Wyndham Worldwide Corporation's (WYN) CEO Steve Holmes on Q1 2016 Results - Earnings Call Transcript

| About: Wyndham Worldwide (WYN)

Wyndham Worldwide Corporation (NYSE:WYN)

Q1 2016 Earnings Conference Call

April 26, 2016, 8:30 am ET


Margo Happer - SVP, IR

Steve Holmes - CEO

Tom Conforti - CFO


Joe Greff - JPMorgan

Steve Kent - Goldman Sachs

Patrick Scholes - SunTrust

Chris Agnew - MKM Partners

David Katz - Telsey Group

Harry Curtis - Nomura

Carlo Santarelli - Deutsche Bank


Good day and welcome to the Wyndham Worldwide First Quarter Earnings Conference Call. Your lines have been placed on listen-only mode until the question-and-answer session. 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. Please go ahead.

Margo Happer

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 statements. These statements are subject to 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 12, 2016 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?

Steve Holmes

Thanks, Margo. Good morning and thank you for joining us. I am pleased to report that we are starting a year with another solid quarter of operating performance across our businesses. Tom will walk you through the financial results in detail. First, let me give you the highlights of the quarter.

In our Hotel Group, RevPAR results are somewhat mixed. We continue to see weakness in oil producing territories but this was offset somewhat by areas of strength such as California and Florida. Comps should get easier in the second half of the year.

At Wyndham Vacation Network, our rental businesses had a strong first quarter with our bookings pipeline running ahead of last year, while RCI remains a consistent steady performer. And Wyndham Vacation Ownership had a great operational quarter as we saw the benefits of various initiatives, new sales processes, new sales offices, and an intensified focus on new owners, payoff with double-digit growth in gross VOI sales. Unfortunately there was also an increase in the provision for loan loss which was attributable to an increased effort by third parties to encourage customers to default on their timeshare loans.

And finally, our free cash flow is strong, and we continue to opportunistically deploy our capital.

Now I would like to focus on the great progress we've made on a number of strategic growth initiatives throughout our businesses. At the Wyndham Hotel Group, our new and award winning Wyndham Rewards program continues to deliver great results designed to appeal to the everyday traveler, we've made Wyndham Rewards the most generous and easiest used program in the industry.

We have won simple and straightforward award night redemption level. All of our rooms are now available for only 15,000 points per night with no blackout dates, and that includes our Wyndham Grand Resorts which previously required up to 45,000 points for each night.

To make the Wyndham Rewards program even more attractive, we're beginning to leverage our unique portfolio of vacation rental and vacation ownership properties. We are expanding award night redemption options across the most aspirational of our destinations. So now Wyndham Rewards members have even more exciting travel options staying for example at timeshares in Hawaii and vacation rentals in Aspen.

In addition to enrolling 5 million new members in the last 12 months, award night redemptions have increased 90% since the program launched last May. We have seen our member occupancy increase over 200 basis points since the launch of the program and our franchisees have never been more engaged, increasing enrollments across their front desk by 55%.

Building on this momentum we launched our third umbrella advertising campaign on April 18. The ads once again featured Game of Thrones star Kristofer Hivju as the Wyndham Rewards Wizard in new primetime network in cable TV spots. The campaign is designed to drive direct bookings by promoting our richest consumer offer ever. The offer is available only on our branded websites and thorough our call centers. Members who receive up to 25% off our best available rate, along with $100 in Wyndham Rewards gift cards on their second stay, which can be redeemed for savings on future stays.

In the Hotel Group our decision to exit the central reservation system and property management system development business and migrate to best-in-class cloud-based technology partners is proceeding as planned. We currently have over 450 properties live on the new Sabre System which includes an automated revenue management component.

Wyndham is the first global hospitality company to offer economy and mid-scale hotel owners a means to automatically analyze millions of historical transactions and demand trends. This enables our franchisees to set the ideal price for their property with the simple push of a button each day. The first group of hotels using this new revenue management tool is showing a 260 basis point increase in RevPAR index compared with hotels not yet on the system.

Moving on to Wyndham Destination Network which is evolving its strategy to better harness its inventory and distribution power to send more people on the vacation of their dreams. For us, the sharing economy isn't a trend. We've been in the business for decades. RCI invented the exchange concept for timeshare back in the 1970s and our vacation rental brands includes well established businesses dating back more than 70 years.

As you all know, we are the largest, world's largest provider of privately owned yet professionally managed unique vacation accommodations with over 112,000 properties. And for us it's about the strength of our proprietary brands and the local relationships we have built with our property owners and customers. The strength of these relationships and our value proposition is at the core of our strategy

In vacation rentals, we are benefiting from initiatives to expand our ecommerce and distribution capabilities, while continuing to develop new markets. In fact, our Denmark based Novasol brand and Netherland's based Landal GreenParks brand just experienced their best ever quarter in terms of bookings and we're seeing strong bookings throughout our business for the peak summer season.

What makes us even more noteworthy is that it has happened during despite the economic turmoil in Europe along with recent terrorism and the refuge crisis.

We have a very resilient business built on the strength of our core brands and our diversified portfolio.

At RCI, we're excited about the continued expansion enhancement of our product offering. RCI has long been the leader in vacation exchange based on our ability to consistently deliver innovations and transform our business to deliver the best experiences for our members and affiliates.

In the first quarter, we launched a multi-year business strategy that will encompass our entire core membership model, including our customer's experiences and our B2B relationships with timeshare affiliates. It will expand our digital capabilities to further improve our personalization; we're initially focused on our North American operations before expanding globally.

The program will leverage the ways we use our customer data, automation, and content, to create exceptional engaging interactions with our customers. For example, we will be able to offer members customized products based on their travel preferences and timeshare ownership characteristics.

We'll improve both the relevance and the quality of leads to our affiliates and improve the effectiveness and efficiencies of their operations. In addition, we will be transforming our website, mobile offering, and digital marketing capabilities. We look forward to updating you about our progress in the future.

Now let's move to Wyndham Vacation Ownership. As we previously mentioned, our focus is gross VOI growth, supported by accelerated growth in new owners. I'm especially pleased to report excellent top-line results in the first quarter and we're well on track to achieve our goal of increasing new owners by 15% in 2016.

Our new sales centers are performing well, particularly strong performances in Las Vegas, New York, Puerto Rico, and St. Thomas. Our timeshare product delivers the ultimate in choice and flexibility as evidenced by our industry leading owner base of close to 900,000 families.

And as our history demonstrates, we are committed to continually evolving our product offerings to meet the needs of today's consumers in an ever changing marketplace. We believe this customer centric approach is the foundation of our success.

First, we started a process a couple of years ago to evolve timeshare sales and marketing to ensure a more consumer friendly buying experience. We introduced and refined a Group presentation sales format for new and existing owners ensuring that our best sales people are in front of our customers using a proven uniform method of telling a consistent story and producing sales.

We expanded post sales surveys, as well as secret shopper program, both part of a vigorous multifaceted compliance and quality assurance effort. As always our closings are led by a designated quality assurance associate to independently explain the contractual terms of each transaction.

More importantly, we ensure that owners remain satisfied with the product long after the original sales by continual surveys and feedback loops.

We're tracking our owners satisfaction whether they are saying at our resorts. We're speaking with the customer service representative or consumer finance representative. We also continually monitor comments on social media to ensure we're getting unfiltered feedback from various survey channels. Our mission is to always keep a close watch on the sentiment and satisfaction of our owners.

We expect to continue evolving and innovating to maintain and grow our position as the market leader in this industry, and that includes providing options to our longtime owners, who may want to exit their contract that they no longer use or regularly using their timeshare.

We first announced our "Ovation by Wyndham" program at this time last year. The goal of this innovative program is to ensure a simple, safe, and secure exit path for owners that preserve the goodwill and strong brand loyalty, we have generated over many years of providing these families with fantastic vacation experiences.

There are no fees, hidden costs, or additional purchase requirements to participate in the program, just an Ovation for these members for their many years of ownership. We believe this customer centric approach benefits our customers, our brand, and in the end our bottom-line.

Now let me turn the call over to Tom for the details on the quarter's results.

Tom Conforti

Thanks, Steve, and good morning everyone. We started 2016 with a solid first quarter on a currency neutral basis and excluding acquisitions, adjusted EBITDA increased 6%. We generated $218 million of free cash flow and 11% increase over the first three months of 2015, due to strong operating performance and the favorable timing of capital expenditures. These results include the negative effect of the Venezuelan currency devaluation which reduced free cash flow by $24 million.

During the quarter, we repurchased 2.5 million shares for $175 million. We've reduced our weighted average share count by 7% year-over-year through share repurchases made during the last 12 months. In addition, we've repurchased 600,000 shares for $45 million so far in the second quarter of 2016.

So now let's take a look at the performance of each of our business units. At our Hotel Group, revenues increased 1%, adjusted EBITDA grew 6% as growth in our Wyndham Rewards Credit Card program, strong performance at our two owned hotels, and cost containment measures more than offset weaker global RevPAR. These factors also led to a higher margin for the quarter.

As we have seen for the last several quarters, there were many macroeconomic factors impacting our Hotel Group performance. The oil-producing markets in the U.S. and Canada, foreign exchange, and the growth in low RevPAR markets such as China continue to pressure our global RevPAR growth.

Domestic RevPAR was flat as higher room rates were offset by lower occupancy. This performance reflected continued pressure on our RevPAR and the oil-producing markets which is defined by STR mainly includes parts of Texas, Louisiana, Oklahoma, West Virginia, Ohio, Pennsylvania, Kansas, and North Dakota.

To put this into perspective, performance in the oil-producing markets was down 28% resulting in a 220 basis point impact on domestic RevPAR. Excluding oil, domestic RevPAR grew 1.9% which reflected RevPAR growth of 2.8% in our economy branded hotels and 3% in our mid-scale hotels. These two segments make up over 90% of our portfolio.

Now domestic RevPAR growth was also adversely impacted by over 100 basis points from the loss of a few Wyndham branded properties such as the San Francisco based Parc 55 in February 2015 and also by the timing of Easter.

Remember first quarter performance is against a strong domestic RevPAR in quarter one of 2015 of almost 8%. System-wide RevPAR declined 1.6% in constant currency, largely due to the continued unit growth of lower RevPAR hotels in China and continued weakness in the Canadian oil markets. Excluding China, and in constant currency, global RevPAR was flat, which includes a 210 basis point unfavorable impact from domestic and Canadian oil markets.

Overall, net system size grew 1.8% year-over-year, which incorporates our continued focus on improving the overall quality of our system. Our development pipeline is over 124,000 rooms that's a 7.3% increase over the prior year. And that number also includes a 20% increase in domestic new construction activity with the concentration in our higher end brands.

Our Destination Network segment had a very good quarter. On a currency neutral basis and excluding acquisitions, revenues increased 5%, and adjusted EBITDA 3%. Additionally excluding a $4 million benefit in the first quarter of 2015 from a value added tax reserve reversal which we discussed with you last year, adjusted EBITDA would have increased 7%. Results benefited marginally from the shift of the Easter holiday into the first quarter.

First quarter 2016 reported EBITDA included the $24 million foreign exchange loss associated with the devaluation of the Venezuelan Bolivar.

At RCI exchange revenues were flat in constant currency reflecting flat average number of members and revenue per member. Vacation rentals revenue for the quarter were up 9% in constant currency and excluding the impact of acquisitions. The increase reflects a 7% increase in transaction volume and a 2.3% increase in the average net price per rental. Transaction growth was strongest in our Novasol and Landal GreenParks brands aided by our ecommerce and geographic expansion initiatives. The pricing increase was primarily due to higher average fees at Landal which we believe also benefited from the Easter holiday shift.

First quarter results for vacation ownership business were solid with revenues up 4% and EBITDA up 5%. In addition to strong gross VOI sales, results benefited from an increase in property management fees and higher consumer finance revenues. As we committed to a couple calls ago, we intensified our emphasis on growing gross VOI sales which is now yielding excellent results. Gross VOI sales were up 10% in constant currency. That growth reflected a 3.8% increase in VPG, and a 6.5% increase in tour flow. VPG benefited from higher transaction sizes and improved close rates while tour flow benefited from higher arrivals and tours at our new sales centers.

Sales to new owners increased 7% consistent with our internal plans. The performance of the consumer loan portfolio remains solid but is experiencing slightly higher default rates. Our average FICO score of originations during the quarter was 727 consistent with underwriting standards of the past year. However, we saw an increase of $12 million in loan defaults during the first quarter resulting from higher activity by third parties that may be soliciting our owners to cancel their contracts. This may be a variation of what we saw a few years ago with cease-and-desist activity. We're looking into whether there is a legal activity associated with this issue and if so, we will take appropriate action. Separately, we are enhancing communications to owners about options that we may have available to them should they wish to exit their timeshare ownership.

The higher defaults contributed to a higher provision for loan loss in the quarter with the provision at $63 million in the first quarter compared to $46 million in the prior period. Approximately $5 million of the increase reflects higher sales volumes. The remainder reflects increased defaults encouraged by third parties. Now remember the provision flows through to EBITDA at an approximate 60% rate since we get about 40% of the loan value in inventory recoveries which we then of course resell.

Companywide net interest expense increased by $8 million in the first quarter over the same period of 2015, reflecting the $350 million, 5.1% bonds issued last September, and the absence of the fixed to floating interest rate swap we unwound during the second quarter of 2015. Depreciation also increased as we brought new long-term projects into service.

We completed two notable capital market transactions in March. At the corporate level, we closed $325 million five-year floating rate term loan and used the proceeds to redeem the remaining $315 million outstanding under our 6% bonds due this December. We incurred an $11 million one-time charge to pay for the related make-whole provision. The effect of these two transactions is now included in our updated interest expense guidance.

At Vacation Ownership, we completed our first term securitization of the year with $425 million Sierra 2016-1 transaction at a 3.2% weighted average coupon, and an 88.9% advanced rate. The order book was strong as our paper continues to be well received by the market.

Now let's turn to guidance which will be posted on the website after the call. As you saw from the press release, we are increasing our adjusted diluted EPS guidance to $5.61 to $5.75 for the full-year and diluted share count goes to 113.2 million shares reflecting the benefit of our first quarter share repurchases. We're adjusting our interest expense guidance to account for the previously discussed debt transactions.

We're reiterating total company as well as business unit revenue, adjusted EBITDA, and driver guidance, although our current view is that RevPAR will be at the low-end of our guidance range. Our projected annual interest expense moves to $127 million to $129 million from $131 million to $133 million as a result of the previously mentioned favorable capital markets transactions.

Our neighborhood target for 2016 cash flow remains at $800 million. As always keep in mind that there can be variability in cash flow in any given quarter or any given year, so we view the $800 million number as a neighborhood target rather than a precise figure.

Now turning to the second quarter, we expect adjusted diluted earnings per share of $1.35 to $1.38. Remember that we don't budget repurchases into our guidance.

Also note that depreciation will be a couple million dollars higher in the quarter sequentially but we expect it to moderate in the second half of the year.

For the second quarter, while we expect continued momentum on the top-line at vacation ownership, our current best view is that there will be continued pressure on defaults and hence the provision which will reduce their EBITDA growth rates. And at the Hotel Group, we expect RevPAR in the oil regions to remain challenged.

Finally, a quick note on some additional disclosure. The majority of our peers have amended definitions of adjusted EBITDA to exclude share-based compensation. While we've not formally changed that definition of adjusted EBITDA, we are now providing our quarterly share-based compensation in Table 7 of our earnings release so that investors can make apples-to-apples comparisons between us and our peers. Note that our full-year adjusted EBITDA guidance would increase by approximately $60 million if it were presented on a similar basis to our peers.

And with that, I will turn the call back to Steve. Steve?

Steve Holmes

Thank you again for joining us today. We are off to a good start in 2016 as we continue to execute and drive innovation across our businesses, whether it is the Wyndham Rewards program at the Hotel Group, revenue management efforts in Europe that are helping to drive our booking base at our rental businesses, or our new owner expansion efforts at WVO. We are continuing to develop differentiated value propositions that will serve as the foundation for growth, profitability, and shareholder value.

The proven resilience of our diversified business model makes us uniquely positioned for any environment. The disciplined capital allocation continues to be hallmark and commitment of Wyndham.

Thank you for your continued support and confidence in us. We will work hard to continue to earn it each and every day. And with that Keith, we are happy to take any questions.

Question-and-Answer Session


[Operator Instructions].

We will go first to Joe Greff with JPMorgan. Please go ahead.

Joe Greff

With regard to your comments on increases in the loan-loss provision in vacation ownership on February 9 and your cash flow representative model, you had a range of about $291 million for that provision and obviously that didn't take into account some of the things you talked about this morning. What is that range now taking into account the third-party pressuring that provision? And from an EBITDA perspective, what is that and where are you offsetting it since the full-year guidance is unchanged?

Tom Conforti

So Joe, we know what the provision is in the first quarter obviously, and we have visibility into the second quarter. And as I said in my comments, Joe, we expect that we will have a similar level of provision variability quarter-to-quarter. But beyond that really our visibility is somewhat limited because we believe that these organized efforts we're not quite sure both longevity of those or the duration of those efforts.

We hope that will end with the end of the second quarter but we no way of knowing at this point. So we expect that the business unit because of the momentum on the top-line as it did in the first quarter, we'll be able to offset a good portion of that and of course we'll do whatever else we need to do in terms of cost containment throughout the company to achieve that number.

Joe Greff

Okay. So the increase in the first quarter was $12 million year-over-year, $5 million of that was just related to higher VOI sales so $12 million less $5 million is $7 million, 50% flow through of the EBITDA impact in 1Q and I should interpret your comments just now as a similar level to that in the 2Q here with nothing in 3Q or 4Q?

Tom Conforti

So let me walk you through the numbers it's $17 million, a $5 million of it is attributable to sales that gets us to $12 million, we get 60% of the $12 million because we recovered 40% on inventory probably that gets you to $7 million. So $7 million was the net sort of EBITDA effect for provision in the quarter associated with this organized third-party activity.

We expect similar levels in the second quarter comparable levels that may be a $1 million or so lower or higher, but in that neighborhood. And we expect that the revenue and there may be some continuation in third and fourth quarter, we expect that the revenue momentum of the business will serve to offset some of that as well as cost control across the board.

Steve Holmes

Yes, and as you know, Joe, we went through something not to similar to this couple of years ago and we worked through it. So this is very -- it’s a very creative, innovative group down in Orlando that take on these challenges and when they come up, we always find a way around.

Joe Greff

Okay, great. And then I have two relatively minor questions. One is on the buyback in the quarter, there obviously was a slowdown since you guys reported results back in early February. And I know the share price has moved upwardly but is there anything to the slower amount of buyback in the last half or two months of the quarter versus what you did in the earlier part of the 1Q? Was there anything that precluded you other than share price?

Steve Holmes

No, no, the pace of the program we put in place for the beginning of the year was adjusted for price. And so it was more accelerated beginning part of the year and then we were on pace with what our expectation was for the quarter, for the rest of the quarter basically. So it was share price driven.

Tom Conforti

Yes, with share price driven and also remember the bumpers we have or we want to retain our investment grade ratings. So we felt that we were above trend. Typically it's a 150 quarter, we did 175 quarter and we want to make sure that we're comfortably within the bumpers of what is investment grade.

Joe Greff

Got it. And then this Venezuela currency devaluation charge, I think most of us are surprised that it was that sizable relative to maybe how we understand the relative size and presence of Wyndham in Venezuela. Can you talk about that a little bit? What is your revenue EBITDA dependency in Venezuela?

Steve Holmes

Well in the old days it was more than it is currently and this is sort of the accumulated effect of years and years of activity in the market and the inability of us to remove cash -- to remove cash out of the market. We knew that this day was coming at some point in time because the regime in Venezuela hasn't changed in some respects. And certainly moving currency out of the currency has been impossible for a number of years now. And so we just we did know that it was going to happen when it did, but we expect that eventually we are going to experience something like this at some point in time.

Joe Greff

And your exposure to adverse currency in Venezuela at this point forward is zero?

Steve Holmes

No, it is minimal, we produced less than $2 million this year in Venezuela, usually a bigger part of our business at RCI but it's not as much anymore in what business we do, do is U.S. currency denominated.

Tom Conforti

Joe, you should know that we don't have much left in Venezuela, so I think it’s probably $1 million or so, couple of million dollars. So I think we've devaluated as much as it could be the value may be if it happens down the road, it will be immaterial for sure.


Our next question comes from Steve Kent with Goldman Sachs.

Steve Kent

Hi. So the -- I wanted to talk to you a little about new customers versus existing customers for the timeshare business. I thought maybe Tom; you said something like the new customers are up 7%.

Tom Conforti


Steve Kent

So if you break it out, what is your split between new and old? That is one question related to that. Second, is the FICO score about these same on the new versus the old? And I know it is early because they are new but the default rates are they running about the same? And then just one final question because I think the VPG number was very strong this quarter. I know it's a continued evolution of how you get better and better at selling. May be you could just give a couple of examples of what is leading to that higher momentum on VPG?

Tom Conforti

So four part question I count it. So the one question I could answer comfortably and immediately is that our FICO score remain, it's actually a couple points higher than it was last year. So the profile is the same.

Too early to tell on the default tendencies of the new owners since they've just become new owners and we haven't noticed a material drop off. Keep in mind that that new owners don't necessarily default at any greater rate than existing owners, the reason being that existing owners typically have larger loan balances, and new owners typically don't, and so the default experience is not materially different than it is with upgrade.

Steve Holmes

And then you had asked about the mix of new and upgrade. It's pretty close to what it was before slightly increased new owner additions obviously by increasing but it's not anything dramatically different.

On the VPG momentum, Steve, it really is -- it's in both of the kind of metrics that go into VPG, both closed rates as well as the transaction size. And this is really I believe a continuation of the process improvements that they have put in place down in WVO, as well as to a degree the opening of the new sales offices, some of our sales offices are in locations where we will deliver just by their locale, we will deliver a higher VPG like New York, St. Thomas. So we're getting a benefit of some of that flowing through as well. So I think it's really kudos to the team. They're doing everything they need to do to continually improve the business and if not for this, this bump in the road on provision this would have been a blow out quarter for WVO.


And we will take our next question from Patrick Scholes with SunTrust.

Patrick Scholes

Hi good morning. I have a number of questions. First, talk a little bit more about in the vacation rental revenue certainly a strong 7% growth rate in transaction volume. Can you give us a little color on like what types of customers are you seeing that large increase from and perhaps where they are located and their geographic region?

Steve Holmes

Sure, it’s as you know this is largely a European business and the two businesses that performed the best were Landal which is largely Dutch for Dutch, but also some German in there as well. And the other was Novasol which is a little more broadly distributed because they have product both in Northern Europe as well as Southern Europe in Croatia and Italy and those are the biggest population, they draw from German travelers and the Danish travelers. So those were the two highest performing markets that we had.

Tom Conforti

Patrick, you might recall that we discussed last year the expansion of our distribution relationships with a couple of online distributors and that also engaged some nice buoyancy to our transaction volume.

Patrick Scholes

Okay. Have you seen any material change after the Brussels attacks in the booking and demand patterns?

Steve Holmes

No, no we did not.

Patrick Scholes

Okay. Two more questions here, when I look at your exchange revenue per member, it’s been a pretty consistent downward trend year-over-year. Is that just propensity to exchange is decreasing? Is there something else going into that decrease?

Steve Holmes

No, it really is the -- it's exactly that. It's the propensity, it says more and more of the members are coming from clubs, the larger clubs, they do less transactions with us and that creates a downward pressure on the exchange revenue per member. Part of what we're doing with this new initiative that is started in destination network is to expand our offerings to these members, so that we can give them more products, more different experiences which can generate a larger share of wallet. So they're doing a great job of kind of looking at different ways that we can reverse that trend but that trend is one that's existed for some time.

Patrick Scholes

Okay, thank you. Last question, historically you have outlined a 6% to 8% organic EBITDA growth going out into the future. How do you feel about that range for the next several years?

Steve Holmes

We feel -- we feel good about it. I was just handed a note on your last question, Patrick, we recognize that there is FX impacting that exchange revenue per member I neglected to say that.

Patrick Scholes


Steve Holmes

Going forward our growth rate we feel very good about it. We did our strategic reviews at the end of last year and have done budget reviews, we feel like we have terrific programs in place and a lot of this seed corn that we're planting right now is going to bear fruit in 2017 and beyond even though we were comfortable for this year because things like the tremendous systems that we're rolling out in Hotel Group are going to have some really positive impacts.

And those aren't felt immediately. Because really we've got there is a series of initiatives that we're rolling out and we haven't even hit the big ones yet that will have the biggest impact. So revenue management for these hotels is important but the two interface and other things that are coming out as part of the Sabre System that will come out in 2016 and 2017 are going to have the bigger impacts. So we feel very good and WVO is quick and long, they've got great plans for going forward.


And our next question comes from Chris Agnew with MKM Partners.

Steve Holmes

Hey, Chris.

Chris Agnew

Thanks very much. Good morning. I wanted to ask about the strong tour flow growth you saw in the quarter with new sales centers. Have the sales centers fully ramped and thinking about the cadence through the year, when do you start to lap the opening of sales centers and any plans for additional sales centers? Thanks.

Steve Holmes

Okay, well just talking generically about tour flow, there were a lot of drivers of our increased tour flow. The new offices were one element of it, they are not completely ramped up yet, they will continue to ramp up over this year and actually into next year to a degree because not only they have to open a sales centers, you then are -- you're finding your tour flow sources, you're training your sales people. So I expect to see a multiyear impact from some of these larger sales centers like New York and St. Thomas and as well as the new center we have out in Vegas. So that is going to blend in over time.

Some of the initiatives that we talked about previously like Norwegian cruise lines that's just starting. We had our first cruise -- the Norwegian cruise line that went into St. Thomas and then went over to our sales center on the 19th I believe of April. So yes, last week, so we're just starting that program and there is a multitude of other programs that the group is working on to continually kind of freshen the sources of our tour generation. So I think what you're seeing I do not expect it to slow down, it was great in the first quarter, it's always difficult to predict. So I don't want to say it's going to be up every quarter like it was this quarter but we feel very good about our marketing and sales efforts at WVO right now.

Chris Agnew

Thank you. And then if I could switch to the weakness you talked about in oil and gas markets. Are you seeing any signs of stabilization and when do you start to run over easier comps in those regions? Thanks.

Steve Holmes

Well it's a good point, Chris. At some point, we should start lapping the issue and it was first identified kind of at the end of the first quarter of last year. So the second quarter had some in it but it really got more dramatically pronounced in the third and fourth quarters. So we should start, that's why comps should be easier in the second half of the year.

Now we're hesitant to say, it will be easier because we're not sure how much contingent it will be from this, there is the market that are oil producing are down, we will expand beyond that, we won't know until the summer quite frankly because we're such a leisure summer driven business. But we are monitoring it closely and we're working with our franchisees in those markets to try to do everything we can to drive business there.


Our next question comes from David Katz with Telsey Group. Please go ahead.

David Katz

So two questions. Some of the discussion around this third-party effort, are you able to provide any more detail as to where that came from exactly or is this a better -- perhaps a better off-line discussion? And then you mentioned that it has happened in the past. Can you point to some specific timing so that we can go back and get a little historical perspective on how that has rolled in the past?

Steve Holmes

Yes, just the last question is easier to answer than the first one. The first time we saw that kind of a similar activity was back in 2012 and it flowed into 2013 and at that time, we called it the cease-and-desist effort. As a result of that cease-and-desist activity, there were people who are prosecuted, who are found guilty, and who are serving sentences right now.

So sometimes these activities are just now legal and we have to beat them back and because of that I'll go to the first part of the question which is I don't think we're really in a position to talk about this on the call or frankly off the call either if we could talk about we talked about on this call because we're in the midst of trying to track all this down right now.

As you can see the business is performing and covering the pressure that we're feeling from this and as I said it would have been a knock out quarter if not for this activity.

David Katz

Understood. And then if I can ask one smaller question around Dolce, can you -- just since it is a newly integrated brand and again recognizing it is relatively small, can you just talk about what your plans are for that over the next 12 months in terms of exiting rooms from the system and what we can reasonably expect that to achieve? And it certainly would help if we went out past rest of this year also if that's possible qualitatively?

Steve Holmes

Sure, well as you said Dolce, is a new brand, it's also a relatively small brand but it's we also have a lot of momentum in the brand. As for exits, we did have a couple of properties leave may be just one property leave after the acquisition but other than that it's very stable. We are producing for them and I think we reported on the last call and even the call before that the impact on those hotels has been dramatic not just on their performance, from a revenue standpoint but also in their cost because they've been rolled into our OTA contracts, they’re getting the benefit of it. So we’ve got some very happy hotel owners in the Dolce world. We will continue to manage those properties and grow as a management company and we will continue to keep the quality of, it’s a terrific quality product.

David Katz

Got it. And if I can ask one last one, I believe you mentioned in the past that and the question comes up about regulatory scrutiny on the industry overall, and the degree to which that may or may not impact your practices, but I believe you talked about surveillance or tracking on your vacation ownership sales closing execution. And if my memory serves correctly, the percentage was around 70%. Can you just talk about how that number, what the sort of factors around that that percentage going up or down I suppose could be in the near-term? And just how you are thinking about this kind of regulatory scrutiny context that comes up with investors all the time?

Steve Holmes

Well couple of thoughts and then Tom could add whatever he likes as well. This has been a highly regulated industry for decades which is a really, really good thing. There used to be some kind of bad actors in this industry and many of them have been eliminated because of the good regulatory environment. So we encourage regulation, we encourage prosecution of the bad guys who are the bad resellers; we do everything we can to continue to build the integrity and the respect of this industry. And I think it's improved dramatically if you follow this industry 15 years ago and you look at it now.

The current flurry of activity has not really influenced how we're operating the business; I think you're referring to our videotaping of closings. We started that before any of this recent flurry has cropped up and we started doing it because we thought we could learn more by understanding how our consumer is understanding our product offering to make sure that our specialist presenter programs and others are the best that they can be.

So this is a constant effort on our part and we survey our customers, we do the video recordings and we also do the closings by the QAs. It's just something we've been doing for years and that’s just the way we -- that’s just the way we manage the business always wanting to improve that.

Tom Conforti

Yes, David, you had mentioned what was the limit -- we are at 70, what's the limitation? The limitation is technology and we're exploring ways to develop mobile technology or utilize mobile technology to be able to video record the whole system at some point. But we haven't found the right technology solution at this point.


Our next question comes from Harry Curtis with Nomura. Please go ahead.

Harry Curtis

Hi good morning. So I'm just trying to drill in to these the third-party issue a little bit more. To what extent is the Ovation plan a response to what these third-party folks are offering. Is there a connection first, that's my first question?

Steve Holmes

The answer is no, we started the Ovation program which is really for our customers who have already paid their loans and have been owners for some time. We started that over years ago -- couple of years ago.

Harry Curtis

Okay. So in trying to understand the Ovation program a little bit deeper is there, to what degree -- I'm not sure I really understand or can articulate the question. But to the extent that there is a loan out there, what happens to that loan if you make them an offer to take that unit or interest back?

Steve Holmes

Well those aren't the people that we are approaching with Ovation, the people that are right now are taking advantage of Ovation program are ones who have paid off their loans and are people have been around for while usually there is some change in their situation, they lost their job, their health is gone bad, they -- we noticed that they are not using their product as much as they historically had used it. So we will reach out to them and say, can we book a vacation for you, if not, is there some reason that you're not using your product. And we just want them to gracefully exit if they don't want it. We don't want them to feel like they're trapped into paying maintenance fees, so we'll give them a way out, and then we can take that product and resell it to somebody else. So it's really just a kind of a recycling program for those people who have kind of reached their term.

Now, to be honest, we have not gotten that kind of response that we were thinking we might see on Ovation not as many people have taken us up on the offering, but we're going to continue to refine it and improve it and we think it will be nice way to get people to recycle out and leave gracefully.

Harry Curtis

Okay. And thank you. And my last question goes back to the second half provisions. You mentioned that the second quarter provision is roughly the same as the first and so in your annual guidance are you assuming that that the provision will be roughly the same as it was last year?

Tom Conforti

Harry, I think that we expected there will be some continuation although probably not at the same rates as we've experienced in the first half of the year. So, but that's constant -- that's a constant area of reassessment frankly, and so what I say to you today may change, month or two down the road as we get a better sense of things.


Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli

Hey guys, thanks for taking my question. Just a follow-up on the Venezuela devaluation. Obviously it has been hard for just about any company to get capital out there but Tom, did you reference the free cash flow that you noted was negatively impacted by $24 million because I'm just trying to reconcile if it was a write-down what the adjustments would be from a cash and EBITDA perspective?

Tom Conforti

Yes, absolutely, it was -- our free cash flow was reduced by $24 million. It struck me odd is well the first time I got through it with my Chief Accounting Officer, but it's a write-down of cash, and so therefore it's cash that had been earned previously that now has been sort of devalued and therefore we have to reverse the prior earnings of cash. I guess is how in my sort of non-accounting mind I would rationalize it. So, yes, it did impact cash flow, and it impact reported EBITDA which we adjusted out because obviously it's not a part and parcel of our daily operations of our business.

Carlo Santarelli

Right. So then the cash flow number that you guys provided, the $218 million for the quarter, you are saying is $242 million prior to that reversal?

Tom Conforti

That's correct, Carlo.


And it appears we have no further questions at this time. I'll return the floor to our speakers for closing remarks.

Steve Holmes

All right thank you all very much and watch out for the Wyndham Reward -- Wyndham Reward Wizard on TV. We will talk to you in the next call.


And this does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.

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