Travel + Leisure Co (TNL) 2012 Q1 法說會逐字稿

Welcome to the Wyndham Worldwide first-quarter earnings conference call. Your lines have been placed on a listen-only mode until we reach the question-and-answer session.

Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Margo Happer, Senior Vice President of Investor Relations. Thank you, you may begin.

Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO, and Tom Conforti, our CFO.

Before we get started I just want to remind you that our remarks today contain forward-looking information. This information is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-K filed February 17, 2012, 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?

Thanks, Margo. Good morning, everyone. We are starting the year with great momentum.

First-quarter revenues increased 9% and adjusted EBITDA increased 8%. Significantly, adjusted EPS for the quarter grew 36% and came in $0.04 above the top end of our guidance range. These results reflect strong operational performance in each of our businesses and the benefit of our share repurchase program.

We continue to successfully execute against our operating plans with strong performance across the Company. Lodging and Vacation Ownership each delivered double-digit EBITDA growth, excluding the intersegment license fee for the Wyndham brand name.

In Lodging, RevPAR was up 7% with continued gains in both occupancy and rate. Vacation Ownership had an outstanding quarter supported by strong consumer travel in the US and continuing progress in optimizing marketing efficiencies. And Exchange and Rental was highly effective in managing a difficult operating environment in Europe, as well as limited growth in the broader timeshare industry.

Free cash flow was robust in the quarter at $1.30 per share, a 26% increase from the first quarter of last year. As you know, our capital allocation philosophy is to invest in our businesses at attractive returns and then to return the cash to shareholders.

We continue delivering cash to shareholders again in the first quarter, repurchasing 3.6 million shares of our common stock and increasing our quarterly dividend by 53% to $0.23 per share. In addition, this morning we announce that our Board has approved an additional $750 million to be added to our share repurchase authorization.

Over the past few years we have achieved shareholder returns in excess of the industry and market benchmarks due to -- first, the strength of our largely fee-for-service business models; second, our proven ability to optimize all of our businesses through superior execution; third, our focus on growing free cash flow; and, finally, our capital allocation that includes an increasing dividend and the repurchase of our shares.

We are very proud of what we have achieved, but we know that we have much to accomplish. As people in our office will tell you, my question usually is what have you done for me lately? As management, it is our job to drive the growth of our business because a business without growth has diminishing value.

So let me tell you why I am optimistic about our prospects for this year and beyond. First, while we are cautious about Europe, we continue to see a global economic recovery in line with our expectations. We had two significant customer events earlier this month -- our global hotel convention and the American Resort Development Association, or ARDA, conference.

Our hotel convention, which is held every 18 months, brings together owners for all 15 of our widely-known lodging brands. More than 5,000 owners and managers, as well as 130 suppliers, were in attendance, and we were able to get a very hands-on read of the state of the global hotel industry.

Since our last conference in September 2010 there has been an obvious improvement in the mood and outlook of our franchisees and partners. Many of our suppliers saw increased order and lead activity, and almost without exception, the owners and managers I spoke with strongly felt that things were improving. Hotel owners are looking to invest in their hotels as well.

So in addition to the numbers we are seeing, this is great confirmation that for us the lodging and recovery is firmly established.

The mood was positive at the ARDA conference as well, but a bit measured as the small to medium developers continue to have limited access to capital. Attendance at over 2,500 was strong and we were encouraged by the number of new developers, both domestic and international. Interest in timeshare continues to grow around the world, which bodes well for RCI and Wyndham Vacation Ownership.

As I mentioned earlier, the current economic environment in Europe is challenging our efforts to grow our vacation rental businesses. We expect our European vacation rental business to remain stable overall due to the strength and resiliency of our portfolio of established brands and customer bases, as well as our strong, experienced management teams. First-quarter performance was consistent with these expectations and our full-year outlook for Europe remains unchanged.

Let me now spend a few moments giving you an update on progress in our business units in the first quarter.

Wyndham Hotel Group continues to make progress in executing its Apollo initiatives, which is a series of technology projects focused on improving our value proposition to franchisees. Our franchisees will be able to measure our results by the number of direct room nights we deliver to overall bookings, primarily through our online strategy. Our goal is to capture the maximum amount of online traffic and then convert these online visitors to staying guests.

Remember that the launch of our new hotel brand websites and improved content were the first step in our Apollo plan to drive more room nights through our online direct distribution channels. Preliminary results have exceeded our expectations with brand booking increases averaging over 10%.

As we discussed on the last call, in 2011 we piloted TripAdvisor ratings and reviews on WyndhamRewards.com. Industry research indicates that up to 50% of consumers will not book a hotel without reading a review. Making ratings and reviews readily available on our own brand sites ensures consumers don't have to leave our site to get that information and, ultimately, book with us.

We saw an approximate 30% increase in bookings during the pilot period. This past quarter we rolled out TripAdvisor to the majority of our websites and will be fully implemented by the end of May.

In conjunction with the rollout, we launched WynReview, a suite of tools and services designed to help our franchisees manage their online ratings and reviews. We expect our affiliation with TripAdvisor, one of the first in the industry, to drive conversions as well as support brand quality.

We are also excited about our new mobile websites. By the end of next year it is expected that more people will access the Internet using a mobile device than a computer. Research indicates that nearly 65% of mobile bookings are made on the day of arrival, many within five miles of the hotel. Based on the narrow booking window of our consumers, as well as the distribution of our hotels, we feel this represents a significant opportunity for us to capture the on-road connected traveler.

We have designed our mobile sites with the end user in mind, providing a robust interface along with geographic search capabilities. We have made great progress, and we believe we are among the leaders in the industry in these efforts.

In addition to important initiatives, like Apollo, that drive our core business, we are pursuing a worldwide growth strategy that leverages our strong and diverse brand portfolio as well as our global footprint. For example, last year we had great success in leveraging relationships to pen multi-unit deals and we expect an acceleration of those efforts this year. As we previously reported, to support the growth of our hotel system we are planning to provide mezzanine financing and other financial support over the next several years.

Now moving to Wyndham Exchange and Rentals, I want to take a moment to commend the Rentals team, which despite the headwinds in Europe and a disappointing ski season in the US, grew revenues 3% and transactions 2% organically. The challenges in Europe were felt most significantly at The Hoseasons Group in the UK, while Novasol, which is in Denmark, and Landal in the Netherlands continued to post solid results.

While it's too early to get a clear read on the summer season, bookings in the shoulder seasons are ahead of last year, which is an encouraging sign. But as I said earlier, our outlook for European rentals remains cautious for the year.

We continue to make significant strides in our vacation rentals integration, which is key to our strategy to build a strong North American platform and gain market share as well as improved margins in this rapidly growing industry.

In the second quarter, we expect to launch two significant initiatives. First, in North America we will consolidate 23 rental websites into a single improved site. Second, in Europe we will integrate the inventory and reservation platform of our UK cottages, parks, and lodges brands into a common property management system, a change that will enable further yield management and operational efficiencies.

RCI's commitment to providing the best tools in the industry to its members and affiliates was showcased at the ARDA convention. RCI was honored with 10 ARDA awards including the coveted ACE Excellence in Customer Service award.

Coming on the heels of the major enhancements to RCI.com over the past 18 months, including trading power of transparency and new online search tools, RCI continues to innovate with the introduction of several new programs, including online tour generation, which will provide affiliates with a new source of qualified sales prospects using RCI's robust platform for lead generation and sophisticated screening tools, and the timeshare online listing center, which is a social media monitoring command center providing our affiliates with a proactive service that protects and promotes their online brand reputations while improving customer service to our owners.

The strength of RCI's technology continues to pay off with online transaction penetration growing to over 40%, up more than 400 basis points from last year.

Now moving to Wyndham Vacation Ownership, which is always also a recognized industry innovator. Results were stellar at WVO with volume per guest increases of 10% and tour increases of 8%. We are seeing great results from our latest initiative to drive efficiencies, our credit prescreening program.

As you know, timeshare is a sold rather than a soft product and finding good prospects is key to our success so last year we introduce a proprietary credit-worthiness prescreening program. The rollout of this program is now effectively complete and it has increased our efficiency by identifying the most qualified prospects for our sales people.

We believe that the credit prescreening program was a meaningful contributor to the 10% lift on VPG and that this will be another game changer for us in the industry. Great innovation, focused management, and terrific execution deliver truly outstanding results at WVO.

Finally, we continue to make progress on the Wyndham asset affiliation model, or WAAM. Developer interest is strong and we recently signed our first WAAM agreement for our WorldMark by Wyndham product. Located in the South Mountain region of Arizona near Scottsdale, our fifth WAAM deal is a purpose-built timeshare project that will nicely complement our three existing Arizona locations within the WorldMark portfolio. We expect to start sales on this product in the fourth quarter.

And with that I will turn it over to Tom to review the financials. Tom?

Thanks, Steve. Let me start with some brief comments on the business overall and then add some perspective to the quarter's results.

First, I have a basic business philosophy that says success is never final. The results of this quarter are an outcome of the strategic initiatives in place at each business unit and the overall company initiatives that we continue to advance and refine over time.

We had a terrific quarter, as Steve said, with adjusted earnings per share coming in 36% ahead of first quarter 2011 and $0.04 above the top end of our guidance range due to the strong execution at each of our business units and the benefit of share repurchases.

Now, as you know, we are focused on growing our free cash flow and deploying it effectively to enhance shareholder value. Free cash flow increased to $193 million, or $1.30 per share, for the first three months in 2012 compared with $185 million, or $1.03 per share, during the same period in 2011. For the year we expect that our available cash flow, which includes proceeds from our debt offerings, will be approximately $1 billion.

We repurchased 3.6 million shares of stock in the first quarter of 2012, spending $150 million. Year-to-date through yesterday's market close, we have purchased a total of 4.4 million shares for $190 million. We continue to believe that share repurchase offers a compelling return, and with the $750 million increase, as of market close yesterday, we have $940 million available in our share repurchase program.

Our capital allocation policy has been consistent since our launch as a public company in August 2006. First, we will use our cash to invest in our businesses up to the point that the return is compelling. Second, we will pursue accretive fee-for-service acquisitions in our core businesses, such as Hotel and Vacation Rental. Then, finally, we will distribute cash to our shareholders in the form of dividends and share repurchases.

Now before we get to our operating performance for the quarter, let's review our recent capital markets activity. We completed a number of transactions and pushed out terms on our unsecured debt financings at record low interest rates. We believe that these actions strengthen our balance sheet and improve our liquidity position while maintaining an overall investment grade credit profile.

So, first, we completed a $650 million tender offer for a portion of our senior notes maturing in 2014 and 2016. Our 2014 notes carried a coupon rate of 9 7/8% and we were able to bring down our notes coming due in 2016 from $800 million to $357 million. These notes were replaced with the issuance of $950 million of senior unsecured notes maturing in five and 10 years with a weighted average coupon of 3.84%.

We also reduced our revolver borrowings by approximately $170 million. The combined impact of these transactions increased our unsecured debt outstanding by over $125 million. Now that is consistent with our plan to maintain leverage as our EBITDA increases.

We will use the extra funds for our strategic initiatives and share repurchases, consistent with our capital allocation policy. The debt repurchase resulted in a pretax charge of $106 million, which has been excluded from our first-quarter 2012 adjusted results. In addition, even with our $125 million increase in debt, our net interest expense will decrease by approximately $10 million in 2012, or $13 million on an annualized basis.

Turning to the ABS markets. Last month we announced a $450 million timeshare securitization with an advanced rate of 87.5% and a weighted average coupon of 3%, another record low.

As expected, the advanced rate was lower than our 2011 transactions as a direct result of our decision to opt for a lower overall coupon rate. Had we opted to issue a BB tranche, similar to our deals in 2011, our advance rate would have been higher, but so would our overall coupon rate. We believe we have hit the sweet spot of the current ABS markets, combining a record low coupon with a slightly lower, but still very attractive, advanced rate.

Now moving to the operational performance for the quarter, let's begin the segment review with our hotel group. Revenues were up 24% compared with the first quarter of 2011. The increase reflects RevPAR improvement, incremental revenue from the Wyndham Grand Hotel in Orlando, and higher revenue from licensing fees charged to the Company's Vacation Ownership business. The revenue also includes -- the revenue increase also includes a $10 million increase reporting clarification which had no impact on EBITDA.

Adjusted EBITDA increased 23%, largely reflecting RevPAR increases, the recently opened Orlando hotel and incremental intersegment licensing fees offset by higher marketing costs. System-wide RevPAR increased 7% in the first quarter, but domestic RevPAR improved 9%, reflecting roughly equal gains domestically in both occupancy and average daily rate. International RevPAR was up 3% led by favorable performance in our Asia-Pacific region, primarily China, while European RevPAR slowed somewhat.

We ended the quarter with approximately 609,300 hotels worldwide, flat compared to the same period last year. The pipeline at March 31 stood at nearly 108,200 rooms, up 6% over the last year. For the first quarter, we added over 220 new deals to the pipeline, a 12% increase compared with the first quarter of 2011.

Now let's take a look at Wyndham Exchange and Rentals. The business unit demonstrated great resiliency in the face of difficult economic environment in Europe and limited growth in the broader timeshare industry.

Segment revenues were $361 million in the first quarter compared to $356 million in the first quarter of 2011. Excluding acquisition-related revenues and the impact of foreign currency, revenues were flat.

Exchange revenues decreased 3% in the quarter, or 2% in constant currency, compared with the same period of 2011. This reflects a 2% decline in our average number of members due to the expected nonrenewal of an affiliation agreement which would have resulted in a situation that was no longer compelling for us.

Exchange revenue per member was flat in the quarter compared with the same period in 2011. Vacation rental revenues in the first quarter of 2012 were up 6% compared to the first quarter of 2011. Excluding the contributions from acquisitions and the net effect of foreign currency, Vacation Rental revenues increased 3%.

Organic transaction volumes in the first quarter of 2012 were up 2% compared with the first quarter of 2011 driven by the growth at Novasol and Landal GreenParks business, as well as our ResortQuest business in the US. This was partially offset by a decline in volume at our Hoseasons Group business in the UK due to weak economic conditions.

Average net price per rental was flat in the first quarter of 2012 compared to the prior year. Overall, adjusted EBITDA was flat in the quarter compared with the same period of 2011. Excluding the impact of acquisitions and foreign exchange, adjusted EBITDA was down 2%, reflecting the economic challenges in Europe.

Now moving on to Wyndham Vacation Ownership. This business delivered an outstanding quarter. Compared with the prior year, segment revenues increased 11%, reflecting increased VOI sales. Tours were up 8% driven by improving efficiencies and volume per guest was up a robust 10%, reflecting the positive impact from our credit prescreening program, improved close rates, and enhanced product offerings, which drove an increase in the average amount purchased per owner.

We expect VPG growth to moderate somewhat throughout the year as we lap the rollout of the credit prescreening program. Consistent with last year, we expect to add 27,000 new owners in 2012.

In our WAAM business commissions were up as we shifted the mix of sales to the new WAAM deals with higher commission rates.

Adjusted EBITDA in the first quarter 2012 was $103 million, up 7% compared with the first quarter of 2011. The improvement reflects the strong increase in VOI sales. Now if we were to exclude the higher intersegment licensing fee paid for the use of the Wyndham brand trade name, adjusted EBITDA would have been double-digit at 11%.

Consumer finance revenue was flat versus the same period last year. Delinquency and default rates in the portfolio continue to improve, although at a slower rate than we would like.

Write-offs during the first quarter were $80 million, down from $85 million a year ago. The provision for loan losses was $96 million compared with $79 million in the first quarter of 2011, primarily reflecting higher sales but also the limited improvement in portfolio performance. On a relative-to-sales basis the provision was flat compared to last year.

Finally, corporate expenses, as well as interest expense, were in line with our expectations and consistent with last year.

Now let me spend a few moments on guidance. Assuming no additional debt transactions we expect our interest expense to decline for the full year from $135 million to $140 million to $120 million to $125 million, reflecting our first-quarter capital market transactions. As a result of this lower interest expense and first-quarter share repurchases only, we are raising our full-year adjusted EPS guidance from $2.85 to $3 to $3 to $3.15.

The new adjusted EPS guidance is based on an expected diluted share count of 149 million shares, down from our original guidance of 153 million shares. Remember that our earnings per share guidance excludes any share repurchase beyond March 31. Our 2012 EBITDA, revenue, and driver guidance remain unchanged.

Finally, for the second quarter we expect earnings per share of $0.82 to $0.85 per share based on a diluted share count of 148 million shares.

With that I will turn the call back to Steve.

Thanks, Tom. Before we open the line for questions let me reiterate a point I made a little bit earlier in my discussion, and that is that this management team is proud but never satisfied with the Company's achievements. We still see many opportunities to take the Company to the next level and drive additional value for our shareholders.

This mindset is evident in the energy and momentum of each of our businesses and in the wide range of innovative initiatives across the Company. We continue to create and deliver new and better services for our business partners and customers, strengthen our consumer brands, and drive revenues, earnings, cash flow, and shareholder value.

With that, let's open the call for questions.

(Operator Instructions) Joe Greff.

Good morning, guys. Nice results. I have a question for you -- my first question relates to Vacation Ownership.

If I look at in the quarter growth VOI sales less WAAM, that was [$357] million, up nicely from $302 million, I believe, from last year. Yet when I look at the cost of Vacation Ownership Interests in your Table 2 those costs were down nicely, $28 million versus $32 million from a year ago. So I was hoping you could help us understand the drivers behind that.

I know that the $28 million to $32 million that is a net number net of recoveries, so I guess my question is what is driving that? Is that more recoveries or is it really the cost of timeshare to be built? Is that coming down, are things being built out more cheaply, or is it the combination of the two? If you can help us understand that that would be great.

Actually -- Joe, it's Steve -- it's a combination of the two plus a third factor that may have actually even been more impactful for the quarter and that was the pricing that we are achieving. As you know, we raise price on a frequent basis of the points that we are selling and we are also premium pricing points under some of the new kind of product offerings that we have with the new levels of ownership -- platinum and VIP ownership that we have; presidential ownership.

And so price is a portion of this that is adding to the other two, which is inventory that costs a little bit less and, as you mentioned, the recovery of some of the product that has been defaulted on by either people who have loans to us or HOA maintenance fees that are lacking payment.

Anything else, Tom? That covers the waterfront I think.

All right. Steve, for you, you talked about on some of the initiatives within the Hotel segment; over the next several years looking at providing mezzanine financing. Can you just talk about that a little bit in terms of how much capital you are thinking about on an annualized basis, and we do think you start to kind of start providing mezzanine financing to developers?

That is a great question, Joe, because we don't know. It really depends on opportunity. We are constantly out in the market looking to see if there are great transactions we can bring in to enhance essentially our Wyndham brand through possible use of mezzanine financing or other financial support initiatives.

We haven't done very many of them. We do them on a regular basis, so we are providing some development advances, but nothing that is so meaningful that we have called it out. A while ago we said that we were setting aside like $200 million for these type mezzanine and development advances just to kind of threw a number out there, but we haven't come close to using anywhere near that over the last couple of years. And I don't know what will come to look like in the future.

We feel like we have got great momentum with the Wyndham brand right now. We are seeing a lot more opportunities than we ever saw before to bring them in. And playing at that level, the upscale level, frankly, the table stakes were set before we entered that the upscale market which is there are development advance, mezzanine financing that you need to do in order to get those management contracts.

So I am sorry I don't have anything more precise to give you because, as you know, it's kind of tough to model opportunity of what will come up for us in the future.

Good enough. Thanks, guys.

Steven Kent.

Good morning. Couple questions. Can you just give us some sense -- in the beginning of your commentary you said that you were seeing improving travel trends and in the past when travel trends have improved you have sometimes accelerated your timeshare sales by design. Do you now feel though that you are in this right timeshare sales range, sort of balancing quality of customer, lack of CapEx need sort of with the right growth rate? So if you could answer that question.

Then, Tom, could you talk a little bit about -- the stock price has had a good move. Are you becoming more price sensitive on purchasing shares? Where do you come out on that?

So I will take the first one and then Tom can take the second one.

The improving travel trends converting into more timeshare sales is a positive. You are absolutely right, Steve. And it may have had some impact on the fact that our tour flow was up above our guidance range.

But also contributing to it is this credit prescreening program that we are using now and other kind of marketing efficiencies that we have brought to bear. So it's kind of hard to separate how many more people are we getting because of the improved travel.

We know that our timeshare resorts are slightly more occupied in 2011 than they were in 2012 and that trend seems to be working in our favor. More people in our timeshare resorts mean there are more people for us to talk to about adding more product to their portfolio, so buying more of our points.

So there is a benefit to it, Steve. It's an insightful question, but I can't tease apart the pieces because we have got a lot of things moving to try to drive efficiency in our sales process.

We are not pushing timeshare harder, though, to kind of part of your point. It's not like we have the accelerator down on full on the timeshare sales. As we have said, we would like to keep that to a mid single-digit grower.

Now we have been beating that continually because this is a horse that is running very fast and efficiently. We are not going to stop it or slow it down, but we are not feeding it any more capital. So the horse is running at a high speed without requiring any more capital -- we are happy with that -- and part is because of what you are talking about, the greater travel trends.

More people traveling to Orlando mean there is more people that we can meet at our marketing off-site offices to bring them in to take tours. But we limit the number of tours, so I wouldn't say it's an overwhelming factor. So kind of a long answer to a short question, but there is a lot involved in that dynamic that you identified.

Steve, do you want to weigh in to Steve's second question as well, which had to do with share price?

Sure. Obviously, the Board just approved another $750 million because we feel that there is still tremendous opportunity. If we look at what we have done so far with our share repurchase program, we have probably increased the value of what we have bought by 50% now that the stock has gone up a little bit from what we have paid for the stock that we have bought.

The stock has gone up a little bit. We still think it's undervalued, so we still have a lot of confidence. We will continue to deploy the capital to take advantage of what we think is a great investment opportunity.

Thanks.

Carlo Santarelli.

Thank you, good morning. I just had two questions. First, in the Lodging segment on the margins, could you guys kind of try and extrapolate the impact maybe the Wyndham brand had on segment margins in the quarter? Then I had one quick follow-up.

The bigger factor on margins had to do with incremental marketing expense, but it had really no discernible -- Bonnet Creek at this point had no discernible impact on margins at all, Carlo. The real impact on margins for the quarter, and we believe that our hotel business will have good margin progress by the end of the year, but at least at this quarter basis we had higher marketing spend than we had last year.

(multiple speakers) One hotel, Carlo, is not that large when you look at it relative to our overall revenue.

Right. So then in terms -- on the Vacation Ownership side, with tour flow up during the 1Q are you guys seeing any mix shift of new VOI sold versus reloads? Then could you clarify what you spent on inventory in the quarter?

I think we spent $8 million? $7 million. $7 million on inventory in the quarter, so the second question is easier. The first question had to do with are we changing the mix between upgrades and first-time buyers?

Are you seeing any kind of mix with tour flow up substantially as it was in the quarter?

No, it has remained consistent with what the recent trends have been.

Great, thank you.

It has been about 65%-ish upgrades and 35% new owners.

Great, thanks.

Bob LaFleur.

Good morning, guys. Just wanted to ask you about the acquisition environment in Vacation Rental, particularly in Europe, and wondering if the sluggish conditions over there actually create more acquisition opportunities for you. Maybe some longtime owners see this as a good opportunity to get out. Just wondering about your thoughts on that.

Bob, it's a great question. We have in the past seen more activity flow when markets have been stressed. Frankly, that is one of the reasons we are able to buy ResortQuest at the right price finally here in the US. When the Deepwater Horizon oil started hitting the Gulf Coast it put pressure on that business and we were able to get it at what we thought was the right price after having looked at it for a very long time.

In Europe we will have to see if the opportunities develop. We are constantly looking at deals, just to be clear, in Europe and in the US on the rental side, so it's not like we are out of the market. We are in the market and we just haven't found anything recently that has been in the right price zone for us to be able to move on.

If this brings the price zone down to a more reasonable level then we could be more active there, but we have nothing to report now.

So you are saying that there is stuff that is available they are just not at prices you like, or are there just not things available?

The former, not the latter. There are things available; just like in general M&A there is always things that are available. We are very disciplined about how we look at these deals. We don't move on a deal unless we think it's worthy of capital allocation.

Okay, thanks.

Chris Agnew.

Thank you very much. Good morning. Just another question on the rental business. I wonder if you could give us any color on booking trends; were they later this year versus previous years? And what is the sort of level of visibility you have looking into the summer, again compared to previous years?

Chris, as I said in my comments, we see the shoulder season performing fairly well. But when you talk about the summer, which you rightfully point out is the important part, that is really where our money is made is in the summer in the rental business, it's still too early to tell.

The booking windows have gotten shorter and shorter in Europe, like they have gotten in the US, basically driven by technology. Because so much information is available now, people wait later to meet their bookings and so we don't have great visibility into the summer yet. But the shoulder season is good; it's actually ahead of last year.

UK definitely, just to give a little more color, UK definitely is the most challenged of the markets over there, but probably the best performing market I would say is Denmark with the German consumer and the Spanish and Italian product that we have. So there are pockets of strength and pockets of weakness.

Frankly, as you know as well as any of us, Europe isn't a single entity; it's a collection of countries. So we see pluses and minuses throughout, but the most challenged is now in the UK.

Great, thanks. Then if I could follow up on something Tom mentioned on VPG pace. I think he said that it would moderate later in the year as you lapped the credit prescreening. I was just wondering if you could expand on that as sort of how that happens and when you actually start lapping it.

I think we will start to lap it in the third quarter, Chris. We introduced credit prescreen in the third quarter of last year, rolled it out in the fourth quarter. Some of the advantage that we are getting is related to credit prescreen so the benefit derived will be offset, that incremental benefit that we are getting in the first quarter and the second quarter would be offset.

Now it isn't the only driver of our VPG increase. We did make some product enhancements to our VIP product level, which we believe impacted our ability to close on transactions; a more desirable VIP package, more people wanted it. It enables our sales force to close more transactions.

Also, it resulted, as we understood it, because of the VIP program and package was more valuable, the price was raised for or the point levels were raised for what qualifies as a VIP qualifier. And that resulted in people spending more money to achieve that VIP status and that helped the average price per transaction. Those were the key drivers.

Frankly, the guys down in Orlando and the entire Vacation Ownership sales force has just performed at an exceedingly high level. We gave guidance of 2% to 5% VPG growth for the year. This came in this quarter at 8%.

That is monster -- I am sorry 10%; tour flows up 8%. That is monster increase and kudos to them for what they have accomplished. They continue to be innovative and pushing the envelope, so they continue to basically outperform even our expectations.

And then just to clarify, you have maintained your guidance for tour flow in VPG for the full year?

I didn't hear the question, Chris. What was it?

I think you said on the call that you are maintaining your guidance for VPG in tour flow for the rest of the year --?

All of our operational drivers we are maintaining our guidance, yes.

First quarter is a little early to call a big change, but it was a great quarter.

Okay, great. Thank you.

Harry Curtis.

Good morning. Couple of quick questions. First of all, tax rate was 30% based on your guidance. It has typically been in the higher 30%s. What are your thoughts on an annualized number?

We are holding to our guidance, Harry, but that lower first-quarter rate had to do with the charge related to the refinancing. So we will take a look at it for subsequent quarters.

Okay. Second question is I was surprised that your timeshare inventory didn't decline a bit. Given the level of sales, I would have thought that it would have come down maybe $100 million or so. If you could walk us through the math as to why that really didn't change much.

Harry, last year, which we viewed as a highly successful year in 2011, our inventory levels came down $80 million for the full year. And so our guidance has been, as we have described, sort of the longer-term trends on our balance sheet that the expectation should be over the next few years that our inventory levels for the year will decline comparably to what happened in 2011.

And so our inventory decline was in line with what our expectations were internally.

Last question, you really outperformed well in the economy segment in your Lodging business. Travel was up about 6.7%. Can you walk us through the reasons for that outperformance?

We will give you -- Harry, this is Steve. We will give you some of the thoughts that we think are contributing to it. Part of it is the Apollo initiatives that we have been talking about for about two years now.

We have dramatically improved our websites. We were behind the curve before; now we are right up on it. I think that definitely helped our performance.

Plus the fact that we have been, and you see it in our numbers, frankly, we have been weeding out some of the weaker franchisees who have not been reinvesting in their properties. So our unit growth has not been what we have wanted. We still feel comfortable with our guidance for this year with the unit growth, but over the last couple of years we have not had the unit growth that we would historically have seen. And that is in part because we have been terminating a lot of products.

We have been bringing in a lot, we have had a lot of gross additions, but we have been terminating a lot. So I think those two factors, and there is many others that probably contributed to it, but I think definitely the Apollo initiative is having an impact. We expect it to have an impact on RevPAR. We expect it to have an impact on the conversion rate of people coming to our websites and then booking with us.

So that is definitely a factor and we expect that to continue, and that is why, frankly, when we gave guidance for 2012 our guidance was ahead of where some of our peers were in this sector, as well as where some of the industry pundits were. It's because we think we are going to start seeing the impact of that Apollo initiative start having true bottom-line positive impact.

And when you think about your pipeline, because of that outperformance is it having a positive impact on applications for conversions?

Our pipeline is up. Part of the up this quarter in pipeline was international, but there is good flow of applications. We have been doing very well, frankly, during the downturn. We have been chasing deals and pulling a lot of the deals in.

I would love it if it got easier, but I am sure our franchise development guys would tell me it's not any easier than it was before. But I think people want to be with winners and having good momentum is a good thing to have.

All right, that is great. Thanks a lot.

(Operator Instructions) Michael Millman.

Thank you. Could you give us your thoughts regarding the increasing -- the environment which you are seeing increasing couponing, OTAs with increasing last-minute deals, and the impact on not only the hotel business but also the rental business in both, I guess, pricing and maybe promotions? Thank you.

Mike, you ask every quarter about the OTA business. Not our business, but our perception hasn't really changed. We do business with the OTAs. We put product through them. We view them as a partner.

The last-minute deal making that OTAs make, frankly, a lot of our hotels do the same thing if they are not filling and they feel like there is opportunities to improve their yield. So I don't think that there is anything that we have seen in what they are doing that is really much different from what we have seen in the past. I haven't heard our team in the Hotel Group mention them as being a detrimental factor at all.

Anybody else, Shay?

At this time, sir, I show no further questions.

Okay. Well, thank you all very much for joining us. We look forward to talking to you about the second quarter and have a wonderful spring. Thanks.

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