Travel + Leisure Co (TNL) 2006 Q3 法說會逐字稿

Good morning, and welcome to the Wyndham Worldwide third quarter earnings call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If there are any objections, you may disconnect at this time. I would like to introduce today's conference host, Steve Holmes, Chief Executive Officer of Wyndham Worldwide. Sir, you may begin when you're ready.

Good morning to everyone. With me today are Gina Wilson, our Chief Financial Officer, and Margo Happer, Investor Relations Officer. Thanks very much for joining us this morning for our initial earnings conference call.

We're excited to have the opportunity to discuss our business for the first time as truly a stand-alone Company. Before we get started, I just want to remind you that our remarks today contain forward-looking information that is subject to a number of risks factors that may cause our actual results to differ materially from those expressed or implied by the forward-looking information. These risk factors are discussed in detail in our most recent Form 10-Q filed with the SEC. In addition, our press release is available on the Investor Relations section of our website at WyndhamWorldwide.com.

It has been a great and exciting quarter for us. We completed our separation from Cendant at midnight on July 31, and we started life as a separate public company on the New York Stock Exchange on August 1. Although we are a newly listed company, we have been a leader in the leisure and hospitality industry for a very long time. We are the world’s largest hotel franchisor, representing 10% of U.S. hotel room inventory. We are the world's largest vacation exchange network with nearly 3.4 million members. And we are the world's largest vacation ownership business with more than 140 resorts and more than 750,000 owner families. We are a leader in all the sectors in which we compete.

As you saw from the press release yesterday, we delivered a solid quarter of results with $0.59 in diluted adjusted earnings per share, or approximately $0.57, if you were to include a full quarter of stand-alone corporate costs.

For the quarter we delivered strong double-digit revenue growth across the board. Our adjusted EBITDA margins for the quarter was 23%, which included incremental corporate expenses, a continued strategic change in our mix of business, some deferred revenue in the Vacation Ownership business, and significant investment in establishing the Wyndham brand, which is one of our most critical objectives for the Company. We will go into greater detail about the importance of the Wyndham brand a little bit later in the call.

We really achieved a lot over the last quarter, but really we have achieved a lot over the last 12 months. We completed a very intense and complex transaction to spin Wyndham Worldwide off and start life as a stand-alone company. We acquired and integrated Wyndham Hotels and Resorts, which expanded our portfolio into the upscale and upper upscale segments, and very importantly provides us management company expertise, which is critical if we want to compete effectively in the upscale sector.

This strategic acquisition solidified our transformation from mostly a domestic-centric economy hotel franchisor to a broad-based international hospitality enterprise. We also acquired Baymont Inns & Suites which expanded our presence in the midscale without food and beverage segment. We created a robust platform for international expansion, which will broaden the geographic reach of our portfolio and provide a basis for new and accelerating growth. We also continued our efforts to combine our European Vacation Exchange and Rental back offices, which will pave the way for increased future efficiencies.

Finally, we expanded our portfolio of Vacation Ownership resorts in many desirable leisure destinations and began the very important process of rebranding this business under the Wyndham umbrella.

We have a great collection of businesses, great business models, and a fantastic group of individuals in the close to 30,000 Wyndham Worldwide associates and over 5,000 franchisees and developers around the world who support our efforts to grow and build this business. I am very pleased with what we have accomplished in a very short period of time.

Now let me briefly discuss achievements in our businesses. In Lodging, in the hotel group we virtually transformed ourselves over the past four years. Instead of relying solely on the domestic economy and midscale hotel market to provide our growth, which we really have done very successfully over the last fifteen years, we have added an upscale offering with management company skills and a much stronger international presence to fuel our future growth.

Our hotel room growth, excluding acquisitions, was flat from the second quarter. Frankly, we expected to build a bit this quarter knowing that the effects of Project Restore were behind us. The reality is that several deals slipped into the fourth quarter. As a result though we have added approximately 4,000 net rooms during the month of October. So we're on track to hit our weighted average room available guidance of approximately 530,000 rooms for 2006, and we are on track to meet or exceed our RevPAR guidance. We will give you full details of our growth plans for next year and beyond in our Investor Day on December 12.

As I mentioned earlier, we are very focused on growing the Wyndham brand, and we're investing prudently to support that growth. We expect to spend approximately $12 million this year above the marketing funds available from our franchised and managed properties to ensure we support this important asset, so that we can fully leverage the brand, not only in Lodging but also across the entire enterprise.

As you probably know, Wyndham is a brand that was in the hands of non-hoteliers for some time. People were managing this business more as a real estate trust -- more of an asset play then a brand play. When we brought it into the fold, we positioned it very clearly as an upscale and upper upscale brand. We're committing the necessary operational, marketing and distribution resources to nurture and grow the system. We have established a compelling value proposition for developers in key primary and secondary markets, and we're making progress on these important initiatives.

In the first 12 months of ownership we signed agreements to franchise or manage 15 Wyndham hotels, totaling almost 3,000 guest rooms, in key markets including Atlanta, Chicago, and a first for our brand, in New York City. These agreements will expand the chain to over 100 hotels and over 25,000 rooms.

Last month we opened the first new construction Wyndham property, the Wyndham Gettysburg Hotel. The 258 room full-service hotel occupies part of Gateway Gettysburg, a $275 million shopping, dining and entertaining complex located on a pedestrian friendly 100 acre campus in historic Gettysburg, Pennsylvania. It really is a terrific property.

We are continuing to move forward with our international plans for growth. We created a joint venture with the Corinthia Group to manage 16 hotels in Europe and Africa. That deal closed on the 31st of October. We will rebrand 13 of their existing properties as Wyndham or Ramada in major cities, including Budapest, St. Petersburg, Prague and Lisbon, as well as some fabulous resort properties in Malta.

While many people view us as a domestic-only chain of hotels, we're now the largest U.S. hotel company in China, with just over 60 properties, including Ramadas, Super 8s, Howard Johnsons and Days Inns. That is up from about 32 properties a year ago. And we expect to add close to 70 hotel properties in China prior to the 2008 Summer Olympics.

Of course, we will be looking for opportunities for the Wyndham brand in gateway cities, as well as resort locations, in China and throughout the rest of Asia. We expect to open three Wyndham properties in China in Beijing, Shanghai and the key port city of Xiamen between now and the 2008 summer games. Our first property, which will be in Xiamen, will be a managed property by us -- is expected to open in late 2007 and will have over 500 rooms.

Now turning to Vacation Exchange and Rental. We are pleased to report that Exchange bookings did shift from the second quarter into the third quarter as we expected, producing a strong quarter and close to $100 million of EBITDA from this business unit. The RCI Global Vacation Network now has unique access to almost 400,000 accommodations, matching supply of real estate with consumer demand across 100 countries. Between the exchange and rental programs, RCI provides personalized vacations for approximately 4 million families each year.

Each year RCI finds new ways to enhance the network's value, extended its scope and expand its geography. For example, the RCI Point Systems, which we have reported on before, continue to grow. The membership should exceed or approach 800,000 by the end of year. This more flexible product is showing greater propensity for use by RCI members and will contribute to future profitability.

Our registry collection offering at RCI is also growing quickly, with about 100 resorts already affiliated with this high end product offering. Much of the new growth we are seeing in Europe, Mexico and Asia is focused on this higher end product category.

On the rental side, our European rental business continues to grow. I just returned from a tour of our European vacation rental businesses two weeks ago. The quality of the product we rent to consumers, the systems that manage the businesses, as well as the management teams running these businesses are all very impressive. We have adapted quickly to the changing travel patterns of European travelers. For example, we have grown our presence in new rental markets like Croatia, where we expect or targeted to have 2,000 homes available for rental by the end of the year.

We're optimistic that as the European travel market improves, we will realize efficiencies and margin expansion from ongoing initiatives and the restructuring we undertook at the end of last year.

Finally moving on to Vacation Ownership, where we had another phenomenal quarter for tour flow and sales. We continue to see increasing interest in our product, which is perfectly suited for the burgeoning baby boomer population. There were some margin challenges due to FAS 152 and some additional deferred revenue, which Gina Wilson will cover in her portion of the presentation.

We have a very strong development pipeline at Wyndham Vacation Ownership. We have product under development from Hawaii to Pennsylvania, and from Orlando to Banff. Some of the product, like our two new towers on the beach in Myrtle Beach were delivered as turnkey construction and are quickly sold throughout our sales centers. Other projects are part of larger and longer-term development, like our Indio project outside of Palm Springs.

The location for our developments and future developments is based on the demand of our customers, but is sold through sales offices throughout the country. We're not dependent on selling product where it is built. We can sell our points-based product from more than 100 sales offices worldwide.

Probably the biggest news this quarter, aside from the spinoff, we announced the rebranding of our time share business under the Wyndham name. This is a significant leap forward in our global brand strategy and sets the stage for future development of mixed-use hotel and time-share properties throughout the system.

The rebranding process will begin with Fairfield Resorts' transition to Wyndham Vacation Ownership resorts, which is effective immediately. Trendwest South Pacific will become Wyndham Vacation Resorts Asia-Pacific later this year, followed by Trendwest North America, which will transition its WorldMark by Trendwest brand to WorldMark by Wyndham in early 2007. Collectively these brands will continue to operate as Wyndham Vacation Ownership.

By the end of the year 16 premier resorts in key markets will prominently carry the Wyndham flag. Over the next 12 months over 140 time-share resorts throughout the United States, Canada, Mexico, the Caribbean and South Pacific will be associated with the Wyndham brand.

It is a huge footprint that we fully intend to leverage. We intend to launch comprehensive marketing campaigns in national broadcast and print media, as well as direct mail and e-commerce applications. Of course my we will develop additional cross marketing programs designed to present our full spectrum of Wyndham branded products to time-share owners, hotel guests and the traveling public in general.

For example, in our first major marketing initiative on September 29 we announced a four-year agreement that will give Wyndham full title sponsorship of the legendary PGA Tour event in Greensboro, North Carolina. It is the final stop in the new FedEx Cup Series the PGA is launching in 2007. After qualifying in the FedEx Cup Series, qualifiers will then compete in an end of season tournament for the big prize.

The inaugural Wyndham Championship will be played August 16 through 19, 2007, and will be televised on the Golf Channel and CBS. This event has great potential to establish the Wyndham name with a highly desirable consumer demographic, and it really is more than a four-day event, it is a year-long marketing platform to promote the Wyndham brand.

We're the largest company in the time-share arena and have accomplished all of this without a brand, and now we have one. The advantages to marketing with an attractive brand like Wyndham are significant. Specifically, the benefit of marketing with a recognized brand is that it is more efficient to acquire tours, and ultimately to complete the sales process. A recognized brand increases the consumer's confidence level in making that first decision about whether to even take a tour and then ultimately to buy the product. A strong brand drives down marketing cost by improving both tour flow and sales efficiency.

Before turning the presentation over to Gina, I want to reiterate how excited we are by the opportunities that lie ahead. We made significant progress this quarter against several of our fundamental growth strategies. First, in branding we're levering the Wyndham brand to grow in the higher end and to improve time-share efficiencies.

Second, in geographic expansion we're developing and expanding in new and existing growth areas. And third, within customer acquisition we continue to strengthen and diversify our marketing channels. And we're doing more.

While creating shareholder value by operating these three great businesses is our primary goal, we also believe our stock is currently a great value. We have been aggressively buying shares since the beginning of our share repurchase program on August 24. Through October 31, we have purchased 9.6 million shares at a total cost of about $278 million. We have another $122 million remaining in our authorization program, and we intend to spend that money if our share price continues to present an attractive buying opportunity.

Now I will turn it over to Gina to go through our financials.

Thanks everyone for joining us this morning. Hopefully we covered most of your basic questions regarding the financial results in the press release. If not, please let us know when we will do our best to get you the information you need. I want share a few additional details that maybe be of interest to you.

First in Lodging, as you saw, we continue to grow the top and bottom line, although EBITDA growth and EBITDA margin are dampened somewhat by our investment in Wyndham brand, bringing with it a fundamental strategic change in the mix in this business. Hotel management, an important part of our strategy to access the attractive upscale market, brings with it high reimbursable expenses, primarily payroll, which GAAP requires us to show on a gross basis both as hotel revenue and as hotel operating expenses, causing an apparent loss in margin. This is further exacerbated by the fact that the hotel management business runs at a lower margin than the margin from our franchise business.

We're also growing our international business in hotel, which requires investment to extend our presence in various markets, resulting in contracts that will provide great opportunities in the long run. TripRewards, which has grown to 5.2 million active members in three years, accounted for $14 million in revenue this quarter and $34 million year-to-date. It contributes little, if anything, to EBITDA but is a critical component of our value proposition to our franchisees. The value-add for the franchisee is a growing base of customers with increasing propensity to repeat business and patronage across our brand.

While margins may seem to be declining, you need to bear in mind that what you're seeing is the result of strategic decisions to grow the business. Our goal is to hold EBITDA margins steady over time as the revenue continues to grow.

Now let's move to Vacation Exchange and Rental. As you saw from the press release and as Steve mentioned earlier, Vacation Exchange and Rental gained real momentum this quarter. Our margins in RCI were affected in part by a change in mix to lower margin transactions this quarter compared to last year. Higher margins in 2005 were a side effect of member booking patterns relative to last year's high hurricane activity.

Other factors affecting margins in RCI is our continuing investment in the international consulting side of the business. And lastly, as noted in the press release, revenues benefited from $7 million of favorable foreign currency translation, which was predominately offset by corresponding expense impact, therefore there was minimal EBITDA effect.

As you know, we're very excited about the opportunities in the Vacation Ownership sector around the globe. RCI Global Vacation Networks views the broad spectrum of leisure real estate, including many kinds of share ownership programs, as largely untapped throughout the world. With a well-established foundation of innovation, RCI is uniquely positioned to capitalize on this growing market. And we're expanding our international consulting activities to capture this opportunity.

Moving on to Vacation Ownership, as Steve discussed, they had a terrific quarter. As a result of the new time-share accounting rules in effect for 2006, year-over-year comparisons based on reported results need to be teased apart a little bit to get a better sense of our operating fundamentals. Let's focus on our key drivers to get a better sense of what is going on.

Gross VOI sales were up 20% driven by tours, up 15%, and volume per guest, up 6%. You won't see all of this strength in sales and marketing in the GAAP reported revenues because of the change in accounting, and because we had an increase in contracts written during the quarter that did not qualify for full revenue recognition yet, resulting in higher deferred revenues.

Consumer finance revenues were up 26%, driven by increased sales levels all year, which brought Vacation Ownership contract receivables up to approximately $2.3 billion at the end of the quarter versus -- or $2.1 billion at the end of last year. We have one more quarter to go before we lap the accounting rule change and are able to do more consistent side-by-side comparisons.

A couple of other income statement items. You'll notice that interest expense at $12 million for the quarter was lower than our guidance of $19 million to $21 million for the quarter. This delta is due to differences in assumptions about the timing of borrowings and the receipt of the travel proceeds, as well as some differences in assumptions regarding the mix of the debt that was eventually paid off. In addition, we incurred separation related costs of $68 million, $43 million after-tax, as a result of the execution of our separation from Cendant on July 31. Most of these are non-cash charges, and all but $3 million pretax are included in corporate.

We also have a tax benefit of $15 million in the quarter related to refinements in our 2005 effective state tax rate, identified as we wrapped up most of our state tax filings during the quarter.

And now a couple of things as we wind down the separation from Cendant. We're making good progress on all the activities required to separate Wyndham from the various support services formally provided by Cendant. Third quarter was a fairly complicated period for our former colleagues, and we're waiting for some final details that will allow us to complete our balance sheet and our Form 10-Q.

Regarding our capital structure, we have provided a table of debt – Schedule of Debt as table 4 to our release yesterday, which gives a summary of our borrowings at quarter end. It should help you follow the third quarter changes associated with our borrowings and separation from Cendant. On July 11 we moved $500 million of borrowings secured by Vacation Ownership receivables from our conduit facility into a securitized term facility. The ABS market's appetite for these facilities is strong, which is important for us because the securitization process gives us enhanced balance sheet efficiency through better advance rates. Finally, as you know, we consolidate these structures on our balance sheet and recognize no gain.

In response to your feedback you'll see that we provided historical quarterly drivers with the earnings information we provided yesterday. Some pointers as you build or reassess their models. First there are financial business model slides for each of our segments in our investor presentation, which can be found on our website. Basically these slides tell you how to apply the drivers to your annual model. In addition, you can assume royalty rate and marketing rates of 3.5% to 4% each in Lodging.

Assume an average commission rate of 40% to 50% in Vacation Exchange and Rental. You can assume other income of approximately 15% to 20% in each of the segments, except for Lodging, where you have to add on TripRewards and management fees.

Now to guidance. As you saw from the press release, we expect 2006 revenues of $3.67 billion to $3.77 billion, and EBITDA of $750 million to $765 million, including incremental stand-alone costs of $52 million and the second quarter tax accrual of $21 million, but excluding separation and related costs, which are expected to be approximately $90 million to $100 million for the year, of which about half will be cash. In essence, we have absorbed the second quarter tax charge and still stayed within our guidance from earlier in the year, albeit at the lower end of that range.

In addition, for the fourth quarter we anticipate depreciation and amortization of $38 million to $40 million, net interest expense of approximately $17 million to $19 million, an effective tax rate of approximately 38%, getting us to net income of $77 million to $87 million. We expect to be at the lower end of our original guidance range for earnings per share of $0.39 to $0.44, assuming approximately 198 million fully diluted shares for the quarter.

Also, as an update to our June business unit EBITDA guidance, excluding separation and related costs, we expect Lodging to be consistent with our previous guidance of $200 million to $210 million. We expect Vacation Exchange and Rental of $260 million to $290 million versus previous guidance of $290 million to $320, Vacation Ownership of $325 million to $350 million, versus previous guidance of $305 million to $330 million.

Lodging is performing as expected in spite of the effort required to integrate two acquisitions. As you may have deduced, Vacation Ownership's strength is helping offset the tax charge taken by Vacation Exchange and Rental in the second quarter.

In our second quarter 10-Q we told you about our expected capital expenditures, and we want to give you a quick update. A combination of European rental property and Vacation Ownership common area spending, plus all other maintenance CapEx, should be between $180 million and $200 million for 2006. This excludes separation related activity.

Now preliminary guidance for 2007. We expect revenue in the range of $4.11 billion to $4.26 billion, adjusted EBITDA, excluding separation and related costs, of $820 million to $855 million. We look forward to giving you a more detailed look at the organization and all of our businesses on Investor Day. Now I will turn it back to Steve.

In summary, I am thrilled by not only what we have accomplished, but all the opportunities that we have lying ahead for these businesses. We really look forward to sharing more about the continued progress on our Investor Day on December 12. We encourage as many to attend as possible, where we will also talk in more detail about our timeshare business.

Now we will be happy to take any questions that you may have.

(OPERATOR INSTRUCTIONS).

While we're waiting for the questions, I'll correct something apparently I said. I said it was the PGA tour in Gettysburg. It is actually in Greensboro, North Carolina. Get our locations straight.

Michael Millman, Soleil Securities.

While you did talk a little bit about the margins, maybe you can dig into it a little bit more, because there seem to be all these puts and takes. Last year there was $14 million of Katrina. There was some $44 million of provision for loan losses. I am not sure where that ended up. So what I am looking for is -- the best of our understandings how we can look at what actually has occurred and for the EBITDA and for the margins and the different businesses taking into -- those puts and takes, and maybe a few others.

There is a lot of movement. I will agree. There is movement related to our separation from Cendant. There is movement because of new accounting pronouncements. You asked about the loan loss. That in essence -- this is the timeshare loan loss -- in essence shifted to reduce revenues in 2006 as opposed to being an operating expense in 2005. That is just a change in FAS 152.

With respect to the Katrina losses, which were in the Timeshare Group as well, we continue to feel some effect from Katrina, frankly. It wasn't just a onetime event in the third quarter of last year which then went away. The fact is that we still have a sales office and a resort in New Orleans which is not yet opened. Our Avenue Plaza site has not yet opened up. Our sales office, which is close to that, has not yet started operations.

In addition, down in Florida we continue to have a resort completely closed and a sales office that has not yet reopened. We still are feeling some effects of Katrina. It was not really just a onetime thing. Fortunately, we have a very diverse sales representation throughout our timeshare business, so we have been able to accommodate that and report some pretty impressive -- I think, pretty impressive growth numbers from quarter to quarter.

Should we look upon the current margins as reasonable going forward? Because your '07 guidance suggests EBITDA margins somewhat below this year when you make some adjustments.

Depending where you pick within the range of our guidance that may be the case. What we have is in all the businesses, and we have talked about this before, is kind of a shift in some of the business. Our mission is to grow our revenues and grow our EBITDA. In some cases in order to get that growth we're looking at getting into new lines of business like the management of hotels, which has by its nature a much lower margin than the franchising business. Now we think that is the right thing to do because it gives us an entree the upscale market, allows us to build the Wyndham brand to be stronger, and ultimately use that Wyndham brand across all of our businesses. From a strategic standpoint, it certainly is the absolute right thing to do.

Similarly there are shifts in other businesses like Vacation Exchange and Rental where the European rental vacation business is not quite as high margin as the exchange business in the U.S. There are shifts going on. Again, we're looking to drive revenue and EBITDA growth. We are investing in the Wyndham brand, so that is absorbing some of the margin that we might otherwise drop down. Hopefully as time goes on we will invest less in that, and the brands itself will begin to support the hotel and franchise and management fees will start to support that more. But we think that is prudent investment in the business.

Patrick Scholes, JP Morgan.

My question concerns share repurchases really looking forward. I know you're about two-thirds, three-quarters away through the $400 million. But I know you have mentioned in the past concerns with having a comfortable level of net debt, especially with the rating agencies, and how you can take out loans for your timeshare. But where going forward do you -- would be an ideal say debt to EBITDA ratio? And when do you begin to get more comfortable to maybe taking out more debt on the balance sheet for share repurchases?

You are right, we have kind of cushioned all of our responses on this with the caveat that we want to make sure that we are in contact with the rating agencies. Having an investment-grade rating is very important to us. Now we have the first quarter to go in and talk to the rating agencies and explain to them what we have done this quarter and what our outlook is for the remainder of the year and into 2007, and we certainly intend to do that.

With respect to what is the ratio of debt to EBITDA that we might be comfortable with, if you look at investment-grade ratings and BBB type zip code, you can probably go up to about 3 times debt to EBITDA. Now we are a new company. We recognize that. We have made commitments to the rating agencies that we will be prudent and thoughtful in the way that we approach -- apply more debt to this business, but there obviously is capacity.

We won't do -- we won't access that capacity unless we feel comfortable that we're not jeopardizing ourselves going forward. So, we still don't have a definitive answer on it because we are evolving this decision process as we go forward. But, obviously, we have taken the decision to use the repurchase program that was available to us.

John Rolfe, Argand Capital.

A few quick questions. You said you would move $500 million from the conduit into the securitization facility. When did you say that took place?

That was a July transaction.

A July transaction. Okay. Can you sort of give us some sense how you guys decide how much of the debt is going to go into the securitization facility? How those decisions are made and ultimately, I guess, what the difference in rates is between what you pay on a securitized piece versus what you're paying at the corporate level?

We accumulate new consumer notes, it if you will, everyday through the sales process, and the sales offices are open seven days a week. We have a practice of bringing them into our loan service operations and getting all the paperwork in line so that we can either put them into the conduit at first, and then when they are ready to be put into the longer-term securitizations, we package them and execute a term facility.

The decisions about how and when to do that are guided by several different factors, and it is more art than science. It has to do with the economic size of the transaction, which have been getting bigger over time as the ABS market has gotten happier with this kind of paper based on its performance. It also is sensible for us to look at the size of the transaction in order to get the best benefit out of the cost associated with doing the transaction. And then, of course, we look at the market to see what the other available product is out in the Street and what rates are. That is not a very succinct answer, but those are some of the factors that we look at in deciding when and how often to go out to the market to package them.

Obviously, it is attractive to go to the market, as Gina said, in her opening comments, because we can get a higher advance rate, meaning we're being more efficient with the assets that we're putting to the securitization when we go to the long-term market.

I think at this point given where the interest rate curve is, there's not nearly as much advantage between the conduit and term facility as there might have been at different points in time.

Just one final question. If you look out a couple of years in the Vacation Ownership segment is it possible -- you said that there is clear I guess sort of marketing expense advantages longer-term from rebranding everything under the Wyndham flag. Is it possible for you to sort of translate that into margin benefit? If you look out a couple of years what do you think is to be gained from a margin standpoint in that segment from the rebranding efforts?

We know what we -- we know where we stand relative to where we think some of our competition is. We know that some of our competition have probably a 500 basis point advantage frankly to us because they are marketing with a brand that is well known. Our hope is that as we move with the Wyndham brand into the marketplace -- and do this isn't going to happen overnight, we're not looking at a 500 basis point increase in margins. But we are focusing on capturing part of that spread that may be out in the market because we now have a brand to market it with.

But as I said before, this was not an overnight happening. Over the next few years, can we eat into that opportunity to improve margin customer, sure we can. We do everything across all of our businesses to improve our margin.

Are you implying then that in your mind the entire 500 basis point spread is really primarily marketing expense? Or I guess my understanding is that some of it might be related to the fact that some of your competitors are able to leverage off the infrastructure of hotels that may be next to the timeshare properties as well.

That is part of the marketing frankly. If you have a hotel that is sitting next to a timeshare resort you can hopefully more efficiently move the marketing -- the people over for marketed tours. Similar to -- we're going to be breaking ground in the upcoming year on a project in Orlando at our Bonnet Creek facility, where there will be a Wyndham Hotel next to a very large development of Wyndham product. So we certainly -- that is an element of it. But really more importantly is the ability to go into the -- through the marketing channels and use a well-recognized, well-respected brand name to inform the potential customers about our product offering.

[Glenn Gordon], York Capital.

I'm hoping you can clarify a little bit about the margins in the Exchange and Rental business. The Exchange revenues you said grew at 10%, but the margin was affected by negative mix. Is the negative mix between the exchange and the rental business, or within the exchange business? And also, if you could just comment on what you expect your outstanding shares to be going forward? You said you bought back 9.6 million shares and expect it to be 198. And I was wondering what increases we might expect to offset the repurchases.

Let's take the first question first. The margin mix is a result of a couple of different things. One, and just to clarify, there is exchange business in the U.S. There is rental business in the U.S., and there's rental business internationally. The rental business internationally is by far our largest component of rental, and it does carry with it a lower margin.

There's a lot of work we do in the rental side of the business in Europe relative to an on-site market presence that we have in locations where we have product. So it is not as high margin of a business as the exchange business. And those businesses are -- the rental businesses are relatively new to us. We have acquired them over the last two to three years. We're putting them together and integrating them and putting systems together to make them more efficient, but at this point they do carry a little bit of a lower margin. That is part of the dilution of the margin in the Exchange and Rental business.

With respect to share count, the share count we are showing is 198 million shares. That is an estimate of where we think we will be on a weighted average outstanding basis for the fourth quarter. I don't know if I answered your question on that one.

I guess my question is what sort of increases in terms of restricted stock or options, issuances, with respect on a given year to offset whatever repurchases you guys are going to make?

Okay. We will be using a long-term incentive program that will in all likelihood include some restricted stock. We have not come out with any sort of a number estimate of that yet for anyone. When we do, maybe that is something we should consider for the December Investor Day to give you more clarity on that. We certainly have a range for it that we think it falls into.

Just to clarify on the first response on the margins, the exchange business itself, not taking into account rental, has the margin been positive on that? Is that increasing or was that also not increasing as fast as its revenue?

The big piece, which is the domestic exchange business, the margin has been really pretty flat quarter to quarter.

Patrick Scholes, JP Morgan

Another question here. I know in the past you have talked about seeing opportunities to pick up distressed timeshare inventory in markets that are slowing. Any progress on that in the last month or two?

No, no real progress to report. As you and I had that conversation, we are seeing -- we see in certain markets, like southern Florida and Las Vegas potentially being markets where the condo business may have gotten ahead of itself and there may be an opportunity to pick up product. We don't have any specifics to report back on that right now.

But we are obviously -- we are very active in the development marketplace. And if we see things that makes sense, we will take advantage of them. For example, the project down in Myrtle Beach that I mentioned before, that was a project that was built by a developer in that marketplace and was given to us or sold to us turnkey. You wouldn't have seen that in our pipeline of product on the balance sheet. It is kind of popped up on the balance sheet when we bought it. We were able to cut a very attractive transaction there that brought our cost of sales in at the level, or below the level, that we targeted. We will do transactions like that as we see them opportunistically in the marketplace.

One other question. I noticed in the press release you talked about investments in international consulting operations in your Vacation Exchange and Rental segment. How much, as far as investments, should we expect that is? And exactly -- I'm not familiar with your international consulting operation. I haven't read about it in any of your releases. What exactly is that business?

That business is -- it is called NorthCourse, and it is a business that we have basically created to take advantage of our -- of what we view is some very, very attractive international opportunities. We have always had a presence in the consulting business within RCI and the Vacation Network Group. It was previously known as Ragatz, Ragatz and Associates, which was really a domestically-based business. It did some work internationally.

We have ramped that up with NorthCourse, because we see some real opportunities in the Middle East, in Asia, where the markets are not yet formed, but there is huge opportunity to help transform the market for timeshare product, but really what we call leisure real estate. There is a variety of different product that is being built internationally that fits very well into a model that is similar to timeshare. In order to capture that, we have made a conscious decision to invest in that international consulting effort.

It will absorb some of our earnings until we start generating profit from that group. We had an expense of about $2 million in the third quarter of '06 that related to the ramp up of that consulting business.

We have, I think, time for one more question, if we have one more.

Michael Millman, Soleil Securities.

Actually I thought maybe I would ask a couple. One is I believe you're guiding to $635 million for CapEx for timeshare. Is this something that we should look at as a normal level? If not, what should be a normal level? Typically on this what should we assume is the time horizon on these from CapEx to revenue recognition?

Also, II [Interval International] just reported in their margin -- EBITDA margin was north of 40%. Do they have higher margins then RCI, and if so, why? And then your pipeline -- your Lodging pipeline I think you indicated there was some slippage in bringing on- stream Lodging, but then I would have expected the pipeline to rise and in fact it was sequentially flat? And could you talked about what you see in your pipeline growth?

Sure. We will take them in the order that you put them out. First of all, the $635 million guidance that we had for timeshare inventory has been updated. We have updated that to $500 million to $600 million. So we took it down a little bit. That is not CapEx, just be clear. It is not CapEx in the sense that it is not going up on our balance sheet and being depreciated or amortized over time.

What it represents is the development of product which then flows through our P&L as cost of goods sold. That product, if you assume about a 25% cost of goods sold, which is what we have been running at, and we're selling let's say round numbers $1.5 billion of product, that is $375 million of cost of goods sold that is flowing through that represents that product that has been built in the past. When you see us building $500 million to $600 million worth of product, that is product that will be sold out over the next couple of years.

It is kind of difficult to look at a specific spend and tell you when that will turn, because we will invest in, for example, land that we have acquired that we will develop on for the next three or four years or even further than that, like the project that we have down in Palm Springs, the Indio project for Trendwest. There is other product like the Myrtle Beach product, which we bought and instantly went into the inventory and is now being sold down and will be quickly sold out of our various sales offices.

It is really a bit of a mix. I think the way to look at it is there is a development pipeline that we need to build in order to continue to flow that rapidly growing business. And we intend to invest in the growth of that business by developing inventory for future growth.

Should we look at that as use of your free cash flow or is that financed in some way?

Right now we are -- it is a use of our free cash flow. Historically we have, back in the old days we did finance part of that. That might be something that we could consider doing down the road as we firm up our capital structure and we have our discussions with the rating agencies. But that is where -- that may be an opportunity for us down the road.

To your second question about by II, we don't know what II' margins are. We don't know how they allocate their overhead compared to how we allocate it. I really -- I don't think I can comment on what their margin might look like. It would surprise me if they are more efficient than us, given our size is twice their size, and our propensity and activity for exchanges is quite a bit higher than what theirs is. But I really can't comment on their margin versus our margin.

The third thing, you asked about the pipeline. My comment was kind of related to pipeline relative to the growth in October. We did see product that came on board in October. We were hoping to get it done in September. Unfortunately, as Gina said, this is not always a science, sometimes it is a bit of art to make sure the product is ready to come online. So we slipped a little bit from September into October.

With respect to our pipeline, we're being very, very cautious with our pipeline, frankly. We're cleansing it constantly. We are making sure that it is a good pipeline to indicate our growth. I think you'll see it increase over time. It certainly is our expectation it will do so. But measuring it quarter to quarter and trying to draw any significant conclusion I think is probably a bit of a stretch.

Where we do expect to see that pipeline at the end of year or in midyear next year?

We're not predicting pipeline right now. We will -- on the December 12 Investor Day we will talk a lot more about where those opportunities are coming from. There certainly is an international aspect to it. There certainly is aspects related to the Wyndham, the Wingate brands and Baymont, which is new to us that we are seeing some good level of interest in. We will flesh that out more fully when we're together on December 12.

Can we assume that we should expect that pipeline to continue to grow?

We would like to see the pipeline grow. On the other hand, if a bunch of properties happen to move through quickly, and we get them open, and they fall into our open and operating system, I think I would be pretty happy to see that as well. Again, I'm not going to predict where this is going to be right now. We will discuss that on December 12.

Thank you.

I would like to wrap it up now. Thank you all very much for attending. Thank you for your interest in our Company. We look forward to seeing as many of you as possible on December 12, and talking about the business further then where the business unit managers will also have a chance to talk in detail about their Company. Thank you very much.

Thank you for participating in today's conference call. And have a good day.