Travel + Leisure Co (TNL) 2010 Q2 法說會逐字稿

Welcome to the Wyndham Worldwide second quarter earnings conference call. (Operator Instructions)

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations.

Good morning. With us today 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 April 30, 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 in 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 today. As you saw from the press release, we had a terrific quarter with operating results at each of the business units better than our expectations. We delivered adjusted EPS of $0.51, significantly above the high end of our $0.38 to $0.42 range, reflecting continued strength and growth across the three businesses, as well as a change in our tax rate and some favorable impact of foreign currency. When evaluating 2010 second quarter comparisons to 2009, remember that last year's results included approximately $37 million roll-in of previously deferred timeshare revenue, which contributed approximately $17 million in EBITDA. Excluding that, as well as excluding the favorable net impact to foreign currency, second quarter 2010 adjusted EBITDA increased by 14%.

We continue to see improving business momentum, especially in North America, which accounts for over 80% of our EBITDA. Domestic RevPAR was flat for the quarter, turned positive in June, and is stronger yet in July. This improvement is being led by occupancy gains over last year. Vacation exchange remains within our expectations and quarterly close rates at vacation ownership have never been higher. In Europe, which has been an area of investor focus over the recent months remains stable. These trends, coupled with continued strong execution by our businesses and a favorable tax rate, give us confidence to raise our full year revenue, EBITDA and EPS guidance. Tom will cover the details a little bit later.

We recently completed the formal stage of what is essentially an ongoing strategic planning process. Our five main strategic initiatives remain the same with the top three being to increase market share, grow cash flow and rebalance our portfolio to emphasize our fee-for-service businesses. Since we established these strategic initiatives in 2009, we have remained on course and have delivered against each of them.

Let me highlight some of the refinements coming from our strategic planning process. In addition to our core organic growth, cash flow will continue to be an enabler for incremental growth. In that regard, I am pleased to share that our free cash flow projections beyond 2010 have us in the neighborhood of $600 million to $700 million annually, instead of the $500 million to $600 million we previously shared with you. This increased cash flow is the result of growth in EBITDA, the favorable flow-through characteristics of our fee-for-service business models and lower cash taxes. It will be applied to growing our businesses and increasing shareholder value.

Next I want to spend a few moments to update you on what WAAM, our alternative timeshare business model will look like in the future. We have shared previously that over the next few years as we streamline our timeshare balance sheet, we would limit the size of our WAAM business to approximately 15% to 20% of total vacation ownership revenue. Moreover, once our balance sheet reached our desired level, we would explore expanding the WAAM business model to a higher level.

As we examine the various impacts on returns, free cash flow and EBITDA of different levels of WAAM activity, we have concluded WAAM should be continued to be viewed as a complementary business to our traditional timeshare business. By the way, we continue to gain traction with WAAM, sales in Myrtle beach, our first WAAM project, remain robust and ahead of plan. In addition, we will begin sales next week on our second WAAM deal as we become the exclusive sales and marketing agent for the sale of vacation ownership interest of up to 275 recently constructed units at the Reunion Resort in Orlando.

Finally, I would like to spend a couple of minutes discussing our growth plans which were a key focus during our strategic planning process. We discussed during our last quarterly call that we are expecting EBITDA in the core business to grow at a compound annual rate of 7% to 9%. That was confirmed in the strategic planning process. If we simply keep our free cash flow on our balance sheet, EPS would grow at 12% to 14%. With a more active deployment of cash through share repurchases, additional investment in our core businesses and acquisitions of fee-for-service businesses, we can yield total earnings growth approaching 20%. Our management team is focused on finding the right opportunities to complement and enhance our organic growth and through the action of our Board of Directors we now have additional capacity to repurchase our shares.

These growth levels will be achieved while dramatically reducing our leverage ratios and enhancing or credit profile. Our specific credit objectives are to maintain a BBB minus investment grade profile. As our credit profile continues to improve, we will have the opportunity to further drive earnings growth by increasing our debt while maintaining a BBB minus credit rating. If you add the commitment that we made regarding our dividend policy, which is basically that we said our dividend increase would track our earnings growth, the opportunity for further improvement in total shareholder return is enhanced.

Now let me take a moment to share some current business unit highlights. The hotel group is making significant progress on a number of fronts. We acquired the Tryp Hotel brand from Sol Melia Hotels and Resorts, comprising license agreements for 92 hotels located throughout Europe and South America. The brand to be renamed Tryp by Wyndham is a select service mid market brand catering to business and leisure travelers in center city locations including Madrid, Barcelona and Paris. While this acquisition increases our international platform, we also plan to pursue an aggressive growth strategy in North America for this Tryp brand.

We continue to make significant process (sic) in growing the Wyndham brand organically, increasing rooms 23% year over year. Brand openings in the second quarter 2010 were at the highest level in two years. In fact, we've added more rooms to the Wyndham system so far this year than we did in all of 2009. Significant additions include Wyndham Hotels in San Francisco and Tampa, Florida, and Wyndham Gardens in Philadelphia and South Beach, Miami. We also signed an agreement for our first Wyndham Grand in Hawaii, a 322-room new build luxury resort.

Yesterday JD Powers released the results of its annual guest satisfaction survey and Microtel was ranked the highest among economy chains for the ninth consecutive year. This is unprecedented for any brand in any segment. As Microtel continues to dominate the economy segment, Days Inn and Super 8 maintained leading positions.

As I discussed on the last call, the hotel group launched a series of initiatives called Apollo, which are aimed at improving the value proposition to our hotel owners predominantly through improved system contribution from technology enhancements. Through the second quarter, we built a strong foundation organizationally and through the establishment of formalized project management processes we are preparing to deliver the many benefits that Apollo offers over the next 12 to 18 months.

Now moving to Exchange and Rentals. RCI continued to demonstrate its ability to grow by signing more than a dozen new long-term affiliations in the quarter. RCI welcomed 15 resorts from new affiliates and added seven additional resorts from existing affiliates bringing our year to date new resort affiliation total to 58 resorts. This increase further strengthens our industry leading exchange network and reflects our commitment to offer our members the best new vacation product choices around the world.

In June, Wyndham Exchange and Rentals rolled out its latest round of RCI.com innovations which were designed to continue to drive more transactions to the web and improve customer experience by creating, first, a simpler yet more robust online member search capabilities. Second, expanding new automatic e-mail member notification functionality on pending vacation services to our European region. And third, continued expansion of our club enablement program to major club affiliates. Developer affiliates using the new web interface have achieved significant gains in online transaction penetration rates in a matter of months. Web penetration at RCI.com was 27% in the second quarter of 2010, compared with 21% in the second quarter of 2009.

Within our rental business, the integration of Hoseasons our recently acquired UK vacation rental company is progressing on budget and on schedule. The holiday cottages grew and Hoseasons management teams continued to integrate their very similar businesses and have renamed their combined companies, The Hoseasons Group. While this has provided tremendous engagements and buy-in from our 700 new host season associates, the name change also provides us with the opportunity to leverage the well-known Hoseasons brand.

Our Vacation Ownership business continued to perform exceptionally well during the second quarter having fully lapped the adjustments made in late 2008 and early 2009, our results this quarter provide a clear view into the health and stability of this business. As you may recall, I first discussed our intention to slow the growth of our vacation ownership business during our 2008 second quarter earnings call. This was months ahead of the financial crisis and the subsequent collapse of the credit markets. While our primary goal at that time was to free up more capital for investment in our fee-for-service businesses, we also believe that slowing growth in vacation ownership would afford us the opportunity to gain greater efficiency and improve the margin of this business. We've accomplished those goals, and in our new view of the traditional vacation ownership model, which moderates growth to streamline the balance sheet, significantly increases the ROIC of this business, especially with the ABS market stabilizing.

This business continues to perform better than our expectations, illustrating our ability to execute. Please recall that occupancy levels at vacation ownership remained consistent throughout the downturn and are currently running at about 85% across our system proving the value proposition of the product.

One final note before turning to Tom. We have strong, resilient, predictable businesses and we are confident that it can deliver superior returns in good, as well as in challenging economic times. As noted in the press release this morning, our Board shares our confidence, approving an increase in the share repurchase authorization of $300 million. With approximately $90 million remaining in the previous program, we have ample opportunity to invest directly in our Company. In addition, as I said before, our policy is to grow our dividends at least in line with earnings and we will allocate the necessary cash to achieve that objective. Finally, through prudent acquisition of fee-for-service businesses, we'll compound the effect of an excellent business model further increasing EBITDA and cash flow. We intend to use every tool available to us to grow our businesses and enhance shareholder value.

I'll now turn the call over to Tom, who will provide you with additional perspective and detail on our results and our outlook. Tom?

Thank you, Steve. As you saw from the press release this morning, as well as in recent announcements from us over the past week, we have much good news to share on this call.

We beat our expectations by a wide margin coming in $0.09 above the top end of our range. A little over $0.02 of the beat came from prudent cost management and in Exchange and Rentals, and additional $0.02 from favorable foreign currency impacts. Approximately $0.04 came from a lower tax rate reflecting our ability to utilize foreign tax credits based on certain changes we made to our tax profile.

The result of the quarter, which reflected the current utilization of cumulative credits taken in the quarter was a 32.6% effective tax rate. We expect our full year tax rate for 2010 to be 35.5%. The longer term effects of the change will be less evident on a GAAP tax basis as we expect our tax rate next year to be close to 37.5% and then approach a more normalized rate of 39% in 2012. Where we expect to see a meaningful and sustainable pickup is in our cash taxes translating to approximately $100 million over the next five to seven years. This is one of the factors that led us to raise our future free cash flow guidance that Steve mentioned.

Before going into the results for the quarter, let me touch upon some of our recent news. We announced a resolution with the IRS of our legacy contingent tax liability related to periods prior to our separation from Cendant. The settlement was well within our reserves. We are paying a total of $145 million against an IRS reserve of $185 million. We will reflect this settlement and the $40 million gain in our third quarter financial statements. In addition to settling the contingent tax liability this agreement also settled $190 million of deferred tax liabilities related to timeshare receivables on our balance sheet. Approximately $125 million of the $145 million payment reflects an accelerated payment of this deferred tax liability. So our cash taxes over the next three to six years will be reduced by the amount of the $125 million payment and the deferred tax liability will be reduced by the $190 million and result in an increase in shareholders equity. We look at the settlement of these two issues as a package settlement and a very positive development for the Company.

Turning to capital markets, earlier this week, we announced an ABS deal with advanced rates and cost characteristics very close to those of deals we did prior to the economic downturn. We securitized $350 million in timeshare receivable notes at an advance rate of 83% and an all in yield of 4.15%. This was the first senior and subordinated deal structure in the market since 2008. The transaction was oversubscribed and we couldn't be happier with the execution.

In addition, in June, we closed a $185 million premium yield securitization. Premium yield securitizations which consists primarily of notes that are ineligible for the conduit due to certain borrower or loan characteristics represent more expensive financing than normal term deals but significantly enhance our liquidity and cash flow.

Net cash from operations was approximately $557 million for the first six months of 2010 a 21% increase compared with the first half of 2009. Free cash flow which we defined as net cash from operations less CapEx, equity investments, and development advances increased over 32% to $486 million for the first six months, compared with $368 million for the same period in 2009. As you know we believe that cash is the great enabler for our Company, and will fuel our growth above and beyond the growth associated with our core businesses. We now expect our free cash flow in 2010 to be at the upper end of the $500 million to $600 million range excluding the upcoming payment of $145 million related to the IRS contingent tax liability, and, as Steve mentioned earlier, we are now projecting steady state free cash flow of $600 million to $700 million in 2011 and beyond.

We remain committed to returning cash to shareholders and as you saw from the press release, we have continued our share repurchases, buying 3.4 million shares through July 27, at an average price of $23.85. These factors have prompted the Board to increase our overall share repurchase authorization by $300 million.

Now, moving to operating performance for the quarter, let's begin the segment review starting with our Hotel Group. Revenues were up slightly while adjusted EBITDA was flat reflecting an increase in bad debt expense, which we attribute to some lingering ripple effects of the recession. System-wide RevPAR was flat ahead of our expectations for the quarter. As we expected the economy segment rebound is lagging the turnaround in upscale and luxury. We have continued to see meaningful improvement in RevPAR through the first three weeks of July. Domestic RevPAR for Wyndham Hotels and Resort brand was up 13% in the second quarter 2010 compared with Smith Travel data for the upscale segment of 6.9% during the same period. We ended the quarter with close to 606,800 hotel rooms worldwide. Excluding the Tryp acquisition, which added approximately 13,200 rooms system growth was flat- in line with our expectations.

So far this year, we've executed 209 new hotel contracts which is 15% above last year. The pipeline is essentially flat reflecting good franchise contract execution in several large Wyndham openings during the quarter. The new construction pipeline is up 6% since December 31, 2009, with much of the momentum coming internationally. And conversion activity is consistent with last year.

Wyndham Exchange and Rentals once again delivered solid results. For the quarter, excluding the net effect of foreign currency, revenue was up 3% and adjusted EBITDA increased 17%, primarily reflecting Hoseasons quarter two results and continued strong cost management by our team.

Hoseasons contributed $10 million to revenues and as Steve said we're very pleased with the integration and performance of this business. Our exchange in rentals management team continued to drive efficiencies in the business to reduce costs. The overall foreign currency impact in the second quarter was positive, resulting in favorable EBITDA impact of $10 million primarily from lower losses than 2009 on f/x transactions.

Wyndham Exchange and Rentals performance drivers were consistent with our expectations, demonstrating again the stability of this business. Annual number of exchange members and exchange revenue per member were relatively flat. Vacation rental transactions were up and average net price per vacation rental was down reflecting the impact of the Hoseasons acquisition.

Now, moving to Wyndham Vacation Ownership, revenues were up 8% despite the absence of the roll-in of $37 million in deferred revenue that was a benefit in 2009. Revenue increases reflect $35 million in lower provision for loan loss while WAAM commissions were $8 million. EBITDA increased 14% from the second quarter of 2009, excluding the prior year period EBITDA benefit associated with the deferred revenue roll-in and restructuring costs. The increase reflected exceptionally strong execution and performance in the business, some of which was slightly offset by higher commission costs. We will be working to bring commissions back to historic levels in the future. Our key performance business driver volume per guest was up 16% above 2009 second quarter results, reflecting strong pricing and close rates.

Property management revenues increased 6% primarily reflecting an increase in managed units and consumer finance revenues declined 3% primarily reflecting a slightly smaller receivables portfolio.

We continue to make great progress in improving our cash flow and return profile in our vacation ownership business. The percent of sales financed for the quarter averaged 54%, down from 56% a year ago and 68% two years ago. On the consumer financing front, overall delinquency and default rates in the portfolio continue to improve. Write-offs during the second quarter declined to 2.7% of the overall portfolio from 3.4% during the second quarter of 2009. The provision for loan losses was $87 million or 24% of gross VOI sales down from 34% in the second quarter of 2009.

Now, turning to guidance, as Steve mentioned and as you saw from the press release, we're increasing revenue guidance $100 million to a new range of $3.7 billion to $4 billion. We've increased adjusted EBITDA guidance $20 million to $825 million to $860 million. We are also bringing adjusted earnings per share guidance to $1.78 to $1.88 per share, reflecting a 35.5% tax rate and a share count of 186 million. Note that as usual, we have excluded future share repurchase assumptions from our guidance today. We expect diluted adjusted earnings per share for the third quarter of $0.60 to $0.64 per share.

Now, drilling down to the business units at the Hotel Group, new RevPAR guidance is flat to a positive 3% increase and room guidance reflecting the Tryp acquisition is now 3% to 5%. We are increasing lodging revenues slightly to a new range of $640 million to $680 million but are keeping EBITDA flat, reflecting the higher bad debt expense in the second quarter as well as increased investment in Apollo and IT Security.

In Exchange and Rentals, revenue and drivers remain unchanged but we're bringing up EBITDA by $5 million, reflecting Hoseasons and continued cost management.

Finally, we're raising Vacation Ownership revenues by $100 million and bringing EBITDA up by $20 million, reflecting an increase in volume per guest to 10% to 14% and a reduction in tour flow improvement of 1% to 3% from last year, which is a slight improvement from our prior guidance. We expect the provision for loan losses to be approximately 24% for the remainder of the year. And 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 with results above our expectations and momentum building. Based on these results and our expectations for the remainder of the year, we have raised our full year of revenue, earnings and EBITDA guidance. Our business models generate significant free cash flow and our execution is consistently strong. Our efforts to transform the business and deliver sustainable free cash flow are paying off as we have raised our sustainable cash flow guidance for the future. We're intensely focused on turning this cash into growth and giving our shareholders the benefit of the multiplier or compounding effect this creates. With that, let's open the line for questions. Caroline?

(Operator Instructions) Our first question comes from Kevin Milota from JPMorgan.

Good morning, Kevin.

I was hoping you could give some more color on the -- you guys had great margin performance on the vacation exchange and rental side of things, wondering how sustainable that is going forward and also, given the hard work that you guys have done in the timeshare ABS space, do you plan on accessing the market in the second half of the year?

I'll take the first one on exchange and rentals and then Tom can address our financing needs, Kevin. On the exchange and rental, what you're seeing is a flow-through of what we had talked about quite a while ago of moving the exchange and rental business to a more automated online business, and those improvements are something that we had talked about and was -- were planning for when we started the process about a year and a half, two years ago. Now, in addition there is some FX that's flowing through this quarter that does have an impact and drops more -- drops more margin improvement to the bottom line. But yes, what you're seeing is a combination of those two factors. You want to talk about the ABS, Tom?

Sure. Kevin, the last ABS transaction we completed last week was really heavily subscribed. We upsized it a bit and we got to the $350 million. We believe we're going to probably do another transaction in the fall sometime. It most likely will be a smaller transaction than the $350 million we just completed but we had to take advantage of what are just exceptionally positive market characteristics in terms of advance rates and coupon that we really wanted to upsize it when the opportunity was there but we'll do one more in the fall.

Okay, thanks a lot.

Thank you. Our next question or comment is from Bob LaFleur from Hudson Securities. Your line is open.

Good morning. I was just curious if I could get a little more color on your comments earlier in the call on the WAAM model as it came through the strategic review. It sounds like you -- I don't know if you tempered expectations for it but I guess there has been a lot of enthusiasm about that as potentially a bigger part of your vacation ownership business going forward and it sounds like that's not the case. I was wondering what happened in that strategic review that led you to that conclusion? Has anything changed from you first proposed it and then also if you could sort of finish that up with talking about your current inventory on the balance sheet, how much sales that gives you, particularly in light of the increased revenue guidance and also at what point do you think you actually might have to start building timeshare again if at all?

Wow, a lot of questions there, Bob, good morning.

Well done, dude. That's quite a bit.

Stream of consciousness. Well, let's talk a little bit about the WAAM model. We had indicated that for the first four years as we're burning through our inventory, the WAAM model would probably be somewhere between 15% and 20%. So that is consistent with what we've said in the past. We get a lot of questions about the WAAM model because it's new and it's an innovative product that we have that we can offer up. What we have been doing as we went through the strategic plan is we said, okay, now, beyond the four years, looking out years five through ten, what could it conceivably look like and should we be gearing ourselves towards 100% WAAM or 0% WAAM, what should it look like. And what we're doing is we're balancing both the return that we get on the investment capital, as well as cash flow and EBITDA generation from the traditional model and the new WAAM model. And what we think is that going forward, and -- now, going forward is five years out, so we're just trying to give people a picture because there's been a lot of questions about it, going five years out, it could be 15% to 20% still. It could be more. It could be less. But we don't want to make it appear that we're going to turn the switch completely over and only do the WAAM product.

We've always said it's probably complementary, there's probably a hybrid approach where we'll own some of the real estate or some of the inventory and we'll use some WAAM. We think that looking out five years and beyond, it probably will continue to be a hybrid model and it's probably not 100% WAAM, it's probably something less than that and it could be somewhere around the level that we're running at right now. So, it's hard to predict that far out exactly what the mix will look like, but because we had questions on it we thought we'd give our latest thinking after our strategic planning process. And one of the things that's driving us in looking at all this is the ROIC that we see and how that plays out beyond the next four years. For that particular business unit.

Now, with respect to inventory, we have about four years worth of inventory on the balance sheet right now, so that -- and that's assuming a mix of 15%, 20% of WAAM, and so it could be four or five years, somewhere in that range. And it really isn't impacted by the level of sales that we're increasing timeshare by. I don't know if I got all the answers there.

I think so. If I might just add a couple other thoughts to what Steve said. Number one, we have said consistently recently that we're going to have to spend $100 million to $125 millionish each year on inventory over the next few years, and that inventory investment would be adequate to get us through 2014. So it takes us through 2014 comfortably.

Now, just to touch on a point that Steve made about ROIC, we've been looking at the return profile business of the business bouncing against EBITDA, and what we saw is that if we streamlined our balance sheet and get our inventory levels to a much tighter level than we've had historically because of our growth goals for this business, that we can drive a ROIC that's in the low 20% which we thought was a dramatic improvement from how this business has been profiled historically as we built up the balance sheet to chase this growth. So the interim period the next five years, which we describe as our balance sheet streamlining period, will get us to a higher ROIC and then we looked at various scenarios of WAAM and decided that at least at this point that the best balance of EBITDA growth with an attractive ROIC and positive free cash flow characteristics at this point in time would have us, as Steve said, view this as a complementary source.

I want to also point out one other statement that Steve made, Bob, which is this business now will be generating our Company $600 million to $700 million a year in free cash flow over the next four or five years and beyond then we believe. And even if we were to invest a bit more in inventory in our timeshare business, let's say we had to invest another $100 million of inventory in our timeshare business, we would still be generating $600 million to $700 million a year in free cash flow. So as Steve said it's too early to call for sure, but we did want to draw a bit of a line in the sand and suggest that this is going to be a complementary business as we go forward.

Thanks.

Thanks, Bob.

Our next question or comment comes from Steve Kent from Goldman Sachs, your line is open.

Hi, good morning. Two questions. First, can you just talk about the number of members in your exchange program? That has sort of declined over the past two quarters modestly, but can you talk about the numbers there and whether that will continue for a while. Then separately, can you just talk about what you're doing on the marketing front to increase the timeshare sales or volume per guest. And one of my concerns has been in the timeshare industry is that essentially you're running out of friends and family to sell to, and whether you're going after new customers and how successful -- how successful that's been and what kind of programs you have in place to sustain that?

Sure, Steve. Well, let me -- I'll take the first whack at it and then Tom can weigh in as well. I don't think that our member numbers, I mean, I'm just looking at the press release here, down by 5,000 members off a base of 3.7 million is meaningful at all, so I would say that's relatively flat. And that's what we were projecting is that we would be relatively flat. As you know with that business, people can come and go as they want if they sign up for RCI membership one year they may decide not to sign up and then the next year they come back and they sign up. One of the advantages of some of the technology that we've rolled out, we think we can ignite people to come back. So there's a larger base than 3.7 million people out there that own timeshare affiliated with RCI. One of our jobs is to try to entice those people and reignite them to come back and renew their RCI membership and start doing transactions with us. I don't think there's anything to be read from that. I think that we're still very confident with that business and where that member growth will go in the future.

With respect to VPG and the selling of product, I think I'll point out two things. One is that part of the reason our commissions were up this quarter was that we had more new sales, because we put a focus on that and we put an incentive on that than we did last year and that was in our original forecast. So we had a little bit more commission but again, that's not a bad thing in our mind because we are driving new sales, we want to make sure that we keep that mix going. So we are focused on bringing in new customers. We've got a base of I guess 850,000 members, who own our product right now. So we've got a pretty deep pool that we can keep selling to we believe on the upgrade side--And bear in mind that about 40% to 50% of the people do upgrade. So it's a very large population that we'll continue to upgrade. So, no, we don't see a slowdown at all. Also bear in mind and then I'll stop and Tom can add anything he wants to add. Bear in mind we have added product and we're adding new product continually. That new product is something new and exciting for our 850,000 customers, so when we add a Reunion Resort in Orlando or we add another project in Myrtle Beach, or some of these other WAAM projects as well as our own project that we're doing it's giving more and more reason for people to want to travel, want to stay with us and want to buy more points.

I don't have much to add. I think Steve covered it. I would just suggest to you, Steve, that we are fully aware of the importance of new buyers into our system. The salesforce is being managed accordingly, commission structures have been altered to emphasize the value, the lifetime value of a new buyer, because we realize that that buyer is not a buyer just one time but multiple times. And so we're very cognizant of it and the business unit has this as a key operational priority.

Great to hear. You're making progress on that. Thanks.

Thanks, Steve.

Thank you. (Operator Instructions) Our next question or comment comes from Ryan Meliker from Morgan Stanley. Your line is open.

Just a couple quick questions for you on vacation ownership. I think first it would be helpful if you could give us any color on where you think run rate margins are going to look like on the vacation ownership business? Obviously things have jumped around a little bit, you guys have taken a lot of costs out of the system and margins look like they're going to be pretty good this year. Do you think this year's margins are going to be in line with what you would say run rate over the next several years would look like? And then second question I had was, as you know the Marriott, one of your competitors in the vacation ownership business, launched a points based program. You guys have been strong advocates to your points based program and the value it adds to your customers. I just want to know if you have seen any impact yet on what Marriott is doing to trying to really conform to part of your business model on timeshare, if you're seeing any impact from that at all yet and anything you might be doing to try to combat that field? So thank you.

Thanks, Ryan. With respect to the margin, we think the margin that we're producing right now is probably the rate that we'll be at. We're looking at the margin on that business is 20% to 22% margin?

Low 20%, yes.

Low 20%, type margin business. Most of the costs that we took out, frankly, was when we downsized that business during the credit crisis and took down the number of offices and sales offices we have. Now, our goal over time with that as well as all businesses is to improve margin, so obviously that is a focus point. We want to continue to drive our profit and drive margin improvement.

With respect to the second question about Marriott's points based system, I did hear that they had launched a points based system. They already had one, I believe internationally, they brought -- they now are converting to a points based system. We applaud them for it. We think points based systems are more powerful tools. We don't see any impact on our sales from them, just like we didn't see any impact when we were competing in a particular market and we're both selling weeks 20 years ago. It's a big marketplace. The sale is made on a one on one basis when the consumer is in front of the sales organization, so it's not like walking down an aisle of a supermarket and deciding which can of beans to buy. It's a much more personalized sales approach, so we don't see an impact from them having points now, so we are not doing anything to combat it. We're constantly improving our points program that we've had for a decade and we add improvements, enhancements to make it even more powerful and stronger for our owners, and that's another reason that people continually are buying more and more of our product. Did I hit the question, Ryan?

You most certainly did. Thanks a lot for your help, guys.

Thanks, Ryan.

Thank you. And our last question comes from Michael Millman from Millman Research Associates. Your line is open.

I'd like to follow up on two previous questions. Maybe you can be more specific regarding the profitability on WAAM versus traditional timeshare, which you talked about return on investment rising, but WAAM's retire investment would seem to be infinite, so possibly talk about kind of the tail of the earnings of the cash flow. And the second which you touched upon regarding the economics between the existing timeshare buyer and the new timeshare buyer and maybe you can give us an idea of, indeed, what is the lifetime value of a timeshare, of a new timeshare buyer?

Okay. I'll take the first one and then Tom can address the comment that you made about the value of the timeshare buy over time. The profitability of WAAM versus traditional, Mike, is there's three basic components to it that we are evaluating. One was the return on invested capital, one was the EBITDA driven by that business, and then the third is the cash flow. And so we're looking at all three of those when we try to look out and see what the mix of the business should be. You're correct with the WAAM model, because it's a simple fee-for-service model, the ROIC is infinite. However, the EBITDA would be smaller if all we did was WAAM over a long period of time because, obviously if you do pure WAAM where somebody else is providing the financing, you'll ultimately lose that interest income spread over time unless we're incentivized to put more business towards WAAM and we're getting a piece that have spread from our partner. So there's a lot of moving parts relative to how you want to evaluate it. But from a straight ROIC, you're correct, WAAM would be the best because it's infinite. But we think that it ends up being the best to have a mix of the business going forward. So hopefully that was clear, Mike, as to how we came to that decision process.

Just give us some idea of how much of the EBITDA comes from the finance piece versus the other pieces?

Well, I mean, we've said historically that from the timeshare business, the three components are from the sales and marketing, from the property management business and from the -- and from the financing sources. Financing has been generally 20% to 30% of the profitability, up to 0.3 at times depending on what the capital market looks like, so that is still consistent right now as far as the traditional product. Tom, did you want to address the timeshare?

Yes, so just, Mike, just quickly, we believe that the business needs to invest in bringing in new buyers because new buyers ultimately will become upgrade buyers, so the measure that we use to gauge the profitability of a buyer is what we call VPG as you know, volume per guest. So just to give you a sense of it, the approximate volume per guest of a front line buyer, a first time buyer is around $1400, which is -- we probably are break even to making slightly some money on the front line buyer.

Now, the upgrade, the in-house buyer, is almost $1100 higher than that. And so you can see that the profitability formula increases significantly. So it's important that we bring in first time buyers, which may cost us more marketing dollars to identify and a higher cost to secure for ultimately a much higher sales down the road, and I think we've shared in the past around 60% of our revenue in a given year comes from these in-house, these upgrade buyers. So having a constant flow of people coming in, which may appear to be less profitable initially translates ultimately into higher sales through upgrades.

Great. That's very useful. Thank you.

Okay. I think Carolyn you said that was the last question?

We had one more person queue up if you'd like to take the question.

Sure.

Chris Woronka from Deutsche Bank, your line is open.

Two quick questions. One on share buy back, I'm just trying to get a sense for what drivers the timing and volume of that if you can just remind us? I mean, is it completely exclusive to an alternative set or is it, is it price sensitive, just your thoughts on how you go forward?

Well, we haven't -- just to reiterate what we said before, we don't comment on the timing or how we -- or when they're in the market or not in the market. That's just from a disclosure requirement what we require, so we do not give specifics. Having said that, we have obviously been active in the market over the last -- the last couple of quarters, we would anticipate utilizing our share repurchase authorization as this cash flow continues to come in. We certainly have removed one uncertainty with this IRS tax litigation that we wanted to settle, put that out of the way and behind us, so it allows us to maybe be more clear about what the cash needs will be for that piece of uncertainty that was there. But as to how we're going to make decisions, purchase decisions and do we have a price point we like or don't like, obviously we think our stock is a good buy now. We were actively out there in the second quarter and up through yesterday repurchasing, and we'll have to see how that plays out over the coming quarters.

Okay. Great. And the second one is on lodging, Steve, you guys have, I think even though it's early, you've seen some good interest out of the WAAM program. Is it possible you would almost take a similar approach in lodging and maybe approach some of the banks that may be involved with distressed properties and again with really no financial commitment from you guys particularly on the independent properties, try to bring them into the system? Is there a way to kind of leverage that same business model in a different way?

Well, we do basically, that's our franchising and our management company model on the hotel side. We did in the example of Reunion and it's a good point, Chris, that is actually a mixed use product where there was a hotel, there is a hotel there at the Reunion Resort. We came in with our WAAM model and as a result of that, we also ended up bringing in a hotel -- a Wyndham Grand Hotel product into our mix, so we were able to utilize our WAAM model to give us an additional benefit on the hotel side. But beyond that, that's where we're constantly in talking to banks about and anybody who's in control of hotels about possibly bringing our brand to help them particularly in difficult times, the brand certainly adds value and we think it will certainly help hotels that are struggling now.

Very good. Thanks. Nice quarter.

Thanks, Chris.

All right, Caroline. Well, thank you very much, and thank you all for being on the call today and we look forward to talking to you next quarter.

That concludes today's conference call. Thank you for your participation. You may disconnect at this time.