Travel + Leisure Co (TNL) 2007 Q1 法說會逐字稿

Good morning and welcome to the Wyndham Worldwide first-quarter 2007 earnings call. will (Operator Instructions). Today's conference is being recorded. If there are any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Mr. Steve Holmes, Chairman and Chief Executive Officer of Wyndham Worldwide. Sir, you may begin.

Thank you, Kimberly, and good morning, all. With me today are Gina Wilson, our Chief Financial Officer, and Margo Happer, our Investor Relations officer. Thanks very much for joining us today.

Before we get started, I just want to remind you that our remarks today contain forward-looking information that is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied by the forward-looking information These risk factors are discussed in detail on our Form 10-K filed March 7, 2007, with the SEC.

We will also be referring to a number of non-GAAP measures, which are discussed in the press release and which Gina will touch on in her comments. A reconciliation of these measures to the comparable GAAP measures is provided in the tables to the press release, which is available on the Investor Relations section of our website at wyndhamworldwide.com.

As you saw from the press release, we had another excellent quarter. We delivered our third straight quarter of solid results as an independent company, with reported earnings per share of $0.45 and adjusted EPS of $0.43, exceeding our guidance and the consensus for the quarter. While I'm thrilled with our quarterly financial performance, we are operating the business for the long term, so I'm equally thrilled to report that we continued to successfully executed our growth strategy, leveraging the Wyndham brand, expanding internationally and acquiring new customers. Let me briefly discuss how we're turning strategy into results.

The Hotel Group continues to strengthen its position as an integrated, international franchise and management company with a platform for sustainable growth based on a full spectrum of well-defined brands. The Hotel Group is solidly tracking in line with our strategic direction and goals, which are focused on three main areas -- building on our strength in the economy and midscale segments, leveraging the Wyndham brand, and expanding our international presence.

I am particularly proud of our performance with respect to RevPAR gains. RevPAR for the first quarter of 2007 increased 3% from the first quarter of 2006. However, it increased 6.8% when we exclude the Wyndham brand. The Wyndham brand comparison was impacted by the expected attrition of certain properties.

If you'll recall, when we acquired the brand back in 2005, there were 19 properties that we knew would be leaving the system. As of the end of March, 10 have already gone. The majority of the remaining properties are expected to leave during the second quarter. Excluding these properties, RevPAR for the Wyndham brand increased 5.2% compared to a 4.8% increase for the upscale sector, as reported in Smith Travel.

In addition, Days Inn, Super 8, Ramada and Wingate all outperformed their segments. Also of note is that the RevPAR increases we experienced came from both ADR and occupancy strength, which demonstrates the value proposition we offer to hotel owners.

As we previously discussed, the integration of AmeriHost into Baymont is well underway, and as a result, accounts for the AmeriHost system declined, as you may have noticed in the tables we distributed with the press release today. The market is responding well to our repositioning and the quality and consistency of the Baymont product, and we look forward to reporting the future growth of this brand.

Our guest loyalty program, TripRewards, continues to show strong growth. In the first quarter of 2007, we enrolled 700,000 new members, and we continue to add an average of almost 250,000 members per month. From the first quarter of 2006, active membership has increased over 20%, and share of room nights delivered through this program has increased by 300 basis points.

Our reservation contribution to gross room revenue continues to grow as well, driving value to our franchisees. Brand website contribution has increased 520 basis points from the first quarter of 2006 as a result of a major website redesign and, going to my earlier point, TripRewards, which represents about 30% of total room night contribution.

Our pipeline, at 95,000 rooms, is up 21% from the first quarter of 2006. This quarter alone, we signed 140 new contracts, of which 30% were new construction. This amounts to adding a new hotel property to our pipeline every 15 hours. The Wyndham pipeline has increased significantly since last year, which reflects our ability to attract quality product to our system.

We really feel the momentum of the Wyndham brand continuing to grow, and in nine days, the former Westin Rio Mar in Puerto Rico will enter the Wyndham family, joining properties we recently added in Tucson and New Orleans. In the very near future, we expect to be opening Wyndhams in New York City, Virginia Beach, Newark, Atlanta and other major U.S. and international markets.

As we discussed previously, when we acquired Wyndham we said that we would look for ways to leverage our new-construction, midscale without-food-and-beverage offering, Wingate, with the Wyndham brand. We will begin this process in two weeks at our Wingate brand conference, and by year end, we expect Wingate signage to flip to Wyndham by Wingate -- excuse me, "Wingate by Wyndham." This, along with appropriate brand-standard enhancements, will help catapult Wingate into the upper tier of the midscale without-food-and-beverage segment, build additional critical mass for the Wyndham brand and create marketing and sales synergies for both brands.

In addition, we are looking for ways to continue to build on the brand equity of the Wyndham brand and will be looking at opportunities to differentiate ourselves in the marketplace. For example, Wyndham Women On Their Way is a program created years ago that we are looking to update to ensure that our product continues to be appealing to women. This program seeks to address the needs of our women guests, from room design to menus to fitness offerings to security.

We also continue to build momentum on the international lodging front. One of the markets attracting the most attention right now is China. We plan to launch the Wyndham brand there during the fourth quarter of this year with the opening of the newly constructed 550-room 26-floor luxury hotel that we will manage in Xiamen.

Of equal importance, our other brands continue to perform well in China. We ended the quarter with 14,900 rooms - 4,900 Ramadas, 4,600 Super 8s, 3,400 Howard Johnsons and 2,000 Days Inns, and another approximately 500 in Hong Kong, all of which are Ramadas. We expect to add approximately 19,500 rooms before the Summer 2008 Olympics, which will bring us to approximately 35,000 rooms in China.

We're ramping up marketing efforts to fuel our short- and long-term international growth plans of 60% over the next few years, as we have articulated before. Currently, we are in the process of launching global language-specific booking websites in Germany, the UK, Ireland and China. In April, we rolled out TripRewards in Ireland and the UK and will be rolling out the program to China and Germany in the upcoming weeks. We look forward to updating you on this progress.

Now, turning to Vacation Exchange and Rental, it was a great quarter, with strong revenue growth in both our exchange and rental product lines. Vacation rentals continued to fare especially well, led again by strong performance in Novasol, Northern Europe's largest rental company for vacation homes and cottages, and Landal GreenParks in the Benelux region. Novasol benefited from a strong Northern European consumer market, a variety of new marketing approaches and entry into new markets segments. We are promoting new destinations to existing customers and attracting new customers through important strategic marketing relationships within the region.

Landal achieved great success with the winter ski program marketed to Dutch and German customers focused on filling enhanced capacity at their Austrian parks. They also were able to leverage capacity in mild winter conditions with vacation offers in the Netherlands.

The RCI team recently attended the American Resort Development Association, or ARDA, conference, which set record attendance of nearly 4,000 timeshare industry professionals and developers. RCI met with over 150 customers and prospects, and we've already closed 10 new deals following those meetings.

While there, we launched an enhanced RCI Points product, our biggest expansion program since the program began in 1999, with great developer feedback. Over 20% of our members subscribe to the points product. As we explained to you at investor day, our exchanges per member are almost double that of our primary competitor's product. Growing this base is critical to our strategy to be the leading intermediary in leisure real estate, whether it's timeshare, fractional ownership, whole ownership or rental. RCI Points is a vacation currency that provides members with more choice and flexibility than our competitor and enables us to effectively broker inventory.

The enhanced product gives RCI Points members access to our rental inventory and additional premium destinations beyond their traditional timeshare exchange, such as European villas, luxury cruises and urban condos or hotels in destinations worldwide, including Hong Kong, Paris, Vienna and Rome. Our members will also enjoy more travel options by using RCI Points with an expanded range of travel partners, which include car rental companies, airlines and resort activities, as well as theaters.

We will improve the ease of use for our members by providing vacation e-alerts to notify members when a vacation at a preferred place and time becomes available. We will also be streamlining home resort reservations and will be providing automatic membership renewals where they are permitted.

We also relaunched our Endless Vacation magazine. This magazine currently reaches over 1.7 million RCI members in North America. We outsourced the production, revamped the design and content, and we're expanding the distribution beyond our membership and to the general public. It will be on newsstands, including Barnes & Nobles, during the second quarter. The new print format will be accompanied by a similar online site, which will become our global vacation portal as we expand the brand's presence across multiple consumer touch points.

Also during the quarter, we achieved our first big rental success in Asia-Pacific. I'm happy to announce that we will be partnering with Mahindra Holidays & Resorts, the leading vacation ownership developer in India, to launch a new travel club in that market. In addition to RCI inventory, we will provide rental inventory to RCI's 115,000 members in India, which include the over 50,000 members of Mahindra Holidays & Resorts, as well as to Mahindra's database of over 1 million leads. The product will also be aimed at the rising population of both domestic and outbound travelers in India, and according to the most recent tourism report from India, there were approximately 390 million domestic tours and visits within India and approximately 7 million departures to non-domestic locations.

Also, we recently signed a deal with Grupo Mayan of Guadalajara in Mexico that is the first joint initiative between RCI and the Wyndham Hotel Group. RCI had an existing relationship with Grupo Mayan, and now eight resorts will become affiliated with the Wyndham Hotel and Resort brand. These are prime locations, including Riviera Maya near Cancun, Acapulco and Puerto Vallarta. These significantly increase the Latin American presence for Wyndham Hotels and Resorts and provide RCI with new member and transaction opportunities. This initiative shows our ability to successfully leverage our diverse portfolio of service offerings.

Finally, moving on to Vacation Ownership, this quarter's results really do speak for themselves. This business has consistently, quarter over quarter, year over year, demonstrated exceptional performance through operational excellence. We have the right product in the right places at the right time. We know how to market and sell, and just as important, we know how to take care of our owners.

For those of you who are keeping score, this is the eighth consecutive quarter that this terrific management team has delivered double-digit gross sales increases, and this was a phenomenal quarter. Gross VOI sales are up more than 20%. Tours are up more than 15%, and volume per guest, which is how we measure our sales efficiency, was up close to 9%, exceeding our already-healthy expectations on every front.

Meanwhile, the industry shows no signs of slowing down. According to data released at the ARDA conference in late March, total U.S. sales volume increased to $10.5 billion in 2006. That's up a whopping 22% over the $8.6 billion figure posted in 2005.

As important, vacation ownership has become a compelling economic force in the U.S. According to a recent study prepared by PricewaterhouseCoopers, in 2005 the timeshare industry supported nearly $62 billion in consumer and business spending, over 565,000 jobs, more than $21 billion in salary and wages, and $8.5 billion in tax revenue. Consumer spending on timeshare and related vacation expenses in 2005 exceeded $22.5 billion, ranking higher than money spent on movies, fitness and recreational sports centers, or golf courses and country clubs. Clearly, this is no longer a niche industry, but a major component of the global hospitality industry, with significant future growth prospects.

So what does all this mean to us? According to a recent Vacation Ownership World survey, we were the largest vacation ownership developer, with record sales and more resorts, units and owners than Marriott, Starwood and Disney combined. Our size improves the value proposition to buyers of timeshare and gives us a powerful base in a growing industry with a demonstrated track record of high success. This is a great business.

And I need to remind you that our success to date has been garnered without a nationally recognized brand, and now we have one. The Wyndham rebranding efforts for timeshare is well underway and on track. As we talked about on our last call, the rebranding is a huge initiative for us, and I can tell you the enthusiasm for this project is high and the execution to date has been incredible.

I had the opportunity to visit a number of sites during the first quarter, all in different phases of the rollout. Property managers and salespeople can't wait to get the collateral out and the signs up. Anecdotally, I'm hearing there is already an impact. Hiring is easier, existing owners are excited and prospects are receptive.

And we're working hard to further Wyndham's Vacation Ownership resort network as well. We recently announced that we finalized a deal to build an upscale 250-unit Vacation Ownership resort on nearly 2 acres of land in the National Harbor Complex in the Washington, D.C., area. Construction is scheduled to begin fall of this year with an anticipated opening in late 2009.

Finally, in probably our most significant real estate achievement in the first quarter, on March 22 we announced the joint transaction to become a minority investor in and manage the 600-room luxury Rio Mar Beach Golf Resort & Spa in Puerto Rico as a Wyndham and develop an adjacent 26-acre tract as a Wyndham Vacation Ownership timeshare resort. The hotel will convert from Westin to Wyndham in nine days. Wyndham Hotels and Resorts will manage the property and all of its assets, including the casino, spa and the two golf courses, and the Wyndham Vacation Ownership will develop and market luxury timeshare units on the adjacent tract over the next several years.

Before turning the presentation over to Gina, I want to reiterate how excited we are about the opportunities ahead. We made significant progress again this quarter against several of our fundamental growth strategies. In branding, we're leveraging the Wyndham brand to grow in the high-end hotel segment and improve Vacation Ownership efficiencies, as well as looking for more ways to leverage our marketing dollars. In geographic expansion, we are developing and expanding in new destinations as well as adding inventory to strong existing growth areas in all three businesses. With consumer acquisition, we continue to strengthen and diversify marketing channels through innovative partnerships and cross-business-unit synergies.

Now I will turn the presentation over to Gina to go through the financials.

Thank you, Steve, and good morning, everyone. I'd like to reiterate how pleased we are with our first-quarter results. Let me first take a few minutes to go through the results and the guidance, and then we will answer any questions you may have. We will post the new guidance numbers on the website following the call for your convenience.

First, in Lodging, as Steve mentioned and as you saw in the press release, we're pleased with the RevPAR growth, despite lapping the impact of Katrina in first quarter 2006. Please note that we have included brand-by-brand Lodging system statistics in table 5 of the press release. This data incorporates the domestic information discussed in the body of the press release, as well as the impact of international activity and timing of franchisee reporting. Reimbursable expenses related to our managed hotels were $16 million for the quarter. These revenues produced no margin.

Marketing program and reservation revenues, including TripRewards program, were $61 million for the quarter. These revenues produced little, if any, EBITDA, but are a critical component of the value proposition to our franchisees.

Domestically, we continue to see strength in the Middle Atlantic and the central U.S. regions, with RevPAR growth in excess of 8%, which is partially attributable to the addition of Baymont to our portfolio during the second quarter of last year, but also reflective of strong RevPAR gains across our other brands. The mountain region is also performing quite well, with RevPAR growth close to 12%.

Our brands have also demonstrated solid performance outside the U.S. In Germany, where we have a significant presence, RevPAR growth was almost 18%. Our franchisees are also enjoying RevPAR gains of 15% in the Middle East and Africa region, albeit on a relatively small base.

During the quarter, we invested $2 million in incremental marketing to continue to build the Wyndham brand. As a reminder, we expect to spend about $10 million this year to promote the Wyndham brand above the marketing funds contributed by franchise and managed properties. Margins, which are tracking to our full-year plan, improved somewhat this quarter based on the timing of that marketing spend.

As Steve said, Lodging firmly hit our expectations, and 2007 guidance for the segment remain unchanged -- revenue of $700 to $730 million, EBITDA of $250 to $230 million, RevPAR unchanged, guiding up 5% to 7% from 2006. However, we are experiencing some minor delays in international conversions, which may affect RevPAR. Therefore, notwithstanding our excellent results this quarter, we're guiding towards the bottom end of the RevPAR range, and we will keep you posted. Weighted average rooms, unchanged, up 2% to 4% over 2006.

Now, turning to Vacation Exchange and Rentals, the improvements we've seen in this business continued in the quarter, with revenues at the upper end of and an EBITDA slightly exceeding our expectations. Changes in currency translations contributed $11 million to revenues and $9 million to expenses, primarily related to the Euro, Pounds Sterling, Krona and Rand.

Based on the strength we're seeing in the business and assuming no further shifts in currency, we are raising our revenue guidance for Vacation Exchange and Rentals to $1.240 billion to $1.290 billion, up from $1.2 to $1.25 billion, and EBITDA guidance from $310 to $330 million, up from $305 to $325 million. Approximately $25 million of the revenue guidance increase is due to currency shifts since we developed our plan last fall, with little impact on EBITDA.

Now, to driver guidance, the new guidance is as follows -- average number of members, unchanged at 4% to 6% increase over prior year; annual dues and exchange revenue per member, 1% to 3%, up from 0% to 2%; vacation rental transactions, 6% to 8%, up from 4% to 6%; average net price for a vacation rental, 6% to 8%, up from 1% to 3%.

And just to be clear, these increases in both revenue per member and net price per rental are due in part to exchange rates. Since vacation rental business is predominantly European, the exchange rate impact is more significant on the average net price per vacation rental. Additionally, when you review the updated seasonality guidance, you will remember that Q1 and Q3 are expected to be RCI's strongest quarters, while Q2 and Q4 won't see the same lift versus 2006 because our fixed and marketing costs don't necessarily flow in sync with bookings.

Now, let's turn to Vacation Ownership. As you saw from the press release and heard from Steve, Vacation Ownership had another phenomenal quarter. These results benefited from, one, continued strong demand for our Vacation Ownership product among both new and existing owners. Sales to first-time purchasers increased 19% and upgrade activity by existing owners increased 40% -- throughout 2006, the number of sales locations increased by 16, which strategically increased the number of touch points with buyers; we also launched new marketing programs, producing results that exceeded even our expectations -- second, higher transaction sizes, reflecting both price increases and higher points packages; and third, continued growth in consumer finance revenue, driven by the growth in the portfolio, which increased about 25% since this time last year.

The increased revenue growth was partially offset by increased interest expense due to improved balance sheet leverage or higher debt balances in the secured facilities, as well as higher interest rates. You shouldn't expect this same level of year-over-year growth in subsequent quarters, since the various sales locations and marketing programs were introduced over the course of 2006 and early 2007.

Our updated seasonality ranges reflect our best thinking about how these programs will play out. Year-over-year comparisons are also affected by operational changes we made in the first quarter of 2006 in conjunction with SFAS Number 152, Accounting for Real Estate Time-Sharing Transactions, resulting in a revenue increase of about $39 million and EBITDA increase of $20 million in the prior year.

In fact, you will remember that we actually expected to be down year over year in EBITDA this quarter because of the strong results associated with this operational change last year. Instead, we managed, as Steve said, to exceed our expectations. Second-quarter comparisons will also be affected as a result of this operational change, which lifted revenues by about $26 million and EBITDA by $13 million.

The business is humming along on all fronts, including consumer finance portfolio, which is both healthy and growing. There has been a lot of buzz in recent months about subprime lenders, and we have answered questions from some of you about our lending portfolio since even before we were spun off last year.

For the rest of the audience, I think it is fair to summarize by saying that we aren't anything like some of the mortgage lenders that have been in the press recently. We monitor a wide variety of performance metrics for our portfolio, including weighted average coupon, down-payment levels, delinquency, roll and flow rates, and credit scores. We make relatively simple loans with level monthly payments and don't use the low-doc, no-doc, low-down, no-down, neg-am, adjustable-rate mortgage products that some single-family lenders have used in recent years.

We have long-term experience in originating servicing consumer receivables in this space and don't see anything that causes us concern at this time. As a result, we expect to be able to continue to access the ABS markets for securitizations consistent with our financial plan.

We are seeing some compression on the consumer finance margins as interest rates, principally LIBOR, inch up, and we're planning to inch up as well. We will be raising note rates modestly beginning this quarter. However, even with the compression, our spread remains north of 600 basis points, and this is an important and profitable piece of our Vacation Ownership business. We had modest separation and related costs for the segment in this quarter of $3 million related to costs associated with the Wyndham rebranding.

So, based on the health of our business and of the industry, we're increasing full-year 2007 guidance for Vacation Ownership, in revenues, to $2.4 to $2.5 billion, up from $2.2 to $2.29 billion; EBITDA up to $380 to $400 million, up from $365 to $385 million; tours, 9% to 11%, up from 8% to 10%; and volume per guest, 4% to 6%, up from 2% to 4%.

Now, moving on to some more general topics, our cash flows and capital structure at the end of the quarter reflects the uses of cash that we discussed in February -- repayment of some subsidiary debt overseas and share repurchases under our new $400 million program. We filed an S4 exchange offer last week, which will register the $800 million in bonds due in 2016 that we issued last December.

There is no change to our overall 2007 guidance on capital spending or cash flows. While we continue to make progress in managing our cash tax levels, some of the expected improvement will be offset by higher combined levels of timeshare inventory and receivables, consistent with our Vacation Ownership operation's greatly increased sales performance.

We continue to make progress on contingent liabilities as well. We've now been able to reduce them to approximately $404 million at the end of the quarter, with related assets of $109 million. That's compared to $589 million in liabilities and related assets of $174 million estimated on July 31, 2006, when we separated from Cendant. A good portion of the reduction in these liabilities since year end relates to the resolution of Cendant litigation matters, while most of the reduction in the related assets results from collection of amounts due and partial liquidation of an investment held on our behalf.

So, looking at total Company as shown in the press release, we're increasing guidance as follows -- revenues, up to $4.350 billion to $4.510 billion; EBITDA of $835 to $875 million; and 2007 adjusted EPS guidance to $1.98 to $2.17, up from $1.84 to $2.02, again excluding separation-related costs as well as legacy matters. These amounts are based on the strength of the business and a March 31 share count of approximately 184 million.

We've also provided Q2 adjusted EPS guidance of $0.43 to $0.46 per share, excluding separation and related costs, as well as legacy matters, again based on 184 million diluted shares. We're not guiding for possible share reduction resulting from what's left of the new repurchase program, which is about $140 million at the end of April. Remember that we expect some continuing costs related to the separation for the remainder of the year that are excluded from guidance. We expect those to be between $10 and $20 million for the full year and spending should be primarily complete by summer. Regarding quarterly guidance, please refer to the seasonality of revenue and adjusted EBITDA slide, which we will be filing on an 8-K and posting on the website after the call.

Now I will turn it back to Steve to wrap up.

Thanks, Gina. So, the summary is we reported a great quarter with growth in all of our businesses. We continue to buy back shares under our approved program, and we did announce that we will be paying a dividend beginning in the third quarter of this year. All of this we have accomplished with just nine months under our belt as a separate public company, so I am very proud of what the entire team has accomplished here at Wyndham Worldwide.

That is it for the prepared comments, and Kimberly, we would be happy to take any questions.

(Operator Instructions). Steve Kent, Goldman Sachs.

Just on timeshare, which was stronger than just about anybody else in the industry, could you just talk about some of the metrics or some of the color you could give on brand repositioning, some of the benefits of that as it's rolled out? I know it's early, but could you just start to give even some anecdotes?

And then secondarily on timeshare, some of the other companies have had some trouble with either inventory or percentage of completion accounting on timeshare. When you look out over the next three or four quarters, should we be factoring any of those types of issues into the results?

Well, let me take those questions, Steve. The first one, about kind of our metrics and what we're seeing and why we think the quarter was so strong and why did we report such strong results, there's a number of factors involved with it. First of all, we have a terrific group that is managing this timeshare business, and we have been continually building momentum over the last couple of years.

There's been a number of things that have happened over the last couple of years that have contributed to that momentum. We have combined the Trendwest and Fairfield management operations under one individual, and we have brought together the marketing and the development and the consumer finance operations. So those things which are mechanically sometimes difficult because they require system enhancements and they require getting all the management teams on one page have created a very cohesive group that is really building this business going forward.

As to metrics that we've seen, we saw tour flow that was very strong -- the response to our marketing programs has been terrific. Was that attributable to the Wyndham branding? It's, I think, a little bit early to tell, and I think it's a little early to assume that that was the case. But anecdotally, we're hearing great response from customers, both existing customers as well as the prospects were dealing with. We're seeing an increase in the response to our call to action marketing under the Wyndham brand versus the Fairfield, and now we're starting the marketing under Wyndham versus the Trendwest brand going forward.

So we're seeing some response -- too early to be giving you quantified numbers, but I can tell you that it is positive, as well as the VPG or the volume per guest, which is really the way we look at the efficiency of the Company -- that has been just really strong. And that is basically a result of good management of the sales organization, getting the proper people in place to be in a position to sell, and also giving a real value proposition to our existing owner, who then comes and buys more product.

So it's a combination of a lot of factors. I can't just point to one thing. But overall, great performance across the board, and when you look at individual locations, there are some locations we have that have been around for some time selling product that had just a great, great quarter. So it's not just new locations we are in; it's locations we've been at for a while, as well as the new locations we're entering.

As to your question on inventory, this is where we have a significant, I believe, a significant difference, and I believe a significant advantage over some of our competition, and I have said this before. We sell our product through a system. We sell our product remotely, not necessarily just at the location that we're building at, which gives us tremendous flexibility to keep all of our sales operations functioning, even if we don't have inventory at a particular location.

And Branson would be a good example of it. We're not building any more product in Branson, but Branson has had a great couple of quarters where we have been selling product rapidly, and product that might exist in Las Vegas or in Orlando or other markets that we have product that is being actively built.

So we don't see the same type of downdraft when a particular market gets sold out or we don't have product in a particular market, is we continue to move the product between our various sales offices and locations. And as I said, again, back when we spun off, we are investing in inventory. I caught a little bit of flak from investors about that because they said you are investing too much in timeshare.

We need to have that inventory available. I don't want to wake up one morning and say, gee, sales force, we have to slow down because we don't have enough product available. So we're very focused in looking forward 18, 24, 36 months as to what we're going to need, and obviously, as our sales ramps up, we need to look more proactively at pulling some of that inventory forward. But believe me, it is a conversation we have every week or two, about where do we stand with our inventory?

William Truelove, UBS.

Good quarter, guys. In terms of looking at your upside in guidance going forward, could you perhaps break it down for us into the four key buckets, one, coming from the Lodging segment -- how much of the upside is from that, how much is from Vacation Exchange, how much from Vacation Ownership, and then just corporate items? Is there a way to break it down just quickly in percentage terms, how much is coming from each of those four buckets?

Well, I mean, I probably could go through, and Gina is pulling out some numbers, so she may be able to articulate a more specific story. But I guess directionally, I would say Lodging, we're not raising our forecasts for the year. We're leaving the forecasts as they are.

And as Gina mentioned in her comments, we saw -- we're still within our range of where our RevPAR expectations were, but we're probably a little bit softer than we were thinking at the beginning of the year, but not enough to move our range of expectation. But Lodging is doing very well and is right on line. Both RCI as well as the Vacation Ownership Group, we actually raised our numbers this year -- I mean, for the rest of the year, and that obviously indicates some strength that we see in those.

So, from a momentum standpoint, timeshare continues to build momentum, and we see good strength in Europe on the vacation rental side, where last year, we, as most people know who followed us, we saw some softness there. No real change in the corporate and other items. That's pretty consistent. We're coming in with corporate costs and interest and depreciation about where we thought.

Well, Steve, while she's looking that up, maybe you could say, what was sort of -- from, I believe you gave a presentation back in March, what was basically the change in the way your guidance has moved or what was the surprise factor moving the guidance so much from basically then until now? Was it the currency issues over at Vacation Exchange, or what was it that just surprised you so much in the past month and a half?

Well, I wouldn't say that we were wildly surprised. We like what we're seeing, and we see good momentum building in the business. I think on the revenue side in RCI, we did see an impact from currency translation. That really -- not much fell to the bottom line, so that's not really an outcome driver on the bottom line, but clearly on the revenue side there was some strengthening there. The operating performance really is what has driven the upside on the RCI side.

In the Vacation Ownership business, it's just a business that's, frankly, it is performing at a very high level and has for the last few quarters. As I said in my comments, we really have operational excellence coming out of that group right now, and it's a result of building a very strong foundation with a good management team and with the right people in the right place and great product and a great relationship with our customers.

On the bottom-line EPS, we did have less shares than we originally had projected because we've continue the buyback program, and I guess our interest expense is a little bit lighter. I said it was -- even before, it was probably a little bit lighter because we had more cash on hand than we thought we would have.

So those are the really the factors. It's good operations and a few other factors corporately. Gina, do you have anything to add?

The only other thing that I think people have asked us about in some one-on-one meetings over the last several months is how are corporate costs performing? Each of the senior officers at the corporate level has a very stern handle on what we spend money on. So we probably caught a little bit of a benefit there as well. But mostly, it's Vacation Exchange and Rental and WVO, the Vacation Ownership, that are driving the improvement.

Great, thank you so much. Good quarter.

(Operator Instructions). Michael Millman, Soleil Securities.

A couple questions as well. Steve just talked about the inventory. Could you let us know if that has changed? I think you had been talking about a $500 to $600 million billed this year?

Okay, you are breaking up a little bit, Mike but you're asking about the inventory and if we're still in line with our billed that we had originally projected for the year of $500 to $600 million. Was that your question?

Well, that's the first question.

Okay. Well, I will take that one and then you can go for the next one. We may see our build increase a little bit this year based on the performance of the business unit, based on the performance at timeshare. We need to keep, as I said before, our inventory in line with where our sales are increasing to, and therefore, there are projects that we have sitting on the books for 2008 that we may need to accelerate into 2007 so that we know we have got enough product in '07 as well as into '08.

So we're looking at that constantly. I don't think it's -- it certainly is not an outcome driver to our results. But we may end up putting more into the timeshare business this year. We just haven't sat down to finalize our numbers yet.

Regarding the timeshare as well, I think maybe Gina mentioned, if I got the numbers, that the demand was first-time buyers were up 19% and upgrades were up 40%. What did they represent of the total? In other words, is 19% off a very big base and 40% off a very low base?

No, so, first, the question is first-time buyers, that 19% increase, is that a large or small portion of our overall sales -- first-time buyers? Is that your question?

First-time buyers is up 16% for the quarter.

First-time buyers versus -- I'm trying to recall back to our investor day presentation versus upgrade -- I want to say it's a 60/40 split. But let's just confirm that. It may be closer to 50/50. It's a large portion of our sales. I'm not sure where it would be. I'm trying to think where it would be for a quarter, like looking at the second quarter alone, and it's probably around a 50/50 split, first-time buyers versus upgrades.

And how does that compare with traditional?

How does that compare to what, Mike?

How does the 16% first-time buyer increase, 40% upgrade, compare with recent quarters, recent years? In other words, are we seeing one or the other jump?

No. It's somewhat seasonal because it goes to the occupancy in the resorts. When the resorts are filled, obviously there's more opportunities to make presentations to existing owners who come to stay at the resorts. So it's a little bit seasonal. We'd probably have a little higher upgrade in the first quarter because of the new programs that we rolled out in the first quarter of this year, which is -- every year, we are designing new programs for our customers. So we may have a little bit of a higher upgrade to the first quarter, but I wouldn't say it's a marked change from what we have seen in the past.

And still continuing on timeshare, Steve, give us some idea of the margin and the IRR on development, on financing, on the service component of timeshare?

Well, on investor day, we showed you what a normal project was and what the IRR was on various ways that we put capital to work. And it's -- somewhere in the range of 30% is what we showed. That doesn't include the spread that we get from consumer finance income. But as a rule of thumb, that's what we're looking at when we design these projects.

And I guess that doesn't include the service, either?

That doesn't include -- the service being the management services we provide?

Management services?

No, it doesn't include that, which is not hugely profitable because we provide a lot of service for that timeshare property management. But it does not include that. That is correct.

And can you give us the margin for the development piece compared with the financing piece?

It's difficult to do, Mike, because it depends on how you're going to allocate your corporate overhead for this business unit. And we've talked that through with a lot of people as the questions have been asked at investor days and at other times. The fact is that we provide a lot of service on the consumer finance side, which is part of our corporate infrastructure that provides service to the entire Vacation Ownership Group.

So we've kind of given direction that probably, if you look at the profitability of this business, is probably around a quarter to a third that comes out of the consumer finance side of the business. But to get it to the fine line that you are getting to, I think it would probably be -- it would not be an appropriate analysis for us to do.

I guess what I'm aiming toward is that it seems like the development may have a very low margin and that the bulk of the margin comes from the financing.

Mike, I'm sorry, I can't hear your questions. I don't know if you are on a cellphone or not, but your questions are coming through very light.

Sorry. I guess what I was aiming for was it seems that the development may generate a relatively small part of the total profit of timeshare, with financing a much larger part of the timeshare profit.

No, I wouldn't agree with that statement. I think a lot of profit comes out of our sales. Upgrade sales are more profitable than front-line sales. But a lot does come out of our development and marketing efforts. As I said, about two-thirds of our profit would roughly come out of that development effort -- development, marketing and sales effort.

I guess finally, on the Lodging, could you talk about growth? It looks like your actual rooms has been flat over the last four quarters. I guess this has been a continuing question.

Yes. If you look at it consecutive quarter over quarter, we're pretty much flat to where we were at the end of the year. Again, we're very comfortable with the growth that we're going to show the rest of the year, and we're still in line with our projections and forecasts.

You're looking at some properties, again, as I've said, from the Wyndham side that came out that were relatively large properties. We knew they would be leaving. We had them built into our forecast as leaving. So there are no surprises there. And as we've told people, the momentum will build as the year goes on in the room count, and we're still comfortable with the range that we have given you of 2% to 4% growth.

At this time, I show no further questions. I would like to turn the conference back over to our speakers for any closing remarks.

Okay. Well, thank you very much, Kimberly. Thanks, everyone, for your attendance today, and we appreciate the questions, and we look forward to talking to you next quarter at the second-quarter call. Thank you.

And that ends today's conference call. You may disconnect your lines.