Wyndham Worldwide Corporation (NYSE:WYN)
Q2 2008 Earnings Call Transcript
July 31, 2008 8:30 am ET
Margo Happer – SVP of IR
Steve Holmes – Chairman and CEO
Gina Wilson – EVP and CFO
Joe Greff – J.P. Morgan
Steve Kent – Goldman Sachs
Michelle Ko – UBS
Michael Millman – Soleil Securities
Chris Woronka – Deutsche Bank
Jake Fuller – Weisel
Patrick Scholes [ph] – Friedman, Billings, Ramsey
Good morning and thank you all for holding. At this time, I would like to inform all participants that your lines have been placed on listen-only until the question-and-answer portion of today’s conference. (Operator instructions) I would now like to turn the conference over to Margo Happer. Thank you. Ma’am, you may begin.
Thank you, Melissa. Thank you, and good morning. And welcome to the second quarter 2008 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 from those expressed or implied. These risk factors are discussed in detail in our Form 10-K filed February 29th, 2008 with the SEC. We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to the comparable GAAP results is provided in the tables to the press release and is available on our Investor Relations Web site at www.wyndhamworldwide.com.
Thanks, Margo. Good morning, and thank you for joining us today. Despite a very tough macroeconomic environment, the resilient Wyndham Worldwide business model continues to perform well. Our earnings for the second quarter of 2008 showed growth over the second quarter of 2007 and even included – and excluding the impact of less deferred revenue than we forecast in our timeshare business, our results were ahead of expectation.
No travel business is immune to the current pressures on the U.S. and global economies. However, our business model is very flexible, and we have worked hard to anticipate the challenges and cut costs while driving for greater efficiency in order to achieve our goals. We believe our brand’s geographic distribution and diverse product offerings combine to produce a stable and resilient business model, just consider our results.
Each one of our business units delivered EBITDA growth in the second quarter of 2008 over the same period of 2007, and our second quarter EPS, adjusted EPS, increased 8% year-over-year. As you saw from the press release, we are adjusting our 2008 guidance to reflect our best views of current trends. The current economic environment creates real challenges for forecasting results as there are more variables in play than we have seen in prior slowdowns. Financial market instability, record oil prices, narrow line (inaudible) productions, an unstable housing market, and rising unemployment, just to name a few.
As we went through the risk process of risk adjusting our forecasts for the remainder of 2008, we felt the bottom end of our previous range may still be achievable, but we felt it was appropriate to slide our range down to reflect the volatility we are seeing. In light of the pressured economy, we lowered our revenue projection by 5.5%, but we are comfortable with only at a 2.5% reduction in EPS. This reflects the flexibility of our business model and the dedication of our associates to strive for our goals.
Gina will walk you through the changes to our drivers and guidance in a few minutes.
Now, let me review second quarter results in each of our three businesses. Results in our lodging group are in line with our plan with revenue of $200 million and EBITDA of $62 million. Worldwide RevPAR for the second quarter of 2008 was up 1.4% over last year. Year-to-date, worldwide RevPAR was up 2%. International RevPAR was particularly strong up 15.2%, but domestic RevPAR declined 3.7%. Even though we saw RevPAR growth in the first half of the year, RevPAR is running below our expectations. And in June, we began to see further softening.
Therefore, we are revising our 2008 worldwide RevPAR guidance to a growth rate of 0% to 2% that is down from our prior 3% to 5% range. Our PBase [ph] model inflates us somewhat in difficult times. So even in the market with domestic RevPAR’s declining, we expect it to continue to grow and be within our previous 2008 lodging EBITDA guidance. Largely due to our international pipeline, our ability to contain costs while maintaining quality of service to franchisees and the modest impact of our recent acquisition.
We have implemented business building initiatives throughout the year designed to optimize our franchisees’ RevPAR performance. For example, we put in place additional programs to ensure rate and inventory information is correctly loaded into property management systems of 900 properties, which has resulted in higher RevPAR performance compared to a controlled group of companies. We expect to enroll another 15,000 properties by year-end.
As I mentioned, international RevPAR was strong at just over 15%, or 8% in constant currency offsetting declining domestic RevPAR. Performance was particularly strong in Canada, Germany, Switzerland, Asia Pacific, and the Middle East. We also continue to expand our management business in Asia Pacific, and expect to manage two hotels in China by year-end.
With regard to our namesake brand, Wyndham Hotels and Resorts, results were up by every measure, rooms, hotels, in RevPAR, driven by both ADR and occupancy increases. This is primarily due to international properties added in the past 12 months. We’ve said we are firmly behind the Wyndham brand and we’ll support its growth while revitalizing and building the subscale brand, and we are doing just that.
Stranger development across our portfolio brands, in the second quarter we opened over 12,000 rooms and executed over 200 contracts representing 25,000 rooms. Since this time last year, overall system size is up 2%, and the total international portfolio is up 15%. International markets provide some of the best opportunities for growth, but they are also somewhat more difficult to predict and forecast than the U.S. when it comes to timing of property conversions or openings.
Our pipeline is strong with almost 109,000 rooms, a 9% increase from a year ago, and a 2% increase from last quarter. Over 40% of our pipeline is international, up from over 30% a year ago. The Wyndham brand now makes up 21% of our total pipeline. Of our entire pipeline, 50% represents new construction. And with respect to that new construction, over 80% of the new construction pipeline is scheduled to open in the next 18 months. That which is expected to open over the next 18 months, is already secured per (inaudible).
Earlier this month, we completed the acquisition of two brands from Global Hyatt, Microtel Inns and Suites, a chain of 298, all new construction, economy hotels, and Hawthorn Suites, a chain of 91, all suites, extended stay hotels. This acquisition expands the Wyndham Hotel Group system to 12 brands encompassing 7,000 hotels on six continents. These new brands are an excellent fit with our existing portfolio, and also provide an entry into the extended stay market. We have great experience in integrating this type of business and leveraging our existing infrastructure to reduce expenses, and we expect the acquisition to be slightly accretive this year. We have already met with the franchisee advisory councils for both brands a couple of times, and we are looking forward to working together as we continue to grow the brands.
Now turning to vacation exchange and rentals, for the quarter, Group RCI did a great job managing costs in the face of slowing economies in some key markets, including Denmark, the UK, and the U.S. Revenue growth was 9% and EBITDA growth was 10% reflecting a focus on cost reductions in management across the entire business as well as the effect of a $6 million adjustment related to consulting activities in the second quarter of 2007.
In the vacation exchange business, the average number of exchange members continued a steady growth at 5% for the period. But annual dues and exchange revenue per member was down 3% for the quarter reflecting tighter booking windows of longer range vacations, fewer higher-priced international exchange requests, and we believe, some customers choosing to return to their home resorts where an RCI exchange is not required.
In the face of economic uncertainty, higher gas prices and airfares, Group RCI has aggressively stepped up its regional drive-to direct marketing efforts, highlighting vacations closer to home for fall and winter, and featuring select vacations that are only a short drive away.
Turning to Group RCI’s rental business, revenue growth of 12%, 3% adjusted for currency, was driven by our Landal GreenParks business. Overall average net price for vacation rental increased 15%, or 5% in constant currency, reflecting a more favorable pricing mix in the Landal property conversion of a franchise to a managed park. This double-digit increase in price was partially offset by a lower number of rental transactions, which were down 2%, primarily due to softness in our Holiday Cottages brand in the UK rental market, our U.S. member rentals, and our Novasol business in Denmark. To support the U.S. member rental business, we are emphasizing our value proposition by promoting lower priced inventory and increasing the frequency of closer-in travel campaigns.
While the trend towards sure booking windows is expected to support growth, we are taking a more conservative stance for the second quarter of the year, and we are reducing our drivers. Yet, we are maintaining our revenue and EBITDA guidance ranges for the full year.
Let’s now turn to our vacation ownership business. Interest in our vacation ownership product is holding up well, particularly when compared to well-publicized demand declines and other consumer discretionary purchases such as boats, RVs, and second homes. Tour flow and gross VOI sales for Q2 experienced modest year-over-year increases of 3% and 2%, respectively. And our selling efficiency remains stable with our volume per guest essentially flat year-over-year.
Similar challenges in the hospitality industry, we are seeing some challenges in Hawaii and Las Vegas, which together contributed 18% of our revenue last year. And our sales plan assumed continued growth in both markets this year. Sales to new customers declined at both sites driven by reduced tour flow in Hawaii and lower volume per guest in Las Vegas.
While sales in the rest of the country are holding up and sales to existing owners remain strong, we are lowering our revenue and EBITDA guidance, which Gina will detail in a minute.
We continue to be pleased with the performance of this business, and remain confident in this long term growth prospect for several reasons. First, timeshares at sold, not at soft (inaudible). Our sales and marketing strategies address this within centerpiece offers to drive consumer behavior. Second, unlike traditional real estate, timeshares purchased with a singular intent to use it year-after-year for great vacations. Our value proposition is not built on any expectation of profit from rental or gain from future sales. And thus, there are fewer hurdles to overcome during the purchase process. In fact, our value proposition is actually enhanced in difficult economic times as consumers previously in the market for a vacation home now look for more affordable alternatives. Third, our customers keep using what they’ve already purchased. Occupancy for the second quarter in our timeshare resorts is roughly 80%, and that’s consistent with last year. Not surprisingly, some of our customers will be visiting resorts closer to their home this year, but our extensive network of drive-to locations accommodate these shifting travel patterns and our points program gives star owners the flexibility to use their timeshare asset as their leisure time permits. Our owners are taking their vacations, enjoying the flexibility of the timeshare product, and buying even more points while staying at our resorts.
Third quarter advanced reservations are up 14% over the same period last year reflecting some great addition to our resort network. During Q2, we added more than 500 units with a successful new resort opening in New Orleans as well as additional development at existing projects in Orlando, Las Vegas, and Wisconsin Dells. We also commenced sales for new projects in San Francisco, in Washington D.C.’s National Harbor.
Clearly, the remainder of 2008 is expected to be challenging and most economists believe the weakness will carry into and possibly through 2009. We are taking proactive steps to position ourselves to face these economic headwinds by leveraging our flexible business model. For example, in our timeshare business, we remained firmly committed to our strategy of increasing our margin while maintaining double-digit growth on the bottom line. A major component of this strategy is to refine and refocus our tour generations efforts on our most – to our most efficient marketing programs such as those associated with our new Wyndham branding while eliminating more costly, lower performing tour sources.
As a result, our revenue growth in 2009 will now shift to the single-digit range as we begin to tour fewer prospective buyers. Yet, our margins will improve as we increasingly focus on buyers with a higher propensity to purchase our product and a greater ability to pay on time and in full. The end result for the WBO business will be solid single-digit revenue growth and improved margins that will drive double-digit EBITDA growth. The added benefit of this approach is that it will allow us to free up capital for other uses like allocating more resources to growing our hotel business, supporting our goal to increase the relative contribution of the hotel business unit.
Before I turn the call over to Gina, let me end up by thanking all of our associates around the world for their dedication to deliver on our goals and for their respective efforts to reduce expenses and adjust marketing sales promotions to fit the current environment.
We continue to prove that our brand’s geographic distribution and the diverse product offerings combine to produce a stable, flexible, and resilient business model. Gina.
Thank you, Steve, and good morning, everyone. This quarter demonstrated not only the resilience of the business model, but our team’s ability to execute within that model by applying disciplined actions to control costs. I’m pleased with our ability to grow the bottom line despite soft line pressures across the business, which reflects the difficult economic conditions we’re in.
Adjusted earnings per share were $0.05 ahead of our guidance range due primarily to lower than expected percent of completion or POC deferred revenues. This acceleration of income in our vacation ownership business into Q2 from Q4 was a result of shift in the timing and mix of completed and partially constructed inventory sold during the quarter.
Since Steve spent a fair amount of time on the macro environment and second quarter revenues and EBITDA results for the businesses, I’ll cover or I was thinking about business drivers and how that impact full year revenue and EBITDA guidance by business units.
In lodging, we’re expecting full year RevPAR growth of 0% to 2%, down from our earlier guidance of 3% to 5%. This assumes 7% to 9% international RevPAR growth and a domestic RevPAR decline of 1% to 3%. System size guidance, absent the acquisition that we recently completed, would have been adjusted down from our May expectations of 4% to 6% due principally to delays in timing of international hotels. As Steve discussed, the pipeline is strong and we expect the openings to occur just later than originally anticipated. So our updated system size guidance is 7% to 9% room growth for 2008, including about 5% related to the rooms that came with the Microtel and Hawthorn acquisition.
As you know, we completed this acquisition of the Microtel Inns and Hawthorn Suites brands two weeks ago. The purchase price was $131 million, and we financed that using the corporate revolver. We expect a modest contribution to EBITDA for 2008, and an EBITDA contribution of up to $15 million next year. We’ll be posting some historical operating statistics for these brands in the next couple of days on the Web site for your reference.
We now expect 2008 lodging revenues to be $770 million to $800 million, bringing both ends of our prior range down $70 million primarily due to the timing of managed property additions, and no change to EBITDA of $235 million to $245 million.
As Steve mentioned, vacation exchange and rental revenues and EBITDA improved 9% and 10%, respectively, for the quarter. However, after considering the 2007 adjustments we made related to Asia Pacific consulting contracts, which resulted in a $5 million revenue reduction and a $6 million EBITDA reduction and the impact of foreign currency, revenue improved by 2% while EBITDA declined 2% driven primarily by the timing of marketing expenses, the mix of products, and investment in our important online strategy freshly offset by good cost control.
Average number of members continues to track to our expectations, and we expect growth at 4% to 6% this year. Based on lower than expected exchange transactions through the first half of the year, we now expect annual dues and exchange revenue per member to decline 2% to 4% this year, compared to our earlier expectation that they would be flat compared to ’07.
Given the current economic challenges in some of our key rental markets, our best estimate is that vacation rental transactions will be down to flat or flat to down 2% versus our earlier guidance of 2% to 4% growth. However, we expect favorable pricing due to the mix of transactions as well as favorable currency effects to drive full year average net price per vacation rental to 12% to 14% growth over the last year, up from our May guidance of 8% to 10%. Based on these mixed trends and our ability to manage costs, we’re making no changes to RCI’s 2008 revenues at $1.3 billion to $1.35 billion or EBITDA at $315 million to $335 million.
Vacation ownership gross VOI sales, as Steve discussed, reflected some weaknesses in Las Vegas and Hawaii, but overall the business is demonstrating solid performance in this challenging environment. However, given the current economic trends, we’re adjusting full year VPG growth to 1% to 3%, down from 4% to 6%, primarily to reflect lower closed rates to new customers. And we’re lowering our tour flow growth for the year to a range of 4% to 6%, which is down from 6% to 8%.
The consumer finance portfolio continues to grow with our increase in VOI sales with modest increases in weighted average coupon and borrower equity in our loans compared to 2007. The consistency of the portfolio’s quality and performance has supported our completion of two securitizations during the second quarter totaling $650 million, and all our securitizations are performing within their predetermined tolerances. Given the unsettled nature of the credit market since last year, we were pleased to be able to complete these two term securitizations at a cost of 7.37% excluding transaction fees, and at a combined leverage rate of about 76%. That compares to a blended cost of 5.7% and a combined advanced rate of 87% for the three securitizations that we did in 2007. We’re already working on renewing the conduit and our consent and our ability to get that deal done.
As we’ve discussed for several quarters, the strains in the economy are showing in the performance of the weaker borrowers in our portfolio, and this quarter’s performance continues that trend. Write-offs as a percent of the quarter-end loan balances were closed to the 2.5% for the second quarter consistent with the first quarter and last quarter of last year. Remember that we increased the provision for loan loss in the first quarter based on what we had been seeing since late last year. The provision for loan losses in the second quarter, which reduces reported GAAP revenues, was $113 million as you can see in table four. This amount is higher than is higher than the prior year amount as a result of recent portfolio performance and growth in the portfolio.
We told you in the past that we look at the quality of the portfolio and loss exposure a number of different ways. For simplicity, you might want to look at the portfolio in two ways, first, comparing the provision for loan losses for the period to the percentage of gross VOI sales less deferred POC revenues, and second, the loan loss reserve as a percent of the gross outstanding loan balances. By both of those measures, the second quarter provision and reserve are consistent with Q1 levels. For the remainder of the year, we’re assuming that there will be continued thrust within the portfolio. We now expect the effects of deferred POC revenue this year to be between $70 million and $100 million due to the sales mix and construction timing that we’ve seen today and expect to see for the remainder of the year. We believe that the impact from deferred POC revenue for the third quarter could be recognition of $5 million to deferral of $10 million. Remember that construction schedules are variable and subject to change, especially the further outward forecasting.
Now, taking our revised – thinking about deferred revenue tour flow, VPG, and credit risk into consideration, we’re adjusting vacation ownership’s revenue range down to $2.45 to $2.55 billion, or $200 million lower at both the top end, bottom end of that range, and EBITDA down to a range $390 million to $410 million, compared to the former range of $405 million to $425 million.
Moving on to some corporate matters at the end of the quarter, our adjusted debt to EBITDA ratio was 2.8, right in the middle of our target range. The balance sheet is strong, and we remain focused on preserving liquidity to leverage investment opportunities, such as our recent brand acquisitions. There’s no change towards (inaudible).
We expect our full year tax rate to remain relatively consistent at about 38.15%. Our guidance for third quarter diluted EPS is $0.80 to $0.82, and $2.18 to $2.32 for the full year on an adjusted diluted basis, down from our former guidance of $2.23 to $2.38.
As Steve said, while we’re not immune to economic strain that others in our industry are facing, we have a number of complementary levers enhanced to navigate what we see ahead.
And now, I’ll turn it back to Steve before we go to Q&A.
Thanks, Gina. In summary, our business has deep and experienced management teams that can and do actively manage them to grow revenue, shift marketing tactics, contain costs, and provide value in our millions of customer interactions we have, whether they are franchisees, hotel guests, developer-affiliated to exchange member, tour guests, or long term timeshare owners.
With that, I will ask Melissa to line up any questions that we may have. Melissa.
Thank you. (Operator instructions) One moment, please, for the first question. Our first question comes from Joe Greff with J.P. Morgan. Please go ahead.
Joe Greff – J.P. Morgan
Good morning, everyone.
Good morning, Joe.
Joe Greff – J.P. Morgan
I was hoping you can just give us – is that the timing on renewing the conduit?
It’s scheduled to expire in the fourth quarter. So we’re looking to get all of that detailed worked on well before then.
Joe Greff – J.P. Morgan
And I was hoping you can also just update us if there was any change in terms of your capital investment and CapEx then for ’08.
No change in CapEx to speak of.
Joe Greff – J.P. Morgan
And as you look at timeshare and you see certain markets like Hawaii and Las Vegas being softer than other timeshare markets, are you looking at altering your investment in timeshare looking beyond this year?
Well it’s a – it’s a good – great question, Joe. We do see a little bit of softness in tour flow in Hawaii. Actually Las Vegas, tour flow was up a little bit, but, Joe, it really wasn’t a question of demand. It’s just a question of how many we can close. With respect to the kind of the spend – as I said, we’re looking at a single-digit revenue growth in 2009. That will allow us to spend less on product in order to fill that need. We’ve given guidance before that our property purchase was at a range, for this year, $650 to $750 million. We revised it down to $600 to $700 million in the second quarter. That’s probably still pretty good guidance for 2008. In 2009, that number will look down further. It’ll be down another $100 million or so.
Joe Greff – J.P. Morgan
Great. And I think expected today or expected tomorrow, should you choose, you can be more aggressive with the buyback. I was hoping you can just update us with your – with your view on buyback in light of your capital structure, in light of the stock price that’s implying five or four and half times EBITDA. Thanks.
Yes. Well, I mean to say our stock is cheap in my view would be an understatement. As you kind of said, it’s really a question of capital allocation and where do we stand in the current credit markets, and what do we see as our opportunities going forward. I’ve always said that the most important thing for us to do is invest in our businesses, and being able to do – to deal like the acquisition of U.S.FS from Global Hyatt is a perfect example of the kind of flexibility we have when we have a good rating and we have good liquidity.
We still feel that there are opportunities out there for us. We think that there would be probably an acceleration of opportunities over the next 18 months, and we want to keep that flexibility to take advantage of deals as they become available.
With respect to the buyback, we still have room in our buyback programs that’s been approved by the Board. We have never said that August 1st is the trigger date for us to change our – to change our mode of managing the company. We’re all frustrated by the share price, but unfortunately, it’s a broad problem across the entire industry and the market as opposed to just specifically us. And I don’t know that we can buy our way out of it.
Thank you. Our next question comes from Steve Kent with Goldman Sachs. Please limit yourself to one question.
Steve Kent – Goldman Sachs
Sure. Steve, can you just – I guess I’m just trying to understand this more broadly. To me it looks like revenue guidance lowered by $275 million, EBITDA guidance only lowered $20 to $25 million. I know you’ve tried to explain this a couple of times, but I still don’t really get it. And then, just to follow on Joe’s question, if stock is trading at four and half, five times, I mean I understand why you want to build the company and get it bigger, find all these opportunities, but I haven’t seen that many deals, hotel deals, at four and a half to five times. So why not buy yourself rather than buy another company?
Okay. Well thanks for the questions, Steve. We’ll take them in the order that you gave them. First on the revenue growth, there are a few things playing into it. The first, I should point out, is we got a great business model. We managed to drive more EBITDA out of our revenue. And therefore, revenue doesn’t drop as much as revenue does, EBITDA doesn’t drop as much as revenue does.
There are a few factors weighing into it, though. The first is the timing of hotel management contracts. Hotel management contracts bring with them a lot of revenue, not a lot of EBITDA. And there are some management contracts that we had in the – in our planning to occur earlier than they’ll occur. They’re still in the pipeline. They’re still going to come on board, but they’re just coming on board a little bit later, which means there’s a reduction in revenue.
The second thing is, Gina talked about the loan loss reserve and the impact in our – the impact on our provision and what we see in the consumer finance portfolio. The loan loss offsets against revenue. Okay. So there’s a direct drop of revenue related to the loan loss provision, and it does dropdown through, but that is what is in part taking down part of the revenue side. In addition, there – we’re thinking there might be a little bit more deferred revenue that’s why we tightened the range up from $40 million to $100 million to $70 million to $100 million. That would, likewise, have impact on deferred – on the revenue overall.
So really it’s kind of those factors, a few others. And then, as we’ve been saying, we put in place a lot of costing programs, efficiency programs, and we’ve been managing the business to try to retain our guidance that we gave all of you. We can’t manage the macro environment so we’re going to be hit on the revenue side, but we can become more efficient and try to drive more margins. The fact is it is a pretty good result, and we wish we could have kept our guidance for EBITDA and EPS. And we did keep – we did kind of just overlapped our range, but moving us down because we’re not really giving up on the bottom end of the range, of our own range by any sense, such as imagination. We’re just trying to be more conservative and show what we’re seeing, and we want to be realistic about where we think the range now is starting to look.
With respect to buyback, I agree that it’s incredibly attractive at these prices, and we can’t do many deals to buy our company at these prices. The difference is that when we buy our company at these prices, we may increase our earnings per share, but we don’t increase our cash flow to our leverage. Where when we buy companies, we’re adding earning that’s building long term value, and we think that there will be great opportunities out there in the marketplace.
Now we’ve never said that we won’t do more buybacks. We never said that we will do more buybacks. We’re just looking at the environment as we see it right now, and feel that the right thing to do is to continue to try to grow the business, continue to take advantage of opportunities that we keep presenting themselves, and we’ll continue to evaluate the marketplace as we go forward.
Thank you. Our next question comes from William Truelove with UBS. Please go ahead.
Michelle Ko – UBS
Hi. It’s actually Michelle Ko. I was wondering if you could give us a sense directionally for the deferred revenues for next year. Marriot has said that there will be powerfully positive forces next year. We understand you might not be able to give us an amount, but if you could tell us if the deferred revenues might be similar to this year or just $70 to $100 million, or like last year about $20 million, or will they actually turn positive. And also, if you could tell us how much deferred revenues are on the balance sheet. Our estimate for cumulative net deferred revenues, for all of revenues, is minus $130 million. We just wanted to know if that was roughly in the ballpark.
I’m sorry, Michelle. Can you say that last part again?
Michelle Ko – UBS
We also wanted to know how much deferred revenues are on the balance sheet. Our estimate for cumulative net deferral of revenues is minus $130 million, and we just want to see if that was in the ballpark.
Okay. Steve, you want to take the first one? I’ll take the second one.
Sure. Which was the first one? Sorry.
The first one was a view into deferred revenues from –
Oh yes, yes. Well for 2009, we have not yet given guidance, Michelle. I don’t know that we’re going to be able to give you much guidance. This year was – had more volatility than we’ve seen in the past, and I would not expect to see this thing kind of volatility going forward. But some of it evolves around the fact of our investment in-product that is going into our Club Wyndham Access business, and part of it is the timing of projects as they come on board and the mix of products that are sold. So I can’t give you a specific – we will – obviously, we’ll give you something before – when we give you the forecast, our guidance for 2009. We’ll give you more specifics. But if you’re trying to look at it on a quarterly basis, I would not expect the same volatility that we saw this year. And if you try to look at it on annual basis, I can’t say that it’s going to be a lot different than this year from a beginning of the year to end of the year standpoint.
Is that accurate or is it more going to be flat? It’ll be probably flat. It’s where – we’re sitting here, looking at each other trying to decide how best answer to that question.
Okay. And then on your question about what’s on the balance sheet at this point, I just want to remind everybody who hasn’t delved into it as much as you might have. We have a number of different kinds of deferred revenues. So I’m just going to talk about the percentage of completion revenue. We have about $200 million at the (inaudible).
Thank you. Our next question comes from Michael Millman with Soleil Securities. Please go ahead.
Michael Millman – Soleil Securities
Thank you. It’s Soleil Securities. Could you give us a breakdown between what the VPG for existing and new buyers was, and what you expect it to be? And can you also give us the medication related to that and to the effect on marketing expense of focusing more on existing – and you expect in ’09 to be slowing production down or building down? That might affect the deferred revenue as well.
Mike, we’re having a hard time hearing you, but I think your first question was VPG.
Michael Millman – Soleil Securities
Okay. VPG is, as we said, it was basically flat in the second quarter. What we’re seeing impacting VPG is, in essence, a slightly lower closed rate than you’ve seen in the past. There’s pressure on our closed rate, and our prices is holding up. Most of that is occurring on the front line, which means – front line is new buyers versus selling to our existing owners. So part of the confidence we have for the rest of the year is the fact that we have a lot of our resource to run (inaudible) fold in the summer and into the fall, and we tend to have a lift in VPG going into the fourth quarter. So that’s – and I hope that that gives you a sense of VPG.
You also asked about marketing spend, and our marketing spend is pretty consistent year-over-year with respect to cost per score and general percentage of marketing spend versus revenue. And then –
The last part of the question was about ’09 and what the impact of the slowing down of sales growth might mean to inventory build, Mike?
Do we still have you, Mike? Okay. Well I’ll keep talking then we’ll go to the next question.
The inventory build, as I said, will probably decline by $100 million or so going into 2009. However, this is a planned reduction in spend that will still maintain a solid single-digit growth, and we will drop it down to a double-digit growth and EBITDA. So revenue in single-digit growth, double-digit growth and EBITDA as we go after the more efficient marketing programs as the Wyndham brand kicks in. This is consistent with what we’ve been seeing in the past. The only difference, we’ve always said in the past is, we are going to take our spending down, which will reduce the top line growth, but we feel that we can still get to the bottom line growth we’ve been talking about.
Thank you. Our next question comes from Chris Woronka with Deutsche Bank. Please go ahead.
Chris Woronka – Deutsche Bank
Hey. Good morning, everyone. Steve, did the U.S.FS acquisition at all impact your ability to buyback stock in the second quarter? And then, your corporate expenses were kind of significantly below where we had modeled them. Can you give us any kind of color on that, and then what you’re thinking for the rest of the year on corporate? Thanks.
Sure. I’ll let Gina handle the corporate side. I’ll address the credit, as you said, Chris. When we announced the U.S.FS deal is when – I think it’s pretty close to the same time, in essence it did put us on negative flop. And then subsequently downgraded us. Normally and in a normal environment, normal being anything that I’ve seen before this environment, doing the acquisition that’s accretive – the petty cash flow is generally viewed pretty positively. So I would say based on anything historical that I’ve ever seen, doing an acquisition like the U.S.FS deal would not have stressed us any more on the credit side, from a credit capacity side.
This deal, I could only respond to what I’ve seen happen now from SMP with their action. Obviously, you’ve done as part of the mix that in their decision process. So I think it probably did put some pressure on our credit standing. But again, it was a relatively small deal. It was only $130 million.
Gina, you want to take the second part of it?
Yes. Chris, I want to make sure that we’re talking about the right numbers. So on a reported basis, you have to remember that there’s some legacy cost in both periods. So they’re substantially different between ’07 and ’08. We had corporate expenses without the legacy impact of about $15 million this year, which is roughly in line with what we had anticipating for the full year.
How that matches up against your model, I don’t have that in front of me.
Thank you. Our next question comes from Jake Fuller with Weisel. Please go ahead.
Jake Fuller – Weisel
Hey, guys. I wanted to delve into the deferral issue a little bit. It looks like, if I’m working the Math right here, your change in annual deferral revenue guidance implies that the back half deferred revenue went from being a positive to between the $70 to $90 million, to now being negative 9 to positive 20. What’s the big change there?
There are a couple of things going on. Obviously, we had less deferred revenue in the second quarter than we anticipated just based on mix and construction progress. So you can think of that as being pulled forward from the second half. And then the other thing that we now have better visibility into, which we obviously did not last quarter, is we have a good sense of kind of where the sales plans look like they’re going to be for the remainder of the year. And the construction progress on some pretty big projects.
Jake Fuller – Weisel
I’m not sure if I’m hearing you correctly. Then is this a function of a change in the pace of building or a function of a change in the pace itself?
It’s both. And you can always use – we are more clear about exactly what progress is going to be made on the individual projects. And I think, essentially, the way you can think about changing the range from $40 to $100 million is really about tightening of the range based on our best estimate at this point, which was less precise the last time we talked about it.
If I could, Jake, let me give you an example in the second quarter of what happened. We have a project called National Harbor outside Washington D.C. in the state of Maryland where – which we were planning on getting into our sales process the beginning of the second quarter. Unfortunately, and Maryland has always been a difficult state to get regulatory approval, that approval did not come through until the very end of the second quarter. So instead of selling what we thought we would be selling for the quarter, we had to shift to other products. And we know the product to sell. It just happened to be products in different parts of the country that was completed so it recorded more revenue that was recordable, and we had less deferred revenue.
We’re still going to sell the National Harbor product, which has now been approved. It is in the sales cycle. It’s under construction. The project’s coming out of – is up out of the ground. But it just shifted a little bit quarter-to-quarter.
Now, as we move forward in the upcoming years, we will be shifting to a new product called Club Wyndham Access, which is going to give us much better ability to control this deferred revenue number. Deferred revenue was not as big an issue for us years ago because we were building very small projects. Now, as you build these larger projects, you have the ability to have a little bit larger volatility in the deferred revenue.
So as an example, just to flush that out a little bit. I don’t know if that was helpful. That’s what happened in the second quarter.
Thank you. Our last question comes from Patrick Scholes [ph] with Friedman, Billings, Ramsey. Please go ahead.
Patrick Scholes – Friedman, Billings, Ramsey
Hi. Good morning. Gina, I may have missed this on your commentary, but what are your expectations for the timing of upcoming securitizations? And my second question is, I think it was in the December timeshare day, investor day you had, the average credit score of your timeshare customers was approximately 660. Have you seen that change in the – at the last several months?
We haven’t really talked about when we think we’ll go back to the market to do another term transaction. We’re really pleased with where we are through June 30, with $50 million issuances so far. FICO is up slightly at the end of June compared to 12/31, but it’s in basis points.
Patrick Scholes – Friedman, Billings, Ramsey
Melissa, anything else queued up for us?
And no one else has queued up at this time.
Okay. Well thank you all very much for attending the call. Go out and take your vacations. It’s good for your health. And we’ll talk to you next quarter.
Thank you. That does conclude today’s conference call. You may disconnect at this time.
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