Travel + Leisure Co (TNL) 2012 Q4 法說會逐字稿

Welcome to the Wyndham Worldwide fourth-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 would now like to turn the call over to Margo Happer, Senior Vice President of Investor Relations. You may begin.

Thank you. Good morning and 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 statements. These statements are 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 24, 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 and is available on the Investor Relations section at our website at WyndhamWorldwide.com. Steve.

Thank you, Margo. Good morning and welcome to our year-end call. Once again, 2012 was a great year for Wyndham Worldwide across all of our businesses. I feel that I am repeating myself each quarter as we talk about our performance. And while the view in the rear view mirror is great, the view out the windshield is even better.

As you saw in our release this morning, we are raising our dividend and our earnings guidance for 2013. We're also increasing our baseline sustainable annual free cash flow target to $750 million. So our outlook is positive.

This morning I'd like to take a couple of minutes to reflect on what is driving these results and why this success is sustainable. In addition to having great businesses, strong brands and fantastic associates, we've also utilized our healthy cash flow to invest in the future growth of our businesses.

We have continuously said that we would invest in our businesses through both M&A and CapEx, as well as return capital to shareholders through an increasing dividend policy and share repurchases. Our capital allocation policy is working. The investments in our businesses have put us in a position to be more efficient and drive future growth.

Innovation such as program interaction, or RCI.com, at our Vacation Exchange & Rental business; our asset light model, WAAM, at our timeshare business; and our hotels group Apollo program are samples of seeds that been planted for future benefit. And we continue to plant more seeds. Our operation momentum has never been better.

I will address some of the opportunities in a few minutes, but first I would like to turn the call over to Tom to review our financial performance and our outlook for 2013.

Thanks, Steve, and good morning, everyone. Results were excellent in the fourth quarter and full year 2012. Year over year fourth-quarter adjusted EBITDA was up 14% and adjusted earnings per share increased 34%. These results reflect strong operational execution in all of our businesses and the benefit from our ongoing share repurchase program.

During 2012 we repurchased 9%, or $12.9 million -- excuse me, 12.9 million of our outstanding shares for $623 million at an average price of $48.30. In addition, our strong results, coupled with our long-term earnings and cash flow growth outlook, give us the confidence to announce a 26% increase in our dividend.

Let's take a quick look at business unit performance. Wyndham Hotel Group had an exceptional quarter; excluding higher intersegment fees, revenues increased 16% and adjusted EBITDA increased 41%. These increases were primarily attributable to RevPAR gains and cost savings.

RevPAR was up 4% globally and 6% domestically in the fourth quarter. As we have discussed in previous quarters, as we grow internationally, specifically in countries such as China, there will be a dilutive impact on global RevPAR. We opened 66,000 new rooms in 2012, our highest level in 10 years. And terminations were down 5%, resulting in a 2% net increase in system size.

At Wyndham Exchange & Rentals, excluding the impact of foreign currency and acquisitions, fourth-quarter revenues were flat and performance was in line with expectations. We are especially pleased with European rentals revenue results, which remained stable despite the macroeconomic challenges in the region.

Adjusted EBITDA, excluding the impact of foreign currency and acquisitions, was up 3% driven by call center efficiencies resulting from our ongoing RCI.com improvements. Adjusted EBITDA excluded $14 million in charges in the quarter, primarily related to trademark asset impairment of recently acquired brands as we decided to transition all of our North America Vacation Rental operations to the Wyndham Vacation Rentals brand over the next few years.

At Wyndham Vacation Ownership, excluding the Shell contribution, business unit revenues increased by 6%. For the fourth quarter year-over-year gross VOI sales increased 6% reflecting a 6% increase in tour flow and a 3% decline in volume per guest due to the expiration of a VIP incentive marketing program and tighter credit underwriting standards.

Revenues from our fee-for-service property management business increased 24%, primarily reflecting the Shell acquisition. Consumer finance revenues for the fourth quarter increased by 5% compared to 2011 reflecting portfolio contributions from the Shell acquisition.

The provision for loan losses in the fourth quarter 2012 was $89 million or 21% of gross VOI sales, down from 22% of gross VOI sales in the fourth quarter of 2011. We continue to adjust our lending standards to achieve the optimal mix of sales and credit performance.

For the full year 2012, excluding the increased licensing fee to the Hotel Group and the Shell acquisition, adjusted EBITDA increased 10%, another terrific year. We added over 28,000 new owners, surpassing our goal of 27,000. 2012 also capped a great year of WAAM growth and expansion with WAAM sales up 40%.

Now let's turn to our 2013 outlook and guidance. We're going to post full guidance details to our Investor Relations website following the call.

We are increasing revenue guidance slightly to $4.925 billion to $5.1 billion, that is up 8% to 12% from 2012. We are also raising full-year EBITDA and EPS guidance. Adjusted EBITDA guidance is now $1.14 billion to $1.165 billion, an 8% to 11% increase from our 2012 results. The increase in guidance reflects operating initiatives in the business and recent acquisitions.

Adjusted earnings per share guidance for 2013 moves to $3.57 to $3.70, reflecting the higher EBITDA assumptions and share repurchases in the fourth quarter of 2012. We expect the diluted share count of approximately 140 million shares, which, for our standard guidance policy, assumes no share buybacks in 2013. That translates to approximately 11% to 15% EPS growth in 2013 before 2013 share repurchases.

Now let's take a quick look at guidance for each of our business units. As I've mentioned, we will be posting full guidance details to our Investor Relations website and on a Form 8-K following the call, so I'm just going to cover the highlights.

Starting with Wyndham Hotel Group, we expect another strong year. At the guidance midpoint we expect revenue growth of approximately 9% and adjusted EBITDA growth of approximately 10%.

Regarding hotel drivers, we expect RevPAR growth of 4% to 6% and room growth of 2% to 4%. We expect Wyndham Exchange & Rentals revenues at the midpoint of guidance to increase 10% and adjusted EBITDA to increase 7%.

Now excluding FX movements and acquisitions, adjusted EBITDA would be up slightly for the year reflecting the weak economic conditions in Europe and the continued challenges in the broader timeshare industry. We expect average numbers of members in our Exchange business to be flat and Exchange revenue per member to grow 1% to 3%. We also expect Rental transactions and average net price per Rental to each grow 6% to 9%.

For Wyndham Vacation Ownership we expect total segment revenue growth of 10% at the midpoint of the revenue and EBITDA ranges. Excluding the Shell acquisition, time-share growth is mid-single-digit, in-line with our long-term plan. We expect tour growth of 5% to 8% and VPG growth of 2% to 4%. We expect the provision for loan losses to decline slightly to approximately 22.4% of gross VOI sales, down from 23.6% in 2012.

Companywide we expect depreciation and amortization to be $217 million to $222 million, higher than last year reflecting 2012 acquisitions, new business unit facilities and various capital and IT projects. We expect to spend between $250 million and $260 million in CapEx.

Now our maintenance CapEx level was roughly $110 million, consistent with last year. The increase in growth CapEx reflects planned investments of approximately $30 million at the Rio Mar Hotel and $15 million for a Chicago hotel time-share project, both of which Steve will discuss in detail shortly.

We expect to spend $120 million to $130 million in timeshare development in 2013, now that is up from $71 million in 2012 but still below the expected average annual spend of $150 million that we've targeted in the past.

Importantly, as Steve mentioned, based on our current forecast and the strong momentum in our business, we are raising our target for annual base line sustainable free cash flow from $600 million to $700 million to a target of $750 million with a reminder that cash can deviate more easily in any given year than earnings.

For the first quarter we expect earnings per share of $0.64 to $0.67. We would note that there are some differences between our outlook and some analyst models with regard to share repurchases and seasonality. On a business unit level WVO will have difficult year-over-year comparisons in the first quarter based on an exceptionally strong quarter one in 2012 and the timing of some expenses on the sale side.

Now switching to activity on Capital Markets transactions, as we all know, the market for corporate debt today remains very strong. Today we will announce an any and all tender for two tranches of outstanding senior notes totaling $500 million. The transaction will be contingent on our ability to refinance the tender debt.

I would like to finish by reiterating our strategy to deploy cash flow to increase shareholder value through growth, dividends and share repurchases. As Steve has a discussed, the momentum in our business is quite strong and the deal pipeline continues to be strong. Our focus now and always is to maximize shareholder return. And with that I will turn the call back to Steve.

Thanks, Tom. Before we turn the call over for questions I will take a few minutes to discuss some of the forward-looking opportunities that will enhance our growth and reinforce our optimistic viewpoint.

At WVO, our timeshare business, we launched our movement to an asset light model with our WAAM program. Since its inception in 2009, we modified the program and continue to find creative ways to transition from capital intensive product development.

The latest example of that transformation is the recent acquisition of the Alex Hotel on 45th Street in New York City by Guggenheim Partners. We will manage the hotel while we prepare to convert it to timeshare. As we are ready for the inventory it will be delivered to us and we will pay for it at that time.

We're looking to expand this relationship to possibly have a partner purchase some of the existing unfinished inventory, which is on our balance sheet, which will then be finished and returned to us as needed.

Another great example of a creative application of our WAAM model is our recent deal with HPT for Hotel 71 in Chicago. This 350 room hotel will undergo a renovation and will be converted into a Wyndham Grand. A portion of the hotel will be converted to timeshare and leased to WVO for timeshare use. Similar to the project in New York, this deal will give us an entree into an urban market for tour generation and sales.

As we have seen in San Francisco, Seattle, New Orleans and other cities, urban locations are highly desired by our timeshare customers. The creative approaches adopted by WVO are not limited to inventory procurement. As you know, marketing and tour generation is the lifeblood of the timeshare business. In this regard we have some great long-term marketing affiliation partners and we are pleased to add another to the mix.

We have entered into a relationship with Margaritaville, Jimmy Buffet's lifestyle brand, to create Margaritaville Vacation Club by Wyndham. The demographics of his customer base is a great match for our product and we will have Margaritaville resorts starting with the conversion of a 34 acre property we control in St. Thomas Virgin Islands. This represents a great new source of owners for WVO.

The Exchange & Rental business also has much to look forward to in 2013 and beyond. We will continue to refine and improve the RCI.com experience for members and affiliates. The functionality and transparency of this program is truly transformational in the timeshare Exchange industry.

In the Rental business the four tuck-in acquisitions we completed since August 2012 will add to our growth and represent new markets for the organic growth of this business.

We see some macro challenges in Europe during 2013 in the Rental business, but we believe we have budgeted and planned for these challenges appropriately in our guidance. Our team has done a remarkable job navigating a very difficult market and delivering for us.

In the Hotel Group 2013 will be a year of continued growth. We recently obtained full ownership of the 600 room Wyndham Grand Rio Mar resort in Puerto Rico, a resort we have managed since 2007. The purchase price was approximately $100,000 per key for this oceanfront upscale resort. We will leverage our mixed use model by converting roughly a third of the existing hotel rooms into Vacation Ownership units.

We have also recently completed several notable transactions with hotel REITs and ownership companies that bring bulk conversion of properties into our brands. An added benefit is that we will be managing some of these properties, expanding our presence in this arena. Deals with HPT, FelCor and Colony bring hotels into our Wyndham Hotels & Resorts brand as well as Hawthorn Suites by Wyndham and Baymont Inn & Suites.

In addition, adding Wyndham branded hotels in Boston, Houston, New Orleans, Philadelphia, San Diego and other great markets make these relationships an important source of targeted geographically attractive growth.

As I said at the beginning of this call, we're very optimistic about the future. We have built a strong foundation and are beginning to harvest some of the benefit from that foundation now. We expect this momentum to carry us well into 2013 and beyond. And now, Shirley, we will take questions.

(Operator Instructions). Joe Greff, JPMC.

Tom, you mentioned that the deal pipeline is strong with the cost of debt continuing to be at very attractive levels. Are you thinking about doing larger than say tuck-in size type of deals, or can you kind of talk about the profile of those deals in the pipeline that you are looking at?

And then my second question, relatively easy question is corporate expense was a bit high in the 4Q (technical difficulty) model, I don't know if you talked about that in your prepared remarks. But if you can help us understand there if there was anything one time?

And then I just will wait for the Investor Relations website to have the details of the guidance, but were corporate expenses -- your thinking about corporate expenses in 2013. Thank you.

Steve, I will take the first one; I will let Tom take that easier second question that you referred to. On the deal pipeline side, the deal pipeline is about the same as it was last year. It was pretty strong last year; we got a deal -- a couple of deals done.

It's -- we are not looking at anything that is much different from what we have done in the past. But when we talk about talk-ins, tuck-ins can be larger than $80 million or $30 million or $20 million. They could be like the Shell deal was or they could be larger than that. So I don't want to make you think that the pipeline is huge.

On the other hand, we are not tied basically to the size deals we have done in the past. I don't see us -- I don't see something out there right now that would push us towards a transformative deal, to be honest, I think there are opportunities for us that are great what we consider to be tuck-ins that will add to the growth of our business.

Joe, on your second question, if you have a follow-up for Steve, of course. But on your second question it is the same story that we have talked about in the past -- there are costs related to information security, there are a higher personnel costs in the quarter because it was a terrific year for the Company.

And there were a couple of one-time things, but I wouldn't say that the expense (technical difficulty) growth in the fourth quarter on corporate expenses was attributable to a couple of one-time events. And then on 2013 guidance, right now we believe we're going to end up somewhere between $115 million and $120 million.

Great. Good work. Thanks, guys.

Steven Kent, Goldman Sachs.

(Technical difficulty).

Steve, you have us on mute.

Can you hear me?

Yes, you are in now.

Okay, sorry about that. (Technical difficulty).

Steve, you must be on a cell phone that is not quite connected --.

How's that?

That's perfect.

I'm slowly but surely learning how to use this telephone thing. So a couple things, first, on how you are thinking about new hotels, we have noticed the pickup in getting the Wyndham brand out there on the full-service front. And in some cases even paying or putting in a little bit of key money and buying some of these assets or at least paying a little bit for management fees.

Should we start to think of that -- also because at the same time you are converting some of these hotels into timeshare. So do you sort of think about these things as we may have to pay up a little bit or we may have to pay to get into some of these hotels and some of these major cities, but then we are offsetting that and reducing our CapEx into some of these major hotels by selling it out as timeshare?

And sort of talk about this circle between all of these things together. And then at the same point, just give us a little bit more color on the lower default rates in this quarter and what is going on there. Some of the issues that you faced in Q2 and Q3, are they (technical difficulty)?

Okay, I appreciate the first question, Steve, because that is something that we have been working on and talking about, frankly, for a long time, which is our mixed use model. And unfortunately, while we had a great idea of how to execute the mixed use model the economy got in our way to a degree.

And so, while we had a great plan in place and we had some great kind of deals lined up, when the credit markets turned upside down it got tough to continue to do deals. So while we got the Bonnet Creek transaction done in Orlando, we really didn't have anything else to talk about.

What you are seeing now is kind of the evolution of that mixed use model where we can take product like the Rio Mar in Puerto Rico, which we have been managing for a while around which we own quite a bit of land, get control of the asset, turn some of it into timeshare.

And you are correct, by doing that we do lower the cost of our investment in the asset. And we can get timeshare in that asset and then timeshare around that asset and grow it out to be a mixed-use development like we have in Orlando.

Similarly, the deal with the Alex Hotel in New York, as well as the Hotel 71 in Chicago, they are a little different, but they both get us into markets that we have been trying to get into for a long time. I think the head of our real estate group told me the other day he has been trying for New York City for 15 years and now we finally found a deal that works in New York for us at the right price point, in a great location with a product that will fit timeshare beautifully.

And so, it's possible to use it as a hotel for a while and then over time convert it to timeshare product. Same in Hotel 71 in Chicago where in that case we created a lease environment where we will lease the product and make it available to our timeshare owners.

So, yes, you're absolutely right, the timeshare hotel mixed use concept is one that we've been trying to get off the ground for a while. We now have gotten it launched and I think you will see more of this going forward.

Steve, (multiple speakers) on your second question, on the portfolio the provision did come down a bit from last year and the prior quarter. And here is how we see it.

We had shared that there were two core sources of the issue, there was this organized third-party activity and then there was the issue of large loan balances. We feel like we're starting to make progress against -- a little more progress against these third-party groups that are defrauding our owners. And so, that we hope we'll continue to see some improvement on.

The large balance loan issue is something that is going to take a little while longer we believe to get right. But our guys are working on it and it really is at the top of everyone's objectives for the year to bring this together. So interpret the fourth-quarter results as the beginning of some progress, but much more work to do.

Steve, if I could just follow up on your comments. Just to be clear though, did you continue to look at all sorts of ways of building that inventory from the most asset light part of WAAM to potentially this mixed use to really? I just want to -- I want to understand where you are on the spectrum of all of these different opportunities, or are you truly opportunistic at this point because you can make the math work in the different scenarios.

Well, we are opportunistic. I think it is kind of -- our charge is to be as creative and as opportunistic as we can for shareholders to drive the greatest value for us. We are trying to do things asset light, we prefer to keep the cash as long as we can; as long as the deal can be structured sensibly to work for us we are willing to do that.

And the added benefit that -- I guess I didn't answer part of your question, Steve, when you talked about are you willing to do these to get into markets. The answer is, yes, we have been probably more aggressive at making key money available to get into some key markets, that is not the standard that we will have forever. But it is the way -- it is kind of the price of entry to get into some of these markets.

I think combinations of assets changing hands as well as the strength of our brand improving as we have done a lot to shore up the delivery and the value proposition for the Wyndham brand.

So, I think that, yes, you are going to see as do create -- hopefully creative things that can drive both the size of the Wyndham brand in the US and around the world, but also get us into opportunities where we might be able to unlock markets that we previously have not been able to get into for both timeshare and for the hotel business.

But we will continue to build some of our own product. As I said, we are thinking about possibly bringing a partner in to take some of our inventory off of our balance sheet that is unfinished, finish it up and in the next few years deliver it back to us. That will free up capital that we can do other things with. So I think we are trying to optimize our capital allocation and get the most out of what we have.

Okay, thank you.

Patrick Scholes, SunTrust Robinson Humphrey.

Two questions here. The first is can you give us a little bit more color on the VPG falling by about 3% year over year. How much did the acquisition of Shell play into that? And then additionally, as far as a loan loss provision, what is your rough target going forward? I know in the past you have said around 20%, is that still unchanged? Thank you.

Okay. It's Steve, I will take the first one and then Tom will handle the loan loss one. On VPG, just to set the stage on that one and to go back to what we have talked to before, many of our drivers are interdependent. Occupancy and ADR play off of each other. A number of transactions on rental and net rental prices play off of each other.

Similarly within the timeshare business tours and VPG play off each other. We could have a lot more tours and we might have a lower VPG; we could have fewer tours and maybe a higher VPG. So I just want to kind of put a little bit of caution out there that there can be movement in those and we've said that there might be movement in the past.

To specifically answer your question though, the Shell transaction accounted for about I think a third of the decline. And the rest of it was just the fact that we -- our tour mix was a little bit different, we had some marketing programs that changed and we're constantly doing that and shifting marketing programs to optimize. So I wouldn't read too much into the VPG decline in the quarter.

Just like we said back when VPG shot up dramatically, we said don't read too much into a dramatic increase in VPG; I just mean some of our programs are working differently and we are getting a little bit of a different result. The important thing is looking at the revenue production of the business and the ability to control our marketing costs and our cost of sales.

Just a quick follow-up on that part. In your prepared remarks did you -- I may have missed it, did you give a VPG growth rate guidance for 2013?

Yes, 2% to 4%.

2% to 4%, okay, thank you.

Anything else on that one, Patrick?

That's all on that one.

Okay, and as it relates to provision, we are targeting a lower number in 2013 than we did in 2012. It's about a 120 basis point difference, 23.6% in 2012 versus 22.4% in 2013. Look, it is our hope and desire that that number be as low as possible and in the past we've had our provision be lower than that.

We have a higher-quality ownership base than we've had in the past, so some of the real important elements of what determine portfolio performance have been improving. But we don't have a crystal ball to say that it is going to be 15% or 20%. But we are going to do all that we can to continue to exercise those practices that enable us to bring that down as much as possible while retaining the sales momentum that obviously is the key driver for this business.

Appreciate the color. One last follow-up question concerning the Vacation Ownership margins in fourth quarter. It looks like they fell about 200 basis points. Remind me again, was that going against a very tough comp? How much did adding Shell into that, into the margin mix impact that?

There was some G&A involved in it. Our VOI, our core business was flat. There was some timing on some G&A spend that didn't work in our favor. That is probably the largest driver of all. But keep in mind that there is a higher licensing fee as well, Patrick, which is worth about 80 basis points of the 200 basis points. So it is those two factors, it's that intersegment fee that they pay the Hotel Group and it is the G&A.

Okay, thank you. That's all.

Chris Agnew, MKM Partners.

Just start off with maybe a bigger picture question. Your EBITDA margin guidance implies -- or your EBITDA guidance implies margins that are flat to down on 2012, which is against the trend of consistent margin improvement and maybe a little confusing given that the higher-margin businesses appear to be growing faster. And I just wonder if you could give me -- provide a little bit of color there. I know you will give the details later. Thanks.

Sure.

Yes, I think largely, Chris, it is a mix issue. And we can go through each one of the businesses, but take the hotel business, which is growing rapidly; part of that growth is coming in the managed in the owned product which has a lower margin than the franchise -- particularly the US domestic franchise business. So it's a little bit of a mix in that case.

In the case of Exchange & Rentals, again the mix issue to a degree, we are bringing in more Rental -- the Rental growth is faster than the Exchange growth and the rental growth -- Rental business has a lower margin than the Exchange business. At WVO I think it is pretty consistent, I don't think it's --

We're going to be up a little. Our margin guidance is up a little bit.

Up a little bit, okay. Did that kind of answer it for you, Chris?

Yes. No, that was perfect. Thank you. And then on the Rental business, you mentioned that four tuck-in acquisitions were adding to the growth. Can you give us some color on how much of that is coming from the acquisitions?

For 2013?

Yes, the incremental EBITDA from those acquisitions -- or total acquisitions including Shell I think is $20 million plus. So, but that is the incremental; that's not the annualized EBITDA contribution but the incremental contribution year over year.

Is that for the overall Company? I was kind of asking about just your -- I think you gave guidance for Rental transaction growth, 6% to 7%.

Rental is about $10 million.

Less than half of that, yes, less than half (multiple speakers).

Less than half, okay, perfect. Thank you very much.

Carlo Santarelli, Deutsche Bank.

I'm just hoping you guys -- with the updated free cash flow guidance to $750 million; could you guys maybe review your uses of capital, i.e. your leverage ratio? And do you expect to keep that constant or should we potentially expect more returns of capital to shareholders ex any kind of acquisition activity?

Well, we haven't changed our capital allocation policy, Carlo, so it's the same. We will keep our leverage ratio around 3.2% the ways that the agencies calculate it for 3.3%. And that will allow us to add on more debt as we increase our EBITDA, which we said we would do because we don't look to improve that rating, but we want to stay where we are right now in investment-grade.

So that does give us a little bit more available cash, kind of cigar box cash of what we have available to do things with. We are increasing the dividend obviously by 26%, as we announced this morning. So that is a little bit of additional use of capital.

We will look to do M&A transactions if they make sense. And that's always kind of a -- it's a little bit of guesswork because you can't model opportunity, you don't know when the other side is going to say it is time to move on their business and to sell their business.

So we continually look and if the price is right and it makes sense we move on transactions. But we will also keep a very active share repurchase program in place. We have about $500 million still left on our existing authorization, and if we need to go back for more we will go back to the Board and get more authorization.

Great, thank you, that's helpful. And if I could just ask one follow-up. With respect to your Vacation Ownership buyers, are you guys seeing or forecasting any shift between new and existing buyers relative to 2012 as we look ahead to 2013?

No, not really. It is going to be about the same ratio of about two-thirds upgrade, one-third new buyers.

That's great. Thank you very much, guys.

I would add to that though just one thing, Carlo. The Margaritaville deal, which I mentioned, is a neat deal, because it's -- obviously Margaritaville has a huge following, Buffett has a huge following. And their demographic is probably just slightly above the average demographic of our buyer.

And so, we think we have this opportunity to tap into a very attractive buyer who will find real value in our product and the experience they can have. So we're constantly looking for ways to shift the owner base and find new buyers. We are hopeful that will have an impact, maybe not in 2013, but certainly in 2014 and beyond.

Great. Thanks, Steve; thanks, Tom.

Nikhil Bhalla, FBR.

Just a question on currency. If I look at the US dollar, it became a little -- the dollar essentially lost some strength in the fourth quarter of last year and that trend -- appears to have intensified in 1Q. When you think about your Rental business in Europe, how do you see currency impacting your guidance what you gave this morning for 2013?

Nikhil, you are very precise in your analysis because one of the reasons that we increased our guidance from our initial outlook, but it is a small contributor, was the weakening of the dollar against the euro is worth a couple million dollars. But we have already reflected that in our upgraded guidance.

Got it, okay. And just general trends in Europe on the Rental side, what you are seeing -- if you could just give a little more color on what consumer behavior is at the moment versus where it was say in the third quarter of last year?

Sure. Well, it wasn't bright and rosy in the third quarter of last year. And it doesn't continue -- it continues that mode of not being bright and rosy. There are some markets that are doing better than others; take the UK, for example, we have seen good activity of UK travelers actually traveling out of the UK to Europe. UK within UK has been a little bit weaker starting the year.

Some of the other markets, frankly there are ups and downs and there are trade-offs. I don't think I would highlight any other one as being really all that meaningful so far.

But as I said, we have tried to kind of handicap that within our guidance because we know, just like we knew coming into this year there would be some challenges, we know going into 2013 that there will also be challenges in those markets and some will be weaker than others. So we have tried to take that into account, but it is hard to handicap something that is as volatile as the European market has been for us.

Sure. And just a follow-up question, Steve. Is your overall view right now that Europe is not getting worse but not incrementally improving? Or do you, just by looking at the data you see, do you feel there is still a another leg down at some point?

Well, we think it will continue to be challenged. When you say a leg down, Europe is a collection of countries. So will a particular country have a leg down, I have no doubt that there will be slips during the year. I am not going to -- I'm not an economist, I'm not going to project what is going to happen in each one of the markets. And that is why I said we have been cautious about how we are approaching that market.

Obviously it doesn't stop us from doing transactions in the market because we did a transaction in 2012 to acquire a UK-based rental company. Because in the long run this is -- these companies will do great, Europeans value their vacations, they value their travel. Germany is the largest travel market in the world.

So there are a lot of pluses over in Europe, but we are just -- we are cautious and we don't believe that there is an upswing coming imminently. So we assume it's going to be kind of hard going and our team is -- which as I said, they have done a phenomenal job managing this business in Europe. All the people involved in the business have just done a remarkable job. They are charged with doing the same thing now in 2013.

That's great. Thank you, Steve.

(Operator Instructions). Bob LaFleur, Cantor Fitzgerald.

A couple things, one, Tom, can you just walk us through the major changes in the components of free cash flow that get you from the previous midpoint of $650 million to the current $750 million? Is that all just better EBITDA production for the business or were there other moving pieces in there?

And then the second question, I am just curious on the Margaritaville transaction. What are the basic economics there, what are you -- how do you get paid, how did they get paid and just how does that whole relationship work? I mean, I don't need the specifics because I know the exact terms are probably confidential, but just the basic structure of the deal. Thanks.

Yes, Bob, on the first question you have given the answer, which is much of it is coming from improved cash EBITDA and continuing to work away at our inventory number. Those are really the two levers that we are focusing on; it isn't any more complicated than that.

We are raising CapEx for the year because there are a couple of important projects that Steve talked about that need some additional CapEx. But in spite of that we are pretty comfortable. We ended 2012 at around $795 million of free cash flow.

So -- and we looked out into years beyond 2013 and Steve. And I were confident that with our projections for the next few years that instead of saying $600 million to $700 million every year we would say $750 million is our new target. So we are pretty confident that we will be able to deliver those numbers.

Was there a tax issue floating around in the free cash flow numbers somewhere? I seem to recall it being either a one-time contributor, but has that been taken out or --?

We did have a cash tax benefit in 2012 related to the tendering of debt that we did at the beginning of the year. And I think that was worth $20 million to $30 million of benefit. But we have talked in the past that our cash tax rate over time will increase, but in spite of that we have the confidence that we do to raise our target to $750 million. Steve, did you want to take a crack at the second question?

Yes, on the second question, Bob, you are right; we are not going to disclose a lot of details about the transaction. But the -- about the Margaritaville transaction. But we have a number of large marketing relationships like this, Caesars, Outrigger, Universal Studios, and each one is a little bit different. Obviously, because each partner is different and what each partner is trying to accomplish is different.

Margaritaville, Jimmy Buffett's organization, has a desire to grow their base of customers, they have very loyal customers, it is a terrific franchise. So our deal with him is built upon mutual effort to create a base of owners of the Margaritaville Vacation Club by Wyndham and as part of that growth we'll both share in the success of that growth.

So for Margaritaville it will be through a marketing fee and participation in our program. From us it will be building this base of customers who are not only loyal timeshare owners but also loyal Margaritaville fans.

And last question, is there any read through on this transaction into the entertainment at the next Wyndham Analyst Day?

I wouldn't go that far.

Thanks, guys.

Tom's got a good voice though and he has offered to sing.

Thank you. At this time I am showing no further questions. I will turn the call back over to the speakers.

Okay, Shirley, thank you very much. Well, we appreciate everybody attending the call this morning and we look forward to speaking to you on the first-quarter call later this year. Thank you very much.

Bye-bye.

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