Travel + Leisure Co (TNL) 2015 Q3 法說會逐字稿

Welcome to the Wyndham Worldwide third- 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.

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

Before we get started, I want to remind you that our remarks today contain forward-looking 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 13, 2015 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 it is available on the Investor Relations section of the website, at wyndhamworldwide.com. Steve?

Thank, Margo. Good morning and thank you all for joining us. We delivered strong results in the third quarter, with currency neutral adjusted EBITDA and EPS growth of 7% and 17%, respectively, on an apples-to-apples basis, excluding acquisitions and a divestiture. These results reflect continued strength and progress across all of our businesses.

In our Hotel Group, results were driven by strong domestic RevPAR. In Exchange and Rentals, we had a big increase in rental transaction volume; and in Vacation Ownership, we posted double digit gross VOI sales growth. Capital allocation continued to benefit shareholders, as well, driving a 6% year-over-year decrease in our weighted average shares outstanding and contributing to a rise in our adjusted EPS guidance for the full year.

Now let me provide some operating perspective for each of the businesses, starting with the Wyndham Hotel Group. Our umbrella marketing campaign focusing on Wyndham Rewards and featuring the Wyndham Rewards Wyzard has been a success. The campaign has provided a great boost to our revamped rewards program, with member stays up over 7%.

We have also added over 2.1 million new members, and nearly half a million previously inactive members reactivated and stayed with us again. We have also seen record franchisee engagement, with significant increases in on-property enrollments. This is a great start for our long-term strategy to grow our loyalty program.

The new program is earning accolades from guests and industry experts alike. Members are delighted by the ease of the program, which allows them to earn and redeem points faster than any other loyalty program. And US News and World Report recently named Wyndham Rewards one of the top programs in the hotel industry.

Of course, all of this is driven by the value of our brands. The brand quality remains a primary focus at Wyndham Hotel Group. We understand the power and reach of our unique portfolio of 13 brands and see a great opportunity to offer guests and franchise owners a variety of clearly defined and compelling experiences, not only in our upscale and mid-scale brands, but in our economy brands, as well. Most importantly, by clearly defining and differentiating our brands, we can better grow our system by offering owners a clear value proposition that drives a higher RevPAR for them.

On the technology front, the upgrade of our property management and central reservation systems are well underway. As a reminder, we have partnered with technology best-in-class providers, such as Sabre, to help ensure our franchisees around the world are utilizing the most technologically advanced systems, both now and into the future. This will help to maximize the value proposition of our family of brands. Hotels within our portfolio will be able to manage their pricing and inventory more effectively, connect to a wider range of global distribution partners, and access a fully integrated customer profile that is tied into our Wyndham Rewards program.

After successful pilots this summer and spring, we began the rollout this month of the property management system and are well on our way toward achieving full implementation by the end of 2016. We are also well into the planning for the migration of the Wyndham Hotel Group's four central reservation systems into one Sabre system and will begin moving our first brands to the new system later this quarter.

As part of our effort to expand our distribution platform, we recently signed a global deal with Trip Advisor Instant Booking. As one of the first hotel companies to feature their ratings on our brand websites, we've had a longstanding relationship with Trip Advisor. Trip Advisor Instant Booking will make it even easier for potential customers to reach and directly book stays across our brands.

Finally, the integration of the recently acquired Dolce brand has been highly effective. Feedback from Dolce owners has been great, as they are already seeing market share and margin improvements from our global marketing and sourcing leverage. The acquisition is outperforming our expectations. As a matter of fact, we have several Dolce prospects in our current pipeline.

Now turning to Wyndham Exchange and Rentals, which had a great quarter, posting strong rental transaction and organic adjusted EBITDA growth. These great results reflect our leadership positions in managed [rental] vacation rental and timeshare exchange. We control the calendar and inventory for over 110,000 vacation properties and provide products and services to over five million families around the world. The range and quality of the products and services that we provide to guests, property owners and affiliates sets us apart in the industry.

We have traditionally spoken about this segment in terms of two business lines, timeshare exchange and professionally managed vacation rentals; however, as we look at Wyndham Exchange and Rentals and consider the many opportunities we have to share core competencies, business enhancements and inventory across our brands, we are increasingly thinking about this business unit more simply as the world's largest provider of professionally managed, unique vacation accommodations, anything from cottages to castles to timeshare resorts.

To better reflect this perspective and to focus our teams on a cohesive growth strategy that harnesses the power of the extensive inventory available to our network and the core competencies of our teams, we are changing the name of this segment to Wyndham Destination Network, effective January 1. There will be no change to our customer experience or consumer facing brands, such as RCI, Lendal GreenParks, Host Seasons and Novasol, many of which have built customer loyalty for decades in their markets. We are taking this step now to optimally position this business unit for future growth by focusing our strengths across our family of brands.

The overarching strategy of Wyndham Destination Network is to provide the right vacation to the right customer at the right time, by leveraging our exclusive access to unique, high quality vacation accommodations. The key to this strategy is our strong service commitment, our expertise in analytics and revenue management, our ability to personalize the consumer experience, our product distribution capabilities and our deep market knowledge.

Now moving on to Wyndham Vacation Ownership, which had an outstanding third quarter. Sales were robust across the system and we've never been more excited to be in the timeshare business. A recent third-party study showed that the $675 billion US leisure travel market is expected to grow at a 4% CAGR over the next 10 years. That's approximately $30 billion of additional spend each year.

Millenials and baby boomers represent the largest growth opportunities. Boomers are still traveling frequently, representing approximately 80% of the US leisure travel spend, with an average of four to five trips per year. Millenials are rapidly becoming a force in travel, with approximately 66% indicating that it is an important part of their life. A majority of Millenials, six out of ten, would rather spend money on experiences, which we see squarely in the Vacation Ownership value proposition. These trends create attractive opportunities for us to continue VOI's sales growth for many years.

And we're well positioned to capture these opportunities. Over the past 12 months, we've opened new sales centers in fantastic locations like New York City, St. Thomas and the Virgin Islands, Puerto Rico, Southern California, Colorado and Las Vegas. Many of these sales centers will be primarily committed to driving new owner growth. Adding new members has been and will continue to be a priority for this business.

In addition to the new sales centers, look for us to expand our network of alliance partners. We're exploring non-traditional partnerships that will enable us to reach a new swath of potential owners. For example, we just signed a new alliance with Norwegian Cruise Lines. This will enable our owners to enjoy unique cruise experiences and will give Norwegian's passengers the opportunity to experience our resorts.

This builds upon a great program we already have in place for potential new owners. Our "Land and Sea" vacation package features a stay at one of our timeshare resorts, along with a cruise on a Norwegian ship. We piloted this program in Southern Florida, where we have a number of Wyndham Vacation Ownership properties in close proximity to Port Miami. Guests enjoy a three- to four-night cruise on the Norwegian Sky, alongside a two- to three-night stay at a nearby WVO resort, which includes a sales tour.

Based on positive results, we are exploring a variety of joint marketing efforts in several Norwegian port cities where we too have a presence, such as New Orleans, Hawaii and the Port Canaveral area. We're excited about our allowance with Norwegian, especially given our long history of successfully partnering with other hospitality companies for mutual growth.

We are also exploring ways to better target new owners who are staying at our resorts, including friends and family of existing owners, renters, and non-affiliated owners who have exchanged for one of our intervals. There's no better customer than one who is already enjoying our product.

To conclude, the opportunities across our businesses are robust. Now let me turn the call over to Tom for details on the quarter results.

Thanks, Steve, and good morning, everyone. The third quarter is always our most important quarter of the year, as it generally produces around 33% of our EBITDA. So I'm particularly pleased to report that our business units achieved strong results.

Adjusted EBITDA and adjusted EPS increased 7% and 17%, respectively, on a currency neutral basis and excluding acquisitions and a divestiture. Compared to the third quarter of 2014, FX translation reduced revenues by $58 million and adjusted EBITDA by $17 million company wide.

We exceeded our EPS guidance by $0.10, reflecting better than expected operating results, particularly at Vacation Ownership, a lower than anticipated tax rate and share repurchases. In the quarter, we repurchased 2.1 million shares for $170 million, contributing to a 6% year-over-year decrease in our weighted average diluted share count through the first nine months of the year.

Free cash flow for the nine months ended September 30 was $660 million, compared with $750 million for the first nine months of 2014, primarily reflecting the timing of inventory spend, CapEx and some working capital. We expect fourth quarter inventory purchases to be significantly under last year's fourth quarter spend.

We still expect to deliver free cash flow in the neighborhood of $800 million, despite $40 million in foreign exchange headwinds. As you know, there can be variability in cash flow in any given quarter, or even any given year, so we view $800 million as a neighborhood target rather than a precise figure.

Reported results for the quarter reflected several items excluded from our adjusted measures. We spent $8 million to close two call centers and streamline operations in our business units. We expect these moves to provide positive financial and operational return in the near future.

We recorded a $7 million write-off of Hotel Group IT projects that are now obsolete, as we move to our new property management and central reservation systems in the cloud. In addition, we took a $14 million charge associated with the termination of an underperforming contract at our Hotel Group.

Now let's take a look at the performance of each of our business units. Our Hotel Group had a solid third quarter, following a strong first half of the year. On an apples-to-apples basis, which excludes the effect of currency, the increased rate on the inter segment licensing fee that the Hotel Group receives, a benefit from resigning a third-party co-branded credit card agreement in 2014, and the Dolce acquisition, revenues and adjusted EBITDA increased 4%. This is in line with our expectations and reflects higher marketing spend and operating expenses associated with the PMS and CRS implementations. As I mentioned, the business recently streamlined operations and we expect the savings from these moves will largely offset implementation costs, starting in the fourth quarter.

Same-store domestic RevPAR continued to perform well, increasing 5.1%, with Super 8 beating the industry and Days Inn brand performing in line. Our mid-scale segment also posted growth consistent with the industry, with the Wingate, Hawthorn and Ramada brands showing growth of greater than 7%. All of this despite seeing a drag on our RevPAR growth due to weakness in the oil producing states of North Dakota, South Dakota, Arkansas, Oklahoma and Texas. Now to put this into perspective, RevPAR in the non-oil producing states grew around 6%, whereas RevPAR in the oil producing states was actually down 3%.

We were especially pleased with the performance of our managed portfolio, which posted a 14% increase in RevPAR year-over-year on a same-store basis. System-wide RevPAR was flat, largely due to the adverse impact of foreign exchange, lower demand in oil producing regions, and continued unit growth of lower RevPAR in hotels in China. If we were to exclude China effect and put our results in constant currency, global RevPAR actually would have grown 4.4%.

Overall, system size was up 2.5%. Our development pipeline has increased 5% sequentially, and we're on track to hit our annual growth target of 3% to 5%, albeit at the lower end of the range.

Our Exchange and Rental segment continued to perform well. Note that adjusted EBITDA in the third quarter of 2014 included an $18 million contribution from Canvas Holidays, a UK-based camping brand which we sold late in 2014. Remember that while Canvas historically contributed significant positive EBITDA in the third quarter, this was largely offset by negative EBITDA in other quarters.

On a currency neutral basis and excluding acquisitions and the Canvas Holidays divestiture, revenues increased 6% and adjusted EBITDA increased 5%. Results primarily reflect strong peak summer growth in our global vacation rental brands, including North America.

At RCI, exchange revenues increased 1% in constant currency. The average number of members increased 1.5%, attributable to new member growth in the Americas. Exchange revenue per member was flat, as pricing increases offset the growth in lower transacting club members.

Vacation Rentals revenue for the quarter were up 8% in constant currency and excluding the impact of acquisitions and the Canvas divestiture. That increase reflects a 5.8% increase in transaction volume and a 1.7% increase in the average net price per rental. Transaction growth occurred in all significant brands and regions. Both pricing and transaction volume were aided by our dynamic pricing initiatives.

Results were particularly strong in our Vacation Ownership business. On a constant currency basis, revenues increased 8%. Adjusted EBITDA increased 9% on a currency neutral basis, which includes a $4 million increase in the licensing fee paid to the Hotel Group. Excluding this fee increase, currency neutral adjusted EBITDA increased 11%, primarily reflecting strong improvements in gross VOI sales.

In constant currency, gross VOI sales were up 12%, albeit from a low base in the third quarter of 2014, reflecting a 10.6% increase in VPG and a 0.9% increase in tour flow. Sales in VPG benefited from a favorable product mix, resulting in higher yields and transaction sizes.

Now while we're delighted by our VPG results for the quarter, please keep in mind that this metric can move around and should be viewed in the overall context of the business. Our operating focus is to drive top line VOI sales growth, which will lead to EBITDA growth.

The provision for loan loss was $78 million, compared to $70 million in the third quarter of 2014, primarily reflecting higher sales volume in the quarter.

In the quarter, we completed another WAAM just-in-time transaction involving the sale of existing inventory to a third-party for completion. Now there are different structures to these WAAM deals. In this particular case, we sold land and work in progress in St. Thomas for $65 million in cash. Our partner will finish the development and deliver the product to us on a just-in-time basis.

This type of WAAM deal has the effect of accelerating the cash flow of timeshare development by one, monetizing inventory on the balance sheet and then reducing the immediate cash outflow for a timeshare development. While the accounting treatment takes it out of the definition of free cash flow, as the dollars received run through financing activity rather than cash from operations, it does increase our total of available cash this year.

We closed our third securitization of the year, the $300 million Sierra 2015-3 on October 21. We achieved a 2.69% coupon with an 89% advance rate. And from a corporate perspective, we issued a 10-year $350 million bond with a 5.1% coupon on September 10. The funds were used to repay our short-term borrowings. We were once again pleased to be able to access the long-term debt markets at such favorable rates.

Finally, let's turn to guidance, which will be posted on the website after the call. As you saw from the press release, we're increasing our adjusted diluted EPS guidance to $5.06 to $5.09 for the full year; and diluted share count goes to 119.4 million shares, reflecting the benefit of our third quarter share repurchase activity. We are adjusting our interest expense, D&A and tax rate guidance, which again is posted on the website.

We are also fine tuning our driver guidance as follows. In the Hotel Group, we now expect that 2015 global RevPAR will increase 3% to 4% on a constant currency basis or be flat, including the impact of foreign exchange translation. Domestic RevPAR is expected to increase 5% to 6%. Our new guidance reflects the impact of updated FX translation effects, coupled with lower demand in oil producing regions and higher international growth.

As noted earlier, we expect net room growth to be at the low end of our 3% to 5% guidance range, as we continue to focus on hotels that meet our quality standards. We're maintaining our Exchange and Rentals driver guidance, but acknowledge that Vacation Rental transactions may modestly exceed the range and exchange revenue per member may fall slightly below the range, due to foreign exchange translation.

For Wyndham Vacation Ownership, we expect to be high end, if not slightly above, our VPG range; and consistent with our update last quarter, we believe we'll be at the lower end of the 1% to 3% tour flow range.

Total Company, as well as business unit revenues and adjusted EBITDA guidance all remain unchanged. Now note that foreign exchange translation created an additional $8 million headwind since our last guidance, compared with 2014 results. The total year-over-year translation headwind is now estimated to be $46 million. Given the increased translation headwind, we are currently more comfortable with adjusted EBITDA estimates slightly below the midpoint of our $1.285 billion to $1.315 billion range.

For the fourth quarter, we expect adjusted diluted earnings per share of $0.94 to $0.97. In Exchange and Rentals, note that the now divested Canvas Holidays business had a $6 million EBITDA loss in the fourth quarter of 2014. We expect interest expense in the fourth quarter of approximately $34 million, reflecting the recent bond offering. And finally, remember that we don't assume future repurchases in our EPS guidance.

As you saw from the press release, we expect 2016 adjusted EBITDA growth in line with our long-term targeted range of 6% to 8%. While our guidance always excludes prospective share repurchase, it's important to note that we expect the application of our considerable free cash flow, either through M&A or share repurchase, to result in earnings per share compounded growth in the mid-teens over the next five years.

We'll provide full 2016 guidance, including Company revenue, EBITDA, EPS and free cash flow guidance, as well as business unit revenue, EBITDA and driver guidance, on our February call, once we have completed our budgeting process.

To close, we are very pleased with the quarter and are looking forward to continued progress in the remainder of the year. And with that, I'll turn the call back over to Steve. Steve?

Thanks, Tom. To sum up, we continue to innovate, adapt and execute, whether it is the upgrade of our property management and reservation system in Wyndham Hotel Group or data driven revenue management program in Wyndham Exchange and Rental, or our new alliance with Norwegian Cruise Line in Wyndham Vacation Ownership. Our entire team is passionate about finding new ways to delight our customers, enhance our value proposition for all our stakeholders, and drive value for our shareholders.

And now, Diane, I'll open the call for questions.

(Operator Instructions)

Joe Greff, JPMorgan.

Good morning, everybody.

Good morning, Joe.

I have three relatively quick questions here for you, two related to Vacation Ownership and one relates to how you're thinking about next year. One, as you had mentioned, the Q3 volume per guest result was better than most of us on this call expected. And I know the comparison was easy, but even on a two-year backed basis, volume per guest was something up like 3.5%. I believe you mentioned on the call that there was favorable product mix that drove higher transaction size. Can you talk about that a little bit and what drove this overall performance? And can you talk about the mix between new and repeat? Was that abnormally favorable? And just broadly, Steve, how much of what you've done in the Q3 can be replicated going forward to generate this type of growth on a sustained basis? And then I had some follow-ups.

Thanks, Joe. With respect to VPG, you asked us several questions. The mix between new owners and upgrade was pretty similar to what we had last quarter, I believe. I don't think there's much change in that.

The product mix, we do have new sales offices that have opened, some of which will have the potential to drive a slightly higher VPG. But as you noted at the beginning of the call, the comparisons here were fairly easy comparisons. VPG was down 5% last year in the third quarter. We were up about 10% this year. So really, if you looked at it on a normalized basis, we probably would have been up 3% or 4%, which is still really good. And the guys did a fantastic job in the timeshare business adjusting and adapting to some of the changes they've made with their marketing. But I would not expect to see a 10% VPG increase going forward.

And also, as we noted in our comments -- and I'll make this and then I'll let you follow-up with any other questions -- really, the key driver -- it's not a driver -- but the key thing to look at here is gross VOI sales. Because VPG can be up or down any quarter, as we've proven over the last couple of years. But the important thing is that we drive VOI sales growth and continue to add new members to our base. And those are two things that we're very focused on and the team is positioned to deliver on well.

Great. And then my second question relates to the loan loss provisioning. As a percentage of net VOI sales, it is the highest in four quarters. I think you mentioned that the dollar amount was up, but given higher timeshare sales VOI sales. But am I right in interpreting that percentage is that you're pretty much caught up with the prior loan over reserving in the past? And then when you look back at the Q3, what percentage of sales did you finance, percentage basis, and how does that compare relative to the last few quarters? Was it much higher in the Q3 is my question.

Joe, it's Tom. On your first question about provision, the provision as a percentage of gross was higher, but our balance sheet reserve is right in the same neighborhood that it's been the last few quarters. So what the provision is is really a plug to a reserve number that gets calculated. And so our reserve number is in the 17.7%, 17.8% range. And that hasn't changed materially quarter to quarter. So I think we're right where we need to be.

It's been pretty consistent, that reserve number now, for a number of quarters. And the provision gets us there. So I would interpret the third quarter number to reflect that we think we've reached a pretty good point in our reserve percentage. The second question?

What is the sales financed? It's pretty much the same as it was in the last several quarters. No real change. We haven't really changed at all our metrics for how we determine what we should be financing. We think there may be opportunities, frankly, to finance more. But we've kept everything pretty much as it is now; and we're evaluating, going forward, how we tackle that.

Great. Thank you. Then lastly, I appreciate your EBITDA guidance for 2016. thank you for that. Steve, would you expect that 6% to 8% growth in EBITDA to translate into a similar growth rate in free cash flow for 2016? And would the $245 million of CapEx guided for this year at the midpoint, does that come down for next year? And that's all for me. Thank you.

Yes, Joe, on free cash flow, you noted we gave EBITDA guidance, but really didn't give free cash flow guidance. And that's because we are still going through our -- actually, we're getting ready to start -- our budget process. We've done the strategic review work, strategic planning process, but the budget process is just starting. We will see where we come out when we get done with that budget review and we certainly will tell everybody where we think it is.

Long term, we still hold firm that if EBITDA is growing, free cash flow should be growing. But we also know that there's certain variability to free cash flow that does not get reflected as running through EBITDA. So I'm avoiding your question a little bit, because we just haven't done enough work to make the definitive statement as to what 2016 will look like yet. But over the long term, you're absolutely correct, free cash flow should grow as EBITDA grows.

Thank you.

Sure. Thanks.

Steven Kent, Goldman Sachs.

Hello. Good morning. Three questions for you. Just following up on Joe's question on VPG showing significant strength, would you say that this business is maybe more idiosyncratic than any of your other businesses, meaning RevPAR vacation rentals can be impacted by industry and macro trends? Admittedly, you guys do a great job on both of those, but they're a little bit more industry and macro linked, while timeshare maybe is more of a function of your own product and marketing programs. Is that how you think about it?

Second question is how should we start to think about FX, because it is starting to move the numbers a little bit? Should we start to mark-to-market? Are you going to start to hedge? What currencies are you exposed to?

And then the final question, just on free cash flow generation. It seems like that, you decided to maybe not give that answer today could also be a function of some of the opportunities you're seeing out there to do deferred CapEx programs, similar to the one you just discussed this morning, where an outside investor is taking over an asset you've sold some of that inventory to them. Is that part of the discussion? Is that heating up more, or are you seeing more opportunities there? So sorry for the three questions, but there they are.

Well, we'll probably have to come back and ask you what they all were.

Okay. I'm here.

But we'll give it a shot, Steve and you'll tell me if we miss the mark. I love your description of the timeshare business, because that is something that we've been saying for a long time in different words and I think you just captured it. This business is very much a business that's impacted good management and it's a business that does not have natural demand drivers. We create the demand through our marketing efforts to bring people in to learn more about our product and then hopefully, buy timeshares.

So yes, it does tend to march to its own drum and its own drum beat, but it is a very management intensive business, from a performance standpoint. It can be affected by good changes. And I think that's what we see over the last year. When you look at the end of the year, you'll see great performance in this business. But for a quarter, we saw some dip in VPG. We weren't concerned and we told people that. There was a lot of noise out there. But the fact is, we felt very good with the changes that the team at the Vacation Ownership group were making. As usual, as they always do, they've executed those changes very well, and we're beginning to see the benefit of that. So yes, to answer your first question with a simple answer, the answer is yes.

With respect to -- I'll let Tom talk about the FX question -- but just jumping to the free cash flow. I don't know that I would say we're seeing a lot of different opportunities. There have always been opportunities. And if you look at what we have lined up right now in these kind of asset-light relationships, we have a year and a half worth or more of inventory that is lined up with these transactions. And we'll continue to line them up, because they're good from a free cash flow basis.

That in and of itself, and the $65 million that Tom spoke to for cash flow that's coming in but it actually doesn't flow through free cash flow, that is not impacting our lack of visibility into 2016 free cash flow. It really is just simply we have to go through the budget process. We have to go through the process of CapEx requests from all the business units, understand what the IRR or ROI is for those opportunities and make decisions. Because we talked a lot about M&A and buying back stock, but still, if we can invest in the business in a very accretive IRR manner, we will do that. And so we encourage our business units to come up with ideas, present them to us, and if they hit the mark, we'll invest more in those opportunities.

And I'm not saying we have them lined up right now. I'm just saying that's part of the process, as a company, we have to go through. And we don't want to short cut that process just to be able to say what we think it's going to look like in 2016 on this call. So that's the best way I can answer that. And Tom, you want to talk about --

Sure, Steve. Thanks. Steve, do you have any follow-up questions on Steve's first two comments before I get into the technical FX discussion? No, I mean, it was very fullsome. It was terrific.

All right. So Steve, as it relates to FX, look, we hope that as we go forward from a commercial point of view that we don't see what we saw this year, which was that the dollar strengthened against our major currencies. And when we think about our currency exposure, our largest currency exposures are the euro, the Danish krone, which is kind of linked to the euro and pound sterling, and then the Australian dollar is also a very important currency. I think if you were to take those four currencies, it's probably worth about 80% of our foreign exchange exposure.

And so when the onslaught of 2015 started and the dollar strengthened, we thought, okay, is there anything we can do more in hedging? And these are not economic activities. The translation effect that we talk about is taking, on a piece of paper, the amount of money, the amount of euros that you earned and calculating, at a specific translation rate, the amount of dollars that that's equivalent to. So it's not economic. It doesn't allow us to do the type of hedging where we can get hedge accounting. And so we really looked at it and we really pushed it, because we would love nothing more than to mitigate this effect. But we judge, Steve and I judged, that the volatility that we would create in not getting hedge accounting was not worth the activity. And we made that decision at the beginning of the year.

So our hope is that the dollar doesn't, from our seats, our professional seats, that the dollar doesn't strengthen again to the same magnitude as it did in 2015 against those baskets of currencies. But we're not quite sure that it won't. And so our ability to mitigate that, I would say, given the accounting rules, is pretty limited. So your guess is as good as mine on where the dollar goes against these major currencies. But this year was a historically significant year in the strengthening of the dollar against those currencies and we hope there won't be a recurrence next year.

Okay. Thank you.

Is there anything else?

That's fine. Other than we do have the natural hedge of many of our businesses operating internationally, so from a operations perspective. But we hold our local management accountable for their performance in their market, not in their market versus the artificial movement of the US dollar.

Let me emphasize one more thing, Steve, as it relates to foreign exchange. The foreign exchange effects that we're talking about are strictly translation effects. As we talk to each of our business units, there's no discernible impact on operational momentum coming about from foreign exchange differences. And that's a very important point that we want to make that it's all translation effect.

Okay. Thanks.

Thanks, Steve.

Chris Agnew, MKM Partners.

Thank you very much. Good morning. First of all, I wanted to ask a couple follow-ups on the provision for loan loss and some sort of expectation going forward, because I think I heard you say that you've really got to the point where increased VOI sales will drive the provision going forward. Or could we see -- I don't know if volatile is the right word -- but the provision for a loan loss on a year-over-year basis move a little more than we have seen over the last couple of years? And then related to that, any deterioration in credit quality or FICO scores behind the loan loss increase? Thanks.

Steve, do you want me to take it?

Yes, go ahead.

Okay, Chris, thanks for the question. The provision, as I mentioned in my earlier comments, is really a number that gets derived by our evaluation of our balance sheet reserve against outstanding receivables. That number has been relatively consistent the past few quarters. It leads me to believe that the balance sheet reserve has reached a point, a reasonable point of stability, and that that number isn't expected to materially change in one direction or another.

So the provision is the additive factor to that reserve. So we'll sit, at the end of a quarter, and judge where the reserve needs to be and look at where the reserve is, consider what defaults have taken place in the quarter, and the provision will be the output of that. And so it's my guess that is if the reserve is going to be relatively stable, that the provision should be relatively stable, as well, because there's no discernible change in credit quality of our buyers, absolutely not. We're consistent. Our FICO target has remained consistent.

And so because we expect that the reserve is going to be relatively constant, we don't expect default rates to change materially. And our credit quality is not changing, of our buyers. I would expect that the provision would be in a period of relatively stable trend, because we have reached that point. Should any of those factors change, meaning should defaults decrease and our reserve requirement on our balance sheet come down, then we could provide for less. But at this point, we think we've reached a pretty stable trend.

Thanks for that.

Chris, on the FICO score question -- you'll see this in the Q when it gets filed -- we actually have a slight increase in the 700-plus FICO scores versus what we had at the end of December and a slight decrease in the FICO scores below 600. So theoretically, a slight improvement, but not worth calling out. It's just something that happened.

Okay. Thanks for that color. And then a last question. Can you break out, excluding acquisitions, what domestic unit growth was in lodging, both gross and net, and also maybe frame how you're thinking about managing exits from the system? I know you mentioned that you're focused on hotels that meet your quality guidelines. Thank you.

Well, I'll take the second part of it first, because it's kind of an operational discussion that we have internally. We are pushing very hard to continually improve the quality of our system. And that comes through really two avenues. One is terminating those properties that don't meet our quality standards, then also, improving the quality of the properties that we bring on, so the gross adds that we bring on. And both those efforts have a lot of focus and attention internally. So you'll continue to see -- we think we'll continue to see that range of growth that we've been talking about for some time. And it will come through a combination of managing both of those efforts, the gross adds, as well as the terminations. I'm not sure what the gross adds were for the quarter or for year-to-date?

Well, if you were to exclude Dolce, the global unit growth was around 2%.

Okay.

I think that's the question that Chris asked.

Great. Thanks. Can you provide that domestically?

We don't have the data at our finger tips right now, Chris. But we'll get that to you, okay?

Okay. Thanks.

It would be less, though, Chris. Because a lot of the growth that we've seen for the last couple years has been on the international side. But we can get that.

Okay. Thank you.

Patrick Scholes, SunTrust.

Hello. Good morning. Just a follow-up question on the guidance and foreign exchange. I just want to be absolutely clear here. Does that 6% to 8% growth guidance include a negative FX drag at all? And I ask because if we were to hold the dollar constant from today's levels, I think there would be a slight negative impact. So basically, in other words, will the actual EBITDA dollar amount be potentially lower than the 6% to 8%, due to foreign exchange?

You know, I would say this, that if the FX effect were minimal, then it's probably -- it's hard to answer that question. Remember last year, when this quarter we looked to next year and we had an $8 million -- I think it was an $8 million EBITDA effect on foreign exchange -- and then the next time we chatted with you, it was like $32 million. And so Patrick, there's really no way of predicting, given the volatility. I don't want to affirm with complete certainty, only because, can you tell me what the magnitude of foreign exchange movement will be in the next three months, before we sit and take you through guidance of next year? I think that's going to be challenging.

I think when we were looking at the strategic plans, we were looking at the rate as of August, I believe, so to give you some yardstick of what we were using at that time.

Okay. Fair enough. Thank you.

Our last question comes from Harry Curtis, Nomura.

Hello. Good morning. Steve, a quick question on the lodging segment. Theoretically, anyway, the lodging segment is the higher multiple business in your portfolio. I'd be interested your thoughts on where we are in the cycle and the best opportunity for Wyndham to grow that business, given where we are in the cycle?

Well, I'll be a prognosticator, like many are in the industry. We don't see a downturn in the cycle with what we're seeing right now from our franchisees relative to occupancy trends, as well as what we see with rate flowing through. It may not be increasing at the rate it was a year ago, but we still see strong trending in the hotel sector.

As you know, our business is a franchise business. We're not necessarily only driven by RevPAR. Room growth is very important. And as we've seen historically during cycles, frankly, it's sometimes easier to sell franchises during a weak part of the cycle versus a strong part of the cycle. But again, I'm not calling a turn to the cycle. Everything we see says that there's still strength in the hotel sector. And I think our results show that, if not for FX, the results would have been very positive for the quarter.

When you go back to the 2008-2009 time frame -- and I'm asking this question as a means of maybe thinking about the future -- when you go back to 2008 and 2009, did you guys think about expanding your hotel business through acquisitions? I'll just stop there.

Well, Harry, whether it's 2008, 2009, 2014, 2015, 2016 or 2017, I'm always thinking about expanding our hotel business through acquisitions. We're constantly looking to see what's out there. But as you and I have talked about before, we're extremely disciplined, and we're not going to chase deals just for the sake of growth or for the sake of going into a segment. We're going to do deals that make sense, like Dolce, like TRYP. We've done some great deals over the last few years. They don't happen to be huge deals, but great deals for us and we're seeing the benefit of that going forward.

So yes, we did, during the 2008 and 2009 downturn, we looked. We also, like everybody else, were a little shell shocked by the relative values that were out there, but also the instability of the credit market. And we weren't looking to issue stock at that time to do deals, because our stock was down at a huge low. So we were limited, but we did look.

And then the last question is, does it make sense, then, if you think that the cycle has more room to run, to dial up development of your mid-scale brands?

Well, we are pushing the growth of the mid-scale brands that we have. And frankly, we've seen some very good response in the marketplace. J.D. Power's put Wingate on the top of the list, as well as Microtel, which is an economy brand, was on the top of the list. And we saw improvements in every one of our brands in the J.D. Power metric. So we are pushing development to grow those brands and we're growing them by bringing in better property.

Whether we'll push hard on a particular brand that is in a particular segment is largely driven by market dynamics and what's of interest to the hotel owners. We've seen a lot of interest in the Dolce brand, in the TRYP brand, in the Wingate brand. So we'll continue to grow those. And those happen to be more around that mid-scale segment. But Microtel is also growing well. So it really is a market opportunity type thing. We don't want to say we only want to grow our mid-scale segments to the detriment of anything else. We just push all of our brands.

Okay. That's great. Thanks, guys.

Thanks, Harry.

I show no further questions. Now I'll turn the call back over to the speakers for any closing comments.

Well, thank you all very much for joining us, and we look forward to speaking to you on the year-end call. Have a great fall.

This concludes today's conference call. Thank you for participating. You may disconnect at this time.