Travel + Leisure Co (TNL) 2009 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded. At this time I will turn the call over to Margo Happer, Senior Vice President of Investor Relations. You may begin.

Thank you. Good morning. Thank you for joining us today. With me are Steve Holmes, our CEO, and Tom Conforti, our CFO. Before we get started I want to remind you that our remarks today contain forward-looking information that is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our form 10-Q filed November 5, 2009, 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 table to the press release and is available on the Investor Relations section of our website at Wyndhamworldwide.com. Steve?

Thank you, Margo. Good morning, everyone, and thanks for joining us on this snowy Wednesday morning in northern New Jersey. As you saw from our press release, we had another great quarter. And overall a terrific year despite the tough economy. We continue to demonstrate strong execution against our strategic initiatives and delivered fourth quarter EPS of $0.40 compared with guidance of $0.35 to $0.38. Our full year adjusted EBITDA of $830 million was also ahead of our guidance.

Today I will talk with you about our 2009 achievements, our exciting plans for 2010, and some major decisions we've made regarding how we will deploy free cash flow going forward. Then Tom Conforti will review results and walk you through 2010 guidance.

Overall, we've see some signs that the economic and operating environments are stabilizing. Like others, we are seeing improvement in the upper upscale segment with Wyndham brand same store managed portfolio RevPAR in the US up over 12% in January. At the same time, unemployment in the US, combined with ongoing consumer concerns about the economy, continue to pressure consumer spending and RevPAR in our primary economy and midscale industry segments. The lower price segments were not impacted as much during the downturn and will probably follow the upper segments out of the recovery. However, we're confident that our resilient business models, our proven ability to execute and our our growing free cash flow position us well strategically and financially for 2010 and beyond.

We continue to make great progress in transforming our businesses to maximize free cash flow. In 2009, consistent with our strategic decision to cap the size of our traditional timeshare business, we reduced inventory spend and reduced receivables in this business. These actions, combined with other cost control efforts, drove free cash flow of $541 million in 2009, a turn-around of over $600 million from 2008. For 2010, we've also introduced additional disciplined balance sheet reviews into our budgeting and forecasting process and a balance sheet efficiency component into our executive compensation programs. This will help maintain our focus on maximizing free cash flow across the organization.

Our transformation positions the Company well for future growth, profitability and cash flow. We expect sustainable annual free cash flow of $500 million to $600 million in the coming years and we are committed to deploying the cash flow to drive shareholder value.

We expect to reinvest a portion of our free cash flow in our Fee-for-Service businesses when we have opportunities that are attractive from a strategic and financial perspective. We also intend to return a greater portion of it to our shareholders through increased dividends and opportunistic share repurchases. In fact, we made two significant announcements today that address our capital allocation plans.

First, we have tripled the dividend, which puts us at a payout ratio of approximately 30% and a current yield of approximately 2%. This decision demonstrates our strong confidence in our business prospects, as well as the sustainability of our free cash flow going forward. We expect to generate over $2.5 billion in free cash flow over the next five years, which enables us to make this commitment now, while maintaining a sharp focus on our credit metrics and continuing to strengthen and grow our businesses. Tom will walk you through our dividend policy shortly.

Second, we intend to resume our share repurchase program on an opportunistic basis. We have $157 million remaining under our current authorization.

Now, let me take you through some of the highlights of our strategic initiatives and results. As a reminder, our mission is to be the leader in travel accommodations, welcoming our guests to iconic brands and vacation destinations through our signature count-on-me service. And of course, our primary objective as a public Company is to increase shareholder value. Our key strategies to support these goals are to increase market share by delivering excellent service, grow cash flow and operating margins through superior execution, and emphasize our Fee-for-Service business models, which accounted for 65% of our EBITDA in 2009.

I will start with the Wyndham Exchange and Rental, which increased adjusted EBITDA by 9%, excluding the net effects of foreign currency in 2009. Our team superbly executed their business plan, demonstrating their technology and marketing leadership across the global exchange business and expanding our vacation rental brands while growing operating margin.

The exchange side of the business, RCI, culminated a fantastic year with an annual affiliate meeting last month in New York City, which drew record attendance. The theme of the event was the innovative value-added services we provide. RCI continues to dominate on the technology front, providing now functionality, not only to its 3.8 million members, but also to its over 4,000 affiliated resorts. For example, RCI .com is now available to our club affiliates as a transparent online booking tool. So, for example, Hilton Grand Vacation Club owners can book within the Hilton Club or transact an RCI exchange all through our portal. Developer affiliates using the new web interface have achieved significant gains in online transaction penetration rate in a matter of months.

On the consumer front, we successfully completed a significant RCI.com upgrade in November, which expanded our cutting edge and Enhanced Search technology to our over 1 million points members, giving them complete and easy access to the tremendous breath and depth of our global portfolio. We also initiated automatic electronic status updates on pending requests, which historically have accounted for approximately 12% of our call volume. Our efforts to date have resulted in 24% penetration of online transactions in the fourth quarter of 2009 compared with 13% in 2008 and resulted in $5 million of sustainable cost center savings throughout 2009.

Our European rental businesses delivered solid results despite the difficult economic environment. These businesses demonstrated strong resiliency during this downturn, as leisure travelers throughout Europe remain committed to their vacations. Our U.K. cottage rental business had an especially stellar year, aided in part by a weak pound sterling resulting in increased domestic travel. This business annually serves over 1 million leisure travelers through exclusive listings of 17,000 rental properties. Excluding the net effect of foreign currency, revenue increased by 5% and contribution margin increased by over 30% compared with 2008. Ongoing investment in e-commerce is also yielding results. In 2009, 73% of bookings were made online, up from 59% in 2008, supported in part by a 21% increase in Google click-through rates. Additionally, the U.K. cottage rental business reduced marketing costs by applying enhanced analytics to the 4 million customers in our database, as well as focusing efforts on the most effective marketing channels, resulting in higher marketing conversion rates.

We have a scalable efficient infrastructure supporting these two great business models, vacation exchange and vacation rentals. We completed restructurings and other cost savings initiatives in 2009 that eliminated over $50 million annually in costs. We focused primarily on increasing efficiency rather than eliminating headcount, resulting in sustainable cost savings and better run businesses, which will support margin expansion in future years.

Moving to the hotel group, we believe that strong well-supported brands and increasing reservation contribution are paramount to our ability to retain and attract new franchisees. As I said earlier, historically, the economy in midscale segments, compared to higher end segments, have been more resilient during economic downturns and exhibited slower recovery. So we will use what we believe will be a transition year to heighten our focus on executing on the blocking and tackling in this business. We are launching a series of strategic initiatives with the goal of strengthening our brands and delivering a reservation experience that maximizes value for both franchisees and consumers. Our efforts will focus on the following areas.

First, we will drive bookings through online channels, by improving consumer shopping experience on our brand websites, by enhancing connectivity to online travel agents, and by increasing product exposure on OTA websites.

Next, we will increase occupancy and allow for better pricing opportunities by insuring all our rate plans are consistently available across all channels and by equipping franchisees with more competitive rate information to enable them to make better rate-setting decisions.

And we will continue to invest in our international platform, with a keen focus on priority markets.

We expect the multi-wave implementation effort on these and other strategic initiatives over the next few years, as we continue to build capabilities that enable future growth.

We continue to make great progress on building the Wyndham brand also. We opened over 2,000 Wyndham rooms in the fourth quarter and nearly 4,200 rooms during the year, the majority of which were international, with approximately 1,200 rooms in China, including the Wyndham Grand Plaza Royal in Hangzhou, 1,000 rooms in Mexico, including four ocean front properties, and 225 rooms at the Wyndham Apollo Hotel Amsterdam.

On the domestic front, we opened the 255-room Graves 601 Hotel, Wyndham Grand, which is the largest upscale meeting facility in downtown Minneapolis and has earned numerous accolades.

Wyndham Vacation ownership had another solid quarter, wrapping up a year of transformation for that business, reducing the size of our business from $2 billion in vacation ownership sales to $1.3 billion, while maintaining high levels of business momentum. We're in the process of transforming this business to move from a growth orientation to a dramatically improved cash flow and return profile.

And we're seeing great success. We reduced our inventory spend from $414 million in 2008 to $189 million in 2009. Cash down payments for the quarter were 22%, up from 13% in the fourth quarter of 2008. In addition, for the full year, we reduced the percentage of sales financed from 66% in 2008 to 55% in 2009. In addition, FICO scores for the full year 2009 were 724 compared with 694 in 2008.

We are also making great progress on our alternative business model for timeshare. With product in Myrtle Beach now registered under our asset affiliation model, we expect to begin sales this month. While we remain in the early planning phases for this offering, we are confident this will be a very successful model going forward. Overall, we believe there is plenty of product available with over 5,000 units in our deal pipeline. To take full advantage of the opportunity, we are exploring various programmatic approaches for this business.

And finally, for Wyndham Vacation ownership, which had a great quarter, we started the year strong as well. And on January 26th of this year, we hosted the grand opening of Wyndham Vacation Resorts at National Harbor, our newest resort located in the heart of National Harbor and just minutes from the snow-covered nation's capital. This is our second property in the market, joining Wyndham Old Town Alexandria, which opened in 1999 and remains one of the most popular resorts in our portfolio. This resort will cater to the growing travel trend among timeshare owners to visit major metropolitan centers and is just one more way we're keeping ahead of the curve for those looking to get maximum value for the vacation dollars.

In summary, I'm pleased with our results, strong balance sheet, and enhanced cash flow. Tripling the dividend and resuming our share repurchase program reflect our confidence in our ability to continue to execute and to deliver significant returns to shareholders now and in years to come. And now I will turn the call over to Tom to go through our results and guidance in more detail.

Thanks, Steve. I will walk you through the details of the quarter, talk about 2010 guidance, and cover some additional topics.

Companywide revenues, which included a $46 million roll-in of previously deferred sales related to the percentage of completion accounting, were flat compared to the fourth quarter of 2008. As Steve noted, we exceeded our EPS guidance for the quarter and our adjusted EBITDA guidance for the year.

The Company's balance sheet is in great shape. We had approximately $870 million of capacity on the corporate revolver at the end of the year compared with approximately $290 million at the end of 2008.

Our debt to EBITDA ratio, as defined by the rating agencies, is at 3.1 times. We have no significant near-term maturities and we have significant room under our covenants. Overall, we believe we have an investment-grade profile.

Cash from operations was approximately $690 million in 2009 compared to just $109 million in 2008, resulting in a breakthrough year in the Company's generation of free cash flow, which we define as cash from operations, less CapEx, and hotel development advances. With a free cash flow turn-around of over $600 million, our results were transformational. Based on these results, as Steve noted, our board of directors has authorized a three-fold increase in the dividend and we will resume our share repurchase program. These decisions were based on our belief that the Company will sustainably deliver $500 million to $600 million in free cash flow well into the future, that our current capital structure is an investment grade profile, and that we have sufficient flexibility to make value enhancing investments in our Fee-for-Service businesses.

Our dividend payout is now about 30%, with a yield of approximately 2% at our current stock price. When we came out of the box with the increase, we wanted to target a 2% dividend yield. Going forward, our dividend policy will be to at least mirror the rate of growth of our business. In addition, on share repurchase, we are reactivating our current authorization with a balance of $157 million.

Now, moving to segment performance, beginning with Wyndham Exchange and Rentals, it once again delivered excellent results, ending the year ahead of our guidance. For the quarter, excluding the net effect of foreign currency, revenue and adjusted EBITDA were flat. On a similar full year basis, adjusted margins increased almost 300 basis points to 28%, reflecting resilient top-line performance in a difficult economic environment, efficiencies from our migration to the web, and cost reduction efforts associated with streamlining our organization - a remarkable achievement given the economic conditions of the last 12 months.

Exchange revenue in the fourth quarter of 2009 was up 2% on a constant currency basis. Member growth was up 2%, reflecting in part the addition of the Disney Vacation Club earlier this year. Fourth quarter 2009 annual dues and exchange revenue per member in constant currency was consistent with the fourth quarter of 2008, reflecting higher transaction fees for call center transactions, offset by lower exchange transactions.

Vacation rental revenues in the fourth quarter were up 2% on a constant currency basis. Transaction volume was relatively flat, reflecting higher volumes at our Landal GreenParks in Holland and our U.K. cottage rentals business, offset by fewer vacation rentals by our RCI members. In constant currency, average net price per rental was up 3% in the fourth quarter of 2009, primarily reflecting mix from higher volumes at Landal GreenParks.

Ancillary revenues in the fourth quarter were $30 million, a 17% decrease from the fourth quarter of 2008, due primarily to lower fees generated from programs with affiliated resorts and our termination of a low margin travel service contract.

As part of my ongoing education with the Company, I recently had the opportunity to visit three of our European rental businesses. I was impressed with the energy and enthusiasm and focus of the teams, as well as their well thought-out growth plans. These are excellent businesses with a great consumer base. They operate for the most part on a Fee-for-Service model. I was also impressed by the quality of the rental properties in the parks. As Steve noted, 2009 proved the resiliency of European vacation rentals in a difficult economic environment and the cottage businesses are scalable with no additional CapEx requirements. We believe there is great exportability of this model throughout Europe.

At Wyndham Hotel Group revenues and adjusted EBITDA for the quarter were down 12% and 41% respectively, due in part to expected industry-wide RevPAR declines and lower other franchise fees. In addition, we recorded an asset impairment charge of $6 million related to a joint venture that manages international four and five star properties, which have been hit hard by the global economic downturn affecting profitability estimates. Now, this charge was not contemplated in our most recent guidance.

Overall, we're beginning to see less stress across the entire system. We lost only two franchise properties to foreclosure in 2010, January of 2010, compared with nine franchise properties in January of 2009.

Domestic RevPAR decreased 14% from a year ago. Worldwide and international RevPAR declined 13% and 15% respectively in constant currency. Our Days Inn and Super 8 brands continue to outperform the economy segment, primarily due to stronger pricing than the competition. It is encouraging that these brands, which account for over 50% of our rooms, have held rate above their segment. In addition, while a small piece of our business, advanced bookings do signal that rate continues to hold, all of which provides a strong base for outperformance when occupancy returns.

Internationally we are seeing some signs of industry improvement. Fourth quarter RevPAR was down only 1.6% in China. In Mexico, in constant currency, fourth quarter RevPAR increased 3% for the Wyndham brand and 2.2% for all brands.

Exhibiting great momentum in a difficult environment, we ended the quarter with approximately 597,700 rooms worldwide, opening over 46,000 rooms in the year, but terminating 41,000 rooms. Now, our ability to reach our long-term room growth rate of 2% to 4% requires that we make retaining the right rooms a top priority. The strategy Steve mentioned earlier addressed this objective.

Now, moving to Wyndham Vacation ownership, revenues and adjusted EBITDA for the quarter were up 3% and 45% respectively. Our results reflect the benefit of a roll-in of percentage of completion deferred revenue, continued efficiencies in sales and marketing, which I will discuss in a moment, and a decline in the provision for loan loss, as signs of some stability appear.

Gross VOI revenues exceeded our expectations again in the fourth quarter. Sales efficiencies were once up again significantly, reflecting the resizing of our business, with volume per guest up over 36% from the fourth quarter of 2008 and up over 23% for the year compared to 2008. Close rates remain strong and transaction sizes and pricing remain stable.

On the consumer financing front, we saw significant improvement in write-offs in the fourth quarter, which were 3% relative to the overall portfolio, down from 3.3% at the end of Q4 of 2008. Accordingly, the provision for loan loss was $103 million or 26% of VOI sales, down from 31% on a similar basis from the fourth quarter of 2008. The securitizations continue to perform within their expected tolerances. And overall, we continue to see good trends in the portfolio, as delinquency and default rates are improving.

Now, let's turn to 2010 guidance. Note that we will post the guidance to the Investor Relations portion of our website immediately following the call. We are maintaining our previous guidance for 2010 revenue and EBITDA and free cash flow for the Company. Let's look at each business unit.

Starting with Wyndham Exchange and Rentals, drivers are generally flat, reflecting continued economic uncertainty in the US and Europe. Specifically, in exchange we expect the average number of members, as well as the annual dues and exchange revenue per member, to be flat. In rentals we expect transactions to be flat and we expect average net price per vacation rental to increase between 2% and 5%. Finally, we expect Wyndham Exchange and Rentals revenue of $1.125 billion to $1.225 billion and adjusted EBITDA of $290 million to $310 million. Given our expectation that members, annual dues and exchange revenue per member in rental transactions will be relatively flat as a result of the economic conditions, we are keeping our EBITDA range consistent with 2009, although we do anticipate a positive FX impact in 2010.

Regarding FX sensitivity, in Wyndham Exchange and Rentals it operates in approximately 100 countries with many currencies. A rule of thumb, a 10% change in the dollar against a representative basket of currencies would result in a $14 million impact on Exchange and Rentals' full year EBITDA.

Now, moving to the hotel group. As we mentioned earlier, we expect RevPAR to be flat to down 3%, with some improvement in the second half of the year, but with the first half still challenged and a 1% to 3% increase in system size. We expect revenues to be between $620 and $670 and adjusted EBITDA in a range of $180 million to $200 million. Increased somewhat, assuming that the continued weakness in RevPAR will be offset by moderating bad debt expense and prudent expense control.

At Wyndham Vacation Ownership, remember that we are deliberately capping the traditional model for this business to concentrate on cash flow generation and the return profile of the business. Now, based on these objectives, we expect gross VOI sales to be flat. We are planning a 3% to 6% decline in tours, as we target higher efficiency marketing channels, and a 5%to 8% increase in volume per guest. We expect GAAP revenue to be between $1.7 billion and $2 billion and adjusted EBITDA of $360 million to $390 million, reflecting our expectation that there will be no impact from percentage of completion deferred revenue this year. Now, this negative impact is offset by the anticipated continued improvement in sales efficiency and lower loan loss reserves.

Remember that we took steps to eliminate deferred revenue and expect no impact from percentage of completion deferred revenue this year. The absence of this revenue will result in headwinds of $187 million in revenues and $89 million in EBITDA for 2010 relative to 2009. The effect will be particularly strong in the first quarter, since we had a $67 million revenue benefit from deferred revenue in Q1 2009.

Based on the improvements we've made to credit standards and the improved performance of the portfolio, we are hopeful that the provision for loan losses will come down this year.

We expect depreciation and amortization Companywide of approximately $180 million to $185 million. Interest expense based on our current capitalization is expected to be between $130 million and $140 million. Now, please note that while we have no significant debt maturities in 2010, we are evaluating alternatives to take advantage of the current improved debt market and refinance some of our debt ahead of schedule, possibly early in the year and that we could incur additional interest expense and related expenses currently not considered in this guidance. Any change would relate to replacement debt. We will not increase our outstanding debt this year. We will keep you posted as these potential transactions develop.

The ABS market is continuing to gradually improve. We anticipate that we will be executing a term transaction within the next few months. Our cash flow guidance assumes pricing and advance rates similar to our deals last fall, but we believe that the environment could be slightly better.

We expect our tax rate for the year to be 38% compared with 40% in 2009, reflecting certain corporate initiatives related to some Wyndham Exchange and Rentals non-US operations. In addition, we are making very good progress on the resolution of our legacy contingent liability for taxes related to periods prior to our separation from Cendant. We are in active settlement discussions with the IRS and those discussions are progressing well. We expect any settlement to be within our reserve. We expect that the vast majority of this issue will be resolved no later than the third quarter and possibly before.

We expect to spend $175 million to $200 million in CapEx in hotel development advances. We expect spending for timeshare development to between $120 million and $130 million, somewhat higher than the $100 million we previously communicated.

And that's really based on the timing of our spend that we anticipated in 2009. We expect a diluted share count of approximately 189 million shares, which assumes some share appreciation, but no share buybacks. We expect earnings per share for the year to be between $1.48 and $1.69 per share.

For the first quarter, we expect earnings per share of $0.27 to $0.32, reflecting a RevPAR decline of between 10% and 13% and the absence of $31 million of EBITDA contribution related to the deferred revenue. Now, with that, I will turn it back to Steve.

Thanks, Tom. Before we open the line for questions, I would like to make a few closing comments. The economic crisis of the past few years and the impact it has had on the hospitality industry caused Wyndham Worldwide and many other companies to make tough decisions on a number of fronts. As the crisis recedes and the economy recovers, I feel very good about the decisions we made and the way we executed against our strategies. We are well positioned for continued success in our markets and we are transforming our business model to maximize free cash flow. In good times and in bad, free cash flow is the great enabler. Our strategic priorities for capital allocation are to invest prudently in our businesses and to return cash to shareholders. We announced a significant step in that strategy today, tripling our dividend and resuming our share repurchase program, demonstrating confidence in our ability to maximize and sustain free cash flow in the $500 million to $600 million range and our optimism regarding our businesses going forward.

Most importantly, I'm proud and pleased with how our associates have responded to the challenges of the past few years. In our business, it is all about the people. You can have a great strategy and a strong balance sheet, but you need your people engaged, focused and enthusiastic to provide outstanding service to customers. Our most recent associates surveyed showed that they are more engaged and motivated than ever. They have a clear understanding of and commitment to our signature count-on-me customer service. This continues to be a significant source of competitive advantage for Wyndham Worldwide. I want to thank all of our associates for their hard work and commitment. With that, Shirley, we will open the call for questions.

(Operator Instructions) Our first question comes from Steven Kent. You may ask your question. Please state your Company name.

Hi, good morning. It is Steve Kent of Goldman Sachs. My main questions are really on the ability to drive further increases in volume per guest on the timeshare business, where you have shown a terrific job of improving margins. And I guess as we look forward, you mentioned that you have a number of strategies and I was wondering if you could just give us little bit more color. Could I -- I guess my concern is that last year, or in 2009, you were targeting more of your existing customers, which inherently are higher margin and as you move forward and go through that customer list, what are the other opportunities to continue to maintain that profitability and efficiency in the timeshare business? And one other thing, Steve, could you just talk about acquisition strategy and where you are on that part?

Sure. Thanks, Steve. Well, I will take the first one first and talk about the VPG or efficiency increases at WVO and they really have put up some tremendous results and we're obviously looking and guiding towards even a greater improvement in 2010. I would focus probably on two things, Steve, relative to continued improvement in VPG or volume per guest. One is the marketing programs. We have continually innovated and been creative in our marketing programs at WVO. And during the downturn, that didn't take a break. We continued to be creative and we continued to work on ways to lever the Wyndham brand, to lever our ability to touch new consumer not just our existing consumers. So the one aspect of it and I've said this in the past, really marketing is so key to the process.

We clearly have the best sales force in the industry, but they need to have the tours generated for them and that's why -- that's where the process starts. Now, we're projecting tour flow down and part of the reason we're projecting that is that our marketing programs are even becoming more focused. So we think we can generate the kind of revenue that we've projected, which is similar to 2009, with actually a lower level of tour flow. So that is number one. Number two is when it comes to -- when you get to the sales table, you are then selling the product, whatever that product is. In our case, it is a very, very flexible point space product. We talked about last year that we were rolling out a new program called Club Wyndham Access and that is a -- it is the next generation or next transformation of the product, the points based product we sell to consumer.

It is even a better more flexible product than we've sold for the last five years and so we do expect to be able to take that product to the table and have a positive impact on our close rates. So it is really, and it may sound basic, Steve, but it is really a function of really staying ahead of the game and ahead of the curve, having the best innovative product in the marketplace with the best marketing programs, and then executing it on that very well. So it may sound basic, but I tell you, the guys down there do a phenomenal job in Orlando. On the acquisition front, we have kind of continually said that we can't model opportunity for acquisitions. We don't know when the right opportunities will come up. We continue to look. We're looking at kind of what I would call strategic tuck-in acquisitions, things that fit our profile right now.

We're not looking to get into another line of business, as we've continually said. And we will have to see how they develop over time. We felt comfortable increasing our dividend and resuming our share repurchase program, which we still think will leave us enough room for any strategic opportunities that are on the horizon.

Okay, thanks.

All right, thanks, Steve.

Thank you. Our next question comes from Patrick Scholes. You may ask your question. Please state your Company name.

Hi, good morning. Two questions here. Can you give an update on the progress that you're making on migrating RCI customers to book online? That's my first. And then second, can I get a little bit more color on the international RevPAR down 15.4%. It seemed a little bit weaker than I expected and weaker than what I had seen in some of the fourth quarter Smith Travel data. Could I just get more color on what markets that was.

Okay. Let me take the first one and then Tom and I will tag team the second one. Our online penetration has been very positive in the RCI business specifically, Patrick. And thanks for the question, because we are, frankly, we're very proud of what we've done here. It really has -- we really have modified the behavior of the RCI customer to expect more from us online and we're delivering more to them online. And it is really a credit to the team at RCI that has gotten on this and made it a top priority over the last couple of years. We increased our penetration from about 13% in -- the fourth quarter of 2008 to about a 24% penetration rate in 2009. And that means that almost a quarter of the people who are doing transactions with us are doing them online. Now we think there is still a great opportunity to grow that. We're continually adding more functionality to RCI .com. And as you may have heard me say, in the rental business in Europe we're above 75% online. So we got a long ways to go to get us to even a greater level of online transaction capability, but we feel like we really made some great progress and we set a great foundation with RCI .com.

Patrick, I would only add that we're in a three-year RCI .com development process. We're basically -- in November we completed a major upgrade. There are going to be two very significant upgrades in 2010. I think one in the spring and then one again, I think, in November. It is the ballpark. And those upgrades we think will really push people to the web even to a greater degree than we have now. So we're pleased with the progress. We have more work ahead of us. And our team is just doing a phenomenal job executing behind a very difficult business transformation. Your second question had to do with some color around international markets. Two of our biggest markets are Canada and the U.K. and Canada was down significantly. China is our second biggest international market and China, as I said in my comments, actually performed nicely in the fourth quarter. But it is really the two markets of Canada and the UK that I think from a geographic perspective were the largest sort of negative contributors to that 15%.

Great. I appreciate the color. Thank you.

Thank you. Our next question comes from Joe Greff. You may ask your question a And please state your Company name.

Good morning, guys. It is Joe from JPMorgan. Can you just talk about in timeshare the decline in the provision for loan losses. I guess, what is driving that and is it a function more that maybe your prior reserves were just too harsh or is it a function of actually collections history improving? And I guess, explain if it is the latter what that is. And then within the lodging segment, if you can talk about, I guess, churn expectations and what I mean by that is what do you think actually comes out of the system this year. I know you gave a net target number, I presume a net target number, if you could clarify that, if you can just talk about some of the things that you're doing to retain the properties that you want to retain. Thank you.

Well, thanks for the questions, Joe, we will tag team them here. First, on the loan loss provision. I haven't heard anybody call us harsh on anything in a while, so maybe we were harsh on our loan loss provision, b But I don't think we were. I think we were reacting, frankly, to the facts that we saw at the time. It is a very systematic approach we take to determine what our loan loss provision should be and we respond to whatever we see as the trends at the time. Now, there are some things that have happened during 2009 that certainly have improved the outlook for that portfolio. One is we've continually talked about the fact that our FICO scores have been improving. That is FICO scores of new sales as well as the portfolio overall. So certainly that is a good dynamic to have. The second thing is that I think we really weathered the toughest part of the storm last year. And we do not see the kind of trends that we saw at the end of 2008 or 2009 continuing today.

That does not mean that it is easy to collect. It never is easy. People wait longer to pay. That's the general nature of the consumer right now. But all the trends would tell us that we really have stabilized in that business and we hopefully will see some improvement going forward. And we will be monitoring that daily, weekly, monthly, quarterly, as we always do.

The second question was on the hotel.

Yes.

And how we reduce churn. Steve talked about a few strategies in his section that are all really geared at delivering, I think, the term is more heads in beds for our franchisees. And the focus is going to be on enhancing our brand websites, because increasingly traffic is going through brand websites, ensuring that our connection with our OTA's is full and complete and that the proper level of business is going through OTA's to our sites. These are the key focus areas. We've also established a dedicated group within our hotel team that, I don't know what the official name of it is, but its objective is to ensure retention of those people we want to retain.

The retention czar.

We have a retention czar. The czar of retention. Nice title. But so that group is focused on ensuring that we keep the people that we need to keep. Now one of the things that we do do from time to time is arrange payment plans for our franchisees as a way to build cohesion between us and them as they deal with the difficult economic climate in 2009. So those are the major steps, improving our web capability, our OTA relationships, this dedicated group, and then ensuring that we build cohesion through reasonable payment plan options that we offer from time to time to our franchisees.

Great. Thank you.

Is there anything else that you would want to add?

No, I think that is it. I mean, we've got to continue to increase that value proposition for franchisees. It is a focus.

(Operator Instructions) Our next question comes from Chris Woronka. You may ask your question and please state your Company name.

Hi, Deutsche Bank. Steve, I was hoping maybe you could give us a little more color on the pipeline of the asset affiliation model. And I understand it's really not probably going to have much of an impact in 2010, but maybe just the size and scope and how your infrastructure there, what kind of size pipeline you can handle in the out years.

Sure. Thanks, Chris. The pipeline for what we call WAAM, the Wyndham Asset Affiliation Model, is strong. We have about 5,000 units that we're currently looking at, talking to people about and are considering for adding to our system. Now not all 5,000 of those will happen and there is a lot that we don't have on that list yet that probably will happen. I would call the makeup of it pretty diverse. It is domestic as well as Caribbean. It is urban as well as golf, ski and beach, frankly. It is kind of a mix of everything. There is a -- if I were to look at concentrations, there is a pretty good concentration in the US southwest. There is also quite a bit of Florida product. But there is also Caribbean product. There is product in the northeast and in the Midwest. So it is really a great array.

I think that how do we bring that product on. Well, it is a function of timing of where we think product would best fit into our system. So if we find demand for urban product continues, which is something we're seeing right now, we are going to be more anxious to bring in some of the, some of that urban WAAM product into our system and make it available to our customers. So we have a dedicated group working on this. It is really coming along very, very well. And as I said, Myrtle Beach will be our first that open sales this month and in a couple of months we will roll out our Orlando product as well. So things are going on course.

Okay. Very good. Thanks.

Thanks, Chris.

Thank you. Our next question comes from Michael Millman. You may ask your question and please state your Company name.

Thank you. This is Mike Millman, Millman Research Associates. I guess a couple of questions. One, can you talk about whether there is a tradeoff between long-term growth and between increasing your Fee-for-Service from 65%. And in that connection, maybe you can give us some idea of where you think Fee-for-Service can go and when can you get there? And I have a couple others.

Well, I don't think it is really a tradeoff. I think it is a key component of our growth strategy. The Fee-for-Service businesses were growing for the last three years, just not as quickly as the Vacation Ownership business was growing. And they were not being fed, frankly, with as much capital as the Vacation Ownership business was being fed. So we think there are great opportunities to grow the Fee-for-Service businesses. And even within, for example, Vacation Ownership, there is a Fee-for-Service business, that we're not kind of pulling out here, which is the resort management business, which is also growing. Year-over-year the resort management business grew from 2009 to 2010, where as all other managed businesses, including our own management Company on the hotel side, was not growing. So there are elements of that business that we do want to talk about and highlight and we will break that out into more detail so you can see it. But we think it is really the place that we can continue to grow rapidly in all of our businesses, rental as well as the hotel franchise.

Michael, we're rationalizing our growth strategy. Our financial plan is simple, let's grow businesses that have great return profiles and that's why we're targeting the Fee-for-Service areas to grow, hotels and the exchange in rental. And what we're trying to do in the timeshare business, the Vacation Ownership business, is really work to improve the return profile of that business. That's why we're managing our balance sheet more conscientiously and we are looking to evolve this alternative business structure. So that is our simple layout of our financial strategy.

Okay. Sort of related, would you call the WAAM program a Fee-for-Service? And secondly, of these 5,000 units, how many units do you need in the next couple of years?

Absolutely, it is a fee, it is the ultimate Fee-for-Service business if structured in a certain way, so highly Fee-for-Service oriented. And if you do the quick math -- it depends, we're going to have a -- it is going to be a hybrid, Michael. It is going to be some traditional timeshare units are going to be sold, because we have three to four years of inventory on our balance sheet and we want to process our balance sheet. And so there is going to be a mix of the traditional business that we're selling and the alternative business model, the WAAM business, the asset affiliation model. And so it all depends how big we can make that business. And so it is not an easy question to give. If we were only selling the alternative business model, which we will not be, we would need to sell probably 1,000 to 1500 units a year.

Okay. Great. Thank you very much.

Thanks, Mike.

Thank you. Our next question comes from the Ryan Meliker. You may ask your question and please state your Company name.

Good morning, guys. It is Ryan Meliker with Morgan Stanley. Just a quick question, just thinking about what you said earlier with your breakdown of guidance by the different segments, looking at lodging in particular. It sounds like at system size up 1% to 3% and revenues of around $620 million to $670 million, it sounds like you're looking at implied RevPAR of down about 5% at the midpoint. If that -- if my math is correct there, what do you think that is going to do to your franchisees, another 5% down in RevPAR when the costs have already been stripped out in terms of foreclosures and risk to property closures, et cetera. Any comments you have, we appreciate it, thanks.

Actually, I'm not sure how we're getting the 5% on our arranges here to 3% on RevPAR, right?

Revenues are $620 million to $670 million a And system size is up 1 to 3%?

Yes and our RevPAR guidance is flat to 3% down.

Flat to 3% down.

We may have other revenues, initial franchisees and other things in there that you're not taking into the mix.

Right. So in terms of the other revenues how much [lower] are they going to be down are you expecting?

Well, let me go to your first question, Ryan, if I could, because you asked the question of even if it is down 3% versus 5%, it is a good question, which is what is the impact on our franchisees. And obviously, it is not good. We prefer to see RevPAR pick up at the beginning of the year, immediately. But the fact is, we don't expect to see that. We don't -- we're expecting a more gradual recovery than a quick snap-back recovery, particularly in the economy in midscale segments. So the good news is that a 3% decline is a lot less than a 12% decline. So what they're seeing, hopefully, is an improving environment on a relative basis. It still is down, but it is not down as much. And through the year, we expect to see it improve, so that the second half of the year is better than the first. So I just kind of restated the facts there of what we laid out before, but we work very closely with our franchisees. We want to see their operations improve.

It is important to us. We don't share in their bottom-line, but we absolutely want them to be successful. And that's very important in the priority of ours. And that's the reason that we're rolling out some of the initiatives we talked about, which is to increase their ability to make sure that they're properly loaded into the systems, into the OTAs, make sure their pricing is appropriate, and help them with their yield management. So I don't know if I'm specifically addressing your question, but those are the kind of things that we need to do to try to help the franchisee.

That is helpful. Thank you. And then in terms of the other lodging revenues, what type of change are you expecting in 2010 versus 2009?

The initial fees, we expect, and the transfer fees, we expect that it is going to be relatively consistent with 2008 -- 2009, I'm sorry. There might be slight growth, but there will be a stabilization of those revenue sources.

So relatively flat other revenue --

Relatively flat.

Great. Thank you.

All right, thank you.

Thank you. (Operator Instructions) At this time I am showing no further questions. I will turn the call back over to the speakers.

All right, Shirley, thank you very much. Well, we appreciate everybody joining us this morning and look forward to talking to you next quarter. Have a wonderful snowy February. Take care.

Thank you. And this does conclude today's conference. We thank your participation. At this time, you may disconnect your lines.