Travel + Leisure Co (TNL) 2007 Q2 法說會逐字稿

Good morning and welcome to the Wyndham Worldwide second quarter 2007 earnings call. Throughout today's presentation, all lines will remain in a listen-only mode. Following today's presentation, there will be a question-and-answer session. 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, Ed. Good morning and welcome to the second quarter 2007 Wyndham Worldwide conference call. With me today are Gina Wilson, our Chief Financial Officer, and Margo Happer, our Investor Relations Officer. Thanks for joining us today.

Before we get started, I just wanted to remind that you 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 in on her comments. The 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 fourth straight quarter of solid results as an independent company, with reported earnings per share of $0.52, and adjusted EPS of $0.49, exceeding our guidance and consensus for the quarter. We continue to successfully execute our growth strategy, leveraging the Wyndham brand, expanding internationally, and acquiring new customers in a good, healthy industry environment. We are well-positioned as a diversified hospitality company to capture the leverage -- capture and leverage trends in the global tourism market, where revenues are expected to nearly double to $13 trillion between now and 2017.

In the United States, tourism is obviously one of the largest industries. According to the Travel Industry Association, leisure travel accounts for over three-quarters of all trips in the U.S. Globally, leisure travel is more than three times greater than business travel. Against that backdrop, let me review our results.

In the Hotel Group, we continue to see strength in our position as an integrated international franchise and management company, with a platform for sustainable growth based on a full spectrum of well-defined brands. Results in Lodging were right in-line with our expectations with revenues of $186 million, at the midpoint of our guidance, and EBITDA of $59 million, at the high end of the range, which included some timing -- delayed timing of marketing activities. Results are solid and we are making great progress on our strategic initiatives, building on our strength in the economy and mid-scale segments, leveraging the Wyndham brand, and expanding our international presence.

We continue to drive value to our franchisees as evidenced by RevPAR gains that exceeded the industry results. System wide RevPAR for the second quarter of 2007 increased 3.7% from last year, or 5.9% excluding the Wyndham brand. As we told you last quarter, the Wyndham brand comparison has been affected by expected property attrition, which is now predominantly behind us. Excluding these properties, RevPAR for the Wyndham brand properties that were open in the second quarter of both 2006 and 2007 was up 9.9%, compared to a 5% increase for the upscale sector as reported by Smith Travel.

RevPAR growth in our powerhouse economy brands, Days Inn and Super 8, increased 4.7% and 5.9% domestically, compared to industry segment growth of just 3%. In the midscale sector, Ramada and Wingate increased domestic RevPAR by more than 8%, well ahead of their competitive set. In addition, Ramada's worldwide RevPAR growth was equally impressive at 9.1%. System growth is increasing in-line with our expectations. We saw a tremendous volume of deals flowing into our hotel franchise organization, with 227 contracts signed in the quarter, exceeding last year's level, and the pipeline is strong with over 100,000 rooms, of which 46% are new construction and 25% are international.

We continue to grow the Wyndham Hotels and Resorts brand. I am pleased to say that Wyndham is growing. We are virtually through our known terminations, and we have successfully retained properties that we thought we might lose in a number of key markets. The pipeline has doubled in the past year, and the level of developer interest in the Wyndham brand has increased dramatically over the last six months.

We are very focused on a handful of key international and gateway cities, and our success to-date has been outstanding. We have secured locations in Puerto Rico and London. We told you about the Rio Mar property in Puerto Rico on the last call, and the property did reflag from Westin to Wyndham on March 10th as scheduled. We look forward to a long and mutually beneficial partnership in this important resort destination, where Wyndham has always been very strong, and where we will soon begin development of timeshare product.

Another great addition to the Wyndham family is the conversion of the Conrad London, a 5-star, 160-unit all suite hotel, which is now The Wyndham London-Chelsea Harbour. London is Europe's economic hub, and one of the largest feeder markets in the world. We assumed management of this property in May of this year. Europe is a significant growth market for us, and the addition further strengthens our position as a global hospitality company, and demonstrates the strength of the Wyndham brand. Look for more news from us soon on other key center city markets as well as resort destinations.

Our tremendous success to date, the traction we are seeing in the pipeline, and our retention and conversion records, reflect both our passion for the business and our ability to effectively innovate. We have been able to lever our experience with relationships as the world's leading largest hotel franchisor.

Many of our new signings are with developers or franchisees whom we've known for years. At the same time we are rapidly becoming known to new developers for our innovation. Following our acquisition of the Wyndham brand, we have redefined the brand standards and philosophy. In addition, we recently introduced The Blue Harmony Spa and Fitness Experience, which is a spa concept that will span our Wyndham hotel and timeshare resorts. The innovative design includes a kit of parts to give existing hotel and timeshare locations, as well as developers of new construction and conversion Wyndham properties, the flexibility to mix and match key components in an economical way that can also be regionalized for local markets.

On May 15 at the Wingate Franchise Conference held at the Wyndham Rio Mar, we announced the alignment of the Wyndham Wingate brand with Wyndham Hotels and Resorts. The affiliation created a combined system that encompasses almost 230 hotels as of June 30. To formalize the relationship the Wingate brand has been renamed Wingate by Wyndham. The response was enthusiastic. Geographically the brands complement each other, with Wyndham properties primarily located in resort and center city locations, and Wingate Hotels largely in secondary markets.

The two brands are also similar in quality, service and value within their respective competitive sets, Wyndham in the large upscale segment and Wingate in the mid-scale without food and beverage segment. Consumers can now search both Wingate and Wyndham hotels on either brand website, and travelers who call either reservation number are offered the other brand if their choice is not available. Early results are impressive. In just one month, incremental bookings at Wingate are up 10%.

Finally, we continued our international expansion with the Hotel Group. In addition to our big win in Chelsea London in the U.K., we continue to grow probably nowhere faster than China. We entered the market there in 2001 with Howard Johnson, and are now, just six years later, approaching 100 properties across four brands, Days Inn, Howard Johnson, Ramada, and Super 8. We will open our first Wyndham there early next year.

In addition we launched our first international coordinated advertising campaign for Ramada, with a global message focusing on a service culture that stresses a positive guest experience. With 275 international properties across 35 locations, Ramada has the greatest international presence of our brands and it provides a strong base for expansion, particularly in Europe. Most of these properties are 4-star hotels in terrific locations. We recently entered the Belgian market with a 210-room Ramada Plaza Antwerp, providing a prime opportunity to build on the success of the brand in the U.K., Ireland, and Germany.

Now turning to Vacation Exchange and Rentals. Revenues and EBITDA at Group RCI were $288 million and $49 million respectively. These results are at the lower end of our guidance, which includes overcoming some challenges in the Asia-Pacific market, which Gina will discuss in a few minutes. The operating statistics or driver for this business were strong in the second quarter, so we see the fundamentals of this business moving in the right direction.

For example, our average number of RCI members increased to 3.5 million during the second quarter, a 5% increase from the same period last year. We successfully launched enhancements to our RCI points program in the U.S., Europe, and Latin America this quarter, our biggest makeover of RCI points since the program began in 2000. RCI points members now have access to new vacation experience, exchange deals, and vacation E-lerting.

Our members have responded favorably to the enhancements, and are already booking unique vacation experiences in New York, London, Paris, and other cities around the world. Points related call center volume and North America points transactions were both up more than 25% in June, the highest monthly growth rate this year.

In the rental business, we booked over 325,000 transactions, up 5% versus last year, at an average net price of close to $416, which is up 11% versus the same period of 2006. In Europe, we continued to see strong performance in both our Novasol and Landal businesses, with revenues in those brands up 22% versus the second quarter of 2006.

So let's look at some trends we are seeing across Europe. The Novasol growth is being supported by the German economy, which continues to improve, for example, with June unemployment rates falling to 9.1%, compared to 10.8% in the same period of 2006. In the U.K., performance at holiday cottages is stable, despite the heavy rains and inclement weather, which is causing some consumer cancellations. This has been offset somewhat as U.K. terrorism threats are resulting in increases in domestic tourism, as people want to remain close to home and drive to their vacations.

As we previously reported, the shift continues to holiday patterns from vacations in France, to vacations in new marks like Croatia, which have been opened by the low-cost carriers in the market. These new markets are helping us to drive the success of our Novasol business, while our French camping business, which is is a small contributor, is showing some signs of softness.

Expanding our rental capabilities is a core Group RCI strategy. We have a strong and growing base in Europe, where rentals account for close to 25% of vacation accommodations, and we are looking to grow the rental business in the Americas region as well. Second quarter rental revenues in the Americas were up 17% versus 2006, reflecting strong growth in Latin American member rentals, as well as rentals outside our member base. Within Group RCI, which is the new name for the rentals and exchange business, we continued to search out innovative ways to provide travel solutions to consumer and leisure real estate owners.

Finally moving on to Vacation Ownership. Revenues and adjusted EBITDA at Wyndham Vacation Ownership were at the upper end of our guidance of $629 million and $105 million respectively. Results were once again outstanding. This business continues to hit on all cylinders. Quarterly gross VOI topped $0.5 billion for the first time. We conducted over 300,000 tours, volume per guest is running at record levels, and close rates are just great.

Virtually all of our Vacation Ownership results have now been affiliated with the Wyndham brand, and our marketing continues to shift under the Wyndham umbrella. Our owners and employees are excited, and I am thrilled so far with the results. While still too early to fully quantify, our key marketing measures are positive, and we believe it is in part due to the Wyndham brand. Call center response rates and poll rates on direct mail are up. We have also seen a 12% increase in tour utilization of certain overnight travel packages, which we attribute in part to our rebranding effort.

Our performance is stellar in a burgeoning industry. According to ARDA, sales totaled $10 billion in 2006, a 16% increase over 2005. Timeshare product now exists in every state except Alaska, North Dakota, Nebraska, and Kansas. Last year there were nearly 538,000 timeshare intervals sold, and average occupancy was 81%. There are now 4.4 million owner households.

All signs point to steady and strong growth for this industry, and with the penetration rate for timeshare ownership estimated at just under 4% of U.S. households, we know this story is only beginning.

Product flexibility has driven much of the growth. And probably the single biggest innovation this area has been the transition from fixed-weeks timeshare, where an owner gets a specified week in a specific development for a specific week a year, to a points-based timeshare, a much more flexible and interchangeable product. We were an early pioneer on points beginning in 1991, and we have continually improved our product to maintain our leadership position amongst timeshare developers, sales and marketing organizations.

Points are an important sales tool, but they also play an important role in our inventory management and development. Some of our major competitors have recently announced shortfalls in Vacation Ownership sales due to inventory constraint.

Because we sell points-based products, we believe we are well-equipped to match sales demand to available inventory. The locations where we develop our timeshare product are based on owner preferences, but it is sold through sales offices throughout the country. Sales are largely independent of physical inventory location. We can sell our points-based product from more than 100 offices worldwide, enabling us better to meet customer demand.

For example, we entered the Williamsburg, Virginia market over 20 years ago. We haven't built new inventory there since 2003, but the sales office brought in over $60 million in sales last year. It is a great model and a significant competitive advantage.

Having said that, we are confident that we will have adequate inventory to supply our sales machine. But our current sales pace will create some situations where inventory is not ready for revenue recognition. This results in some deferred revenue, which we have had historically, and which we will have in the future, and Gina will discuss this a little later.

Now turning to some general corporate matters. As you saw from the press release, we basically completed our most recent share repurchase program, which was our second program since the spinoff. In less than 12 months we have repurchased 25 million shares at an average price of about $32. That's close to 13% of our stock.

As we have discussed before, to preserve the tax-free status of the spinoff, we cannot buy back more than 20% of our shares before August 20 -- of 2008. Also as I have said repeatedly, our first objective is to invest in the business. So while we believe our shares are a great value, we are looking at a variety of attractive investments, alternative investments in the businesses. We see some interesting opportunities to expand the Wyndham brand in some key markets, and are actively looking at tuck-in acquisitions that will expand our hospitality presence.

We look forward to keeping you posted on these developments. In addition, we announced today that the Board approved the payment of our first quarterly dividend of $0.04 per share.

Before turning the presentation over to Gina, I want to reiterate how excited we are about the opportunities ahead.

With almost half of our revenue generated from franchise fees, property management fees, membership fees and exchange fees, combined with our international diversity, Wyndham Worldwide is an extraordinarily diversified and financially stable hospitality company. We made significant progress once again this quarter against several of our fundamental growth strategies.

In branding, we are leveraging the Wyndham brand to grow in the high-end hotel segment and improve Vacation Ownership sales and marketing efficiencies, as well as looking for more ways to leverage our marketing dollars. In geographic expansion, we are developing and expanding in destinations, as well as adding inventory to strong existing growth areas in all three businesses, and with consumer acquisition, we continue to strengthen and diversify marketing channels through innovative partnerships and across business unit synergies.

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

Thank you, Steve. Let me take a few minutes to go through our results and guidance, and then we will answer any questions you may have. In Lodging, again as Steve mentioned to you, and as you saw from the press release, RevPAR growth was in-line with our expectations. Reimbursable expenses related to our managed hotels were $22 million for the quarter, these revenues produced no margin.

Marketing, program, and reservation revenues including the TripRewards program were $75 million for the quarter. Remember that these revenues produce little, if any, EBITDA, but are a critical component of our value proposition to the franchisees. Domestic RevPAR gains in the mountain and mid-Atlantic regions exceeded 8%, while the Pacific region also performed well with RevPAR growth of almost 7%. Internationally Europe continues to perform well, particularly in the U.K., Ireland, and Switzerland, where RevPAR grew 8%, 7% and 13% respectively.

Margins improved somewhat again this quarter based on the timing of marketing spend and are tracking to our full-year plan.

Remember that in the last call, we refined RevPAR estimates to the lower end of a 5% to 7% increase over 2006. We are experiencing some delays in international conversions which may affect RevPAR. These delays will also likely drive the weighted average room growth to the lower end of the 2% to 4% room growth range versus '06.

Although the timing of new property openings is slower than we would have hoped, as Steve mentioned many of these new construction additions are enhancing the portfolio, and we are making good progress towards our long-term strategic goals.

In Vacation Exchange and Rental, as Steve noted, our Group RCI revenues and EBITDA came in at the lower end of our expectations, with revenues up 10%, and EBITDA up 53% over the prior year quarter, with a reminder that last year included a charge for some foreign tax matters of $21 million. The 2007 quarter's results reflect the good underlying trends in Europe that Steve described, offset by some challenges in Asia-Pacific.

As a result of a review of some of our Asia-Pacific consulting relationships, we adjusted the associated values, which resulted in a reduction of revenues by about $6 million between revenues and expenses, and had the effect of reducing margins for the quarter by about 185 basis points as well. Weakening of the dollar versus foreign currency since last year, principally the Euro, pound, sterling, krona and rand, contributed about $10 million to revenue, but only about $1 million to EBITDA, since most of the related expenses are paid in local currency.

Now let's turn to Vacation Ownership, which once again did a great job. Similar to first quarter results, year-over-year comparisons are affected by the operational changes we made in the first-quarter of 2006, in conjunction with FAS-152 Accounting for Real Estate Timesharing Transactions, which resulted in a revenue increase of $26 million, and an EBITDA increase of $13 million in the prior year. On a comparable basis, you will see that our margins improved by about 150 basis points, primarily reflecting strong control and holding G&A levels while revenues increased. The lapping effect of the operational change will be minimal in the third and fourth quarters.

The consumer finance portfolio is both growing and healthy, contributing $88 million in revenues for the quarter this year, versus $70 million in '06. 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. All indicators are stable, and we see nothing that concerns us at this time.

At the risk of sounding like a broken record, I will remind you, as I did last quarter, that our consumer finance operation isn't like some of the mortgage lenders that are currently causing concern among investors. We make relatively simple loans, which are fully amortizing with level monthly payments. We don't use low doc, no doc, low down, no down or adjustable rate products that may have caused some single-family lenders problems in recent years. We have over 20 years' experience in originating, servicing, and securitizing consumer receivables in this space, and our current ABS transactions are performing as or better than projected.

Our May securitization was very successful, three times oversubscribed, and we believe that the ABS market will remain interested in these vehicles generally, and in this asset class in particular. We expect to be able to continue to access the ABS markets for securitization consistent with our plan. We had modest separation and related costs for this segment for the quarter of $5 million related to costs associated with the Wyndham rebranding.

There were a couple of items in the quarter related to the 2002 Vacation Ownership acquisition of Equivest, which at the time of acquisition was a developer with 29 resorts. Results reflect a charge relating to litigation resulting from a carryover dispute, which was partially offset by the favorable resolution of a vendor-related tax issue. The net impact of these items reduced EBITDA by about $2 million. In addition, we sold some noncore Equivest properties in July, so you can expect to see a pretax gain of about $7 million in the third quarter. This divestiture was assumed in our guidance earlier in the year.

As you know, our sales pace this year has been very strong, driven by both tour volume and volume per guest. We expect that trend to continue, and are raising our VPG guidance to 6% to 8%. You should expect to see a very healthy increase in gross VOI sales this year.

We are maintaining Vacation Ownership full-year revenue and EBITDA guidance as we now expect a higher percentage of GAAP revenues to be deferred as the sales momentum is outpacing our inventory build cycle. This is a trend we expect to continue through the first half of 2008, with the tide turning in the second half of the year. As Steve described, our sales model is flexible, that enables us to continue selling at all sites, but we will recognize some of that deferred revenue and corresponding EBITDA in future quarters as construction progresses.

Now moving on to some corporate matters. Corporate expense excluding separation related costs as well as legacy matters was $12 million, lower than expected due to slower hiring of employees and timing of payments, as well as the reduction of some litigation-related accruals. We expect a significant ramp in corporate expenses in the third quarter as we resume a more normalized run rate of about $18 million to $20 million a quarter.

Our cash levels and capital structure at quarter end reflect results year-to-date, as well as our May securitization, and substantial completion of the February share repurchase program. 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 level, some of the expected improvement will be offset by growth in inventory and receivables consistent with Vacation Ownership's recent gross sales performance.

We continue to explore opportunities to improve the efficiency of our balance sheet, and it is worth pointing out a subtle shift that occurs when we do that. As we securitize more consumer receivables, and use the proceeds to pay down other corporate borrowing, the related interest costs counts against Vacation Ownership's EBITDA, and reduces interest expense below EBITDA. Our modified debt-to-EBITDA ratio at the end of Q2 was 2.8, reflecting debt, excluding securitized debt, divided by rolling 12-month adjusted EBITDA, excluding net consumer receivables income. Our target credit metrics allow for a range in the mid to high twos. For those of you tracking on your own, interest expense related to securitized Vacation Ownership debt was about $25 million in the quarter.

We substantially completed our $400 million share repurchase announced in February, buying 11.7 million shares at an average price of $35.26. We continued to make progress on contingent liabilities related to the separation from Cendant, which have now been reduced to approximately $373 million, with related assets of $74 million at the end of June, compared to $404 million, with related assets of $109 million last quarter end.

A good portion of the reduction of these liabilities since last quarter relates to resolution of Cendant litigation-related matters, payments against balances due, while most of the reduction in the related assets results from receipt of what was due to us. Since the majority that remains at this point relates to tax and litigation matters, which could take years to resolve, we will likely talk about this topic less frequently going forward.

So looking at the total Company as shown in the press release, we are refining our guidance. Now that we are halfway through the year, we think it is appropriate to narrow some of our ranges. While the EPS and other ranges have been narrowed, the mid-point of the new ranges are about the same as they were in our May 1 update. Revenues, $4.34 billion to $4.48 billion. EBITDA of $845 million to $860 million. And 2007 adjusted EPS guidance of $2.02 to $2.13. This is excluding separation-related costs and legacy matters and assumes a diluted share count of approximately 184 million.

We have also provided Q3 adjusted EPS guidance of $0.70 to $0.73 per share again excluding separation-related costs, as well as legacy matters, based on the same 184 million diluted shares. Please note that the share count is higher than we expected earlier in the year due to an increase in the number of dilutive shares from options based on our expected share price.

Lodging guidance is unchanged for revenues and EBITDA. We are lowering RCI guidance slightly to $1.23 billion to $1.26 billion in revenues, and $305 million to $315 million in EBITDA, based on results in Asia-Pacific. Again, Vacation Ownership guidance is unchanged. We now expect corporate expense for the year of $60 million to $75 million, and interest expense of $65 million to $75 million.

Remember that costs relating to the separation which we expect to be minimal for the remainder of the year and legacy-related items are excluded from guidance. Regarding quarterly guidance, please refer to the seasonality of revenue and adjusted EBITDA slide, which we filed in the 10 -- 8-K, along with the press release this morning, and also posted to the website.

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

Thanks, Gina. So in summary, we reported another great quarter of earnings, and we continue to see tremendous opportunity in our businesses. With that, Ed, we will take any questions.

Thank you, at this time we would like to take questions. (OPERATOR INSTRUCTIONS) One moment please while the questions register. Our first question today comes from William Truelove from UBS.

Good quarter, guys. My two questions would be, one, I just want to clarify about the revenue range. The change in that is from the timing of timeshare accounting? Is that accurate?

No, no. The revenue range is for, you are saying specifically for the whole company? It has just tightened a little bit. The growth range is still, the growth rate is still about what it was before, and the midpoint is where it was before.

Okay. I just wanted to make sure, I thought I misheard something. On to the pipeline and openings internationally. You said it was slowing a little bit. Is that because of some sort of construction issue? Or because hotels are signing up a little bit slower? Can you clarify that as well please.

No, it is not really hotels are signing up slower. The pipeline is actually growing, so the hotels are signing up more quickly. It is really slowed down in the process of getting the hotels completed, and getting all of the appropriate clearances to bring them over to our brand, or for those hotels to open or begin construction.

I will give you one example is our transaction with Corinthia, where we are converting a number of the Corinthia Hotels to Ramadas and Wyndhams. We are still waiting on clearance on health and safety issues to meet the Wyndham standards, and it is just taking longer in those particular markets. That is one example of the type of thing we are seeing internationally.

Great. Thanks so much.

Thanks, Will.

Our next question comes from Steve Kent from Goldman Sachs.

Hey, Steve.

Hi, good morning. Can you just review a little bit more on why the top of the range of EPS is coming down a little bit. Is it the, Gina, the G&A ramp-up or $6 million Asia-Pacific issue. On that $6 million Asia-Pacific, maybe you can just tell us a little more what exactly that is, and we will leave it there for now.

The best way to think about the EBITDA range is we are halfway through the year. We thought it was appropriate to actually tighten it down, based on what we think the expectation for the second half is. We talked a little bit in the comments previously about Lodging having delayed a little bit of marketing expense, so that moved a little bit of earnings out of the second half into the first.

And there is a little bit of sort of concern about some of the revenues that we anticipated for the second half in Asia-Pacific. And basically, what we found there was that there were some relationships that had revenues associated with them, that we weren't confident should be recorded yet.

And that $6 million, that was specific to this quarter, could you just give us a little more color on what that is for Asia-Pacific?

We had a couple of consulting relationships that when we looked at them a little bit more closely, we concluded that the revenue should not be recorded.

Okay. And then, hey, Steve, on the share buyback if I can just follow up, obviously you still have a little bit more to go under that 20% rule. Why not just announce something, and sort of fulfill it on a slower pace? Is this something that the Board would revisit? How quickly can you do that if you need to?

Well, the Board to answer your second question, the second part of that question first. The Board is always revisit it. The fact is that we have said continually, that our #1 priority is to invest in the business. And we have to balance the opportunities that we see in front of us, our desire to buy back stock, which obviously we think it's a screaming buy right now, along with our credit metrics. We have got to, as a group, kind of manage all of those elements. Right now we have a lot of opportunities that we are looking at. We don't want to forestall our ability to take advantage of those opportunities, and therefore, we have decided at this point that we are not extending the buyback, but as you said the Board can revisit that at any time.

All right, Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from [Alec Henry] from Corsair Capital.

Hi, everyone. Sorry to come back to this, but can you just clarify a little bit the RCI issue in Asia? You said you wrote down some associates. Is that something that should continue to happen? Or is that sort of a write down, a one-time kind of thing that is behind us? Can you talk about how much deferred revenue you think you will have out of the Vacation Ownership business this year, that will flow into next year? Thanks.

Sure. I will let Gina handle the deferred revenue question, but let me take a shot at describing the RCI situation. As Gina said, and as we said previously, one of the areas for growth for us with RCI is in Asia. For example, in Macau, where we think eventually there will be a large market for leisure, real estate, either as rental, or as timeshare, or frankly, we think it will more likely be a hybrid product. We have been in that market, investing in that market for a number of years, and we have ramped up that activity, and we have got relationships with a number of very viable partners in that market.

We kind of re-evaluated where we stood with some of those relationships at the end of the second quarter, and we determined that some of the relationships, we didn't think were going to pan out. So we made the decision to take down the value of those relationships. It is a one-time item. We think we have done a very thorough review of all of our relationships over there. We don't think this is an ongoing issue at all. We think it is a one-time event, and on the deferred revenue, Gina.

Just to be clear we have deferred revenue in the system at any point in time, because we frequently are in a situation of selling inventory in buildings that are not 100% complete. What we are experiencing now because sales are so strong is that we are starting to sell product and buildings that are not 100% complete. What we are experiencing now because sales are so strong, is that we are starting to sell product in buildings that are less complete than they have been in the past. We are looking at potentially, you know, a $25 million increase in the level of deferred revenue from mid-year until end of the year.

Great, thanks.

Actually that is good news on a relative basis. The fact is we are still selling, and we are selling at such a rapid pace, that we are outpacing a little bit of the completion of the product, but the fact is we are not having to back off our sales force. In fact we are adding more exciting new inventory to the portfolio every month.

Anyone else queued up, Ed?

Sir, at this time we show no additional parties are queued up for questions.

Okay. Well, thank you all very much for joining the call. And we will see how the markets move today with a tumultuous start of the day. Thanks very much!

Thank you for participating in today's conference call. Have a good day! You may disconnect at this time.