Wyndham Worldwide Corporation Q4 2009 Earnings Call Transcript

| About: Wyndham Worldwide (WYN)
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Wyndham Worldwide Corporation (NYSE:WYN) Q4 2009 Earnings Call February 10, 2010 8:30 AM ET


Margo Happer – Senior Vice President Investor Relations

Steve Holmes – CEO

Tom Conforti – CFO


Steven Kent – Goldman Sachs

Patrick Scholes – FBR Capital Markets

Joe Greff – JP Morgan

Chris Woronka – Deutsche Bank

Michael Millman – Millman Research Associates

Ryan Meliker - Morgan Stanley


(Operator Instructions) At this time I’ll turn the call over to Margo Happer, Senior Vice President of Investor Relations.

Margo Happer

With me 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 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-Q filed November 5, 2009, with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to comparable GAAP measures is provided in the tables to the press release and is available on the Investor Relations section of our website at www.WyndhamWorldwide.com.

Steve Holmes

As you saw from our press release, we had another great quarter and overall a terrific year despite the tough economy. We continued to demonstrate strong execution against our strategic initiatives and delivered fourth quarter EPS of $0.40 compared with guidance of $0.35 to $0.38. Our full year adjusted EBITDA of $830 million was also ahead of our guidance.

Today I will talk with you about our 2009 achievements, our exciting plans for 2010 and some major decisions we’ve made regarding how we’ll deploy free cash flow going forward. Then Tom Conforti will review results and walk you through 2010 guidance.

Overall we see some signs that the economic and operating environments are stabilizing. Like others we are seeing improvement in the upper upscale segment with Wyndham Brand same store managed portfolio RevPAR in the US up over 12% in January. At the same time, unemployment in the US combined with ongoing consumer concerns about the economy, continued to pressure consumer spending and RevPAR in our primary economy and mid-scale industry segments.

The lower priced segments were not impacted as much during the downturn and will probably follow the upper segments out of the recovery. However, we’re confident that our resilient business model, our proven ability to execute and our growing free cash flow position us well strategically and financially for 2010 and beyond.

We continued to make great progress in transforming our businesses to maximize free cash flow. In 2009, consistent with our strategic decision to cap the size of our traditional time share business, we reduced inventory spend and reduced receivables in this business. These actions, combined with other cost control efforts, drove free cash flow of $541 million in 2009, a turnaround of over $600 million from 2008.

For 2010 we’ve also introduced additional disciplined balance sheet reviews into our budgeting and forecasting process and a balance sheet efficiency component into our executive compensation program. This will help maintain our focus on maximizing free cash flow across the organization.

Our transformation positions the company well for future growth, profitability and cash flow. We expect sustainable annual free cash flow of $500 to $600 million in the coming years and we are committed to deploying the cash flow to drive shareholder value. We expect to reinvest a portion of our free cash flow in our fee for service businesses when we have opportunities that are attractive from a strategic and financial perspective. We also intend to return a greater portion to our shareholders through increased dividends and opportunistic share repurchases. In fact, we made two significant announcements today that address our capital allocation plans.

First, we’ve tripled the dividend, which puts us at a payout ratio of approximately 30% and a current yield of approximately 2%. This decision demonstrates our strong confidence in our business prospects as well as the sustainability of our free cash flow going forward. We expect to generate over $2.5 billion in free cash flow over the next five years, which enables us to make this commitment now while maintaining a sharp focus on our credit metrics and continuing to strengthen and grow our businesses. Tom will walk you through our dividend policy shortly.

Second, we intend to resume our share repurchase program on an opportunistic basis. We have $157 million remaining under our current authorization.

Now let me take you through some of the highlights of our strategic initiatives and results. As a reminder, our mission is to be the leaders in travel accommodations, welcoming our guest to iconic brands and vacation destinations through our signature “Count on Me” service. Of course our primary objective as a public company is to increase shareholder value.

Our key strategies to support these goals are to increase market share by delivering excellent service, grow cash flow and operating margin through superior execution, and emphasize our fee for service business models, which accounted for 65% of our EBITDA in 2009.

I’ll start with Wyndham Exchange and Rental which increased adjusted EBITDA by 9% excluding a net effect of foreign currency in 2009. Our team superbly executed their business plan, demonstrating their technology and marketing leadership across the global exchange business and expanding our vacation rental brands while growing operating margins.

The exchange side of the business, RCI, culminated a fantastic year with an annual affiliate meeting last month in New York City, which drew record attendance. The theme of the event was, innovative, value added services we provide. RCI continues to dominate on the technology front, providing new functionality not only to its 3.8 million members but also to it’s over 4,000 affiliated resorts.

For example, RCI.com is now available to our Club affiliates as a transparent online booking tool. For example, Hilton Grand Vacation Club owners can book within the Hilton Club or transact an RCI exchange all through our portal. Developer affiliates using this new web interface have achieved significant gains in online transaction penetration rate in a matter of months.

On the consumer front, we successfully completed a significant RCI.com upgrade in November which expanded our cutting edge and enhanced search technology to our over one million point’s members, giving them complete and easy access to the tremendous breadth and depth of our global portfolio.

We also initiated automatic electronic status updates on pending request, which historically have account for approximately 12% of our call volume. Our efforts to date have resulted in 24% penetration of online transactions in the fourth quarter 2009 compared with 13% in 2008 and resulted in $5 million of sustainable cost center savings throughout 2009.

Our European rental businesses delivered solid results despite the difficult economic environment. These businesses demonstrated strong resiliency during this downturn as leisure travelers throughout Europe remained committed to their vacations. Our UK Cottage rental business had an especially stellar year, aided in part by weak pound/sterling resulting in increased domestic travel. This business annually serves over one million leisure travelers through exclusive listings of 17,000 rental properties.

Excluding the next effect of foreign currency, revenue increased by 5% and contribution margin increased by over 30% compared with 2008. Ongoing investment in ecommerce is also yielding results. In 2009, 73% of bookings were made online, up from 59% in 2008, supported in part by a 21% increase in Google click through rates. Additionally, the UK Cottage rental business reduced marketing costs by applying enhance analytics to the four million customers in our database as well as focusing efforts on the most effective marketing channels, resulting in higher marketing conversion rates.

We have a scalable efficient infrastructure supporting these two great business models, Vacation Exchange and Vacation Rentals. We completed restructuring and other cost savings initiatives in 2009 that eliminated over $50 million annually in costs. We focused primarily on increase efficiency rather than eliminating headcount, resulting in sustainable cost savings and better run businesses which will support margin expansion in future years.

Moving to the Hotel Group, we believe that strong well supported brands and increasing reservation contribution are paramount to our ability to retain and attract new franchisees. As I said earlier, historically the economy in mid-scale segments compared to higher end segments, have been more resilient during economic downturns and exhibited slower recovery. We’ll use what we believe will be a transition year to heightened our focus on executing on the blocking and tackling in this business.

We are launching a series of strategic initiatives with the goal of strengthening our brands and delivering our reservation experience that maximizes value for both franchisees and consumers. Our efforts will focus on the following areas: First we will drive bookings through online channels by improving consumer shopping experience on our brand websites by enhancing connectivity to online travel agents and by increasing product exposure on an OTA websites.

Next, we’ll increase occupancy and allow for better pricing opportunities by ensuring all our rate plans are consistently available across all channels and by equipment franchisees with more competitive rate information to enable them to make better rate setting decisions. We will continue to invest in our international platform, with a keen focus on priority markets. We expect the multi-wave implementation effort on these and other strategic initiatives over the next few years as we continue to build capabilities that enable future growth.

We continue to make great progress on building the Wyndham brand also. We opened over 2,000 Wyndham rooms in the fourth quarter and nearly 4,200 rooms during the year, the majority of which were international, with approximately 1,200 rooms in China including the Wyndham Grand Plaza Royal in Hangzhou, 1,000 rooms in Mexico including four ocean front properties and 225 rooms at the Wyndham Apollo Hotel in Amsterdam. On the domestic front, we opened the 255 room Graves 601 Hotel Wyndham Grand which is the largest upscale meeting facility in Downtown Minneapolis and has earned numerous accolades.

Wyndham vacation ownership had another solid quarter, wrapping up a year of transformation for that business, reducing the size of our business from $2 billion in vacation ownership sales to $1.3 billion while maintaining high levels of business momentum. We’re in the process of transforming this business to move from a growth orientation to a dramatically improved cash flow and return profile. We’re seeing great success.

We reduced our inventory spend from $414 million in 2008 to $189 million in 2009. Cash down payments for the quarter were 22% up from 13% in the fourth quarter 2008. In addition, for the full year, we reduced the percentage of sales finance from 66% in 2008 to 55% in 2009. In addition, FICO scores for the full year 2009 were 724 compared with 694 in 2008.

We are also making great progress on our alternative business model for timeshare. With product in Myrtle Beach now registered under our asset affiliation model, we expect to begin sales this month. While we remain in the early planning phases for this offering, we are confident this will be a very successful model going forward. Overall we believe there are plenty of products available with over 5,000 units in our deal pipeline. To take full advantage of the opportunity, we are exploring various programmatic approaches for this business.

Finally, for Wyndham Vacation Ownership, which had a great quarter, we started the year strong as well. On January 26 of this year we hosted the grand opening of Wyndham Vacation Resorts at National Harbor, our newest resort located in the heart of National Harbor and just minutes from the snow covered nation’s capital. This is our second property in the market, joining Wyndham Old Town Alexandria which opened in 1999 and remains one of the most popular resorts in our portfolio.

This resort will cater to the growing travel trend among timeshare owners to visit major metropolitan centers and is just one more way we’re keeping ahead of the curve for those looking to get maximum value for the vacation dollars.

In summary, I’m pleased with our results, strong balance sheet, and enhanced cash flow, tripling the dividend, and resuming our share repurchase program, reflect our confidence in our ability to continue to execute and to deliver significant returns to shareholders now and in years to come.

Now I’ll turn the call over to Tom to go through our results and guidance in more detail.

Tom Conforti

I’ll walk you through the details of the quarter, talk about 2010 guidance, and cover some additional topics. Company wide, revenue which included a $46 million roll in of previously deferred sales related to the percentage of completion accounting, were flat compared to the fourth quarter of 2008. As Steve noted, we exceeded our EPS guidance for the quarter and our adjusted EBITDA guidance for the year.

The company’s balance sheet is in great shape. We had approximately $870 million of capacity on the corporate revolver at the end of the year, compared with approximately $290 million at the end of 2008. Our debt to EBITDA ratio as defined by the rating agencies is at 3.1 times. We have no significant near term maturities and we have significant room under our covenants. Overall we believe we have an investment grade profile.

Cash from operations was approximately $690 million in 2009 compared to just $109 million in 2008, resulting in a break through year in the company’s generation of free cash flow, which we define as cash from operations less CapEx and hotel development advances. With the free cash flow turnaround of over $600 million our results were transformational.

Based on these results, as Steve noted, our Board of Directors has authorized a three fold increase in the dividend and we will resume our share repurchase program. These decisions were based on our belief that the company will sustainably deliver $500 to $600 million in free cash flow well into the future, that our current capital structure is an investment grade profile, and that we have sufficient flexibility to make value enhancing investments in our fee for service businesses.

Our dividend payout is now about 30% with a yield of approximately 2% at our current stock price. When we came out of the box with the increase we wanted to target a 2% dividend yield. Going forward, our dividend policy will be to at least mirror the rate of growth of our business. In addition, on share repurchase, we are reactivating our current authorization with a balance of $157 million.

Now moving to segment performance beginning with Wyndham Exchange and Rentals, it once again delivered excellent results, ending the year ahead of our guidance. For the quarter, excluding the net effect of foreign currency, revenue and adjusted EBITDA were flat. On a similar full year basis, adjusted margins increased almost 300 basis points to 28% reflecting resilient top line performance in a difficult economic environment, efficiencies from our migration to the web, and cost reduction efforts associated with streamlining our organization, a remarkable achievement given the economic conditions of the last 12 months.

Exchange revenue in the fourth quarter of 2009 was up 2% on a constant currency basis. Member growth was up 2% reflecting in part the addition of the Disney Vacation Club earlier this year. Fourth quarter 2009 annual dues and exchange revenue per member in constant currency was consistent with the fourth quarter 2008, reflecting higher transaction fees for call center transaction, offset by lower exchange transactions.

Vacation rental revenues in the fourth quarter were up 2% on a constant currency basis. Transaction volume was relatively flat, reflecting higher volumes at our Landal GreenParks in Holland and our UK Cottage rentals business, offset by fewer vacation rentals by our RCI members. In constant currency, average net price per rental was up 3% in the fourth quarter 2009 primarily reflecting mix from higher volume at Landal GreenParks.

Ancillary revenues in the fourth quarter were $30 million a 17% decrease from the fourth quarter 2008, due primarily to lower fees generated from programs with affiliated resorts and our termination of a low margin travel service contract.

As part of my ongoing education with the company I recently had the opportunity to visit three of our European rental businesses. I was impressed with the energy, enthusiasm and focus of the teams as well as their well thought out growth plans. These are excellent businesses with a great consumer base. They operate for the most part on a fee per service model.

I was also impressed by the quality of the rental properties and the parks. As Steve noted, 2009 proved the resiliency of European vacation rentals in a difficult economic environment. The cottage businesses are scalable with no additional CapEx requirements. We believe there is great exportability of this model throughout Europe.

At Wyndham Hotel Group, revenues and adjusted EBITDA for the quarter were down 12% and 41% respectively due in part to an expected industry wide RevPAR declines and lower other franchise fees. In addition, we recorded an asset impairment charge of $6 million related to a joint venture that manages international four and five star properties which had been hit hard by the global economic downturn, affecting profitability estimates. This charge was not contemplated in our most recent guidance.

We also recorded incremental bad debt expense in the quarter of approximately $6 million, principally related to three properties in our managed portfolio, which experienced occupancy declines similar to the rest of the industry. Please note these managed properties comprise less than 2% of our systems portfolio in total. As Steve noted, RevPAR significantly improved at our managed properties in January. Overall, we’re beginning to see less stress across the entire system. We lost only two franchise properties to foreclosure in January 2010 compared with nine franchise properties in January 2009.

Domestic RevPAR decreased 14% from a year ago. Worldwide and international RevPAR declined 13% and 15% respectively in constant currency. Our Day Inn and Super 8 brands continue to outperform the economy segment primarily due to stronger pricing than the competition. It’s encouraging that these brands, which account for over 50% of our rooms, have held rate above their segment. In addition, while a small piece of our business, advanced bookings do signal that rate continues to hold, all of which provides a strong base for out performance when occupancy returns.

Internationally we are seeing some signs of industry improvement. Fourth quarter RevPAR was down only 1.6% in China. In Mexico, in constant currency, fourth quarter RevPAR increased 3% for the Wyndham brand and 2.2% for all brands. Exhibiting great momentum in a difficult environment, we ended the quarter with approximately 597,700 rooms worldwide, opening over 46,000 rooms in the year, but terminating 41,000 rooms. Our ability to reach our long term room growth rate of 2% to 4% requires that we make retaining the right rooms a top priority. The strategies Steve mentioned earlier address this objective.

Moving to Wyndham Vacation Ownership, revenues and adjusted EBITDA for the quarter were up 3% and 45% respectively. Our results reflect the benefit of a roll in and percentage of completion deferred revenue, continued efficiencies in sales and marketing which I’ll discuss in a moment and a decline in the provision for loan loss as signs of some stability appear.

Gross VOI revenues exceeded our expectations again in the fourth quarter. Sales efficiencies were once up again significantly reflecting the resizing of our business with volume per guest up over 36% from the fourth quarter 2008 and up over 23% for the year compared to 2008. Close rates remain strong and transaction sizes in pricing remain stable.

On the consumer financing front, we saw significant improvement in write offs in the fourth quarter which were 3% relative to the overall portfolio, down from 3.3% at the end of Q4 2008. Accordingly, the provision for loan loss was $103 million or 26% of VOI sales down from 31% on a similar basis from the fourth quarter 2008. The securitizations continue to perform within their expected tolerances and overall we continue to see good trends in the portfolio as delinquency and default rates are improving.

Now let’s turn to 2010 guidance. Note that we’ll post the guidance to the Investor Relations portion of our website immediately following the call. We are maintaining our previous guidance for 2010 revenue and EBITDA and free cash flow for the company.

Let’s look at each business unit, starting with Wyndham Exchange and Rentals. Drivers are generally flat reflecting continued economic uncertainty in the US and Europe, specifically, in exchange we expect the average number of members as well as the annual dues and exchange revenue per member to be flat. In rentals we expect transactions to be flat and we expect average net price per vacation rental to increase between 2% and 5%. Finally, we expect Wyndham Exchange and Rentals revenue of $1.125 to $1.225 billion and adjusted EBITDA of $290 to $310 million.

Given our expectation that member’s annual dues and exchange revenue per member and rental transactions will be relatively flat, as a result of the economic conditions, we are keeping our EBITDA range consistent with 2009, although we do anticipate a positive FX impact in 2010. Regarding FX sensitivity in Wyndham Exchange and Rentals it operates in approximately 100 countries with many currencies. A rule of thumb, a 10% change in the dollar against a representative basket of currencies would result in a $14 million impact on exchange and rentals full year EBITDA.

Moving to the Hotel Group, as we mentioned earlier, we expect RevPAR to be flat to down 3% with some improvement in the second half of the year, but the first half still challenged and a 1% to 3% increase in system size. We expect revenues to be between $620 and $670 and adjusted EBITDA in a range of $180 to $200 million, increased somewhat assuming that the continued weakness in RevPAR will be offset by moderating bad debt expense and prudent expense control.

At Wyndham Vacation Ownership, remember that we are deliberately capping the traditional model for this business to concentrate on cash flow generation and the return profile of the business. Based on these objectives we expect gross VOI sales to be flat. We’re planning a 3% to 6% decline in tours as we target higher efficiency market channels, and a 5% to 8% increase in volume per guest.

We expect GAAP revenue to be between $1.7 and $2 billion and adjusted EBITDA of $360 to $390 million reflecting our expectation that there will be no impact from percentage of completion deferred revenue this year. This negative impact is offset by the anticipated continued improvement in sales efficiency and lower loan loss reserves. Remember that we took steps to eliminate deferred revenue and expect no impact from percentage of completion deferred revenue this year.

The absence of this revenue will result in headwinds of $187 million in revenues and $89 million in EBITDA for 2010 relative to 2009. The affect will be particularly strong in the first quarter since we had a $67 million revenue benefit from deferred revenue in Q1 2009. Based on the improvements we’ve made to credit standards and the improved performance of the portfolio, we are hopeful that the provision for loan losses will come down this year.

We expect depreciation and amortization, company wide of approximately $180 to $185 million. Interest expense based on our current capitalization is expected to be between $130 and $140 million. Please note that while we have no significant debt maturities in 2010 we’re evaluating alternatives to take advantage of the current improved debt market and refinance some of our debt ahead of schedule, possibly early in the year, and that we could incur additional interest expense and related expenses currently not considered in this guidance. Any change would relate to replacement debt. We will not increase our outstanding debt this year. We will keep you posted as these potential transactions develop.

The ABS market is continuing to gradually improve. We anticipate that we’ll be executing a turn transaction within the next few months. Our cash flow guidance assumes pricing and advance rates similar to our deals last fall but we believe that the environment could be slightly better.

We expect our tax rate for the year to be 38% compared with 40% in 2009 reflecting certain corporate initiatives related to some Wyndham Exchange and Rentals non-US operations. In addition, we are making very good progress on the resolution of our legacy contingent liability for taxes related to periods prior to our separation. We are in active settlement discussions with the IRS and those discussions are progressing well. We expect any settlement to be within our reserve. We expect that the vast majority of this issue will be resolved no later than the third quarter and possibly before.

We expect to spend $175 to $200 million in CapEx in hotel development advances. We expect spending for time share development to be between $120 and $130 million, somewhat higher than the $100 million we previously communicated and that’s really based on the timing of our spend that we anticipated in 2009. We expect a diluted share count of approximately 189 million shares which assumes some share appreciation but no share buybacks. We expect earnings per share for the year to be between $1.48 and $1.69 per share.

For the first quarter, we expect earnings per share of $0.27 to $0.32 reflecting a RevPAR decline of between 10% and 13% and the absence of $31 million of EBITDA contribution related to deferred revenue.

With that, I’ll turn it back to Steve.

Steve Holmes

Before we open the line for questions I’d like to make a few closing comments. The economic crisis of the past few years and the impact it has had on the hospitality industry caused Wyndham Worldwide and many other companies to make tough decisions on a number of fronts. As the crisis recedes and the economy recovers I feel very good about the decisions we made and the way we executed against our strategies. We are well positioned for continued success in our markets and we are transforming our business model to maximize free cash flow. In good times and in bad, free cash flow is the great enabler.

Our strategic priorities for capital allocation are to invest prudently in our businesses and to return cash to shareholders. We announced a significant strategy today, tripling our dividend and resuming our share repurchase program, demonstrating confidence in our ability to maximize and sustain free cash flow in the $500 to $600 million range and our optimism regarding our businesses going forward.

Most importantly, I’m proud and pleased with how our associates have responded to the challenges of the past few years. In our business, it’s all about the people. You can have a great strategy and a strong balance sheet but you need your people engaged, focused and enthusiastic to provide outstanding service to customers. Our most recent associate survey showed that they are more engaged and motivated than ever. They have a clear understanding of and commitment to our signature “Count on Me” customer service. This continues to be a significant source of competitive advantage for Wyndham Worldwide.

I want to thank all of our associates for their hard work and commitment.

With that, we will open the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Steven Kent – Goldman Sachs

Steven Kent – Goldman Sachs

My main questions are really on the ability to drive further increases in volume per guest on the timeshare business where you’ve shown an impressive job of improving margins. As we look forward you mentioned that you have a number of strategies and I was wondering if you could just give us a little bit more color. I guess my concern is that last year, in 2009 you were targeting more of your existing customers which inherently are higher margin and as you move forward and go through that customer list what are the other opportunities to continue to maintain that profitability and efficiency in the timeshare business.

One other thing, could you talk about acquisition strategy and where you are on that part.

Steve Holmes

I’ll take the first one first and talk about the VPG or efficiency increases at WVO and they really have put up some tremendous results and we’re obviously looking and guiding towards even a greater improvement in 2010. I would focus probably on two things relative to continued improvement in VPG or volume per guest.

One is the marketing programs, we have continually innovated and been creative in our marketing programs at WVO and during the downturn that didn’t take a break, we continued to be creative and we continued to work on ways to lever the Wyndham brand, to lever our ability to touch new consumers not just our existing consumers.

One aspect of it, I’ve said this in the past, really marketing is so key for the process. We clearly have the best sales force in the industry but they need to have the tours generated for them and that’s where the process starts. We’re projecting tour flow down and part of the reason we’re projecting that is that our marketing programs are even becoming more focused. We think we can generate the kind of revenue that we’ve projected which is similar to 2009 with actually a lower level of tour flow, that’s number one.

Number two, when you get to the sales table you’re then selling the project, whatever that product is. In our case it’s a very, very flexible points based product. We talked about last year that we were rolling out a new program called Club Wyndham Access and that is the next generation or next transformation of the points based product we sell to consumer. It is even a better more flexible product than we’ve sold for the last five years and so we do expect to be able to take that product to the table and have a positive impact on our close rate.

It may sound basic but it’s really a function of really staying ahead of the game and ahead of the curve, having the best innovative product in the marketplace with the best marketing programs and then executing it on that very well. It may sound basic but I tell you, the guys down there are doing a phenomenal job in Orlando.

On the acquisition front we’ve continually said that we can’t model opportunity for acquisitions. We don’t know when the right opportunities will come up. We continue to look, we’re looking at what I would call strategic tuck in acquisitions, things that fit our profile right now, and we’re not looking to get into another line of business as we’ve continually said. We’ll have to see how they develop over time. We felt comfortable increasing our dividend and resuming our share repurchase program which we still think will leave us enough room for any strategic opportunities that are on the horizon.


Your next question comes from Patrick Scholes – FBR Capital Markets

Patrick Scholes – FBR Capital Markets

Can you give an update on the progress that you’re making on migrating RCI customers to book online? Second, can I get a little bit more color on the international RevPAR down 15.4%, it seemed a little bit weaker than I expected and weaker than what I’d seen in some of the fourth Smith Travel Data? Could I get more color on what market that was?

Steve Holmes

Let me take the first one then Tom and I will tag team the second one. Our online penetration has been very positive in the RCI business specifically and thanks for the question because frankly we’re very proud of what we’ve done here. We really have modified the behavior of the RCI customer to expect more from us online and we’re delivering more to them online. Its really a credit to the team at RCI that have gotten on this and made it a top priority over the last couple of years.

We increased our penetration from about 13% in the fourth quarter 2008 to about a 24% penetration rate in 2009. That means that almost a quarter of the people who are doing transactions with us are doing them online. We think there’s still great opportunity to grow that, we continually adding more functionality to RCI.com and as you may have heard me say in the rental business in Europe we’re above 75% online. We’ve got a long ways to go to get us to even a greater level of online transaction capability. We feel like we’ve really made some great progress and set a great foundation with RCI.com.

Tom Conforti

I’d only add that we’re in a three year RCI.com development process. We’re basically, in November completed a major upgrade. There are going to be two very significant upgrades in 2010. I think one in the spring and then one again I think in November, ballpark. Those upgrades we think will really push people to the web to a greater degree than we have now. We’re pleased with the progress, we have more work ahead of us and our team is doing a phenomenal job executing behind a very difficult business transformation.

Your second question had to do with some color around international markets. Two of our biggest markets are Canada and the UK. Canada was down significantly. China is our second biggest international market and China, as I said in my comments actually performed nicely in the fourth quarter. It’s really the two markets of Canada and the UK that I think from a geographic perspective were the largest negative contributors to that 15%.


Your next question comes from Joe Greff – JP Morgan

Joe Greff – JP Morgan

Can you talk about in timeshare the decline in the provision for loan losses? What’s driving that and is it a function more that maybe your prior reserves were just too harsh or is it a function of actually collections history improving, explain if it’s the latter what that is? Within the lodging segment if you can talk about churn expectations, what I mean by that is what do you think actually comes out of this system this year. I know you gave a net target number, I assume a net target number if you could clarify that? If you can talk about some of the things that you’re doing to retain the properties that you want to retain.

Steve Holmes

On the loan loss provision, I haven’t heard anybody call us harsh on anything in a while so maybe we were harsh on our loan loss provision. I don’t think we were. I think were reacting frankly to the fact that we saw at the same the very systematic approach we take to determining what our loan loss provision should be. We respond to whatever we see as the trends at the time. There are some things that have happened during 2009 that certainly have improved the outlook for that portfolio. One is we’ve continually talked about the fact that our FICO scores have been improving, that’s FICO scores of new sales as well as the portfolio overall. Certainly that is a good dynamic to have.

The second thing is that I think we really weathered the toughest part of the storm last year. We do not see the kind of trends that we saw at the end of 2008 or 2009 continuing today. That does not mean that it’s easy to collect, it never is easy. People wait longer to pay, that’s the general nature of the consumer right now. All the trends would tell us that we really have stabilized in that business and we hopefully will see some improvement going forward. We’ll be monitoring that daily, weekly, monthly, quarterly, as we always do.

Tom Conforti

The second question was on the hotel and how we reduced churn. Steve talked about a few strategies in his section that are all really geared at delivering; I think the term is more heads in beds, for our franchisees. The focus is going to be on enhancing our brand website because increasingly traffic is going through brand websites, ensuring that our connection with our OTAs is full and complete and that the proper level of business is going through OTAs to our sites. These are the key focus areas.

We’ve also established a dedicated group within our hotel team that, I don’t know what the official name of it is; its objective is to ensure retention of those people we want to retain.

Steve Holmes

The retention czar.

Tom Conforti

We have a retention czar, the czar of retention. That group is focused on ensuring that we keep the people that we need to keep. One of the things that we do, do from time to time is arrange payment plans for our franchisee as a way to build cohesion between us and them as they deal with the difficult economic climate in 2009. Those are the major steps improving our web capability, our OTA relationships, and this dedicated group and then ensuring that we build cohesion through reasonable payment plan options we offer from time to time to our franchisees.

Steve Holmes

We’ve got to continue to increase that value proposition for franchisees, it’s a focus.


Your next question comes from Chris Woronka – Deutsche Bank

Chris Woronka – Deutsche Bank

I was hoping maybe you could give us a little more color on the pipeline of the asset affiliation model. I understand it’s really not probably going to have much of an impact on 2010 but maybe just the size and scope and how you’re infrastructure there, what kind of size pipeline you can handle in the out years.

Steve Holmes

The pipeline for what we call WAAM (Wyndham Asset Affiliation Model) is strong. We have about 5,000 units that we’re currently looking at, talking to people about, and are considering for adding to our system. Not all 5,000 of those will happen and there’s a lot that we don’t have on that list yet but probably will happen.

I would call the makeup of it pretty diverse, it’s domestic as well as Caribbean. It’s urban as well as golf, ski and beach. It’s kind of a mix of everything. If I were to look at concentrations, there’s a pretty good concentration in the US Southwest. There’s also quite a bit of Florida product but there’s also Caribbean product, there’s product in the Northeast and in the Midwest. It’s really a great array.

How do we bring that product on? It’s a function of timing of where we think product would best fit into our system. If we find demand for urban product continues, which is something we’re seeing right now, we’re going to be more anxious to bring in some of that urban WAAM product into our system and make it available to our customers. We have a dedicated group working on this. It’s really coming along very, very well. As I said, Myrtle Beach will be our first, that open sales this month and in a couple months we’ll roll out our Orland product as well. Things are going on course.


Your next question comes from Michael Millman – Millman Research Associates

Michael Millman – Millman Research Associates

Can you talk about whether there’s a trade off between long term growth and between increasing your fee for service from 65% and that connection maybe you can give us an idea of where you think fee for service can go and when can you get there?

Steve Holmes

I don’t think it’s really a trade off, I think it’s a key component of our growth strategy. The fee for service businesses were growing for the last three years just not as quickly as the vacation ownership business was growing. They were not being fed, frankly with as much capital as the vacation ownership business was being fed. We think there are great opportunities to grow the fee for service businesses.

Even within vacation ownership there’s a fee for service business within that that we’re not pulling out here which is the resort management business, which is also growing. Year over year the resort management business grew from 2009 to 2010 whereas all other managed businesses including our own management company on the hotel side was now growing. There are elements of that business that we do want to talk about and highlight and we’ll break that out into more detail so you can see it.

We think it’s really the place that we can continue to grow rapidly in all of our businesses; rental as well as our hotel franchise.

Tom Conforti

We’re rationalizing our growth strategy. Our financial plan is simple, let’s grow businesses that have great return profiles and that’s why we’re targeting the fee for service areas to grow; hotels and the exchange and rental. What we’re trying to do in the timeshare business, vacation ownership business is really work to improve the return profile of that business. That’s why we’re managing our balance sheet more conscientiously and we are looking to evolve this alternative business structure. That’s our simple layout of our financial strategy.

Michael Millman – Millman Research Associates

Would you call the WAAM program a fee for service? Secondly, for these 5,000 units how many units do you need in the next couple of years?

Tom Conforti

Absolutely it’s the ultimate fee for service business. It’s structured in a certain way to highly fee for service oriented. If you do the quick math, it depends, it’s going to be a hybrid, it’s going to be some traditional timeshare units are going to be sold because we have three to four years of inventory in our balance sheet and we want to process our balance sheet.

There’s going to be a mix of the traditional business that we’re selling, the alternative business model, the WAAM business, the asset affiliation model. It all depends how big we can make that business. It’s not an easy question to get. If we were only selling the alternative business model which we will not be, we would need to sell probably 1,000 to 1,500 units a year.


Your next question comes from Ryan Meliker - Morgan Stanley

Ryan Meliker - Morgan Stanley

Thinking about what you said earlier with your breakdown of guidance by the different segments, looking at lodging in particular, it sounds like the system size up 1% to 3% and revenues of around $620 to $670 million. It sound like you’re looking at implied RevPAR of down about 5% at the mid point. If my math is correct there, what do you think that’s going to do to your franchisees, another 5% down in RevPAR when the costs have already been stripped out in terms of foreclosures and risk to property closures etc?

Tom Conforti

I’m not sure how you’re getting the 5% down; our range is 0% to 3% on RevPAR.

Ryan Meliker - Morgan Stanley

Revenues are $620 to $670 million and system size is up 1% to 3%.

Steve Holmes

Our RevPAR guidance is flat to 3% down. We may have other revenues, initial franchise fees and other things in there that you’re not taking into the mix.

Ryan Meliker - Morgan Stanley

In terms of the other revenues, how much are they going to be down are you expecting?

Tom Conforti

Let me go to your first question because you asked a question of even if its down 3% versus 5% it’s a good question which is what is the impact on our franchisees. Obviously it’s not good, we prefer to see RevPAR pick up at the beginning of the year immediately but the fact is we don’t expect to see that. We’re expecting a more gradual recovery than a quick snap back recovery, particularly in the economy and mid scale segments.

The good news is that a 3% decline is lot less than a 12% decline. What they’re seeing hopefully is an improving environment on a relative basis. It still is down but it’s not down as much. Through the year we expect to see it improve so that the second half of the year is better than the first. I restated the facts there what we laid out before but we work very closely with our franchisees, we want to see their operations improve, its important to us.

We don’t share in their bottom line but we absolutely want them to be successful and that’s very important in a priority of ours. That’s the reason that we’re rolling out some of the initiatives we talked about which is to increase their ability to make sure that their property loaded into the system, in the OTAs, make sure their pricing is appropriate and help them with their yield management. I don’t know if I’m specifically addressing your question but those are the kinds of things that we need to do to try to help the franchisees.

Ryan Meliker - Morgan Stanley

In terms of the other lodging revenues, what type of change are you expecting in 2010 versus 2009?

Steve Holmes

The initial fees we expect and the transfer fees we expect that its going to be relatively consistent with 2009. There might be slight growth but there’ll be a stabilization of those revenue sources.


At this time I’m showing no further questions. I’ll turn the call back over to the speakers.

Steve Holmes

Thank you very much. We appreciate everybody joining us this morning. Look forward to talking to you next quarter. Have a wonderful snowy February.


This does conclude today’s conference. Thank you for your participation. At this time you may disconnect your line.

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