Travel + Leisure Co (TNL) 2008 Q3 法說會逐字稿

We welcome you and thank you for standing by. At this time all payments from a listen only mode. After the presentation we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) Today's conference is being reported if you have any objections you may disconnect at this time. I had now like to introduce your host for today's call, Ms. Margo Happer, Senior Vice President of Investor Relations. Ma'am, you may begin.

Good morning. Thank you for joining us for the third quarter 2008 Wyndham Worldwide earnings call. Joining us today are Steve Holmes, our CEO and Gina Wilson, our CFO. Before we get started, I'd like to remind you that our remarks today contain forward looking information that is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our form 10-K filed February 29, 2008, with the SEC. We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to the comparable GAAP measure is provided in the tables to the press release and is available at the investor relations section at our website at www.wyndhamworldwide.com. Steve?

Thanks very much for joining us today. We always look forward to our quarterly calls as an opportunity to share with you the performance of Wyndham Worldwide and the developments within each one of our powerful businesses. However, before we get started, I want to spend some time up front addressing the elephant that's been in our room for the last couple of weeks. Specifically the status of our conduit and our liquidity. I won't spend anytime talking about how tight the credit markets are and the challenges in the current global economy. You all knows what's happening out there.

With respect tour timeshare conduit facility, we expect to close on a new facility lead by JPMorgan on or about November 10th, we expect the new conduit have the capacity of at least $800 million with at standard 364-day term. As we announced previously, we are de-emphasizing the growth of our timeshare business and our conduit does not need to be as large as in the past. Not surprisingly, due to the current credit market, the terms are not as attractive as the previous facility. The most significant changes are expected to be a decline in the advance rate from around 80% closer to 50% for new loans and an approximate 400-basis point increase in the interest rate. Clearly these terms will change the financial returns of our timeshare business, and I will address that in a few minutes.

With respect to our timeshare business, I would like to make a few observations and tell you where we are headed. First, we are not seeing the same level of pressure that others have seen with the marketing tail of timeshare. As we have repeatedly said, our points based timeshare model is relatively unique and has multiple distribution channels. As you saw with our third quarter results, our timeshare business continued to perform well because of its scale, and its flexibility. We can sell as much or as little as the consumer can afford to buy. This is a real testament to the product as well as the marketing and sales prowess of this business.

Having said that, despite relative strength in this business, the current credit environment requires some adjustments and that is exactly what we are doing. We have already mentioned that we reduced our sales pace for the timeshare business. This reduction will result in about a 15% decrease in gross VOI sales from 2008 to 2009. We expect our EBITDA from the timeshare sales to be in the $370 million to $410 million change for 2009 which is relatively flat compared to 2008. We are reduce the sales pace by closing the least profitable sales offices and eliminating marketing programs that were producing prospects with lower credit quality. Therefore, you will start to see our timeshare sales slow in the fourth quarter of this year, as reflected in our revised guidance. In addition, we have slowed or delayed our product development pipeline to create more cash flow from this business. We will sell the product on our balance sheet and complete our projects currently under development. We believe that our timeshare business will have adequate inventory to carry us through 2010, by spending approximately $300 million over the next two years on product development. As we have said before, the timeshare business is a net user of cash during periods of rapid growth, as it has been in the last few years. As we reduce the base of sales and limit our product development, this business will become a cash generator.

In addition to closing sales offices and eliminating some marketing programs, we recently made additional changes to our sales process. For example, we are shortening the term of the consumer paper, and we're increasing down payment requirements at the time of sale. Both of which will have the effect of generating additional cash flow. We are also increasing the interest rate on the consumer loans we finance. This sales strategy will over time leave us with a smaller consumer finance portfolio with a stronger credit profile.

With the uncertainty swirling around the securitized and asset-backed market, we recognize the liquidity that existed in this sector in the past may not return for quite a while. If we find that the markets are not opening, we are prepared to make further modifications to our timeshare business model to reduce our need for secured financing. We have told you in the past, that the timeshare business model is flexible and we have the ability and experience to actively manage it as circumstances dictate. We are demonstrating that flexibility in the changes we are making now to our sales and development pace for the remainder of 2008 and 2009. There are other changes that we can and will make to our sales and consumer finance practices to work within current and changing market dynamics. As Gina will cover later, these changes with along with a very volatile marketplace, make it more difficult to provide precise guidance for our timeshare earnings.

So how does all this impact our liquidity and how are we positioned today to weather this global credit storm? First since the start of the year, we have managed down our spending for timeshare inventory from prior guidance of $650 million to $750 million to our current expectation of about $430 million for 2008 - showing that we can adjust our spend to the environment. Second, the terms of our new timeshare conduit will reduce our advance from existing consumer receivables by $200 million and we have adequate capacity in our revolver to cover that reduction. Third, after accommodating the new terms of the conduit. We expect to end the year with about $200 million of capacity available under our revolver. Fourth, as we pare down this sales pace and development in the timeshare business, we expect to be cash flow positive. And finally, while we are expecting to access the securitized markets in 2009, we are prepared to privately sell some of our receivables as we have done in the past, or make additional changes to our timeshare operating model to further reduce our need for financings. Given the tools we have available, we are comfortable with our liquidity.

I will now review our operating results for the third quarter of 2008.

As expected, earnings for the third quarter showed growth in total and across each of our three business units. Once, again, despite a tough global economic environment, the Wyndham Worldwide business model continues to perform well. We have believe our brands, geographic distribution and diverse product offerings combine to produce a stable and resilient business model, which even in this environment produced a double digit third quarter adjusted EPS increase of 11% year over year.

We have worked hard to anticipate the challenges and cut costs, while driving for greater efficiency in order to achieve our goals. To that end, we recently announced a series of strategic realignments, which are geared toward greater customer focus, as well as cost containment - we don't believe the two are mutually exclusive. And while the catalyst for much of the change was to make adjustments for long-term strategic growth, we believe the steps we're taking will also contribute to our success as we navigate the current environment.

As you saw from the press release, we have identified some additional high return restructuring opportunities. When we originally announced the plans a few weeks ago, we were anticipating pre-tax charges of $10 to $15 million in the fourth quarter of 2008, and $5 to $10 million in the first quarter of 2009. We now anticipate pre-tax restructuring costs of approximately $25 to $30 million in the fourth quarter and approximately $5 to $10 million as we said before in the first quarter of 2009.

Specifically within the business units:

The hotel group delivered adjusted EBITDA of $76 million, a 9% increase over last year, excluding a $4 million charge relating to the strategic realignment. We are pleased with this result as it further demonstrates the resilience and scale of our franchise business model, which delivers predictable royalty revenue even in challenging times. Our international portfolio is growing, with top line royalty income up, 17% year over year. In addition, our ability to contain costs, coupled with the modest impact of the recent acquisition of Microtel and Hawthorn brands, position us well to the achieve our full year 2008 EBITDA goals.

Worldwide RevPar for third quarter of 2008 was down 2.7% over last year, reflecting a 4.2% decline in domestic RevPAR and a 1.7% decrease in international RevPAR, which was predominantly impacted by the UK. Year to date, worldwide RevPAR was flat versus prior year, with international RevPAR up 8% (or 3.8% in constant dollars) and domestic RevPAR down 3%.

This quarter, we executed 125 contracts, representing another 13,000 rooms. Since this time last year, overall system size is up 2%, excluding the impact of Microtel and Hawthorn brands acquisition, and the total international portfolio is up almost 17%.

Our pipeline is strong with over 111,000 rooms, a 7% increase over year ago and a 2% increase from last quarter - indicating strong interest in our brands even in these tough times. Approximately 41% of our pipeline is international, up from 35% a year ago. The Wyndham brand continues -- excuse me. Wyndham brand makes up almost 20% of our total pipeline, with almost three quarters being new construction. And part of that pipeline are three new Wyndham Garden hotels that will open in Manhattan in the next few months. Of our entire pipeline, over half represents new construction. Over 80% of the new construction pipeline that is scheduled to open by the end of 2009, has financing already in place. Since the remainder of the pipeline is conversions, there are minimal capital requirements for these franchisees.

The integration of our newly acquired brands Microtel and Hawthorn Suites is nearly complete and we believe the opportunity for growth in these brands even in a week economy, is excellent.

Now turning to vacation exchange and rentals.

For the quarter, group RCI reported solid growth 5%, (3% adjusted for currency) and EBITDA growth of 2%.

Group RCI's transaction volume decelerated at the end of the quarter as the uncertainty in global markets increased. However, EBITDA growth of 2% reflects continued focus on expense control partially offset by higher rental costs of sales. As part of the cost control effort, RCI began implementing a restructure plan in third quarter focusing reducing overhead cost by funding technology to drive on-line marketing share growth.

The restructuring plan is primarily focused on stream lining the international exchange operations by reducing management layers to improve regional accountability. In North America we are accelerating the move to RCI's new web based exchange platform and our restructuring plan better aligns our exchange functions with this new platform. The majority of the restructuring plan will be implemented in the fourth quarter of 2008.

In the vacation exchange business revenue was down 2% despite 4% growth in average number of exchange members. Annual dues and exchange revenue per member was down 5% for the quarter, reflecting a general slow down in exchange transactions. We believe this is linked to global economic uncertainty, coupled with members postponing longer range vacation plans and an increased impact from our members deciding to simply return to their home resorts or clubs when RCI exchange is not required. Member growth moderated only slightly during the quarter, however we expect a further slow down as vacation ownership developers reduce sales and marketing programs in reaction to the overall economic environment.

To address these issues, RCI is launching member retention and renewal campaigns, and continuing to promote value vacations. As part of this, its drive to continually improve member experience and move more of its transaction processing to the web, RCI is launching enhanced search for Weeks exchange in early November. Earlier this year we successfully launched the enhanced search for rentals, which resulted in an 18% increase in web bookings during the quarter. The enhanced search for Weeks program will dramatically improve the online experience for RCI's largest member base, enhancing and significantly simplifying their web search capabilities while providing more robust information. RCI has already improved web penetration from 12% in the third quarter of 2007 to 16% in the third quarter of 2008.

Turning to group RCI's rental business, revenue growth of 9%, or 5% adjusted for currency, was driven primarily by our Landal GreenParks business. Overall average net price for vacation rental increased 9%, or 5% adjusted for currency, reflecting a conversion of one franchise Landal property to a managed park and more favorable pricing mix. Vacation rental transactions were flat for the quarter, primarily due to softness in the US member rental market, which was impacted by lower member interests in additional vacations. To support the US member rental business, we're focused on close to home travel campaigns and targeted promotional activity. Group RCI's fourth quarter forecasts reflects lower transaction volumes which weaken at the end of the quarter this past quarter, and a negative impact from the stronger dollar. We are reducing revenue in EBITDA to reflect the current economic environment and in Gina will provide more detail shortly.

Let's turn now to our vacation ownership business.

I covered the modifications we are making to our timeshare business at the start of the call. Now I'll spend a few minutes discussing our results for the third quarter. Our diverse resort portfolio and our points based product continue to provide resiliency within our business model supported by a terrific sales organization. Growth VOI sales increased 3% versus prior year reflecting stable tour flow and DBG compared with the same period in 2007.

As noted our third quarter sales efficiency, as measured by VPG, are close of those of one year ago. As we stated before, we've, we believe our flexible points based product gives us significant advantage versus those developers who sell a fixed week and therefore a less flexibly priced timeshare product. Points based timeshare enabled our perspective buyers to purchase the amount they want, ensuring that we will always have a product and a price to match their pocket book. More over, points enable multiple, shorter stays as opposed week long vacations - a key distinction as consumers increasingly opt for less costly and shorter getaways.

We recently conducted a Wyndham Worldwide research study to confirm our strategy of re-banding our vacation business with our Wyndham name we are pleased to see that 71% of our owners who bought from us under the Fairfield and WorldMark names believe that their time shares is more valuable to them today under the Wyndham brand name. Further these owners ranked the Wyndham vacation ownership product higher than any of our competitors.

So to wrap up my remarks, once again, in a very difficult economic environment, we are proud to report year over year increases in EBITDA in all three of our businesses. With our recently announced restructuring plans, we are taking the necessary steps to position each business and there by the Company to continue to perform well within the current economic downturn and at the same time be poised for growth when the economic recovery begins. In the meantime, we'll continue to deliver value to well over 100 million guests, add more franchised hotels to our system to surpass the 7,000 hotel mark, affiliate more resorts and rental properties to RCI family of 67,000 plus locations and leverage our tremendous scale to deliver results for our franchisees and affiliates and of course, our shareholders.

Gina?

Thank you Steve and good morning everyone. Since Steve spent a good amount of time going through the results, let me detail some additional items from the quarter, focus on updates for 2008 guidance, and then provide you with some high level thoughts around 2009.

As you saw from the press release, this quarter's result were pretty much when we expected which is quite an achievement in this environment and as Steve mentioned, illustrates the strength of our model and the dedication and skill of our employees and consistently executing that model. Business unit performance was consistent with our expectations and corporate performance was better than expected, reflecting $4 million from a combination of continued cost containment and favorable currency translations.

Like many companies, we suspended our share repurchase program during the quarter. We have $155 million available under the current authorization, but at this time we expect to defer further purchases until the macroeconomic outlook and credit environment are more positive.

Overall, the consumer finance portfolio continued to perform within our revised expectations during the quarter. Write offs as a percent of the quarter end gross loan balances were close to 2.5% for the third quarter, consistent with levels we've seen in the last four quarters. Provision for loan loss for the period, as a percent of grow VOI sales less deferred percent of completion revenues, again was consistent with recent periods.

To provide more transparency, you'll notice that we've included a separate line on the income statement had on table two this quarter for consumer finance expense. This information was previously available in the foot notes, but now you can easily calculate the interest margin on the face of statement. That consumer finance interest expense is one component of the costs associated with consumer finance operations. Other costs are integrated in the WVO and corporate overall cost structure, our best estimate for EBITDA contribution for the timeshare financing operation for the last several years has been somewhere between 20% and 30%, depending on how we allocate shared costs and excluding any allocation for loan loss. Obviously, that contribution will be reduced as we look at expected financing conditions going forward, and those assumptions are included in our 2009 guidance.

Now, moving onto our expectations for the remainder of this year.

We expect four quarter EPS of $0.41 to $0.46. That assumes neutral fourth quarter deferred revenue from vacation ownership and a reduction of about $0.01 due to changes in the foreign exchange spot rate since the end of the third quarter.

We have slightly modified full year guidance based on current business trends. Despite the challenging environment, our revenue drivers for the year are tracking to expectations, albeit hovering around the lower end of their ranges. We have moved quickly to scale back vacation ownership, and we, and based on that initiative we now expect full year 2008 tour flow and volume per guest to be relatively flat compared to 2007.

In lodging and group RCI, we are taking into account these generally weaker revenue drivers. So we expect 2008 lodging revenues to be $755 to $770 million, the majority of the revenue shortfall was in low or no margin revenues, such as reimbursable cost pass-through in the managed hotels. Therefore we are not changing EBITDA guidance of $235 to $245 million as we have been able to mitigate the remainder of the revenue short fall with continued cost containment.

We're adjusting group RCI 2008 revenue range down to $1.25 to $1.27 billion, and EBITDA down to a range of $300 to $310 million. About $45 million of revenue reduction and $11 million of EBITDA reduction relates to current foreign exchange assumptions compared to the previous July 31st guidance. The remainder of the change relates to trends that we've send in the third quarter and last few weeks.

Taking our recent operational changes into consideration, we are adjusting vacation ownership revenue range down to $2.33 to $2.38 billion (or down about $120 million to $170 million). EBITDA will be down to a range of $360 to $385 million, compared to former range of $390 to $410 million.

There's no change for guidance of depreciation and amortization. We've reduced or net interest expense guide of $5 million to a range of $70 to $80 million to reflect our current estimates regarding borrowing levels, rates and capitalized interest for Q4. We expect our full year tax rate to remain at about 38%.

One other thing related to the rest of the year. Under FAS142 we are required on an annual basis to perform a goodwill impairment assessment, which requires, among other things, a reconciliation of our current market capitalization to shareholders equity. Based our recent stock price, our total shareholders equity exceeds our market capitalization. If the stock price continued to be depressed, we may be required to record a non-cash charge for goodwill impairment for the fourth quarter. We are unable to estimate the amount, if any, of a potential charge at this time but for your reference our total goodwill balance as of September 30, 2008, was $2.7 billion (comprised of $300 million related to lodging, $1.1 billion to our vacation and exchange rental business and $1.3 billion to our vacation ownership segment) and our current market cap is $1.3 billion, any charge could be substantial.

Now moving onto 2009. I'll echo what many other companies have said during this reporting cycle and caution that the economic environment continues to be unstable and visibility is reduced. This preliminarily look at 2009 is based on current foreign exchange rates and significant movements between key operating currencies will be reflected at actual results. Recent strengthening in the dollar versus other currency, for example, has reduced our expected 2009 growth in revenues and EBITDA for RCI from 7% and 5% respectivly. Having said that based on current trends we currently expect total Company revenues of $4.1 to $4.5 billion and EBITDA of $830 to $890 million for 2009.

We expect a vacation ownership's revenue to be relatively flat and that assumed about $75 $175 million of recognition of previously deferred percent of completion revenues. Under the current scenario, vacation ownership's EBITDA will also remain relatively flat reflecting improved margins on the role in of those deferred revenues and an lower average level of securitized borrowing. There will be a corresponding increase in corporate interest expense net to about $100 million next year based on higher corporate borrowing levels.

This early look at what we expect for 2009 will be refined as we wrap up our budget process in the coming weeks. We expect to provide a more detailed outlook for 2009 in December, via a conference call instead of an in person investor day and we'll nail down the date and time for that call in the near future. And I'll turn it back to Steve before we go to Q and

Thanks Gina. Before taking questions, I'd like to close with a few key points. First, we are well positioned to whether this economic storm. We previously announced and began working on a strategy to rebalance our earnings sometime ago to lower the contribution from vacation ownership in favor of our hotel group. The current economic conditions have accelerated that strategy and we have taken the necessary steps to enhance our liquidity. We have the talent and management expertise to perform in these conditions. Our fee for service model combined about our global scale and product diversity give us solid financial stability. Second, in the past when the economy has been soft, our franchise hotel brands have been particularly attractive to hotel owners and financial institutions, seeking global marketing, sales and reservations. Further, customers aiming to save but not stop their travel choose our brands because of their exceptional value. Finally, our current share price provides investors with a very attractive long term value.

On that note, Gina and I will now take any questions you have. Evan?

(OPERATOR INSTRUCTIONS). Our first comes from Steve Kent from Goldman Sachs, your line is open, Sir.

Hi, good morning. Two questions, first Steve and Gina, just walk me through the margin improvement and timeshare, again, for, essentially for late '08 into '09. I guess what I'm struggling with, it feels like part of it is just reducing marketing expense and at the same time it's also just slowing down timeshare, and if you slow downtime share you just naturally get an improvement in margins because of, sort of the way, the mix of the business is going, and I had this conversation with somebody already this morning and we're just trying to understand that.

And then the second question is, just on your pipeline, you know, seem to be gaining some traction here, are you gaining market share from your competitors in part because you're doing any discounting or, or offering any financing or doing any of those other things or is it, just simply people transitioning from other brands in your brands or independent into your brands?

Okay. Thanks for those questions Steve, between Gina and I, we'll tackle them. First on the margin improvement question, on timeshare, you're right, that as you, we take down the, the volume of our sales pace and we're not growing at a double digit rate, we will get some marketing efficiency, both from the use of the Wyndham brand as well as from the fact that we go through a process of, of removing the, the sales offices that are not performing as well and taking out the marketing programs that aren't performing as well, so it's kind of Darwinism survival of the strongest and the strongest offices are continuing to sell, so that's a kind of a natural, a natural impact of the, of the slow down of the business. And we would expect to see that, that continue, but at the same time, obviously we've had to take some steps to remove some of the fixed overhead as well. And then Gina, you want to address the loan loss.

Yeah one of the other things you see if you look at this quarter or the year to date performance, is, loan loss is also reducing revenue, which has a modest impact on the reported margins, and we're doing our very best to analyze and make sure that we're estimating next year appropriately for the impact that that will have as well.

And then finally we will for the margin question, we see some interest expense shift from the EBITDA timeshare down to our corporate interest expense line. As some of our, some of the financing that we previously did was securitized positions, are not going for as large relative to the size of the business, so there there will be some shift tune, so hopefully Steve, between all that we answered the margin question.

The second one about why are we attracting people to our hotel brands? We have continually attracted people to our hotel brands. The fact is that in the past few years we've been terminating a large number of properties, kind of cleaning out our brands, but we've always had a high level of interest in the brands. What we've seen historically in difficult times like these, two things happen. One, the brands become more, more relevant to the hotel owner. A hotel owner who's performing well in a, in a great market because, "a rising tied lifts all boats" has been the case for the last few years, and owners may not feel the need to go branded and may be comfortable remaining independent. As time gets tougher, there's definitely, an attraction of joining a brand. Our brands happen to be very, very powerful brands in the economy in mid scale sector, now with our new Wyndham offering we have a brand that we can compete very effectively in the upper scale market so I don't think there's any rate change other than it will be probably and we'll see more of it, a shift of people looking to, to move toward brands. But we've maintained a strong position with our brands you know, throughout the years.

Thank you.

Our next question comes from Bill Truelove of UBS. Sir, your line is open.

Hi I've got a few questions, Gina maybe you can help me out with a few of them. The conduit facility - I knew it was due around October. Now around November 10th, is there any shift in that to the corporate line of creditor is that just, how does that work?

You mean the shift, the shift in the timing? No there won't be, I understand your question. There won't be any shift in it the conduit will remain in place and we're working with JP Morgan about seven other banks to put the new facility in place over, over the next few days. In essence to give you kind of a little more color on the update, we're, we're in the process of going through the rate agency, all the documentation that's required to complete in order to, to close the facility, but we're very confident based on all the discussions with the banks which we've had over the last, 48 hours, to, to get this closed, at that point in time. At the time that we closed the transaction, there will be a shift, and that's what I mentioned in part of my script is, when we close the transaction, we'll be taking roughly around $200 million, that's currently out in the conduit, and we will fund that from our revolver, because our advance rate will be lower on the revolver. On the new conduit. I think the terms we're looking at is, about a reduction of 80% to 60% immediately, and then there's a, then there's a 50% advance rate for all new loans that are going in, so I'm not sure which question you were asking. I answered a couple of them there.

Yeah. That was helpful. Quickly on timeshare cash flow expectations. You mentioned you were going to $370 million and $410 million in EBITDA in timeshare. If you do $300 million in Capex over 2 years, I'm just going to use roughly $150 million annually, so essentially I can take the EBITDA minus the cap ex, any other type of adjustments on segmentation basis for cash flow and timeshare?

The only other pieces we haven't given you yet, we haven't given you an idea about what the operating cap ex is going to be, and we are still in the process of working with the business units to, to sort of take their list and scrub them appropriately, which we should have some very sort of solid numbers to share with you when we talk in December and then there's also some modelling related to working capital strain related to receivables.

Can you --

Unfortunately you don't have enough information to get a real beat on it.

Yeah so that's common theme. So can I have maybe what was going on in 2008 so far? Or what the projection was for 2008 for those two line items.

We did show in the, in the information we've given in the past what we thought the, the receivable financing take out would be from, on a cash basis. We haven't updated any modelling for, for the, for the timeshare business by itself. We will be doing that in the December call that we do when we, when we kind of finalize what 2009 will look like and some of it will be depended upon the way that we finance our receivables. If we take them to them to the private market as we've done in the past, the advance rate may be what we're, what we're currently achieving. It may be, it may be better, it may be worse, I'm not sure. It depends on what the market's like at the time. Based on how we're looking forward to 2009, I think the best way to model it would probably be to assume that 2009 timeshare is pretty much cash flow neutral. If we can make it a cash flow generator as soon as 2009 will do it, but, but I would probably model kind of neutral.

Our next question come from Chris Woronka of Deutsche Bank. Your line is open, sir.

Hey good morning. Steve, how do you look at some of the adjustments your making on cap ex and op ex on timeshare. How do you balance that with a year to two-year weakness in the economy versus your longer term view of the business? And kind of how quickly do you, do you reign in cost and how quickly can you bring them back? And then the second question is, what kind of appetite do you have for more lodging brand acquisitions given the liquidity situation, investors are having a preference for preserving capital but you might see some, some opportunities out there that where pricing's attractive?

Thanks for your questions, Chris. The, kind of the, let's talk about open ex and cap ex for the timeshare business first and how quickly can we adjust the cost spend. We've shown that we can adjust it pretty quickly. I mean, we're, we're decreasing our sales pace by 15% next year over what we did in 2008. And we're effectuating that now. Now, we're taking it down by, by taking out the unprofitable sales offices and marketing programs, we can we could go deeper if we needed to. We would prefer not to, because we've got a great business model. We've got incredible sales organization and marketing group down at the vacation ownership group and we think that we can be very, very profitable at the, at the pace that we're now projecting for 2009.

But, if we needed to be down lower because the financing market was worse, we would do that and we would do it very quickly. Much of the cost associated with timeshare is variable cost, when you look at it. When we sell timeshare, about 25% of the revenue is spent on the product. So, if we're not selling anything, we don't have any product costs, its just going to sit on our balance sheet. About 25% of the sale cost of the price is commissions. Sales commissions. Obviously if we're not selling anything, those go away. And another 25% is marketing, and of that marketing, probably about half of it you'd consider to be variable, because a large portion is just the incentive that we give away at the time that we sell, sell the timeshare, whether it's Wyndham awards points or some other, some other element that we give away when we sell the timeshare, and the remainder is other than our profit is GMA that we have to obviously right size for the size of the business as we project it needs to be.

So I don't mean to give you too much detail Chris, but I'm just trying to walk through the elements of why we can flex this business very, very quickly. And, you know we're obviously hopefully that there will be a return in the securitization market sometime in 2009, but if there isn't we'll probably place the re-receivable. With if we don't seize that's possible. We'll have to downsize the business further.

And then with respect to the acquisition we, I think it's safe to say that right now we would probably view liquidity as a more important aspect than acquisitions, even though there may be a lot of attractive opportunities out there. We've got to see a stabilization of the, of the credit markets before we start turning our eyes to, either acquisitions or share buy back.

Our next question comes from Kevin [Maloada] of JPMorgan. Your line is open, sir.

Good morning I have a question questions on balance sheet and capitalization issues. The new $800 million conduit -- kind of get your expectations for usage in 2009?

Secondly, net debt, what you're expectations are for year-end of '09 and also are you working to increase the revolver size or the corporate revolver size shall?

And then lastly, cap ex excluding timeshare development for 2009? Appreciate it.

Okay. I'm just writing down the questions because you've got these multiple questions and they become challenging. The conduit, what I said was the conduit would be at least $800 million. Obviously we're still bringing in a few people and we're trying to get the, the best balance of our conduit facility, and so we know that it will be at least $800 million. The just to kind of give you a sense what have we've done in the past, the average draw that we've had in the conduit has been somewhere around $600 million in 2009. Looking forward to what the, of what we think the draw will be in the conduit for 2009 based on our current sales base, we're thinking it will probably be around $500 million, I'm not sure it answered both the questions you had there.

We're not currently looking to increase our revolver. We have a 1.2 -- I'm sorry. A one, a $900 million revolver. Excuse me, $900 million revolver we think that's adequate to what we need.

With respect to the cap ex excluding, excluding timeshare for 2009, I think for purposes of, if you're trying to model something, for purposes of modelling, I would assume that it's about the same level as it was for 2008, and we'll try to give you better visibility when we have our call in December.

Our next question comes from Michael Newman of Soleil Securities. Your line is open.

Thank you it's Soleil Securities. I guess going over some same ground on the timeshare development, how is the development financed? And when you complete development, does, does it go from, if as a construction loan to some other loan and do you have that available? That's the first question.

We, there is two ways that we finance the development of timeshare, Mike. One is the, one is just we do it on our balance sheet. We do off the corporate availability of the revolver. The second is that we use developers to build for us, turn key developments and we've done that a number of times, and, and actually have moved mother to that model over the last year or so where we'll find a developer who has a piece of land and wants to develop it for us, and we negotiate a fixed price for that development. So those are the two ways we do it. We do not go out and get construction loans.

So the, when you show, what you show on the balance sheet, does that include what's being turn keyed for you?

On the inventory, is you're question related to inventory?

Yes.

Only if we've closed on it, obviously. If we've purchased it, it's then in our balance sheet yes.

And it's in the commitments table in the 10-Q by year of when we expect to actually execute those commitments

Could you give us some numbers as to what that looks like in total for '09 and 2010?

Well it's included in the $300 million that we expect to spend over the next two years, Mike. Some of the projects that we are, that we will be closing on in 2009 are turn key projects.

Yeah. And if you look at the second quarter 10-Q in the commitments table inside the financial condition liquidity section, you'll see our best guess as of that point in time. We've obviously adjusted that so stay tuned and you can look a 10-Q when we file it shortly.

And looking at, it looks like, I guess 30,000 feet, that you're saying '09's earnings will be kind of similar to 08's less something on the order of $0.30, $0.40, $0.50 of interest, is that the correct way to look at that?

That sounds a little hey on the interest. There will be more interest expense, but not too, not to that tune. I mean, $30 million, if you meant $30 million, it's probably, that might be in the neighborhood. But not $0.30.

(OPERATOR INSTRUCTIONS).

All right. Evan, it sound like we have, we have no more questions. We appreciate everybody's time. We, we look forward to talking to you next in the, on the December call to give you an update of, in more detail for 2009. And we appreciate all your support, and look forward to finishing the year strong. Thanks very much.

This concludes today's conference, you may disconnect at this time.