Travel + Leisure Co (TNL) 2007 Q3 法說會逐字稿

Good morning and welcome to the Wyndham Worldwide third 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 you have 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, Rosie. And good morning and welcome to the third 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. Before we get started I just wanted to remind that you that our remarks contained 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 in the forward-looking information. These risk factors are discussed in detail our Form 10-K filed March 7, 2007 with the SEC. We will also be referring to a number of nonGAAP measures which are discussed in the press release and which Gina will touch on in 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 strong quarter. We delivered our fifth straight quarter of solid results as an independent company with reported earnings per share of $0.65 and adjusted EPS of $0.75. We continued to successfully execute our growth strategy, leveraging the Wyndham brand, expanding internationally, and acquiring new customers.

Let me review our 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. Results in lodging were right in line with our brands with revenue of $211 million and EBITDA of $70 million. We continue to make good progress on our strategic initiatives which include building our strength in the economy and mid-scale segments, leveraging the upscale Wyndham brand, and expanding our international presence. We continue to drive value to our franchisees through strong brand management and enhanced marketing program as evidenced by RevPAR gains that consistently outperform our peer set. Systemwide RevPAR for the third quarter of 2007 increased 5.6% from last year and comparable RevPAR was up 6.2%.

Overall system growth is steady and we are on track for net room growth around 2% this year. With that said, we are below our target for weighted average rooms principally due to timing issues. It's taking us a little longer than we anticipated to complete permitting, QA, and other issues in international regions. And as a result we are experiencing some shifting versus our prior expectations as to when these properties will come into the system. However, we are confident in our ability to reach our long term goals. These properties will open, just a little later than we had originally expected. Deal flow in the quarter continues to be solid with 174 contracts signed, and the pipeline is strong with over 104,000 rooms, of which 45% are new construction. Interest in our brands continues to grow as evidenced by a 22% increase in our pipeline since this time last year.

We continue to grow the Wyndham Hotel and resorts brand. We had a number of recent new Wyndham openings, most notably in Panama City, Panama, where we now have a 300 room five-star luxury hotel in the heart of Panama's Financial District. In Cozumel, Mexico, where the 400 room Wyndham Cozumel Resort and Spa became the first Wyndham on the island. And in Princeton, New Jersey, where we opened the Wyndham Princeton Forrestal Hotel and Conference Center with 360 guest rooms and 60 meeting rooms. We've also built the resort portfolio, adding 11 new properties for a total of 23 resorts in some great locations like Acapulco, Cozumel, Puerto Rico, St. Thomas, St. Martin, Puerto Vallarta and the Bahamas. Our resort portfolio now offers significant variety to effectively compete in this segment and remains a key focus of the Wyndham brand strategy.

We recently held a conference for Wyndham owners, managers, and prospective clients where we outlined a three prong strategy to continue our expansion efforts to improve guest satisfaction and to enhance brand value through a new marketing plan targeting Gen X customers. We saw a dramatic increase in our attendance since our last conference, which was late in 2005, shortly after we acquired the Wyndham brand. The conference was held at the Wyndham Rio Mar, a crown jewel of our development efforts this year, which now includes a recently opened timeshare sales office as well. The Wyndham brand pipeline continues to strengthen, more than doubling in the past year, and now represents close to 25% of our total pipeline. We believe that we are in an excellent position to increase the global footprint of this brand.

We are also making progress on the hotel management front. RevPAR increased 14.3% at company managed hotels, demonstrating our ability to bring value to the system and drive better performance for the property owners.

Despite the delays in openings that I mentioned earlier, our international expansion remains firmly on track. International deals represent 30% of the pipeline. We continue to enjoy rapid expansion in China, a market that the World Travel and Tourism Counsel has predicted will become the second largest travel and tourism economy in the world by 2016, and where we already have more hotels than any other U.S. hotel company. One indication of the value in Super 8 brand in China that Aetos Capital announced in late August that it would invest up to $50 million in Tian Rui Hotel Investment Corporation, the master franchiser of Super 8, to accelerate hotel development in China. This will give Tian Rui and us the ability to expand and accelerate the growth of the Super 8 brand in this important market from a very strong base of 54 hotels open right now and 40 under development.

Now turning to Vacation Exchange and Rentals. Revenues and EBITDA at Group RCI were $336 million and $103 million, slightly below our expectations. While we are pleased with growth in the number of new exchange members, annual dues and exchange revenue per member was dampened by the timing and mix of exchange deposits versus last year, primarily reflecting the lapping effect of some marketing programs which resulted in high interval deposits in the third quarter of 2006. While there are no fundamental changes in the trends of this part of the business, we believe we have some opportunities to improve the business by further leveraging our growing membership base, improving inventory management and better utilizing customer service to boost exchange transactions.

As we reported earlier this year, we launched an enhanced version of our Points product, which is showing early positive results. Many of the enhancements are web-based. We are actively working on the best use of technology and the Internet across the business as a means to increase inventory utilization, enhance customer satisfaction and ultimately improve margins. We are in the process of testing a new member rental platform that will roll out in November and is a significant improvement of the current site. We expect that it will help us manage inventory more effectively and help members understand the breadth of what RCI has to offer.

Another exchange area that's been expanding is in luxury exchange products. Our Registry Collection leverages the global growth trend in fractionals and private residence clubs. The Registry Collection exchange program is the industry's first and largest global exchange network of luxury vacation accommodations. It includes high end vacation ownership resorts, fractional ownership resorts, and condo hotels around the world. We now have more than 120 affiliates, nine of which were signed in the third quarter, at which our base of more than 24,000 Registry Collection members can exchange. Today the pipeline consists of over 200 projects throughout all region.

In the rental business, overall performance was strong driven by higher net price per vacation rental up 14%, which was supported by mix and favorable currency translations. We booked approximately 360,000 transactions, up 1% from last year. The Novasol and Landal brands continued their strong performance while the UK business saw some softness from the unusually severe summer rains in the UK. As we told you on our last call, expanding our rental capability is a core Group RCI strategy. We have a strong 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. To maintain growth and bring leadership to the rental category in the U.S., we need to further invest in and expand our rental capabilities. To that end, we recently formed a strategic alliance with LeisureLink, a premier provider of online distribution for vacation rental properties. The agreement with LeisureLink will increase the online presence of our global condominium and vacation rental inventory via new channels, including online travel agents such as Travelocity, Orbitz, and Expedia. The relationship helps lay a strong foundation to build a U.S. rental platform.

As you saw from the press release today, Ken May, the president of Group RCI, is leaving the business to pursue personal interests. Ken's vision has been instrumental in shaping RCI. I want to personally thank him and wish him well in his future endeavors.

Finally moving on to Vacation Ownership. Revenues and Adjusted EBITDA at Wyndham Vacation Ownership were strong at $671 million and $117 million respectively. Gross VOI sales were up an impressive 15% from last year's third quarter, reflecting solid gains in both sales efficiencies and tour flow. This business remains strong and we continue to be pleased with its performance. As we've been saying for quite some time now, we like the timeshare segment for two reasons: growth and resiliency. And we've continued to experience both throughout 2007 as evidenced by strong results in all three quarters. Moreover, our customers continue to value their ownership as evidenced by increased occupancy rates in 2007 versus the prior year. Our owners are out there. They are traveling and they are traveling to our locations. This business continues to meet our expectations of delivering solid results and growth.

A big part of our success is the Points system. As we told you in previous calls, Points are an important sales tool, but they also play an important role in our inventory management and development. 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 owners preferences, but 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 to better meet customer demand.

Another part of our success is due to our scale and flexible product offerings, which enable us to understand the market as defined by our owners and to anticipate their travel aspirations. For example, many of you may have seen recent press coverage about the popularity of water parks. We saw this trend emerging several years ago and began planning. Nowhere is this trend more apparent than at Glacier Canyon in Wisconsin Dells, which welcomes more than 3 million visitors per year and now supports nearly $1 billion in traveler spending. We recently opened a 102 unit Wyndham vacation resort, the only vacation ownership property located within the complex. The Wisconsin Dells resort is one of a kind property that features access to three indoor water parks with more than 200,000 square feet of water activity as well as several outdoor water parks and other year round activities. Driven by high owner interest for the area, we have already planned for a 99 unit expansion at that resort.

Another hot area for Vacation Ownership is urban resorts. We entered the urban market in 2000 when we entered our 88-unit property in Alexandria, Virginia. We are now the leader in this market with an established portfolio of urban resorts located in San Francisco, Seattle, San Antonio and New Orleans. We have additional projects underway in San Francisco and Prince Georges County, Maryland, and others are in the planning stages. Urban locations have become popular with our owners as the model fits new travel trends with shorter visits made possible with our Points based product. This allows to split a traditional week of timeshare into multiple smaller increments. Not surprisingly, these resorts have some of the highest occupancy rights than some of our most efficient sales offices in our system.

Of course, our destination markets continue to perform well and we saw particular success in Orlando, Myrtle Beach, and Atlantic City.

We are constantly seeking to leverage our portfolio and we have the scale to opportunistically build the portfolio. For example, we recently acquired 100 finished Vacation Ownership units at the Emerald Beach Resort in Panama City Beach, Florida and entered into an agreement to purchase 156 additional units. The new location complements four existing Wyndham Vacation Resorts properties in nearby Destin, Florida, which have always been extremely popular among our owner base, and this will provide them with even more vacation options along the Emerald Coast.

On the consumer finance side of the business, the portfolio continues to perform well and as you saw from the press release today we have priced a $455 million term securitization as well as renewed and upsized the conduit to $1.2 billion from $1 billion. Gina will cover the details of these financings.

Before turning the presentation over to Gina, I wanted to reiterate our optimism about our opportunities ahead. With almost half of our revenue generated from franchisees, property management fees, membership fees, and exchange fees, combined with our international diversity, Wyndham Worldwide is a well diversified and financial stability hospitality company.

We made significant progress once again this quarter against 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 new destinations as well as adding inventory to strong existing growth areas in all three businesses. And with customer acquisition we continue to strengthen and diversify marketing channels through innovative partnerships and cross business units synergies.

Overall I am pleased with our execution, particularly on the domestic front against the macro economic backdrop that obviously has been unsettled for several months now. We are closely watching the potential impact of any ripples from the credit crunch or the slowing economy on our businesses. However, Wyndham's fundamentals are intact. We have a resilient business model and we remain optimistic. Our focus on the leisure traveler, along with the diversity of our businesses and our global footprint, are key differentiators that I believe position us well against our peers even in a difficult economic environment. I am proud of our global team, confident in our strategy, and the soundness of our business model for the long term. Now let me 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 then we'll take your questions. First, in lodging business, as Steve mentioned and as you saw from the press release, RevPAR growth was in line with our plans. Our largest brands Super 8, Days Inn, and Ramada, which together make up 70% of our portfolio on the domestic side continued to post domestic RevPAR gains above their competitive set. Domestic RevPAR growth in our economy brands, Days Inn and Super 8, increased 6.1 and 5.0% compared to industry segment growth of just 3.1%. Worldwide, Days Inn's RevPAR was up 7.2% and Super 8's RevPAR was 6.1%. Ramada increased domestic RevPAR by 8.4%, well ahead of its competitive set and Ramada worldwide RevPAR growth was equally impressive at 11.5%. Performance was pretty solid across all domestic regions, with Days Inn particularly strong this quarter in the Midwest and Pacific and Mountain regions, with RevPAR gains in excess of 8%. Super 8 too showed strong growth in the Pacific and Mountain regions as well as in the Northwest with RevPAR gains over 7%, and Ramada grew its RevPAR in the Northwest region in excess of 10%. These three brands also enjoyed occupancy gains in excess of their competitive sets, particularly Ramada, where occupancy grew 130 basis points versus a 20 basis point reduction in mid-scale with food and beverage segment, and in Super 8 where occupancy grew 120 basis points versus a 20 basis point increase across the economy segment.

Our top five international markets -- Canada, Great Britain, China, Germany, and Mexico -- account for over 80% of our international portfolio. We saw strong growth in these key markets with Canadian RevPAR up 10%, Great Britain up 13%, China up 7%, Germany up 15%, and Mexico RevPAR nearly doubled.

We added some disclosure to the release and table to help you track franchising margins. If you exclude margin neutral items from revenue, specifically property management reimbursables and marketing and reservation revenues, including TripRewards, the franchising margin for the third quarter was about 70%, in line with a year ago as we continue to invest in the business internationally and in building the Wyndham brand. So looking at the full year plan for the lodging business, as Steve mentioned, system size is growing in line with our expectations. Terminations are according to plan, but openings are little bit behind schedule, so we would expect to end the year below our estimates on weighted average rooms. Nonetheless, we continue to expect system size to increase by about 2% for 2007. Revenues, EBITDA margins, and RevPAR are all tracking to plan for the year.

Now moving on to Vacation Exchange and Rentals, Steve covered the highlights, so I just like to add a few additional points. This quarter reflected a slight reduction in ancillary revenues versus 2006 consistent with repositioning some of our international consulting services. As you saw from the press release, EBITDA also included marginally higher cost consistent with increased rentals and incremental investment in IT infrastructure. Also included is about $4 million in severance expense. RCI remains on track regarding our margin expectations for the year.

Now let's turn to Vacation Ownership. We were pleased to be able to announce a $455 million term securitization as well as the renewal and upsizing of the conduit facility to $1.2 billion which closed yesterday. Hopefully these new financings will moderate any concerns in the market about our ability to effectively monetize the receivables generated by our timeshare organization. On the term deal, Sierra 2007-2, our weighted average spread over LIBOR was higher than our May 2007 transaction. However, due to reductions in the related benchmarks, the all-in cost at 5.85% was less than 30 basis points over the previous transaction. This translates into a P&L impact of approximately $1 million in 2008. We are pleased with our ability to continue to secure favorable financing terms in this environment.

Despite the recent instability in financial markets, particularly in the ABS and conduit markets, we were able to renew and upside our conduit. We believe that this is a testament to the performance of our program over time and the underlying loan quality as well as the confidence of the members of our banking group. We were able to add an additional $200 million of capacity to this facility in the most difficult market for these product types in recent memory. Like the term deal, this renewal price wider than last year's facility, very much in line with current market conditions. Assuming that we'll use about half of the conduit over the course of its term, the average cost of funds would increase about 10 basis points. We've considered this pricing on both the term deal and the conduit in the 2008 guidance reflected in the press release today. Our portfolio remains healthy and all indicators are stable. We don't see any early warning signs among the many metrics that we track on a regular basis.

Gross VOI sales tours and volume per guest were strong again this quarter and we expect the business will end the year very well. As we've previously discussed, our Points system and our sales model provide us with flexibility to sell inventory from multiple locations, and 2007 timeshare sales have been terrific. However, we need the inventory to be at various levels of completion to recognize earnings for GAAP purposes. Remember from last quarter's call that we stated that increasing deferred revenue in the second half was expected to reduce GAAP revenues. We expect to see that in the fourth quarter, which will reduce GAAP revenues by about $25 million and EBITDA by about $13 million, which equates to almost $0.04 earnings per share. We expect to see increased deferred revenues in 2008 based on the projected pace of sales and construction and a number of our developments, which is also reflected in our 2008 guidance. Please remember for Q4 '07 and 2008 you'll be able to see the strength of our timeshare sales and marketing program in the gross VOI sales metric -- that is again before the GAAP accounting deferral calculation as shown on our drivers table.

Continued growth in contract receivable portfolio over the last 12 months contributed an additional $16 million in consumer finance revenues, which contributed an additional $7 million in spread for the third quarter of 2007 compared to prior year. This improvement is despite slightly higher average cost of funds and higher average securitized debt balances as we continue to improve our leverage rate. Remember that increases in securitized debt shift interest expense above the EBITDA line.

Now moving on to some corporate matters. Adjusted corporate EBITDA, excluding separation and related costs as well as legacy matters, was $14 million, slightly lower than expected due to slower hiring of employees principally. We expect to continue ramping up corporate expenses in the fourth quarter and estimate that a normalized run rate will be about $17 million to $19 million a quarter headed into 2008. Our cash and borrowing levels at quarter end reflect the growth in our business and the modest level of share repurchases made during the third quarter. Capital spending and cash flows are tracking to plan. Separation and related expenses are tapering off as expected. Contingent liabilities related to the separation from Cendant along with the previously disclosed Q3 increase in the litigation reserve now stands at approximately $391 million with related assets of $65 million at September 30, 2007.

Now turning to guidance, there is no change in the overall company guidance for the year. While revenues and EBITDA for Group RCI are trending below our expectations this year, the balance and diversity of our business model -- namely continuing performance from both lodging and Vacation Ownership as well as lower than expected corporate cost -- put us in a position to reaffirm overall guidance for 2007. We reaffirm revenues of $4.34 billion to $4.48 billion, adjusted EBITDA of $845 million to $860 million, and adjusted earnings per share guidance of $2.02 to $2.13, excluding separation related costs as well as legacy matters, assuming full year diluted share count of approximately 184 million. Fourth quarter adjusted EPS guidance is $0.44 to $0.46 per share, excluding separation related costs as well as legacy matters, based on a approximately 180 million diluted shares. For 2008 we expect revenues of $4.8 billion to $4.9 billion and adjusted EBITDA of $920 million to $945 million excluding legacy items. And now I'll turn it back to Steve to wrap up.

Thanks, Gina. So in summary we reported another strong quarter of performance and we continue to see tremendous opportunity in our businesses. We are very focused on executing against our strategies and we look forward to providing you with additional details at our investor day in New York City on December 11. This concludes our prepared remarks, so Rosie, we can open the line for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Mr. William Truelove of UBS.

Hi, guys. Good quarter. I want some clarification on a couple of things. First, on the deferral of revenues every year you have -- given the way timeshare accounting works -- you do have some deferral revenues. Is this an unusual amount of deferral revenues so that the $0.04 -- how much, given that you're going to have deferred revenues again next year, how much of that $0.04 that happens in the fourth quarter this year really needs to be added to the 2008 given that this continues? And second of all can you give more details about the all in additional cost to --

The additional cost to what? Will?

I think we've lost you.

I think we lost Will. But to go to his first question on the deferred revenue, and Gina will add in here as well if I miss anything. We always do have deferred revenue. That's the nature of a product that is sold that is in a development pipeline, so you've got percentage of completion accounting. At the end of 2006 we had about $25 million in deferred revenues. At the end of 2007 we'll have about $50 million we think of deferred revenue, which means that we built about $25 million of deferred revenue this year, and we think most of that -- we now see most of that will be in the fourth quarter. That is a very small number compared to -- we're on $2 billion of overall sales. We do expect to have some VOI deferred revenue in 2008. We are working through all of our modeling right now of what we think that would look like. And on our investor day we will spend sometime walking through our development program, what's coming on when so you'll have a better visibility for each quarter of 2008 and where we think the year will end up.

Great, thanks. Can you hear me now?

Was there a second part to that question, Will?

We heard only the part about all in, and then you got cut off, so I'm not sure I heard the rest of it.

Can you hear me now?

Yes.

I was talking about the term facility -- the additional $1 million of all-in cost you got for 2008 and the 10 basis points. That's far lower than what I think many people were anticipating given then current credit market. Can you talk about the a little bit more color the underlying benchmark changes and why it is only $1 million for next year given all the different -- current credit market? Thanks.

I think the easiest way to sort of understand it is the underlying benchmarks both on fixed and floating have gone down. The cost to hedge has not been nearly as we might otherwise have expected. So even though the spreads have increased, the baseline has gone down and all-in cost for the term facility as I said was 5.85(%). A little bit higher than the last one we did in May, but certainly within what we think is a reasonable cost to continue to access that market. On the conduit, I really think what we've been able to accomplish is to demonstrate to a wide variety of banks over an extended period of time how reliably our performance in the receivables is. Not to say that you know each of the banks didn't have a significant sort of credit decision to make, given all of the other commitments that they are being asked to make in the market, but we think that we've done a real good job in making sure that people understand what they are committing to.

Thank you so much.

Sure.

Our next question comes from Mr. Joe Greff of Bear Stearns.

Good morning, everyone. Steve, you talked about net growth coming a little bit less -- or I guess coming a little bit less over the next couple of quarters due to some issues. Can you talk about where sustainable net growth rate and sort of what is incorporated at this point for 2008?

Well, just to be clear on the delays, because sometimes it's a little confusing, our system size is going to come in at around 2% we think growth year over year. The problem is when you are looking at this weighted average number of rooms, if we open something in December versus November, that has an impact on our weighted average number of rooms. So actually it's more that weighted average number that is a tough one to peg on the timing of openings. We think that the growth the growth overall, Joe, to go to your second part of your question is -- is above the rate that we've been growing in 2007 and again our plan is to at the Investor Day is kind of to lay out where we see that coming out 2008 specifically. We haven't given specific guidance on that yet, but we will give guidance on our room growth expectation for 2008, and if I can ask you to hold off to then to get specific on it, we want to give everybody the same information.

Great. Thank you.

Our next question comes from Mr. Steve Kent of Goldman Sachs.

Hi, Steve and Gina. Again on sort of Joe's question about sort of the unit growth potential, one thing that I'm struck by is that it seems like some of the unit growth is coming from some of the higher RevPAR performing brands and could you just give a little bit of some discussion on that and how you see that laying out over the next 12 to 24 months? That's my first question.

Okay. Well, we see a lot of enthusiasm for the Wyndham brand as I mentioned in my comments. The meeting that we had down in Puerto Rico at the Wyndham Rio Mar was very well attended, and 300 people versus 100 people a couple of years ago when we had the meeting. And there's a high level of enthusiasm for that brand. So clearly we've gone through this transitional period with Wyndham where we knew we were going to lose a lot of properties. It was all within our modeling of what we thought would be in place after we bought the brand from Blackstone and we are stabilizing now. And I think you're right -- you will see growth in some of the higher RevPAR areas such as Wyndham and Wingate. And I think Baymont will also be a big grower for us going forward. Having said that, we are still adding product at Super 8 and Days Inn which are terrific strong brands, in the economy sector and we are adding product in some of our other brands as well. So it's a mix, but I think you are right -- you will see a little bit higher RevPAR product weighting coming in over the next couple of years.

And then separately on just timeshare trend, I think Gina said that when you look at some of the matrix things look still very very good. Was that -- Gina, were you referring more to the flow of people coming in to buy timeshare or were you also referring to the quality of the timeshare loans, meaning default rates, accounts receivables, et cetera are in line with your expectations?

I think it's both. And when I read metrics that we follow on a regular basis, we have an extensive volume of things that we watch both on new loan creation as well the performance of the loans that we've granted over an extended period of time. And I would say stable performance in the existing portfolio, good trends, and new loans being created.

Okay. Thank you.

Our next question comes from Mr. Patrick Scholes of J.P. Morgan.

Hi, good morning. Just a follow-up on timeshare tour flow. When I look at the year-over-year rate of timeshare tour flow growth, it looks like it's been decelerating from the first half of the year. How are things looking so far for you in the fourth quarter, specifically in October, with timeshare tour flow?

They are looking strong, and it's a small sample. We are looking at a couple of weeks of activity -- or a few weeks of activity but it's looking strong. One thing you have to consider, Patrick, is that the third quarter is our largest quarter for tour flow. And tour flow is somewhat dependent upon the number of salespeople you have at the location to run the sales operation. And so I think what you see is the fact that we've had the ability to push the growth through both existing sites as well as new sales offices that we've opened that were driving the first and second quarter to the degree as we talked about. The other thing is that we did establish within our WorldMark by Wyndham -- in-house sales offices that have collected more tours. Those in-house sales offices are ones that are at the resorts, which previously WorldMark as it was known, or Trendwest and now by WorldMark by Wyndham -- did not have those sales offices. So we've had that ability -- those are some of the new sales offices that we've opened. So we opened them towards the second half of last year and you are seeing a little bit of that lapping going on. But some of that is the sheer volume that we do and the size of the sales force.

Great. One or two more questions here. One thing -- I noticed that you sold -- had a $7 million gain on sales of Vacation Ownership properties because you had changed your development plans. Since you bought those properties, what have you seen that's changed that make you want to sell them? It's kind of interesting because you have some competitors who are looking for properties or in need of properties whereas Wyndham is actually selling some of them.

Well, those properties are properties that were purchased during our purchase of Equivest back in 2005? Or 2002, excuse me. 2002. And we've tried to integrate as many as we could of those properties into our system based on a variety of factors -- location, quality, the general demand for the product. And we determined that some of them which had available inventory were no longer a good fit with our -- with where our sales plans were focused on and where our demand indicators were. That doesn't mean they are not very valuable for somebody else in the market who is focused on a particular market, but it didn't fit into our overall plan. So we preferred to reallocate that capital into areas that we thought better fit our program.

Great. My last question -- just quickly on Ken May's departure -- will there any charges or impact on your fourth quarter EPS from any severance charges?

No. We took that hit in the third quarter.

Okay. Thank you. That's all.

Thanks.

Our next question comes from Mr. Michael Millman of Soleil Securities.

Thank you. Can you talk about timeshare availability and break that down between completed, construction, under construction and planned?

Let's see. In our 10-Q, do we break down land and the various components? I believe we do.

The components would be on the footnote to the 10-Q when we file it, Mike. It will be the same as what you had from prior quarters.

I don't think you'll see that it's shifted significantly from where we were before. From the beginning of the year, you did have the fact that we did buy some land that we reported previously. So our land number would be up a little bit. But I think you'll see that the other factors are pretty much in line with where we were before.

Actually I was looking for not what those were but what they would support in sales.

I'm sorry. I didn't hear that question, Mike. Can you repeat that?

For example, in your completed buildings, what's the sales potential -- existing sales potential in the completed buildings, in the buildings under construction, and in the nonconstructed?

Well, on a very simplistic basis if we have $1 million of completed inventory that's complete and sitting ready for sale, that should produce roughly $4 million of VOI revenue, because we run at a cost of sales that is around 25%. So I guess simplistically if you want to look at our finished product sitting on a shelf, you would see it would have the earnings -- the revenue potential about four times what's sitting on the shelf. Obviously the land in the uncompleted still has work to do in order to get it to a form where it's in a completed state, but that's the way to look at the completed fees.

When we look at the completed piece, do we know how much has already been spoken for? What I'm really looking for is the potential.

Well, anything that is sold then flows through the P&L as cost of sale. So if it's -- as you say spoken for, it would already flowed through the P&L.

We'll have to follow this up later. Second question is, is there some mix change? The volume per guest (VPG) sequentially was down again. I was wondering if it was just a sales mix change that is resulting in the numbers looking like they are down.

No. We had a strong we have a strong VPG, I think. I don't have the numbers in front of me, but I think that we generally have in our highest quarter a little lower VPG than we did in the prior quarter. It's at just the nature of the beast when you are -- when you are selling more and more product through your pipeline. The busiest season tends to be down a little bit. I'm looking at last year. It was flat last year.

It's been up in the last three years and it was down this year.

Yes. I would take no significance from that. I think it's a balancing act with VPG because you look at the tour flow that you have coming, your close rate -- there are a lot of factors that go into that, but I wouldn't put a lot of significance on that trend.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Mr. Jake Fuller of Thomas Weisel.

Hey, guys, it's very helpful to get the sensitivity to changes in the underlying cost on the receivables? How about the sensitivity to any changes in the underlying default rates of the portfolio? What would -- can you give us a sense of quantification, how that might impact earnings if we see changes there?

We haven't got that number at our fingertips here and I think what we've seen over many many years is that the default curves really haven't changed much, even the economy has cycled up and down. We can certainly look into that and see whether we want to provide a little bit of that sensitivity information on Investor Day.

From a broader standpoint, and it sounds like accounting is the answer but start with Marriott with for the last couple of quarters have really throttled back the earnings guidance, largely driven by changes in their timeshare outlook. What are you doing differently? How are you managing your business differently to avoid the same issues?

Well, it's really kind of a fundamental difference that we've been trying to articulate since we spun off, which is our timeshare business is a true Points based product. It's a real travel currency, and we can sell that product from multiple locations. We don't have to be sitting at the resort where the product is in order to sell it and we can be building product not where necessarily our sales offices are, but where we have high demand from our owner base. It is an extraordinarily flexible product that has allowed us to perform as we've performed this year and to maintain our outlook into 2008. The other thing that I will say is when we spun off and we went around meeting with investors, I took some flack -- we took some flack -- for the investment that we were making in timeshare. And at the time I was saying this is a high growth business. We need to be fueling this, and in fact we had frankly not been putting enough inventory into the pipeline previously. So we did spend to build this pipeline. We are now harvesting the benefit of that effort that we made over the last several quarters to make sure that we have adequate inventory, and that is why we've locked up parcel of lands in places like Las Vegas and Puerto Rico and Orlando to make sure that we have that growth prospect in the planning phase.

Great. Thank you.

Our last question comes from Mr. Bob Thompson of Advantus Capital.

Hi guys. Thank you. Just a couple of quick questions. In terms of the securitization and the conduit, is that -- is that process getting easier going forward? I mean like right now versus a month ago or six weeks ago?

I would say is a little spotty. As the news for the third quarter is coming out on the financial performance and as some of the financial institutions who are most active in this market would tell you, each of the individual institutions needs to make its own decision where it's going to deploy its capital. And we feel as if the ability to issue in this market and get commitments from very strong financial partners is part of what we've been able to demonstrate about the quality of the program that we run.

Okay. Is there a level of pricing or liquidity in terms of -- what would be your backup plan if we were in a period of a market where you basically can't get financing for four to six weeks? What's the backup plan?

Well, four to six weeks would not be a problem. We have -- we have this conduit facility, which has now been upsized to $1.2 billion. That's pretty sizable, considering that we do one or two term financings a year to take it out. So some years, we've only done one term financing. This year we happened to do -- actually we did three but two large ones, and so I don't think that that question of a disrupted market for a period of time of four to six weeks would create any issue. Fortunately, and this is an important factor -- fortunately the way we report our earnings related to our portfolio is we report it as we receive it. As we get the cash in from the interest income, we report the interest income and we report the interest expense as we pay it out. We do not report a gain on the sale when we do the securitizations. So we are not wed to doing it at one particular time and telling you -- oh gee, we didn't get a securitization done, therefore our forecast for the fourth quarter is off or whatever whenever it might be in the planning phase. We do it when we see the market is right for it. And to your prior question, if we had been talking August 4th about this, because that's when the crunch was the most severe, it would have been a lot more difficult to get it done just because everybody's attention was directed in other locations. The fact is that we still have great dialogue going on with our lenders in the banks who help us through this during that time. So we maintain that high level of confidence that we'll be able to get this financing done as well as the extension of the conduit.

Okay. Another question on RCI. Do you have a good management depth there, do you have a prospect in mind for taking over?

We have a great team there and I actually spent the last month or so traveling around to the Middle East and out to London to meet with some of our team. We have hired Egon Zehnder to do the search for us. And we'll be looking for a really high quality individual obviously to take the helm there.

And any thoughts on divesting or doing something different with the Knights Inn properties?

Well, Knights Inn is a great brand. It's a hard budget brand. We don't comment on M&A activity or decisions that we're making other than to say that we throw a lot of support behind Knights Inn and we think it is a great brand.

One last question. Any other -- what are some more of the main metrics you watch for possible slowdown, and what actions if we do get into -- say we got into a recession next year, what things do you do differently?

Well, there's obviously you go into a cost cutting mode if you see your revenue starting to lag out into the future and you might change some of your short term planning on projects that you are working on. Having said that, if you look at timeshare, which is the largest contributor to our earnings, timeshare has done well during up and downs in the market. It shown great resilience, which is again why we like that business so much. The other businesses I'll remind you are 60% of our earnings are driven by fee based fee for service businesses. So we are much less -- much less impacted by downturns than if we were the owner of the hard assets and we were subject to the risk of those lower margin type businesses. So we've shown in the past that we've grown earnings during difficult times -- during the first Persian Gulf War in 1990 we performed very well. And I think we feel confident that we've got the attributes within our business model to weather any storm, if one should occur.

Okay. Nice quarter.

Thank you very much. And I think, Rosie, you said that was the last question?

Sir, we have one more question.

Okay. I think we have time for one more.

Mr. Michael Millman of Soleil Securities.

Thank you. I wanted to follow up on the securitization -- the $455 million, what were you aiming for when you started the negotiations? And I have a cost question.

Mike, we had gone out with a smaller size, but we are always prepared given the access that we have to a pretty big portfolio to upsize if market demand is there.

So basically you are saying that the markets in fact like your paper.

They love our paper.

Can you tell us what the -- how much was the increase relative to what you went out with?

I think the original talk was $300 million or $350 million and we ended up at $455 million.

So that was very good. And secondly, just to clarify the all-in cost for the -- was 5.85(%) and that was how much compared with May?

It's less than 30 basis points higher.

And the $1 million impact -- that's taking into account the securitization and the conduit and not -- and assuming no increase in what you charged borrowers?

That is just the term facility, Mike, and the conduit is going to depend a little bit on what our average usage is going to be, and we'll have more color on the financing income picture when we get to Investor Day in December.

So there's no plans right now to increase your finance charges in line with the market?

We always look at what we charge our customers, and we use a number of different market oriented kind of benchmarks which is credit cards, auto loans, and we look to make sure that we are in line with market on that front.

Okay. But again this $1 million assumes no change?

$1 million assumes --

The P&L impact from the securitization assumes no change in your finance charges.

Just to be clear, the notes that were put into the securitization already have coupons on them. Those don't change.

Okay. Great. Thank you.

All right. And thank you all very much. Have a happy Halloween, and remember to drive around safely tonight with all the trick or treaters out on the road. Thanks very much.

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