Travel + Leisure Co (TNL) 2012 Q2 法說會逐字稿

Welcome to the Wyndham Worldwide second-quarter earnings conference call. Your lines have been placed on listen-only until the question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations. 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 want to remind you that our remarks today contain forward-looking information. This information is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-Q, filed April 25, 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, and good morning, everyone. I am pleased to report we had another great quarter as we continue to execute at a high level in an uncertain global economic environment. Second-quarter revenues increased by over 4% and adjusted EBITDA was up over 10%. Adjusted EPS was up 36% and came in $0.02 above the top end of our guidance range.

Wyndham Hotel Group and Wyndham Vacation Ownership each delivered double-digit EBITDA growth. I am also pleased with the efforts of our Wyndham Exchange & Rental teams, which was in line with our expectations, producing stable results despite the economic challenges in Europe and limited growth in the broader timeshare industry.

We continue to deploy capital to drive value for our shareholders. So far this year, we've spent nearly $70 million on dividends and $400 million on share repurchases. Our second-quarter weighted average diluted share count decreased by 23 million from the same period last year.

From our inception as a public company on August 1, 2006 through yesterday, we repurchased 73.8 million shares at an average price of $32.60 per share.

Equally important for long-term shareholder value is our ongoing commitment to invest in our business to drive earnings growth and increased cash flow in the years to come. Our baseline sustainable free cash flow guidance of $600 million to $700 million assumes CapEx of approximately $200 million, about half of which is used to fund growth projects, such as Apollo in our hotel business, RCI.com and vacation rentals reservation and website integration in our Exchange & Rental business, and Voyager, a program to optimize our reservation system in our vacation ownership business.

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

Now moving to our business unit review. The Wyndham Hotel Group had another great quarter, with adjusted EBITDA growth of 12% and domestic RevPAR gains of nearly 8%. We made some significant development headway in the second quarter, signing a deal with Hospitality Properties Trust, or HPT, for a 20-hotel portfolio comprising 3000 rooms throughout the US. Four of the properties will be rebranded as Wyndham Hotels, with the remaining 16 properties to be rebranded Hawthorn Suites.

The conversions are scheduled to occur next week, providing growth for two of our brands and adding 20 properties to our managed portfolio. We are pleased to partner with HPT and hope to work more closely with them in the years to come. We look forward to updating you on similar deals going forward.

We are aggressively pursuing many tracks to grow the total number of hotel rooms in our system, including investing in our brand's market position, focusing on multi-deal contracts, both for conversion and new construction, and increasing retention of our existing franchisees. Central to all of our strategies is improving our system contribution and the resulting value proposition to our franchisees.

We will achieve this primarily through the Apollo initiatives which we have spoken about before. We've made significant progress over the past two years with one of our key Apollo initiatives, brand.com. Revenue and room nights across the brand portfolio are up approximately 20% from this channel year to date, in part due to improved content and Web functionality.

On the international front, over the next four years -- excuse me -- over the next five years, we expect annual system size growth of 8% in EMEA, 15% in Latin America, and our highest growth market will be APAC, where we expect our system size to almost double by 2016. This is from an exceptionally strong base in the region, particularly in China, where we have close to 60,000 rooms. Our long-term vision is to have a footprint in China that rivals our presence in the US.

We are also seeking to grow in India and other countries such as Singapore and Thailand on an opportunistic basis.

Of course brand equity is a foundation for growth. We are especially pleased with our rankings this year in Consumer Reports' annual travel issue, where Microtel and Wingate were ranked number one in their segments. In the budget segment, Microtel topped the list for the third time, and was joined in the top five by Super 8 and Days Inn.

Now moving to Wyndham Exchange & Rental. In constant currency, rental revenues in Europe for the quarter were flat compared with the second quarter of last year. This was a significant accomplishment given the tough macroeconomic conditions. Year to date, European vacation rental revenues increased by 1%. As I've said before, we've assembled a collection of the best vacation rental product in the right locations, which provide great value to a variety of consumer segments throughout the many different European markets in which we operate.

We continue to be confident in the resiliency of this business because of several factors -- the outstanding value proposition of our products; the strength of our brands and our management teams; the concentration of our feeder markets in northern European economies; our ability to retain homeowners and attract homes from owners who are looking to rent for rental income; the fact that many of our properties are drive-to destinations; and the operating flexibility of our mostly fee-for-service business model.

In total, approximately 95% of our European vacation rental volume comes from our Landal GreenParks, Hoseasons and Novasol brands. Each brand is a market leader, and the majority of the consumers are driving to the product. Nearly 90% of Landal consumers are from the Netherlands and Germany, while Novasol generates 80% of its customers from Germany and Scandinavia. For our British Hoseason cottage and parks business, over 95% of customers are from the UK.

Our vacation rentals are an outstanding value and represent an affordable family vacation option. To put this value proposition in perspective, in 2011, our European vacation rental business had an average daily rate of $140. This is for inventory that is predominately single-family homes with multiple bedrooms, living space and full kitchens. This compares to the same $140 average daily rate for a single hotel room in Europe.

On the technology side in Europe, we launched a new integrated reservation platform for our UK cottage and parks brands, enabling greater efficiency in our internal process, as well as our ability to drive inventory utilization.

Beyond Europe, in the second quarter, our North American rental teams continued their strategic focus on innovation, with key accomplishments including the consolidation of 23 separate ResortQuest websites into a single enhanced platform under the Wyndham Vacation Rentals brand umbrella.

At RCI, our business development teams have added over 75 resorts to our system through midyear. We announced several outstanding new affiliations, including The Baha Mar Residence Club, which will provide RCI members with access to more than 300 luxury Caribbean units managed by such world-class brands as Rosewood and Mondrian.

On the technology front, we completed another successful release of RCI.com, which included an upgrade to an innovative click-to-chat functionality with multiple language support. From when we started the project in the first quarter of 2008 through the end of 2012, we expect our migration to online transactions to improve our Exchange & Rentals margin by over 225 basis points.

The enhanced online experience also increases the overall value proposition to our members through greater functionality and better online content. The result is that online transactions in the second quarter were 41% of total transactions compared with 13% when we began the project four years ago.

Finally, let's turn to vacation ownership. WVO continued to achieve stellar results, with revenue increasing 5% and EBITDA increasing 15%. Tour flow and volume per guest remained strong, aided by our credit prescreening tool.

In addition to achieving significant efficiencies, the team has continued to refine its business model to support our focus on free cash flow. A first step was establishing the Wyndham Asset Affiliation Model, or WAAM, which positions us to offer turnkey solutions for developers or banks holding inventory, which we sell for a fee through our industry-leading sales and marketing channels.

In 2011, with healthy conditions in the ABS market, we introduced WAAM 2.0, where we not only sell third-party inventory, but also offer consumer loans. 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 late last year and began sales in the second quarter of 2012. Tom will walk you through the accounting on this later.

Finally, regarding a corporate matter. As you may know, we are in litigation with the FTC regarding Wyndham Hotels' data security and privacy practices in relation to data breaches that occurred from 2008 to 2010, in which a limited amount of consumer information at some Wyndham Hotels and Resort branded properties may have been accessed.

Let me first say that we've cooperated fully with the FTC in its investigation of these data breaches and that safeguarding consumer information is a priority for us. We believe the FTC's claims are without merit, and we will vigorously defend our position. Regardless, we do not believe that the outcome of the litigation will have a material effect on our Company.

Now before I turn the call over to Tom, I want to note a special anniversary. Next week, we will celebrate the sixth-year anniversary of our listing on the New York Stock Exchange. I would like to take a moment to evaluate our performance for shareholders over those years.

Between dividends and share repurchases, we have returned nearly $2.7 billion to our shareholders through the end of the second quarter. The cumulative impact of our share repurchase activity over this period has been a 29% reduction in our share count. And our total return to shareholders, including dividends, has been 81% compared with 21% for the S&P 500. Never being satisfied, we know we still have great opportunities to build on these accomplishments. Tom.

Thank you, Steve. Let me start with brief comments on the overall quarterly results and then provide some detail into business unit performance and guidance.

As we've said in the past, our results are the outcome of sound strategies that we continue to advance and refine over time, strong operational execution at each of our business units and disciplined capital allocation. Overall, our second-quarter results again were strong, with adjusted earnings per share coming in 36% above the same period in 2011 for the second quarter in a row and $0.02 above the top end of our guidance range.

These results reflect solid performance in our lodging and vacation ownership businesses and a meaningful impact from our ongoing share repurchase program.

We continue to generate high levels of free cash flow, and consistent with our capital allocation strategy, return cash to shareholders in the form of dividends and share repurchases, while actively seeking value-enhancing acquisition in our core businesses.

In the first six months of 2012, free cash flow increased to $567 million, or $3.83 per share, compared with $544 million, or $3.13 per share, during the same period in 2011, excluding the impact of $51 million of VAT refund received last year.

We expect that our available cash for the year, which includes net proceeds from ABS financings and assumes we'll calibrate leverage to our increased EBITDA, will be approximately $1 billion.

With our strong free cash flow, we repurchased 3.8 million shares of stock in the second quarter of 2012 for a total of $190 million. Taking into account the additional 1.1 million shares purchased thus far during quarter three, we have $733 million remaining in our current share repurchase authorization.

Now moving to operating performance for the quarter, let's start with Wyndham Hotel Group. Revenues were up 23% and adjusted EBITDA increased 12% compared with the second quarter of 2011, reflecting an increase in franchise royalties and higher intersegment fees for the use of the Wyndham brand. Excluding the intersegment fees, adjusted EBITDA increased 5%.

The revenue increase also included $10 million of reporting reclassifications and $11 million of incremental global franchise conference fees, both of which were fully offset by expenses.

Domestic RevPAR improved by 8% in the second quarter, while systemwide RevPAR increased 5%. North American RevPAR improvement was driven primarily by an increase in the average daily rate, further evidence of a positive trend in pricing power in our segments. This bodes well for continued lodging recovery.

Internationally, RevPAR was up 2% in constant currency.

The system size was essentially unchanged, with gross openings of 15,500 and terminations of 16,400. Openings were in line with expectations, while terminations were higher than expected as a result of some proactive steps on our part to address underperforming franchisees. Note that we expect 3022 rooms from the HPT transaction that Steve mentioned earlier to enter the system on August 1, and that overall pipeline activity is up 3% year-over-year and 5% sequentially.

Now let's look at Wyndham Exchange & Rentals. Again this quarter, our Exchange & Rentals business demonstrated solid performance in the face of a difficult European macroeconomic environment and limited growth in the broader timeshare industry. As Steve articulated, we have great confidence in both our Exchange & Rental businesses based on the quality of the management teams, product offerings and our mostly fee-for-service business models.

Excluding the impact of foreign currency and acquisitions, revenues for the quarter were flat compared to the same period 2011. Excluding acquisitions and foreign currency, adjusted EBITDA was up 5%, or flat if you exclude a $4 million claim settlement related to the Gulf oil spill.

In constant currency, second-quarter vacation exchange revenues were flat. Exchange revenue per member increased by 2% in constant currency compared with the same period in 2011, primarily due to higher exchange fees. Average number of members declined 2% in the quarter due to the expected nonrenewal of an affiliation agreement at the beginning of 2012.

Vacation rental revenues were down $10 million for the quarter, unfavorably impacted by the stronger US dollar. If you were to exclude the impact from acquisitions and the net effect of foreign currency, vacation rental revenues were flat.

Transaction volumes were down 3% due to weak economic conditions in Europe, offset by a 4% increase in the average net price per rental, primarily driven by a higher yield at our Hoseasons Group in the UK and Landal GreenParks business in Holland.

Now moving on to Wyndham Vacation Ownership, the business again delivered another outstanding quarter. Compared to the prior year, segment revenues increased by $29 million or 5%, primarily due to the positive impacts of higher VPG and increased tour flow.

Year-over-year gross VOI sales increased by $48 million or 12%. Year to date, we have brought 13,500 new owners into the system, an increase of 10% over the same period in 2011 and consistent with our annual goal of 27,000 new owners.

WAAM 1.0 volume was $18 million for the quarter. In addition, as Steve mentioned earlier, we began selling WAAM 2.0 products in June, with volume of $12 million by quarter end. As a reminder, the accounting for WAAM 2.0 transactions will run inventory through our balance sheet on a just-in-time basis. So we will record the inventory on the balance sheet at registration, but pay for the inventory shortly after each sales transaction.

Note that at the end of the second quarter, approximately $16 million of inventory on the balance sheet was related to WAAM 2.0.

WAAM 2.0 enables us to capture the attractive consumer finance EBITDA, while optimizing the balance sheet and cash flow. Combined, WAAM 1.0 and WAAM 2.0 revenues showed a 58% increase over the same period of 2011. Consistent with our commitment to provide timely disclosures, we have added the breakout of WAAM 1.0 and WAAM 2.0 to Tables three and Table nine of our press release.

Adjusted EBITDA for the quarter was $150 million, up 15% compared with the second 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 name, adjusted EBITDA actually increases 19%.

Consumer-financed revenue was flat versus the same period last year. Write-offs during the second quarter were $77 million, slightly up from the $75 million a year ago. The provision for loan losses was $100 million compared with $80 million in the second quarter of 2011, primarily reflecting higher sales and limited improvement in portfolio performance.

Now, while the portfolio remains strong overall, we had hoped to see more improvement in performance by now. We've looked closely at the limited improvement in portfolio performance over the past few months and attribute it primarily to the pace and strength of the economic recovery. But while there is nothing we can do about the economy, we have dramatically improved our buyer profile.

In addition, we believe there are two other factors at play here. First, recent portfolio performance has been affected by an organized third-party scam, where fraudulent representatives were calling our customers and encouraging them to default on their loans. We have worked with authorities and these parties have been indicted. We believe this issue is now under control.

Second, we are seeing an impact from some owners holding balances higher than historic norms. Typically loan performance diminishes as loan balances increase, and these loans are affecting overall portfolio performance. We are putting plans in place to mitigate the effect of these very manageable issues and will keep you updated as we progress.

The ABS capital markets remain robust. On July 19, we closed a $300 million timeshare securitization with an advanced rate of 90% and a weighted-average coupon of 2.66%, another great execution. We couldn't be happier with the results.

Finally, corporate expenses as well as interest expense were in line with our expectations.

Just having completed our five-year plan review process, we are solidly on course with our long-term goals. We are committed to EBITDA growth of 6% to 8%, with high single to low double-digit growth in the Hotel Group and mid-single-digit growth in the Exchange & Rentals Group and Wyndham Vacation Ownership.

We expect sustainable annual free cash flow of $600 million to $700 million. We remain committed to an investment-grade profile which will enable us to increase debt by $300 million for every $100 million that we add in EBITDA. The result is $1 billion of available cash to deploy each year to increase shareholder value.

Two years ago, we shared that the deployment of that cash through M&A and share repurchase would result in compound annual EPS growth of between 17% and 21% over the subsequent five-year period. We are well on our way to achieving and exceeding that goal.

Now finally, I would like to spend a few moments on guidance. Full-year revenue guidance is unchanged. We are, however, raising the lower end of EBITDA guidance with a new range of $1,040,000,000 to $1,055,000,000.

In the business units, we expect vacation ownership and lodging revenues and adjusted EBITDA to be at the high end of their respective ranges. We expect Exchange & Rentals revenues to be at the low end of its range, and adjusted EBITDA to be at the midpoint of its range. Also, we expect corporate expense to be at the high end of the numeric range, while depreciation and amortization will be at the low end of the numeric range.

Business unit driver guidance remains unchanged. We are raising our full-year adjusted EPS guidance to $3.10 to $3.20; our prior guidance was $3.00 to $3.15. The new adjusted EPS guidance is based on an expected diluted share count of 147 million shares. Remember that our earnings per share guidance excludes any share repurchase beyond June 30, while some analysts' estimates factor in estimated repurchases in the second half of the year.

For the third quarter, we expect earnings per share to be $1.07 to $1.10. This is below the consensus, reflecting differences in both share repurchase assumptions and seasonality between the third and fourth quarters. However, our guidance for the second half of the year is consistent with Street expectations.

With that, I will turn the call back to Steve.

Thanks, Tom. In summary, this was another excellent quarter in what has become a very strong track record of success. We have accomplished much during the last six years, a period that has included severe financial and economic upheaval and ongoing economic uncertainty.

As I have said many times, we have a phenomenal business model with strong brands and outstanding associates executing our strategies. And I know these attributes will serve us well, fueling our growth and shareholder value for years to come.

With that, Shirley, we'll take any questions.

Joe Greff.

Joe Greff, JP Morgan. A few questions here. Steve, can you -- and Tom, can you talk about how ripe the current environment is for acquisitions? Obviously in the past, stress has created some opportunities that you have acted on. Can you talk about what you are seeing currently, how ripe the environment is for opportunities for you. And then I have a couple follow-ups.

Sure. Well, the acquisition pipeline, whether the market is stressed or not stressed, has been fairly consistent. We've probably seen a little more activity recently, more deals seem to be coming to market, but it is not a dramatic change in the volume of our activity. And really kind of what has to change is the expectation of the other side, because we are very disciplined. We are not going to chase anything. So if deals don't make sense, they are not going to fit into our plan. But I would probably characterize it as the pipeline is a little bit stronger than it was last year at this time.

Okay, great. Then can you talk about your VPG expectations for the second half? And then when you look back at the second quarter, was there a difference between the beginning of the second quarter versus the end of the second quarter? Was it stronger in the earlier part of the second quarter and tapered off at the end of the second quarter?

You are saying of this year, did VPG in the second quarter -- was there any sort of trending inter-quarter, is that your question?

Yes, correct.

Okay. I don't believe so. I think it was pretty consistent throughout the quarter, but --.

Correct. And we remain -- I think our guidance is 5% to 8% -- 2% to 5%, apologize -- 2% to 5%. We think it is likely that we are going to come in close to the top end of the range. But we don't expect any significant change in the second quarter than we had in the first quarter on VPG.

Great. Thank you.

And as we've talked about before, Joe -- you know this obviously -- tour flow and VPG kind of go together. We could have very few tours and a very high VPG and not be happy with it. So it is a bit of a balancing act.

But that group down there has done just a spectacular job of driving tour flow and the quality of the tour flow that is coming in. And they are very adaptable. They adjust to circumstances as they arise.

And then my final question, the HPT deal, can you talk about what your expectations are for fee contributions in the Hotel Group for the second half of this year, I guess August 1 going forward? And maybe what that run rate is on an annualized basis for year one? Thank you. That's it for me.

It is 20 hotels, so it is not going to move the needle dramatically. It is a managed deal, so we will be getting management fees for those 20 properties. It is positive, but I wouldn't -- we are not adjusting our numbers for anything that is coming in. In fact, in our rooms guidance, because we've been working on this for quite some time, this basically was built into our rooms guidance, and is part of the reason that we are comfortable that we are going to get the growth that we've been talking about during the year to deliver in the second half -- through the second half of the year by December 31.

Steve Kent.

Steve Kent with Goldman Sachs. Just following on a little bit on that, just on the vacation rental business, I know that you mentioned to me that business actually has held up very well. Was wondering again sort of through the quarter whether there was any change there, and especially on the European side.

I guess I would note that it does look like the average price per vacation rental and vacation rental transactions did look like it declined a little bit.

And then separately, maybe for Tom, on the securitization market, it seems very strong. Is that helping other timeshare developers accelerate their sales, which could then boost the old RCI membership business?

I'll let Tom address the ABS part of the question. I will start to tackle the European rental question. Again, looking within the quarter -- because I think that was your first question -- did we see any trending -- within markets, we do see trending every month and every week, and that is because of weather. The weather has been miserable. For those who watched the British Open recently, the announcers just kept talking about how miserable the weather has been over there. And we never complain about the weather, but that does have an impact.

So when you see trending, the economy has something to do with it, but the weather does as well, because people are driving to these locations. So do we see any trending? Steve, I would not say that there was any trending that I would say was meaningful. We saw pockets that were stronger as the period went on. We saw pockets that were a little bit weaker. But nothing that I would say was giving us any reason to pause, frankly.

And with respect to the pricing over there, I think if you take out the FX impact, you will actually see that the average price increased about 4%. So that business definitely is being impacted by foreign currency translation.

We feel really good about how those brands performed over there. Management did a terrific job. We didn't panic and try to drop price at all. They held price and the transaction volume picked up and we ended up the quarter very strong.

And I will make one comment, Steve, is -- I don't know if this was in your question or not -- but you did ask me the last quarter. Looking into the -- because we have pretty good booking visibility into the summer for the rental business, and we feel it is pretty consistent with what we've seen so far, that we are not going to see a huge uptick, but we are not seeing any decline that we think is meaningful. I think we will be stable in that business, just as we have been calling for all year long.

Steve, I would just add to Steve Holmes' comments that we have seen a compression in the booking window. But as Steve said, we have good visibility into the booking trends for our key period, and we are optimistic that we will deliver what we've promised we are going to deliver in this business.

I think your question around the ABS question, if I heard it correctly, was have things gotten so robust that others in the timeshare industry can access the market as well. Was that the nature of your question, Steve?

Right, Tom. And then in turn, that would be a positive for you, because then those customers would want to be part of the RCI network.

We haven't seen that level of openness in the ABS market at this point. We are regular participants in issuing ABS debt. The execution on this last transaction, the results on this last transaction were as good as any results we've ever had. But we don't see it at this point necessarily carrying forward to smaller timeshare developers. We are trying to aid in any way we can to accelerate that process, but it is not readily apparent that the market is open for that level of developer.

Okay, thank you.

Beyond what we previously talked about, Steve, which is there was two groups that got deals done, I think, in the first quarter. But in the second quarter, there was no new product that came in. But two groups that had not historically been regular issuers in the ABS market did access in the first quarter.

Carlo Santarelli.

Carlo Santarelli, Deutsche Bank. Hope all is well. Just with respect to your VOI inventory, could you guys maybe provide a bit more granularity on how you bridged the gap between the last quarter and this quarter as it relates to your build cost, obviously your COGS and recoveries?

Carlo, I'm not sure -- on the first half of the year, inventory has come down around $40 million to $50 million on inventory. Your specific question has to do with bridging between quarters?

Yes, exactly, between the first quarter and the second quarter, and kind of how much you spent to build inventory in the 2Q, as obviously the levels have come down a little bit.

I think that is a little more granularity than we'll cover. We will talk to you off-line about that if we could, Carlo.

Yes, no problem, guys. Then if you wouldn't mind, when you look at your domestic RevPAR, if we were to exclude Orlando, how would you guys kind of have that tracking?

For all of our brands, you are saying, across the board?

Yes.

Okay. I think we have seen some regional strength and weakness, without a doubt. The Southeast was a little bit weaker -- probably just domestic here. Domestic Southeast was a little bit weaker this quarter than some of the other areas.

But I don't see anything there that I would say, wow, that is a big aha. Again -- and we don't use weather as an excuse, but there was some weather-related conditions in the Southeast during the second quarter which probably impacted people's travel patterns. We saw it on the panhandle of Florida. We also saw it in Florida in general. But Orlando has been strong. Our hotel down there, the Bonnet Creek property that we own, is doing very well.

Okay, great. That's helpful.

Patrick Scholes.

This is Patrick Scholes from SunTrust Robinson Humphrey. Just a couple questions for you. On your current $1.1 billion of inventory, in your view, if you weren't to purchase or build anything new, how many years do you think that would last you at this time?

We would have to purchase, as we've said in the past, Patrick, around $150 million a year to finish some inventory on our balance sheet. But we believe that investment, which we've talked about in the past, plus what is on our balance sheet, would give us the equivalent of four to five years' worth of inventory.

This is Steve. I feel that there is probably more than that, personally. I know four to five is kind of where we come out and that is what we put in the Q, and that is arithmetically where you end up. But we do take product back from people. We do end up increasing our WAAM participation over the last couple of quarters. In fact, as Tom mentioned, that increased from Q2 last year to Q3 this year. So I think we probably have more than four to five years personally. But that is arithmetically where you come out.

And to Carlo's question before, we spent in the second quarter about $23 million on inventory -- so, in that neighborhood.

Okay. Is it a fair assumption to say with that four to five years, that at least over the next one to two years, your target of [$150 million, $175 million] for inventory spend, that is still for the next two years going to be your target?

Absolutely, yes. Probably the next few years and beyond.

Okay. And then just two more questions here. You talked about consumer finance revenues were flat year-over-year, though overall revenues for the segment were up. Is that because new buyers, just a lower propensity to borrow, or are you continuing to tighten the credit standards on that?

Overall receivables are down from where they were last year. It is a combination of all of the above, really.

Okay. Lastly here, in the lodging segment, you had higher intersegment licensing fees for the use of the Wyndham brand trade name. Can you just give me a little more color on exactly what that is? Is that a one-time gain?

No, Patrick, it is the fee that is charged by our Hotel Group, which owns the intellectual property of the Wyndham, to our timeshare and Exchange Rental businesses. It is much a smaller number for Exchange & Rentals. But for the timeshare business, there is an intersegment charge, and it's an ongoing charge.

Okay, great. That's all. Thanks.

Patrick, we've always had that charge. It was increased in part as a result of -- frankly, of the Marriott Vacation spinoff. They had a value that they were attributing to the brand, and so our property -- our intellectual property people, in looking at it and having third parties look at it, felt that we were probably, frankly, undercharging for the use of the brand. And obviously, it is a valuable asset and we want to make sure it is well-protected.

Understood. Thank you for the color.

(Operator Instructions) Christopher Agnew.

Thanks very much. Christopher Agnew, MKM Partners. Good morning. First question I wanted to ask about vacation ownership. And your tour growth slowed sequentially from the first quarter, despite an easier comp. And to hit a high end of your tour flow guidance for the full year, assuming it is unchanged, would show quite a steep deceleration in the second half. I was just wondering if there was any specific thought process behind that.

No, we don't see anything that would indicate the tour flow would be changing dramatically and that there would be a drop-off. I think that with tour flow, it is a -- as we talked about before, it is a manageable undertaking for us. We've got great marketing programs that drive the tour flow, great partners who are driving tour flow in. And we can kind of turn the spigot on and off as it is needed.

And so, no, we feel very comfortable with the guidance that we've given, and we have been coming in a little bit ahead of the guidance. I think -- what was it -- like 1% to 4% was our guidance for the -- and so we are comfortable with that range. We will probably be on the top end of it.

Okay, thanks. And Steve, if you could maybe expand a little on the strategy for driving growth in APAC. Are your expectations to take all brands, maybe think about China in particular? And is it a franchising strategy? Would you look at some management? And are these master franchise agreements? Thanks.

Sure. Chris, it is not all the brands. We have taken many of the brands over, but not all the brands over to APAC. In fact, the head of our Hotel Group, Eric Danziger, is over in China this week and -- was there last week and he is there this week, as well, and down in Australia.

So it is a high level of focus for us. We have both managed agreements with the Wyndham brand, and in some cases Ramada, where they are four-star, full-service properties. We have master franchise agreements for both Days Inn and Super 8 in China. And then we have direct franchising relationships with the other brands. And so it really is -- it is an amalgamation of different approaches.

I think -- for the most part, I think our master license agreement for Super 8 is working extremely well. The brand has grown rapidly over there. And so we are comfortable with that model for Super 8. And we will evaluate the other models as we move forward and find the one that works best. We expect to see a relatively significant increase in our development business, development group over there over the next three or four years, and that will impact obviously our growth in that market.

Excellent. Thank you. That's it for me.

Nikhil Bhalla.

This is Nikhil Bhalla from FBR Capital Markets. I have a question on -- just looking at your dividend payout as a percentage of your net income, obviously it is a much lower number, 30% or so. At what point do you start to favor more dividend payout and that as a way of returning cash to shareholders, rather than just share repurchases? Thank you.

Thanks for the question. We've increased our dividend dramatically over the last three years.

Yes, you have.

I'm not sure what the percentage is, but it is big.

We tripled it two years ago. We increased it by 25% last year, and then this year, we increased it by 53%.

50%. So we've increased it obviously dramatically. And our stated intent is that we will increase it in line with the growth of our earnings. And that obviously is enhanced by the fact we don't have as many shares outstanding. So -- because we are buying back shares.

So it means the dividend grows more rapidly than our earnings growth does. And we evaluate this on a regular basis with our Board, and stay tuned. We will be looking at it going forward.

Sounds good. Just a follow-up question on Europe. Did you see any impact or any movements due to the Pentecost holidays? I believe that impacted Europe both in May and June. And then final thoughts on any positive impact from Olympics. Thank you.

I'll take the Olympics one. I'll leave Tom to answer the Pentecostal one. The Olympics, we are not really seeing much of anything. It's really kind of a jump ball in most people's mind about what kind of the impact the Olympics, which start on Friday, will have with the market over there. The summer is a busy travel time in the UK as it is, and we are not seeing anything that would suggest that the Olympics are having a big impact. Did you hear anything about the --?

About Pentecost? No, I didn't. We didn't see -- there wasn't a trend that we can discern.

Okay, thank you very much.

Harry Curtis.

Nomura. A couple of quick questions. First of all, I'm just trying to understand the math behind the RevPAR a little bit better. Because if international in a constant currency was up 2% and the US or domestic was up 8%, it sounds like there was -- there must have been a drag somewhere, probably currency. How big a currency drag was there in the quarter?

Well, Harry, it was -- first off, let's explain the international number; then we will answer the currency number for a second. The international number really is a mix effect. And that is our largest growing market, China, also has a much lower RevPAR than some of our more established international markets. And even within China, some of our lower RevPAR brands, specifically Super 8, were growing more rapidly than our higher RevPAR.

So it is an interesting dynamic in that really what we are seeing is international growth being impacted by a significant -- sort of like a double mix shift effect, where your market with the lowest RevPAR is growing the most rapidly. And then within that low market, your lowest RevPAR is growing the most rapidly, and that is Super 8.

And so it was -- so without FX, it was 2%. And with FX, it was down 1.5%, international RevPAR. Excuse me for a second, Harry.

Okay, so I think that is really -- so it is without FX, it was 2% and with FX it was down about 1.5%.

Okay. And then just wanted to follow up on the system size. And understand that growth is accelerating in the back half of the year, partly due to HPT. But trying to get a sense of some of the attrition that has occurred over the past two or three quarters. Is that just natural attrition, or are you actively attempting to prune the underperformers in your portfolio?

Well, it's both frankly, Harry. We do have natural attrition, which are properties that are just leaving the system for whatever reason. They are being taken out of hotel stock in the marketplace or they are going through a significant repositioning of themselves.

But there is also a significant amount of what we consider to be attrition that is kind of self-inflicted. We are knocking properties out because their quality is not keeping up or they are not paying. And that has always been the case. There has been a higher level of self-inflicted attrition, where we are making the decision to kick people out, over the last several years, frankly -- not just the last couple of quarters, the last several years -- as the economy has been so difficult for the hotel owners and they have not been investing in their properties.

Now, we are hopeful that we will see a turn on that. As we reported last quarter, I think, or the quarter before, we've started to see some improvement in the receivables from our hotel franchisees. So we are optimistic that there will be an improvement of that. The good news is the adds have been very healthy. We've been adding a lot of properties. The problem is we have been taking out a lot, and that has been leaving us relatively flat.

We feel that based on our pipeline and what we see as visibility for the second half of the year that we will be able to get to that growth range that we have designated.

Just as a follow-on, is there an attractive ROI whereby you provide financing to your brands so that it helps them renovate? Is there any kind of return that might make sense there?

In general, the answer is no, because it is a very slippery slope. If we started becoming the lender of last resort to the hotel industry, we might be able to bring in some properties, but all of a sudden now you would be viewing us as a bank. And I don't think we are set up to be a bank and be a lender to the hotels. So could there be a good return? Yes, there could be a good return. Is that our business model? No, it has not been our business model.

We do, as everybody does, Marriott and Starwood and Hilton in the upper upscale level, we provide development advances to properties to try to bring them on. We've done that in some of our new construction product, the Wingates that we've brought on. So we do it on a selective basis. But to become a general lender to the industry, it is just not our business. We are not wired or set up to do that.

Got you. Thanks very much.

At this time, I am showing no further questions.

Okay, Shirley. Thank you very much, and thank you all for being on the call. We look to speak to you in the next quarter, and have a great summer.

Thank you, and this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line.