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Wyndham Worldwide (NYSE:WYN)

Q2 2012 Earnings Call

July 25, 2012 8:30 am ET

Executives

Margo C. Happer - Senior Vice President of Investor Relations

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

Thomas G. Conforti - Chief Financial Officer and Executive Vice President

Analysts

Joseph Greff - JP Morgan Chase & Co, Research Division

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Christopher Agnew - MKM Partners LLC, Research Division

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Operator

Welcome to the Wyndham Worldwide Second Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now turn the call over to Margo Happer, Senior Vice President of Investor Relations. You may begin.

Margo C. Happer

Thank you. Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO; and Tom Conforti, our CFO. Before we get started, I want to remind you that our remarks today contain forward-looking information. This information is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed April 25, 2012 with the SEC.

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

Stephen P. Holmes

Thanks, Margo, and good morning, everyone. I'm pleased to report we had another great quarter as we continue to execute at a high level in an uncertain global economic environment. Second quarter revenues increased by over 4% and adjusted EBITDA was up over 10%. Adjusted EPS was up 36% and came in $0.02 above the top end of our guidance range.

Wyndham Hotel Group and Wyndham Vacation Ownership each delivered double-digit EBITDA growth. I'm also pleased with the efforts of our Wyndham Exchange and Rental teams, which was in line with our expectations, producing stable results despite the economic challenges in Europe and limited growth in the broader timeshare industry.

We continue to deploy capital to drive value for our shareholders. So far this year, we've spent nearly $70 million [ph] on dividends and $400 million on share repurchases. Our second quarter weighted average diluted share count decreased by $23 million from the same period last year. From our inception as a public company on August 1, 2006 through yesterday, we repurchased 73.8 million shares at an average price of $32.60 per share.

Equally important for long-term shareholder value is our ongoing commitment to invest in our business to drive earnings growth and increased cash flow in the years to come. Our baseline sustainable free cash flow guidance of $600 million to $700 million assumes CapEx of approximately $200 million, about half of which is used to fund growth projects such as Apollo and our hotel business; rci.com and Vacation Rentals reservation and website integration in our Exchange and Rental business; and Voyager, a program to optimize our reservation system in our Vacation Ownership business. We also continued to selectively evaluate the potential acquisitions, which we will only pursue if they're strategically and economically compelling.

Now moving to our business unit review. The Wyndham Hotel Group had another great quarter, with adjusted EBITDA growth of 12% and domestic RevPAR gains of nearly 8%. We made some significant development headway in the second quarter, planning a deal with Hospitality Properties Trust or HPT, a 20-hotel portfolio comprising 3,000 rooms throughout the U.S. All of the properties will be rebranded as Wyndham Hotels, with the remaining 16 properties to be rebranded Hawthorn Suites. The conversions are scheduled to occur next week, providing growth for 2 of our brands and adding 20 properties to our managed portfolio. We are pleased to partner with HPT and hope to work more closely with them in the years to come. We look forward to updating you on similar deals going forward.

We are aggressively pursuing many tracks to grow the total number of hotel rooms in our system, including investing in our brand's market position, focusing on multi-deal contracts, both for conversion and new construction, and increasing retention of our existing franchisees. Essential to all of our strategies is improving our system contribution and the resulting value proposition to our franchisees. We will achieve this primarily through the Apollo initiatives, which we have spoken about before. We've made significant progress over the past 2 years with one of our key Apollo initiatives, brand.com. Revenue and room nights across the brand portfolio are up approximately 20% from this channel year-to-date, in part due to improved content and web functionality.

On the international front, over the next 4 years, we -- excuse me, over the next 5 years, we expect annual system size growth of 8% in EMEA, 15% in Latin America, and our highest growth market will be APAC, where we expect our system size to almost double by 2016. This is from an exceptionally strong base in the region, particularly in China where we have close to 60,000 rooms. The long term vision is to have a footprint in China that rivals our presence in the U.S. We are also seeking to grow in India and other countries such as Singapore and Thailand on an opportunistic basis.

Of course, brand equity is the foundation for growth. We are especially pleased with our rankings this year in Consumer Reports' annual travel issue. From Microtel and Wingate, we're ranked #1 in their segments. In the budget segment, Microtel topped the list for the third time and was joined in the top 5 by Super 8 and Days Inn.

Now moving to Wyndham Exchange and Rental. In constant currency, rental revenues in Europe for the quarter were flat compared with the second quarter of last year. This was a significant accomplishment given the tough macroeconomic conditions. Year-to-date, European Vacation Rental revenues increased by 1%. As I said before, we've assembled a collection of the best vacation rental product in the right locations, which provide great value to a variety of consumer segments throughout the many different European markets in which we operate.

We continue to be confident with the resiliency of this business because of several factors: the outstanding value proposition of our products; the strength of our brands and our management teams; the concentration of our feeder markets in northern European economies; our ability to retain homeowners and attract homes -- for homeowners who are looking to -- for rental income, in fact, many of our properties are drive-to destinations; and the operating flexibility of our mostly fee-for-service business model.

In total, approximately 95% of our European Vacation Rental volume comes from our Landal GreenParks, Hoseasons and Novasol brands. Each brand is a market leader, and the majority of the consumers are driving to the product. Nearly 90% of Landal consumers are from the Netherlands and Germany, while Novasol generates 80% of its customers from Germany and Scandinavia. In our British Hoseason cottage and parks business, over 95% of customers are from the U.K.

Our Vacation Rentals are an outstanding value and represent an affordable family vacation option. To put this value proposition in perspective, in 2011, our European Vacation Rental business had an average daily rate of $140. This is for the inventory that is predominantly single-family homes with multiple bedrooms, living space and full kitchens. This compares to the same $140 average daily rate for a single hotel room in Europe.

In the technology side in Europe, we launched a new integrated reservation platform for our U.K. cottage and parks brands, enabling greater efficiency in our internal process, as well as our ability to drive inventory utilization.

Beyond Europe, in the second quarter, our North America Rental teams continued their strategic focus on innovation, with key accomplishments including the consolidation of 23 separate ResortQuest websites into a single enhanced platform under the Wyndham Vacation Rentals brand umbrella.

In RCI, our business development teams have added over 75 resorts to our system through midyear. We announced several outstanding new affiliations, including the Baha Mar Residence Club, which will provide RCI members with access to more than 300 luxury Caribbean units, managed by such world-class brands as Rosewood and Mondrian.

In the technology front, we completed another successful release of rci.com, which included an upgrade to an innovative click-to-chat functionality with multiple language support. From when we started the project in the first quarter of 2008 to the end of 2012, we expect our migration to online transactions to improve our Exchange and Rentals margin by over 225 basis points. Enhanced online experience also increases the overall value proposition to our members with greater functionality and better online content. The result is that online transactions in the second quarter were 41% of total transactions compared with 13% when we began the project 4 years ago.

Finally, let's turn to Vacation Ownership. WVO continued to achieve stellar results, with revenue increasing 5% and EBITDA increasing 15%. Tour flow and volume per guest remained strong, aided by our credit prescreening tool. In addition to achieving significant efficiencies, the team has continued to refine its business model to support our focus on free cash flow. Our first step was establishing the Wyndham vacation -- the Wyndham Asset Affiliation Model or WAAM, which positions us to offer turnkey solutions for developers' or banks' holding inventory, which we sell for a fee through our industry-leading sales and marketing channels. In 2011, with healthy conditions in the ABS market, we introduced WAAM 2.0, where we not only sell third-party inventory, but also offer consumer loans. Our goal is to capture the attractive spreads available through financing and preserve our capital lite operating philosophy. We signed our first WAAM 2.0 deal late last year and began sales in the second quarter of 2012. Tom will walk you through the accounting on this later.

Finally, regarding a corporate matter. As you may know, we are in litigation with the FTC regarding Wyndham Hotel's data security and privacy practices in relation to data breaches that occurred from 2008 to 2010, in which a limited amount of consumer information at some Wyndham Hotels and Resort branded properties may have been accessed. Let me first say that we've cooperated fully with the FTC in its investigation of these data breaches and that safeguarding consumer information is a priority for us. We believe the FTC's claims are without merit, and we will vigorously defend our position. Regardless, we do not believe that the outcome of the litigation will have a material effect on our company.

But before I turn the call over to Tom, I want to note a special anniversary. Next week, we will celebrate the 6th year anniversary of our listing on the New York Stock Exchange. I'd like to take a moment to evaluate our performance for shareholders over those years.

Between dividends and share repurchases, we have returned nearly $2.7 billion to our shareholders through the end of the second quarter. A cumulative impact of our share repurchase activity over this period has been a 29% reduction in our share count. And our total return to shareholders including dividends has been 81% compared with 21% for the S&P 500. We're never being satisfied. We know we still have great opportunities to build on these accomplishments. Tom?

Thomas G. Conforti

Thank you, Steve. Let me start with brief comments on the overall quarterly results, and then provide some detail into business unit performance and guidance.

As we've said in the past, our results are the outcome of sound strategies that we continue to advance and refine over time, stronger operational execution at each of our business units and disciplined capital allocation. Overall, our second quarter results, again, were strong, with adjusted earnings per share coming in 36% above the same period in 2011 for the second quarter in a row and $0.02 above the top end of our guidance range. These results reflect solid performance in our Lodging and Vacation Ownership businesses and a meaningful impact from our ongoing share repurchase program.

We continue to generate high levels of free cash flow and, consistent with our capital allocation strategy, return cash to shareholders in the form of dividends and share repurchases while actively seeking value-enhancing acquisitions in our core businesses. In the first 6 months of 2012, free cash flow increased to $567 million or $3.83 per share, compared with $544 million or $3.13 per share during the same period in 2011, excluding the impact of $51 million of VAT refund received last year. We expect that our available cash for the year, which includes net proceeds from ABS financings and assumes we'll calibrate leverage to our increased EBITDA, will be approximately $1 billion. [ph]

With our strong free cash flow, we repurchased 3.8 million shares of stock in the second quarter of 2012 for a total of $190 million. Taking into account the additional 1.1 million shares purchased thus far during quarter 3, we have $733 million remaining in our current share repurchase authorization.

Now moving to operating performance for the quarter. Let's start with Wyndham Hotel Group. Revenues were up 23% and adjusted EBITDA increased 12% compared with the second quarter of 2011, reflecting an increase in franchise royalties and higher intersegment fees for the use of the Wyndham brand. Excluding the intersegment fees, adjusted EBITDA increased 5%. The revenue increase also included $10 million of reporting reclassifications and $11 million of incremental global franchise conference fees, both of which were fully offset by expenses.

Domestic RevPAR improved by 8% in the second quarter, while systemwide RevPAR increased 5%. North American RevPAR improvement was driven primarily by an increase in the average daily rate, further evidence of a positive trend in pricing power in our segments. This bodes well for continued Lodging recovery. Internationally, RevPAR was up 2% in constant currency.

The system size was essentially unchanged, with gross openings of 15,500 and terminations of 16,400. Openings were in line with expectations, while terminations were higher than expected as a result of some proactive steps on our part to address underperforming franchisees. Note that we expect 3,022 rooms from the HPT transaction that Steve mentioned earlier to enter the system on August 1. Net overall pipeline activity is up 3% year-over-year and 5% sequentially.

Now let's look at Wyndham Exchange and Rentals. Again, this quarter, our Exchange and Rentals business demonstrated solid performance in the face of a difficult European macroeconomic environment and limited growth in the broader timeshare industry. As Steve articulated, we have great confidence in both our Exchange and Rental businesses based on the quality of the management teams, product offerings and our mostly fee-for-service business models. Excluding the impact of foreign currency and acquisitions, revenues for the quarter were flat compared to the same period 2011. Excluding acquisitions in foreign currency, adjusted EBITDA was up 5%, but flat if you exclude a $4 million claim settlement related to the Gulf oil spill.

The constant currency second quarter Vacation Exchange revenues were flat. Exchange revenue per member increased by 2% in constant currency compared with the same period in 2011, primarily due to higher Exchange fees. Average number of members declined 2% in the quarter due to the expected nonrenewal of an affiliation agreement at the beginning of 2012.

Vacation Rental revenues were down $10 million for the quarter, unfavorably impacted by the stronger U.S. dollar. If you are to exclude the impact from acquisitions and the net effect of foreign currency, Vacation Rental revenues were flat. Transaction volumes were down 3% due to weak economic conditions in Europe, offset by a 4% increase in the average net price per rental, primarily driven by a higher yield at our Hoseasons Group in the U.K. and Landal GreenParks business in Holland.

Now moving on to Wyndham Vacation Ownership. The business again delivered another outstanding quarter. Compared to the prior year, segment revenues increased by $29 million or 5%, primarily due to the positive impacts of higher VPG and increased tour flow. Year-over-year gross VOI sales increased by $48 million or 12%. Year-to-date, we have brought 13,500 new owners into the system, an increase of 10% over the same period in 2011 and consistent with our annual goal of 27,000 new owners.

WAAM 1.0 volume was $18 million for the quarter. In addition, as Steve mentioned earlier, we began selling WAAM 2.0 products in June, with volume of $12 million by quarter end. As a reminder, the accounting for WAAM 2.0 transactions will run inventory through our balance sheet in a just-in-time basis. So we'll record the inventory on the balance sheet at registration and pay for the inventory shortly after each sales transaction. Note that at the end of the second quarter, approximately $60 million of inventory on the balance sheet was related to WAAM 2.0.

WAAM 2.0 enables us to capture the attractive consumer finance EBITDA, while optimizing the balance sheet and cash flow. Combined WAAM 1.0 and WAAM 2.0 revenues showed a 58% increase over the same period of 2011. Consistent with our commitment to provide timely disclosures, we have added the break out of WAAM 1.0 and WAAM 2.0 to Tables 3 and Table 9 of our press release.

Adjusted EBITDA for the quarter was $150 million, up 15% compared with the second quarter of 2011. The improvement reflects the strong increase in VOI sales. Now if we were to exclude the higher intersegment licensing fee paid for the use of the Wyndham brand name, adjusted EBITDA actually increases 19%.

Consumer finance revenue was flat versus the same period last year. Writeoffs during the second quarter were $77 million, slightly up from the $75 million a year ago. The provision for loan losses was $100 million compared with $80 million in the second quarter of 2011, primarily reflecting higher sales and limited improvement in portfolio performance.

Now while the portfolio remains strong overall, we had hoped to see more improvement in performance by now. We've looked closely at the limited improvement in portfolio performance over the past few months and attribute it primarily to the pace and strength of the economic recovery. But while there's nothing that we can do about the economy, we have dramatically improved our buyer profile. In addition, we believe there are 2 other factors at play here: first, recent portfolio performance has been affected by an organized third-party scam where fraudulent representatives were calling our customers and encouraging them to default on their loans. We have worked with authorities, and these parties have been indicted. We believe this issue is now under control. Second, we are seeing an impact from some owners holding balances higher than historic norms. Typically, loan performance diminishes as loan balances increase. And these loans are affecting overall portfolio performance. We are putting plans in place to mitigate the effect of these very manageable issues, and we'll keep you updated as we progress.

ABS capital markets remain robust. On July 19, we closed a $300 million timeshare securitization with an advanced rate of 90% and a weighted average coupon of 2.66%, another great execution. We couldn't be happier with the results.

Finally, corporate expenses, as well as interest expense were in line with our expectations.

Having completed our 5-year plan review process, we are solidly on course with our long term goals. We are committed to EBITDA growth of 6% to 8%, with high single to low double-digit growth in the Hotel Group and mid-single-digit growth in the Exchange and Rentals Group and Wyndham Vacation Ownership. We expect sustainable annual free cash flow of $600 million to $700 million. We remain committed to an investment grade profile, which will enable us to increase debt by $300 million for every $100 million that we add in EBITDA. The result is $1 billion of available cash to deploy each year to increase shareholder value. 2 years ago, we shared that the deployment of that cash through M&A and share repurchase would result in compound annual EPS growth of between 17% and 21% over the subsequent 5-year period. Well, we're well on our way to achieving and exceeding that goal.

Now finally, I'd like to spend a few moments on guidance. Full year revenue guidance is unchanged. We are, however, raising the lower end of EBITDA guidance with a new range of $1,040,000,000 to $1,055,000,000. In the business units, we expect Vacation Ownership and Lodging revenues and adjusted EBITDA to be at the high end of their respective ranges. We expect Exchange and Rentals revenues to be at the low end of its range and adjusted EBITDA to be at the midpoint of its range. Also, we expect corporate expense to be at the high end of the numeric range, while depreciation and amortization will be at the low end of the numeric range.

Business unit driver guidance remains unchanged. We are raising our full year adjusted EPS guidance to $3.10 to $3.20. Our prior guidance was $3 to $3.15. The new adjusted EPS guidance is based on the expected diluted share count of 147 million shares. Remember that our earnings per share guidance excludes any share repurchase beyond June 30, while some analysts' estimates factor in estimated repurchases in the second half of the year.

In the third quarter, we expect earnings per share to be $1.07 to $1.10. This is below the consensus, reflecting differences in both share repurchase assumptions and seasonality between the third and fourth quarters. However, our guidance for the second half of the year is consistent with Street expectations.

With that, I'll turn the call back to Steve.

Stephen P. Holmes

Thanks, Tom. So in summary, this was another excellent quarter in what has become a very strong track record of success. We've accomplished much during the past 6 years, a period that's included severe financial and economic upheaval and ongoing economic uncertainty. As I have said many times, we have a phenomenal business model, with strong brands and outstanding associates executing our strategies. And I know these attributes will serve us well, fueling our growth and shareholder value for years to come.

And with that, Shirley, we'll take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Joe Greff.

Joseph Greff - JP Morgan Chase & Co, Research Division

This is Joe Greff from JPMorgan. A few questions here. Steve, can you just -- and Tom, can you talk about how ripe the current environment is for acquisitions? Obviously, in the past, stresses created some opportunities which you've acted on. Can you talk about what you're seeing currently, how ripe the environment is for opportunities? Then I have a couple of follow-ups.

Stephen P. Holmes

Sure. Well, the acquisition pipeline, whether the market is stressed or not stressed, has been fairly consistent. We've probably seen a little more activity recently, more deals seem to be coming to market, but it's not a dramatic change in the volume of our activity. And really, kind of what has to change is the expectation of the other side because we're very disciplined, we're not going to chase anything, so if deals don't make sense, they're not going to fit in to our plan. But I would probably characterize it as, the pipeline is a little bit stronger than it was last year at this time.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay, great. And then can you talk about your VPG expectations for the second half? And then when you look back at the second quarter, was there a difference between, say, the beginning of the second quarter versus the end of the second quarter? Was it stronger in the earlier part of the second quarter and tapered off at the end of the second quarter?

Stephen P. Holmes

You're saying, of this year, the VPG in the second quarter, it was earnings that's sort of trending inter-quarter, is that your question?

Joseph Greff - JP Morgan Chase & Co, Research Division

Yes, correct.

Stephen P. Holmes

Okay. I don't believe so. I think it was pretty consistent throughout the quarter. But...

Thomas G. Conforti

Correct.

Stephen P. Holmes

Yes. That was -- yes.

Thomas G. Conforti

Yes. And we remain -- I think our guidance is 5% to 8% -- 2% to 5%, I apologize. 2% to 5% percent. We think it's likely that we're going to come in close to the top end of the range. But we don't expect any significant change in the second quarter than we had in the first quarter on VPG.

Stephen P. Holmes

And as we talked about before, Joe, you noticed obviously, tour flow and VPG kind of go together. We could have a very few tours and a very high VPG and not be happy with it. So it's a bit of a balancing act. But that group down there has done just a spectacular job of driving tour flow and of -- and the quality of the tour flow that's coming in. And they are very adaptable. They adjust to circumstances as they arise.

Joseph Greff - JP Morgan Chase & Co, Research Division

And then my final question. The HPT deal. Can you talk about what your expectations are for fee contributions in the Hotel Group for the second half of this year, I guess, August 1 going forward? And maybe what that run rate is on an annualized basis for year 1?

Stephen P. Holmes

Sure. Joe, it's 20 hotels. So it's not going to move the needle dramatically. It is a managed deal, so we'll be getting management fees for those 20 properties. It is positive, but I wouldn't -- we're not adjusting our numbers for anything that's coming in. In fact, in our rooms guidance, as we've been working on this for quite some time, this basically was built in on our rooms guidance. And it's part of the reason that we're comfortable that we're going to get the growth that we've been talking about during the year to deliver in the second half -- through the second half of the year by December 31.

Operator

Our next question comes from Steve Kent.

Steven E. Kent - Goldman Sachs Group Inc., Research Division

It's Steve Kent with Goldman Sachs. I -- just following on a little bit on that. Just on the Vacation Rental business. I know that you mentioned to me that, that business actually has held up very well. I was wondering again sort of through the quarter whether there was any change there and especially on the European side. And, I guess, I would note that it does look like the average price per vacation rental and vacation rental transactions did look like it declined a little bit. And then separately, maybe for Tom on the securitization market, it seems very strong. Is that helping timeshare -- other timeshare developers accelerate their sales, which could then boost the old RCI membership business?

Stephen P. Holmes

Okay. Well, I'll let Tom address the ABS part of the question. I'll start to tackle the European Rental question. Again, looking within the quarter, because I think it was your first question, did we see any trending? Within markets, we do see trending every month and every week, and that's because of weather. I mean, the weather has been miserable. For those who watched the British Open recently, the announcers just kept talking about how miserable the weather has been over there. And that -- we never complained about the weather, but that does have an impact. So when you see trending, the economy has something to do with it, but the weather does as well because people are driving to these locations. So do we see any trending? Steve, I wouldn't say there was any trending that I would say was meaningful. We saw pockets that were stronger as the period went on. We saw pockets that were a little bit weaker. But nothing that I would say was giving us any reason to pause, frankly. And with respect to the pricing over there, I think if you take out the FX impact, you'll actually see that the average price increased about 4%. So that business definitely is being impacted by foreign currency translation. We feel really good about how those brands performed over there. The management did a terrific job. We didn't panic and try to drop price at all. They held price, and the transaction volume picked up and we ended up the quarter very strong. And I will make one comment, Steve, because I don't know if was on your question or not, but you did ask me the last quarter, looking into the -- because we have pretty good booking visibility into this summer for the Rental business, and we feel it's pretty consistent with what we've seen so far that we're not going to see a huge uptick, but we're not seeing any decline that we think is meaningful. I think we'll be stable in that business just as we've been calling for all year long.

Thomas G. Conforti

Steve, I would just add to Steve Holmes' comments that we have seen a compression in the booking window, so -- but as Steve said, we have good visibility into the booking trends for our key period, and we're optimistic that we'll deliver what we've promised we're going to deliver in this business. I think your question around the ABS question, if I heard it correctly was, have things gotten so robust that others in the timeshare industry can access the market as well. Was that the nature of your question, Steve?

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Right, Tom. And then in turn, that will be a positive for you because then, those customers would want to be part of the RCI network.

Thomas G. Conforti

Yes. We haven't seen that level of openness in the ABS market at this point. We are regular participants in issuing ABS debt. The execution on this last transaction, the results from this last transaction were as good as any results we've ever had. But we don't see it at this point necessarily carrying forward to smaller puncture developers. We're trying to aid in any way we can to accelerate that process, but it isn't readily apparent that the market's open for that level of developer.

Stephen P. Holmes

Yes. [indiscernible] beyond what we previously talked about, Steve, which is there was a -- 2 groups that got deals done, I think, in the first quarter. But in the second quarter, there was no new product that came in. But 2 groups that had not historically been regular issuers in the ABS market did access in the first quarter.

Operator

Our next question comes from Carlo Santarelli.

Carlo Santarelli - Deutsche Bank AG, Research Division

Carlo Santarelli from Deutsche Bank. Just with respect to your VOI inventory, could do guys maybe provide a little bit more granularity on how you bridge the gap between the last quarter and this quarter as it relates to your billed cost, obviously your COGS and recoveries?

Thomas G. Conforti

Well, I'm not sure. In the first half of the year, our inventory has come down around $40 million to $50 million on inventory. Your specific question has to do with bridging between quarters?

Carlo Santarelli - Deutsche Bank AG, Research Division

Yes, exactly. If you're between the first quarter and the second quarter. And kind of how much you spent to build inventory in the 2Q as, obviously, the levels have come down a little bit?

Thomas G. Conforti

Yes. I mean, I think that's a little more granularity than we'll cover. We'll talk to you offline about that if we could, Carlo.

Carlo Santarelli - Deutsche Bank AG, Research Division

Yes, no problem guys. And then if you wouldn't mind, when you look at your domestic RevPAR, if we were to exclude Orlando, how would you guys kind of have that tracking?

Stephen P. Holmes

Now there's the -- for all of our brands, you're saying across-the-board?

Carlo Santarelli - Deutsche Bank AG, Research Division

Yes.

Stephen P. Holmes

Okay. Yes, I think that we have seen some regional strength and weakness without a doubt. The southeast was a little bit weaker, the -- I'm talking just domestic here. Domestic southeast was a little bit weaker this quarter than some of the other areas. But I don't see anything there that I would say, "Wow, that's a big aha." Again, we don't use weather as an excuse, but there was some weather-related conditions in the southeast during the second quarter, which probably impacted people's travel patterns. We saw it on the panhandle of Florida. We also saw it in Florida in general. But Orlando has been strong, and our hotel down there, the Bonnet Creek property that we own, is doing very well.

Operator

Our next question comes from Patrick Scholes.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

This is Patrick from Suntrust Robinson Humphrey. Just a couple of questions for you. On your current $1.1 billion of inventory. In your view, if you weren't to purchase or build anything new, how many years do you think that would last you at [Audio Gap]?

Thomas G. Conforti

Well, we would have to purchase, as we've said in the past, Patrick, around $150 million a year to finish some inventory in our balance sheet. But we believe that, that investment, which we've talked about in the past, plus what's on our balance sheet would give us the equivalent of 4 to 5 years worth of inventory.

Stephen P. Holmes

And I -- this is Steve. I feel that there's probably more than that, personally. I know 4 to 5 is kind of where we come out, and that's what we put in the Q, and that is arithmetically where you end up. But we do take product back from people. We do end up increasing our WAAM participation over the last couple of quarters. In fact, as Tom mentioned, that increased from Q2 last year to Q3 this year. So I think we probably have more than 4 to 5 years, personally. But that's arithmetically where you come out. And to Carlo's question before, we spent in the second quarter about $23 million on inventory, so -- in that neighborhood.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Is it a fair assumption to say with that 4 to 5 years that at least over the next 1 to 2 years, your target of $150 million, $175 million for inventory spend, I mean, that's still for the next year is going to be your target?

Thomas G. Conforti

Absolutely.

Stephen P. Holmes

Yes. Probably the next few years and beyond.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay, okay. And then just 2 more questions here. You talked about consumer finance revenues reflect year-over-year though overall revenues for the segment were up. Is that because new buyers have a lower propensity to borrow or you're continuing to tighten the credit standards on that?

Thomas G. Conforti

Overall, receivables are down from where they were last year. It's a combination of all of the above really.

Charles Patrick Scholes - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And lastly here -- just 1 sec. In the Lodging segment, you had higher intersegment licensing fees for the use of the Wyndham brand trade name. Can you just give me a little more color exactly what that is, I mean is that a one-time gain?

Thomas G. Conforti

No, Patrick, it is the fee that's charged by our Hotel Group, which owns the intellectual property of Wyndham to our timeshare and Exchange Rental businesses, it's a much smaller number for Exchange and Rentals. But for the timeshare business, there's an intersegment charge. And it's an ongoing charge.

Stephen P. Holmes

Yes. And, Patrick, we've always had that charge. It was increased as -- in part as a result of the -- frankly, of the Marriott Vacations spinoff. They had a value that they were attributing to the brand, and so our property -- our intellectual property people have been looking at it and having third-parties look at it, felt that we were probably, frankly, undercharging the -- for the use of the brand. And obviously, it's a valuable asset, and we want to make sure it's well-protected.

Operator

[Operator Instructions] Our next question comes from Christopher Agnew.

Christopher Agnew - MKM Partners LLC, Research Division

Christopher Agnew from MKM Partners. First question, I wanted to ask about Vacation Ownership. And your tour growth slowed sequentially in -- from the first quarter despite an easier comp. And to hit the high end of your tour flow guidance for the full year, assuming it's unchanged, would show quite a steep deceleration in the second half. And I was just wondering if there's any specific thought process behind that.

Stephen P. Holmes

No. We don't see anything that would indicate that the tour flow would be changing dramatically and that there would be a dropoff. I think that with tour flow, it's a -- as we've talked about before, it's a manageable undertaking for us. We've got great marketing programs that drive the tour flow, great partners who are driving tour flow in. And we can kind of turn the spicket on and off as it's needed. And so, no, we feel very comfortable with the guidance that we've given and we've been coming in a little bit ahead of the guidance. And I think what it was, 1% to 4% was our guidance for the -- and so we're comfortable with that range. We're probably beyond the top end of it.

Christopher Agnew - MKM Partners LLC, Research Division

Okay. And then, Steve, if you could maybe expand a little on the strategy for driving growth in APAC. I mean, are [Audio Gap] to take all brands, maybe think about China in particular? And is it a franchising strategy, would you look at some management? And are these master franchise agreements?

Stephen P. Holmes

Sure. Well, Chris, it's not all of the brands. We're -- we've taken many of the brands over, but not all the brands over to APAC. In fact, the head of our Hotel Group, Eric Danziger, is over in China this week and was there last week instead of this week, as well, down in Australia. So it is a high level of focus for us. We have both managed agreements with the Wyndham brand and in some cases, Ramada, with their 4-star full-service properties. We have master franchise agreements for both Days Inn and Super 8 in China. And then we have direct franchising relationships with the other brands. And so, it really is -- it's an amalgamation of different approaches. I think for the most part, I think our master license agreement for Super 8 is working extremely well. The brand has grown rapidly over there, and so we're comfortable with that model for Super 8. And we'll evaluate the other models as we move forward and find the one that works best. We expect to see a relatively significant increase in our development -- business development group over there over the next 3 or 4 years, and that will impact, obviously, our growth in that market.

Operator

Our next question comes from Nikhil Bhalla.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

This is Nikhil Bhalla from FBR Capital Markets. I have a question on just looking at your dividend payout as a percentage of your net income, obviously it's a much lower number, 30% or so. At what point do you start to favor more dividend payout and that as a way of returning cash to shareholders rather than just share repurchases?

Stephen P. Holmes

Well, we've -- Nikhil, we've increased our dividend dramatically over the last 2 years. I'm not sure what the percentage is but it's big.

Thomas G. Conforti

We tripled it 2 years ago. We increased it by 25% last year. And then this year, we increased it by 53%.

Stephen P. Holmes

50%. So we've increased it, obviously, dramatically. And our stated intent is that we will increase it in line with the growth of our earnings. And that, obviously, is enhanced by the fact we don't have as many shares outstanding. So we -- because we're buying back shares -- so it means the dividend grows more rapidly than our earnings growth does. And we evaluate this on a regular basis with our board. And stay tuned, we'll be looking at it going forward.

Nikhil Bhalla - FBR Capital Markets & Co., Research Division

And just a follow-up question on Europe. Did you see an impact or any movements due to the Pentecost holidays? I believe that impacted Europe both in May and June. And then final thoughts on any positive impact from Olympics.

Stephen P. Holmes

Well, I think the Olympics one -- I'll leave Tom to answer the Pentecostal one. The Olympics, we're not really seeing much of anything. I mean, it's really kind of a jump ball in most people's mind about what kind of the impact. The Olympics will start on Friday. We'll have with the market over there. The summer is a travel -- is a busy travel time in the U.K. as it is. And we're not seeing anything that would suggest that the Olympics are having a big impact. Did you hear anything about the...

Thomas G. Conforti

About Pentecost, no, I didn't. But we didn't see -- there wasn't a trend that we can discern.

Stephen P. Holmes

No.

Operator

Our final question comes from Harry Curtis.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

It's Nomura. A couple of quick questions. First of all, I'm just trying to understand the math behind the RevPAR a little bit better because if international, in a constant currency, was up 2% and the U.S. or domestic was up 8%, it sounds like there was -- I mean, there must have been a drag somewhere -- probably, currency. How big a currency drag was there in the quarter?

Thomas G. Conforti

So Harry, it was -- first of all, let's explain the international number then we'll answer the currency number for a second. The international number really is a mix effect, and that is our largest growing market. China also has a much lower RevPAR than some of our more established international markets. And even within China, some of our lower RevPAR brands, specifically Super 8, are growing more rapidly than our higher RevPAR. So it's an interesting dynamic. And that really what we're seeing is international growth being impacted by a significant, sort of like a double mix shift effect, where your market with the lowest RevPAR is growing the most rapidly. And then within the -- within that low market, your lowest RevPAR is growing the most rapidly, and that's Super 8. And so, it was -- so without FX, it was 2%. And with FX, it was down 1.5% international RevPAR. Excuse me for a second, Harry. Okay, so I think that's really -- so it's without FX, it was 2%, and with FX, it was down about 1.5%.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Okay. And then just wanted to follow-up on the system size, and I understand that, that growth is accelerating in the back of the year, partly due to HPT. But I'm trying to get a sense of some of the attrition that has occurred over the past 2 or 3 quarters. Is that just natural attrition or are you actively attempting to prune the underperformers in your portfolio?

Stephen P. Holmes

No, it's both, frankly, Harry. We do have natural attrition, which are properties that are just leaving the system for whatever reason. They're being taken out of hotel stock in the marketplace or they're going through a significant repositioning of themselves. But the -- but there's also a significant amount of what we consider to be attrition that is kind of self-inflicted. We're knocking properties out because their quality is not keeping up or they're not paying, and that has always been the case. There's been a higher level of self-inflicted attrition, where we're making the decision to kick people out over the last several years, frankly, not just the last couple of quarters, last several years as the economy has been so difficult for the hotel owners and they have not been investing in our properties. Now we're hopeful that we will see a turn on that. As we reported last quarter, I think that the quarter before we've started to see some improvement in the receivables from our hotel franchisees. So we're optimistic that there will be an improvement of that. The good news is the adds have been very healthy. We've been adding a lot of properties. The problem is we've been taking out a lot, and that's been leaving us relatively flat. We feel that based on our pipeline and what we see as visibility for the second half of the year, they will be able to get to that growth range that we have designated.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

And just as a follow-on. Is there an attractive ROI whereby you provide financing to your brands so that it helps them renovate? Is there any kind of return that might make sense there?

Stephen P. Holmes

In general, the answer is no, because it's a very slippery slope, Harry. If we started becoming the lender of last resort to the hotel industry, we might be able bring in some properties, but all of a sudden now, you'd be viewing us as a bank. And I don't think we're set up to be a bank and be a lender to the hotels. So could there be a good return? Yes, there could be a good return. Is that our business model? No, it's not and has not been our business model. We do as everybody does, Marriott and Starwood and Hilton in the upper upscale level, we provide development advances to properties to try to bring them on. We've done that in some of our new construction product, the Wingates that we've brought on. So we do it on a selective basis, but to become a general lender to the industry, it's just not our business. We're not wired or set up to do that.

Operator

And at this time, I'm showing no further question.

Stephen P. Holmes

Okay, Shirley. Well, thank you very much, and thank you, all, for being on the call. We look to speak to you in the next quarter. And have a great summer.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line.

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