Travel + Leisure Co (TNL) 2016 Q2 法說會逐字稿

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

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations. Please go ahead, ma'am.

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

Before we get started I want to remind you that our remarks today contain forward-looking 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 12, 2016 with the SEC.

We will also be referring to a number of non-GAAP measures. Corresponding GAAP measures and the reconciliation of these non-GAAP measures to GAAP are provided in the press release and the tables to the press release which are available on the investor relations section of our website at WyndhamWorldwide.com. Steve?

Thanks, Margo. Good morning and thank you for joining us.

Second-quarter results were in line with our expectations. There is great energy across our businesses. While we execute on near-term objectives, we are also looking ahead - making sure we are continually innovating and making prudent investments, to ensure strong, continued growth in the years to come. Let's take a look at the key initiatives in each of our businesses.

Wyndham Hotel Group is making investments in three key areas to ensure they business is well-positioned for the future. First, we are redefining what technology means for economy and midscale hotels. Second, as we discussed in recent quarters, we are taking a fresh look at our brands and the guest experience. And third, we are reinventing hotel loyalty with some industry-leading improvements to Wyndham Rewards. Our goals are to continue to increase our value proposition to both our hotel owners and consumers and drive higher contribution for our hotel owners.

We are convinced that this direction is absolutely the correct path to take even though we are implementing these plans in a decelerating RevPAR environment.

As you might recall effective January 1 of this year, Wyndham Exchange and Rentals became Wyndham Destination Network. The name reflects our expanded vision for the business. We are leveraging the strength of a portfolio of unique vacation accommodations to provide our worldwide customer base with the options to vacation the way they want. We believe that executing this vision will result in higher combined growth than exchange growth or vacation rental growth alone.

On a practical level, that means we are enhancing technology, continuing to leverage our yield management capabilities and strengthening our marketing across brands.

In addition, we recently launched a project to develop the next generation of RCI product offerings. This business continues to deliver on its strategy despite modest growth in the exchange industry and potential FX headwinds in Europe resulting from Brexit.

Finally, in Wyndham Vacation Ownership, we spent the past couple of years transforming our sales process to ensure a great experience for new and existing owners. We have opened new sales centers in key vacation destinations which will be important to bring new owners into our system. That is our focus. We are increasing our new owner growth target to the mid-teens this year and we are on track to hit that number with a 13% increase recorded in the second quarter. In setting this goal, we realized the short-term margin impact but the lifetime value of a timeshare buyer remains highly compelling.

Also as we discussed in our last call, our progress is being somewhat muted by the unexpected increase in third-party guided defaults. Let me take a moment here to update you on that topic.

We are vigorously pursuing legal alternatives against individuals and companies that might improperly be targeting our owners. We have filed a lawsuit and discovery is underway. But at this point there are no silver bullets. While we are aggressively exploring all options, we think this situation may be a situation that we lap before we solve. Given its size, we believe it is a manageable situation as evidenced by our maintaining EBITDA guidance for the year.

So stepping back, let me say that as usual while headwinds do exist, we believe our operational agenda establishes the correct long-term direction for our Company.

Now turning to the quarter, let me point out a few operating highlights in each of the business units.

Let's start with the Hotel Group. As the world's largest hotel franchisor, with a concentration in the economy segment, we see a unique opportunity to leverage our strength to enhance the economy hotel experience for both hotel owners and consumers in new ways and on an unprecedented scale.

While much of the industry's recent development and innovation has been focused in the upscale, upper upscale and luxury segments, 40% of all rooms are purchased in economy and midscale hotels. We expect this number to continue growing as the global middle class increases from 2 billion to 5 billion over the next 15 years.

Many of our brands- Days Inn, Ramada, Travelodge and Super 8 - have a rich heritage in US brand awareness of over 90%. We are working to enhance the guest experience and tap the full potential of our brands to ensure that we resonate with the next-generation of travelers. We initiated this effort a little over a year ago with the transformation of the Wyndham Rewards Program. We eliminated award tiers, blackout dates and other features that make loyalty programs frustrating, confusing and unattainable for many customers. The result of this transformation is that redemptions are up over 90% and nearly 6 million people have joined the program since its relaunch.

Our goal is to create the industry's top-ranked loyalty program. To support that effort, our summer umbrella marketing campaign is underway now through the busy Labor Day week bolstered by a $20 million national advertising campaign featuring the Wyndham Rewards Wyzard.

Of course the best loyalty program in the world is irrelevant without a strong consumer value proposition. So we recently completed a global research study to help us enhance the guest experience and better define the value and positioning of each one of our hotel brands. Based on this research, we are developing new marketing campaigns, digital experiences, websites, on-property amenities, travel perks and marketing partnerships.

On the technology front, our transformational cloud-based property management and central reservation system installations are proceeding on schedule. We recently completed a flawless migration of the Wyndham Hotels and Resorts, Wyndham Garden and Wyndham Grand Hotels to the Sabre Central Reservation System. Our migration to the Sabre Property Management System is progressing equally well. We now have nearly 1600 of our economy and midscale hotels operating on the new PMS system utilizing or preparing to utilize the new automated revenue management tools- a first for the economy space.

Supporting all of this is our continued focus on quality as we work to remove properties that are no longer up to our brand standards. These efforts have helped raise our overall customer satisfaction and net promoter scores across our brands.

Now let's turn to Wyndham Destination Network. We continue to add to our scale, geographic reach and diversity of experiences within our portfolio. This year RCI announced new affiliations in China, Japan, the Czech Republic, Portugal, the Canary Islands, England and Mexico. These affiliations include one-of-a-kind experiences such as the family themed Nickelodeon Hotels and Resorts in Punta Cana, and two resorts within the first Cirque du Soleil themed park which is now under development in Nuevo Vallarta.

All told, Wyndham Destination Network offers more than 112,000 properties to the everyday traveler in over 100 countries. We are seeing strong transaction growth in Croatia, Spain, Belgium and the Netherlands and the outlook is strong for the summer season with third-quarter vacation rental bookings up 8% compared to 2015.

Now I would like to take a moment here to briefly comment on Brexit and why we don't expect any operational effect on our business. 13% of Wyndham Worldwide revenue comes from Europe. The majority of this from vacation rentals, while we are predominantly domestic drive-to vacations. 90% of our vacation rental transactions in the UK are made by UK consumers. The same applies in Continental Europe where over 90% of transactions are made by Continental Europeans, primarily German, Dutch and Danish consumers traveling to Continental European destinations.

Our rental brands have traditionally performed well in periods of economic and political turmoil because of our outstanding drive-to locations and strong value proposition. And our large inventory in the UK and nearly 40,000 units positions us well should demand for UK vacations increase due to the depreciation of the pound. So while we may experience some additional FX headwinds resulting from the Brexit decision which Tom will discuss in a moment, we do not expect any change in overall demand or impact on bookings.

Now moving on to Wyndham Vacation Ownership. As I mentioned earlier, the team is doing a great job of executing their plan to bring in new owners. Our new sales centers in New York, St. Thomas, Puerto Rico, Southern California and Las Vegas are performing well generating strong growth in new owner tour flow. About half of our new owner tours are sourced through our community marketing programs and alliances which put the Wyndham Vacation Ownership product front and center in desirable vacation locations.

Our community marketing programs include local outreach at malls and representation at events such as NASCAR. We focus on venue and alliance partners whose customers match our timeshare owner demographics.

Our alliance partners share a commitment to truly knowing their customers and providing great experiences for them. These partnerships provide Wyndham Vacation Ownership with access to potential tours while enabling existing owners to use their points for new services, benefits or products offered by our alliance partners.

Our partners typically benefit from increased product exposure and incremental income while we gain scalable access to large segments of consumers. It is a win for us, for our partners and for our owners.

We have enjoyed much success over the years partnering with major brands to fuel our growth and expansion in markets such as Caesars in Las Vegas, Outrigger in Hawaii and Margaritaville in the Caribbean. Of course we also continue to connect our hotels and vacation ownership brands through Wyndham Rewards.

We are constantly improving and enhancing our marketing efforts for distribution and efficiency. One great recent example of a new alliance is Norwegian Cruise Lines. Potential new owners can purchase "Land and Sea" vacations combining a cruise with a stay at a new nearby Wyndham Resort. Another is our alliance with Avis Budget Group, which includes a call transfer program and also enables our owners to rent a car using their timeshare points. And we have recently signed a new alliance with a major tour operator in New York.

Individually none of these sources is intended to account for more than 5% of our tour flow but collectively they serve to broaden our marketing reach and grow our pipeline of prospective new owners.

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

Thanks, Steve. Good morning, everyone. As Steve mentioned, results for the second quarter were in line with our expectations. On a currency neutral basis and excluding acquisitions, adjusted EBITDA increased 3% in the quarter as higher revenues at our businesses were muted by a higher provision for loan loss at Vacation Ownership which while large, was in line with our expectations.

We generated $616 million of free cash flow in the first six months of the year compared to $625 million over the first six months of 2015. Now recall that 2016 results include the negative effect of an unanticipated Venezuelan currency devaluation in the first quarter which reduced free cash flow by $24 million. In total, our free cash flow has been adversely affected by $35 million of unexpected foreign exchange headwinds over the first six months of 2016 including the impact from Venezuela and an additional $11 million primarily from a devaluation of the British Pound.

During the quarter, we repurchased 2.1 million shares of stock for $150 million. We have reduced our weighted average share count by 7% year-over-year through share repurchases made during the last 12 months. In addition, we have repurchased 600,000 shares for $42 million so far in the third quarter of 2016.

Now let's take a look at the performance of each of our business units.

At our Hotel Group, revenues were flat reflecting difficult year-over-year comparisons. Higher royalties and growth in the Wyndham Rewards credit card program were offset by the absence of $3 million of global conference fees and $2 million in termination fees from two large properties that left the system in the second quarter of 2015.

Adjusted EBITDA increased 4% reflecting higher royalties and growth in the Wyndham Rewards credit card program as well as cost containment measures offset somewhat by the lower termination fees.

Domestic RevPAR increased 2%. That increase reflects higher room rates. Excluding oil-producing regions, domestic RevPAR actually grew 3.3%. RevPAR in the oil-producing markets was down 16%. Remember that RevPAR in these regions was down 28% in the first quarter so we are happy to see some sequential improvement. System-wide RevPAR was flat in constant currency pressured by the continued unit growth of lower RevPAR hotels in China which has also been experiencing some market softness and continued weakness in the Canadian oil markets. Excluding China and in constant currency, global RevPAR increased 1.6% which includes about 120 basis points unfavorable impact from domestic and Canadian oil markets.

Net system size grew 2.2% year-over-year which is net of the impact of our continued focus on improving the overall quality of our system. Our development pipeline is nearly 128,000 rooms. That is a 10% increase over prior year which includes a 21% increase in domestic new construction activity with a concentration in our higher end brands particularly our Wyndham brand.

Moving on to our Destination Network segment. On a currency neutral basis and exiting acquisitions, revenues increased 1% and EBITDA 2%. At RCI, exchange revenues increased 1% in constant currency reflecting a 0.7% increase in the average number of members and a 0.3% increase in revenue per member.

Vacation Rentals revenue for the quarter was also up 1% in constant currency and excluding the impact of acquisitions. A 4% increase in volume was offset by a 3.3% decline in the average net price per rental. Transaction growth was particularly strong in the UK-based Hoseasons business as well as our Denmark-based Novosol brands and was reduced a bit due to the shift of the Easter holiday into the first quarter of 2016.

Faster growth in our more moderate product offerings adversely impacted the average net price per rental.

At our Vacation Ownership business, revenues increased 1% and EBITDA 3%. Results benefited from an increase in gross VOI sales and property management fees partially offset by a higher provision for loan losses. EBITDA further benefited from lower cost of goods sold.

Gross VOI sales increased 3% in constant currency and the number of new owners increased 13%, in line with our previously stated goal of increasing new owner sales. Sales to existing owners was flat. The growth in gross VOI sales reflected a 3.4% increase in tour flow offset by a 0.8% constant currency decline of VPG. Now VPG was impacted by higher sales to new owners which are generally less efficient than upgrade sales. While tour flow benefited from higher arrivals in tours at both our newer and existing sales centers.

Second-quarter consumer portfolio performance was in line with our expectations at the end of the first quarter, which included the activity by third parties encouraging our owners to cancel their contracts. Our average FICO score of originations during the quarter was 727 and that is consistent with our underwriting standards of the past year.

Defaults for the quarter were $74 million. That is an increase of $14 million which was almost entirely due to the organized third-party efforts. Both of these numbers were consistent with our expectations.

The provision for loan loss was $90 million in the second quarter resulting in an overall reserve level of 17.7% consistent with recent levels over the past three years. It is worth emphasizing that the increase in the provision is in line with our expectations when we last spoke to you in April with the breakdown as follows: $12 million from third parties causing our owners to default; $8 million from higher sales volume and financing propensity; and $10 million from comparisons to favorable performance trends in the second quarter of 2015. Remember that the provision flows through to EBITDA is approximately 60%.

As Steve said, we are continuing to work on the third-party issue and in the meantime the situation is tracking to our expectations. We calculate that the EBITDA impact in the first six months has been around $15 million. We estimate the third-quarter EBITDA effect to be $8 million.

Companywide net interest expense increased by $4 million in the second quarter compared with the same period of 2015 reflecting higher levels of debt including the $350 million 5.1% bonds issued last September as well as the absence of a fixed floating interest swap that we terminated in the second quarter of 2015. Depreciation also increased as we brought new, long-term projects into service.

Corporate expenses increased by $2 million largely due to higher stock-based compensation expenses and these expenses were offset somewhat by cost-cutting initiatives.

At Vacation Ownership, we completed our second term securitization of the year in July. The $375 million Sierra 2016-2 transaction had a 90% advance rate and a 2.42% weighted average coupon. That is nearly 80 basis points below our prior 2016-1 transaction as we benefited from lower post-Brexit interest rates and generally improved market conditions.

Now let's turn to guidance which will be posted on the website after the call.

As you saw from the press release, we are increasing our adjusted diluted EPS guidance to $5.68 to $5.82 for the full year and diluted share count goes to 111.8 million shares reflecting the benefit of our second-quarter share repurchases.

We are fine-tuning our revenue guidance, lowering the overall range by $150 million. Approximately $50 million of the adjustment relates primarily to a forecast correction in our hotel management gross up at the Hotel Group which has no EBITDA impact. The remainder is at Vacation Ownership and primarily reflects our best view of the impact of third-party prompted defaults.

Just a reminder in timeshare accounting, the provision for anticipated defaults is a contra-revenue account.

Our adjusted EBITDA guidance remains unchanged at $1.375 billion to $1.400 billion. Note that this guidance incorporates a negative $17 million year-over-year EBITDA impact from changes in foreign exchange rates, $6 million higher than in the full-year guidance that we issued in April largely due to the impact of Brexit on the British pound. We expect the EBITDA impact from third-party defaults to be around $30 million this year but we are holding our adjusted EBITDA guidance range for Vacation Ownership and the overall company. However, given these headwinds we are more comfortable at the lower end of our EBITDA guidance range.

There are no changes to driver guidance although remember we said on the last call that RevPAR would be at the lower end of our guidance range which implies flat global RevPAR.

Our neighborhood target for 2016 free cash flow remains $800 million. As always keep in mind that there can be variability in cash flow in any given quarter or any given year so we view $800 million as a neighborhood target rather than an exact figure.

In addition, we are facing two free cash flow headwinds this year. First, as discussed, we have $35 million of unexpected foreign exchange headwinds year to date. Second, remember that as part of our strategy to drive new owner growth at timeshare, we are increasing financing to creditworthy customers which will have an adverse short-term impact on free cash flow in 2016. However, we regain around 90% of that spend in financing activities from the receivables we securitize. And that is outside of our free cash flow definition.

Typically our receivables age four to five months before they enter a term securitization so this is a short-term investment and not a long-term investment in the business.

Now turning to the third quarter, we expect adjusted diluted earnings per share of $1.84 to $1.87 which includes an $8 million foreign exchange impact. You will note seasonality differences between our expectations and current analyst estimates. Our results are more heavily weighted to the fourth quarter this year reflecting expected revenue improvements in timeshare as new sales sites become fully operational and in our hotel business as the oil impact comparisons moderate.

In addition, we expect increased benefit from disciplined cost management in the fourth quarter. Remember that we don't budget repurchases into our guidance either.

So with that, I will turn the call back to Steve. Steve?

Thanks, Tom. Monday will mark our 10-year anniversary of Wyndham Worldwide's listing on the New York Stock Exchange. Before we close, I would like to take a moment to comment on our performance since then. Between dividends and share repurchases, we have returned nearly $6 billion to our shareholders. The cumulative impact of our share repurchase activity over this period has been a 45% reduction in our share count. This combined with the strong operating performance in growth has driven significant increases in key metrics.

Just to put a few numbers around it, adjusted EBITDA is up over 80% and adjusted EPS is up over 225%. Looking forward, we see great opportunities in all of our businesses for future growth. We remain relentlessly focused on continuous innovation and execution of strategies that will deliver compelling value to our customers and great returns for our shareholders both now and in the future. I am extremely proud of the culture we have built and the team we have delivering value to our customers and our shareholders every day. And the passion of our 39,000 associates is also a source of great pride.

Thanks for your continued support, enjoy the summer, travel and remember to tune into the Wyndham Championship August 18-21 on the golf Channel and CBS.

With that, Erica, we can now open the call for questions.

(Operator Instructions). Joe Greff, JPMorgan.

Good morning, everybody. Not surprisingly, I have a bunch of questions on loan-loss provisioning and you gave a lot of data on this call and I just want to make sure I'm understanding this correctly. So revenue is off $150 million this guidance versus the prior quarter's full-year guidance. $50 million relates to hotel pass-throughs, that leaves us with $100 million. Of that $100 million, the majority of that relates to loan-loss provision in Vacation Ownership. And then you mentioned about 60% flow through on that impact which would generate $60 million of EBITDA. I think you said the impact from the third-party activity is $30 million for this year.

So am I missing something. Can you just explain maybe what I'm missing there?

Yes, Joe, so it is $50 million for hotel, that brings it down to $100 million for timeshare. If you take the $30 million to EBITDA and assume that number is 60% of the revenue number, that means that the lost revenue associated with the higher provision is $50 million. That leaves us another $50 million and that other $50 million is we are bringing our gross VOI expectations down to the lower end of our gross VOI range and that is how we get the $150 million.

Got it. Okay, $50 million for lower growth VOI sales. What is driving that $50 million delta in growth VOI sales now versus a quarter ago?

I think we are just getting better visibility into how the new sales centers are operating. We are driving more new owner growth which is what we are really focused on and it does come at the expense of some gross VOI. If you imagine a sales center where we have 30 sales associates, we are putting more new owners in front of those sales associates. So that means they are selling new owners versus upgrade owners. Upgrade owners produce more in a sale than a new owner does so I just think it is us getting our arms around the balancing of that and what it looks like.

Again, we are not changing EBITDA because we are managing through it but it means that each sales office might be a little bit lighter than we thought as a result of the new owner generation. We like the outcome. It is what we are shooting for, it just means a very minor modification on the top.

Thank you. And, Steve, your comment leads me to my next question where you are managing for EBITDA and you are managing through some of these buckets of revenue headwinds. Where are you extracting cost savings or expense management? What are the big markets across the reportable segments? I would imagine much like the 2Q it is across all three reportable segments, not just in VO.

Yes, we run as you know a pretty lean shop here but there is always opportunities to look at our cost base and so we are taking a very hard look at our costs and making sure we are as efficient as we could possibly be. The other thing is we have cost of goods sold which we have been able to manage down through some efficient inventory acquisition methods and so that is helping us get there. But in the end of the day, we are dedicated to hitting our number and one of the costs we have is variable costs at the end of the year related to bonuses and things that if we are not at our number, that is going to be something that will have to be considered.

Okay. My final question kind of going back to the loan-loss provisioning and your comments that the flow through at 60%, why isn't it 100% and what does that 40% delta relate to?

It relates to the recapture of inventory when we take back inventory, there is a value to it and that value is recaptured so it is not 100% loss.

Okay. So it is not a function of prior reserves against that incremental loan-loss?

No, it means if you have a loan and there is a piece of timeshare associated with it which there would be if you default on the loan, we will take back that inventory. And as you know, Joe, we are going to sell it for more than we probably originally sold it for because there is no depreciation in that asset. It is one of the wonderful things about the timeshare model. So as we take it back in, we are required to put that on our balance sheet at a value and the net result is it is a flow through of about 60%. Am I describing that right?

Okay, great. Thank you, guys.

Patrick Scholes, SunTrust.

Good morning. A couple of questions here. What exactly is for the hotel segment -- you had a $50 million revenue forecast correction. What exactly is that? I haven't heard the term before.

Patrick, it is a simple thing. When we set our budgets at the beginning of the year, we knew that there were certain managed properties that were going to leave our system. The business unit budgeted for the inclusion of those units for the full year and so what we did is the pass through, so the cost that we incur in managing that we also offset that dollar for dollar with revenue recognition. And so simply it was the inclusion of hotels that shouldn't have been included for the full year on revenue that has zero margin.

Okay, so a higher degree that some of the managed properties. So you don't have a lot of managed properties to start with, how many are you losing?

In this case it was three particularly important, three larger managed properties.

Okay, are those -- those are the FelCor properties?

No, these are -- two of them were Dolce properties that departed as a result of the acquisition. We knew they were leaving and another, there is a property in Florida. This was probably the simpler vernacular for it is we blew the forecast on this. They should not have been included in the budget initially. We didn't include the income from the management fees but we did include the pass-through costs so it was just a correction of that missed budget.

Okay, let's move on here. Then my next question, when you talked about the provision change breakdown, the third category was -- correct me if I am wrong -- was $10 million from comparison or favorable comparisons from good performance. What exactly is that, how is that not just more defaults or is it more defaults?

No, no, no. So the last $10 million -- in 2015 you might recall that our provision, on a relative basis, was declining and the reason was we had favorable default trends. And so we were just simply reflecting in the second quarter of last year favorable default trends, which led to lower provision of about $10 million. And those trends, those positive trends obviously -- in this particular environment we weren't able to recognize those same benefits in 2016.

So it is simply favorable default trends in 2015 that were reflected by a lower provision rate.

Okay. So as I understand it, this is separate from the third-party defaults and it's --

That's correct.

-- just a higher belief that outside of those third-party defaults that you will have more defaults, correct?

Well, the $12 million we cited was the effect of third-party-guided defaults. That is component number one.

The second number that I quoted reflected higher volume and greater financing propensity. We have talked about our commitment to lower the down payment and so those two factors were the second number.

And the third factor, for year-to-year comparisons, was that in 2015 we had favorable default trends and we were able to lower our provision in 2015. We are not able to make a similar reduction in 2016, so for year-to-year comparisons we didn't have that benefit that we had in 2015.

Okay. Last question on the Diamond Resorts financials that came out a couple of days ago concerning the pending acquisition. It listed in there a public company that had made an offer. Can you comment on that or confirm or deny it was or wasn't you folks?

No, we don't -- as you know, Patrick, we don't comment on M&A activity and so I won't make a comment about that.

Okay, fair enough. Thank you.

Chris Agnew, MKM Partners.

Thanks very much. Good morning. Your revenue guidance assumes acceleration and growth in the second half of the year. What gives you confidence in revenues accelerating and what would get you to the high-end of our guidance range? Thanks.

Chris, I cited two things that we were counting on for improved revenue performance. One is and we know this will materialize, the effect of the disruption in the oil-producing regions, we saw an improvement quarter to quarter. Last quarter we had a 28% reduction, this quarter we only had a 16%. By the end of year that number should be fully mitigated so we will pick up revenue there in the hotel group.

And in the timeshare business, we cited particularly importantly the sort of the maturing of the new sales centers that we have opened and the additional use of lower down payments. So we are optimistic that both of those factors will lead to an improvement in the timeshare business.

Steve, do you want to add any color to that?

No, that is basically it. We scrub these forecasts very carefully and push to make sure that we know where our sources are coming from and we are comfortable.

Got you. Thanks. Can you give any color on the progression of the oil-producing or the impact from oil-producing states through the quarter, (inaudible) sequential progression, see how you ended up coming out of the quarter?

You mean month by month progression?

Yes, just color the improvement.

The improvement was, I don't remember if June was better than May but certainly May and June were better than April on a comparative basis. So there was sequential improvement. We think ultimately we are going to lap this downturn but we think that there probably is some lessening of the impact.

Okay, thank you. Last question, some of the other timeshare companies have not been impacted by third-party guided defaults or have a very limited impact. Have any thoughts on why you have been targeted or why this is a bigger impact for you rather than other companies?

Well, Chris, I would dispute the opening part of that statement because I was down at the conference for the timeshare industry and even midsized players have seen an increase in this activity and all the large players I talk to have seen this activity. It is a question of how much is there. And when you are the largest in the industry you obviously have the largest opportunity for people to make money based on your customer base. And so I think that we probably are a little bit more of a soft target for people because we are so much bigger but I think everybody is seeing it and we have had to deal with this before and we will shut it down.

I think importantly as I said, we see us being able to tackle this problem but we probably won't get it beat back until we start lapping it which is next year. But we feel with even with what we are seeing we are covering it and we are keeping our EBITDA guidance the same.

The fact is, it came in this quarter right online with our expectation. I could not have said that about the first quarter because we weren't really sure what was going to happen. We had a broader estimate. This quarter we were pretty accurate with what we saw coming in. So we feel like we have got our arms around this. It is not what we would like which is for it just to go away. But these guys, they don't just go away, they are making money and they're going to keep playing the game for as long until some of them go to jail.

Got you. Thank you very much.

David Katz, Telsey Group.

Good morning. I will apologize for going back to this issue given all the other interesting business dynamics you have going on here but with respect to the lawsuits and your legal actions with this, I believe at a public conference a couple of months ago or a month or so ago there was discussion about injunctions which I assume are intended to put a stop or to mitigate what is going on today. And I would just be curious sort of where that stands? And to the degree that you are launching lawsuits, are they in pursuit of remedies or getting money back or are we suing for injunctions? What are we hoping to accomplish with some of these legal actions?

And I did notice lastly that it grew by $1 million for the third-quarter expectation. Are we really comfortable that it is not going to continue to grow through the remainder of the year?

Then I really do have a business-related question.

I'm not going to go into too much comment about lawsuits because it is something that we should not be talking a lot about. Basically let me give you as an example what we have done in the past. We want to shut this down. It is something illegal is happening because our customer information is getting put into other people's hands and it is being used to aggressively pursue our customers and that is something that we need to stop. The only way you can stop it is to find out who is doing it and how it is happening and in order to go through that discovery process, the best way to go about it is to file a lawsuit and start looking inside the inter-workings of some of these enterprises. And that is what we did last time and that is the way lawsuits usually progress.

I don't know what you are referring to with the injunctions. That is not something I am familiar with. It may have been somebody the else's comment but that is not something that I am familiar with.

Okay. With respect to the Hotel Group, you mentioned in your comments about removing rooms from the system. Are we able to tell from the very copious disclosure that we have, how many rooms did you remove and are they oriented toward some brands more than others? And what expectation do you have in terms of removing rooms going forward and cleansing the system?

There has always been a certain level of churn in our system with these economy hotels. Generally and I don't know about percentages for the quarters but generally we add about 6%, we take out about 3% or 4% which gives us a net 3% growth roughly. That is rough numbers. That varies by brands but it is in all of our brands. Our largest brands are Days Inn, Super 8 and obviously there is a number that leave from there. But there is a number that leave from Howard Johnson, Ramada and Travelodge and all of our brands. So it is a normal activity of our business that for the 20+ years I have been involved with it has been kind of standard operating procedure.

You would love to not have to not to kick out anyone but quality is something that we will not compromise on.

Understand. Thank you very much.

Jared Shojaian, Wolfe Research.

Good morning, thank you. So appreciate all the color here on the loan losses but it sounds like that 50% growth rate here in the second quarter is the right run rate for the back half of the year. But just want to make sure I'm understanding you correctly. Is your expectation that this is completely lapped by 1Q 2017 or could we see more trickle effect into next year?

I think we will probably see an impact of lapping and reduction in 2017, yes. So I guess the answer to your question is yes.

Okay. And then what is driving the 32% decline in timeshare expenses in the quarter? Is that just expenses associated with the revenue forecast adjustment or is any of that from the Ovation program and what is the right run rate here going forward?

I'm not quite sure, Jared. It is Tom. I am not quite sure what the 32% reduction that you are referring to, is it something specific?

Yes, the cost of Vacation Ownership interests.

Oh, VOI sales, the cost of goods sold?

The cost of goods sold is coming about from two sources. One is has to do with the recycling of inventory and we are able to take in lower-cost inventory that way. I think that is the largest piece of it. And there are some other costs in one of our brands that we are putting lower-cost inventory into one of our brands than we had in previous periods. It is a bit of a technical term but that is what it basically comes down to. We are sourcing lower-cost inventory through cycled inventory and some of the newer inventory we are putting into one of our brands is of lower-cost.

Okay, got it. Thank you.

Harry Curtis, Nomura.

I will just ask one other quick question, Steve, about the provision. You sound pretty confident that in 2017 you will reduce the provision. What needs to happen to actually get a reduction in the provision? It sounds like you are kind of anticipating a positive legal outcome to achieve that.

No, Harry, I never handicap lawsuits. It is too hard to do that so I wouldn't say we are getting positive income -- I think outcome. I think we are going to become more educated and we'll understand what these people are doing and if they are doing illegal activities we do expect to be able to point prosecution in the right direction. That is what we have done in the past.

I think my confidence comes as much from lapping the problem as it does solving the problem. As I said, there is no silver bullet here. What I think we have the ability to do is -- I think we do have the ability to turn it back and we have done that in the past but I also think that by Q1 we will be lapping the issue. So it won't be an increase in the provision anymore. In the absence of an increase, will be flat or reduce provision, that is more of what I'm talking about for Q1.

Harry, it is Tom. Let me add just a thought. There is a school of thought that says what we are seeing now is sort of an acceleration of defaults that may have taken place at some point in time. We saw that in 2012 when we had a similar type of issue that there was a spike in defaults in the near-term and then the loss curve leveled out much quicker. And so to Steve's point, there is a school of thought that says what we are seeing now is a bit of an acceleration of activity that might have happened in the future that won't happen in the future because it is happening now. And that might be an optimistic view of it but that is the experience we had in 2012 and 2013.

Okay, that is helpful. And then my second question is between increasing your financing to creditworthy customers, I guess the first part of the question is why are you doing that now? And then the lower down payments, it seems like you are getting more aggressive to generate incremental sales again. Why have you changed your sales techniques if you will or getting more aggressive?

It is not really getting more aggressive, Harry, it is actually getting somewhat opportunistic. We manage the amount of down payment that we require from customers based on basically our compensation model with our salespeople. We incentivize them to get certain levels of down payments. When we have stood back and looked at this doing our strategic planning, we said we are actually leaving a lot of money on the table because we have very good creditworthy customers that we are not allowing to borrow more than X amount of dollars. So what if we allowed them to borrow a little bit more, would that give us an opportunity to actually grow our EBITDA in the future as we are going to be driving more interest income? And as you know the spread there is pretty good.

So this had nothing to do with the defaults or anything. This has everything to do with us strategically taking advantage of what we thought was a real opportunity and we still feel that way evidenced by the fact that our FICO scores are the same as they were before and we are kind of opening the spigot a little bit. This is not big movement, this is relatively small movement. And as I said, I think the last quarter we probably wouldn't even talk about it if it didn't have a free cash flow impact. It potentially does have a current period free cash flow impact because we don't recover the cash that we put out for those receivables until we have gone through a securitization which generally takes three to four months.

So it is really just if not for the cash flow thing, you probably wouldn't even notice it but I think it is strategically the right thing for us to do for the Company for the long-term and that is why we made the decision to do it.

One other thing I would say on your first question, Harry, is don't lose sight of the fact that this business is still hitting its numbers, its EBITDA number despite this pressure from the provision. So these guys are really good at managing their business, they are very thoughtful and when they see pressures like this as we did with the cease and desist a few years ago, we adapt and adjust and we make our numbers. And that is one thing we are very committed to do at this business and we have done it successfully for 10 years now.

Okay, that is very helpful. Thank you.

Carlo Santarelli, Deutsche Bank.

Good morning and thanks for taking my question. With respect to the news sales centers that you guys opened and are starting to kind of get some traction and with respect to the attempt to drive kind of a mid-teens growth within the new owner base, what are you guys doing to target kind of the millennials at this stage?

We gather them in our basket of consumers that we talk to because in essence what we are doing is we are capturing the traveling public into our tour flow mix. And just looking at the statistics of what is happening in the industry overall, there has been a dramatic decline in the average age of buyer from 54 maybe five years ago, 54 was the average age to now the average age is 39 years old according to ARDA. Is that right, 39? Yes, 39, which is a remarkable decline.

That means that there is younger people buying the product than there used to be and yet our numbers and others in the industry continue to increase. So I think the fact is we are capturing them in our marketing net and they are buying. We do stress different things with our sales pitches. For example, we will talk more about experiences because millennials tend to lean towards experiences so we make it more experiential of what you will have with these trips and what you can take advantage of with timeshare. But that is just describing the product differently to suit the desires of the buyer. It doesn't change necessarily our product. It is just pointing out what you can do with your timeshare.

And I think the fact is the flexibility we gave timeshare buyers both us and the rest of the industry by going to a points-based product really addressed much of what a millennial will want to see which is I want more flexibility, I want more ability to make my vacations the way I want them to be. And so that is what we are delivering. We are obviously increasing our ability to do more bookings online, that is something that has been very important. We actually have been talking about this for several years. We are launching a new program called Voyager that is building that capability that will make it easier for people to go on their iPhone and make decisions about their vacation planning.

So there is a lot that we are doing but we are seeing the capture happen just across the industry, not just us.

Thank you. And if I may just one quick follow-up. As it pertains to your current guidance, Tom, correct me if I am wrong but the FX impacts that you are seeing right now, how are they being contemplated for the back half of the year within the current guide?

Well, the assumptions we have made are based on current foreign exchange rates. We don't project going forward, Carlo, what direction rates might take. So whatever the rates are at the end of the second quarter, those are the rates that we include in all of our forecasts going forward and that is where we got the $17 million number for EBITDA. And the year-to-date number on cash flow was a little bigger, $35 million because of the Venezuelan situation that happened in the first quarter. We are just using second quarter ended FX rates.

Great. That is perfect. Thank you both very much.

Patrick Scholes, SunTrust.

Just a follow-up question, one thing I guess that hasn't been discussed here is when we talk about up-ticking and defaulting. What underlying causes are making these people defaulting in the first place here? What do you see and what may be changing of late?

We talked about that a little bit before, that is part of what we are investigating to understand more about. What we know is that people, third parties are calling our owners and are encouraging them to default. Exactly what their pitch is to make them do that we are not sure, we don't know what they are promising them. We don't, because at that point that they come to us, our customers come to us and say that they don't want us to talk to them anymore because they are being represented, then we can't talk to them anymore and that is the wonderful consumer protections that we have.

So we don't have the ability to dialogue with our customers to ask them what convinced you that you wanted to default? You have been taking vacations for the last 10 years and you have been enjoying yourself, what is making you default at this point? So we are not sure what promises are being made. We are finding more about that and we will continue to find out more about that through our process.

But the fact is we have hugely high customer satisfaction, we have probably record occupancy in our timeshare resorts this year so the product is being used, people are buying more of it, it is a very highly regarded product. So we don't know exactly why and remember this is a very small number on a base of 1 million owners that are actually being addressed with this concern.

As far as when you say a small number out of that million, what roughly, did you say in the past it was about 600 people?

In that neighborhood, Patrick. It is measured in hundreds to Steve's point on a base of 1 million. We know it is a business of large numbers and some incremental shift albeit a small incremental shift, that incremental shift equates to $15,000 or whatever the number is thereabouts that gets defaulted that at that to a lot of money in a hurry. But as Steve said, the level of our owner enjoyment is exceptionally strong and so we are talking about sort of an incremental effect here.

Okay, thank you.

At this time we have no further questions. I would like to turn it back over to our speakers for any closing remarks.

Okay, Erica, thank you very much. Thank you all for joining us today and we look forward to talking to you soon.

We would like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.