Travel + Leisure Co (TNL) 2011 Q2 法說會逐字稿

Welcome to the Wyndham Worldwide second-quarter earnings conference call. All lines will be on a listen-only mode until the question-and-answer segment of today's conference. Also the call is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations. Ma'am, you may begin.

Good morning. 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 our remarks today contain forward-looking information. This information 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 29, 2011 with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliations of these measures to GAAP is provided in the tables to the press release is also available on our investor relations website at wyndhamworldwide.com. Steve?

Thanks, Margo, and good morning, everyone. I'm pleased to report we had another great quarter as we continue to execute our operating and capital deployment plans. Second-quarter revenues increased 13% and adjusted EBITDA was up 17%. Adjusted EPS for the quarter grew 25% and came and $0.08 above the top end of our guidance range.

Each of our businesses delivered growth in adjusted EBITDA and performed ahead of plan with particular strength this quarter in Lodging and Vacation Ownership. This strong performance and has further visibility into the second half of the year is allowing us to raise our guidance for 2011. Tom will go through the details in a few minutes.

In addition, free cash flow was robust in the first half of the year, coming in at $3.42 per share. We continued to implement our capital deployment strategy in a disciplined fashion to drive value for our shareholders. In the second quarter we invested $200 million in share repurchases and July to date, we invested another $50 million. So far this year we have spent nearly $425 million on share repurchases. Our weighted average diluted share count is down by $17 million from a year ago. This contributed $0.06 of earnings in the second quarter compared with last year.

Our results this quarter combined with our confidence in the short-term and long-term growth and cash flow potential of our businesses convince us that share repurchase is a very solid investment.

Having said that, our first priority is the continued investment in our business to drive earnings growth and increase cash flow in the years to come. Our baseline sustainable free cash flow guidance of $600 million to $700 million a year assumes continuing investment in existing growth projects such as Apollo in our hotel business, RCI.com in our vacation exchange business, and Voyager in our vacation ownership business.

We also continue to selectively evaluate potential acquisitions which we will only pursue if they are strategically compelling and earnings accretive.

Now moving to our business unit review, the Wyndham Hotel Group had a great quarter exceeding our expectations with almost a 10% increase in RevPAR. Most significantly, we are seeing rate improvement across all chain scale segments in the US. The lodging recovery is continuing and I believe we are exceptionally well positioned to capture more than our fair share of that recovery.

The development environment is improving but financing still remains tight. Developers are looking to diversify the composition and geographic reach of their portfolios to include economy and midscale properties outside major cities centers, which is where the majority of our brands are positioned. And of course, the conversion market is always important in a tight credit environment.

Both of these dynamics work to our benefit. We have a well seasoned development team able to capture opportunities, both new build and conversion. We are the world's largest hotel franchisor based on number of hotels with over 7,200 properties which translates to almost 613,000 rooms in our system. We offer individual franchisees as well as multi-property developers a strong network of market-leading brands. Our brands cover every segment and we have broad geographic reach.

As we have discussed before, we are strengthening this exceptional base through a series of technology and business enhancements we call Apollo aimed at further improving the value proposition to our hotel owners. We recently began an effort with our franchisees to improve the content and navigation of our websites. We launched our first beta test with the Baymont brand in June. Our early results are encouraging. Response times improved threefold and conversions were up 30%.

In another hotel group highlight, J.D. Powers & Associates recently released the results of its annual guest satisfaction survey. For the 10th consecutive year, Microtel leads the economy budget segment. In fact, Wyndham Hotel Group's economy budget brands took the first three positions in this segment.

Now moving to Wyndham Exchange & Rentals. From a rental industry perspective, we were pleased with the enthusiasm investors over the recent home away IPO. As a reminder, there are two operating models in the vacation rentals market. First, there is the rent by owner or listings model used by home away and others. In this model, the vacation homeowner lists his or her property on a website for a listing fee. The listing company refers the potential renter back to the homeowner to inquire about availability, make the reservation, and then process the payment.

The second model is the professionally managed model. This is primarily how our business operates at Wyndham Vacation Rentals. Approximately 60% of our bookings are transacted online. We rather than the homeowner control the inventory. We have it loaded in our system on a live and real-time basis. We hand-select and inspect the inventory. Homeowners provide homes to us primarily on an exclusive basis. We process the payments and handle the customer service. Unlike the listings model, the consumer rarely deals with the homeowner.

We are the world's largest company in this professionally managed segment of this growing market. We expect 2011 revenues from our vacation rental business to be over $700 million and transactions to exceed $1.3 million. We have approximately 93,000 properties in 32 countries representing over 51,000 homeowners. We have tremendous scale which we continue to expand. Integration of our most recent acquisitions, the James Villa Holidays and ResortQuest is progressing very well, with both businesses ahead of our earnings expectations.

We are making great progress on integrating our systems and leveraging best practices and inventory distribution strategies across all of our businesses.

We are also the market leader in the exchange industry. While tempered growth in the timeshare industry has produced some headwinds for our exchange business, we have been able to drive growth through innovation, resulting in a stable, high free cash flow business. Through the end of 2010, our migration to online transactions has improved our exchange margin by over 130 basis points. The enhanced online experience also increases the overall value proposition to our members through greater flexibility, functionality, and better online content. Online transactions in the second quarter of 2011 were 38% of total transactions compared with 27% in the second quarter of 2010.

Now let's discuss a segment that's been receiving a lot of investor attention, vacation ownership. We had great response to an initiative Tom started about a year ago in repackaging this story. We recently had the management team out on the road and the feedback has been overwhelmingly positive. We are happy for the investor acknowledgment because we knew this timeshare business is a great business and we also know that we have the best timeshare business in the world.

Wyndham vacation ownership is a highly evolved and highly adaptable business model resulting from years of innovation and operational excellence, with approximately 815,000 owners, 21,000 units, and 160 resorts, we have the scale to fully leverage market opportunities such as WAAM, our asset light model. Our owners have been investing in our points-based product for more than 20 years. They know it, they love it, and they buy more. Our points products offer owners a diverse range of vacation experiences including Club Wyndham Access and Presidential Reserve in both resort and urban locations. We have a seasoned team of sales professionals and we have an execution-based culture led by an exceptional management team. They have met or exceeded our expectations quarter after quarter even during the economic downturn.

The proof is really in the numbers. Over the past five years, which everyone would agree was pretty tumultuous, volume per guest is up approximately 50%. Adjusted EBITDA is up approximately 45% and the EBITDA margin has increased by over 750 basis points.

Let me transition now to a broader Wyndham Worldwide story. We recently completed our annual strategic reviews. Our five main strategic initiatives remain the same with the top three being to grow cash flow, rebalance our portfolio to emphasize our fee-for-service businesses, and increase market share. Since we established these strategic initiatives in 2009, we have remained on course and have delivered against each of them. And we continue to find and pursue new opportunities for growth that are consistent with these initiatives.

For example, the distressed real estate market has created a great opportunity for Wyndham Vacation Ownership to acquire high-quality inventory at very attractive prices and drive improved margins. In addition to our asset-light opportunities, we are shifting a portion of our existing development budget to the purchase of inventory in the distressed real estate market. This initiative supports our strategy of optimizing the capital deployed to the vacation ownership business while extending the tail of the inventory already on our balance sheet.

In addition, we are exploring a new concept, WAAM 2.0, which is a hybrid asset-light solution. Under the WAAM 2.0 concept, we will sell third-party inventory for a commission but we will finance the receivables. This will enable us to take advantage of the great spreads and high advance rates that we as a company are best able to realize.

Within Wyndham Exchange and Rentals, we continue to innovate at RCI to drive margin as well as member and developer satisfaction. The vacation rental team is laser focused on building out the US rental platform. We will do this by applying our best in class strategies to grow organically and with small tuck-in acquisitions.

At Wyndham Hotel Group, in addition to important initiatives to drive our core US business such as Apollo, we are pursuing an aggressive growth strategy around the world. For example, we are the largest US hotel company in China with over 50,000 rooms. We expect to double that number in the next five years. And our long-term vision is to have a footprint in China that rivals our presence in the US.

And in key US states, we are planning -- cities, rather, we are planning to invest approximately $200 million in mezzanine and other financing over the next several years to support the growth of the Wyndham Hotel and Resorts brand.

This entire strategic framework is consistent with our target of generating baseline free cash flow of at least $600 million to $700 million a year. This is approximately $3.50 to $4.10 per share based on our diluted share count guidance for 2011. I am very optimistic about the future of Wyndham Worldwide and look forward to updating you as we execute these strategies.

Before I turn the call over to Tom, I want to note a significant milestone. Next week we will celebrate the five-year anniversary of our listing on the New York Stock Exchange. At that time, nobody anticipated that a few years later we all would experience the worst economic downturn since the Great Depression. What we did know was that we had great businesses, great people, and great potential. We are proud of what we have accomplished during this period.

Between dividends and share repurchase, we have returned nearly $1.7 billion to our shareholders over the past five years. The cumulative impact of our share repurchase activity over this period has been a 17% reduction in our share count. This combined with our growth has driven significant increases in key metrics on a per share basis.

Just to put a few numbers around it, revenues are up 38%. Adjusted EBITDA is up 87%. Impressive results. With all three of these businesses in great shape and the economy continuing to recover, we are even more optimistic about what we can do over the next five years. Tom?

Thanks, Steve. Our second-quarter results reflect continued momentum and execution across our businesses and our ongoing commitment to return cash to shareholders. Adjusted EBITDA increased 17% and adjusted earnings per share increased 25% compared with the second quarter of 2010. These results reflect improved RevPAR performance and lower bad debt expense at the Wyndham Hotel Group. Growth in our Wyndham Vacation Exchange and Rentals business, higher sales and a reduction in the loan-loss provision at Wyndham Vacation Ownership, and the meaningful impact of our ongoing share repurchase program.

We came in $0.08 above the top end of our guidance range. Each business performed better than our expectations. In addition, there was some benefit, about $0.03, primarily in Lodging from the timing of expenses in the quarter, which we will give back in the second half of the year.

Share repurchase, which is excluded from our guidance, also contributed to the beat.

Free cash flow increased to $595 million or $3.42 per share for the first six months in 2011 compared with $486 million or $2.61 per share during the same period in 2010. The 31% increase in free cash flow on a per-share basis reflects the strong operational performance of our businesses, the impact on our share count from our share repurchase program, and a $51 million benefit from a refund of value-added taxes.

We have stated many times before that cash is the great enabler of our long-term business goals. For 2011, we expect free cash flow of $3.50 to $4.10 per diluted share based on our diluted share count guidance of 171 million. We expect to continue to grow this important measure in the future, accelerating our growth and enhancing shareholder value by supporting further investment in the businesses, share repurchases, and dividends.

Let me begin our quarterly operating review with the Wyndham Hotel Group, which had a great quarter. Revenues were up 7% and adjusted EBITDA was up 32%, driven by RevPAR improvements and lower bad debt expense. Adjusted margins improved 660 basis points.

Systemwide RevPAR was up 9.7%. Now excluding the trip acquisition and in constant currency, RevPAR was up 5.8%. As in the first quarter, we saw occupancy gains across all regions and domestic change scale segments. Encouragingly, we saw rate gains across all chain sale segments domestically and across all regions except for Asia Pacific. We believe the recovery is in full progress in all lodging segments including the economy and midscale segments.

We ended the quarter with approximately 612,900 hotel rooms worldwide and development efforts in the quarter were robust. We opened over 16,000 rooms while terminating approximately 12,800 rooms in the quarter in line with our expectations. The development team executed over 150 deals this quarter, up 6% compared with a year ago. The total pipeline consists of nearly 111,000 rooms, up 3% from a year ago. 64% of the pipeline is international, up from 49% a year ago. The new construction pipeline is up 10%, all international. All of this is a good indication that we are successfully executing our international growth strategy.

Wyndham Exchange and Rentals had another good quarter in spite of difficult market conditions with exchange and rentals results slightly better than expected. Segment revenue increased to $361 million, reflecting $53 million in incremental revenues from ResortQuest and James Villa Holidays and a $19 million benefit from favorable currency translations.

Now excluding the acquisition-related incremental revenues and the impact of foreign currency, revenues increased 3%, reflecting higher rental revenues in our Novasol and Landal GreenParks businesses, growth in exchange, and a year-over-year change in the classification of some [contra] revenue items to expenses.

Excluding currency impacts, exchange revenue in the second quarter increased about 2% compared with the same period in 2010. Consistent with our expectations, the average number of members remained flat. Excluding currency, exchange revenue per member increased 1%, reflecting an increase in other transaction revenue resulting from some of our recent innovations at RCI.com. Now remember in the November 2010 RCI.com release we enhanced our week's exchange program by providing more transparency to our members and change back on an exchange of lesser value. Change back deposit credits can be combined along with timeshare deposits to trade up into a higher value timeshare. In addition to the benefit of creating additional transactions, there is a fee for that service which is already providing some revenue gain.

Vacation rentals revenue increased 57% to $180 million in the second quarter of 2011 compared with the same period of 2010. Now our most recent additions, US-based ResortQuest and UK-based James Villa Holidays contributed $46 million of incremental rental revenue during the quarter and foreign exchange movements had a $15 million favorable impact on vacation rental revenue. In constant currency and excluding the acquisitions, rental revenues increased 3%. The average net price per vacation rental increased 5%, primarily driven by higher yield at our Novasol and Landal GreenParks businesses. Transaction volumes declined slightly due to difficult market conditions in the UK.

Wyndham Exchange and Rentals adjusted EBITDA increased 5% in the quarter compared with the same period in 2010, primarily reflecting the benefit of the ResortQuest and James Villa Holidays acquisitions. Excluding the acquisitions, EBITDA was flat. Now we are pleased with that during these difficult economic times in Europe. Our European rentals business remained stable while others in the market had revenue and profit declines.

Now moving onto Wyndham Vacation Ownership, this business once again delivered strong results. Compared to the prior year, revenues increased 7%, tours were up by 9% and VPG increased 3%. Year to date, we have added over 12,000 new owners into our system and we are ahead of our new owner goal of 25,000 for the full year.

Adjusted EBITDA in the second quarter 2011 increased 25% to $130 million compared with $104 million in the second quarter of 2010. The increase reflects great sales results, lower loan loss provisions, and a growing contribution from our property management business.

Property management fees grew 8% in the second quarter of 2011 compared with the comparable period in 2010. As you know, this business, which produced $50 million of EBITDA in 2010, provides a recurring fee-for-service revenue stream and steady, reliable growth.

As anticipated, consumer finance revenues were down 3% due to a decrease in our contract receivables portfolio. However, interest expense decreased 21%, reflecting lower rates on our securitizations, which were partly offset by higher advanced rates on our recent securitizations. Remember that higher advance rates improve cash flow but decrease EBITDA as we report the interest expense on securitized debt above the EBITDA line.

Portfolio performance continues to improve somewhat. Write-offs during the second quarter were $75 million, down from $90 million a year ago. The provision for loan losses was $80 million compared with $87 million in the second quarter of 2010. So we continue to see improvement in these important measures but at a moderate pace.

Now moving onto Corporate, excluding legacy related items, expenses increased $9 million primarily reflecting increased information security and IT expenses. We are investing in our systems infrastructure and hiring additional information security staff to address the serious and increasing threat of data breaches targeting the hospitality industry. We will continue to keep you updated on this important progress.

Now let me review our activities in the capital markets where we had another busy and productive quarter. Last week we announced the closing of a new $1 billion revolving credit facility to replace our $980 million facility, which was scheduled to mature in October of 2013. The maturity date of the new facility is July 15, 2016. There is no change to the overall corporate debt balance as a result of this transaction.

Now the financing extends the credit facility to a five-year term and has more favorable pricing terms, which further strengthens our liquidity profile and decreases our ongoing interest expense. All of our historical relationship banks participated in the financing and several new participants were added, demonstrating the banking community's confidence in Wyndham Worldwide.

Last month we announced the renewal of our securitized time-share receivables conduit facility. Our prior conduits were one-year terms and this is a two-year facility. This further strengthens our liquidity and balance sheet position and highlights the broad support enjoyed by our timeshare ABS program. The new facility maintains capacity of $600 million.

Now I would like to spend a few moments on guidance. We're going to post this to our website and email it to you following the call. For the third quarter, we expect earnings per share of $0.86 to $0.89, assuming a share count of 168 million shares.

As you saw from the press release, we are increasing our full-year revenue guidance to $4.2 billion to $4.3 billion and our adjusted EBITDA guidance to $960 million to $975 million.

We are raising our full-year adjusted EPS guidance from $2.15 to $2.25 to $2.32 to $2.40. The new EPS guidance is based on an expected diluted share count of 171 million shares, down from our original guidance of 181 million shares and their most recent guidance of 173 million shares.

This new guidance reflects the benefits of our share repurchase program through the second quarter. The guidance excludes any further share repurchases. We have approximately $345 million remaining on our current repurchase authorization.

We are narrowing the range on our D&A guidance by $5 million on the high end. The new range is $180 million to $185 million. Interest expense guidance has been reduced to $130 million to $135 million, reflecting lower borrowing costs and higher capitalized interest. We expect our tax rate for the year to be a little lower than expected at about 38% and we think most of that reduction will come in the fourth quarter.

Please note that the implied fourth-quarter earnings per share guidance is $0.38 to $0.43 per share. Remember when considering year-over-year fourth-quarter comparisons that we benefited from an unusually low tax rate of 27% in 2010 and that the historic seasonality of our WER business has changed due to the acquisitions we did in 2010.

Now drilling down to the business unit level, at the Hotel group, we are increasing our revenue guidance to $710 million to $730 million and adjusted EBITDA guidance to $208 million to $215 million. Our RevPAR guidance increases 100 basis points to 6% to 8% year-over-year growth and room guidance remains unchanged at 1% to 3% year-over-year growth. We expected hotel margins to moderate for the remainder of the year reflecting planned increases in advertising spend compared to last year and timing differences which I touched on earlier. Based on the new guidance, the implied full-year margin improvement in the Hotel group is about 150 basis points to 175 basis points for the year.

Exchange in rentals revenue increased to $1.46 billion to $1.5 billion and we are bringing up adjusted EBITDA to $343 million to $353 million. Exchange drivers remain unchanged. Average net price per vacation rental increases to 25% to 27% year-over-year growth and rental transactions guidance decreases slightly to 16% to 18% year-over-year growth. The decline in transaction guidance is attributable to soft demand at our UK cottage business, while the uplift in price is due to improved yield and the impact of currency in the first half of the year. Note that guidance assumes currency rates as of June 30.

We are also raising Vacation Ownership revenues to $2 billion to $2.1 billion. We are bringing the EBITDA range up to $495 million to $510 million, reflecting a narrowing of the VPG guidance 2% to 4% and an increase in tour flow of 5% to 8% from last year.

We now expect corporate excesses to be $90 million to $95 million, primarily reflecting increased information security costs as well as higher employee and bonus costs. We expect CapEx to be $225 million to $240 million, reflecting higher information technology and security costs, but we also expect Vacation Ownership inventory spending to be within our original budget of $80 million to $90 million.

And finally, we are confident in our free cash flow guidance of $600 million to $700 or approximately $3.50 to $4.10 per share in 2011. And all of this points to another great year of financial and operational performance for the Company.

So with that, I will turn the call back to Steve.

Thanks, Tom. In summary, let me just reiterate a few key points. Overall we delivered strong year-over-year growth in revenues, adjusted EBITDA, and EPS in the quarter. Our free cash flow per share was up 31% in the first half of the year. We continue to deploy our cash flow to enhance shareholder value. And finally, based on our year-to-date results and outlook, we are raising our full-year EBITDA and EPS guidance.

Now with that, Laurel, we will take some questions.

(Operator Instructions) Joe Greff.

Good morning, everybody. Within the time-share segment, we saw better-than-expected or at least better than our expectation tour flow improvement. Did that result in a shift in terms of repeat buyers versus first-time buyers? Can you talk about that within the quarter?

Yes, Joe, Tom and I will both tag team that one. The increase in tour flow was in fact driven by first-time buyer marketing activity. As we said previously, we have a target for first-time buyers of around 25,000 new members coming in as first-time buyers. We are running a little bit ahead of that now. There's been a heavy focus down in Orlando within the marketing group to drive those first-time buyers in and the results were frankly a little bit better than our expectations as well. So they are doing a great job down there, but you are absolutely right.

Great and then I think I heard Tom correctly talking about property management fees were up within time-share -- were up 8% year-over-year. Do you think that's sustainable growth rate?

It feels about the right growth rate, Joe. We expect that growth rate to the mid to upper single digits. Part of it is coming from some of the restructuring of pricing agreements that we have with some of the HOAs. So we expect to continue to have that as a good contributor to the growth of this business as we go forward in the mid to upper single digits as we go forward.

Great. Excellent. That's all for me. Congratulations on nice results, guys.

Robert LaFleur.

Good morning, guys. You are at $595 million in free cash flow through the first half of the year. Your target has been $600 million to $700 million. You may have addressed this. I missed a little bit of the call. But obviously you are practically there. What does cash flow look like in the back half of the year? You would assume that you would be something substantially higher than $600 million to $700 million for at least this year unless there's something that's going to affect cash flow negatively in the back half of the year. (multiple speakers)

Bob, so there are two issues that are working to make the second half of the year less than the first. Number one, typically we spend more CapEx in the second half of the year than the first half of the year. So that's an important contributor. And as you know, we raised our CapEx guidance a bit.

The second part is the seasonality of the rentals business. As you know, the way our rentals business in Europe works is we get cash early, hold onto the cash, and then we pay the homeowner in the second half of the year. So the benefit that we get in the first half of the year receiving cash early is -- the offset is in the second half of the year.

And then finally as we pointed out, there's about $50 million in our free cash flow that is associated with the settlement that we had with the UK government on an outstanding value-added tax issue and on a cash flow basis, that was a $50 million benefit for the quarter.

So those are the three factors why we think that $600 million to $700 million is still the right number and still a very strong number on a per-share basis.

Thank you.

Amanda Bryant.

Great, thank you. Good morning. Just within your time-share segment, two questions. First, what was the customer's propensity to finance in the quarter? Then second, can you just provide us with a little bit more color on the purchase of distressed inventory? Thank you.

The first question, the answer was around 50, low 50s, so about 52%. Steve, do you want to --?

Yes, on the distressed inventory, Amanda, there is, as we have said continually through this downturn, there's a lot of product out there that's available and we have been evaluating whether to acquire some of that product or whether to complete the products we have on balance sheets and move it forward. And we are seeing some offers that are just so compelling that we think we will probably do a little bit more purchase on the distressed side and hold off finishing the inventory.

We kind of look at it as on a return on investment basis which one are we going to get the best return for? Right now taking advantage of what is out in the marketplace is marginally better than what we have on our balance sheet to finish. S we will get around to finishing what is on our balance sheet. It's just as I said, it pushes the tail out on how long we can produce sales from our existing balance sheet, then completing the product that's on there already. But there are a lot of great opportunities out there in markets that we have wanted to be in or in markets where we already have presence but we could use more product.

So how much do you think you will spend on distressed inventory this year as it relates to your overall expectations for CapEx spend within that segment?

Well, we've got it to I believe $80 million to $90 million total spend. It will be within that number and I wouldn't anticipate it being a large portion of that number necessarily this year because we are already in the second half of the year. But you know, lining up deals, getting them done, executing and closing and funding sometimes takes a little bit longer. So it may be a larger portion of our 2012 spend than it is of the 2010 spend, but our goal is still to be in that range that we've given you longer-term for annual spend on our inventory of $135 million -- $130 million. So we want to be in that zip code and this will include some of the distressed inventory purchase.

Got it. Thank you.

Patrick Scholes.

Good morning. I just have a couple of questions related to the loan loss provision. What was that -- for instance, what was that loan loss provision percentage in the second quarter and how much incremental EBITDA did you receive from lowering that?

Incremental EBITDA versus last year?

Versus last year, correct.

I think the provision dropped $7 million if I remember what I read correctly.

Okay. And roughly what is that provision percentage? What was it in 2Q? And what does your full-year guidance assume that the full year will be?

Hold on for a second, Patrick.

Sure.

Hey, Patrick, let us get back to you. I want to make sure we are answering the exact question that you have and we are going back and forth here on exactly what you are asking. So we will come back to you on it. Okay?

No problem, thank you. That's it.

As a percentage of gross VOI, I think it's going to be around 21%, 22%. Is that what you're asking?

Yes.

Okay, so 21%, 22%.

Okay, thank you.

Chris Agnew.

Thank you very much. Good morning. Just going back to distressed inventory, I'm just wondering can you give us any sense of how it impacts cost of goods sold maybe on a per development basis?

Well, it will have a positive impact and that's part of the reason that we are pursuing it. As to what -- how much it will lower our cost of sales, it's kind of hard to say. It kind of goes back to the question that Amanda asked before of how much will we do of it? And I don't know that we can handicap that for you right now, Chris, to be honest.

I think that this year we are running a cost of sales around 21%. That is already several hundred basis points, a couple hundred basis points below where we were running in previous years. So we have already seen some improvement by taking advantage of both the WAAM deals that we have done as well as some of this distressed inventory. So we would hope to be able to lower that cost of sales below where we are now, but I don't want to point towards a way lower number because we do have a lot of product that we are still moving through on our balance sheet and so it should moderate it somewhat, Chris, but I can't be specific on an answer for you.

Sorry. I think the line cut out there. One quick follow-up, if I may. Just on the vacation rental business, exclude FX and acquisitions, you saw deceleration from the nice growth you got in the first quarter. I think you touched -- is that really just the UK business and the impact that you are seeing in the UK or are you seeing a weakening in the stronger North European businesses that you have?

I would say it's clearly the UK and in our Dutch business also is feeling some effects, but they are growing year-over-year. So I would point largely to what's going on in the UK but acknowledge that there is -- it is a challenging environment in all of Northern Europe.

Yes, and Tom told me the other day he never wanted to say it as the CFO, but the rain in Holland isn't helpful either.

Thanks for saying it. You prevented me from having to say it so. The weather in Holland has not been great.

Well, I hope it gets better. Thank you.

(Operator Instructions). Michael Millman.

Thank you. You mentioned that your exchange businesses, membership business is kind of flat, suggesting the industry is flat. Europe growing. Can you talk about what's going on in the industry consolidation? And I guess a little bit related to that, the distressed inventory, is that being bought by other timeshare -- from other timeshare developers or is that general condominium, hotel kind of product that you are able to get and then convert to timeshare? Thank you.

Okay. Great, Mike. On the general industry, it is still growing. The industry is growing. It's just not growing at the pace it was several years ago, so a lot of the big players like ourselves and Marriott and Hilton and Disney are all continuing to sell product and therefore there is a growth in the industry. It's just not as fast as the growth historically was.

And it really unfortunately is a story of the haves and have-nots. The larger companies have access to capital. The smaller companies do not yet have access to as readily available capital. We see new players coming into the market all the time. We have seen new players -- when I say new players, I mean new financing sources coming in. Hopefully that will continue to fuel some of the smaller players who have had difficult time accessing capital. There are some terrific operators out there who just can't access the kind of capital they need in order to sell timeshare and finance the receivables that that sales generate.

So it's still -- we still see improvement, but it's going to take some time, as we previously said, for that to return.

As to the distressed inventory question, it's really -- Mike, it's a combination of both. It's other developers who are looking to sell off portions of their development because they are unable to access that financing that I was speaking of. But it's also projects that were developed as whole ownership condos that are being converted into timeshare. And again, as long as it's in the right place, the product quality is right and we can give an experience to our consumer that is consistent with what they -- Wyndham vacation ownership wants to provide, then it makes sense for us.

Okay, so thank you all very much for joining us. I think Laurel said that with the last question in the queue and we look forward to talking to you next quarter.

That does conclude today's presentation. Thank you all for joining. You may now disconnect.