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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

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

Joseph Greff - JP Morgan Chase & Co, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Christopher Agnew - MKM Partners LLC, Research Division

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

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

Robert A. LaFleur - Cantor Fitzgerald & Co., Research Division

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

Michael Millman - Millman Research Associates

Wyndham Worldwide (WYN) Q3 2012 Earnings Call October 24, 2012 8:30 AM ET

Operator

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

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations. 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 just want to remind you that our remarks today contain forward-looking information. This information is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed July 25, 2012, with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliation of these members -- 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. Our third quarter results reflect continued strong operations, as well as our ongoing commitment to deploy capital to increase shareholder value. While there's some noise related to FX in the numbers this quarter, especially in Exchange and Rentals, on a constant currency basis, revenues and adjusted EBITDA increased 6%, and adjusted earnings per share increased 24%.

Each of our business units exceeded our expectations. The Wyndham Hotel Group benefited from domestic RevPAR increases. Wyndham Exchange and Rentals continued to deliver solid results despite the economic turmoil in Europe. And our timeshare business, Wyndham Vacation Ownership, continued to drive tour flow and VPG growth while delivering on our new owner goals.

In terms of our capital allocation, in addition to 2 tuck-in acquisitions we completed in the quarter, we used $133 million to purchase 2.6 million shares of our stock during the quarter. Year-to-date, we have purchased 10.9 million shares for $522 million. This reflects our consistently strong cash flow and our confidence in the company's prospects. We continue to believe that our stock is a great investment. Our capital allocation philosophy is consistent and is built to drive shareholder value. We will invest in our core businesses, pay dividends, repurchase shares and do opportunistic accretive acquisitions.

Now moving to our business unit review. At the Hotel group, industry fundamentals continue to improve, albeit at a slower pace. While RevPAR recovery seems to be moderating, we believe development opportunities are expanding. This bodes well for room growth as we go forward. With our strong array of brands, we are exceptionally well positioned to capture franchise and management opportunities, giving owners the ability to choose the right flag to best maximize their assets.

For example, in India, we led with Ramada, an established international brand, and then introduced the Wyndham, Days Inn and Howard Johnson brands. In China, we began in the '90s with Days Inn and Howard Johnson master franchises and added Super 8, again a master franchise, and then Ramada as a direct franchise in 2004. Since then, we have introduced Ramada Encore, TRYP and Wyndham, resulting in a total presence of over 63,000 rooms.

Looking at more recent opportunities. I just returned from a 7-day trip to Brazil and Uruguay to visit the large customers and prospects for both our RCI and hotel businesses. There is strong hotel and timeshare growth in Brazil right now, and our participation in that growth is another great example of how wide brand footprint creates enhanced development opportunities. We are in Brazil with our TRYP by Wyndham brand and have seen great demand for our other offerings, including Ramada, Super 8, Days Inn, Howard Johnson and Wyndham.

Developers understand the value of our distribution capabilities, as well as the opportunity of our multiple brand strategy, and they are eager to partner with us. Building strategic alliances with multiunit developers has proven successful in growing international regions. Also, in the Hotel group, we continue to make excellent progress on Apollo, our series of technology and business initiatives that aim to improve the value proposition to our franchisees by maximizing our system contribution.

In August, we relaunched the Wyndham Hotel and Resorts website, completing the most complex project of our brand.com initiative. We have now completely revamped 13 brand websites, significantly enhancing features, functionality and content for over 7,000 properties. Room nights resulting from brand.com initiative are up 17% versus prior year on both a year-to-date and a quarterly basis. In another phase of Apollo, we are embracing the significant shift to mobile devices by improving our click-to-chat functionality, which simplifies the booking process and enhances the consumer experience.

Now moving to Wyndham Exchange and Rentals. During the seasonally largest quarter of the year, the team continued to do a great job, despite the challenges in Europe and limited growth in the broader timeshare industry. Four of our 5 European rental businesses had increases in transaction volume without significant discounting. This speaks to our leadership in the industry and our ability to grow transactions.

Here's how our service rental model works. All of our properties are backed by the Wyndham service commitment, giving both owners and consumers peace of mind in their rental experience. We provide our owners and guests with a high level of service, from marketing to managing their calendar, handling the booking and payment process, providing check-in and checkout services and maintaining quality standards through property inspections.

This is very different from the listings model, which typically provides only online marketing, leaving it to the owner to field inquiries from prospective guests; update and maintain their availability calendars; provide key holding, check-in and checkout services to guests; address service and property issues for guests during their stay; and ultimately, handle the collection process. We have over 40 years’ experience in vacation rental and follow a disciplined approach to developing new markets.

The development model in Europe was designed to minimize risk in the early stages and maximize profit once the market is ready. Initially, we analyze the market and establish a network with local tourist organizations to help develop demand. We then test our brand in the market on a small scale. We begin property recruitment efforts through partnership with third parties in the market, such as travel agents, with minimal internal cost and risk. Once critical mass has been reached, we will make a full-scale entry to realize the potential of the market.

This is a tested and proven approach, and Croatia is a great example. We entered Croatia in 2004 and sold less than 200 weeks. In 2012, we're the market leader, and we have already sold over 30,000 weeks through September. The key to our strategy in Europe and in the U.S. is applying best practices across our businesses and leveraging our core competencies in marketing and analytics.

We also supplement growth through M&A. For example, in August, we continue to expand our vacation rental business in the United States with the acquisition of a leading vacation rental company located at the main entrance to the Great Smoky Mountain National Park. This is America's busiest national park, attracting over 9 million visitors each year. We think the acquisition is a great addition to our portfolio.

Moving to the Exchange business. We've just completed the latest release of rci.com, which delivered several new advancements, including web enablement of our points exchange transactions on mobile devices, the ability of -- to cross-sell products using predictive modeling to provide offers uniquely tailored to our members’ needs and wants and the introduction of the first fully transactional and translated Chinese website in the global vacation exchange industry. This is the final major release of our successful 4-year rci.com mission, which has greatly enhanced the value we bring to our members, as well as our efficiency.

rci.com has launched several industry firsts, including RCI TV, enhanced search, RCI Platinum, trading power transparency, combining deposits and change back. We are on track to reduce call volume by over 30% from the inception of the project through year-end 2012, and we expect a total reduction of almost 40% by 2015. We've driven online web share from 13% to currently over 40%, and it's still climbing.

Now let's turn to Wyndham Vacation Ownership, which had a busy and productive quarter. In September, we acquired Shell Vacations, which brought us approximately 115,000 owners and 19 managed resorts in North America. WVO will now operate Shell Vacation Club, a leading points-based club system, featuring a wide variety of member benefits and travel options.

As Tom will discuss, this tuck-in acquisition has a healthy rate of return, is immediately accretive to earnings and will generate meaningful cash flow. With strong fee-for-service revenues, the acquisition was consistent with our capital-light strategy. We look forward to building upon Shell's many achievements and continuing the growth of its highly successful vacation club by providing outstanding quality, value and customer care.

The timeshare business is attractive because it is a business that has great returns, high customer satisfaction and a great future. Interestingly, the demographic is broadening. Recent buyers are younger, and the ownership base has shifted slightly in terms of marital status with a lower percentage of married owners and a higher percentage of singles.

According to ARDA's recently released biannual consumer survey, the typical timeshare owner today has medium household income of $74,000. 89% own their primary residence. 64% do not have children at home, and 58% are college graduates with over 1/3 of those owners have graduate degrees. The ARDA results also show that 83% of timeshare owners say their experience is good to excellent.

Timeshare owners love the product for a variety of reasons, including resort locations; saving money on future vacations; the overall flexibility of the product, including the opportunity to exchange; and the discipline of taking vacations every year. Clearly, timeshare offers an attractive value proposition for consumers. This bodes well for our own timeshare business and also for RCI.

Finally, as you saw from the press release, we have given you the first view of our 2013 outlook. Revenue, EBITDA and EPS growth is consistent with our long-term strategy. Our investor theme has been, “Excellent execution and powerful cash flow drive dependable growth.” Two years ago, we laid out a plan that resulted in EPS growth of 17% to 20% over the following 5 years with the proper allocation of our strong and sustainable annual free cash flow of $600 million to $700 million. We are well on our way to achieving that plan and much more.

And now I'll turn the call over to Tom.

Thomas G. Conforti

Thanks, Steve. Overall, our third quarter results were solid with adjusted earnings per share coming in 20% above the same period in 2011 and $0.03 above the top end of our guidance range. These results reflect the sound strategies that we continue to advance and refine over time, strong operational execution in all of our businesses and the impact of our ongoing share repurchase program.

Through the first 9 months of 2012, we generated $682 million or $4.61 per share of free cash flow compared with $636 million or $3.74 per share during the same period in 2011. Now, that excludes the impact of a $67 million benefit from a VAT refund and related interest income received late last year. We used the majority of our year-to-date cash flow to repurchase shares. We repurchased $133 million in the third quarter for a 9-month total repurchase of $473 million, plus an additional $49 million in October.

As Steve mentioned and consistent with our capital allocation strategy, on September 13, we acquired Shell Vacation ownership club and property management group. The purchase price was $96 million net of cash, plus $157 million of debt primarily related to consumer loan receivables. This tuck-in acquisition will increase our vacation ownership fee-for-service property management EBITDA by approximately 10%.

From an earnings perspective, the deal will be minimally accretive on an adjusted basis in the fourth quarter, and we expect it to add a few pennies to our 2013 EPS. On the balance sheet, you'll see an increase of approximately $126 million in consumer finance receivables and an increase in inventory of about $41 million related to the acquisition. We expect after-tax unlevered returns of close to 20%, which, of course, is above our hurdle rate.

As you saw from the press release and as Steve mentioned, currency had a significant effect on the results in the third quarter. When we evaluate business unit performance, we look at the results in local currency and exclude the impact of foreign exchange. In accordance with GAAP, our reported numbers include this effect, so where meaningful, I shall highlight results in constant currency.

At Wyndham Hotel Group, revenues were up 12%, and adjusted EBITDA increased 28% compared with the third quarter of 2011, attributable to domestic RevPAR gains, our Wyndham Grand Hotel in Orlando and higher intersegment fees. Excluding the higher intersegment fees, adjusted EBITDA increased by 21%. Domestic RevPAR improved by 5% in the third quarter, driven equally by increases in the average daily rate and occupancy. Systemwide RevPar increased 2% with a 5% decline in international RevPAR offsetting the stronger domestic results. In constant currency, systemwide RevPAR is up 3%.

Now the decline in the international RevPAR reflects a mix effect, driven by the growth in Asia, our lowest RevPAR region. Over the past year, we have increased the number of hotels in our Asia-Pacific region by 26%. This rapid growth has a dilutive impact on systemwide RevPAR due to Asia Pacific's relatively low RevPAR compared to North America and other international regions. Compounding the effect, our lower RevPAR brands, specifically Super 8, are growing more rapidly than our higher RevPAR brands in China. This creates an interesting dynamic where system growth can reduce RevPAR while increasing earnings.

To further the point, on a reported basis, RevPAR in Asia Pacific was down 9%. However, same-store RevPAR was up 1%. Excluding the mix effect, same-store international RevPAR was up by 2% in constant currency. System size was up 1% year-over-year with net openings of 11,500 rooms, partially driven by multiunit deals, such as the recent Hospitality Properties Trust transaction, which consisted of 20 properties and 3,000 rooms throughout the United States.

As Steve mentioned earlier, emerging markets, such as Brazil and China, are driving international room growth, which now accounts for nearly 28% of the portfolio, compared with 26% during the same period in 2011. Overall, pipeline activity is down 5%, both year-over-year and sequentially, primarily related to the openings in our Asia-Pacific region. Our overall development efforts remain on track.

Now let's look at Wyndham Exchange and Rentals. As Steve said, despite the challenges in Europe and limited growth in the broader timeshare industry, the business had another solid quarter. Excluding the effect of foreign currency and acquisitions, both revenues and adjusted EBITDA for the quarter were flat compared to the same period in 2011. In constant currency, third quarter vacation exchange revenues were flat. The average number of members declined 2%, reflecting the nonrenewal of an affiliation agreement at the beginning of 2012, while exchange revenue per member increased by 1% compared with the same period last year.

Looking at rentals. Excluding the net effect of foreign currency and acquisitions, third quarter 2012 revenues compared with the same period in 2011 were flat. Transaction volumes were up 3%, primarily driven by better penetration in recently developed Novasol markets and improved results in our Hoseasons Group business despite continued softness in the U.K. market. These gains were offset by a 2% decline in the average net price per vacation rental, reflecting a mix shift to lower-priced markets.

Now moving on to Wyndham Vacation Ownership. This business delivered another strong quarter. Compared to the prior year, revenues increased by $49 million or 9%, primarily due to positive VOI results. Year-over-year, gross VOI increased by $47 million or 10%. The improvement reflects a 5% increase in both VPG and tour flow. The VPG increase was attributable to both higher pricing due to better yield management and improved close rates, resulting in part from our credit prescreening program. Tour flow reflects a focus on marketing programs directed to new owner generation. Year-to-date, we have brought almost 22,000 new owners into the system, an increase of 5% over the same period in 2011, and we are on track for our annual goal of 27,000 new owners.

Total gross VOI sales from WAAM increased to $62 million in the third quarter of 2012 compared with $38 million in the prior year, a 63% increase. This growth reflects sales of the second phase of one of our initial WAAM projects near Orlando. The first phase, launched 2 years ago, was the WAAM 1.0. This new phase is WAAM 2.0. We believe this demonstrates both the success of our overall WAAM program and developers' interest in various WAAM models.

Consumer finance revenue was flat versus the same period last year. Write-offs during the third quarter improved somewhat to $71 million, down from $73 million in the prior year. The provision for loan loss was $124 million compared with $96 million in the third quarter of 2011, primarily reflecting higher sales and challenges in portfolio performance, which we discussed with you last quarter. These challenges reflect higher default levels due to larger loan balances and some third-party fraud affecting loan defaults. Remediation plans are in place, and we are monitoring the situation closely. We expect the provision to moderate going forward, and we will keep you updated on our progress.

Adjusted EBITDA for the quarter was $155 million, up 4% compared with the third quarter of 2011. The increase primarily reflects the revenue increases, partially offset by higher sales and marketing expenses related to the increase in VOI sales and higher intersegment licensing fees for use of the Wyndham brand trade name. Now excluding these higher fees, adjusted EBITDA for WVO was up 7%.

Now on a corporate financing front, we recently launched a new commercial paper program. This program, which is already in use, allows us to borrow short-term funds at even lower rates than our revolving credit facility. Overall debt levels will be unaffected by this facility.

As Steve noted, our long-term corporate goals remain unchanged. We are targeting annual EBITDA growth of 6% to 8%, high-single to low-double digit growth in our 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 will continue to manage our balance sheet metrics consistent with an investment grade profile, which enable us to increase debt by $300 million for every $100 million that we add in EBITDA.

Now I'd like to spend a few moments on guidance. For the fourth quarter, we expect adjusted earnings per share of $0.59 to $0.61, assuming a diluted share count of 143 million shares. As you saw from the press release, we are narrowing our full year revenue guidance range to $4.5 billion to $4.6 billion and our adjusted EBITDA guidance range to $1,045,000,000 to $1,055,000,000.

We are also narrowing our full year adjusted EPS guidance to $3.15 to $3.20 per share. The new EPS guidance is based on an expected diluted share count of 146 million shares, down from our most recent guidance of 147 million shares. This new guidance reflects the benefit of our share repurchase program through the third quarter and excludes any further share repurchases. We currently have approximately $608 million remaining on our share repurchase authorization.

Now let's touch on a few modifications regarding final 2012 driver guidance. For the full year, we expect RevPAR to come in at the lower end of our guidance range, while tours and VPG will come in at the upper end of our guidance ranges.

Our 2013 outlook reflects continued momentum in the businesses. We expect revenues of $4.9 billion to $5,050,000,000; EBITDA of $1,125,000,000 to $1,150,000,000; and adjusted earnings per share of $3.50 to $3.60 a share, assuming a diluted share count of 143 million shares.

The share count assumption includes our share repurchase through September 30, 2012. Also assume that our 2013 EPS guidance's higher depreciation and amortization expense based on the Shell acquisition, as well as a some capital projects and IT initiatives being put into service. We'll give you, of course, full guidance on our February call. Finally, we expect free cash flow of between $600 million and $700 million in 2013 and available cash of close to $1 billion.

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

Stephen P. Holmes

Thanks, Tom. Before opening for questions, I want to note that this is our 25th quarter reporting as a public company. I am both pleased and proud that the team has delivered optimal results each and every quarter, despite some pretty tough macro headwinds. Shareholder feedback that is gratifying to hear is, "You did exactly what you said you would do." I know our outstanding team will continue to deliver excellent results and execution, which will enable us to continue delivering on our promises to you for years to come. I look forward to keeping you posted on our progress. Thank you for your continued support.

And now, Shirley, we'll open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steve Kent with Goldman Sachs.

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

Two questions. First, can you talk about upside to free cash flow? You've made several acquisitions, so why shouldn't we see free cash flow start to go higher or at least the guidance start to move higher? And then on the provision for loan loss, Tom, you mentioned that you're working on some issues there. But I was wondering, what are you doing or what kind of specific measures are you taking to start to track that down a little bit over the next couple of quarters?

Thomas G. Conforti

Great, Steve. Steve, do you want to cover the first one?

Stephen P. Holmes

Well, on the free cash flow, Steve, frankly, we'll probably be over $700 million this year. Don't know what for sure we'll be at next year. There's a lot that goes into free cash flow, so trying to nail it down to be too precise is difficult. But I think it's safe to say that we feel comfortable with that range, and if we beat it, we beat it. We just don't want to be creating an expectation that's too high. There's taxes in there. There's a lot of things that move around that we don't want to be subject to not being able to deliver exactly what we say we're going to deliver. But I don't think it indicates any sort of a slowness of the growth of the free cash flow. I think we're right on target with our free cash flow.

Thomas G. Conforti

Then on the second question, Steve, on portfolio performance, so we've isolated 2 issues, the underlying causes of some of the portfolio performance. One is large balance loans. Typically tend -- people with large balance loans typically tend to default more frequently. And our team in Las Vegas and -- our teams in Las Vegas and Orlando have worked on tightening up some of the underwriting standards on how we lend out money and to whom we'll lend money. So we hope that the tightening of those underwriting standards will help us to both retain momentum in VPG, while dealing with some of the large balance loan situation. As it relates to the second factor, which is this organized fraud activity, we had started some months ago to pursue very aggressive legal tactics with some of these third parties. We feel like it's a bit like a whack-a-mole situation. But we think that we've addressed some of the major sources of this fraud activity in a pretty significant way. So we expect to see improvement in that area, probably more rapidly. Within the next few months, we expect to see some improvement.

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

Just to follow up, Steve, on the free cash flow part of the story, on the -- when you acquire -- some of the acquisitions you've made, though, those are free cash flow generators, right? I'm trying to think of some the stuffs you've done, and they don't seem like they would require a lot of CapEx or any other PP&E, so that's why I was asking the question. Is that true for the most part of anything you've acquired in the past 12 months or so?

Stephen P. Holmes

You're absolutely right. All of the acquisitions that we've done are cash flow generative, so they will be adding to our free cash flow. It's just we don't want to get ahead of ourselves, and that's basically the reason we left the guidance the same on free cash flow.

Operator

Our next question comes from Joe Greff with JPMC.

Joseph Greff - JP Morgan Chase & Co, Research Division

The contribution from WAAM 2.0 is a little bit higher than what we had thought, and I’m presuming that's going to be a bigger part of the business and certainly bigger than 1.0. But you can correct me if my premise is wrong on that. I guess my question on that is this. Is there a margin mix issue? Is there a margin differential between revenues related to WAAM 2.0 and WAAM 1.0? And then I have a follow-up question.

Thomas G. Conforti

Joe, we're definitely on the path to WAAM 2.0, so your baseline assumption is completely accurate. Not that we wouldn’t selectively do 1.0, but we are walking with great momentum on the path on 2.0. There is no margin differential between either model. There will be some optics on our balance sheet that look a little different. On the WAAM 2.0, think of WAAM 2.0 as like a just-in-time inventory model, where as it will go, inventory will appear on our balance sheet. There won't be a cash expenditure for that inventory. When we sell a WAAM 2.0 ownership right, we will almost simultaneously pay for the inventory and provide the inventory to the buyer. So it's a much more efficient cash flow model. Some of the optics on balance sheet -- and we'll start to get into it more as it becomes a bigger part of our business -- will be a bit different. The revenue classification will be gross VOI. It won't be commissions. So you'll see the commission line on our financial statements start to wane a bit. But from a margin perspective, it's going to be improved, of course. The interest income that we get on WAAM 2.0 is a whole different business category, so the margin that we -- the VOI margin that we get will be comparable, but the interest income, of course, will add incremental EBITDA that we wouldn’t have received had be only been a WAAM 1.0 participant.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay, great. And Tom, in your remarks discussing the VO performance in the third quarter, you said VPG, higher price, improving yield. It was in part related to some of the credit prescreening initiatives that you guys talked about for over a year now. But you used the word “in part.” What were some of the other reasons that drove that improved VPG performance?

Thomas G. Conforti

Steve, do you want to...

Stephen P. Holmes

Well, there's a number of factors that go into that, Joe. You also have close rate, if we improve the close rate. VPG is a little bit like RevPAR because you have the price that you're selling it at, but you also have the number of deals that you close. So there's other factors that go into it, but we were trying to highlight the ones that we recently talked about and the fact that we are seeing impact from them. But I mean, frankly, the sales machine is working on all cylinders. We couldn't be prouder about the effort that these guys have put forth and that they continue to deliver on, so it's a variety of factors.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay. And then my final question, Tom, you kind of talked about some project capital stuff that's should be incremental to this year's CapEx number when discussing your 2013 guidance. What is your 2013 project CapEx or guidance? I mean, this year, it was between $195 million to $210 million. Where is that relative to that number for next year?

Thomas G. Conforti

We haven't given that guidance yet, Joe. And I think I mentioned the higher D&A because our CapEx levels over the last couple of years have been a little higher than they were historically. And that's why we're seeing a little bump in D&A, but we'll talk about it in February. Steve and I are both really keen to support any initiatives in our business units that are compelling economic investments in our core business. And so if we felt like increasing it over the last 2 years was the right thing to do, we'll let you know in February what it looks like, but we continue to be really supportive of investing in the business.

Operator

Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

Just a quick housekeeping question. During the quarter given the acquisition, were you guys restricted from buying in stock for a longer period than usual?

Stephen P. Holmes

No, we -- generally, if there's activity that's taking place, we'll put a 10b-5 in place like before the earnings are announced or when we go into our quiet period. But no, there's nothing that restricted us.

Carlo Santarelli - Deutsche Bank AG, Research Division

Okay. And then getting back to one of the prior questions, if you look at kind of the incremental flow-through on some of your timeshare business in the quarter, it looked like the conversion EBITDA from some of the incremental revenues in that segment were a little bit weaker, and I just wanted to understand a little bit more maybe why that wasn't flowing through at kind of the normal rates or normal margins. Is there any more color you guys can provide on that?

Thomas G. Conforti

Yes. Our margin was a little light. In part, it was because of this intersegment fee that we charge, that our Hotel group charges. That was worth about 3/4 of the difference. But there was also the provision effect. We've increased our provision above and beyond what we did in 2011. So those are the 2 factors, Carlo. I mean, there was a bunch of gives and takes. But in general, operations was a plus. Portfolio was a minus, and then the intersegment fee was the minus.

Carlo Santarelli - Deutsche Bank AG, Research Division

Great, Tom. That's really helpful. And just in terms the provisions, is kind of that 25% level of sales what we should be looking at going forward? Or is there anything as we look out that would make that change?

Thomas G. Conforti

My reaction would be if these remediation plans we have work, and we believe they will work, then we'll see a moderating of that number over time.

Operator

Our next question comes from Chris Agnew with MKM Partners.

Christopher Agnew - MKM Partners LLC, Research Division

Question on inventory. I guess I was surprised to see that not come down a little bit more in the quarter, especially given the strong VOI pace. And then a separate but maybe related question on WAAM 2.0. How do you expect that to impact inventory as you grow that within your mix?

Stephen P. Holmes

Thanks, Chris. Well, Tom, you can jump in here, too. I think the only thing that really impacted inventory not going down was the fact that we added some inventory on the Shell transaction, which offset the decline that you normally would have seen for the quarter. I think that's the only thing that impacted...

Thomas G. Conforti

Yes, absolutely.

Stephen P. Holmes

Our spend level was not...

Thomas G. Conforti

Our spend level is actually consistent with where it was last year, so no, that’s not it.

Stephen P. Holmes

Yes. On the WAAM piece, you're right, Chris. There's an impact on WAAM 2.0, where, as Tom said, it's like just-in-time inventory. It comes on the balance sheet and flows off as we do the sales. So in any particular quarter, there could be a slight increase in inventory because of WAAM 2.0, but it's not going to be meaningful. Our kind of objective remains the same, which is we want to take our balance sheet down, we want to sell what's on our balance sheet. But we'll continue to take advantage of these WAAM 2.0 opportunities or WAAM 1.0 opportunities and, we think, most effectively manage that cost of sale element of our balance sheet -- of our P&L.

Christopher Agnew - MKM Partners LLC, Research Division

And then a question on lodging. Several of the brands’ RevPAR was well above average, and I'm just wondering how much is attributable to Apollo. And I don't know if you can quantify that in any way, because I know that you've rolled out different Apollo initiatives across the different brands at different times.

Stephen P. Holmes

Yes, it's tough to be really precise, Chris, and we did look at this quite a bit. And let me just give you a little bit of color because maybe it'll help explain some of those increases. The third quarter is obviously a huge quarter for us because it's the big leisure travel quarter. And if you look at where we were up and where we were down, basically the Pacific Northwest, the West and down into the South into Texas was very strong during the quarter, in the U.S., obviously. Less strong was in the -- on the East Coast and towards the Northeast. So I think there were maybe shifts in some leisure travel during the quarter versus the quarter last year. But it wasn't massive, and it was very hard to tell what is specifically related to our Apollo initiatives. We know that we saw increases of the bookings through our websites. That definitely has picked up. But we don't know how many of those we would've gotten on the call center. We don't know how many of those would have been drive up, so it’s a little bit difficult to tell with specificity. But I think the biggest barometer is what we hear from our franchisees. And we just had Howard Johnson franchisees in here yesterday, and there was good enthusiasm with the group. So I think they're seeing the results of some of these initiatives we're putting out. The TripAdvisor on our websites, as well as the various initiatives we've taken with Apollo.

Operator

Our next question comes from Patrick Scholes with Suntrust Robinson Humphrey.

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

I see that the number of rooms in your portfolio jumped up nearly 2% quarter-over-quarter after basically being flat over the prior 2 years. What's driving that? Or what drove that in the third quarter? Is it signings, conversions, stability of financing?

Stephen P. Holmes

Thanks for the question, Patrick. There's a few things that are impacting it. One is we executed that HPT transaction that Tom spoke about in his comments. That brought on, I think, around 3,000...

Thomas G. Conforti

3,000.

Stephen P. Holmes

3,000 rooms. In addition, as Tom said, our pipeline is down a little bit because we did have some good strong openings in Asia. Openings internationally, and particularly Asia, are difficult to time. There's factors that are not as readily predictable as in the U.S. that we're trying to monitor closely, plus the fact that we do have master franchisees over there, which gives us a little bit less control on the timing, a little more subject to their availability to get those properties open and in the system. So there -- it's mostly that, but -- mostly those 2 factors, but the fact is that we have been talking all year that we would see an increase in rooms by the end of the year in part because we saw the HPT transaction coming. But also, there are a number of other opportunities that we're looking at that are large bolt -- conversions. As I said, I think RevPAR may be moderating. It's still growing, but it may be moderating a little bit. But we definitely see the growth in room opportunity as improving, and so we will be aggressively pursuing that.

Operator

Our next question comes from Nikhil Bhalla with FBR.

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

Tom, just a question on when you're talking about the system size being a little bit dilutive, as you open new hotels internationally, to RevPAR. How should we think about the ramp in the new hotels that are opening up across the international locations? I mean, do you expect the ramp to be a little bit stronger at this point than what one would expect to see in the U.S.?

Thomas G. Conforti

It's a great question, and we've discussed it internally in preparation for the call. Our pipeline in Asia Pacific, while heavily influenced by our lower RevPAR brands, will start to be influenced over the next 12 to 24 months by Wyndham branded hotels, which will be much higher RevPAR impact than what our Super 8 produces in China. China will continue to be an engine of growth. So the bias in the calculation to a faster growing Asia-Pacific region, that phenomenon will be with us for a while. But the compounding effect of the lower RevPAR brands also contributing to that dilutive effect, I think that phenomenon over time will moderate because we do have a significant number of higher RevPAR hotels in China opening over the next 12 to 24 months.

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

Got it. And Steve, one follow-up question for you. You mentioned about U.S. RevPAR growth slowing down. Any color you may provide, what in your view may be causing that and how you see that shape up in the fourth quarter?

Stephen P. Holmes

Well, we are leaving our guidance the same for the year. We were just saying we'll probably be at the bottom end of that guidance. So we don't see any cliff coming where things are falling off dramatically. We just see us a slower RevPAR growth. I think it's attributable to the fact that we've had a recovery in the hotel industry. There are more new starts now going on in the industry, probably impacting more the urban market than our market quite frankly. But we're starting to see some additional hotels being built. I don't think that this is, frankly, anything unusual. And in our planning, this is basically what we forecasted was there'll be a decline in the growth rate of RevPAR as the recovery continues. So it's pretty much predictable if you look at it over many years of cycles.

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

Got it. So construction activity, is that ramping up? Are you seeing some construction financing come back for some of the mid-scale brands and lower?

Stephen P. Holmes

A little bit, not dramatic, but a little bit. We've -- it's funny in our properties. Because we have a lot of economy products, we continue to see new construction happening, even during the middle of the downturn. And I would get a notice every week about another Microtel or Super 8 that was breaking ground. So there's always been a little bit out there. There's been some activity. It's picking up a little bit but not dramatically. I think more we've seen some of the urban markets like New York, where we've seen some new construction opportunities surfacing that had been silent for 2 or 3 years or more. So I think, as I said, I think most of it’s going to be, right now, more immediately in the urban market.

Operator

Our next question comes from Bob LaFleur with Cantor Fitzgerald.

Robert A. LaFleur - Cantor Fitzgerald & Co., Research Division

Tom, Steve, you guys were aggressive buyers of your stock in the 20s, in the 30s, in the 40s and 50s. Can you talk a little bit about your thinking about how far we might be from that inflection point where buying back stock might not be the highest and best use of your capital?

Stephen P. Holmes

All right, Bob. We're not there. I don't know what else to say. We don't put a target as to where we think the stock should be. As I've said before, I think, on these calls and I know I've said it in investor meetings, we look at this on a quarterly basis with our board. We present them with an analysis that shows what we think the intrinsic value of the stock is. We're not there. We're not close to it, so we think that there's still a lot of room. As I said, we think our stock is a great investment. So we've been pretty consistent with our point of view and continue to be.

Operator

Our next question comes from Harry Curtis with Nomura.

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

Just going back to WAAM 2.0 for a minute. Was -- the sector was responsible for a good chunk of the timeshare revenue gain. And what I'm wondering is if you expect those kinds of sequential increases to continue and, specifically, if you could give us a sense of the pipeline of projects that are -- that should feed those sales going forward.

Stephen P. Holmes

Thanks, Harry. I don't think sequentially it's going to ramp up dramatically. And frankly, if we didn't tell you what was WAAM, you wouldn't know because WAAM 2.0 gets just reported the same way as our normal sales do. So you wouldn't really notice a difference. We're just describing it because we've said that we would update people on our WAAM progress. We have a number of deals that are still in the pipeline. The way we build our pipeline for deals is we look at our sales plan, what we expect to do over the upcoming years, and we back into what inventory we need and what locations. So I think I mentioned on the last call that we will look at 150 deals this year. We're only going to do a couple of them because they're exactly what we want. But that doesn't mean that half of them didn't make sense and couldn't be done in the future. So there's still a tremendous amount of opportunity out here. I think that this WAAM 2.0 or whatever our next iteration will be -- and we're constantly tweaking and improving this process. This group down in Orlando and our real estate team here in Parsippany are incredibly innovative and come up with new ways of approaching this, so stay tuned. I'm sure we'll be talking about other ways that we find access to inventory that is on a capital-light way that can improve our cash flow and the dynamic of the business.

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

For the projects that do make it through and get approved, is there a common thread, characteristics that you're looking for? Is it a location? What are the features you're focusing on?

Stephen P. Holmes

Well, they have to meet our minimum requirements, which is we need to know that the location is something that's desirable for our customers, the owners of our timeshare. The quality has to be right. The amenities has to be -- they have to be right. So it's really -- think of it as we're going out to look for a new construction site, and we want to find all of those aspects that make the site right. We look for the same thing in the projects. That's why some of them don't make the grade. And as we go through this process, we identify them, and sometimes we're talking with people about things that we might consider doing in 2 or 3 years and letting them know that they're still in the queue for us, but we're not prepared to execute a transaction with them yet because we just don't want to be too far ahead and then eliminate ourselves from other opportunities that become available.

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

And so last question is I think you mentioned that you looked at 150 deals to put 2 into the system. Are there another 150 that you think are fertile enough looking ahead? Or is -- do you think the pool of candidates is smaller, larger, about the same?

Stephen P. Holmes

Let me rephrase what I said before, just in case I didn't say it clearly. We looked at 150. At least half of those probably would have qualified for deals with us, and we only did 2 of them. So there's still a lot of product out there. We only looked at 150. Our guys are constantly traveling. If they -- if we added more people or we added more days to the year, we would have more product to look at.

Operator

And our final question comes from Michael Millman with Millman Research Associates.

Michael Millman - Millman Research Associates

Discussing the U.S. hotel market, could you, a, on revenue -- on RevPAR moderating, break that down between ADR and occupancy? And also, regarding East Coast, West Coast, maybe you can give us same-store sales. And then I have another question.

Stephen P. Holmes

All right, Mike. With respect to occupancy and ADR, I think they were relatively equal this quarter. Occupancy, ADR, that’s all in the tables to the earnings. But I think they're relatively equal. As to East Coast, West Coast, the West Coast -- I mean, it's hard to get real specific, Mike, because I know the Pacific Northwest was up like 9% or something like that, and we were down a little bit on the -- in the Northeast. So it wasn’t like we were up 25% somewhere. There were just some areas that were stronger, and that may reflect, frankly, weakness in 2011 that now is recovering and showing better in 2012. I think in the Pacific Northwest, that is one of the factors influencing it was that was weakened in 2011. So I don't think there's -- I mean, I'm trying to give you a little bit of that color, but I don't think there's a lot more that would be insightful for you. And Smith Travel, obviously, comes out with a lot of information on this as well.

Michael Millman - Millman Research Associates

And the other question is regarding mobile devices. Could you give us some idea of what -- how that differs from historic -- history regarding the length of stay and if it's new customers, existing customers, whether it's -- how much is direct versus third party and any other color that might be helpful?

Stephen P. Holmes

Sure. I mean, mobile is becoming a bigger and bigger portion of the booking machine. And what we did was -- what I spoke about was we added a click-to-chat feature, an easier-to-use click-to-chat feature, it was always kind of there, but it was clunky, to our mobile sites. What we're trying to encourage people to do is we're making it easier for them to contact us and book their room. If you go to our mobile sites right now, Super 8, Days Inn, whatever you might want to look at, there's a very easy express check-in button on the site where you can book based on the location you're at right now. It'll bring up the closest properties, and you can book it with basically one click and let people know that you're coming. So we're just trying to make it easier. Our travelers are largely car-bound travelers domestically, and we just want to make it as easy as possible. So when you pull over to the side of the road to look at your mobile phone and book your reservation, that it’s as easy as possible and you can get back on the road.

Michael Millman - Millman Research Associates

I guess I was looking for more -- a little bit more color on whether the customers differ in a number of characteristics or any characteristics.

Stephen P. Holmes

Well, I don't have statistics on that right now. But the -- I would be willing to bet $1 that it's a younger demographic that's on the mobile phones than is on the reservations line. And we know that, I guess, another factor is that, I think I said this last quarter, that like 2 -- almost 2/3 of the bookings that we do are done on the day of arrival, and many of it is done within 5 miles of the hotel. So that's for the mobile bookings. So the mobile is the most immediate type of booking rather than just driving up to the hotel. So the immediacy is there, and my guess is it's probably a younger demo than you'd see in the normal either online or reservations booking.

And thanks, all of you, for spending time with us. We appreciate the opportunity to share the results and look forward to talking to you at the end of the next quarter. Thank you.

Operator

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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