Travel + Leisure Co (TNL) 2011 Q4 法說會逐字稿

Welcome to the Wyndham Worldwide fourth-quarter and full-year 2011 earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. I would now like to turn the call over to Margo Happer, Senior Vice President of Investor Relations. You may begin.

Thank you. 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 October 26, 2011 with the SEC.

We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to GAAP is provided in the tables to the press release. It is also available on the Investor Relations section of our website at WyndhamWorldwide.com. Steve?

Thank you, Margo. Good morning, everyone, and thanks for joining us and welcome to our 2011 year-end call. It was a great year for Wyndham Worldwide. We produced adjusted EBITDA growth of 13% and adjusted EPS growth of 25%. We generated over $750 million of free cash flow and over $1 billion in available cash.

These results and our long-term earnings and cash flow outlook give us confidence to raise our dividend by 53%. This increase is consistent with our policy of growing our dividend at least at the rate of growth of our business.

During 2011 we repurchased 17% of our outstanding shares for $902 million, buying 28.7 million shares at an average price of $31.45. Since our launch as a public company in August 2006 we have repurchased 65 million shares for $2 billion at an average price of just under $31.

Operationally we continue to execute against our strategic initiatives throughout our Company. At Wyndham Hotel Group, Apollo, our series of initiatives aimed at improving our value proposition to our hotel owners, is well underway and we are seeing measurable success which I will discuss in a moment.

At Wyndham Exchange and Rentals our RCI team delivered yet another series of technology upgrades to our Web capability, increasing customer satisfaction, online share and operating margins. We also made significant progress growing our North American rentals platform with the integration of ResortQuest exceeding our expectations.

And we continue to achieve record of efficiency levels at Wyndham Vacation Ownership with margins up over 250 basis points and an EBITDA increase of 17% for the year.

Before going into 2011 results, let me spend a few minutes on what we're seeing in the economy and within our sector. Despite many macro twists and turns in 2011 the geographic and demographic diversity of our businesses and the resiliency of our fee-for-service business models provided a stable base for us to grow. We expect that also to be the case in 2012.

In 2011 hotel industry demand hit a new all-time high with more room nights sold than ever before. However, rates charged for hotel rooms have not recovered to pre-2009 levels. The net is that RevPAR improved during 2011 and we believe this positive trend should continue in 2012.

According to a study conducted by Atmosphere Research Group in October, while only 29% of US travelers favorably viewed their 2011 financial condition, 43% believe their finances will be better in 2012. And travelers who expect their finances to improve outnumber those who are pessimistic about their finances by more than two to one.

Most travelers expect to take the same number of trips, which is seven on average, in 2012 as they did in 2011. They also expect to spend about the same amount of money on travel as last year, which is about $3,200. This is consistent with the continuing gradual recovery we foresee in our US businesses, which contribute nearly 70% of our EBITDA.

In the Hotel Group we finished 2011 ahead of expectations and we expect a strong 2012 with RevPAR increases of 5% to 8%. In our Exchange and Rentals business 2011 was our first full year with ResortQuest in North American vacation rentals market. This business is running ahead of our plans with great room momentum carrying into 2012.

RCI held its first -- excuse me, its annual affiliate event in New York last month. The record attendance indicates that interest among timeshare developers is strong and growing. New sources of financing for the overall timeshare industry are still evolving and the mood was more optimistic than I've seen in a long time. And of course our own timeshare business continues to exceed expectations.

Despite some significant dips in consumer confidence during the year our timeshare owners continue to demonstrate the value they place on vacations with the rivals at our results reaching an all-time high. And our sales force demonstrated its ability to sell the product as volume per guest also reached all-time highs. So in the US we expect to see a continuing gradual improvement in the economy.

In Europe, however, where the majority of our vacation rental businesses are based, the economic climate remains challenging and the future uncertain. In this region, which is about 15% of our EBITDA, we continue to see the shortening of booking windows and pressure on yields as customers become increasingly value focused. Despite these challenges the strong value proposition of our products and the strength of our established local brands lead us to expect that our European rentals business will remain stable in 2012.

Against this economic backdrop we continue to focus on two areas to increase shareholder value. The first is a focus on execution. That means ensuring we execute to capture more than our fair share of the US economic recovery. We expect our domestic RevPAR, for example, gains to be ahead of the industry.

Great execution also means taking steps to mitigate the impact of a potential economic downturn in Europe. As always we'll be disciplined in discretionary spending and we'll continue to invest in our resilient fee-for-service businesses.

One final comment on execution is that we have strong operating plans that leverage our competitive advantages and we are adaptable to changing conditions. We've proven our ability to operate in difficult conditions over the last five years and we expect nothing less in 2012.

The second area of focus is capital allocation. In 2011 we returned $1 billion of available cash to shareholders through dividends and share repurchases. We have a well-established capital allocation plan which includes investing in our businesses through acquisitions, paying dividends and share repurchases and we will continue to execute against that framework. Tom will discuss this more in detail later.

Now let's take a look at our business units in more detail. Wyndham Hotel Group continues to make great progress in executing its online strategy as part of its Apollo initiatives. Online bookings are a growing portion of the hotel reservation process and now account for about a third of hotel -- total hotel and lodging industry revenue.

Studies show consumers are spending an increasing amount of time shopping and comparing hotel options on line, often visiting between 8 to 15 different websites to make an informed decision. Our goal is to capture a maximum amount of that traffic and to ensure that page views result in booking click-throughs or conversions.

We've developed a comprehensive multifaceted plan to drive more room nights to our hotels through our online direct distribution channels. The launch of our new hotel brand websites and improved content were the first steps. Most of our brand websites have now been updated; results are excellent with conversion rates up on average 20%.

In December we piloted TripAdvisor ratings and reviews on WyndhamRewards.com. Industry research indicates that up to half of consumers will not book a hotel without reading a review. Making ratings and reviews readily available on our own sites ensures consumers don't have to leave our site to get that information. Initial results of the pilot are positive. We plan on adding TripAdvisor ratings to all our brand websites in 2012.

We have also launched an umbrella cross brand website, WyndhamHotelGroup.com, which is designed to aggregate traffic and provide a vehicle to attract consumers who are looking to shop all of our brands on one site. These efforts are supported by another initiative under our direct strategy, our investment along with five other hotel companies in Roomkey.com.

We believe Roomkey.com will provide consumers with a trustworthy and uncluttered way to compare and book hotels through a superior hotel shopping experience while driving bookings directly to our own online channels. Roomkey.com provides a new cost effective channel for our owners and will better meet the needs of consumers who currently shop across multiple sites before booking.

Wyndham Hotel Group will be rolling out additional initiatives over the course of the year including new mobile sites and apps all designed to drive more online business and develop a more profitable channel mix for the owners of our hotels.

Of course we have had much success in driving online transactions within our Wyndham Exchange and Rentals unit where over the course of three years we have built the best online timeshare exchange and club servicing platform in the industry.

We are pleased with the results of our latest RCI.com enhancements introduced in October. As we explained previously, this release included several major milestones such as improved search functionality (technical difficulty) by points members and the innovative recommendation engine which provides proactive travel recommendations to members based on their individual preferences.

The results since launch have been measurable with favorable feedback from users and increases in points transactions and WebShare. In the fourth quarter we saw a 7% increase in points transactions and we continue to see the resulting improved efficiency in our exchange operations with online transaction share growing to 39% in the fourth quarter compared to 30% in last year's fourth quarter and 13% when we started the project.

On the rental side we made great progress in growing our North American rental business in the fourth quarter by integrating two acquisitions in key Colorado and Florida markets. ResortQuest finished off a great 2011 meeting revenue goals and exceeding earnings expectations by capitalizing on the operating synergies within Wyndham Worldwide.

In 2012 we expect continued growth in our North American rental business with additional synergies expected to drive improved efficiency and growth in earnings. In addition to organic growth we hope to add to this business through select acquisitions in 2012.

We're also pleased with the performance of our vacation rental businesses in Europe. As you know, we have many well-established brands with loyal customer bases across the UK, Netherlands, Germany and Denmark. Despite the challenging conditions our businesses remain stable. We expect the same for the upcoming year as Europeans continue to look to vacation rentals as a great value and our product is located where they want to vacation.

Finally, turning to Wyndham Vacation Ownership, which had another great year generated over $500 million in EBITDA. The business has out-performed our expectations every quarter since we right sized the business in late 2008. In addition to achieving significant efficiencies the team has continued to refine its business model to support our corporate focus on fee-for-service businesses that generate significant free cash flow.

The first step was establishing Wyndham Asset Affiliation Model, or WAAM, which offers turnkey solutions for developers or banks holding newly developed inventory which we sell for a fee through our sales and marketing channels. In 2011 with healthy conditions in the ABS market we introduced what we call WAAM 2.0 where we sell not only the inventory but also offer consumer loans.

WAAM 2.0 has continued to evolve. Our goal is to capture the attractive spreads available through financing and preserve our capital light operating philosophy. We signed our first WAAM 2.0 deal in December 2011 and expect to start sales in the third quarter of 2012.

Last quarter I spoke of a new marketing initiative in our timeshare business which enables us to better target new buyers. As you know, new owner acquisition is an important strategy for Wyndham Vacation Ownership. It's critical that we maintain a healthy pool of lifetime buyers of vacation ownership as new owners drive upgrade sales in the future.

I'm pleased to report that during 2011 we added approximately 27,000 new owners exceeding our goal. We expect continued strength in 2012 as we remain focused on generating high-quality tours and improving our already high efficiencies.

In summary, 2011 was a strong year across the board and I'm excited about 2012 and our ability to continue delivering value to shareholders.

Before turning the call over to Tom I want to comment on our count on me culture at Wyndham Worldwide. We just received results from our bi-annual employee survey; our employee engagement scores ranked with best-in-class companies. This indicates that Wyndham associates are committed, loyal and proud; they have a strong sense of personal responsibility in delivering a great experience for our customers and great results for the Company.

And while it's gratifying to see the survey results, I wasn't surprised because I see the real proof every day in the action of our associates and every quarter in our results. With that I'll turn the call over to Tom.

Thanks, Steve. I'm going to focus the bulk of my comments today on our fourth-quarter results and 2012 guidance. As far as our results for 2011, let me echo Steve's comment that 2011 was a terrific year and that the fourth quarter ended on a good note.

Our fourth-quarter results reflect continued strong business unit execution and our ongoing commitment to focus on generating cash and making smart capital allocation decisions. We came in $0.03 above the top-end of our guidance range, reflecting the impact of fourth-quarter share repurchases as well as lower interest expense, D&A and taxes.

Fourth-quarter EBITDA -- adjusted EBITDA, which excludes the impact of $44 million of non-cash impairment charges related to the lodging business, was flat compared to the same period of 2010 and slightly better than our expectations. Remember that we had expected quarter four EBITDA to be down year over year reflecting, among other factors, the seasonality of our larger rentals business, continued unfavorable timing of higher marketing costs at the Hotel Group and increased information security costs at corporate.

Free cash flow increased to $754 million for the full year. Now excluding a one-time VAT refund and related interest income of $67 million, free cash flow normalized to $687 million for the year.

As you know, I have said often that cash is the great enabler. We will use our significant free cash flow to support growth and build shareholder value. This will enable us to invest in the business including acquisitions, pay dividends and repurchase stock. We expect the deployment of cash flow combined with the organic growth of our businesses to generate annual earnings per share growth approximating 20% a year over the next five years.

As Steve noted the Board of Directors has authorized an increase in the quarterly dividend to $0.23 per share which is a 32% pay-out at the midpoint of our 2012 net income guidance range. In addition, we repurchased 6.7 million shares of stock in the fourth quarter, spending $225 million. In 2012 through market close last evening we purchased an additional 1.5 million shares for a total of $60 million. We continue to believe that share repurchase offers a compelling return.

Now moving to operating performance for the quarter, let's begin the segment review with our Hotel Group. Revenues were up 15% compared with the fourth quarter of 2010. Now a portion of that increase reflects a reporting reclassification of $15 million which had no impact on the EBITDA. Excluding reclassifications revenues were up 6%, reflecting improved domestic RevPAR and incremental revenues from our newly opened Wyndham Grand Hotel in Orlando.

As mentioned earlier, we had non-cash write-offs at the Hotel Group in the fourth quarter. Let me take a minute to walk you through the components of this non-cash charge. First, when we repurchased -- excuse me, when we purchased the Wyndham brand in 2005 we allocated a portion of the purchase price to approximately 60 of the existing franchise and management contracts, creating an intangible asset on the balance sheet.

The brand has evolved over the past six years and many of those original contracts are no longer in the system. As a result we have recorded an asset impairment of approximately $14 million. We now have 100 hotels in the Wyndham Hotel and resorts brand and nearly 70% are new flags since acquisition.

Second, we've determined that we are unlikely to realize expected returns from investments at three managed properties and we believe the prudent course is to write down the investments by approximately $30 million. These investments made at the height of the market were primarily related to development advances and management agreements. Again, these are non-cash asset impairments.

Excluding the impact of these charges adjusted EBITDA was up 3% reflecting RevPAR improvement and lower bad debt expense, partially offset by the unfavorable timing of marketing costs which we described in our third-quarter call. RevPAR recovery continued in the fourth quarter. In the fourth quarter system-wide RevPAR increased 5%.

Now in the US fourth-quarter RevPAR improved 8.4% versus a year ago reflecting improvements in both occupancy and rate. International RevPAR was down 3% due primarily to the rapid growth of lower RevPAR hotels in China and some softness in Europe.

We ended the year with 613,100 rooms in the system. Excluding the Corinthia and Ramada UK terminations which we disclosed in previous quarters, the system size increased by 1%. The pipeline stood at nearly 112,000 rooms at December 31, 2011, down slightly sequentially reflecting strong room openings of close to 15,000 in quarter four.

For the full year contract signings were up 15% compared with 2010 and we executed 399 conversion deals compared with 363 deals in 2010, about a 10% increase.

Wyndham Exchange and Rentals did a great job of delivering their financial results despite FX headwinds and a difficult economic environment in Europe. Total revenue in constant currency was up 4% in the fourth quarter reflecting acquisitions, which contributed $14 million in incremental revenues.

Excluding acquisitions and the net effect of foreign currency revenue was flat. Adjusted EBITDA decreased $4 million in the fourth quarter reflecting the impact of acquisitions and foreign currency. The impact of the acquisitions of vacation rental businesses, which have seasonally light sales in the fourth quarter, exacerbated quarter-to-quarter comparisons.

Reflecting negative foreign-exchange impact, exchange revenues decreased by 2% in the quarter. The average number of members was flat. In constant currency exchange revenue and exchange revenue per member were also flat.

Vacation rental revenues increased 10% in the fourth quarter compared with the same period of 2010. Excluding the impact of acquisitions and foreign currency, vacation rental revenue was flat with average net price per rental up 5% and vacation rental transactions down 5%. This reflects active yield management offset by volume declines at our Dutch and UK businesses, consistent with the lower consumer confidence in those regions.

Now moving on to Wyndham Vacation Ownership. This business once again delivered outstanding results. Revenues and EBITDA in the fourth quarter of 2011 both increased 6% with tours up 8% and volume per guest up 4% versus the fourth quarter of 2010. We also benefited from higher WAAM commissions.

We made good progress in expanding our pool of lifetime buyers of vacation ownership. In 2011 we welcome 27,000 new WV owners to the Wyndham family, that's a 23% increase compared with 2010 and it exceeded our goal for the year.

Our property management business continued to contribute predictable recurring fee-for-service revenues in 2011 producing $56 million of EBITDA. Consumer finance revenues in the quarter were down slightly reflecting the decrease in our contract receivable portfolio and interest expense was flat.

Looking at portfolio performance, delinquency and default rates were flat. Accordingly the provision for loan loss was flat and write-offs during the fourth quarter were $75 million.

As Steve mentioned, we signed our first WAAM 2.0 deal. Now the accounting for these transactions will run inventory through our balance sheet on a just-in-time basis. We'll record the inventory on the balance sheet at registration and pay for the inventory shortly after each sales transaction.

Going forward we will refer to this type of deal as WAAM Just-in-Time. This arrangement will enable us to capture the attractive consumer finance EBITDA while optimizing the balance sheet and cash flow.

Now moving to corporate -- excluding legacy-related items corporate expenses were higher, primarily reflecting increased data security and higher employee-related costs.

Now let's turn to our 2012 guidance. We're going to post full guidance details including cash flow to our Investor Relations website following the call. To give you the highlights -- revenue guidance remains at $4.4 billion to $4.6 billion, up 4% to 8% from 2011 and EBITDA guidance remains at $1.030 billion to $1.055 billion, up 6% to 8% from 2011.

Because of share repurchases in the fourth quarter of 2011 we are raising our EPS guidance for 2012 to $2.85 to $3 with a diluted share count of approximately 153 million shares, which assumes no additional share repurchases in 2012. Those ranges translate to approximately 18% EPS growth at the midpoint of the range. For the first quarter we expect earnings per share of $0.53 to $0.56 per share.

Now please note that as cash flow and share repurchase continue to be an important part of our investment thesis, we have considered whether to include share repurchase in our guidance assumptions. We decided to adhere to our current practice of not doing so to allow for investment in our business, including acquisitions, when opportunities present themselves.

We view share repurchase as an attractive opportunity as well, of course, which we will weigh against M&A opportunities in our capital allocation decision process.

Now let's take a quick look at guidance at each of our business units starting with the Hotel Group. This year our growth expectations for the lodging business reflect in part our decision to charge a higher licensing fee to our timeshare business for the use of the Wyndham brand, which we believe has been of tremendous benefit to our timeshare business over the past few years.

Additionally, we expect increased contributions from our recently completed Wyndham Grand Hotel in Orlando. Excluding these new items the normalized EBITDA growth rate for the Hotel Group for 2012 would be 8% to 10%.

In addition, we expect RevPAR to be up by 5% to 8% and a 1% to 3% increase in system size. We expect revenues to be $835 million to $875 million and EBITDA in the range of $260 million to $270 million.

Moving to Wyndham Exchange and Rentals, in Exchange we expect the average number of members to be flat to down 2%, primarily reflecting the loss of an affiliate with approximately 60,000 members. This affiliate's requests resulted in a situation that was no longer compelling for us.

We expect exchange revenue per member to be flat to up 2% reflecting higher transaction pricing in other member-related revenue offset by negative currency impacts. In rentals we expect transactions to be up 4% to 7% and average net price per vacation rental to be flat to down 3% reflecting the unfavorable impact of foreign currency.

Based on these drivers we expect Wyndham Exchange and Rentals revenue of $1.44 billion to $1.51 billion and EBITDA of $335 million to $355 million. Note that our growth expectations in Exchange and Rentals continue to be mid-single-digits through 2015. The 2012 guidance reflects the current foreign-exchange headwinds and the macroenvironment challenges in Europe.

Finally, moving on to Wyndham Vacation Ownership, we expect gross VOI sales to be up slightly from 2011 to $1.65 billion to $1.75 billion which includes approximately $120 million in gross WAAM sales; a 1% to 4% increase in tours as we target more new owners and a 2% to 5% increase in volume per guest. We expect total segment revenues of $2.15 billion to point $2.225 billion and EBITDA of $515 million to $540 million. Excluding the increased licensing fee to the Hotel Group, we expect a normalized growth rate at Vacation Ownership in the mid-single-digits.

Based on the improvements we've made to credit standards and the performance of the portfolio we are projecting that the provision for loan losses will continue to decline this year to $315 million to $335 million.

Regarding our outlook for the ABS markets, 2011, of course, was our best year ever. We were able to obtain an average advance rate of 95% based on the quality of our portfolio and favorable market conditions. Each of our deals included a BB tranche.

Going forward we may choose not to access the BB market for each and every deal due to higher costs to secure investor demand. Accordingly, we expect 2012 advance rates to normalize in the high 80s. We expect corporate expenses for the year of approximately $93 million to $100 million primarily reflecting continued investment in information security and IT in general.

We expect depreciation and amortization to be $185 million to $190 million, somewhat higher than 2011, reflecting the opening of our Wyndham Grand Hotel in Orlando and technology investments. We expect interest expense of approximately $135 million to $140 million. Now remember, our intention is to maintain a stable leverage ratio which means our goal would be to add debt as we add EBITDA.

Our interest expense guidance assumes our current debt profile. Any additional debt will incur, of course, additional interest expense and we'll update our guidance when and if appropriate. We expect our effective tax rate for the year to be 38%, consistent with 2011.

We also expect to spend $195 million to $210 million in CapEx. This is slightly higher than our five-year plan baseline which is about $180 million to $200 million. We expect to get back to those levels in the next year or so.

We expect to spend between $110 million and $120 million in timeshare development in 2012, up from the $80 million we disclosed in 2011, and closer to our projection of a $150 million average over the five-year period starting in 2011.

Based on our current forecast we expect free cash flow to be in the $600 million to $700 million range. With financing activities we expect that 2012 available cash could be close to $1 billion. We will use that additional cash, of course, to invest in the business including M&A and a return to shareholders through additional share repurchase. So with that I'll turn the call back to Steve.

Thanks, Tom. As I think about the macroenvironment and our opportunities for 2012 I feel good about where we are positioned. We continue our track record of exceptional execution across all of our businesses, we continue to generate strong cash flow and we continue to deploy that cash to maximize shareholder value. With that, Shirley, let's open the line for questions.

(Operator Instructions). Joe Greff, JPMC.

Two quick questions here, one on the lodging side and then one on vacation ownership. Steve, I think you mentioned earlier on the hotel side you expect your domestic RevPAR growth to outpace the industry. I was hoping, one, you could just give us some rationalization or why do you think that and maybe where you think the industry growth is going to be in '12.

And then on vacation ownership, on WAAM 2.0 or WAAM Just-in-Time, does that change, when you look at the next couple of years, how big WAAM could potentially be as a percentage of overall vacation ownership revenues? I mean, could it be larger than say 15%? Those are my questions, thank you.

Okay, thanks. Thanks, Joe. With respect to RevPAR outpacing, there's a couple things contributing to that. First of all, the initiatives that we've put in place over the last several years, these Apollo initiatives that we've talked about, are really starting to kick in now. Our websites have been upgraded and they needed to be upgraded and they've been upgraded.

And some of the other online initiatives will continue to drive traffic to those websites and we hope to convert and capture more. So I think that is one element of helping. The other element helping is our mix.

As we add more Wyndham product, which we have a very good pipeline of, that Wyndham product comes in at a higher RevPAR. So just the general mix of us should lift us above the average if you looked at just our component pieces. So that's really the reason for the RevPAR -- what we think will be in outpaced RevPAR performance and we've been doing very well in our online efforts.

With respect to WAAM 2.0 or WAAM Just-in-Time, that is a relatively manageable number for us. As we've told you in the past, we try to balance taking off of our balance sheet product as well as taking advantage of a marketplace that's attractive right now. Do we think it could be more than the 15%? Over time, Joe, it definitely could be.

The reception for this WAAM product that we're providing has been very strong from developers and banks who own the product. So I think we have a great model that's out there and now we have a year and a half of actually proving that it works well.

The people that we do business with are very happy. We have repeat customers now in the WAAM world who want us to do more product with them. So I think that we have a great model to move that business more towards the asset light that we've talked about in the past, becoming less asset dependent, taking down the balance sheet and increasing the ROIC on that business.

Carlo Santarelli, Deutsche Bank.

Quickly on VOI inventory, obviously if we look at it it hasn't declined much in the last year. How long right now are you guys thinking about the current level of inventory, how long that could last? And then a quick follow-up if you wouldn't mind -- could you tell us how you're thinking about your financing propensity in 2012 and beyond?

Could you repeat the second part of that? I didn't catch the second part.

Yes. Just wondering what kind of your expectations are for financing propensity in 2012 and beyond.

Okay. Well, on the inventory, and then I'll let Tom handle the financing propensity. On the inventory we probably have software between -- I don't know -- six, seven, maybe more years worth of inventory because, you're right, it only came down about $100 million this year. And that's a result of the fact that as we do upgrades we take product back and then we sell that product through our system and the fact that we've had very attractive opportunities out in the marketplace.

I would expect to continue to see that kind of decline. And when you look at what we have on our balance sheet right now, you just kind of do the math, you probably come to we have at least six, seven, maybe more years worth of inventory.

Now that could be drawn out further and the tail could be extended if we do more WAAM product. And again, that's part of the balancing act that we see. We're seeing the market real-time and making decisions about what's the best thing to do with the inventory that we have. So I would expect to see the inventory number to continue to come down, but it's not going to come down precipitously in any one particular year.

Yes, and Carlo, on the propensity to finance, I assume that you're directing that to our propensity to finance within the timeshare business. And so, I think that's a managed target for us, Carlo. We do try to manage the -- and target the amount of financing we do to like mid-50s, 53% to 55%.

I don't expect that's going to increase over time. We're not seeking to grow our balance sheet. Our number one objective in our timeshare business is to manage it for cash flow. And I don't see it shrinking further. It seems like we've struck a good balance in the mid-50s to finance the business. So I wouldn't expect much change there.

Thanks, Steve, thanks, Tom.

Patrick Scholes, FBR Capital Markets.

Just a couple questions here. First on foreign exchange hedging, can you give us the latest update where you stand with that? And is there any way to quantify that for us?

So the FX impact year over year, if you were to compare the average FX rate or the average euro rate, as far as the euro and pound sterling, against our 2012 guidance assumptions, it's probably cost us $13 million, $12 million to $13 million. And so that's what's built into our guidance range.

As it relates to hedging practices, we're not -- what we have is a philosophy that we act appropriately and modestly in our hedging. And so we typically hedge a quarter out. And this year we may do a little more to protect against the downside of a significant euro depreciation, but it's not going to be a material type of spend on our part.

So it counts for about -- Europe counts for about 15% of our business, that's where most of the FX movement takes place. So I think we're measured in our efforts to hedge against the euro or the pound sterling.

Okay, thank you for the color on that and just two more questions here. Could you give a little color on the lodging margins for the fourth quarter? I noticed that over the past year they've been sort of all over the place with -- wild increases and then a margin decrease in the fourth quarter. Could you just give a little more color on the fourth quarter, what was driving that?

Yes, Patrick, there were two things that were driving it. Number one was our loyalty program, Wyndham Rewards. In 2010 we were recovering some of the previous investment we had made, in 2011 we didn't, so that led to a bit of a deterioration in our margin. And then as we said in our organized comments, there was a timing of marketing-related costs that had a significant impact.

If you recall the chronology in 2011, in the first half of the year we cited the timing of marketing spend as an advantage to margin. In the second half of the year we attributed some of the margin deterioration to the timing of marketing spend. So those are the two most important factors. We would expect that margins in 2011 will improve in our Hotel Group as RevPAR increases and we keep expenses in check.

Okay, I thank you for the color. And then just lastly sort of an open question here. Concerning the acquisition environment, 2010 you were very business, 2011 was quiet for you. What are sort of your general thoughts on the acquisition environment as it relates to 2012 and going forward?

Well, Patrick, it's always a tough thing to do, we kind of put our finger up in the air and see where the wind is blowing. Obviously we don't dictate the environment that's out there, we're somewhat reactionary to that environment.

I would characterize this year -- going into this year kind of feeling like going into 2011. There hasn't been a tremendous amount of activity. During 2011 the deals that we saw were overpriced. We were disciplined, as we always are, and passed on many of the deals that we saw. And going into this year the environment does not feel a lot different.

There are deals that are out there, but if they're at the prices that we can rationalize and that make sense for us we'll consider them, but if not we'll pass on them. We certainly have another terrific use of our free cash flow, which is to buy back our stock, which we think is undervalued right now.

Okay, fair enough, I appreciate the color. Thank you.

Chris Agnew, MKM Partners.

Wanted to dig a little bit into the European vacation rental business and ask, when is the main booking season, at what point do you get good -- better visibility into 2012? And then a couple other areas there. Is the weakness that you saw on volumes, is that really sort of longer distance vacation rental, sort of Northern Europeans traveling down to Southern Europe? And are you seeing -- you mentioned the UK being weaker. Have you seen any uplift because of the euro versus the pound? Thanks.

There were a lot of questions in there. I'll take a first shot at answering them and then if I miss something Tom can fill in. As for when the bookings are most heavily done, it's generally in the first and heavily in the second quarter. So it's the first half of the year, obviously teeing up for the summer.

Booking windows have in general diminished so they're definitely shortening, people are shopping around more waiting for good deals so to speak. And so we expect to be in the same kind of a pattern with maybe a little bit of a push to the later period for the bookings for this year.

With respect to the UK situation, I can't say that we've seen much of an increase with the euro pound trading. But again, it's kind of early game here so it's a little hard to define exactly what will happen. We also have the Olympics over in London this year, as you know. We're not sure what the impact of that will be. And so we're watching it very carefully and watching the booking patterns to determine if we think there will be an impact and if we need to make any movement on pricing.

And as for the long-haul versus the short-haul, I can't say that I've seen anything that has really directed that to be the issue. Some of our package deals to Southern Europe have been a little bit lighter coming out of the UK. But it's also a function of the booking window getting tighter because we may see more of it in the second quarter.

Thank you. And if I could ask a follow-up for Tom, just thinking about the balance sheet. I think you said before you didn't really -- you wouldn't want to de-lever over time. So as you think about EBITDA growth this year and next what's your thought process on adding debt to stop -- [you] de-lever?

Yes, so, Chris, our simple rule of thumb when we speak to investors is for every of dollar of EBITDA that we add we'd like to add $3 of debt, we just have to pick the right market conditions and the timing to get it done. So I think we ended the quarter at the low end of our credit range that we've talked to our rating agency friends with. And so I think we have some room and some flexibility to do some things in the near term.

Great, thank you.

Amanda Bryant, Susquehanna.

Just a quick follow-up on the vacation rentals segment. What is the actual length of the booking window in that segment and how does that compare to basically the same time last year?

Well, I mean the booking -- the booking window is basically dependent, Amanda, on how far the booking is done in advance of the heavy travel season in the summer. And historically the business has been kind of -- that booking, as I said, has been spread over the first and second quarter.

If I try to guesstimate for 2012 how much would that booking window slide it would probably be measured in weeks not months, because you've got a bulk of the business all coming within essentially a two quarter period of time. So we're not suggesting that the booking is changing from being all in January to being all in June, but it's just sliding to be a tighter window towards that heavy summer travel.

So depending on which market we're in -- the inner Dutch market, for example, we saw a more dramatic tightening of the booking window in 2011 than we saw in 2010. The UK window in 2011 was not real dissimilar from 2010. So it really depends on market, but it's not a full quarter slide, it would be probably measured in weeks or months, not multiple months.

And the compression, Amanda, is not happening necessarily exclusively because of what the economic conditions in Europe are now. It's been -- we've seen some form of compression taking place for a number of years now. So this is not necessarily a reaction to what's going on in Europe, we think more of a secular trend in the business.

Yes, as technology becomes more available people dig for more information before they make their purchase decision.

Got you. Thank you so much.

Steven Kent, Goldman Sachs.

Just two questions. First, on cash flow for 2012 I think, Tom, you said it was $1 billion, but it included financing. I just want to understand what that was a combination of -- securitization, more leverage given the increased EBITDA and then just flat out free cash flow?

And then the second thing is on CapEx for 2012 spending more on timeshare build I guess I'm -- how do you balance that versus what seems to be a very robust WAAM environment? So why spend any money on building physical timeshare in anticipation when you can seem to use WAAM more aggressively?

Do you want me to handle the first question?

Sure.

So, Steve, I'll handle the first question, it's Tom. So, our free cash flow guidance range is $600 million to $700 million, the rest will come from financing. In 2011 we benefited from an exceptional ABS market and we -- our advance rates were on average 95%.

When Steve mentioned that we generated $1 billion in available cash last year, more of the difference was attributable to ABS advance rates. In 2012 we don't see advance rates improving above last year's rates, it's practically impossible. So you should interpret the difference being that at some point in time we'll raise additional debt based on our incremental EBITDA.

And, Steve, with respect to the question on inventory, why buy versus just selling what we have on our balance sheet. As we've said in the past, most of what we have on our balance sheet, some of it is completely finished inventory and we're selling that, some of it requires additional capital spend in order to complete it for us to be able to sell it. So there's additional fresh capital going out to finish those projects.

I think it's -- and as we said in the past, this is kind of one of those things that we're paid to do. We have to look at what's available out in the market, what we have on the balance sheet, the location of the inventory, the quality of the inventory. There's a lot of factors that go into it and this is a conversation that Tom and I have with the guys who run the timeshare business and our Chief Real Estate Officer on a regular basis.

So there are situations where we feel that it's more advantageous to go into a market that we've been trying to get into for a while where the pricing hasn't been appropriate, where now we see that pricing available and we say, okay, let's grab that market, it's someplace that we feel like we need more product based on what our customers are telling us. Because we asked them where would they like to go, where would they like to see more inventory.

So there's a lot of factors that go into it. At the end of the day we feel like we're doing an optimum job managing the capital allocation for inventory versus spending to finish building versus buying. And it's one of those things time will tell whether we've made good use of the capital. I think we're seeing the cost of sales go down which is one of the results of being opportunistic out there in the market.

And it's shrinking our balance sheet as well.

And we're shrinking the balance sheet. So we're kind of doing them both at the same time, just balancing it.

Okay, thank you.

Harry Curtis, Nomura.

Quick question, two quick questions. First of all, hate to just harp on vacation rental. I'm just wondering how do the forward bookings look in Europe this time versus last year?

Well, forward bookings are -- and again, early, early season. So I don't want to state that this is the conclusion that we should take for the whole quarter because, as I said, we book out the second quarter as big as the first quarter. It's not a whole lot different.

There are definitely some softer spots. The UK has been softer and, again, we don't know everything that's impacting that. And we're not doing anything dramatic at this point because frankly we don't think there's a need to do anything dramatic with respect to pricing. We feel that we will see the results bleed in over the next few months.

So I'm trying to answer this question in a different way than it's already been asked just to give you some additional color. But we really can't tell a whole lot. As we said, we think that that will be a challenged region. However, we've also said that we think that because of the business model we have and where we have our product we will be stable in that market. And I think stable is the new up in that market.

And so we're feeling pretty good about how we're positioned. And also as we've shown in the past, we have always been resilient and able to adjust and adapt our model to whatever the market conditions are. So when we saw the decline in 2009 our businesses there grew. We shifted, we brought product in in different locations and we managed to find growth in that market which others were not seeing growth in. So we are calling for a stable year out there, we're making that call based on what we're seeing right now.

Okay. And then just following up on Steve's question on the WAAM business. It seems like there's a reasonable amount of developer and bank inventory today. But as you look out two to three to four years that inventory is likely to dwindle because the amount of building over the next couple of years probably dwindles. So how are you going to refresh that inventory? Or not you, but how would you see it developing over the next few years?

Harry, I love a question that looks out three to four years, it's fantastic. I think there's a couple of things that I would say about that. One is the WAAM model -- and we said this before, I think actually before you were involved in our story. We talked about the WAAM model developing and it's something that's existed for a while.

We did a deal probably five years ago now during the peak of good times where we brought in product under a WAAM model. We didn't call it WAAM at the time because we weren't focused on that as a market initiative. We focused on that opportunity as just being opportunistic. We brought in a project in Panama City Beach, Florida and did it under this WAAM model.

So the model has always been out there and available. I think even during good times there will be opportunities and I think during the good times it will probably shift a little bit. It will be away from the product that is on the market that is weighing the market down right now with too much whole ownership condos.

It will shift to being developers who are now developing new product who are building a hotel, some whole ownership condos and they want also some timeshare product in the mix. And we will be a great partner for that person who wants to develop it.

Timeshare owners spend time in their units, that's a fact, and they tend to spend more per stay on ancillary things like restaurants and theater tickets and other activities than a normal hotel stay does. And so we -- the timeshare owner is a very attractive person to have in the mix of a development. So I think it shifts from being -- taking maybe what people are calling broken deals to becoming additive to other people's transactions over time.

Interesting, thanks.

Michael Millman, Millman Research Associates.

Just following up and then going on. On the UK softness, are you talking about UK as a rental destination or are you talking about UK as buyers? And then my other question relates to if you could discuss what you see as positive and negatives for the merchant and agency models and which way are you headed and what kind of difference in cost do you see for you for those models? Thank you.

On the UK one, Mike, I would say it's both, it's the UK consumer. The bulk of the travel in the UK is the UK consumer. There is some German consumer traffic coming into the UK, but I think that -- I don't know what the percentage is off the top of my head, but it's relatively high UK within UK.

Going outside of the UK, the consumers traveling outside is what I was talking about. We saw some softness going to Southern Europe from the UK. So I think I would define it as being more the UK traveler. The German traveler continues to be strong, but, again, it's not a huge part of UK.

With respect to the OTAs and other agency type bookings, they're our partner. We work with them closely, we feel that there's a place for agency delivery within our distribution channels and we frankly embrace it.

Having said that, we would love to get more done on our own websites because it's the most cost efficient way to deliver business for our hotel owners. And therefore we're trying to drive more ways of finding traffic come to our websites to book directly for the direct booking. So they're complementary to us, they're our partners, but we also like to find ways to drive business to our own websites.

Just to follow up on that, I was kind of wondering about -- some of the OTAs use both a merchant model and an agency model as kind of looking at that as opposed to your own rental.

Well, the merchant model for the most part is done directly with the hotel and it really flourished during the post-9/11 tragedy where hotels were just basically dumping product trying to fill the rooms. I think most hotels found that that is not a very efficient way to do it and they took a long time to recover from that -- from giving control of their inventory to somebody else.

So I think that if, again, you're asking a forward-looking statement, I think that agency model is where you'll see more work. In the future you'll see more agency model push versus the merchant model, but you really should be asking that question to the guys who are running that business as opposed to me. Okay? Anything else, Shirley, or is that our last question in the queue?

At this time I'm showing no further questions.

All right. Well, thank you all very much for joining us today and we look forward to talking to you at the end of the first quarter.

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