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Wyndham Worldwide Corporation (NYSE:WYN)

Q4 2007 Earnings Call

February 12, 2008 8:30 am ET

Executives

Stephen P. Holmes - Chairman & CEO

Gina Wilson - Executive Vice President and CFO

Margo Happer – Senior Vice President, Investor Relations

Analysts

Steve Kent – Goldman Sachs

Joe Greff – Bear Stearns

William Truelove – UBS Research

Patrick Scholes – J.P. Morgan

Michael Millman – Millman Research

Jake Fuller – Thomas Weisel Partners

Chris Woronka – Deutsche Bank Equity Research

Operator

Welcome to the Wyndham Worldwide Fourth Quarter Full Year 2007 Earnings Call. Throughout today’s presentation, all lines will remain in the listen-only mode.

Following today’s presentation, there will be a Question & Answer Session. Today’s conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Ms. Margo Happer, Senior Vice President of Investor Relations of Wyndham Worldwide. You may begin.

Margo Happer

Good morning and welcome to the Fourth Quarter and Full Year 2007 Wyndham Worldwide Earnings Conference Call. Joining us today are Steve Holmes, our CEO, and Gina Wilson, our CFO.

Before we get started, I just want to remind you that our remarks today contain forward-looking information that is subject to a number of risk factors that may cause our actual results to differ materially than those expected or implied. These risk factors are discussed in detail in our Form 10K on March 7, 2007, with the SEC. We will also be referring to a number of non-GAAP measures. The information of these measures to a comparable GAAP result is divided to the play book in the press release which is available on the Investor Relations section of our website at www.wyndamworldwide.com. Steve?

Steve Holmes

Good morning and thanks for joining us. As you saw from the press release, we had another strong quarter delivering the results that we said we would with no surprises. Looking at the full year, we achieved double-digit, top and bottom, line growth and made significant progress against some of our strategic goals.

You will notice that our adjusted EPS for the fourth quarter of 2007 did not grow as rapidly as it did in the first three quarters of 2007 and I’d like to address that for a moment up front.

As we expected, this reflects some tough comparisons with the fourth quarter of 2006. In our timeshare business, as we had anticipated, we had an increase in deferred revenue at the end of 2007. We also had a phenomenal fourth quarter of 2006 as the timing of revenue related to the change in GAAP accounting for the timeshare rolled into the end of 2006.

With the hotel group, we had a net increase of marketing expenses in the fourth quarter of 2007 compared to 2006 which impacted that segment’s EBITDA. And with Group RCI, we were comparing 2007 with no meaningful international consulting contracts to 2006, when in the fourth quarter we recorded some significant time track revenue.

Again, all these comparative factors were worked into our plan for 2007 and we delivered right on our expectations. Excluding the year-over-year noise, momentum across the company is strong and we are looking forward to continued strong performance in 2008.

Of course, what everyone is focused on is what we’ve seen in the current market place and what we see looking forward into this new year. As I’m sure you noticed we are forming the guidance given in our Investor Day on December 11th. We continue to believe that our business model solidly positions us, even in a tough wreck environment because we have a global portfolio of diverse businesses and brands and our concentration in the midscale on economy segments play well in uncertain economic times. And we have multiple revenue sources and more than half of our revenue generated from fees related to services.

Overall, our business continues to perform very well. That said, we are watching consumer sentiments and stresses in the overall economy very carefully. The resiliency and nimbleness built into our business model makes us optimistic that Wyndham Worldwide can continue to perform and grow and generate substantial long-term value for our shareholders. Now let me review our results.

The Wyndham hotel group had a great year with 10% revenue growth and 6% adjusted EBITDA growth. Fourth quarter lodging results were in line with expectations and reflect our ability to execute against our key strategic initiatives: Leveraging our strength in the domestic economy and midscale segments, growing the upscale Wyndham brand and expanding our international presence.

RevPAR grew 5.3% in the fourth quarter of 2007 versus the same period last year. We ended the year with overall system revPAR growth of 4.4% and comparable revPAR growth of 5.6%. Our Super 8 and Days Inn brands outperform their competitive set with domestic revPAR growth of 5.6 and 4.2% respectively compared to just 2.4% growth for the economy segment. A good portion of Super 8’s revPAR performance resulted from occupancy gains in excess of the industry average. Super 8 also was the top rated economy hotel brand and number 24th overall in Entrepreneur Magazine’s 2007 ranking of the best franchise businesses.

Our Ramada brand also enjoyed domestic revPAR growth well in excess of its competitive set. Ramada ended the year with domestic revPAR growth of 8.3% versus just 3.8% for the midscale with food and beverage segment. These three brands, Ramada, Super 8 and Days Inn, collectively represent over 70% of our US lodging portfolio. The performances of these brands illustrate our focus on product improvement, franchisee education and training, and the power of our loyalty program.

There’s been much speculation and concern regarding the US economy and the lodging cycle. One of our advantages, especially on a slowing economy, is that we have a diverse-like business model so our sensitivity to any one business driver is muted. For example, a 100 basis points change in revPAR would only have the a $2-3 million impact on EBITDA and that assumes no cost-cutting initiatives. So general discuss where we are slightly lowering our expectation for revPAR to 3 to 5% from 4 to 6% in light of the macro economic environment, we remain comfortable with our financial guidance. Our lodging platform is a franchise and management business with dependable and consistent cash flows. We’re not as exposed as owners managing hard assets with an inflexible cost structure.

Turning to franchise development, in the fourth quarter of 2007, we opened approximately 19,000 rooms. We grew our overall system by 1.4% in 2007 which reflects a 15% increase in our international presence and an 8% increase in our Wyndham brand system size. Our pipeline remains robust with over 105,000 rooms in the pipeline, representing a 15% increase over last year and reflecting continued strong interest in our brands.

The Wyndham Hotel and Resorts brand is over 20% of our pipeline and another 40% represents international properties. By statistics, approximately 45% of our pipeline is new construction. We are now beginning to see the impact of our rebuilding efforts for the Wyndham Hotel and Resorts brand. We have strong growth in the first three quarters of the year and in 18 properties in key markets, such as, London, Puerto Rico, Mexico, and New Orleans.

In the fourth quarter we opened properties in Newark, New Jersey, Portland, Maine, Cosmo, Mexico, which is a luxury boutique resort that represents Wyndham’s first grand bay new construction property. And we opened another new one in Panama City housing one of the largest casinos in Latin America.

Internationally, we have increased our footprints significantly. With 15% growth in system size this year, we now have presence in over 60 countries. In the fourth quarter alone, we added hotels in key cities like Seoul, Shanghai, Beijing, and Bucharest.

Over three-fourths of our international lodging portfolio is in Canada, China, the UK, Germany, and Mexico. Countries world brands have enjoyed revPAR growth of almost 19% in the fourth quarter and more than 10% for the full year.

We also proudly announce that Super 8 hotel in China has been appointed by the Beijing organizing committee for the games of the 29th Olympic ad as a number of the Beijing Olympic Village accommodations service management team.

We are pleased with our strong revPAR performance, significant developed momentum and the opportunities that lay ahead of us, specifically, with respect to the potential international expansion and our growth plan for the Wyndham Hotel and Resorts brand.

At Investor Day in December, Peter Yesawich and his Ypartnership research predicts that even if the travel market slows down, business in leisure travel will continue but with renewed focus on value. We are confident that our broad selection of products, locations, and price points will continue to meet the needs of travelers looking for high value in leisure and business travel.

Now turning to Vacation Exchange and Rentals. For the year, RCI revenues and adjusted EBITDA both increased 9%. Results for the fourth quarter are in line with our expectations with revenues off 5% and EBITDA down 5%. Both metrics were dampened by the impact of international consulting and other revenue in Q4 of 2006. It was not repeated in 2007. Excluding these items, the underlying base business EBITDA grew.

In the exchange business, growth in the average number of exchange members continue to be stable, up 5% versus prior year in Q4 and the full year of 2007. However, annual dues and exchange revenues per member was relatively flat for the full year and down 3% in Q4, reflecting the timing and mix of exchange deposits versus last year which resulted in higher inventory deposits in the fourth quarter of 2006.

In December, we launched a new web-based US member rental platform that is a significant improvement over our prior offering and includes links to Google Maps. Early results are positive with online member rental bookings, increasing 59% during the month of January versus last year. More broadly speaking, we are building our internet capabilities in the exchange business to improve the overall member experience and drive transaction revenue, while at the same time, benefiting from lower cost.

During the last few months, I have met with many of our timeshare development partners and what I’m getting from them confirms what we see in our own timeshare business, which is that the timeshare business looks strong. Of course, our timeshare developer relationships are the life blood of the exchange business and I’m pleased to say we ended the year with good results for developer affiliations, completing approximately 40 affiliations in Q4 for a total of approximately 115 for the year. Our affiliates consistently renew their multi-year agreements with RCI at a rate of about 99%.

In the rental business, overall performance was strong in Q4 driven by a higher net price for vacation rental of 9%, excluding favorable currency translations which was supported by mix and pricing, as well as, the conversion of two Landal parks from franchise to managed parks.

Landal’s success is due to favorable local trends coupled with continued improvements in shoulder season space management. Our Novasol business also grew and benefited from its southern European destination expansion, as well as, an improving economy in Germany.

We continue to expand our rental capabilities outside of our strong and growing base in Europe. To our recent agreement with LeisureLink, we will increase the online presence of our global condominium and vacation rental inventory via new channels including online travel agents, such as, Travelocity and Orbitz.

In Q4, we made progress towards putting this alliance into operation and expect to begin selling and expanding our use of this distribution channel in the first half of 2008. We will put our building blocks in place in 2008 and look forward to further positive momentum in 2009.

Now turning to our Vacation Ownership business. 2007 was a spectacular year with gross annual VOI sales up 14%. Our reportable drivers were not only up across the board, but set new records in every category. We saw more perspective buyers last year than in any time in our history and we converted these prospects with greater efficiency and higher transaction sizes than ever before.

We added over 1,500 timeshare units to our portfolio through on-going development of resorts Orlando and Gatlinburg, among others, and opened multiple high-profile properties in several key expansion markets, including San Diego and Oceanside, CA; San Antonio, Texas; West Yellowstone, Montana; Wisconsin Dells, Wisconsin; and Panama City, Florida.

In addition, we’ve now solidified our pipeline for future developments with several projects now under way in major destinations like Washington, D.C., National Harbors, San Francisco and Anaheim, CA; Steamboat Springs, Colorado; Kauai, Hawaii; as well as, a planned next year’s project at the Wyndham Rio Mar Resort in Puerto Rico.

It’s worth mentioning that all of this was accomplished during a year long transition period for this business as we worked to rebrand and realign our extensive sales and servicing operations under the new Wyndham flag, including an existing portfolio of approximately 145 resort properties. As a result of these efforts and those of our hotel divisions that I discussed earlier, 223 hotels and timeshare resorts now fly a Wyndham flag, up from only 87 in August 2006.

Our Vacation Ownership business enters 2008 with a clear path forward to more exfoliate leverage and capitalize on the Wyndham brand. We believe our strong results in 2007, particularly in upgrade sales efficiencies, were in part due to the early use of the Wyndham brand within in-house sales channels. Clearly, we’re excited about what the Wyndham brand means for our Vacation Ownership business in the long term. In the short term, however, particularly as we work to sustain double digit growth in an uncertain economy, we believe our greatest assets are our people, a satisfied member base, and our business model which includes diverse marketing strategies during on-site and off-site sales channels and a best-of-breed product structure that works well for our customers and just as well for us as the developer.

As we noted in our Investor Day conference in December, our Vacation Ownership business employs one of the most highly diverse marketing strategies in the industry, allowing us the flexibility to adjust our strategies to match consumer behaviors.

In 2007, our marketing programs yielded more than a million tours through a combination of in-house direct mail, call transfers, telemarketing, e-commerce, magazine ads, alliance partners, special events, community marketing programs, and other offers designed to bring consumers directly to our sales centers. We continue to add new approaches to our marketing as you can see in our motorsports and golf alliances which appeal to wide audiences from baby bloomers to Gen-X and Gen-Y.

Our points-based product structure enables us to sell any inventory we develop or acquire from virtually any sales center throughout our system of which there are currently more than 135. While many of these are located on-site within resort properties and major tourist destinations, more than 45 are off-site sales centers located in suburban markets where our customers live and work. So, our strategy is not dependent on whether people plan on traveling to exotic places this year or maybe staying closer to home. In addition, our points-based product, by design, is not a one-size-fits-all offering. We’re able to adjust each sale by the amount of points a particular customer is willing and able to purchase. We can effectively meet the demand and match the pocket book of each individual consumer.

Throughout 2007, our sales base exceeded our expectations while maintaining sales efficiencies. Our early read into 2008 is at the strength in sales is continuing. Our double digit growth projections are fully reflective of how we see the business performing today.

But before I turn it over to Gina, I’d like to report on an aspect of the business, though while one of my top priorities we really discuss with the street, corporate culture and employee morale. We’re in the process of tallying the results of our first associate opinion survey. We had a great response rate and the most significant finding was though we score higher than both external norms and hospitality norms in employee engagement. This is especially impressive since we have been an independent public company for only a little over a year when this survey was taken. The strongest ratings included ethics, teamwork, work-life balance, and employee sense of inclusion. To me, the results reflect the energy and direction of our great employees and I’m very proud to be part of this organization.

Let me now pass the call over to Gina, who will provide some more detail and walk you through the financials. Then I’ll come back to briefly wrap up before we take your questions. Gina?

Gina Wilson

Thank you, Steve. Let me take a few minutes to go through our results and then we’ll take your questions.

First, in the Lodging business, we ended the quarter and the year right within our expectations, continuing to make progress on system size and quality. Margins are tracking according to plan with full year adjusted franchise margin of 75%. On a broader note, here are some points to consider in evaluating our sensitivity to various economic factors. Because of the positioning in market segments of the majority of our brands, we historically have been left affected by softness of the economy. Indeed, we see an opportunity for Wyndham Worldwide to benefit in a softer market as consumer seek value and independent hotels become franchisees to benefit from stable brand performance.

So, where does that leave us? In light of recent industry reforecast for the lodging segment, we’re revising our revPAR 3 to 5% from 4 to 6%. Steve went into the details regarding revPAR and how changes in that metrics will only impact our EBITDA in a muted way but despite the reduction in revPAR, we are able to maintain our lodging revenue and EBITDA guidance and company-wide financial guidance, including EPS, revenue and EBITDA remains unchanged.

Now, moving on to Vacation Exchange and Rentals—exchange and rental results were in line with our guidance. The year and quarter reflect an adjustment of previously recorded revenues related to consulting activities in Asia Pacific which we told you about when we announced the second quarter. Impact on 2007 reflect a year-over-year decrease in revenues of $11 million with fourth quarter comparisons adversely affected by $4 million in consulting revenues in 2006 and were absent in 2007.

On the exchange side, the average of number of members is where we expected it to be and annual dues and exchange revenue per member was flat during the second half of the year. As we told you on the last call, this was due primarily to the mix and timing of inventory deposits.

On the rental side, the average net price per vacation rental was strong, helped by currency and the mix of premium locations. The number of transactions met our expectations.

Now, let’s turn to Vacation Ownership. Results for the fourth quarter which reflects $21 million in deferred revenues were in line with expectations. Drivers are tracking to plan stuff for 2008 and we see no signs of any slow down in this business.

Gross and gross sales for the quarter was in line with our expectations as well at 4% ahead of last year but somewhat dampened due to the benefit of revenues recognized in the fourth quarter of 2006 on business written early in earlier periods related to the change in accounting rules at the beginning of the year.

The second half of 2007 also reflect the lasting effect of sales offices opened in the first half of 2006. In addition, the fourth quarter of 2006 benefited from a pricing freeze to defray certain marketing-related costs. Consistent with our previously communicated guidance, we expect to see the timing of those marketing programs reduced or drive a comparison early part of this year.

Consumer finance revenues were up 22% for the quarter and 24% for the full year 2007, driven by higher outstanding consumer receivable levels. As we’ve told you before, our goal post-spend is to improve our balance sheet leverage by shifting to more secure-type debt to help finance growth in this business. This improved financing efficiency shift interest expense from below EBITDA to operating expense above EBITDA, reducing Vacation Ownership’s reported results.

We estimate that this shift to a higher secure-type debt ratio reduce fourth quarter and full year 2007 EBITDA by approximately $4 million and $13 million respectively. That means Vacation Ownership would have reported even better results if we hadn’t continued to work on the balance sheet over the course of 2007. Fourth quarter Vacation Ownership EBITDA was also reduced by the higher levels of deferred revenues that we talked about before which carries about a 50% margin. Absent of the effect of the deferred revenues, margins would have been about 18%.

Our growth assumptions for VOI sales this year is 10 to 12% and again, what we’ve seen so far this year leads us to believe that we should achieve it. Remember that 2008 reported results will be reduced by $40 to $100 million in deferred revenues associated with percentage of completion accounting under GAAP. We have included increased disclosures on Table 4 of the earnings release to give you more transparency into this aspect of the business.

It’s also worth reminding you a construction reality which any of you has done your own construction project knows, the various development projects that we have underway at any point in time are subject to a host of factors that can lead to changes in the pace of construction, such as, weather, materials delivery, and inspections by local building departments. We build our project plans with those uncertainties in mind and our best estimates construction progress show true into our GAAP revenue forecast. We have more visibility into the level of deferral closure end but actual results will still depend on how those various construction realities play into our percent complete level at each quarter end, project by project. Our estimated deferred revenue range for Q1 is based on our current assessment of the construction pace at this point.

As discussed on Investor Day, we currently expect deferred revenues of $70 to $90 million in the first quarter and at this point, we’re estimating $5 to $20 million in the second quarter. Remember again that deferred revenues carry an estimated 50% margin.

On the consumer financing side, our portfolio remains stable. The quality of the portfolio is strong with average FICO scores increasing slightly since 2006 to 665. An average borrower equity in the portfolio is about 37.5%. Overall, the portion of the portfolio that is current is tracking close to our past experience, taking seasonality into account. We’re not seeing any dramatic changes in the performance of the overall portfolio but we are seeing some stress among our weaker borrowers, consistent with what you’d expect in weaker economic environments. For example, our collections team may need to place more calls to contact past due borrowers. We will continue to watch our portfolio carefully and we always do. Our seven outstanding securitizations are all performing well within their predetermined tolerances.

On our last call, we announced a $455 million term securitization, as well as, the renewal and upsizing of our conduit facility to $1.2 billion. Based on our current sales pace, we expect to be in the market with the securitization in the second or third quarter.

On market research, which include talking to both banks and investors on a regular basis, indicate that demand for our paper remain strong. While our last few deals were wrapped with an insurance guarantee over $1.6 billion of our historical securitization transactions were successfully completed without rep coverage. We’re reviewing various structures and relationships so the next time we go to market and the decision whether to insure the securitization will ultimately be determined by price and availability. It’s important to note that our securitization transactions are bankruptcy remote and therefore, none reports to us, even though they are consolidated onto our balance sheets.

Now, moving on to then corporate matters. Adjusted corporate EBITDA for the fourth quarter, excluding legacy matters, was $13 million. We expect to see a ramp of corporate expenses in the first half of 2008 and estimate that a normalized run rate will see about $15 to $17 million a quarter in 2008.

Decoration and related expenses are now finished as expected. Contingent liabilities related to the separation from Cendant now stand at approximately $349 million with related assets of $48 million as of 12/31/2007. Changes in which will continue to be reported as legacy items.

We are pleased with the Ernst & Young settlement announced in late December, which resulted in a $29 million after-tax gain.

As you saw from the press release, we are affirming the 2008 guidance that we provided in December. Before I turn it back to Steve, I want to spend a moment on the quality of our balance sheet and how we have managed to improve its efficiency while maintaining our credit metrics.

During the course of 2007, we’ve grown our revenues and adjusted net income by 13 and 14% respectively while our total assets have grown by only around 10%. We have a good portfolio of timeshare inventory spread between finished project in construction pipeline and land slated for 2000 and later development and delivery. As I mentioned just now, we’ve shifted our debt-mixed-use our timeshare receivables more effectively and we have an appropriate liquidity posture to support our plans for growth. That combined with the well balanced global portfolio of businesses that we operate positions us well to execute our plan and take advantage of opportunities that these unstable markets may present.

And now I’ll turn it back to Steve to rap up.

Steve Holmes

Thanks, Gina. So, I hope that you all come away today with a clear sense that we are watching things very carefully and that we have the ability to quickly make adjustments to our business if we need to. Our businesses are performing well and we will continue to focus on executing on our strategic plan and thereby generating long-term value for our shareholders. With that, let me open up the call for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we’ll take questions. Please press *1 if you have a question and *2 if you’d like to withdraw your question. When prompted, please state your name. We ask that you limit yourself to one question so that everyone can get an opportunity to ask a question. One moment while the questions register…

Our first question comes from Steven Kent.

Steve Kent - Goldman Sachs

Hi, Steve and Gina. It’s Steve Kent. Can you hear me?

Steve Holmes

Yes, we can Steve.

Steve Kent - Goldman Sachs

A couple of questions. First off, just on—maybe it’s my new point—but it looks like the estimated on collectible receivables sell in the fourth quarter—is that a seasonal issue or are you doing a better job at getting those collected correctly? And then, more broadly, we can’t help but see that the pipeline of your hotel development is robust. Has there been any shifting, anybody talking about capital constraints slowing down their development, etc?

Steve Holmes

Well, I’ll take the second one and I’ll let Gina take the first one. With any slowdown, all the feedback that we’re getting from the developers that we’re dealing with, particularly on new construction, is that the projects are moving forward as planned. Now, realize that most of the new construction projects we’re talking about are smaller projects that are often financed by the local banks or the local funding institutions within their communities. So, it’s a little bit different than large, urban big city center projects. We did hear because we had people out at the conference two weeks ago out in Los Angeles that there was currently pressure on big projects. We haven’t seen the pressure on the smaller kind of projects that we’re dealing with. And Gina?

Gina Wilson

And Steve, on your question on the Lancer’s down just slightly from third quarter. That is a seasonal pattern. If you look at last year’s charge off, you would see that the fourth quarter was relatively high compared to Q3 as well.

Steve Kent - Goldman Sachs

But you mentioned earlier that your people are making more phone calls to get these collected. Is it more dramatic? How significant is that and how concerned should we be about that?

Gina Wilson

The charge offs are pretty much in line with what we would have expected for the fourth quarter given the larger size of the portfolio. On the collection size, what our teams are telling us is that people who are not inclined to answer the phone may be a little harder to track down. So, they may have to work a little harder to catch them and talk to them about their repayment plan.

Steve Holmes

But to your question we’re not seeing anything significant.

Steve Kent - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Joe Greff. Your line is open and please state your company name.

Joe Greff – Bear Stearns

Hi, guys, Joe Greff Bear Stearns. Steve took most of my questions. Just with regards to that last comment about seeing some stress with the weaker borrowers and making more calls and things like that—are you thinking of changing some of the financing criteria in terms of who you’re lending to?

Steve Holmes

No, Joe. I’ll take that one and Gina can add anything that she would like. No, we are constantly changing our marketing programs to target the best possible consumer but at the end of the day, we are targeting a very broad net. We’re pulling in one million tours in 2007. So no, we’re not planning on adjusting our marketing programs specifically to change the credit profile of the person that we’re targeting. We do try to target to the best possible buyer that we can get. We do that on a constant basis but again, there’s no significant movement that we’re seeing in the portfolio. The answer is we are making a few extra calls to get those collections and we’re just trying to give people a feel for what we’re seeing on a hands-on basis.

We have over the last two years though, Joe, just to give you one aspect of what we’ve done. We did change some of our pricing to consumers based on their credit worthiness, what we called internally, our risk-based pricing. So, the better consumers could achieve a lower interest rate from us in their consumer financing and that has tended to keep some of the higher rated FICO consumers with their paper in place by getting a 9.9% loan instead of a 13% loan, but those are all built into the models of what you’ve been seeing.

Joe Greff – Bear Stearns

Great, and then one final question with respect to your earlier outlook and Gina, I think you mentioned this and Steve, you talked about the revPAR sensitivity which—thank you for that. In terms of the revPAR growth going from 3 to 5 from 4 to 6, that EBITDA impact is offset by higher margins. Is that what you said, Gina?

Gina Wilson

No, I think what we’ve said is that we’re confident we should be able to hold the EBITDA for the segment because of cost savings that we’re going to charge the business with making sure that they achieve.

Joe Greff – Bear Stearns

Great. Thanks, guys.

Operator

Our next question comes from William Truelove. Your line is open and please state your company name.

William Truelove – UBS Research

UBS. Hate to be the dead horse with the consumer financing but on your December presentation, slide number 33 on the consumer financing operations, you give a chart that shows net new monthly default dollars as a percentage of qualified portfolio, excluding 120 days past due. It’s never been over, say, 80 basis points. What’s it currently running?

Is it over 80 basis points now or is it still within the historical range of, say, roughly 60 basis points?

Gina Wilson

Good question, Will. We have that information somewhere here. We could go to another question while we’re looking for that. That’ll be great.

William Truelove – UBS Research

Sure. I got back ups. All right. My next question is: The deferred revenue—you’re talking a range of $40 to $100 million which is also what you said in December. Is there any sense that that range could narrow in terms of your expectations and a little bit more on the quarterly expectations possibly about?

Steve Holmes

Yes, it could narrow as we get closer to it. It’s a lot easier for us as we get closer to the end of the quarter—what our deferred revenue’s going to look like. Let me give you an example, Will, of the kind of things that impact the deferred revenue line:

In the first quarter of 2008, we’re in the process of developing a project up in Wisconsin Dells. They’re under construction for a while and the kind of delivery of the certificate of occupancy will determine that final bit of earnings that we can report on that project. Weather’s been good up in Wisconsin. We could add that project end up, delivering a CO in the first quarter. Likewise, there could be another project that we’re working on where we can’t pull the foundation because the project is in an area that gets hit by bad weather and it could delay some of the reporting of the revenue until the next quarter. So, there’s gives and takes in all of them. We try to be as precise as we can to give you guidance. We’ve always been close at hitting where we said we would be relative to deferred revenue and we foresee that we’ll continue to do that.

We have projects ongoing and in over a dozen markets and we monitor all of them very closely. We have a great development team that manages that process and so we think we are very close to the range that we’re giving. We’ll try to tighten those ranges as we get closer.

William Truelove – UBS Research

All right. Thanks so much, Steve. I really appreciate that.

Gina Wilson

Okay, going back to your first question. What we’re seeing in the last couple of months is that generally within the zone of what we’re seeing in prior years, maybe slightly closer to the top end of that range.

William Truelove – UBS Research

So, still under the 80 basis points bubble?

Gina Wilson

That’s the best information that I actually have at the moment.

William Truelove – UBS Research

Right. Thank you so much.

Operator

Our next question comes from Patrick Scholes. Your line is open and please state your company name.

Patrick Scholes – J. P. Morgan

Hi. Good morning. This is Patrick Scholes with J.P. Morgan. In the commentary, you mentioned that locally, you’ll be doing a securitization in the second or third quarter. What type of backup plans do you have if securitization markets aren’t favorable for you at that time?

Steve Holmes

Well, there are a number of different steps that we would take, Patrick, and it sounds like the same conversation we had last year when the credit markets were falling apart and nobody said that securitizations would get done and then we did one. Because these markets are—there’s great demand for the paper that we’re issuing. If we can’t do a securitization as we did it in the last year, as Gina said, we’ve got a number of securitizations that are just in the tier structure, the seniors, the structure of issuing the additional debt. If for some reason all of those markets are closed, we do have a conduit that’s up to $1.2 billion and then we do a revolver. And then if all of those are tapped out and we’re sitting here and we want to continue to grow our business and we’re not willing to take our growth rates down in the timeshare business, we can always just sell our receivables. We’ve often gotten unsolicited inquiries from people who would just like to buy our notes. That’s not our preferred approach because we think it’s less efficient but there are different ways that we could go. So, we’ve looked at a number of different kind of Armageddon-type scenarios to make sure that we’ve thought through all the various alternatives. We’re very actively in the market on a daily basis, talking to both people who buy these securities, as well as, the banks that help us issue them.

Gina Wilson

And I think the only additional comment that I’ll make is that when we talk to investors and to the bankers that work with those, there are still a fair amount of liquidity that needs to find a home and we’ve looked for this low yield that they cannot get alter state security like treasury. So, we don’t really have a concern that that money won’t be looking for the kind of paper we have to offer. It’s just a question of timing.

William Truelove – UBS Research

Great, thanks. One more question on a different topic. Concerning your lodging segment—looks like you’re forecasting a step up in your wind count growth from 1.5% in 2007 to 4 to 6 in 2008. Does that assume any acquisitions like you had in 2006 with the Corinthia transaction?

Steve Holmes

Well, the Corinthia transaction was more of a—well, we consider it kind of a bulk conversion. We did a conversion of a number of Corinthia properties to Ramada and Wyndham brands. And yes, we may do more of those types of bulk conversions. It doesn’t assume large acquisitions that we might be able to do based on what’s in the marketplace but it does assume that we continue to do those bulk conversions. Then, we’ve always done those. Those are part of our organic conversion pipeline.

William Truelove – UBS Research

Great, thanks. One last question here: In taking a look at your timeshare market across the country, are you seeing any market that are particularly stronger than others? Any particularly weaker than others?

Steve Holmes

Yes, Patrick, that is actually a great question because it’s a question that we get quite a bit, but the fact is because of the way that we sell our product and we sell a pure points-based product, the ability to adjust marketing channels is very flexible. We’re selling from 134 different locations. We sell various products that are built in different locations. So, really from our standpoint, it’s not a question of Is the Las Vegas market a market for timeshare to be built and sold right now? It’s likely we haven’t built any in Las Vegas in the last year but we’ve been selling in Las Vegas a lot of products that was built in markets like Oceanside, California and San Francisco.

So, the markets that we’re marketing to are those where either people are living because we sell in suburban market, or people are traveling to in our resort market. So, really, if you look at our sales offices, Las Vegas had great performance; Orlando had great performance; our San Diego office did very well this year. I can rattle off a lot of great locations that we saw from a sales perspective performance come out of and I would say there was no market that we would say, “Gee, that market really fell off the table. People weren’t buying in that market.” So, long winded answer but we don’t see any areas of softness and we continue because of the very flexible model that we have. We continue to push products throughout all of our channels.

William Truelove – UBS Research

Okay, thanks.

Operator

Our next question comes from Michael Millman. Your line is open and please state your company name.

Michael Millman – Millman Research

Thank you. So, like securities—just several questions: I just wanted to follow up on a recent one. The pipeline for lodging—could you tell us where you expect to be at the end of the year or give us some of the increases for the pipeline less the attrition? I thought I heard a 46% number but I’m not sure where that came from.

Steve Holmes

Well, we don’t give projections on pipeline and frankly, Mike, if we could get all of our products and our pipelines open next week, I’d love to do it, which means our pipelines would go down but we have more products that are being worked on every day by our sales force to tee up to flow into the pipeline. So, we’d like to see the pipeline grow. We’d like to see that pipeline grow sequentially every quarter but again, I wouldn’t get too caught up. If we have a great quarter of opening products like we did in the fourth quarter of 2007. We opened 19,000 rooms and we still grew our pipeline. There wasn’t as much as it would have grown if we only opened 14,000 rooms because we would’ve let in 5,000 of pipeline. So, get a look at that pipeline and the rooms are opening is working very closely together. I think what you’re referring to on the 4 to 6% that is our room growth guidance for 2008 and we achieved about a 1.5% growth in 2007. So going back to Patrick’s question. We are looking at a faster level of growth in 2008.

Michael Millman – Millman Research

Okay, thank you. Also, could Gina repeat what she said with the first and second quarter deferred revenue numbers disclosed?

Gina Wilson

Yes, hold on one sec. First quarter is unchanged for all we told you in December.

Michael Millman – Millman Research

Which was?

Gina Wilson

Which was—

Michael Millman – Millman Research

$70 to $90 million.

Gina Wilson

$70 to $90 million and our current best estimate for the second quarter, again, recognizing that things might move between Q1 and Q2, is $5 to $20 million of additional referred revenue.

Michael Millman – Millman Research

So $70 to $90 million in the first quarter and then five—

Gina Wilson

Five to twenty.

Michael Millman – Millman Research

Okay. Regarding the vacation business—I understand the tough comparisons but little unsure as to why it was up only 4%. Can you talk about that? Is there mixed within that number more semi-annual or more trials, or are existing buying smaller pieces?

Steve Holmes

I think it’s really more of a function of what happened in the fourth quarter of 2006. We opened in 2006 a number of sales offices. We rolled out some new marketing programs in response to the change of accounting that occurred at the beginning of 2006, where we had to adjust our sales processes to be able to report earnings and a lot of that came and hit in 2006.

Also, in the fourth quarter of 2006, part of the sales offices that we opened were in-house sales offices for WorldMark by Windham, was formerly known as TrendWest, and there was also increased our VPG in the fourth quarter of 2006. So, I think what you’re really seeing is just a good trend in VPG. You’re just seeing less of an increase because we had a real killer 2006 fourth quarter.

Michael Millman – Millman Research

I can see them and the tour numbers are much bigger differences but on the RCI business—I guess a couple things. One is it seems to be a very large difference when you compare with what numbers Interval’s putting up. Could you discuss? Are they doing something different? Why are they growing close to double digit?

Steve Holmes

Well, I don’t want to comment on what Interval is doing. I think if you go back to their numbers, you can divide from it. Clearly, they did an acquisition, a resort in Hawaii, which really added a lot to their growth in the fourth quarter of 2007 versus 2006.

Michael Millman – Millman Research

I’ve taken that out and still they’re up 9% in revenue and 12% in OIBA.

Steve Holmes

That’s in the fourth quarter specifically?

Michael Millman – Millman Research

Specifically the fourth quarter with an over 40% margin.

Steve Holmes

I’d be happy to sit down and analyze their financials alongside ours. We’re happy with our performance at RCI. That fact is we had a great fourth quarter of 2006 so I don’t know how their fourth quarter of 2006 compared to ours. So, I think the question you’re asking—I welcome the analysis but I’m not sitting here prepared to do an analysis of the competitor.

Michael Millman – Millman Research

Related to that, are there any slowdowns in the actual number of exchange? We see membership is up.

Steve Holmes

Well, as we mentioned we did see some slowdown in exchange revenue per member and that was, as we said, was really related to the inventory mix and the timing of the inventory that we had. In the fourth quarter of 2006, we had a marketing program that was accumulating during this first three quarters of 2006. They’ve delivered a lot of inventory for us at the end of 2006. That is what we’re comparing ourselves to right now.

I can tell you what we see in the business and in the business, we need to continue to drive to get inventory in, focus on the fundamentals and give our customers inventory to trade in to. If we had it slow like we did at the fourth quarter of 2006, it may offset the comparisons a little bit but we don’t see an overall negative trend here and we haven’t predicted that for 2008. Rather, I think we predicted it pretty much flat for 2008.

Michael Millman – Millman Research

Touching back on the VPP’s for the final question again. I’m not sure if you’re saying that there is some difference in or no difference in the mix you’re saying between existing owners and new owners in terms of how much each one is buying?

Steve Holmes

No, we’re seeing pretty much the trends that we’ve seen over the last several quarters. There’s really nothing different and I wouldn’t read anything more into that. And Mike, I apologize but I need to touch off so other people can get some questions in.

Operator

Our next question comes from Jake Fuller. Your line is open and please state your company name.

Jake Fuller – Thomas Weisel Partners

Good afternoon, guys. A couple more questions for you: First, the higher lodging marketing you talked about—what did that go for?

Steve Holmes

The majority of it went for Wyndham and about five million or so went into TripRewards. The marketing program—we are converting this year, as we told you before, the TripRewards program over to Wyndham Rewards, and we’re starting that process now.

Operator

Our next question comes from Chris Woronka. Your line is open and please state your company name.

Chris Woronka – Deutsche Bank Equity Research

Good morning, everyone. Steve, looking at the lodging—the number of rooms at the end of the quarter—I know you added about 19,000 the fourth quarter. It looks like, by my math, you probably about 9,000 left the system because I think there’s like 10,000 net increase. Is that about right?

Steve Holmes

Yes, Chris. I think that’s pretty close to right. We continue to be aggressive at terminating properties that did not meet the qualities standards or not high enough.

Chris Woronka – Deutsche Bank Equity Research

Right and so, as we look at 2008—do you think the attrition rate changes much and then how does that affect your revPAR outlook because presumably a lot of this stuff that’s leaving this system is probably a lower revPAR, I would guess.

Steve Holmes

Well, that’s a good point. There are a number of things that go into the mix of the revPAR. The fact is, we’re bringing in more Wyndham products as a mix. We’re bringing in more international products which can carry a higher revPAR. So, there’s a lot of things going into our revPAR mix and it maybe why we’re not reducing our revPAR by more based on what a lot of other people are saying about just US domestic straight out. So we do have improvement in our revPAR through mix which we’d always like to take out the weaker and bring in the stronger. That’s a good model for growing the business.

With respect to the number of properties in the attrition—the attrition has been pretty much what we expected. We look at our quality assurance scores of the properties. We put people on plans if they don’t meet our quality. We can look forward and see how many we put in default and how many we think are going to able to remedy themselves. So, we’re pretty scientific about the way that we look at our role of attrition, as well as, what’s going to be coming into the system. So, the guidance we’re giving for 2008 is based on the best information we have available and looking at all the current trends.

Operator

Before our next question from Patrick Scholes, I’d like to remind parties *1 should you wish to ask a question. Mr. Scholes, your line is open.

Patrick Scholes – J.P. Morgan

All right. Just one more question here. Could you remind me again where you stand with the status of the share repurchases? I recall you had that after the two-year site restriction after spinning off from Cendant that limited the number of shares you can repurchase. Remind me again where you stand with that.

Steve Holmes

Well, we still have some room under our current $200 million program that we’ve put in place. We still have about $154 million outstanding in that. And then we have some room beyond that still stay within the IRS Safe Harbour for the tax re-spinoff. So we still have some room even over what we’ve currently authorized. The fact is, you’d have to take the share repurchase mix with what we see as business opportunities for investing in our business, both organic and inorganic growth, as well as, our credit ratings and a lot of other factors. So, we’ve said that we can’t do more than 20% until August 2008 because of the spinoff but we’d also have to see where we stand with all of our other factors. So, I don’t want to make—it’s not like it’s a one-event trigger, Patrick.

Patrick Scholes – J.P. Morgan

Okay, thanks.

Operator

Chris Wolonka, your line is open

Chris Woronka – Deutsche Bank Equity Research

Thanks. Just a follow up also on Patrick’s question: I see you’ve brought back about half a million shares in the quarter. Can you tell us how many days of the quarter, of any given quarter, are you blacked out?

Steve Holmes

Well, the black out with be during our quiet period where we can’t be between. That’s assuming that we don’t put a 10B5 plan in place. So theoretically, there’s no time that you’re blocked out if you put a 10B5 plan in place.

Chris Woronka – Deutsche Bank Equity Research

Okay, and how do you look at where the stocks are? It looks like if we just extrapolate it, you’d be on pays for about another million shares in total for the 1Q just like 4Q. Would you be comfortable going beyond that? I understand what you said about the opportunities and other things. Are there any kind of inherent limit that you guys where you just wouldn’t do a certain amount of repurchase or how do you look at that? And thanks.

Steve Holmes

Well, Chris, we look at holistically. We look at it in light of what opportunities are sitting in front of us now. We look at it based on our build rate on the timeshare side of our business. We kind of look at all the pieces, prices, seasonality to our cash flow so we can certainly buy it off through a revolver but that gives us more limiting capacity on the overall debt capacity. So, we’ll be willing to change the pace that we’re buying. I really don’t want to speculate or predict how we’re going to buying back stocks or at what pace we’re going to be buying it back.

Chris Woronka – Deutsche Bank Equity Research

Okay, thanks.

Operator

And that is our final question.

Steve Holmes

All right. Well, thank you all very much for joining us for the call this morning. Thank all for the questions and we look forward to talking to you soon.

Operator

Thank you for participating in today’s conference. Have a good day. You may disconnect at this time.

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Source: Wyndham Worldwide Corporation Q4 2007 Earnings Call Transcript
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