Travel + Leisure Co (TNL) 2010 Q1 法說會逐字稿

Welcome to the Wyndham Worldwide first quarter earnings conference call. At this time, all participants under a listen-only mode. (Operator Instructions) Today's conference is being recorded. I would now like to turn the call over to Margo Happer, Senior Vice President of Investor Relations. You may begin.

Thank you, Shirley. Good morning, and thank you for joining us. With me today are Steve Holmes, our CEO and Tom Conforti, our CFO. Before we get started, I just want to remind you that 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 results are discussed in detail in our Form 10k filed February 19, 2010 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 to the tables 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. As you saw from the press release, we had a terrific quarter with each of the businesses performing at or ahead of plan. We delivered adjusted EPS of $0.34 above the high end of our $0.27 to $0.32 range. Remember that we are comparing with first quarter 2009 which benefited from a roll-in of $67 million of previously deferred vacation ownership revenues and approximately $31 million of associated EBITDA.

Considering that headwind, first quarter 2009 comparisons are especially impressive. Excluding the 2009 roll-in of deferred revenues and favorable impact of foreign exchange, adjusted EBITDA increased by almost 20%. Our continued strong execution and the momentum of the business give us confidence to raise our revenue, EBITDA and EPS guidance for the year. Much of the upside is being driven by vacation ownership.

As you know, beginning in the third quarter of 2008, we underwent a substantial restructuring to right size the vacation ownership business. We close lower margin sales offices and cut less efficient marketing programs. Our focus is to optimize cash flow and efficiency rather than double digit top-line growth. The magnitude of the change was driven by the upheaval in the capital markets and our desire to be masters of our own destiny by reducing our reliance on the ABS market. But the strategic intent which we outlined in late 2007 was driven by our desire to focus more investment in our fee-for-service businesses. The results are impressive. We had the best timeshare business in the world before the downturn, and the business we have today is even better. It's more profitable, more resilient and it generates more cash.

We have dramatically improved the quality of the consumer loans that we underwrite, resulting in a stronger portfolio. And we've made operational changes that simplify the accounting by eliminating the deferred revenue that make tracking the business difficult for some investors. From this exceptionally strong base, we are building an add-on business model that will further improve the return profile of the business. Combine this with our fantastic fee-for-service business models, and I think you'll agree that Wyndham Worldwide is well positioned for growth.

In addition, the overall economy is clearly improving. The decline in RevPAR is moderating and despite what the doomsday prophets predicted, leisure travelers are active. The credit and ABS markets also continue to improve. Throughout the downturn, we proved the resiliency of our business models as well as our ability to execute, and we are confident that we'll capture more than our fair share of the recovery. But we're more than a recovery story. We transformed our businesses to generate free cash flow in a sustainable range of $500 million to $600 million annually, or about $3 per share per year. That's at least $2.5 billion of free cash flow over the next five years, and we are committed to using that cash to drive shareholder value.

We will return a portion directly to shareholders through increased dividends and will use the remainder to supplement our earnings per share growth by first investing in the businesses for organic growth. Second, making acquisitions of fee-for-service businesses in our industries and finally, repurchasing stock, which is already underway. Now I'd like to discuss the progress we're making in our strategic initiatives starting with the hotel group. Our vision is to be the world's leading hotel company in size, customer value and performance. We believe that strong, well supported brands and highly motivated franchisees are a key to achieving our vision.

As I mentioned last quarter, we are sharpening our focus on execution to take this business to the next level. Similar to our efforts to transform the exchange business over the last few years with RC I.com, the hotel group is launching a series of strategic initiatives which we refer collectively to as Apollo, with the goal of driving incremental revenue to our franchisees and strengthening the value of our brands. We will launch our first four missions in the near term which involve, number one, improving the overall content of our hotel brands across all channels; number two, improving consumer conversion on our brand website by enhancing navigation, content, rate availability and technology' three, enhancing and consolidating our reservation system; and four, optimizing rate information for our hotel owners through all distribution channels. I look forward to updating you on our progress as we proceed over the next 18 months.

We're seeing substantial momentum in the Wyndham brand gaining great traction, especially in critical major urban and key destination markets. Overall, we've increased the number of rooms by over 16%, adding 12 properties over the past year. We opened 1,115 Wyndham rooms in the first quarter. In addition, we recently signed an agreement for the 1,011 room Park 55 hotel room in San Francisco, which converts today to a Wyndham hotel. Located near Union Square, this hotel and other recent announcements signify a resurgent presence of the Wyndham brand in major center city markets. The Wyndham Park 55 recently completed a $30 million top to bottom renovation and redesign that included upgrades to all guest rooms, a reconfiguration of the lobby and front desk and expansion of the hotel's meeting and events facilities to 30,000 square feet. We're thrilled to have this hotel in our Wyndham family.

On April 13, we opened a newly constructed 280 room Wyndham hotel located on 26th Street in New York city. Internationally, we continued our expansion in Mexico with the opening of the 198-room Wyndham Casa Grande Monterrey and executed a three-hotel deal in China. Other notable international signings include four new Ramada franchise agreements in China, our fourth management agreement in Bangkok and four new Ramada franchise agreements in India. And we continue to win accolades here in the US in the economy segment. Super 8 and Days Inn were recently named two of the top ten most popular franchises on CNNmoney.com.

Moving to Wyndham exchange and rentals. The business continues to increase EBITDA through superior execution and the strength of the segment's two phenomenal business models. These models are characterized by great brands, strong distribution networks and significant market positions with loyal customer bases and high barriers to entry. From a financial perspective, these businesses are substantially fee-for-service revenue streams with modest capital requirements.

Last month, I attended timeshare's annual convention known as the ARDA conference. It was clear to me, and I think to everyone there, that RCI continues to be the leader in the timeshare exchange industry. Year after year, RCI proves its leadership by providing the most innovative technology, marketing and product solutions to both timeshare developers and consumers. The 2010 event was no exception. At ARDA, RCI further expanded its reputation as a technology leader with another first in the timeshare industry by announcing its debut into the mobile marketing world of two new apps, the RCI TV application and RCI SnapBook application. Both are available for free download at the Apple App store.

In addition, for the first time in its history, RCI launched a premium membership product, RCI Points Platinum which will begin sales in June and has already attracted several large developers who have signed up to offer this to their existing owners. Price is a premium to RCI points. RCI Points Platinum will offer a plethora of a of lifestyle benefits including last-minute upgrades to larger units, along with a first look at specialty premium inventory.

Coming off of a very successful 2009, RCI celebrated the affiliation of more than 100 resorts added last year, including a new affiliation agreement with Fiesta Hotel Group that welcomed five properties from the Grand Palladium Travel Club to RCI's global network and affiliation of two resorts with Ski Star, one of the Nordic region's strongest hospitality brands. Already this year, RCI renewed its 17-year affiliation -- relationship with Hilton Grand Vacations, which includes 50 affiliated resorts and more than 150,000 members. And additionally, RCI renewed its affiliation with Blue Green Vacations, which includes 45 affiliated resorts and more than 180,000 members.

Last month, we announced RCI's newest agreement with In-Season Resorts, one of the most well known vacation brands in New England with seven properties in the region. And just last week, RCI announced nine new resort affiliations across Indonesia, Malaysia and Vietnam at its 2010 Asia Leisure Real Estate Symposium where over 100 of RCI's Asian affiliates and industry leaders gathered to network and discuss growth opportunities within this important part of RCI's world.

Our European rental businesses delivered solid results once again, supported by the newest member of Wyndham Worldwide family of brands, Hoseasons, one of the UK's most recognized holiday brands. We closed this strategic acquisition on March 1, and the integration is moving along on schedule and according to plan. Hoseasons is an excellent strategic fit with its fee-for-service model, strong UK brand presence and the additional scale that it provides to our UK cottage rental business. It offers a wide range of holiday offerings in over 15,000 lodges, cottages, villas, caravans and boats across seven European countries. The addition of Hoseasons to our existing portfolio of exceptional vacation brands expands our wide range of holiday rental experiences in Europe from caravans to castles.

Turning to Wyndham vacation ownership, who again had an extremely strong quarter with gross VOI sales up 10% and volume per guest up over 25%. As I discussed earlier, these results reflect the benefit of the transformational changes we've put in place over the last 18 months. The business is more efficient and has dramatically improved its cash flow profile. Our performance in 2009, which continued into the first quarter of this year, demonstrated the resiliency of this business model in difficult economic times, and I believe we have proven that it's a highly manageable, predictable business. So we are excited about the sound fundamentals of our business model in good times and in bad, and I am confident that this business will continue to deliver superior results, both in the short and the long-term.

We have spoken before about our new fee-for-service Wyndham Asset Affiliation Model, or what we call WAAM. As a reminder, this model offers turnkey solutions for developers for banks in possession of newly developed, nearly completed or recently finished condo or hotel inventory. We will sell this unused or unsold inventory as timeshare points for a fee. Through our extensive distribution channels, WAAM enables to us expand our resort portfolio with little or no capital deployment while providing additional channels for new owner acquisition and growth for our fee-for-service resort management business.

As you may know, we began selling our first Wyndham asset affiliation product in Myrtle Beach in March and sales are ahead of plan. The sales force is enthusiastic about the product offering, and so are our customers. In fact, average transactions on these sales are running perfectly comparative to our traditional inventory, indicating a seamless transition into our product mix. In short, our customers ascribe the same value to new resorts enabled by WAAM as those which we would otherwise develop and finance ourselves.

We are building a solid runway to allow this part of the business to take off once we've worked through the bulk of the inventory on our balance sheet. With approximately three years of inventory on our balance sheet and with an additional investment to $100 million to $125 million each year over the next three years, we believe we will have sufficient inventory for the next 4 to 5 years. At the end of that period, we would like to see the Asset Affiliation Model contributing a meaningful portion of our timeshare revenue.

Over the next five years, sales from the Asset Affiliations may augment growth somewhat, but would largely be a tradeoff with Company sourced inventory. It is at the end of the period when this inventory will provide its greatest benefit in that it would significantly alter the return profile of the business. Over the long term, we would expect EBITDA growth in vacation ownership in the mid-single digits with an improving return profile. Also, let me remind you that this will include opportunities to grow property management as it fits well with our fee-for-service strategy.

Before I turn the call over to our CFO, Tom Conforti, let me say how proud I am of our continued strong results, which demonstrate great business models and committed teams of talented individuals delivering superior execution. We will maintain our sharp focus on maximizing cash flow to drive shareholder value. We are about to enter our annual strategic planning process where we will be identifying many of the opportunities to grow the business, both organically and inorganically. Since we've established quite clearly the sustainable cash profile of the business, our management team's focus now will be on how to best deploy that cash to maximize growth. Tom will give you additional perspective on our thoughts about growth and how you should expect a clear picture from us over the next three to six months. Now I'll turn the call over to Tom to go through our results and outlook in more detail.

Thank you, Steve. Let me begin by echoing Steve's observations regarding the strong execution and ongoing transformation of our Company. First quarter revenues and adjusted EBITDA were relatively flat. A significant achievement given the benefit in the first quarter, 2009 from the roll-in of deferred revenue and associated EBITDA in our vacation ownership business. Now, I'm going to come back to detailed quarter results in a bit, but first, I'd like to follow up on Steve's point about our growth prospects. As Steve said on the last call, cash is the great enabler. So the critical strategic question is, what effect will all this cash have on the growth profile of our Company? We've been working through some hypothetical, but we believe realistic, per-share growth scenarios for the next several years. We start with organic growth, which we project at mid-single digits. If we apply the available free cash flow to either share repurchase or acquisition of fee-for-service businesses, we find that the contribution to overall Company growth is equal to or greater than the growth from our base business. The growth contribution above baseline growth we estimate could add approximately 700 basis points of growth, yielding overall growth of 12% to 15%. We will be working on solidifying our growth plan during our upcoming strategic planning process and will share our more detailed thoughts with you in the upcoming months.

So let's shift now to look at capital markets activity in quarter one. We completed a number of transactions, including refinancing some debt well ahead of schedule, locking in reasonable rates and pushing out some maturities. We believe these actions strengthened our balance sheet and improved our liquidity position and overall investment grade credit profile.

We issued $250 million of 10-year senior unsecured notes as the a rate of 7.38% and renewed our revolver at a level of $950 million. We were over seven times oversubscribed on the senior unsecured notes, demonstrating strong investor interest, and 18 banks participated in the revolver renewal. Again, underscoring the banking community's confidence in our Company.

We used a portion of the senior notes proceeds to repay and terminate our Australian credit facility, with the remainder applied to retiring the $300 million term loan. Now, the balance of the term loan was repaid with new revolver borrowings. And as a result, we ended the quarter with $199 million drawn on the new facility. We incurred early extinguishment fees of approximately $10 million after tax, and we expect to incur approximately $4 million to $5 million pretax in additional interest expense annually as a result of these transactions. Our outstanding debt levels were unchanged.

Our adjusted debt to EBITDA ratio is 3.0 times. We have no significant near-term maturities. We have abundant liquidity, and we have significant room under our covenants.

Overall, we have an investment grade profile. We also completed a term securitization transaction involving the issuance of $300 million of investment grade asset-backed notes. The single A rated vacation ownership loan backed notes carried an advance rate of 72.25% and a coupon of 4.48%. Reflecting significant improvement in the asset-backed securities market over the past year, as well as Wyndham's elevated position in the market.

Net cash from operations was approximately $205 million in the first quarter 2010, relatively flat compared to the first quarter of 2009. Free cash flow, which we define as net cash from operations less Cap Ex, equity investments and development advances increased over 7% to $166 million in the quarter compared with $155 million during the first quarter of 2009. Our transformational actions have put us solidly on track, and our base business to sustain annual free cash flow of $500 million to $600 million over the next several years. Excluding cash payments, of course, related to contingent tax liabilities. That's $2.65 to $3.17 per share this year. We believe that cash is the great enabler and will fuel our growth above and beyond the benefits of the economic recovery. As we look to acquire fee-for-service businesses in our core lodging and exchange in rental segments over time, our free cash flow target could be augmented in the future.

In addition, we are committed to returning cash to shareholders. In the first quarter, we trebled our dividend. Our overall dividend policy calls for growth in the dividend to at least mirror earnings growth. And as you saw from the press release, we have resumed share repurchases at a pace consistent with our activity prior to the downturn, purchasing 1.2 million shares through April 27 at an average price of $25.10.

Now moving to segment performance, let's begin with the hotel group. Revenue declined $10 million, reflecting moderating but continued pressure on RevPAR, which was partially offset in EBITDA by disciplined expense management. Systemwide RevPAR declined 6.8% compared with our first quarter guidance of 10% to 13% decline. Now, in constant currency, RevPAR declined 8.7% compared to the first quarter. We are cautiously optimistic that we have seen the worst of the RevPAR declines. We ended the quarter with approximately 593,300 hotel rooms worldwide, opening over 9,300 rooms in the quarter and terminating approximately 13,700 rooms. Over 20% of the terminations, or 3,145 rooms were related to the expiration of a low-margin contract for unbranded affiliated rooms which we chose not to renew. Now as I discussed on the last call, our ability to reach our lock-term room growth rate of 2% to 4% requires we make retaining the right rooms a top priority, and we are making progress in this area. We have implemented an early warning intervention program that routes termination notices to a special retention group, which has helped us reduce our attrition rate for the quarter.

System growth trends are improving from last year's first quarter, and the pipeline is holding up well from the end of last year with approximately 106,500 rooms. We saw an increase in new construction activity domestically in the first quarter with 13 contract executions in 2010 compared with only eight during the same period in 2009. Overall, the new construction pipeline increased 4% based on rooms since the end of 2009, with over 60% of the increase coming from the Wyndham brand, another indication of accelerating brand momentum. While we believe it's too early to call the trend, these signs are nonetheless encouraging.

Wyndham exchange and rentals once again delivered excellent results. For the quarter, excluding the net effect of foreign currency, revenue was flat and adjusted EBITDA increased 3%, primarily reflecting Hoseasons March results and continued cost reduction programs. Exchange revenues in the first quarter of 2010 were flat on a constant currency basis and up 2% on a reported basis. Prior to detailing these results, I must call your attention to a change in our exchange in rentals drivers to better reflect revenues in the two pieces of our business. Specifically, RCI member-related rentals are now captured in the exchange drivers, whereas we used to include those revenues in the rental drivers. We believe this presentation better captures the full value of RCI members and aligns with exchange peer practices. So with this realignment, our vacation rentals and average fee for vacation rental drivers will be focused on our European rentals business.

Now looking at the drivers. The average number of members was consistent with the first quarter of 2009. Exchange revenue per member and constant currency was also flat compared with the first quarter 2009 and up 4% on a reported basis. Higher exchange and member-related rental transaction fees were offset by lower exchange and rental transactions, subscription fees and travel service fees. By the way, web penetration for RCI.com was 29% in quarter one of 2010 compared to 20% in the first quarter of 2009.

Rental revenues in the first quarter were up 2% on a constant currency basis and up 9% on a reported basis. The acquisition of Hoseasons in March contributed $3 million of incremental revenues. Excluding the impact of the Hoseasons acquisition, transaction volumes in the first quarter of 2010 were consistent with the first quarter of 2009, reflecting higher volumes at our Novasol business, offset by a decline in volumes at our Landal GreenParks business. In constant currency and excluding the impact of the Hoseasons acquisition, average net price per rental was up 1% in the first quarter of 2010, primarily reflecting a favorable impact of higher commissions on new properties added to our network in 2010 by our UK cottages business.

Now, moving to Wyndham vacation ownership. Revenues were down 4% and adjusted EBITDA was up 4%, reflecting the absence of the previously mentioned roll-in of $67 million in deferred revenue that was a benefit in 2009. This was substantially offset by exceptionally strong execution and performance in the business, resulting in a 71% increase in adjusted EBITDA, excluding the 2009 deferred revenue benefit and restructuring from 2009 results. Close rates remain stable, and transaction sizes and pricing are strong. Tours were down 10% year-over-year, slightly better than planned and VPG, which increased 25%, significantly exceeded our plan. Our strong sales efficiencies reflect our ongoing focus on tour quality as we continue to refine the database to target only the most qualified prospects as well as the efforts of the best sales team in the industry. It's important to note that we expect VPG growth to moderate as we move through the year and further adjust our tour mix to include greater front line tour flow to support the long-term growth of the business.

Property management revenues increased 10%, primarily reflecting a higher number of managed units. Consumer finance revenues declined 4%, primarily reflecting a reduction in the size of our receivables portfolio, while consumer finance interest expense declined 25%, reflecting a decline in average borrowings and improved rates on our most recent securitization transactions. Now, as you know, we're transforming this business and continuing to make great progress in terms of improving cash flow and our return profile. The percent of sales financed for the quarter averaged 54%, down from 58% a year ago and 64% two years ago. On the consumer financing front, we saw significant improvement in the first quarter in write-offs which declined to a rate of 2.8% of the overall portfolio from 3.4% during quarter one of 2009. Overall, delinquency and default rates in the portfolio continue to improve. Considering these and other factors, the provision for loan losses was $86 million, or 28% of gross VOI sales, down from 31% on a similar basis from the first quarter 2009. Note as we continue to write higher quality loans and as the economy begins to stabilize, the earnings upside from lowering provisioning could be significant over the next 18 months. We gained approximately $8 million in full-year EBITDA for every 100 basis point decline in the provision as a percent of gross VOI sales.

Now turning to guidance. As Steve mentioned and as you saw from the press release, we're bringing up the bottom of our revenue guidance slightly with a new range of $3.6 billion to $3.9 billion. We've increased adjusted EBITDA guidance to $805 million to $840 million, up from the previous guidance of $775 million to $825 million. Adjusted interest expense based on the new capital structure is expected to be $135 million to $145 million. And we are increasing our adjusted earnings per share guidance to $1.56 to $1.71 per share. We expect diluted adjusted earnings per share for the second quarter of $0.38 to $0.42. Remember that second quarter 2009 results benefited from a roll-in of deferred revenue of $37 million resulting in $17 million of additional EBITDA.

At the Hotel Group, our current best view is that RevPAR could be flat or down slightly at the upper end of the guidance that we provided in February. Bear in mind that some of the immediate turn around in industry RevPAR is for the luxury and upper upscale segments, which are typically the first to show positive growth coming out of the downturn. We primarily operate in the economy in mid-scale without food and beverage segments, which are historically more resilient in a declining RevPAR environment, but slower to improve in an increasing RevPAR environment. Travel patterns during spring break were encouraging, and if this trend carries over to the summer months when we derive 30% of our annual royalties, we are optimistic that we could see an improvement in our full-year RevPAR performance. However, for now, we are leaving hotel guidance unchanged.

In Exchange and Rentals revenue and EBITDA guidance remain unchanged, however, we are updating the driver guidance based on the new methodology which moves RCI member related revenues to the exchange drivers and the Hoseasons acquisition which, excluding the acquisition-related costs, will be accretive. Aside from these changes, our underlying assumptions for the business remain unchanged. Taking the methodology change and the acquisition into account, the new driver guidance is; First, in Exchange, we expect the average number of members, as well as exchange revenue per member to be flat. However, in Rentals, we expect transactions to increase 20% to 23% and Average Net Price for Vacation Rental to decrease 12% to 15%, primarily reflecting increased volumes at lower rental yields for our new Hoseasons business.

As Steve mentioned, the guidance increase overall is due to strong vacation ownership performance, and we are upping our revenue guidance to $1.8 billion to $2 billion and EBITDA guidance to $380 million to $405 million. Tour guidance remains unchanged, and VPG guidance will be increased by 100 basis points to a range of 6% to 9% growth. We also expect continued improvement in the loan loss provision. Finally, we continue to make very good progress on the resolution of our legacy contingent liability for taxes related to periods prior to our separation from Cendant. We in active settlement discussions with the IRS, and those discussions are progressing well. We expect any settlement to be within our reserve amount of $274 million, and the vast majority of this issue to be resolved no later than the third quarter and possibly before. With that, I'll turn the call back to Steve.

Thanks, Tom. Before we open the line for questions, I'd like to make a few concluding comments. Overall, this was a strong quarter across all three of our business units. We have robust business models and our associates are executing our business strategies extraordinarily well. The economic environment is showing signs of improvement. In addition, we're seeing tangible evidence of the transformation of our business in the form of strong free cash flow which we're deploying to build shareholder value, both directly and indirectly. We have tripled our dividend and reactivated our share repurchase program. We will invest in our strong businesses to achieve strong organic growth, and we will look for acquisitions in our fee-for-service businesses that will fuel additional cash and more growth. And as Tom mentioned, we've raised our guidance. In short, we're delivering on our commitments to shareholders, and we will continue to do so each and every day. With that, let's open the line for questions. Shirley?

Thank you. We will now begin the question and answer session. (Operator Instructions) One moment for our first question. Our first question comes from Joe Greff of JPMorgan. You may ask your question.

Good morning, everyone. With respect to your outlook on vacation ownership, you mentioned you altered your loan loss provision outlook. I believe a quarter ago it was 28% of gross sales. What is that going for for the rest of the year? I know you mentioned 28% in the 1Q.

I don't think we've given guidance on loan loss provisions, Joe. And so, we just see real positive signs and expect that that number will improve as we go through the next three quarters.

Okay. So if we look at the vacation ownership EBITDA guidance, the upside there is really coming from that, well, clarify if it's that entirely the additional upside. And then how much of that is WAAM contribution that you may not have had in the guidance before?

Yes. It's a mix of VPG increase and an improvement loan loss. One of the things that I think our Company is seeing in our hotel business is an economy scale brand that recovers a little slower than some of the upper upscale and luxury brands. But within our time share business, we have this loan loss provision, as you know, Joe, that is influenced by the direction of the economy and as the economy improves and the ground beneath us gets more solid, then our belief is that the loan loss provision will improve, and we shared that for every 100 basis points of improvement in loan loss it's $8 million of EBITDA. So that's a big swing factor, and we're constantly assessing where we should be with that loan loss provision.

Okay, and then Steve, talking about the Wyndham Asset Affiliation Model, can you talk about how many additional deals beyond what you have at Myrtle Beach in Orlando are kind of in your sort of WAAM pipeline?

Sure, Joe. There's a tremendous pipeline out there. We do a triage on the pipeline determining -- by determining where we would like product, what the quality of the product looks like and the partner that we would be entering into to know that they'd be able to provide financing to the end consumer. We have dozens in the pipeline. I think this year it's probably safe to say that we'll probably see three or four more get executed. We may only start selling one or two more, because we want to continue to work down our balance sheet, but there's a lot of product out there available.

Great. Thank you.

Thanks, Joe.

Thank you. Our next question comes from Chris Woronka with Deutsche Bank. You may ask your question.

Hey, good morning, guys. Steve, I was hoping we could talk a little bit about the time share business. It looks like things are getting better, maybe a little bit faster than you thought there. Are you guys operationally geared to handle that increased demand in terms of, I know you have the inventory, but do you have the sales force and things like that to accelerate things a little bit?

Well Chris, as we articulated before, our goal is not to ramp that business back up to a strong double digit grower. We've done that before, we know we can do it. But what we're really managing that business for is to maximize cash flow and maximize efficiency. And that's why you see in the results for this quarter a 25% in volume per guest is phenomenal. I mean, the sales force did a remarkable job. Between marketing and sales, they delivered more than we thought they could for the quarter.

Now, the quarter -- the first quarter is always a heavily in-house quarter because you don't have as many people out traveling for summer vacation, so you tend to see more in-house sales and therefore, an over exceed would be easily achieved maybe in the first quarter versus, let's say the third quarter, when you've got the summer months included. But we don't -- we do not plan on ramping that business up back to a double digit grower. So to answer your question, we don't have the sales force sitting on the sidelines waiting to launch in. There's a lot of sales people out on the street. We could probably ramp that up, but that's not our goal. Our goal is to continue to improve the efficiency of the business and to produce cash flow. And on those two areas, that business is an A++.

Okay, great. And then on the lodging, the Apollo program. Can you just maybe share a few thoughts there in terms of does that -- will that mean more voluntary removals initially and then hopefully more units on the back end? And what, if any, kind of financing would you guys -- what's your financial commitment there? Is there any at all in terms of Cap Ex or investment in the brands?

Well, our financial commitment is to develop the backbone that would provide these additional features to the franchisees, so our commitment to it is complete. It as also within the numbers that we've guided people towards. We've been working on this project for some time, and now coming public with it. So it was -- it has been in the works, it has been in our planning, so within the Cap Ex numbers we've shown you, it includes the launch of our Apollo initiative this year. As to what will it do to the franchise community, hopefully it will increase the franchise community because our value proposition will even be stronger to prospective franchisees as well as existing franchisees. This is not a process that will eliminate people. This is say process that hopefully will bring more in.

And importantly, as Tom said, I think in the last quarter, retention is key. We were very focused on increasing our retention rate. Keeping somebody on is easier than having to go out and find a new hotel.

Okay, very good, and nice quarter.

Thanks, Chris.

Thank you. (Operator Instructions) Our next question comes from from Patrick Scholes with FBR Capital Markets. You may ask your question.

Hi, good morning. Now with the timeshare sales intentionally slowing, it looks like certainly, timeshare property management is becoming a larger part of that business. I'm wondering if you could give me a little color on what sort of margins that you are getting on that type of business and typically, how long are your contracts for your timeshare property managements?

Well, the contracts are generally -- they can be -- they're not long, long-term contracts with the property management on the timeshare side like they are on the hotel side. The contracts can be one year. They can be three years. They can be five years. The key is, though that we generally keep those contracts from year to year to year. There's very little loss rate in our contracts for -- actually, none that I can think of recently on the timeshare side. So the length of the contract is not as critical as the fact that we've got good relationships and good hooks with those properties. Some can get as long as ten years, but they are generally shorter term. The other part of the question was the margin?

Correct.

And Patrick, this is the ultimate fee-for-service business. It's a cost plus business. And so the cost, we basically take 10% or so above cost. So this is a business that is the type of business structurally that we love. No Cap Ex, and it's a fee-for-service business because we're providing the homeowners a service, and that's around 10%.

10% margin that you're taking?

Yes.

Okay.

10% markup.

Not margin, but markup? Okay.

Correct.

Just one other question. Now that your balance sheet about three times and you are buying back some shares, what level of debt to EBITDA is your comfort? Where you are comfortable with.

We like where we are. We believe we already have an investment grade profile, all measures point to that. Internally, we'd like to keep it in the low threes, and so when we reported that we were at three times adjusted EBITDA for the quarter, that's about where we'd like to be, maybe a little higher, but in that ballpark of low threes.

Okay, great. Thank you.

Thanks, Patrick.

Thank you. Our next question comes from Steve Kent with Goldman Sachs. You may ask your question.

Hi, good morning. Tom, maybe you could talk to or Steve, talk to this 700 basis points of increased growth from, it sounds like, I think acquisitions. How do you do that given the parameters of wanting to still buy back stock, still make them relatively small tuck-in acquisitions? How do you achieve that over the next couple of years? Or maybe I misunderstood something.

Yes Steve, I really wanted to specify that these are per share growth targets. So we have the two levers. We're basically did a reasonably simple exercise and said, we're solidly bought into the fact that we're going to generate between $500 million to $600 million a year baseline in free cash flow. So the question is, what do you do with the free cash flow? So in one scenario, we made certain assumptions about share price appreciation and assumed that all of that cash would be used to buy back -- this is, again, a hypothetical exercise.

All of that cash would be used to buy back stock at various levels over the next five years. We came out to sort of the incremental per share growth of X. And then we made an assumption that said, if we took all of that same cash flow and we purchased EBITDA, we use as another side of the equation, we purchased EBITDA at what we consider to be a reasonable target multiple, we came out with another growth number. Now, the likely scenario's going to be a hybrid scenario where we buy back stock and we buy EBITDA over time. So we basically went through that exercise and came out with that number of around 700 basis points of growth on a per share basis.

For both of them, Steve.

That's correct, for both of them.

To answer the question, it wasn't 700 basis points just for acquisition.

Right.

So it's by using a combination of making some acquisitions, buying back stock, that's how you get incremental 700 basis points more.

And we think it's an important exercise just to start because we spent the last few months establishing the cash statement, and now we're trying to translate that cash into what we're going to do with it. And initially, it was sort of a broad application of the cash that said about 700 basis points of growth on a per share basis would come about because of that.

Just one more thing on that issue of making acquisitions. I always struggle with this because your multiple is seven times or so 2011, which is a reasonably low multiple. So how do you make accretive acquisitions if you are trading at seven?

Well, I couldn't agree with you more that seven is a low multiple, Steve, so I appreciate you saying that. The fact is though that we make acquisitions and we make them better by our business model. So, for example, the Hoseasonstransaction may have appeared to be based on what they were earning a higher multiple. But in our hands, it ended up being an accretive deal because of the synergies and the infrastructure that we can bring to bear. And that is, frankly, how we've done a lot of our deals, whether it was Hawthorne Suites and Microtel. We have continually brought in deals and made them better by our management and infrastructure.

Okay. Thanks.

Thank you. (Operator Instructions) And one moment, please. And at this time, I'm show no further questions. I'll turn the call back over to Steve Holmes.

Okay. Well, thank you very much, everyone, for spending time with us this morning, and have a great day.

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