the year. Share repurchase, which is excluded from our guidance, also contributed to the b. Free cash flow increased to $595 million or $3.42 per share for the first 6 months in 2011.
great enabler of our long-term business goals. For 2011, we expect free cash flow of $3.50 to $4.10 per diluted share based on our diluted share count guidance of $171 million. We expect to continue to grow this important measure in the future, accelerate on our growth and enhancing shareholder value by supporting further investment in the businesses, share repurchases and dividends.
Let me begin our quarterly operating review with the Wyndham Hotel Group, which had a great quarter. Revenues were up 7%, and adjusted EBITDA was up 32%, driven by RevPAR improvements and lower bad debt expense. Adjusted margins improved 660 basis points. Systemwide RevPAR was up 9.7%. Now excluding the Tryp acquisition and in constant currency, RevPAR was up 5.8%. As in the first quarter, we saw occupancy gains across all regions and domestic chain scale segments. Encouragingly, we saw rate gains across all chain scale segments domestically and across all regions except for Asia-Pacific. We believe the recovery is in full progress in all lodging segments, including the economy and mid-scale segments. We ended the quarter with approximately 612,900 hotel rooms worldwide, and development efforts in the quarter were robust. We opened over 16,000 rooms, while terminating approximately 12,800 rooms in the quarter in line with our expectations. The development team executed over 150 deals this quarter, up 6% compared with a year ago. The total pipeline consisted nearly 111,000 rooms, up 3% from a year ago. 64% of the pipeline is international, up from 49% a year ago. The new construction pipeline is up 10%, all international. Now all of this is a good indication that we are successfully executing our international growth strategy. Wyndham Exchange and Rentals had another good quarter in spite of difficult market conditions with exchange and rentals results slightly better than expected. Segment revenue increased to $361 million, reflecting $53 million in incremental revenues from ResortQuest and James Villa Holidays, and a $19 million benefit from favorable currency translations. Now excluding the acquisition-related incremental revenues and the impact of foreign currency, revenues increased 3%, reflecting higher rental revenues in our Novasol and Landal GreenParks businesses, growth in exchange and the year-over-year change in the classification of some contra revenue items to expenses. Excluding currency impacts, exchange revenue in the second quarter increased about 2% compared with the same period in 2010. Consistent with our expectations, the average number of members remained flat. Excluding currency, exchange revenue per member increased 1%, reflecting an increase in other transaction revenue, resulting from some of our recent innovations at RCI.com. Now remember in the November 2010 RCI.com release, we enhanced our Weeks exchange program by providing more transparency to our members and change back on an exchange of lesser value. Change back deposit credits can be combined, along with timeshare deposits, to trade up into a higher value timeshare. In addition to the benefit of creating additional transactions, there is a fee for that service which is already providing some revenue gain. Vacation rentals revenue increased 57% to $180 million in the second quarter of 2011 compared with the same period of 2010. Now our most recent additions, U.S. based ResortQuest and U.K. based James Villa Holidays contributed $46 million of incremental rental revenue during the quarter, and foreign exchange movement had a $15 million favorable impact on vacation rental revenue. In constant currency and excluding the acquisitions, rental revenues increased 3%. The average net price per vacation rental increased 5%, primarily driven by a higher yield at our Novasol and Landal GreenParks businesses. Transaction volumes declined slightly due to difficult market conditions in the U.K. Wyndham Exchange and Rentals' adjusted EBITDA increased 5% in the quarter compared with the same period in 2010, primarily reflecting the benefits of the ResortQuest and James Villa Holidays acquisitions. Excluding the acquisitions, EBITDA was flat. Now we're pleased with that during these difficult economic times in Europe. Our European rentals business remained stable, while others in the market had revenue and profit declines.
Now moving on to Wyndham Vacation Ownership. This business once again delivered strong results. Compared to the prior year, revenues increased 7%. Tours were up by 9%, and VPG increased 3%. Year-to-date, we have added over 12,000 new owners into our system, and we are ahead of our new owner goal of 25,000 for the full year. Adjusted EBITDA in the second quarter 2011 increased 25% to $130 million, compared with $104 million in the second quarter of 2010. The increase reflects great sales results, lower loan loss provisions and a growing contribution from our property management business. Property management fees grew 8% in the second quarter of 2011, compared with the comparable period in 2010. As you know, this business, which produced $50 million of EBITDA in 2010, provides a recurring fee-for-service revenue stream and steady, reliable growth. As anticipated, consumer finance revenues were down 3% due to a decrease in our contract receivables portfolio. However, interest expense decreased 21%, reflecting lower rates on our securitizations, which were partly offset by higher advance rates on our recent securitizations. Remember that higher advance rates improved cash flow but decreased EBITDA as we report the interest expense on securitized debt above the EBITDA line. Portfolio performance continues to improve somewhat. Write-offs during the second quarter were $75 million, down from $90 million a year ago. The provision for loan losses was $80 million, compared with $87 million in the second quarter of 2010. So we continue to see improvement in these important measures but at a moderate pace.
Now moving on to corporate. Excluding legacy related items, expenses increased $9 million, primarily reflecting increased information security and IT expenses. We are investing in our systems infrastructure and hiring additional information security staff to address the serious and increasing threat of data breaches, targeting the hospitality industry. We will continue to keep you updated on this important progress.
Now let me review our activities in the capital markets where we had another busy and productive quarter. Last week, we announced the closing of a new $1 billion revolving credit facility to replace our $980 million facility, which was scheduled to mature in October of 2013. The maturity date of the new facility is July 15, 2016. There is no change to the overall corporate debt balance as a result of this transaction. Now the financing extends the credit facility to a 5-year term and has more favorable pricing terms, which further strengthens our liquidity profile and decreases our ongoing interest expense. All of our historical relationship banks participated in the financing, and several new participants were added, demonstrating the banking community's confidence in Wyndham Worldwide. Last month, we announced the renewal of our securitized timeshare receivables conduit facility. Our prior conduits were 1-year terms, and this is a 2-year facility. This further strengthens our liquidity and balance sheet position and highlights the broad support enjoyed by our timeshare ABS program. The new facility maintains capacity of $600 million.
Now I'd like to spend a few moments on guidance, and we're going to post this to our website and email it to you following the call. For the third quarter, we expect earnings per share of $0.86 to $0.89, assuming a share count of 168 million shares. As you saw from the press release, we are increasing our full year revenue guidance to $4.2 billion to $4.3 billion, and our adjusted EBITDA guidance to $960 million to $975 million. We are raising our full year adjusted EPS guidance from $2.15 to $2.25 to $2.32 to $2.40. The new EPS guidance is based on an expected diluted share count of 171 million shares, down from our original guidance of 181 million shares and our most recent guidance of 173 million shares. This new guidance reflects the benefits of our share repurchase program through the second quarter. The guidance excludes any further share repurchases. We have approximately $345 million remaining on our current repurchase authorization. We are narrowing the range on our D&A guidance by $5 million on the high end. The new range is $180 million to $185 million. Interest expense guidance has been reduced to $130 million to $135 million, reflecting lower borrowing cost and higher capitalized interest. We expect our tax rate for the year to be a little lower than expected at about 38%, and we think most of that reduction will come in the fourth quarter. Please note that the implied fourth quarter earnings per share guidance is $0.38 to $0.43 per share. Remember when considering year-over-year fourth quarter comparison that we benefited from an unusually low tax rate of 27% in 2010, and that the historic seasonality of our WER business has changed due to the acquisitions we did in 2010. Now drilling down to the business unit level. At the hotel group, we are increasing our revenue guidance to $710 million to $730 million, and adjusted EBITDA guidance to $208 million to $215 million. Our RevPAR guidance increases 100 basis points to 6% to 8% year-over-year growth, and room guidance remains unchanged at 1% to 3% year-over-year growth. We expect hotel margins to moderate for the remainder of the year, reflecting planned increases in advertising spend compared to last year and timing differences, which I touched on earlier. Based on the new guidance, the implied full year margin improvement in the hotel group is about 150 to 175 basis points for the year. Exchange and rentals revenue increased to $1.46 billion to $1.5 billion, and we're bringing up adjusted EBITDA to $343 million to $353 million. Exchange drivers remain unchanged. Average net price per vacation rental increases to 25% to 27% year-over-year growth. And rental transaction guidance decreases slightly to 16% to 18% year-over-year growth. The decline in transaction guidance is attributable to soft demand at our U.K. cottage business while the uplift in prices due to improved yield and the impact of currency in the first half of the year. Note that guidance assumes currency rates as of June 30. We're also raising vacation ownership revenues to $2 billion to $2.1 billion. We're bringing the EBITDA range up to $495 million to $510 million, reflecting a narrowing of the VPG guidance to 2% to 4%, and an increase in tour flow of 5% to 8% from last year. We now expect corporate expenses to be $90 million to $95 million, primarily reflecting increased information security costs as well as higher employee and bonus cost. We expect CapEx to be $225 million to $240 million, reflecting higher information technology and security cost. But we also expect vacation ownership inventory spending to be within our original budget of $80 million to $90 million. And finally, we are confident in our free cash flow guidance of $600 million to $700 million or approximately $3.50 to $4.10 per share in 2011. And all of this points to another great year of financial and operational performance for the company. So with that, I'll turn the call back to Steve.
Thanks, Tom. In summary, let me just reiterate a few key points. Overall, we delivered strong year-over-year growth in revenues, adjusted EBITDA and EPS in the quarter. And our free cash flow per share was up 31% in the first half of the year. We continue to deploy our cash flow to enhance shareholder value. And finally, based on our year-to-date results and outlook, we're raising our full year EBITDA and EPS guidance. And now with that, Laurel, we'll take some questions.
[Operator Instructions] Our first question today comes from Joe Greff.
Joseph Greff - JP Morgan Chase & Co
Within the timeshare segment, we saw a better than expected -- better than our expectation tour flow improvement. Did that result in a shift in terms of repeat buyers versus first-time buyers? Can you talk about that within the quarter?
Yes, Joe. Tom and I will expect the -- the increase in tour flow was in fact driven by first-time buyer marketing activity. As we said previously, we have a target for first-time buyers of around 25,000 new members coming in as first-time buyers. We're running a little bit ahead of that now. There's been a heavy focus down in Orlando within the marketing group to drive those first-time buyers in, and the results were frankly a little bit better than our expectations as well. So they're doing a great job down there, but you're absolutely right.
Joseph Greff - JP Morgan Chase & Co
Great. And then I think I heard Tom correctly talking about property management fees were up within timeshare, we're up 8% year-over-year. Do you think that's a sustainable growth rate?
Yes. It feels about the right growth rate, Joe. We expect that growth rate to be mid to upper single digits. A part of it is coming from some of the restructuring of pricing agreements that we have with some of the HOAs. So we expect to continue to have that as a good contributor to the growth of this business as we go forward in the mid to upper single digits as we go forward.
Robert LaFleur - Rodman & Renshaw, LLC
You're at $595 million of free cash flow for the first half of the year. Your target has been $607 million to $700 million. You may have addressed this, I missed a little bit of the call. But obviously, you're practically there. What does cash flow look like in the back half of the year? I mean, you would assume that you would be something substantially higher than $607 million, $700 million for at least this year, unless there's something that's going to affect the cash flow negatively in the back half of the year.
Bob, so there are 2 issues that are working to make the second half of the year less than the first. Number one, typically, we spend more CapEx in the second half of the year than the first half of the year. So that's an important contributor. And as you know, we raised our CapEx guidance a bit. The second part is the seasonality of the rentals business. As you know, the way our rentals business in Europe works is we get cash early, we hold on to the cash, and then we pay the homeowner in the second half of the year. So the benefit that we get in the first half of the year of receiving cash early is the offset is in the second half of the year. And then finally, as we pointed out, there's about $50 million in our free cash flow number that's associated with the settlement that we had with the U.K. government on an outstanding value-added tax issue and on a cash flow basis that was a $50 million benefit for the quarter. So those are the 3 factors why we think that $600 million to $700 million is still the right number and still a very strong number on a per share basis.
Our next question comes from Amanda Bryant.
Amanda Bryant - Susquehanna Financial Group, LLLP
Just within your timeshare segment, 2 questions. First, what was the customer's propensity to finance in the quarter? And then second, can you just provide us with a little bit more color on the purchase of distressed inventory?
Yes, the first question, the answer was around 50 -- low 50, so about 52%. And Steve, you want to...
Yes, on the distressed inventory, Amanda, there's, as we've said continually through this downturn, there's a lot of product out there that's available. And we've been evaluating whether to acquire some of that product or whether to complete the product we have with our balance sheet and move it forward. And we're seeing some offers that are just so compelling, that we we'll probably do a little bit more purchase on the distressed side and hold off finishing the inventory. We kind of look at it as a -- on a return on investment basis, which one are we going to get the best return for. And right now, taking advantage of what's out in the marketplace is marginally better than what we have in our balance sheet to finish. So we'll get around to finishing what's on our balance sheet. It's just as I said, it pushes the tail out on how long we can produce sales from our existing balance sheet and completing the product that's on there already. But there are a lot of great opportunities out there in markets that we've wanted to be in or in markets where we already have presence but we could use more product.
Amanda Bryant - Susquehanna Financial Group, LLLP
So how much do you think you'll spend on distressed inventory this year, as it relates to your overall expectations for CapEx spend within that segment?
Well, we've guided to, I believe, $80 million to $90 million total spend. It will be within that number, and I wouldn't anticipate it being a large portion of that number this year means we're already in the second half of the year, writing the deals, getting it done, executing and closing and funding sometimes take a little bit longer. So maybe a larger portion of our 2012 spend than it is in the 2010 spend, but our goal is still to be in that range that we've given you longer-term for annual spend on our inventory of $135 million, $130 million, so we want to be in that zip code, and this will include some of the distressed inventory purchase.
Next question is from Patrick Scholes.
Charles Scholes - FBR Capital Markets & Co.
I just have a couple of questions related to the loan loss provision. First of all, what was that loan loss provision percentage in the second quarter, and how much incremental EBITDA did you receive from lowering that?
Incremental EBITDA versus last year?
Charles Scholes - FBR Capital Markets & Co.
Yes, versus last year, correct.
I think the provision dropped $7 million, right? If I remember right. Great question, though.
Charles Scholes - FBR Capital Markets & Co.
Okay. And roughly what is that provision percentage, what was it in 2Q, and what does your full year guidance assume that the full year will be?
Hold on for a second, Patrick. Hey Patrick, let us get back to you. I want to make we're answering the exact that you have, and we're going back and forth here on the exact numbers. So we'll come back to you on it, okay? That's it.
As a percentage of gross realized, I think, it's going to be around 21%, 22%, is that what you're asking?
Charles Scholes - FBR Capital Markets & Co.
Okay. So 21%, 22%.
Next question comes from Chris Agnew.
Christopher Agnew - MKM Partners LLC
Just going back to distressed inventory. Just wondering, can you give us any sense of how it impacts cost of goods sold maybe o a per development basis?
Well, it will have a positive impact, and that's part of the reason that we're pursuing it. As to what -- much it will lower our cost of sales, it's kind of hard to say. It kind of goes back to the question that Amanda asked before of how much will we do of it, and I don't know if we can handicap that for you right now, Chris, to be honest. I think that this year, we're running the cost of sales around 21%. That's already several hundred basis point -- a couple of hundred basis points below where we are running in previous years. So we've already seen some improvement by taking advantage of both the WAAM deals that we've done as well as some of this distressed inventory. So I mean, we would hope to be able to lower that the cost of sales below where we are now. But I don't want to point towards a way lower number because we do have a lot of product that we're still moving through on our balance sheet, and so it should moderate it somewhat, Chris, but I can't be specific on an answer for you.
Christopher Agnew - MKM Partners LLC
One quick follow-up if I may. Just on the vacation rental business, exclude FX and acquisitions, where you saw a deceleration from the nice growth you've got in the first quarter, and I think you touched -- is that really just the U.K. business and the impact that you're seeing in the U.K., or are you seeing a weakening in the stronger North European businesses that you have?
I would say it's clearly the U.K. and in our Dutch business also is feeling some effects but they're growing year-over-year. So I would point largely to what's going with the U.K. but acknowledge that there is -- it is a challenging environment in all of Northern Europe.
And Tom told me the other day, he never wanted to say this as CFO. But the rain in Holland isn't helpful either.
The weather in Holland has not been great.
[Operator Instructions] Our final question today comes from Michael Millman.
Michael Millman - Millman Research Associates
You mentioned that your exchange businesses -- membership business is kind of flat suggesting the industry is flat. You're growing -- can you talk about what's going on in the industry consolidation? I guess a little bit related to that, the distressed inventory. Is that being bought by other timeshare from other timeshare developers? Or is that general condominium, hotel kind of product that you're able to get and then convert to timeshare?
Okay. Well, on the general industry, it is still growing. The industry is growing. It's just not growing at the pace it was several years ago. So a lot of the big players like ourselves and Marriott,and Hilton and Disney are all continuing to sell products and therefore, there is growth in the industry. It's just not as fast as the growth historically was, and it really unfortunately is a story of the haves and have-nots. The larger companies have access to capital. The smaller companies do not yet have access to as readily available capital. We see new players coming into market all the time. We've seen new players, when I say new players, I mean new financing sources coming in. Hopefully, that will continue to fuel some of the smaller players who have had a difficult time accessing capital. There are some terrific operators out there who just can't access the kind of capital they need in order to sell timeshare and finance the receivables that, that sales generate. So it's still -- we still see improvement, but it's going to take some time as we previously said for that to return. As to the distressed inventory question, it's really, Mike, it's a combination of both. It's other developers who are looking to sell off portions of their development because they are unable to access that financing that I was speaking of. But it's also projects that were developed as whole ownership condos that are being converted into timeshare. And again, as long as it's in the right place, the product quality is right, and we can give an experience to our consumers that is consistent with what the Wyndham Vacation Ownership wants to provide, then it makes sense for us. Okay, and so thank you, all, very much for joining us. I think, Laurel said that was the last question in the queue. And we look forward to talking to you next quarter.
That does conclude today's presentation. Thank you, all, for joining. You may now disconnect.
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