Travel + Leisure Co (TNL) 2014 Q4 法說會逐字稿

Welcome to the Wyndham Worldwide fourth-quarter earnings conference call. (Operator Instructions). 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.

Thank you. Good morning and thanks 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 risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Form 10-K filed February 14, 2014 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 of our website at WyndhamWorldwide.com. Steve?

Thanks, Margo. Good morning and thank you all for joining us. As you saw from the release, we closed the year with another great quarter. Adjusted diluted EPS grew 23% in the quarter and 18% for the full year with growth driven primarily by stronger operating performance and supported by share repurchases.

Quarterly performance was particularly strong in the Wyndham Hotel Group with adjusted EBITDA up 23%. The summer momentum continued at our European vacation rental business into the last quarter of the year resulting in 14% adjusted EBITDA growth at Wyndham Exchange and Rentals excluding foreign currency. Wyndham Vacation Ownership achieved a significant sequential improvement in VPG as they applied the learnings from the summer to their new sales processes.

2014 was a great year as each of our business units grew at or above their target range, supported by initiatives such as our umbrella marketing campaign in the Hotel Group, dynamic pricing in Exchange and Rentals a better consumer portfolio performance as well as enhanced timeshare inventory acquisition models in Vacation Ownership.

While we are proud of our accomplishments we are focused on the future and excited about the opportunities ahead.

As you are aware, every US company with even moderate foreign exchange exposure is experiencing headwinds from the significant strengthening of the dollar and we are no exception. While operating momentum in our European businesses remains strong, FX translation has negatively affected the EBITDA guidance we gave you just three months ago by $25 million. However, in response we are adjusting our EBITDA range downward only by $15 million. We expect to deliver the remaining $10 million through strong operating performance at our businesses and tight cost controls.

Tom will walk you through the guidance in detail but I will also note that despite the reduction in EBITDA guidance, we are raising our EPS guidance to reflect primarily the full-year impact of our fourth-quarter 2014 share repurchases.

The energy and momentum in our Company remains strong and this is reflected in our Board's decision to raise our quarterly dividend by 20% and our decision to raise our free cash flow target to $800 million in 2015.

So now let's talk about some of the initiatives that are going to fuel our growth over the coming years. I will begin with our Hotel Group which had a great year in 2014, growing adjusted EBITDA close to 15% and margins over 200 basis points. Our efforts in the Hotel Group are focused on two important areas, increasing our reservation contribution to our franchisees and improving the quality and awareness of our brands.

One very important initiative to support these goals last year was our multi-brand umbrella marketing campaign. The campaign ultimately drove over 1.8 billion impressions. Bookings in our central channels increased 10% and enrollments in our Wyndham Rewards loyalty program grew 52%. This is great progress toward our goal of establishing the best-in-class loyalty program in our primary economy and midscale market segments which we expect will significantly drive reservation contribution to our franchisees. Stay tuned for some exciting developments with our Wyndham Rewards loyalty program this year.

Of course maintaining category leading brands begins with the quality of the hotels in our system which is a significant area of concentration for us. In 2014, terminations for properties below our system standards accounted for nearly 90% of the total properties terminated from our domestic system helping to ensure that guest experience with our brands isn't tainted by a small fraction of hotels that failed to meet our standards.

Following the recession, the vast majority of the properties were terminated from our system due to monetary defaults. As termination for quality defaults are now leading the way, we are also focused on adding properties that will improve the overall quality of the system. As a result, properties added to the system in 2014 had an average Trip Advisor rating that was 24 basis points higher than our system average.

In addition, new construction openings were up 11% last year and new construction hotels are immediately accretive to brand quality.

You may remember from an earlier call that we were working on a process of launching new prototypes for many of our brands. We have plenty of opportunity to put these new prototypes into development ensuring high quality for our guests and strong financial returns for our franchisees. Prototype redesigns and a compelling brand portfolio have helped us achieve a 17% increase in our new construction pipeline over the past three years.

We continue to add to the breadth and depth of our portfolio with our recent acquisition of Dolce Hotels & Resorts. Dolce's hotels and conference centers enhance our portfolio with a significantly larger presence in the group and meeting segment as well as the upper upscale and lifestyle segments. Its 4000 employees worldwide will add depth and experience and expertise to our already well-established hotel management team. The managed business is a great growth platform opportunity for us. We have taken that business from just 24 properties three years ago to 84 properties today.

Our managed portfolio across the globe achieved 2014 RevPAR growth of over 10% or 16% in North America, a testament to the strength of our brands and our effective hotel management capabilities.

Now let's move to Wyndham Exchange and Rentals which grew adjusted EBITDA in 2014 in our targeted range and improved their margins. They consistently do a great job of managing in difficult operating environments through innovation and tight expense management. As you know Wyndham Exchange and Rentals is the world's largest vacation exchange network with 3.8 million members and is the world's largest professional manager of vacation rental properties with 103,000 properties.

We match a portfolio of unique, nontraditional lodging accommodations through trusted well-established brands with the demand of leisure travelers, many of whom have vacation with us, with our brands, for generations. Our scale and global marketing expertise enable us to enhance demand and drive occupancy across our portfolio.

Last quarter I spoke about how our Exchange and Rentals business is increasingly leveraging analytics to transform the customer experience and improve yield. Today I would like to spend a few minutes on some important initiatives to increase cross-selling amongst our brands.

Recently we launched inventory cross-selling between Novasol, our Denmark-based vacation rental business and cottages4you and Hoseason, each based in the UK. Cottages4you holiday homes and Hoseasons boating holidays are now accessible across the Novasol websites giving customers better visibility into approximately 15,000 private cottages and over 1000 boating holidays in the UK and Ireland and making it easier to book vacations.

By integrating this UK and Irish product into its homepage, Novasol can better serve and help its Danish and German customers who want to travel to the UK and Ireland while filling the demand for inventory with cottages4you and Hoseasons product. Cottages4you and Novasol offer a similar holiday home product making it a natural fit from a customer desirability perspective.

This builds on the recent introduction of cross-selling of over 3000 French units between these brands. We believe that this is the start of an exciting opportunity to maximize cross-penetration -- cross-market penetration through each of our brands in Europe and the US.

Another example of sharing inventory across brands is the Wyndham Home Exchange program. This program provides our vacation rental property owners with the ability to [deposit] up to five weeks per property annually in exchange for comparable intervals from within RCI's portfolio of affiliated vacation ownership resorts. It allows exchange members the opportunity to access a wider variety of vacation properties while also providing outstanding value to the vacation rental property owner.

Cross-selling supports our strategy to offer more choices to the customers while driving better utilization of nontraditional leisure inventory across our many brands.

Now let's move to Wyndham Vacation Ownership which had a great year coming in at the top of their original guidance range while instituting new sales and marketing processes that will ensure our ongoing success in years to come. More immediately, we have a good progress since the third quarter in refining our marketing and sales approach as evidenced by the sequential improvement in VPG, which was close to flat in constant currency in the fourth quarter.

We further refined our approach on the specialist presenter model and our outreach to owner upgrades. We remain committed to ensuring that our sales process is effective and in tune with the needs and preferences of existing and potential owners. Previously we focused our discussion on the sales process but it is important to remember that a large part of this process is targeting the right consumers. We are always developing new analytical models that allow us to approach the right prospects with the right offer including financing terms.

This is a carefully orchestrated effort among the finance, sales and marketing teams. We have worked hard in this area over the past five years dramatically improving our FICO scores and down payments. In 2014, we further refined our underwriting standards focusing on the size of loans. While this action negatively affected our VPG in gross sales, it also drove lower than expected charge-offs from those sales enabling us to achieve net sales growth of 8% for the year.

Our provision for loan loss is near a record low and we are continuing to look for improvement. This reflects fundamental operating changes we made to the business but also supported by improving US economy and remember that a lower provision means that we are seeing lower charge-offs and higher collections which improves cash flow.

Of course nowhere are the changes in our timeshare business more transformative than in how we source inventory. Since 2009, we have increasingly moved from capital intensive to capital efficient inventory sources. As a reminder, our capital efficient inventory sources include our Wyndham asset affiliation and just-in-time models as well as recovered inventory we receive primarily through homeowners associations and directly from our owners.

We formalized the process on recovered inventory last year and we are excited about the benefits we receive as we have not only more capital efficient but it is seen positively by homeowners and homeowners associations.

Going forward, we expect to source 60% to 70% of our inventory needs through capital efficient models. It is a significant reason why we are confident raising our free cash flow target. Capital efficient inventory sources provide significant ROIC and cash flow benefits to us.

Now let me turn the call over to Tom for details on the quarter results.

Thanks, Steve, and good morning, everyone. As Steve noted, we are very pleased with our fourth-quarter results which topped off another year of solid adjusted EBITDA and diluted earnings per share growth. Let me review the financial performance of each of our business units and then discuss our expectations for 2015.

In the Hotel Group, revenues were up 9% and adjusted EBITDA increased 23% for the quarter reflecting higher RevPAR and the favorable timing of loyalty and marketing expense compared with the fourth quarter of 2013. Domestic RevPAR increased 8.6% led by strengthen in our economy and upscale brands. Systemwide RevPAR increased 3% reflecting both currency headwinds and higher growth in lower RevPAR markets, specifically China.

Now if we were to exclude China and bring it to constant currency, global RevPAR grew 5.9% and international RevPAR was flat.

System size increase 2.4% for the year and the pipeline at year end stood at approximately 960 hotels and 117,000 rooms.

Our Exchange and Rentals segment generated solid operating results in what is traditionally its slowest quarter of the year. On a currency neutral basis, revenues increased 6% and adjusted EBITDA was up 14% reflecting revenue increases and effective cost management.

On the exchange side of the business, revenues were up 2% in constant currency. The average number of members increased 2.2% reflecting member growth in the Americas attributable to higher retention rates and new member growth while exchange revenue per member was flat.

For vacation rentals, revenues were up $15 million or 11% for the quarter in constant currency reflecting a 7.3% increase in transaction volume and a 3.3% increase in average net price per rental, primarily driven by growth in higher yield at our Landal GreenParks business based in Holland where we are seeing the tangible benefits of our enhanced pricing tools.

We are coming off a strong year in Europe for our Vacation Rentals business and our early booking experience indicates a continuation of this trend in 2015. Our bookings thus far are up compared to prior year.

Let's keep in mind the nature of what we sell in our rental business in Europe, primarily domestic vacations in Europe sold to continental Europeans or British consumers. So our product in Continental Europe for euro currency consumers is still a great value for those domestic market consumers and now an even better value for our UK customers due to the relative strength of the British pound.

Consumer confidence in our major European markets has remained steady. Our customers really value their vacations and the product offerings we provide.

Near the end of the quarter we completed the sale of Canvas Holidays, a provider of European camping holidays resulting in a $20 million non-cash loss. This segment of the leisure industry in Europe had experienced significant consolidation over the past 12 months. After careful assessment we determined that we would need to make significant capital investments to maintain a relatively small position with limited growth prospects and therefore we decided to exit the business.

In our Vacation Ownership business, we wrapped up another strong year with adjusted EBITDA growth of 6% for the full-year. Fourth-quarter revenues were up 2% and EBITDA was flat year-over-year. Net VOI sales were flat reflecting flat VPG in constant currency and a 2.1% decline in tour flow offset by a lower provision for loan loss. Similar to last quarter, tour flow decreases reflect lower upgrade tours as we transition to our new specialist presenter marketing program. While fewer existing owners are touring, our close rate for those owners who are touring is higher providing promising signs for the specialist presenter model.

Overall VPG was still affected by the resulting mix shift to new owners. However as Steve noted, we are pleased with the sequential progress we made on VPG in the fourth quarter.

The provision for loan loss was $60 million, down 18% from a year ago. As Steve noted, the refinements we have made to our credit standards and other operational steps have resulted in provision rates that are near all-time lows.

Turning to some Companywide figures, free cash flow for the year was $749 million or $5.90 per share comfortably in our neighborhood target of $750 million. Inventory on the balance sheet increased approximately $140 million. Now this primarily reflects late 2014 inventory purchases and some non-cash items.

We repurchased 2.1 million shares for $171 million during the quarter, decreasing our weighted average diluted share count by 5% year-over-year. For the full year, we repurchased 8.6 million shares for $662 million. Including the $179 million we paid in dividends, we returned about $825 million to shareholders in 2014.

So now let's turn to our 2015 outlook and guidance. As a reminder we will post full guidance details to our investor relations website following the call.

As Steve mentioned, we have adjusted our earlier guidance levels due to the significant strengthening of the dollar. Recall that we noted a $9 million foreign exchange impact 2015 versus 2014 when we issued our guidance in October. Since then, the currency has impacted adjusted EBITDA by another $25 million resulting in total year-over-year foreign exchange headwinds of $34 million.

While we are lowering EBITDA guidance for 2015, we have refined our revenue assumptions and are increasing our revenue guidance by $50 million. The new range is $5.450 billion to $5.550 billion. Note the negative FX impact is being primarily offset by the acquisition of Dolce. Our new adjusted EBITDA guidance will come down just $15 million to $1.285 billion to $1.315 billion. This guidance range reflects FX rates on January 30, 2015. We may update our views as we progress into the year should the value of the dollar change meaningfully.

Let me take a brief moment to explain to you why the Company is experiencing this FX translation effect. Our hedging activity for earnings translation exposure is done on a quarterly basis. So while the P&L is somewhat protected from FX fluctuations in the short term, exposure beyond a given quarter remains unprotected. In large part, our hedging practices around translation are guided by consideration of hedge accounting implications.

Hedging of noneconomic activity such as earnings translations in our business does not received favorable accounting treatment which could result in P&L volatility. Therefore, we hedge within a quarter to avoid the optics of P&L volatility.

As it relates to how we see these FX movements impacting our business, our ongoing philosophy has been to evaluate the performance of our international businesses excluding the effects of foreign exchange. Our operating teams are responsible for the commercial momentum of our businesses and we believe the best way to judge the momentum of our underlying businesses is on a local currency basis. Therefore, we will disclose our results in 2015 with and without the impact of foreign currency effects.

On a currency neutral basis, our full-year adjusted EBITDA guidance for 2015 implies growth of 6% to 9% which is consistent with our targeted business growth rate. Adjusted diluted earnings per share guidance for 2015 moves to $4.75 to $4.90 reflecting share repurchases in the fourth quarter of 2014 and the net effect of foreign exchange. We expect a diluted share count of approximately 123,000,000 shares which per our standard guidance practice assumes no share buybacks in 2015.

Now let's take a quick look at guidance for each of our business units. Starting with the Hotel Group, we expect another strong year. We expect revenues of $1.270 billion to $1.320 billion. We expect RevPAR growth of 4% to 6% and room growth of 3% to 5%. In constant currency however, RevPAR growth will be 5% to 7%.

Note that the Hotel Group revenues assume approximately $100 million of passthrough reimbursable revenues from the Dolce acquisition. Passthrough reimbursable revenues contribute no EBITDA and will result in a full-year margin detriment of about 250 basis points for the Wyndham Hotel Group in 2015. Hotel Group EBITDA will be $360 million to $375 million.

At Exchange and Rentals while the operating results of Canvas were immaterial to our full-year results, the sale of the business will impact our driver growth rates and also have a significant seasonality impact on EBITDA and EPS. In 2014, Canvas generated losses in the first, second and fourth quarters but produced $18 million of EBITDA during the third quarter. We will mention these effects in future quarters.

Reflecting January 30, 2015, FX rates in the sale of Canvas, we expect revenues of $1.500 billion to $1.560 billion and adjusted EBITDA of $364 million to $377 million per WER. On a currency neutral basis and excluding the effect of the Canvas sale, growth would be 3% to 6% for both revenue and adjusted EBITDA. We expect the average number of exchange members to grow 1% to 3% and exchange revenue per member to be down 1% to 3%. However on a constant currency basis at the midpoint, exchange revenue per member would be flat.

We expect vacation rental transactions to grow 2% to 4%. We expect average net price per rental to decrease 9% to 11% primarily reflecting foreign exchange. On a currency neutral basis, average net price per rentals would be flat. Adjusting Canvas results out of 2014 drivers, the growth rate in rental transactions in average net price per transaction would be approximately 200 basis points higher.

For Vacation Ownership, we expect revenues of $2.660 billion to $2.725 billion and adjusted EBITDA of $680 million to $700 million. We expect tour and VPG growth of 1% to 3%. Excluding foreign exchange effects, EBITDA growth would be 4% to 7%.

Companywide, we expect corporate expenses of $130 million to $135 million, down from 2014 due to lower employee expenses and legal fees. We expect depreciation and amortization to be between $242 million and $245 million. We expect interest expense of $112 million to $114 million which assumes no debt issuances in 2015.

I'm also very happy to say that our free cash flow target will move to $800 million for 2015. That equates to $6.50 per share. Remember that we manage to a neighborhood target when it comes to cash flow but overall we expect free cash flow to grow in 2015. We will post our cash flow representative model with our cash flow assumptions for the year to our website following the call.

For the first quarter, we expect adjusted diluted earnings per share of $0.91 to $0.94. Year-over-year 2015 first-quarter comparisons will benefit from the absence of approximately a $6.5 million loss from Canvas in 2014. Remember that our interest expense is always a little lower the first quarter than our annual run rate due to the timing of VAT credits and we would also remind you that we don't budget repurchases into our guidance assumptions.

To close, we were very pleased with the performance of 2014 and are looking forward to another terrific year in 2015. And with that, I will turn the call back to Steve. Steve?

Thanks, Tom. Before we open the line for questions, I would like to reiterate a few key points. We had a strong quarter to cap off a great year across our businesses. We have outstanding people collaborating in a culture performance and continuous improvement. Our commitment to value-creating capital allocation is unwavering, all of which positions Wyndham very well to continue to deliver for our shareholders.

The positive momentum of our business is allowing us to increase our free cash flow target and also increase our dividend by 20%. In addition despite FX pressure which is impacting our EBITDA guidance by just over 1%, we are raising our EPS guidance for 2015. And while we are very proud of what we have accomplished so far, we remain firmly focused on achieving success in the future by continuing to execute across our businesses generating significant free cash flow and deploying our shareholder's capital to drive a superior value.

With that, Wendy, we can open the line for questions.

(Operator Instructions). Joe Greff, JPMorgan.

Good morning, everybody. A question for you on your 2015 free cash flow guidance. The conversion of year-over-year EBITDA growth into incremental free cash flow growth in 2015 versus 2014 was nicely ahead of I think what most of us were expecting. Can you give us the high-level bridge there, what was driving that and how sustainable is that conversion? Is there anything one time in 2015 that we should be mindful of that might not sustain itself beyond 2015 particularly with regard to inventory spend and timeshare? And then also the cash tax rate? Thank you.

John, happy to answer the question. So we ended the year at $750 million. We expect EBITDA growth -- I think foreign exchange impacted EBITDA growth to around 5% or so. There are a couple of things as it relates to product investment, we ended up investing a little more in inventory in 2014 and so we don't expect any incremental spend on inventory in 2015 so that is a neutral factor.

On the cash tax side, we have actually identified some opportunities that were taking what was a headwind in the past and adding that as a positive to our overall free cash flow contribution. So we feel pretty good that that $800 million number is achievable for the year and sustainable into the future.

Great. A lot of us want to ask about M&A. I'm not sure if there is anything new to provide there but if you could. Then since it is topical today with another lodging company talking about spinning out its timeshare business following what another company did a few years ago, can you talk about, Steve, the strategic value you see in keeping your timeshare business intact with your other hospitality related businesses? And can you tell us why you think it should stay within Wyndham versus spinning it off like what [Starboard] talked about this morning. Thank you. That is all for me.

Sure Joe. First of all, every company is different with their situation and circumstances and what they view as critical to their ongoing success. Our timeshare business is roughly half of our overall Company and has a great track record for proven growth and delivery of innovation. We are also very happy with our collection of businesses. We have got great businesses with fantastic talented associates and everybody has proven to be very adaptable and resilient. We have gone through some periods of downturn where other companies have seen more pain and we haven't seen as much in part because of the resilient nature of the way the business is built.

So at any particular cycle, it could look like a great idea or not a good ideas to have all the businesses together but we feel really good about the collection of businesses that we have.

Having said that as we have said continually since we listed on the New York Stock Exchange, we understand our fiduciary responsibility to our shareholders and we will look at all options and all opportunities. We have looked at all options and all opportunities and we have now what we feel is the proper collection of businesses. But we continue to look at that and that is not foretelling of anything. It is just foretelling of the fact that we are also always mindful of looking at what our options are out there.

So we really think there is great connectivity with our businesses. We are continually looking at how we can cross fertilize and cross market the businesses and we really feel like we have a terrific collection of very resilient and very strong leading businesses in each one of their sectors.

Thank you.

Steven Kent, Goldman Sachs.

Good morning. So could you just give us a little bit more color on the VPG improvement. It got a lot of focus last quarter. Could you just give a little bit more detail exactly what Franz and Mike Hug and that whole crew did in three months, how they pivoted and changed that trajectory so quickly?

Second question is just the Dolce, nice acquisition in a niche area and just following on what Joe said from a capital allocation perspective on an acquisition perspective, do you see more opportunities like that? And I think what is interesting about Dolce if you don't mind me saying it, that it was a niche area. I didn't hear a lot of other hotel companies talking about it and you all found a way to buy that. So is there a pipeline of those kind of things out there that we should be looking for?

I will take the questions and Tom will weigh in as he sees fit. On the VPG question which I do understand there were a lot of questions in the third quarter. If you look at the history of our VPG, it has not been straight line. It has been a little bumpy, a little volatile and that is the nature of a sales and marketing business like this. We set long-term goals and we achieve those goals and that is what we have done continually but it doesn't mean for one quarter we may not be up or down.

As Franz who you mentioned runs that business said the other day, we start the year we run a marathon. Our splits may not be exactly what we want them to be but we know that we can sprint a little harder and reach the goal at the end of the day. That is part of how he runs that business and they do a phenomenal job of running the business down there in Orlando.

Specifically what they did was as we talked about it on the last call, they had a pretty good idea of what was impacting the VPG downturn. They adjusted for that. Some of the things they did was they changed the kind of timing and rhythm of our tours for our in-house guests, so people staying at the resort coming into take a tour. We were a little bit too rigid and structured about when those tours were going to be so we moved back to a little more flexible model but still using our specialist presenter program, a new way of positioning the product. That had a very big impact on the success rate of generating those in-house tours. And as you know, VPG on in-house tours are higher than the frontline tours so just that mix can have a bit of a change to it and that is really -- there is no more really to the secret sauce than that. That is what we did.

We looked at basically our marketing methodology and we adjusted in and we will continue to adjust it and again, I will say this, we said it in the past, don't expect VPG to be straight line every quarter. We work to maximize our profitability in the business. As we commented, our gross VOI was kind of flattish and down a little bit in the third and fourth quarter but our net VOI when you take into account who we are selling to and what our loss profile is was actually growing by 8%. So there is give and takes in that businesses. It is one of the wonderful flexibilities of that business and I don't know that there is any group that manages it better than our group down in Orlando.

As for Dolce, thank you for the compliment of finding that deal. M&A is kind of part of our DNA here and we have a terrific M&A, group. It is not huge but it is a great group that are constantly turning over rocks and looking for deals. We have looked at Dolce for a while. We were doing other things and had our focus in other areas but once we turned our laser focus to it, we were able to complete that deal relatively quickly and we think it will be a great addition to our hotel portfolio.

As I said, not only adding more group and meetings business capability to us from an inventory standpoint but also from the sales standpoint. They have a great reputation in the meetings business for group meetings and now we can apply that same group salespeople to also driving more business to our women and other meeting and banquet hotels.

So we feel like this is a terrific opportunity for us, a great fit. It is a New Jersey-based company so it is kind of easy. We hope to keep a lot of those key players involved and so we are very much looking forward to the integration of that business.

Okay, thanks.

Patrick Scholes, SunTrust.

I have a number of questions here. First, just a few questions on the results in the quarter. Did you say how much versus your original expectations October FX hurt you for the fourth quarter result?

It was a little. It didn't stand out as big numbers, Patrick. (multiple speakers)

So EBITDA growth for the fourth quarter would have been approximately 150 basis points higher if you strip out the effect of foreign exchange.

Okay. Secondly in here, it looks like part of your earnings beat versus Street expectations was in the lodging segment but you noted in your press release that you did have favorable timing of loyalty and marketing expenses. How much did those account for?

I don't know the specific number off the top of my head. I might get that in a second but what ended up happening was that in 2014 we had been running a surplus -- excuse me 2013 -- we had been running a surplus through the first three quarters and the accounting requirement is such that you can't end the year with a significant surplus. So we ended up booking a big expense in 2013 and our approach in 2014 was different. I think the effect was worth around $5 million to overall EBITDA in the fourth quarter year-over-year.

And then one last question on the quarter. I do see here in the non-GAAP statement you had a $27 million hit from an equity investment in Vacation Exchange and Rentals. Can you give us some color on that?

The $27 million in Exchange and Rentals has to do with the sale of Canvas and we also had a minority investment in a small business and the valuation of that business was recast. So those were the two components of it.

Okay. I have two last questions here. Can you give us a ballpark estimate of what you expect for EBITDA for Dolce in 2015?

It is small, Patrick. We are not adding anything in for it frankly. Between the integration costs that we will incur to bring the company together, it is going to be less than $5 million and I am not sure exactly at the end of the day how much it will be but it is not much to add. In 2016, it will be a more significant contributor.

Okay, so expect an uptick from $5 million in 2016. Last question here. Have you seen at all any uptick in incoming US tourism for staying at European hotels or in your vacation rental business? And I relate that to the depreciation of the euro so anything noticeable with US travelers coming over to Europe in the last couple of months?

No, not specifically. What we have seen is the European rental business is starting the year very strong. They are right in line or ahead of our expectations and at this point I have not gotten a report of whether any of that is driven from US consumers. We are just seeing the bookings coming in. I am not seeing the source of the bookings at this point. We will see later but it has never been a big part of the bookings for rental in Europe. The dream is the bill in Tuscany but I don't know how many Americans actually do that but it is a very common thing for Europeans to do. As soon as we know, Patrick, we will tell you how we are doing with US consumers going over to Europe but at this point I don't have anything to report.

Would I guess your expertise and experience and intuition tell you that the vacation rental business in Europe should actually benefit from Europeans being more expensive to go to US so they decide to stay in Europe for the summer? Is that a fair statement?

I don't think so. I mean it is a nice thought but I don't think so. I think that frankly the Europeans take more holidays than Americans do and we pick up a couple of those weeks of holiday from the people who travel with our rental product and they may have six weeks. They take two weeks with us and maybe a week is with visiting family and maybe a week is traveling abroad. But we haven't seen over the years where there has been ups and downs in consumer confidence in some of the countries in Europe as well as volatility in the currency that it has had all that much of an impact on our business.

Again as I said, we see starting the year strong over there so we don't see anything to indicate that even though the euro is way down that it is impacting. Could it be because people are not planning their international trips? An interesting thought. But my intuition would tell me it is probably not having that large of an impact.

If anything within Europe, I think it may increase the flow of drifts to Continental Europe because there is a nice arbitrage of the pound to the euro but for long haul like coming from the US, I don't think it is going to be that much of an impact.

Great. That is it for me. Thank you.

Christopher Agnew, MKM Partners.

Thanks very much. Good morning. I wanted to ask about timeshare inventory and I understand that it increased because of timing around year end. But as you move forward and toward that 60% to 70% capital efficient sourced inventory goal, how should we think about inventory on the balance sheet changing over time? Thanks.

I think that as we have looked at this going forward that it has been our view that we will increase inventory spending up to a certain level, not materially different than what we are doing right now and that we will manage our inventory balances accordingly.

So one would think that that would translate over time to a gradual reduction in the levels of inventory we have on our balance sheet. But remember that the inventory on our balance sheet is comprised of a number of different components and so those components are not going to necessarily go away. So I think in the past we have talked about the number getting south of $1 billion, maybe $800 million or $900 million at its optimal. But we wouldn't see it going much beyond that because again of the components that are sort of fixed components. And I will remind you that one of the components is the expected return of inventory that we get from our loan loss provision. And so I think that is worth about $250 million in and of itself.

So we think that it will get -- if we are running the business optimally, a couple of notches below $1 billion and that is where we would settle.

Okay, makes sense but you will be presumably growing EBITDA and its inventory won't be growing with it essentially?

We hope to be growing inventory more efficiently as we get bigger.

Okay. And then just a follow-up on VPG and obviously you said guidance is 1% to 3% and you said don't expect that every quarter. But can you point us to any thoughts to maybe first quarter, first half of the year? I mean I think that optically it looks like you have some tougher comps in the first quarter and I think you had mentioned before that some of your initiatives were kicking in later in the year. So any color you could give us on what to expect over the next couple of quarters would be great. Thank you.

Chris, as you mentioned, the comps get easier in the third and fourth quarter just because of what we saw happen this year. So I think if anything you would probably see a lower VPG growth in the first quarter, maybe a little bit higher in the second quarter and then better in the third quarter and the fourth quarter probably about the equivalent. So I guess there would be a phasing of kind of low to slight negative in the first quarter moving to positive as we move through the year. But the team is very comfortable with the 1% to 3% that they have guided to for the full year.

Great, thank you. Last question, just on the umbrella marketing campaign, I know you had some major advertising campaign last year. Are you -- not relaunching but repeating national advertising again this year? What should we expect? Thank you.

Bigger and better than last year. We will be telling our franchisees about the umbrella campaign that we will be running this year at our conference in Las Vegas in March. We will also be talking about some changes that we are making to our loyalty program at that time. So yes, great stuff going on in the Hotel Group. The umbrella campaign this year I think will be terrific.

Thanks a lot.

Nikhil Bhalla, FBR.

Good morning, Steve and Tom. A quick question on just tours in the fourth quarter and you might have alluded to this earlier and sorry if I missed that. Why were the tours lower year-over-year in the fourth quarter, by the toward volume?

Nikhil, it is Tom. So we have initiated this podium presentation, this specialist presenter model and one of the things that we are working on is ensuring that our ability to put people on tours is strengthened and we made good progress on it in the fourth quarter. But we are still working through ensuring that our outreach on this new method of sales pulls people on tour that we want. And in my comments I identified that the deficiency in our tours reflected our need to work through -- it was related to the upgrade sales. And we were reverting fewer upgrade sales again as we work through improving our outreach to people who are taking vacation visits with us to take tours.

Okay. So it is just a mechanism of how you attract tours that was changed, correct?

How we reach out to our existing owners to come and visit our new specialist presenter presentations.

Okay, got it. And just on Dolce Hotels overall, Steve, can just talk about how this actually fits in from a strategy standpoint into the current portfolio you have for hotels, where there could be some synergies, where would be the opportunity to actually grow the Dolce brand? How do you see that in the future?

A couple of different ways. Dolce is a great brand with great product. It is a global brand. There's quite a few properties in Europe as well as what we have in the US but it has been a brand that has been somewhat starved for growth just because of the capital structure that the business was living in before. And we feel like we have the opportunity to bring our capabilities to bear including using capital to help grow the business more quickly as we do in all of our upscale managed property environment with our development advance nodes or key money. So we have the ability to open doors that maybe were not open before with the limitations that Dolce had.

On top of that, they have a terrific group sales marketing business as I said before. That is both an advantage to us and our Wyndham Properties but also an advantage to the existing Dolce Properties because we have ourselves a good group sales business. So we can kind of expand the group sales effort we have to deliver more for the owners of the Dolce Hotels as well as the owners of the Wyndham Hotels.

And so it is really a win win on both sides. Both the teams are going to come together and we are going to be in a position to drive a lot more value. The more value proposition we can build the more people we will sign up to become part of the Dolce system. And that is kind of the secret sauce of how we grow our brands when we bring them together is that the combined whole is more powerful than the individual pieces.

Got it. And just to clarify on your free cash flow guidance for next year, when we look at 2014 your share buybacks totaled 600 million plus overall. Should we expect share buybacks to be in the same proportion of free cash flow in 2015 as it was in 2014? Anything that would take away from that?

Yes, as we say every year at this time, it all depends on what the M&A prospects look like, what are the other uses of capital for us to grow the business more quickly. We are always looking to deploy capital into the businesses to get them to grow even more quickly than they are growing right now. And we will continue to look for those opportunities.

But if you drew a picture that was the same as 2015 that existed in 2014, then your assumption should be correct. But it really depends on what opportunities present themselves to us. We don't target a share repurchase, we try not to because we don't know what the future will hold. It is very hard to model opportunity in the future so we tend to be opportunistic in that regard but again, we don't see any reason to hang cash up on the balance sheet. We don't see any reason to delever the Company. So if there is cash flow, it will be used to enhance shareholder value.

Thank you for that, Steve. One final question for Tom. Tom, can you just talk a little bit about if you can book-end where the CapEx would be in 2015?

I think we are going to be up $10 million against this year. So I think 245 to 255. 240 to 250, let me correct that, please.

Okay, 240 to 250. Thank you.

Harry Curtis, Nomura.

Good morning, everyone. Just a couple of quick questions. The first is some clarification on the growth of your brands. In looking at the growth of the brands, the hotels that seem to expand the most were kind of barbelled. It was really Wyndham and then Knightsbridge and so as we look further into 2015 and 2016, if you could talk about your strategy, where would you like to see your brands expand the most?

We would love to see all the brands expand really rapidly but we again have to be flexible and optimistic about what the market is presenting. We rolled out several new prototypes this year and are rolling them out at our conference in March to the franchisees that we think will engender even greater support from the franchisees. And those brands that we are rolling out are Baymont, Days Inn, Super 8 -- there are five of them, I'm not remembering all of them. I think Hawthorn is another one. So those will have a fresh prototype that will be available for franchisees. These are new constructions or conversion so those are brands that we would like to see grow because we think the prospects exist for quick growth.

A lot of our growth is coming internationally. So when you look at our international markets, most of our brands are representative in most markets but not all. This year we opened properties in some South American markets where we never had those brands before and they now represent new growth prospects.

So we don't go into the year saying we want to see X number of Wyndhams, X number of Howard Johnson's, X number of Super 8s. We go in with a targeted growth rate and then the development team then targets very, very tightly regionally what is available, what fits best into a market. So I'm not answering your question probably the way you would like to have an answer with some specific number for Knights Inn or Days Inn or Super 8 but we really don't manage the business that way. We manage the business to maximize growth and manage the business to grow with the brands that present themselves with the best opportunities in specific markets.

My second question is really more clarification on guidance for 2015 and how much incremental improvement that guidance includes just a lower provision? So in 2014, your provision came down to $260 million. That was down 25%. Does your 2015 guidance anticipate much incremental change in that?

It doesn't assume much incremental change at all. It is pretty flat to what our experience was in 2014.

Okay, so do you think you are at a level now that really reflects kind of a stability for a multi-year period?

My personal opinion and hopefully Steve and I see it the same way is we have made radical improvements, we have taken the right operational steps, Harry, to get to a better place. The economy has worked in our favor. These things are really hard to project but we believe that we have an enhanced consumer profile that we have identified some operational practices and we have arranged credit standards such that there is no reason to believe that things can't get better. But at this point in time, we don't have any visibility into it and so while we are optimistic about continued improvement right now, we are just guiding to continued strong performance in that metric. Steve?

Dead on.

Great. That does it for me. Thanks.

Thank you. I will now turn the call over to the speakers for closing comments.

Okay, Wendy, thank you very much and thank you all for being on the call today. We look forward to talking to you on the first quarter report. Thanks.

Thank you. This does conclude today's conference. Thank you for joining. You may disconnect at this time.