Travel + Leisure Co (TNL) 2011 Q3 法說會逐字稿

Welcome to the Wyndham Worldwide third quarter earnings conference call. I would like to remind the parties that they will be in a listen-only mode until today's question and answer session. Today's conference is being recorded. If you do have objections you may disconnect at this time. I will now turn the call over now to Margo Happer, Senior Vice President of Investor Relations. Thank you, 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 risks 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 August 1, 2011 with the SEC. We will also be referring to a number of non-GAAP measures. The reconciliation of these numbers to GAAP is provided in the tables to the press release and it is available on the website of our investor relations website at WyndhamWorldwide.com. Steve?

Thanks Margo and good morning, everyone. We are pleased to report strong performance again this quarter. Compared with the prior year third quarter revenues increased 14% and adjusted EBITDA was up 19%. Adjusted EPS for the quarter grew close to 40%. Each of our business units exceeded our expectations. The Wyndham Hotel Group benefited from RevPAR increases driven by improvements in both occupancy and rate. Wyndham Exchange and Rentals delivered strong results despite the turmoil in Europe and benefited from the acquisitions we made last year. And our timeshare business, Wyndham Vacation Ownership, once again exceeded expectations, delivering EBITDA growth of over 20%. In terms of capital allocation, we committed $300 million to repurchase 10 million shares of our stock during the third quarter.

In October to date we have repurchased an additional 1.4 million shares for $40 million. This reflects our confidence in the growth and sustainable cash flow of our businesses. And as you saw from the press release, we have given you the first view of our 2012 outlook. We expect EBITDA growth of 6% to 8% and EPS growth of 10% to 14%. We expect 2012 free cash flow of $600 million to $700 million.

We'll allocate capital to drive shareholder value and that includes investing in our businesses, paying dividends and share repurchases. We have a well-established proven track record of successful acquisitions. We know how to value businesses and we know how to integrate acquisitions and we know how to build successful momentum. Last year we enhanced our fee-for-service revenue streams with 3 acquisitions in the rental space and 1 in lodging, totaling $232 million. Hoseasons, which we acquired in the first quarter of 2010, is now fully integrated into our systems, contributed adjusted EBITDA 20% ahead of our expectations last year. The other acquisitions, James Villa, ResortQuest and Trip, are also outperforming our expectations, producing over 30% more EBITDA in 2011 than we expected when we completed the deals.

This year our capital deployment has been more focused on share repurchases. Through October 25 we have invested over $715 million in share repurchases. We have reduced our weighted average diluted share count by 22 million shares or 12% from the third quarter a year ago.

Now moving to the business unit review. At the Hotel Group industry fundamentals continue to improve, with the recovery tracking to our expectations. During the quarter we saw continued improvement in both rate and occupancy. And we believe the overall health of the franchisee base continues to strengthen, as we see improvement in bad debt trends. Tom will address this point in more detail later.

We had a number of significant hotel openings recently. Most notably, the Wyndham Grand at Bonnet Creek in Orlando, our only owned hotel, opened September 30 both on time and on budget. The hotel, located within the Walt Disney World Resort gates, is managed by our Wyndham Hotel Management Group and is next to our 1149 unit Bonnet Creek timeshare resort. The hotel is being well received by both guests and vacation ownership members and the transient booking phase has been robust. Also in the Hotel Group we continue to make significant progress on Apollo, our series of technology and business initiatives.

These initiatives were designed to transform the reservation experience for consumers and to maximize our contribution to franchisee performance. We achieved a significant milestone recently with the completion of the content solicitation initiative. This involved the complete overhaul of the information and images of 7000 properties worldwide.

The backbone of Apollo is the relaunch of our various hotel brand websites, which began this year with Baymont and Travelodge brands. The conversion results have been terrific for these first 2 brands. We are planning a series of rollouts for the additional brands in the coming weeks, with the majority of our hotel brands having new websites by the end of the year. This is one example of how we are working to enhance our brand positioning and value proposition.

Now moving to Wyndham Exchange and Rentals. Our North American rentals business is taking off and our European rental business continues to perform well despite the recent political turmoil and economic challenges in Europe. In North America, ResortQuest is performing significantly better than our expectations. In the third quarter we bolted on 2 small vacation rental acquisitions, 1 in Colorado and 1 in Florida, adding over 1500 new rental units to our platform in those 2 high demand markets. We now have over 7000 rental units in North America and nearly 99,000 units globally. On our past 2 earning calls we talked about the consumer benefits of our full-service vacation rental model as compared to the listing model. Today I want to share an example of how our full-service model is superior when challenges arise.

ResortQuest has years of experience in emergency management planning that came into play with hurricane Irene hit in August. Irene's path was forecasted to move directly over our Delaware operations. We began evacuating guests on the Thursday before one of the highest occupancy weekends of the year. By the weekend, mandatory evacuations were ordered for all Delaware locations where ResortQuest properties reside. ResortQuest rerouted its call center operations to northwest Florida. They guided visiting guests through evacuation and safety instructions and contacted guests who were scheduled to arrive over the weekend. ResortQuest employees more than 1000 miles away put in overtime to ensure the highest level of support to its customers in a time of need.

The extra effort went a long way to comfort guests and property owners and ResortQuest's ability to leverage its vast inventory allowed arriving guests in many cases to postpone travel to future dates without penalty. This level of service is fundamental to ResortQuest and the professionally managed value proposition.

Now looking at the exchange business. At RCI we recently completed another significant release of the RCI.com web enhancements. We began this transformational journey in 2008 with web penetration of 13%. Today our web penetration is 39%.

On October 15 we brought even more simplicity, speed and efficiency to vacation exchange experience with another major milestone technology upgrade. This included a new property information management platform, as well as a new enhanced search function for our points members.

In addition, we launched an innovative recommendation engine technology where members see real-time vacation suggestions that best fit their unique travel preferences. We are transforming RCI from a high touch, high cost call center-based business into a innovative industry-leading technology driven Company. These enhancements build on other innovations, such as the trading power transparency and change back benefits of our weeks enhancement upgrade we implemented last November and previously discussed. Combined these offer RCI members what they need to transact with us on the web and through mobile devices. We expect these innovations to help drive membership, transactions, and margins. Now let's turn to Wyndham Vacation Ownership, which also has a long history of innovation.

In the early 1990s we were among the first to introduce a points system for timeshare owners and have continued to lead the way with many product development initiatives. We are once again breaking new ground in sales and marketing. As you know, unlike other lodging products, timeshare is not a demand driven business model. And since timeshare is sold rather than sought, finding good prospects has always been key to our success. In recent years Wyndham Vacation Ownership has been especially focused on finding highly qualified prospects who meet our credit standards. To that end, we recently launched a fully proprietary and innovative credit worthiness prescreening program. The program has increased the efficiency of our model by identifying the most qualified prospects for our salespeople. The results already speak for themselves, eliminating 1000s of otherwise unprofitable sales tours and resulting in significant cost savings. This program is now live at close to three-quarters of our off-site marketing locations and some locations are realizing VPG lifts of applicable tour types in excess of 30%. This is truly a new way of doing business for Wyndham Vacation Ownership and we believe it is unlike anything employed by our competitors. The team who conceived and developed this initiative won our Inaugural Chairman's Award for Innovation at Wyndham Worldwide. Earlier this year we launched a formal recognition program for something that we believe will have long -- we believe we have long excelled at, coming up with innovative ways to improve our business. We received 81 award nominations across our business units and corporate teams reflecting the great energy and enthusiasm for innovation in a Company.

Innovation was also recognized in RCI last year when the team was honored for the industry-leading weeks enhancement rollout, which garnered widespread recognition for promoting transparency in the timeshare exchange process. Whether it is WAAM, points-based timeshare or the RCI.com initiative, to name a few, we have a long track record of innovation. Sustainability is another area of innovation and is a core value here at Wyndham Worldwide. And so we were proud to recently be ranked among the top 100 greenest companies in the US by Newsweek Magazine. We were number one among hotels and restaurant companies. This follows closely on our recent recognition as an S&P carbon disclosure index leader. I couldn't be more pleased by the progress we are making. Of course another cornerstone of our Company is our count-on-me service culture.

Wyndham Hotel Group is energizing count-on-me through an innovative new program designed to ensure the leaders of the business walk a mile in the customer's shoes. 80 members of our hotel group senior leadership team recently completed 3 day work visits at our franchisees hotels. We have received fantastic feedback from franchisees and employees, who are coming back with a deeper understanding of customers' needs. I'm very proud that through outstanding service innovation, our Company continues to shine in operational performance. Before I turn the call over to Tom, I want to take a minute to reflect on -- upon the broader macroeconomic environment. In 2012 we expect moderate economic growth in the US, continued economic difficulties in Europe, and higher growth in the developing markets. This is the underlying basis for our 2012 plan and budget.

But regardless of the environment, as we showed in 2008 and 2009, our businesses are built for performance in all economic conditions. Further, we're fiscally conservative. We have an investment grade profile. Our balance sheet is strong. We have a well stacked capital debt with no significant near-term maturities. And while the ABS market has performed very well in recent months, it is a bonus to our business, not a necessity. Our securitized conduit facility, which is not up for renewal until June 2013, has ample capacity to fund the business for over a year before we even consider our operating cash flow or our revolver. Finally and maybe most importantly, we expect to sustain baseline annual free cash flow of $600 million to $700 million. Tom and I have great confidence in that number and in the future. And with that I will turn the call over to Tom.

Thanks, Steve. Good morning, everyone. Our third quarter results reflect continued momentum and execution across our businesses and our ongoing commitment to thoughtful capital allocation. We came in $0.05 above the top end of our guidance range, with share repurchases contributing $0.03 to the beat.

Free cash flow increased to $699 million or $4.11 per share for the first nine months in 2011 compared with $564 million or $3.03 per share during the same period in 2010, which excludes a $145 million cash payment related to our contingent IRS tax liabilities. The 36% increase in free cash flow on a per-share basis reflects the strong operational performance of our businesses, solid working capital management, the impact on our share count from our ongoing share repurchase program, and a $67 million benefit from a refund of value added taxes and related interest income.

Through the first nine months of 2011 we generated $779 million in available cash, which we define as free cash flow plus net proceeds from securitized borrowings. Now, we spent 86% of that money on share repurchases, 10% of that cash on dividends and 3% on M&A. While we expect higher CapEx and working capital requirements in the fourth quarter, it is clear that our free cash flow generation for the year will exceed our expectations. We expect our free cash flow in 2011 to be about $725 million or $658 million if you exclude the value added tax refund and related interest income.

Now let me begin our quarterly operating review with the Hotel Group, which had a solid quarter. Revenues were up 9% compared with the third quarter of 2010, driven by RevPAR improvement.

Now a portion of that increase also reflects a reporting reclassification of $12 million related to certain reservation fees which had no impact on EBITDA, but reduced margin by approximately 180 basis points. EBITDA was flat reflecting the unfavorable timing of higher marketing costs and pre-opening cost for the Bonnet Creek Hotel. As we have mentioned on our previous 2 calls this year, timing difference in marketing spend can have a significant impact on the Hotel Group's quarterly financial results. While timing was favorable in the first half of the year, it is going against us in the second half. Now to smooth out the impact, if we look at nine-month results we see a 7% increase in revenues and a 16% increase in adjusted EBITDA. This is being driven by continued improvement in lodging fundamentals, including improving bad debt trends. Now returning to the quarter, system wide RevPAR was up 6.3% or 4.8% in constant currency. The RevPAR increase came from occupancy and ADR gains of 3% each. We saw strong rate performance as well as occupancy gains across all regions except Asia-Pacific, which was down slightly due to a difficult comparison in Shanghai, the site of last year's World Expo. We are encouraged that rate has returned and appears to be sticking. We ended the quarter with approximately 611,200 hotel rooms worldwide, up about 1% from a year ago. This modest increase included the loss of a Ramada master licensor in the UK that filed for bankruptcy. The effect of this was the loss of 24 hotels or 2,676 rooms from the system. Excluding the loss of the Ramada master, terminations were in line with our expectations and openings were up about 8%. Overall we believe the financial health of our franchisees has been improving steadily throughout the year.

Our year-to-date bad debt expense for the Hotel Group has improved by $6.6 million. We are seeing continued growth in the development pipeline as well, with good contributions from some strong international markets. The total pipeline consists of 114,600 rooms, up about 7% from a year ago. 62% of the pipeline is international, up from 47% a year ago. The new construction pipeline is up 14%, however all international. We are concentrating our new construction development efforts in China, India, and Brazil, all high growth markets.

Now moving on to Wyndham Exchange and Rentals. Revenue was up 32% in the third quarter of 2011 compared with the same period of 2010. Recent acquisitions contributed over $90 million of incremental revenue in the quarter.

A weaker US dollar favorably impacted revenue by $16 million in the third quarter of 2011. So excluding acquisitions and the net effect of foreign currency, revenue for the segment was flat. Adjusted EBITDA increased 30% in the third quarter of 2011 compared with the same period in 2010, driven primarily by the impact of acquisitions. Excluding acquisitions and the net effect of foreign currency, adjusted EBITDA in quarter three 2011 was flat compared to the same period in 2010, as growth in our rental businesses was offset by a decline in our exchange business. In constant currency exchange revenue decreased by 3% in the third quarter. The average number of members was flat and exchange revenue per member decreased by 2.2%. This reflects a continued shift in the mix to clubs, which have a lower propensity to transact and the timing of sales promotions compared to the prior-year.

The exchange business continue to drive operating efficiencies through prudent expense management and continued success in driving transactions online. For the quarter the mix of online transactions in our exchange business increased from 28% during 2010 to 39% during the last quarter. Vacation rental revenue increased 61% in the third quarter of 2011 compared with the same period of 2010. Excluding the impact of acquisitions and currency, vacation rental revenue increased 2% in the quarter and average net price per rental was up 1.4%, primarily driven by higher yield at our Landal Parks business. Transaction volumes, excluding acquisitions, were flat compared with the third quarter of 2010. So in our minds, this quarter once again demonstrated the resiliency of our European rentals business.

The current economic challenges in Europe, as we all know, are ongoing. So despite those challenges, our vacation exchange and rentals business continues to deliver solid results. This consistent performance is a reflection of the strong execution of our management teams and the strength of our global product offerings.

Moving onto the Wyndham Vacation Ownership. This business once again delivered exceptional results. Compared to the prior year segment revenues increased 5%. Gross vacation ownership interest sales were up 10.4%, reflecting a 5.3% increase in tours and a 5.6% increase in VPG. EBITDA in the quarter increased 21% to $149 million compared with $123 million in the third quarter of 2010. And margin improved 360 basis points. These results reflect great sales momentum in both traditional and WAAM sales, higher VPG and lower commission rates and cost of sales.

Consumer finance revenues were down 2% due to a decrease in our contract receivables portfolio. However, interest expense on securitized debt decreased 22%, reflecting lower rates, partly offset by higher advance rates. Now remember that higher advance rates improve the Company's available cash, but decrease EBITDA as we report the interest expense on securitized debt above the EBITDA line.

Write-offs in the portfolio during the third quarter were $73 million, down from $77 million a year ago. So the good news is that we saw slight improvement in the performance of the portfolio. However, based on our experience during the 2008/2009 downturn, we have concluded that it is prudent to maintain a slightly higher reserve balance. Therefore, in the third quarter we booked a $96 million provision for loan loss compared with $85 million in the third quarter of 2010.

This brings the reserve relative to the overall portfolio to 11.9% up from 11.1% at the end of second quarter 2011 and 10.8% at the end of 2010. This means that we will end the year slightly higher on the provision than we had originally expected, somewhere around 23% of gross realized sales. Our third revenue stream at vacation ownership, property management, also showed good strength. While property management revenues were flat, profit was up 6%, reflecting higher efficiencies. Now turning to the ABS markets. In August we announced a $300 million timeshare securitization, with an advance rate of 92% and a weighted average coupon of 4.01%. The transaction was oversubscribed, enabling us to increase the size of the offering. The terms of this financing were among the best ever for an ABS deal by Wyndham Worldwide.

We were pleased, but not surprised, to see continued investor support for our program given the strong performance of our portfolio. Finally, corporate expenses increased $3 million in the quarter, excluding legacy items, which primarily reflects the increased information security and IT expenses. We continue to invest in data security to address the serious and increasing threat of data breaches facing all businesses today. Now I would like to spend a few moments on guidance. For the fourth quarter we expect adjusted earnings per share of $0.40 to $0.44, assuming a diluted share count of 158 million shares. As you saw from the press release, we are narrowing our full-year revenue guidance to $4.225 billion to $4.275 billion, our adjusted EBITDA guidance to $965 million to $975 million and our D&A guidance to approximately $180 million.

We are increasing our full-year adjusted EPS guidance to $2.41 to $2.45. The new EPS guidance is based on an expected diluted share count of 167 million shares, down from our most recent guidance of 171 million shares. This new guidance reflects the benefit of their share repurchase program through the third quarter. The guidance excludes any further share repurchases. We currently have approximately, as of yesterday, $550 million remaining on our share repurchase authorization. One final note on 2011. When you do the math you will see that we expect adjusted EBITDA to be slightly down in the fourth quarter when compared to the fourth quarter of 2010. Now this is explainable. It reflects the seasonality of our larger rentals business, continued unfavorable timing of higher marketing costs at the Hotel Group, and increased information security cost here at corporate.

Our 2012 outlook indicates continued momentum in the businesses and significant growth enabled through free cash flow. We expect revenues of $4.425 billion to $4.6 billion, EBITDA of $1.030 billion to $1.055 billion, and adjusted earnings per share of $2.72 to $2.82, assuming a diluted share count of 160 million shares. The share count assumption includes our repurchases through the end of the quarter, third quarter 2011. So let me conclude my remarks by reminding you that our capital allocation mantra is that cash is the great enabler. And our philosophy is simple. First, our current leverage ratio reflects an investment grade profile, thus we will seek to maintain our current leverage ratio. This means as we grow EBITDA we will prudently add debt.

Second, we will not retain cash on the balance sheet beyond our basic liquidity needs, which we believe are minimal. We will continue to deploy our significant available cash flow in a timely fashion to enhance shareholder value. And then finally, we will increase dividends at least at the rate of growth of earnings. That translates to a cash commitment for dividends of approximately $100 million in 2011 based on our current payout. With all investment accounted for in the business, we will use the remainder of cash for share repurchases and growing our business. And with that, I will turn the call back to Steve.

Thanks, Tom. In summary I'd like to reiterate a few points. Over the past several years we have refined and sharpened our business model and capital allocation strategy. From the beginning we have instilled and reinforced a culture of innovation and execution throughout the Company. The net result of this process of continuing -- continuous improvement is a Company with a solid sound proven business and capital allocation strategy, which leads to strong sustainable free cash flow; an outstanding track record of operational and financial performance and innovation; and most importantly, great people. We believe this is a powerful formula for creating sustainable shareholder value as we move forward. With that, Kelly, let's open the line for questions.

(Operator Instructions) Joe Greff from JPMorgan.

I have a quick question on tuck-in acquisitions. Obviously, last year was a very big year, and this year the focus has been taking capital and deploying it into buyback. Are you currently seeing anything out there of any good values that make sense?

Are you warming any MNA and then is there anything out there from a MNA perspective that you think could be more favorable or generate better returns for you than buying in stock? Thank you.

Thanks, Joe. I think that there are a couple of thoughts within the questions that you asked. One, are there deals out there. Yes, there are deals out there. Are they at a value that are attractive to us.

While we have not executed anything this year, so that might indicate that the values have not been in the zone. But, more importantly, you can't really model opportunity. You don't know when the deal is going to come at the right value that make sense for us.

We are very disciplined, as I noted in my prepared comments, we execute extremely well on acquisitions. We know how to do it. We know how to do it right, but we also know how to be disciplined about it.

So I can't, to the second part of your question, I can't really answer is there's anything out there that might be of interest that might be better than buying back stock. What I can tell you is that we're constantly looking. We're constantly reviewing and we are a serious partner to look at transactions, but we are disciplined and I think people recognize that and understand it.

Great. That's all for me. Good job, guys.

Carlo Santarelli from Deutsche Bank.

Thanks, guys. I know Tommy touched on it briefly, but would you mind commenting a little bit more on how you're thinking about your leverage ratio and will you guys continue to lever incremental EBITDA at maybe that 3 times that you have noted in the past. And then I have a follow-up on your VOI inventory, if you don't mind.

Sure. So, right now we are split-rated. We are investment grade by S&P, we are 1 notch off of investment grade with Moody's with a positive outlook. So, we are encouraged by that qualification.

And we think in this environment it is really important to remain investment grade. We want to remain investment grade, and so we don't really believe that we need to delever when we grow EBITDA. Effectively if we were to add that equivalent level of debt than we would effectively be delevering.

Because of our business models, Carlo, we don't think we really need to delever, because they are all structured to generate cash flow, and so we feel quite good at staying at that level. Right now the ratio is around 3 to 3.3 times EBITDA that we are trying to manage to.

So, as we look at it simplistically, if we were to add $70 million or $80 million of EBITDA next year, then along those lines, assuming that the environment stays reasonably normal, we would seek to add another $200 million of debt to our balance sheet, or thereabouts.

Again, the reason we are comfortable saying that is because our business models are structured in a way that generate significant amounts of cash flow, and we have ample levers to pull if we needed to, to sustain, or even enhance that cash flow if we wanted to, without impacting the momentum of the business.

And then in terms of your $1.1 billion of VOI inventory as of 3Q. That was virtually unchanged from 2Q levels. Do you guys have an update on the expected life of that inventory?

That is a subject of lively debate here. We have said that we believe -- I think in our Q we said that we believe we have enough inventory, with some incremental investments, to about 2015. What's happening a bit, Carlo, is that, because our COGS are improving in this business, our rate of takedown on inventory in the balance sheet is slowing just a little bit.

Our sales aren't, but because our COGS are not at 25, as they were historically, but closer to 20, the takedown in inventory is just going to be -- it gives us flexibility. We have a ton of flexibility on how we can manage inventory going forward. We feel like we have a great deal of flexibility for many years to come. But Steve, do you have --

Well, I would just add, Carlo, that we are -- every quarter we look at an outlook of what the inventory will look like running through our sales machine for the succeeding 12 months. And we adjust it and tinker with it and that impacts how much WAAM we do, how much we pulled down off our balance sheet, what our investment pace is to complete the inventory to pull down off the balance sheet.

So we're very mindful of what our return is going to be for the capital we're putting out, or doing more WAAM deals and allowing the inventory to sit on the balance sheet. We are trying to manage it as thoughtfully and as efficiently as possible.

Okay, great. Appreciate the color. Thank you.

Patrick Scholes from FBR Capital Markets.

Couple questions here. First is on distressed timeshare inventory. The past couple quarters you have discussed that you are actively looking for that.

Have you actually been able to go out and purchase anything that you would view as distressed, and, if so, how should we, as far as analysts, think about the product cost of purchasing distressed versus the product cost of building.

Patrick, from a product cost standpoint, it is clearly going to be a lot less than the 25%, as Tom mentioned before, that we historically have run. It is going to be at that 20% or below level probably, if we can acquire it.

The way I would characterize the market is, there is a tremendous amount of product out there. Not all product is easy to deliver on, because maybe there is some that has already been sold in a regime that requires some time to convert it to timeshares. So, it is not as if it is sitting out there on a shelf to just be picked and brought into our inventory.

But on the other hand there is a tremendous amount of product out there. So we are constantly looking. We have a team that travel around the country looking at product, turning over rocks, finding the best possible product for us. I would characterize it as, there is a lot of product out there.

One of the dynamics that you see in places when the downturn hit in 2008, 2009 there were a lot of funds that were pulled together to buy distressed inventory. They bought the inventory. They've been sitting on it for 3 years now and it is not moving very much. They don't see the recovery happening.

And so there are opportunities now to harvest some of that off, because people want to move their investments along and they want to reallocate capital. I think that there will be and we will continue to see, the industry will see, a lot of product flowing and available. But it all takes work, because it requires -- they are usually broken situations that need to be fixed. But that is something we happen to be pretty good at.

Just 2 more questions here. One, in your prepared remarks you had talked about taking -- adding more screens, as far as the credit quality of your timeshare buyer. How have FICO scores been tracking of the new buyers? What's been the trend on that?

The trend has been upward, and that is a function of a couple of things, Patrick. One is this credit worthiness prescreening that we are doing. That will have an impact.

But that probably, frankly, over the last couple of quarters has had less of an impact then the fact that we increased the down payment amount, and that by its nature, requiring people to put more cash down, tends to tilt you towards a higher FICO scored customer. So, we would -- we think we will probably continue to see a FICO score improvement over time.

Are you at about 700 right now for your typical new buyer.

It is a little bit above 700.

Then lastly, on your new Bonnet Creek Hotel, what are your long-term plans for ownership on that? Will you eventually sell it, or do you think you'll own it for perpetuity? And then in that regard, what was your actual cost to build and open the property?

Well the -- I will let Tom handle the cost of the property, he may have that handy. But the property -- I will give a little bit of a sideline. I was down there actually on Monday night for a conference that we had down there. It was -- it is a spectacular property and it's set right in our timeshare resort area.

Our long-term view of the property from an ownership standpoint is we are not in the business of owning hard assets. We're not in the business of owning hotels. It is not something that we necessarily want to do long-term.

However, the market at this time is not attractive for selling. We're going to get a great return on this asset. We feel very comfortable with it. It is a great complementary piece to our timeshare business down there with 1400 timeshare units around it.

But I would say that if the right offer came we would probably consider selling it. Having said that, we are not marketing it now. It is on our balance sheet. For the interim term we assume that we will be owning it.

And Patrick, the amount of money we spent was around $125 million on the hotel.

Thank you for all the answers. Thank you.

Amanda Bryant from Susquehanna.

You have obviously made great strides migrating customers to the web at RCI. How high can web penetration realistically go and what if anything can you do to grow your exchange membership base?

Well, Amanda, from a how high can it go standpoint, we are not actually sure how high we can get it. It really is a function of how much our customers want to migrate and use that forum. We're up to 39% in the exchange business.

If you look as a proxy of our rental businesses in Europe, they run 60% plus and so there is -- if that is a line to use as a marker, we are doing things to make it more attractive to book online. And so I think we will continue to skew that way.

And I think as more people get familiar with using it and the transparency that it gives and this recommendation engine, which is really cool. If you've stayed on at beachside resorts before and you're looking for one, it will come up with recommendations that you're capabilities and the dates that you -- your point value capability as well as the dates that you want to travel. It is going to be a different way for people to transact and we think it will draw people there.

The other part of the question was on --

How to grow the exchange membership base.

The membership base. The membership base is really a function of developers selling more timeshare. And right now the environment is still what it was 2 years ago, which is the medium and small developer is having a hard time getting access to capital.

Therefore, it is difficult for them to finance the receivables they generate when they sell timeshare and, therefore, their sales are off pretty dramatically. The big guys are still selling and still doing very well. Those of us who access the ABS markets, obviously that has been terrific.

And there are a number of the large players in our industry who don't even use the ABS market, they just work off their own balance sheet. So, for the big guys it is so good, for the little guys it is still a challenge. We need those little guys to come back to really drive membership base growth. We will win a few and lose a few affiliates over the years.

We always have and we always probably will, but the real difference maker will be when development comes back online and we see those smaller developers selling more product. I think that the online capabilities we have now and the flexibility that we are giving our members might attract some that have lapsed to come back on when they see that they can really learn how to use the product better and they can have more flexibility and they can have more control over their own destiny.

I think that will help re-attract members who have lapsed, but to see new ones come onboard will require the development at the mid to small developer level.

Great. Thank you for the color.

Chris Agnew from MKM Partners.

I wanted to ask about the creditworthiness prescreening program. How much impact did you see in that in the quarter, and how much more room for improvement from this initiative do you think you have going forward? And then I had a quick follow-up on the loan loss provision. Thanks.

Sure. Well, the creditworthiness program is in rollout phase right now. As I said, we're at about 75% of our off-site sales locations. So, I don't have sitting in front of me right now the specific impact. We did see an improvement to the marketing costs in our timeshare division.

Kind of hard to, with this kind of small base of information, to equate the marketing cost decreases to that specific program. But we do expect it to have a significant impact and we will talk about it going forward once it is fully integrated into the -- across the board. So, I don't mean to be vague, I just don't have a specific impact because it is been such a short period of time, and it is not fully integrated across our system.

And then just on the loan loss provision, you did mention that you are being prudent based on the 2008, 2009 experience, but are you seeing actually anything in the data where write-offs or performance of receivables that is giving you any cause for caution?

We actually saw improvement in our portfolio during the quarter, Chris. And I think that is the most important thing. We are -- we have mentioned this on past calls. There has been recovery. If you recall we were at the end of 2009 I think we were about 30% of gross VOI, we are down to 22% to 23%, which we consider to be meaningful improvement.

But we have cautioned people that our buyers have not returned, and their practices haven't returned to the pre-2008, 2009 behavior and therefore we were trying to moderate expectations at how immediately we would go back to the levels that we saw in 2008, which were around 17% or 18% of gross VOI.

So, we see in general the trends to be encouraging. But, again, we've cautioned people to expect a moderate improvement, a slow and moderate improvement in our buyers, not an immediate return to pre-2008 levels.

Got you. Makes sense. Thank you very much.

Steven Kent with Goldman Sachs.

I just had some broad questions on margins and some of the -- and the fourth quarter EBITDA decline. First on the fourth quarter EBITDA decline, I don't completely understand the seasonality issue or the timing of higher marketing costs at the Hotel Group or information security. Those seem like relatively modest expenses, yet it is putting pressure on the overall EBITDA. So that is Number One.

And then just broadly on margins. You mentioned earlier that your cost to goods sold is going lower, from 25% to 20%, and I don't understand why that is happening. I think that is for timeshare.

And is there really a bigger opportunity, margin opportunity for timeshare sales, because you are really moving to more asset like financing more of this. And is that being offset by paying for higher fees or product cost to the property owner?

Okay. So, let's answer your first question first, which was the fourth quarter decline in EBITDA. Okay, so, as you know we made acquisitions in the vacation rental business. The vacation rental business is a highly seasonal business where the EBITDA is generated in quarters 2 and 3 and you basically sustain losses in the quarters 1 and 4. It's not losses, just marginal profitability.

As we double down a bit last year on these European vacation rental businesses, we saw an exacerbation of that seasonal effect, just bigger businesses or a larger commitment to a business where there are losses in the fourth quarter. So, I think that is pretty easily understood, at least I understand it.

The second issue is information security cost. I think on every call that we have made this year, Steve, every quarterly call that we have made, we have said that we were investing in information security. Really, we kicked off the initiative at the third quarter of last year, but we really have increased investment spending on information security, which is a corporate expense, significantly this year.

I mean, the incremental spend on information is measured in the tens of millions of dollars, incremental spending against last year. So if we are doing more of that than we had at the end of last year where the program was more of a nascent program and now a fully functioning program, that would seem to indicate that we are going to spend more on information security on a quarter-to-quarter basis in the fourth quarter than we did last year.

And then the final issue is the timing of marketing spend. And so the timing of marketing spend, which this is directed strictly at our hotel business. We have benefited in the first half of the year by delayed marketing spend where we received the royalty equivalent for marketing spend from franchisees, but under spent the amount of money that came in.

And in the third and fourth quarter we are effectively spending that money which was already taken in previously, but reflected a benefit for us in the first half of the year, now is working against us, because we're spending more than we're actually taking in on a quarter-to-quarter basis, but that is because money is accumulated in the first half of the year that we are spending in the second half of the year.

Right. And then as we mentioned on previous calls, Steve, part of the beat in the Hotel Group in the first and second quarter were specifically related to timing of marketing, which we mentioned, because we knew this was a question of timing not a question of the profitability for the full year.

I think that was the first question, as it related to, why is the fourth quarter EBITDA coming down. I think the second quarter had to do --

The only other thing I would add to that is bear in mind that the fourth quarter overall is about 50% less then the third quarter. So, when you have these impacts like IT additional spend, it has a more meaningful impact on a much smaller base.

The third quarter was about margins, I think. And you're right, Steve, it is in the cost of goods sale, which was your specific question, is in the timeshare business. The reason that it is 20% versus 25% is, some of that distressed inventory that we have picked up and we've been able to flow through P&L and sell, it's just a matter of basically managing the environment well, to be quite honest.

The real estate group and the timeshare group have done a great job of managing our costs and sales down. In addition our efficiency has gone up, so we're actually selling more efficiently, which means that if you have the same base of cost with a more efficient sale, you also will drive down your cost of goods sold.

The other thing that I think is really important for everyone to realize and we talk about this on our visits with investors and analysts, is that there is a structural bias to lower cost of goods sold in this business. And that is because when we take back inventory for defaults, we resell them at considerably higher prices than they were first sold.

So as long as people keep returning to us, we will always be able to sell inventory that is returned to us because of our points base system at a higher price than the price of the original inventory. And so I think there is a structural bias to a lower cost of goods sold. I don't know how low it is going to take us, but, Steve, our plans are that one of the drivers of EBITDA performance in this business as we go forward will be continuing lowered cost of goods sold over the next 5 years.

Thanks for that information. If I could just follow-up though. Vacation rental margins were a little bit lower this quarter and I guess I'm trying to balance out what sounds like many efficiencies being created on the RCI side being offset by the acquisitions, if I'm getting that right. When does the efficiencies on the RCI side offset some of these, it sounds like lower margins on the acquisition of the rental business.

It is pretty basic, Steve. The rental business has a lower margin, profit margin than the exchange business. The rental business is growing more rapidly than the exchange business. So, as long as the rental business with a lower margin is growing faster than the exchange business with a higher margin, there will be some pressure on margin within that overall unit.

And as I said I think a year ago, our goal for that business was to try to keep the overall segment, exchange and rentals, at a constant margin by being more efficient on the exchange side as we grew the rental side. And depending on how quickly that rental piece grows, we may or may not be successful in achieving that goal, but that has been our goal for that business. Hopefully this year kind of set the level that we'll be at going forward, because we didn't have any acquisitions that we have done this year, but I can't predict what we are going to do in the future.

Okay, thanks very much.

Harry Curtis from Nomura.

Two quick questions. You talked about, a little bit earlier, about the pipeline of distressed timeshare inventory. Can you talk a little bit more about the competition there is for that product/

It is probably not too intense now, but are you get any sense that some of the other timeshare companies are beginning to filter into that strategy as well. And then the second question is, when you consider the amount of cash flow that you have available for repurchase in 2012, how -- will it be greater, about the same or somewhat less than 2011.

Okay, Harry. As I said before, there is a lot of product out there. I think any good idea has followers. So I am sure that others are following. In fact, I know others are following our WAAM concept in looking at product to be brought in on our, what we call our WAAM basis. I don't think it is significant, though, because there is so much out there.

We are, frankly, more efficient than anybody else, so I think we are probably, as we have been in the past, probably the most likely buyer of product that we want to get our hands on. We will continue to be very critical of the product quality that we bring in. Not that others would not be, but we are going to keep a very close eye on product quality.

So, I think that there will be other people in the market doing this. They are there now, and I think they will continue to be. But I don't think that is at all an impediment to our ability to bring product onboard. I think the bigger impediment, frankly, and the bigger timing issue is what I mentioned before.

You have got a, let's say, a whole ownership condo development that only sold out 5% of their inventory. It is sitting there 95% unsold, but the homeowner documents say that they can't do timeshare. So, that 5% that was bought previously has to open their eyes and say, if we don't agree to allow a timeshare regime to come in we are going to sit with this half-baked product, and it is going to be very difficult for us to improve the product and keep it up because you have got 95% of the product sitting owned by some bank that really doesn't want to invest in it.

So, that is more the process of this distressed inventory situation and I think that we have been in the midst of it for now a couple of years. We know what needs to be done. We know which ones are likely to be able to move and we'll continue to work the marketplace.

Harry, your second question was on 2012 cash flow. So, let's look at the components for a second. Free cash flow we are guiding is going to be $600 million to $700 million last year. This year we said it is $725 million. But $67 million of that $725 million is a one-time benefit that we got from recovering some VAT payments that had been made previously, along with associated interest.

So, if you take the $725 million and you subtract out $67 million, you get to, what is that number, it's like $660 million. Okay, something like that. So, around $660 million. I would say that free cash flow right now is probably going to be ballpark, on an aggregate our guidance is $600 million to $700 million, it is in the ballpark on free cash flow.

One of the benefits we got this year that enabled us to spend a little extra on capital allocation was, our advance rate differential on our ABS transactions was materially better this year than it was last year. And we shared previously that that advance rate differential benefited us to the tune of around $100 million plus of incremental cash.

Now our advance rates this year have been 92%, 98%. We are not encouraging anyone to model anything better than that. And so, maybe that advantage that we had in 2011 won't accrue to us in 2012. We are not sure. It is too early to tell.

And then the final question is, what will we do in continuing to maintain our leverage ratio, Right now I think our guidance is for an incremental $70 million to $80 million of EBITDA. So, if we were to lever on top of the $70 million to $80 million of EBITDA, that would generate another $200 million potentially of available cash.

I think that is pretty consistent with this year. I think in a year-to-year comparison maybe the only difference will be, and I'm talking in approximations here, the only difference will be that we are not counting on better advance rates then 98% advance rates.

And any meaningful difference in acquisition activity?

Hard to project. As Steve said, you can 't project these things. But Steve, do you have -- ?

Harry, were you talking about acquisition of inventory or acquisition of companies?

Companies.

Of companies. Again, like Tom said, we can't predict what that is going to look like. We don't know what opportunities will be out there, but we will continue to be disciplined around it.

Okay. That is it for me. Thank you.

Joe Greff from JPMorgan.

Tom, do you plan on accessing the securitization market in the fourth quarter? And if so, can you talk about what sort of [dyes] of the offering that you are thinking up?

Joe, hard for me to answer that question for legal reasons. But, we generate about $1 billion of receivables a year. And generally we do 2 to 3 deals a year. So, hard for me to answer the question, big guy.

All right, thanks.

All right, Kelly, is that it?

I'm showing no further questions.

All right. Well, thank you very much. Thanks all for joining us today and we will speak to you after the fourth quarter.

Bye.

Thank you. And that concludes today's conference call. You may all disconnect at this time.