Travel + Leisure Co (TNL) 2013 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.

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 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. The risk factors are discussed in detail in our Form 10-Q filed April 24, 2013 with the SEC.

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

Steve?

Thank you, Margo. Good morning and welcome to our second-quarter call.

As you saw from the press release, we had another great quarter, with adjusted EBITDA growth of 6% and adjusted EPS growth of 13%, reflecting strong execution in operating momentum in each of our businesses. We also continue to drive value for our shareholders through disciplined capital allocation. Based on our strong cash flow and what we continue to believe is great value in our stock, the Board of Directors has added $750 million to our share repurchase authorization. Tom will go through the details on the quarter, but I'd like to point out a few highlights.

In vacation ownership, we closed our first WAAM 3.0 deal in Las Vegas. And we are seeing strong monthly, sequential improvement in VPG from the first quarter. The exchange and rental business is performing very well in a difficult operating environment, with improving yields in Europe and revenue increases from new products in the exchange business. And the Hotel Group continues to execute its plan, achieving solid adjusted EBITDA growth.

Next week marks the seven-year anniversary of our listing on the New York Stock Exchange. I'm proud of what we've accomplished so far. We've taken great businesses and made them even better. But I'm even more excited by what lies ahead.

We recently completed our annual five-year strategic reviews, and we're very excited about the opportunities before us. Let me make a few comments on our strategic direction in each of our businesses.

Since the spin, the Hotel Group has established itself as a full-service hotel Company, adding hotel management expertise to what it was already the largest hotel franchiser in the world. We've gone from 11 brands in 48 countries to 14 brands in 67 countries, and there's plenty of runway left. We have a strong pipeline of what which close to 60% is international today, compared with just 25% when we went public.

We will continue to focus on increasing our value proposition to our franchisees and consumers through enhanced technology and marketing. While we see great potential for all our brands, we will continue to investigate opportunities to add new brands to our portfolio.

In the exchange and rental business, we are focused on inspiring world-class service, leveraging technology, expanding our -- into new geographic markets, developing new products, and improving analytics. All of these are evident in the progress we've made at RCI. We continued to increase the value to our affiliates and members through our industry-leading technology, which has improved service delivery and resulted in innovative product offerings. Innovation and technology continues to pay dividends, increasing margins and growing revenues.

As a side note, but very relevant to RCI's growth prospects, ARDA, the timeshare association, recently published its 2013 State of the US Vacation Timeshare Industry study. We are encouraged that 2012 marked the first significant increase in timeshare industry sales volume since the low mark in 2009, and the largest increase since 2007. Trends in the industry point to a continued rebound from the lows experienced during the global economic downturn.

In the vacation rentals business, we have successfully acquired nine businesses in the last three years, and importantly, they are performing better than our expectations. Vacations rentals is estimated to be a $65 billion global market. According to Focusrite, more than half of the market in Europe and the US is professionally managed. With over 100,000 vacation rental properties now under management, Wyndham Vacation Rentals is the undisputed global leader in managed vacation rentals, with exciting potential to grow.

Now, turning to Wyndham Vacation Ownership. We've dramatically improved our already impressive traditional timeshare business. We have reduced marketing spend, improved margins, tightened our credit underwriting standards, and are eliminating the capital deployed, while improving the bottom line. The result has been a stronger business with better cash flow.

In addition, we've completely revolutionized the timeshare industry by introducing a fee-for-service model, which results in even better cash flow and returns. We introduced the Wyndham Asset Affiliation Model, also known as WAAM, in the spring of 2009. In our first iteration, WAAM 1.0 is a pure asset-light, fee-for-service model, where Wyndham Vacation Ownership uses its sales and marketing platform and expertise to sell completed inventory for third-party developers. WAAM 1.0 has great returns, but there's a trade-off, since we don't finance the consumer purchases, we give up EBITDA and growth.

To address this issue, we introduced WAAM 2.0. In WAAM 2.0, Wyndham Vacation Ownership purchases completed inventory from a developer on a just-in-time basis, allowing us to finance the sale and capture the attractive consumer finance spread. In addition, it significantly collapses the time the asset is on our balance sheet, improving overall cash flow and returns compared with our traditional model.

With WAAM 3.0, as with 2.0, we purchase the inventory on a just-in-time basis, and we finance the consumer purchases. But in this case, we are working with a financial partner to make strategic investments for our future use. This inventory is built to our specifications. It could either be ground-up development or using inventory from our balance sheet.

In our WAAM -- in our first WAAM 3.0 transaction, our financial partner for this deal, Guggenheim, purchased from us land and work-in-process in Las Vegas for $87 million in cash and a note. They will finish the development and deliver it to us on a just-in-time basis.

We have approximately $180 million of land and work-in-process remaining on our balance sheet after the Las Vegas transaction, most of which is suitable for WAAM 3.0. In addition, we are already in discussions on ground-up development opportunities utilizing the WAAM 3.0 model. As we said on the last call, we believe that the majority of our timeshare sales within the next three to five years could be in an asset-light form, significantly improving the cash flow and returns from the business, a primary strategic focus of Wyndham Vacation Ownership and Wyndham Worldwide, overall.

Now, before I turn the call over to Tom, I would like to take a moment to comment on our performance since we listed on the New York Stock Exchange seven years ago. Between dividends and share repurchases, we have returned nearly $3.5 billion to our shareholders. The cumulative impact of our share repurchase activity over this period has been a 34% reduction in our share count. This, combined with our strong operating performance and growth, has driven significant increases in key metrics on a per-share basis.

Just to put a few numbers around it, revenues are up over 85%. Adjusted EPS up close to 120%, and free cash flow is up by over 235%. Our total shareholder returns over the last seven years, including dividends, is more than double that of the S&P 500. Most importantly, we see great opportunities in all of our businesses for future growth.

Now, I will turn the call over to Tom.

Thank you, Steve. Second-quarter results were strong, with adjusted EBITDA up 6% and adjusted earnings per share up 13%. These measures were better than our expectations, reflecting improved timeshare results, strong performance in our European rentals and timeshare exchange businesses, and lower than expected corporate costs. We also stepped up our share repurchase activities, spending $175 million in the quarter.

Let me spend a few moments on the highlights of the quarter, and then we will get your questions. In the hotel group, revenues were up 12%, primarily reflecting revenues associated with hotel management, reimbursable expenses, and revenues from our owned hotels. Adjusted EBITDA increased 5%, primarily due to higher royalties and ancillary fees. A higher number of managed hotels and the resulting increase of revenues associated with reimbursable costs, which have no impact on EBITDA, caused margins to decline 200 basis points.

RevPAR was up 5% domestically, but only 2% globally in the second quarter. International RevPAR was down 6%, partially reflecting faster growth in lower RevPAR regions, as well as faster growth in lower RevPAR brands within China, namely Super 8.

Our exchange and rentals segment performed better than our expectations, as well. Revenues increased 8% over the second quarter of 2012. Excluding the impact of foreign-currency and acquisitions, second-quarter revenues were up 4%.

Now, excluding foreign currency, acquisitions, and a $4-million Gulf Coast claim settlement in the second quarter of 2012, EBITDA for the segment was up 3%. We are very pleased with these results, given the economic and consumer confidence environment in Europe.

On the exchange side, revenue was up over 4% in constant currency, driven by higher exchange revenue per member, reflecting growth in fees from innovative new products and services.

We are also pleased with the renewal of RCI's affiliation with Fairmont Hotels and Resorts and its luxury private residence club. The relationship has expanded to include resorts in Mexico and Dubai, adding quality destinations to our Registry Collection program.

On the vacation rentals side, revenues were up 13%. Now, excluding the impact of acquisitions, rental revenues were up 5% for the quarter, reflecting a 4% increase in average net price per rental and a 1% increase in transactions. These results were driven primarily by yield-management strategies at our Hoseasons Group and Landal GreenParks businesses. Foreign currency had no impact on quarter two vacation rental revenues compared to the prior year. Rental acquisitions, however, contributed $13 million of incremental vacation rental revenues.

At our vacation ownership business, revenues were up 11%, and EBITDA was up 7%. Shell had no material impact on EBITDA, as integration-related expenses offset normal operations. The EBITDA increase primarily reflects improved VOI sales, lower cost of goods, and a lower provision for loan loss. Gross VOI sales were up 5%, reflecting an 11% increase in tour flow, partially offset by a 4% decline in VPG.

The VPG decline reflected the mix effect of lower Shell VPGs, which accounted for almost half of that decline, and the difficult comparisons to an exceptionally strong upgrade marketing program in the second quarter of 2012. We are getting great traction from our summer sales tools, and VPG improved each month throughout the second quarter.

The number of new owners added increased 4% from the second quarter of last year. Remember, growing the new owner pool continues to be an important component of our overall business model.

WAAM sales for the quarter were $45 million, a 50% increase from the second quarter of last year. Now we report WAAM results separately, so you are able to track our long-term progress on these initiatives. Keep in mind, that WAAM sales move up or down on a quarter-to-quarter basis, depending on the mix of available inventory and our overall sales plan. But importantly, we expect that the long-term trajectory will be significantly positive.

Property management revenues significantly increased, reflecting the addition of the Shell portfolio. Remember that these fee-for-service revenue streams were an important reason for acquiring Shell. However, as in the hotel business, property management revenues include reimbursable expenses, which reduce the reported margin.

Defaults in the quarter were down over 5%, and the provision for loan loss was $90 million, down from $100 million a year ago. Relative to sales, that's a 200-basis-point improvement from the second quarter of 2012. We continue to see good progress in portfolio trends, especially around slowing cease-and-desist activity, which we have discussed with you all in the past.

Now, let's spend a few moments on the quarter's balance sheet and capital markets activity. On the ABS front, we just completed our second timeshare securitization transaction for the year, a $325 million offering, with a 98% advance rate, and a weighted average coupon of 2.68%. The high advance rate reflects the successful issuance of a BB tranche. This is our first BB tranche in almost two years and is a good indication of the support we have in the market, despite the recent increase in the underlying interest rates. We are very pleased with the execution of the financing.

Now, recently, we've had a number of questions regarding interest rate sensitivity, especially as it relates to the consumer finance spread in our timeshare business. First, our securitized term notes are at fixed rates, so in the near-term, our interest rate sensitivity is quite low. For example, looking out to 2014, we estimate that an immediate 100-basis-point rise in near to midterm interest rates would increase our consumer finance interest expense by under $8 million. Of course, with a business that produces $600 million of EBITDA, we would look to mitigate any such impact. ¶

Adding to a strong track record of capital markets transactions, we renewed our revolving credit facility for another five years and upsized the capacity by $500 million to $1.5 billion. Strong relations with our bank group, coupled with exceptional business performance, enabled us to simultaneously expand the revolver to increase our available liquidity and reduce the all-in funding spread.

Free cash flow for the six months of 2013 was $4.77 per share, compared with $3.84 per share last year, a 24% increase from the first six months of last year. Now, this reflects the timing of working capital and deposits on bookings for summer arrivals from the three vacation rental acquisitions we completed last December and January. Our payments to homeowners on these bookings occur in the third quarter.

In addition, our WAAM 3.0 sale of Las Vegas resulted in $87 million in cash, which you will see in financing activities on the cash flow statement, contributing to available cash, but not free cash flow, as we had originally thought. With a sustainable free cash flow target of $750 million, we expect around $5.50 in free cash flow per share in 2013.

As you saw from the press release, we are raising our EPS guidance based on our second-quarter share repurchases and a slightly reduced tax rate. Our new range is $3.66 to $3.76, up from $3.60 to $3.70. We expect our full-year tax rate to be 37%, down from 37.25%.

Our full-year share count guidance is now at 136 million shares. Remember, this excludes any share repurchases beyond the second quarter of 2013. We are increasing our earnings per share guidance, in spite of currency movements that have worked against us this year, creating $15 million in EBITDA headwinds, based on FX rates as of December 31, 2012. Please remember that we raised our EBITDA guidance already in February of 2013.

We are reiterating our business unit revenue EBITDA and driver guidance, except at vacation ownership, where we are increasing tours from 5% to 8%, to 6% to 9%. We also now believe that VPG will be flat to down 2% for 2013.

For the third quarter, we expect earnings per share of $1.33 to $1.36. Remember that our outlook does not assume any additional share repurchases, while some analyst models might. As a reminder, our full-year earnings and driver guidance are posted on the Company's website at www.wyndhamworldwide.com.

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

Thank you, Tom. Before we open the call for questions, let me sum up.

We've come a long way in seven years as a public Company, and we continue to have many exciting opportunities ahead of us. We have delivered for our shareholders and expect to continue to deliver, because we have powerful elements in place to create value. We have an outstanding team and a great culture.

We have clear plans and a commitment to outstanding execution and game-changing innovation. And we are focused on generating free cash flow and optimizing the deployment of that cash to drive value. Going forward, you can expect us to continue to do these things, while at the same time constantly looking for opportunities to improve our business model and create additional value.

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

(Operator Instructions)

Joe Greff with JPMC.

You mentioned that you saw improvement sequentially throughout the quarter on the VPG front. I was hoping maybe you can elaborate or give us some numbers on a monthly basis. I guess my question is -- did you see it turn positive year over year by the time it got to June? And then I have a couple of follow-ups.

Well, Joe, we don't go through monthly VPG numbers. Let me just give a couple of comments related to what happened during the quarter, and Tom can elaborate, if he'd like to. We have a couple of factors impacting VPG, as we talked about. The first is the Shell acquisition brought in a product that has a lower VPG than our Wyndham Vacation Resorts product. So, we've got a little bit of a negative impact from that. And then we had the lapping of the marketing program that we ran last year.

Absent the Shell impact -- negative impact -- we probably would have been pretty close to flat by the end of the quarter. But, again, we are not giving monthly numbers. So, yes, there was an improvement, but I'm not going to say it turned around and became positive. But then again, I wouldn't expect it to become positive, because we do have the Shell impact that we are dealing with.

Joe, the Shell impact is worth about 150 basis points of the VPG decline.

Got it. Okay, great. Two other quick ones. If I look at your P&L, cost vacation ownership interests, down $10 million year over year. Can you help us understand what drove that, and how sustainable is that relationship?

You're talking about the provision or the cost of goods sold?

The COGS, so $32 million this 2Q versus $42 million a year ago.

Joe, that number can vary quarter to quarter based on the source of the inventory. And in this quarter, I think we had some favorable sources of inventory. And we think that it's a good, really strong number. I think last year we ended up at around 18% or 19%. We would like to see improvement on the 18% or 19%. So it will vary quarter to quarter. The 16% was a pretty strong number.

Okay. Last question, here. You mentioned that Shell had some integration expenses in the quarter. How much was that?

$2 million.

$2 million, Joe.

So, not huge. All right, good job, guys. Thank you very much.

Steve Kent with Goldman Sachs.

So, two questions. First, Tom, you mentioned, essentially if rate is going higher, it only hurts you by a relatively modest amount. But I just wanted to understand that a little bit better. Are you factoring in what that might do to timeshare sales, meaning, if the consumer has a higher interest rate on other parts of their financial statement, does that impact sales? Also, would you keep, essentially, the monthly price to the consumer the same, and offset it with some of the other expenses?

Then, you mentioned that you continue to pivot from existing owners to new owners. Do you have the percentage in the quarter, or could you give us some general guidance of where that's been? It's been 60%, 70% existing upsells to -- where has that gone in this quarter?

Well, I guess I will start with the -- there were so many questions in there, Steve, I've got to keep track of all the questions that were in place. With respect to the interest rate and the impact that it might have on the consumer from having higher interest rates on the rest of their, basically, portfolio or cost, we haven't seen that to be a factor in the past. We haven't seen the consumer change very much their buying pattern, based on what's happening in their world. Evident what happened when we saw the downturn and the credit crunch, timeshares sold very well during the period. It wasn't just us, it was everybody in the timeshare industry that had access to capital did well during that period.

So, I don't think that -- I don't envision a knock-on effect from interest rates going up. The impact, to us -- Tom was making the point is -- is relatively low. We only say that because people have been asking questions about it, because there is a big portion of our portfolio that is locked in at a fixed cost. So, it would take a long time for anything meaningful to happen to our cost.

If it went up that dramatically, and it had that big of an impact, of course, we can either do one of two things. We can lay off that increase to the consumer by increasing the financing cost that we charge. Or, we've got a business that produces over $500 million of EBITDA, $600 million of EBITDA, we try to find other ways to mitigate that cost increase.

Do you want to comment on the -- what was the last?

The last one was about new owners versus upgrade. So, Steve, I would react to one word in your question, which is the word pivot. Pivot implies you are changing direction, at least that's what it implied when I played basketball. So, I think the verb pivot is a verb that doesn't apply here, because I think we are staying the course.

We expect that upgrades will be the majority of our business. We want to grow new owners, and we want to grow new owners profitably. We are looking for ways to grow new owners profitably because, as you know, the long-term sustainability of the Business is dependent on constantly replenishing that upgrade pool. I wouldn't say we are pivoting, but I would say we are driving to the hoop on this one, and keeping our direction and our balance what it's been in the past.

Just to add to that -- one thing. We've been talking about our new owner goals for the last couple of years. So, this is nothing new. We've been consistent with what our new owner goals have been, increasing them a little bit as our sales paces increase. But we feel like we are right on -- like Tom said, we are right on our plan. We are not changing our plan.

So, Steve, Tom, is the plan -- just remind me, is it to get to 50/50 existing versus new? I'm not sure I remember what the goal was.

It's two-thirds/one-third, Steve. It will be more likely two-thirds/one-third. It may be a few basis points higher than that, as we uncover new sources for new owners, but it's not going to materially be different than what everyone's become accustomed to.

And a great example of that, Steve, would be our relationship with Margaritaville. We will begin selling a Margaritaville product probably this year -- later this year. We have an opportunity to market to a whole new customer base -- people who we have not, maybe, touched before. That may drive our new owner numbers up a little bit. We wouldn't be upset by that, as long as we can manage the marketing cost to still deliver the kind of earnings that we are expecting to deliver. So, we are constantly looking for new avenues to bring in new owners and build new relationships. Margaritaville is one example of that.

Okay, thank you.

Patrick Scholes with SunTrust.

A little bit more color on your international RevPAR results -- it looked like, obviously, international dragged down the overall average. How did you fare in Europe as far as a RevPAR growth rate, and how did Asia fare? That was the first question.

Secondly, if you could give us a little bit more color on the year-over-year increase in room count. How much of that was organic, new growth versus acquiring management contracts?

You want to take a crack at the first one, Steve?

International RevPAR, Patrick, was definitely down. It was down, I would say, somewhat broadly. There were pockets in Europe where there was negative comparisons. There were pockets in Europe that were up.

Same thing was true in Asia. There were parts of Asia that were up, parts of Asia that were down. So, I wouldn't say that there was one area that we could point to. We highlight China because we have so much growth in China, we have the combination of RevPAR impact being, maybe, a negative comparison. But also, we are adding properties that are in the Super 8 zone more quickly than anything else, which has a lower RevPAR. So, we've got a mix impact in China, as well as whatever pressure that market happens to see.

I think, as we said last quarter for the rental business, there's been pressure in northern Europe versus southern Europe this year, that we saw last year -- more pressure in southern Europe than northern. But southern Europe wasn't devoid of challenges as well. Spain, for example, was down, but also Germany was down. But there were also markets that were up. So, it was a mixed bag, to be quite frank.

Year-over-year room count -- there is not much that's from management contracts, I would say. There were some large deals that we did in the second quarter, but if you are asking -- I mean, in the first quarter, but if you are specifically asking about the second quarter, I can't think of any large management contract deals. It was all just our normal organic sales, I believe, in the second quarter.

Okay. Great. Thank you for the color.

Chris Agnew with MKM Partners.

First question on inventory. With the majority of timeshare sales in asset-light form the next three to five years, what sort of inventory would you estimate would be required to support that model? Then, should we start to see inventory come down at slightly faster pace going forward?

Chris, on that, we've given guidance that we are sticking to at this point, which is -- we expect to spend about $150 million on inventory investment each year, on average, between now and three to four years out. So, we are not changing that. As we make -- in the last couple of years, our numbers always come in a little light. I think last year it was around $70 million or $80 million. So, we are always keeping an eye on our balance sheet. We are always trying to do more with less. But, right now, for the purposes of your models and planning, let's stick to the $150 million.

Okay. Then on -- you had good cost control on vacation ownership, and you mentioned lower cost of goods. I'm wondering if you could give just a little more color -- granularity -- what drove that?

As Tom said, it's really a mix of the inventory. We have different areas geographically that we bring inventory in that may have a different cost of goods sold. The various deals that we do bring in different cost of goods sold. So, there's no -- I don't think there is one thing to point to and say -- gee, that's why it was down this quarter.

As Tom said, it has bounced around. We used to talk about a 25% cost of sale a few years ago, and then we brought it down to about a 20% cost of sales. I think 20%, long term, over five years might be a pretty good number.

Right now, we are running, as Tom said, about 18%, 19%. We think over the next few years, we might be even able to do better than that. It's 16% now. But I think anything in the zone of 16% to 20% is probably pretty good, and I feel like we are really delivering well on that business. So, we have a very creative, very determined group in the real estate department that is very mindful of our costs and making sure that we are matching it up well.

Thanks. And if I can ask one last question, and sorry, it's got three parts. But just in terms of M&A, can you describe -- or how would you describe the current [M] transaction environment? And which business do you see more near-term opportunity? Then, on lodging, you mentioned new brands. Just wondering -- is there any specific geographic or chain scale or business area that you are targeting in particular? Thanks.

Sure. The M&A environment I think is, based on what we see, pretty similar to what it was earlier this year and last year. There is some deals out there. They may not be appropriately priced for us or anyone, so there aren't as many deals getting done as maybe could be available. I think that that's pretty consistent. Clearly, the IPO market is going to create opportunities for some of those companies to come to market versus trade on a sale basis, but that's something that we've seen over the decades in the deal side.

As for areas that we are focused on, it's all going to be on the fee-for-service side, like the hotel side and the rental side. We did the last deal -- the large deal we did with Shell was done in the timeshare side, but remember, that was really done for the fee-for-service management side more than anything else, because they had a great group of managed properties that we're bringing into the portfolio.

As for the last question -- was about hotel -- is there any chain scale or geographic region? We never handicap that. We keep our eyes open. We have people who are constantly in contact with opportunities, and geography doesn't matter to us, as long as the potential is strong in that market. And chain scale, it doesn't really matter, again, as long as they are potential to grow and we can drive that business. We really feel that there's no one in our industry who is more efficient on bringing on brands and, therefore, we think that we can be competitive in any opportunity that's out there. It just has to work for us.

Thank you.

Bob LaFleur with Cantor Fitzgerald.

Question about the VPG differential with Shell. Is that a function of a lower price-point product? Is that a function of selling efficiencies that are not up to where the broader Wyndham system is yet? Could you maybe just give us a little more insight as to that differential?

Bob, it's a number of points, but I think most importantly, I think it's the frequency and focus on upgrades at Shell that hasn't been the same as ours. So, I think it's mostly attributable to upgrades.

Okay. Then, broadly on VPG -- obviously selling efficiency is a big point about that. Could you talk a little bit about changes you are seeing, close rates among the different channels? What's going on in the reload channel versus the front-line channel, as far as close rates and selling efficiency?

Not much of a difference, quite frankly. We did see some improvement in close rate in the first half of this year, but I wouldn't say that it was differentiated between front-line and upgrade sales. So, no, I can't point to anything and tell you that there's one specific area where we saw dramatic improvement. I'd tell you we have a phenomenally good sales team that does a great job of educating our existing owners on the product, and how they can be more efficient in using it, which is part of the reason that there's so much in upgrade sales.

On the front-line side, we continue to improve our process for selling, which now includes -- we're moving more towards a podium presentation where there are group discussions of what the product is, so there is very clear understanding of what it is that we are selling. And then an individual salesperson will get together with a couple to discuss the product and whether it fits for them. But we create an educational environment that is more of like a classroom setting where the delivery of the description of the product can be very consistent, which, again, helps the sales process.

How much of the improvement in close rates do you think is attributable -- just a healthier consumer, and how much of it is proactive measures that you are taking to aggressively improve your sales efficiency?

I guess the answer to that question would depend on who you ask. If you ask our salespeople, they would probably say it's because they're doing such a great job at selling. And that probably is a big part of it.

But I think also, we saw -- close rate is interesting. We saw an increase in close rate during the global economic crisis, if you recall. The reason, at the time, that I personally think there was a reason for the increase was there was a more dedicated traveler out on the street. So when the economic crisis hit, people who were very tight on money, and travel wasn't important to them, they didn't travel. Therefore, you had a more dedicated traveler out there. Maybe that impacted our close rate.

It's a very difficult thing to tell because we don't -- we interview people when they don't buy or when they do by, but it's very hard to tell what's the real reason that they didn't buy. So, it's a tough question, Bob, to answer, that you are asking because we don't have specific statistics on it. We only have a feel. I think our feel right now is, yes, we are doing a great job selling, and we're presenting a terrific product. The flexibility of our product is unparalleled, and that also helps sell the product.

Okay. Thanks. One quick question just on -- the loan loss provision came in quite nicely in the quarter. You said you made a lot of headway with the fraud issue. How much more improvement can we expect in that line, till it gets to back to some sort of, quote, normalized level?

The line meaning what -- defaults associated with that fraud activity?

That, and your loan loss provision as a percentage of sales. It's been trending down. How far -- how long should that trend continue, and where would you expect it to stabilize?

Look, I think there's always room for improvement on our default trends. We've made a big dent in this fraudulent activity. There's still some of it going on, but we are down considerably from where it was at its peak, which drove our provision in 2012. So I'd give ourselves decent marks there.

We have more work to do. We still have the issue of -- the larger the loan balance, the higher the default rate. And we need to continue to think about that. So I would expect that we'll continue to make improvement, but we still have some work to do.

Okay, thanks.

Nikhil Bhalla with FBR.

I wanted to ask you -- just a little bit more about Europe and what's going on there. We are clearly, on the rental side, you saw some improvement there. Any color on what's really driving that? Is it just sentiment in some ways? Is it promotions? Any other color? Thank you.

Sure, Nikhil. Just a couple of points of reference. We've seen a shortening of the booking window, or compression of the booking window in Europe, which has been relatively dramatic and more pronounced recently. What that does is, it means that basically people are waiting later to book their holidays. So, it's a little bit more difficult to predict what that pattern is going to look like. But people are booking.

So we've seen, basically, an improvement in sentiment in Europe, particularly in the more affluent traveler, which does hit some of our travel dynamics, particularly the longer-distance travel from the UK. So in general, we are seeing an improvement in the consumer sentiment and travel pattern. That is not necessarily reflected in the overall consumer confidence surveys in Europe, which is why sometimes we don't match up well with that, and it's hard to correlate the two. But we are seeing an improvement in the desire to travel and their bookings. But, again, on a compressed basis, so that we are seeing it come up more quickly.

That's part of the reason why the yield management systems that we are putting in place in Europe are so important. We've seen this pattern developing over the last several years, where the booking window is compressing. A compressed booking window makes it even more important to have good yield management, so that you are not dropping your rate or you're not doing the promotion that you referred to, too early. That you are actually getting a better sense of when you should be rolling out promotions or when you should be moving pricing. So, it's an area, Nikhil, that we are very focused on. We've got a terrific team that's working on this, and we think we will continue to see good results from our yield management efforts over in Europe.

Thanks, Steve. Just a follow-up question there. Do you feel that with the dislocation in the Middle East, maybe some of the vacation market that would have probably gone to the Middle East overall, is now staying back in [Europe] and perhaps helping your business?

Boy, I don't know. You've gone one level too deep for me. I'm sure somebody in our Group would have an opinion on that. Tom and I are both shaking our heads. I don't know; it's an interesting question.

[Gainesville] is performing a little better, which does take the Brits out of the UK and into other parts of Europe, but I don't know the effect on the Middle East.

Got it. Just a final question there. With Olympics, comparison is maybe getting a little bit difficult in the third quarter for some of the hotels there. Any potential impact for you there?

With respect to -- did you say the Olympics?

Yet, last year.

From last year.

From last year -- we don't anticipate -- I don't remember that being a reason, when we went through our business unit review at the Hotel Group, for any impact. I would say probably not.

Got it. All right, thank you very much.

Carlo Santarelli with Deutsche Bank.

Just quickly, I just wanted to -- I know you guys spent some time talking about it, but just in terms of the COGS, I know you guys mentioned favorable inventory sources. Were there any true-ups or anything in that number this quarter that would also have made it a little bit irregular on a go-forward basis?

There are always true-ups, Carlo, in the way that we account for COGS in that business. The driver was the source of inventory that we chose.

Okay. And then in terms of the $180 million in land on the balance sheet that you guys mentioned, how are you thinking about the timing of that over time? When you start thinking about trying to monetize that, is that something we should be looking for over the next 12 to 18 months, or is it a much longer-term process?

Some of it, yes. We had mentioned on our earlier call that we were working on -- I think the earlier first-quarter call -- that we did mention we were working on deals, other deals that were on our balance sheet that would reduce those levels further. But -- so some of it will happen, but our goal is to do as much of it as we can. And I think it will unwind itself. Certain deals will get done sooner rather than later, within this year or within 6 to 12 months. The rest of it, over time, we will find ways to monetize it.

Great. And then just one last follow-up as it pertains to the balance sheet and, obviously, the buyback and the buyback authorization. Are you guys -- I guess the right way to ask would be -- how are you contemplating just in terms of ratings and the importance of maintaining an investment-grade credit over time as you continue to buy back, obviously with EBITDA growth underlying it?

We hold that objective as a very important objective. We will do everything in our power to stay within that objective. We have a bunch of cash on our balance sheet this quarter related to the seasonality of our vacation rental business that brings down our credit ratio a bit. So, our goal is to stay there if we can.

Tom, that's great. Thank you very much.

And as you are familiar with, Carlo, we, like all companies, communicate with the rating agencies on a regular basis. So what we're doing, we feel comfortable is within the boundaries of their comfort level, as well.

That's very helpful. Thank you, Steve.

(Operator Instructions)

Harry Curtis with Nomura Securities.

To follow-up on some of the questions related to the loan loss, in your guidance, what's assumed for your loan loss in the second half versus last year?

I don't have the number off the top of my head, but maybe someone can get us what that is. We are targeting full year a little over 21% of gross VOI.

Okay, so that would assume then, it's probably going to be pretty flat for next -- for the back half?

It's our current projection, but as default trends improve, that number evolves.

Okay. And the loan loss provision has fluctuated, give or take, roughly between 21% and 23% of sales. As your tour flow increases, can you give us a historic perspective on -- in the past when your tour flow increases, what does -- is there any meaningful change in your customer profile?

Well, it depends -- depends what period of time you're talking about. If you are talking about the period of time when we were growing a strong double digit, and we had a huge amount of front-line sales going on to drive that growth, yes, there was a difference in profile back then. We are talking about 2007, 2008. Because, there, we're hitting customers that we don't know, and it's a little bit of a different profile.

Right now, if you look at the last couple of years, our profile is probably pretty consistent. We've been hitting the same number of -- or an increasing number, but roughly the same number of new sales versus upgrade sales. Really, the only thing that impacted it over the time was the amount of large transactions we were doing. And as we talked about, we changed some of our credit underwriting standards, and we moved that around a little bit. But that was the only other thing I would say over the last couple years that had any meaningful impact.

Tom, do you have anything --?

I would say -- the way you should think of this, Harry, is our profile for our customer target is fixed. And it's higher, as Steve said, than it had been in the earlier years. And so, the challenge for our marketing team is to figure out how to target what we've established as a fixed profile.

Okay. At the end of the day, my question from a modeling point of view would be -- as the defaults fraud issue becomes more of looking in the rear-view mirror, should we be thinking that the loan -- the provision ought to be -- settle in the 21% to 21.5% of sales going forward? Or does that tie your hands too much?

Our target is to continue to see that number decline. If you recall, in I think 2008, I wasn't here, but I seem to remember a number of about 17% to 18%. I'm not saying we are going to get there, but I am saying that the customer profile has improved. And we are focused at bringing that number down further. We are not accepting a 21% target for the next five years, that's for sure.

Okay, that's helpful, thanks a lot.

Michael Millman with Millman Research Associates.

Following up on a couple of things you've discussed -- on the COGS, to what extent does the reduction suggest you've actually increased the pricing? I guess there's two sides on -- second question -- can you talk about the marketing costs relative to the revenue for new owners? And then, following yesterday's article in The Times on innovation, can you talk about -- which talked about Wyndham -- could you talk about what some of this innovation means, in terms of occupancy rates and pricing? Thank you.

Sure. As for the COGS percentages are driven by price increase, not to a large degree, Mike. We do increase price. We do premium-priced product. But it's more on the purchase side, so it's more on the cost side than it is on the price side.

As for marketing costs for new owners, as we said before, we are constantly trying to find ways to be more efficient, to bring in new owners. I referenced the Margaritaville relationship as an example of trying to use some creative methodologies to drive new owners. But right now, I would say that our delivery of marketing cost is not dissimilar to what it was a year ago. I wouldn't say that there's been any real wholesale movement in that cost section.

And as to innovation, we are constantly trying to innovate. It's something that is part of the culture here at Wyndham. In fact, we have an innovation award that we give to an associate or groups of associates who do extraordinary things to drive innovation within the Company. So whether it's on the technology side, like we've done at RCI, or it's finding new ways to deliver a different product to the consumer in WBO or on the hotel side.

Parts of our project Apollo that we've talked about for the last several years, where we are finding better ways of delivering heads and beds for our franchisees through technology improvement, and trying to drive that business to be better. We want to increase our value proposition to our franchisees. In order to do that, we need to be innovative. We need to be creative, and that is heavily, heavily our focus. I appreciate the recognition, and we continue to work as hard as we can to be innovative.

Thank you.

Thank you. At this time, I'll turn the call back over to the speakers.

Okay, Shirley. Thank you very much. Thanks for joining us, and remember to tune into the Wyndham Championship on August 15 to 18 on the Golf Channel and CBS. And enjoy the rest of your Summer.

Thank you. This does conclude today's call. We thank you for your participation. At this time, you may disconnect your lines.