Travel + Leisure Co (TNL) 2016 Q3 法說會逐字稿

Welcome to the Wyndham Worldwide third quarter 2016 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. Please go ahead, ma'am.

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. I'll start by sharing our view of the quarter and some business unit highlights and then Tom will go into more details. As you saw in our release, revenues in constant currency and excluding acquisitions were up slightly and adjusted EBITDA grew 5%, consistent with our expectations.

The hotel industry cycle appears to be moderating to historical norms coming off years of accelerated growth starting in 2010, following the recession. Despite reported sluggish global economic growth, people around the world are committed to spending time with loved ones. They're looking for unique experiences at all price points and we believe that our diverse portfolio of travel offerings can continue delivering on that growing demand.

On a business unit level, Wyndham Destination Network and Wyndham Hotel Group had strong quarters with 8% organic adjusted EBITDA growth in constant currency. Wyndham Destination Network achieved robust transaction growth and Wyndham Hotel Group had a solid quarter despite a softening RevPAR environment, supported by growing credit card revenue coming from our Wyndham Rewards efforts and disciplined cost control.

Adjusted EBITDA results at Wyndham Vacation Ownership were weaker than expected. Our upgrade sales were light, but new owner sales were strong. In addition, sales and marketing commissions were higher than we anticipated primarily as a result of modifications we made to drive new owner sales. This cost overrun was inconsistent with our typical execution standards. We have made subsequent adjustments and the programs are now correctly generating appropriate incentive relative to results.

The issue of third-party induced defaults, which we've discussed on previous calls, improve slightly from the first half of the year. While we are aggressively pursuing legal options, we believe our best defense is a strong base of happy, satisfied timeshare owners. We have dramatically increased our communication outreach to our customers.

We know our owners are happy by surveys we regularly conduct, which include every owner touch point from sales to collections to owner stays. For example, over 80% of owners this year were satisfied with their Wyndham vacation. We want to ensure they remain happy with the product and that we are the first to know should they become unhappy. We believe fourth quarter defaults related to these third-party efforts will modestly improve sequentially.

As you know, increasing new owners is our most important strategic initiative at WVO. Along these lines we're making great progress in adding new owners and in bringing in younger owners. Wyndham Vacation Ownership brought more owners into the system in the third quarter than any other quarter since the downturn.

35% of sales were to new owners compared with 33% in the third quarter of last year. And we are happy to see that 25% of new owners, owner transactions year to date, have been to consumers under the age of 40. There's are great owner results and bode well for the future.

In addition we are looking forward to opening at least three new sales centers next year that will further support these efforts. Now let's turn to Wyndham Destination Network. Between our timeshare exchange and vacation rental offerings, Wyndham Destination Network is a major player in the sharing economy. But unlike the big online marketplaces, our model goes well beyond linking supply and demand.

As the world's largest provider of professionally private accommodations, we connect travelers seeking the authenticity of homestay with owners looking to rent their property. We offer both a range of services -- we offer both these groups a range of services to ensure a smooth expense. For owners we offer yield management, cleaning, maintenance, billing, reservations, key handling and marketing.

For consumers, we offer great travel experiences with trusted brands. We call it peer-to-peer plus. It's about making life easier for consumers and owners and creating maximum value for both. And this is a business that continues to develop first in segment innovations to capture market share.

In our rental brands, we introduced our dynamic yield management program a few years ago. Driving consistent increases in revenue at installed locations through optimized pricing and occupancy. Yield management helped drive in an 8% increase in organic rental transaction volume this quarter. For example, we recently introduced dynamic pricing at Hoseasons, Holiday Parks in the UK and our business there is thriving with Q3 revenue growth of nearly 25%.

Additionally, in 2017, we will launch the next generation of timeshare exchange products, which will enable us to tier our membership offering, customize products and expand our services to new and existing RCI members. Let me close by giving you an update on the strategic initiatives at the Hotel Group.

We are solidifying our position as one of the largest and most formidable players in the hotel space through a combination of our growing loyalty program, re-invigorated focus on our hotel brands, continued commitment to quality, and our implementation of a new best in class technology infrastructure. Each of our iconic brands is being repositioned and strengthened.

We have refreshed marketing campaigns, our new websites are improving online conversion rates by double digits across all devices. In addition, over 30 guest facing and revenue generating pilot initiatives will bring customer value propositions to life for both our franchisees and the traveling guests. This is all being supported by the combined rollout of the industry's largest integrated cloud-based property and revenue management system.

Our owners are beginning to see tangible bottom-line benefits. In addition we have already rolled out a new reservation system to our Wyndham and TRYP brands with Dolce set for set for November 17th and Ramada targeted for December. All the implementations remain on schedule and we look forward to reporting on this performance in upcoming quarters.

As I've discussed on previous calls, 24 months ago or so our hotel division began redesigning and expanding our global loyalty program, Wyndham Rewards. We bucked the industry in overall loyalty trends by creating the most simple and generous redemption program, rewards program in the hotel space. We also enhance member levels to provide higher recognition and unique experiences from cooking classes to exciting city tours that are included as every award redemption in our top 25 destinations around the world.

Since its relaunch the results have been outstanding. The program has enrolled over 7 million new members and our hotels have seen a 200 basis point increase in member occupancy year-to-date compared to last year. Wyndham Rewards members stay 12% longer than non-members and generate 64% more in revenue to our franchisees. Wyndham Rewards was also just named the number one hospitality loyalty program by US News & World Report and earlier this month, the Wall Street Journal published a front-page story comparing the industry -- industries hotel reward programs which found that Wyndham Rewards delivers the strongest consumer value of all.

Building on this success, today we are announcing that Wyndham Worldwide will be the first hospitality Company to globally expand the use of its loyalty program across Vacation Ownership and Vacation Rental properties. This will provide members with an unmatched choice of redemption options, create an even stronger proposition for guess to earn points by staying at our hotels. Provide a powerful and a cost efficient marketing platform for our WVO sales organization and help us attract and reward renters and owners in our vacation rental brands.

We've always maintained a strategic vision to provide customers with a cohesive platform to access the widest range of places to stay. Our re-energized loyalty program is a major step in achieving that vision. We remain confident in our ability to drive continued growth and value for our shareholders.

Before turning call over to Tom, let me take a moment to discuss our outlook. As you know, we look for long-term EBITDA compound annual growth rate of 6% to 8% and we have been above that for the past five years. We are just starting our budget process now and we take that process very seriously.

At this time it is imprudent to give guidance so like our peers we will wait until we finish our budget process but be assured that we will do our best to achieve our long-term objectives next year and beyond and as always to deliver shareholder value. With that I'll turn the call over to Tom to walk you through more details for this quarter.

Thanks Steve, good morning everyone. As Steve noted our overall financial performance was in line with our estimates. Adjusted EBITDA increased 5% in constant currency and excluding acquisitions.

As strong results at our Destination network and Hotel businesses and companywide expense reductions more than offset the underperformance of our timeshare business. We generated $650 million of free cash flow in the first nine months of the year, compared with $660 million over the first nine months of 2015.

Now remember that our free cash flow has been reduced by $34 million of unexpected foreign exchange headwinds over the first nine months of 2016, including a $24 million impact from a Venezuelan currency devaluation in the first quarter. During the quarter we repurchased 2.1 million shares of stock for $150 million. We've reduced our weighted average count by 7% year-over-year-over-year through share repurchases made during the last 12 months.

In addition, we have repurchased 700,000 shares for $50 million so far in the fourth quarter of 2016. Now let's take a look at the performance of each of our business unit. At our Hotel Group revenues increased 2% reflecting higher royalties, growth in Wyndham Rewards credit card program and global franchisee conference fees, partially offset by the loss of pass through revenues from two managed hotels that are no longer in our system.

Adjusted EBITDA increased 8% reflecting higher royalties and growth in the Wyndham Rewards credit card program as well as expense management initiatives. Domestic RevPAR increased 1.9% reflecting higher room rates partially offset by lower occupancy. Excluding oil-producing regions, domestic RevPAR grew 3.1%. RevPAR in the oil-producing regions, which represent approximately 7% of our portfolio, declined 15% year-over-year, roughly consistent with 16% decline we saw in quarter two.

But a substantial improvement over the 28% declines in both quarter one and the fourth quarter of 2015. Pointing to one headwind removed for the fourth quarter. Those of you who have followed us for some time know that are system-wide RevPAR results have been negatively affected in recent years by our rapid growth in China. Where our portfolio consists of hotels that generally have significant lower room rates than our overall system average. Beginning this quarter, we will discuss global RevPAR on a same-store basis to give a more accurate reflection of our underlying RevPAR performance.

So on a same-store basis, system-wide global RevPAR was up 1.4% in constant currency reflecting flat to modest growth in most major international regions and incorporating a 120 basis point unfavorable impact from domestic and Canadian oil markets. Net system size grew 2.7% year-over-year as we continued our focus on improving the overall quality of our system with termination of substandard properties.

Gross room additions increased 5% compared with the third quarter of last year. Our development pipeline is nearly 134,000 rooms. That's a 9% increase over the prior-year, which includes a 14% increase in domestic new construction activity with a concentration in our higher end brands particularly our Wyndham brand. Moving on to Destination Network.

On a currency neutral basis and excluding acquisitions, revenues increased 5% and adjusted EBITDA increased 8%. At RCI exchange revenues increased 2% in constant currency reflecting a 1.4% increase in revenue per member which benefited from higher pricing and 0.9% increase in the average number of members due to growth in North and South America.

Overall performance continues to benefit from innovation and product extensions. Vacation rentals revenue for the quarter were up 6% in constant currency and excluding the impact of acquisitions. An 8% increase in transaction volume was partially offset by a 1.7% decline in the average net price per rental. Transaction growth benefited from our dynamic pricing initiative, which often results in higher occupancy due to more efficient pricing, especially during off-peak travel weeks.

Transactions also benefited from capacity increases as our brands continue to expand both in existing and new markets. Growth was strongest in our UK-based Hoseasons, Denmark-based Novasol and Netherlands based Landal GreenParks brands. Our continued momentum speaks to the strength of our value proposition with consumers, especially with domestic drive to vacations. Faster growth in our more moderately priced products reduced the average net price per rental.

At our Vacation Ownership business, total revenues and growth VOI sales were flat. As Steve noted, gross VOI sales were below our expectations. The short flow reflects lower-than-expected upgrade tours. Owner tour flow was dampened by our focus on new owners as well as more targeted marketing efforts.

As you know, coming into the year our plan was to grow new owners substantially while keeping sales to existing owners flat. As part of that process we refined our marketing, our owner marketing to be more selective, ensuring that we are touring the right owner at the right time. That put a natural but healthy constrain on the number of upgrade tours and it affected third quarter performance more than we anticipated.

Year-to-date however, sales to existing owners are tracking ahead of 2015. On the other hand, new owners are crucial to the long-term health of the business and expanding the number of new owners ranks among our most important strategic initiatives. However, bringing in new owners is more costly and takes more effort and that is reflected in lower VPG. Since we sold proportionally more to new owners in the third quarter, it affected our overall VPG rate which was down by 1.4%.

Year-to-date we are tracking a little behind our aggressive goal of tripling the growth rate of new owners, but we are very pleased with our progress in adding new owners this year. Adjusted EBITDA decreased 3% again below our expectations. Year-over-year results reflect a higher loan loss provision and higher sales and marketing commission costs. Partially offset by higher property management fees, consumer financing, interest income, along with expense management initiatives.

Defaults were slightly better and the provision for loan loss was in line with our expectations but worst than 2015. Defaults for the quarter were $70 million an increase of $10 million which was primarily due to the organized third-party efforts. The provision for loan loss was $104 million in the third quarter, an increase of $26 million primarily reflecting the third-party activity and a higher level of finance sales. Consistent with our strategy of lower down payments.

Note that we have good visibility four months out into the third-party prompted defaults. So our fourth quarter expectations for the provision are $90 million, which assumes a year-over-year increase of approximately $25 million, again, primarily related to the third-party issue and higher loan originations. Remember, that only approximately 60% of the provision will flow through to EBITDA.

As Steve noted, sales and marketing commissions were higher than we anticipated. Coming into the year, we reworked our commission structures to focus on new owners and we didn't adequately adjust by reducing commission spend in other areas. In addition, we anticipated higher upgrade sales with lower commission rates which did not materialize in the quarter. This execution was inconsistent with our typical standard and we have made changes to ensure it doesn't happen again.

As Steve noted, we have adjusted the commission program and it is running at the proper level. In addition, we're instituting more centralized control over commissions going forward. Finally, the increase in interest income relates to a higher portfolio balance resulting from our strategy to increase the percent of sales that we finance. Company-wide, net interest expense increased by $1 million in the third quarter compared with the same period of 2015.

Depreciation also increased $4 million as we brought new long-term projects into service. Corporate expenses declined by $3 million due to expense management initiatives. Reported results for the Company included $14 million pretax for restructuring initiatives across our businesses to reduce operating costs and better aligned the organization and position us for future growth.

We expect an additional $3 million charge in the fourth quarter related to lease terminations from the restructuring. These efforts will result in $20 million in annual savings starting next year. We also booked a $7 million charge associated with the termination of an underperforming contract at our Hotel Group. Tables 7 and 8 include full reconciliations of reported to adjusted results for both periods.

At Vacation Ownership we completed our third term securitization of the year in October. The ABS market remains robust. The $325 million Sierra 2016-3 transaction had a 90% advance rate and a 2.47% weighted average coupon. The terms are in line with our last transaction and significantly better than our first transaction of the year. Now let's turn to guidance which will be posted on the website after the call.

At this point in the year we are moving to approximate projections rather than ranges on the P&L lines, except for EPS. We believe revenue will be approximately $5.650 billion, at the low end of our previous range. Our EBITDA target for the full year will be approximately $1.375 billion. This is consistent with our last call where we guided to the low end of our adjusted EBITDA guidance range of $1.375 billion to $1.4 billion.

Note that this reflects 6% growth year-over-year or 7% in constant currency. Despite the impact of approximately $30 million from third-party related defaults. In addition, we have fine-tuned our depreciation and amortization guidance to approximately $252 million. EPS guidance is $5.68 to $5.71 for the full year with a diluted share count of 111 million shares.

At the business unit level, adjusted EBITDA guidance for Wyndham Vacation Ownership was reduced to approximately $710 million, which is below the bottom end of the range. This change is primarily attributable to Wyndham Vacation Ownership's third quarter adjusted EBITDA shortfall and lower expected sales in the fourth quarter due to the closure of a few sales offices as part of our third quarter restructuring activity.

The temporary shutdown of 14 locations due to hurricane Matthew and the mix between new owner an upgrade sales. Also, we've updated for full-year driver guidance to reflect some of the changes and conditions we mentioned during the call. Now expect system-wide RevPAR to be flat to down 2%, down from the prior flat to up 2% to reflect the slowing industry growth in the US.

At Wyndham Vacation Ownership our tour guidance is reduced to 2% to 3% from 3% to 5%, primarily as a result of the aforementioned sales office closings and the impact of hurricane Matthew. Finally, reflecting great business momentum, our rental transaction guidance at Wyndham Destination Network increases by 200 basis points to 7% to 9%. Our neighborhood target for 2016 free cash flow remains at $800 million.

As always, keep in mind there can be variability in cash flow at any given quarter or any given year, so we view $800 million as a neighborhood target rather than an exact figure. We're confident in this target despite the fact that we are facing two free cash flow headwinds this year consisting of foreign exchange headwinds and the effect of lower down payments. Now turning to the fourth quarter, we expect adjusted diluted earnings per share of $1.29 to $1.32 and remember that we don't budget repurchases into our guidance.

Regarding our 2017 outlook, we will provide full 2017 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. When we will have completed our budgeting process. So with that, I'll turn the call back to Steve. Steve?

Thanks, Tom. Looking forward, I remain confident in investments we're making today to drive our future growth. The strengthening of our hotel brands, innovating timeshare for the next generation of owners, the continued growth in our peer-to-peer plus portfolio and further connecting our brands and inventory to our industry-leading loyalty program.

The market forces we see driving the future of hospitality play squarely to our strengths. And our unmatched portfolio remains uniquely positioned for continued success. And with that we welcome your questions. Erica?

Thank you.

(Operator Instructions)

Joseph Greff, JPMorgan.

Good morning, everybody.

Good morning, Joe.

I recognize your comments on 2017 guidance. So I have something that kind of big picture, broad strokes in terms of a forward outlook. Can you visit with us maybe what your long-term annual EBITDA growth target is? And then maybe how that has changed now prospectively versus what was in the past? Just given the world is slowing economic growth and to use your words, Steve, the hotel cycle that is moderating, how do you see things now and then I have a follow-up post your answer.

Sure, well as you may remember, Joe, our long-term growth target is 6% to 8% for EBITDA and we are not changing that. We feel comfortable with that. What would change it is in talking about the macro events that are happening around us, obviously the RevPAR market is kind of going back to its normal level of RevPAR growth.

That does put a little bit of pressure on the growth of that business, but that business is not the main driver of our Company. We have a nice portfolio. So the biggest driver is timeshare and we really don't see any change in timeshare. The change we're seeing is our intentional change to move more toward new owners and that is something that most in the industry are in the process of doing now.

Some stuck with new owners after the downturn, but most the players move towards more upgrade sales. Long-term you want to keep a good firm pipeline of new owners coming in because that will give us more opportunities to grow in the future and that's what we are committed to do. That will potentially put pressure on EBITDA because the margin is less on new owners, but we are looking at ways to mitigate and manage through that. So we're not moving on our long-term view.

Okay. Great, and this doesn't count as my follow-up, this relates to my first question. When you think about the 6% to 8% long-term annual EBITDA growth target do you think from here it's more OpEx driven then revenue driven relative to history?

I think we need to get it back to being revenue driven. And that is a big focus of the Company is to drive the top line. There are pressures obviously that we and everybody else are seeing and during those times of pressure, it might put more pressure on revenue growth and we may have to be more OpEx focused. We will manage the business to deliver as we always have on our growth objectives.

If the general hotel industry is going to be at flat to 2% growth next year whatever the pundits are saying, that means that there will be pressure on companies have cost that are going up faster than that. So we will have to adjust for it. We do want to focus on growth. Just talking about the Hotel Group for a minute, we have done a lot recently to improve our value proposition to the franchisees so I would like to see our growth of units start picking up in our domestic growth.

Because we have really teed up a great environment for franchisees and we saw that at our conference in Las Vegas. There is a lot of excitement around our brands right now. So at times when there's RevPAR pressure for us as a conversion brand and new construction, it often increases the opportunity to sign up more franchises. So we will go after every opportunity we see and do what we can to achieve that kind of growth and that is our goal.

Then my final follow-up here, and I believe I've asked this before in the past both on conference calls and even privately to you, Steve, given the size of your Company now versus when it's spun out of Cendant, why not here today or sometime today think about spinning out into two or three companies? You have a valuation that is hard for you to grow through in organic means and M&A and spinning out might allow you to do that, how do you think about those things right given where we are in the economic cycle? And that's it for me.

Okay. Just to show I'm consistent, Joe I will give you the same answer I gave to when we were speaking privately. It's something that we constantly look at. The Board is very active looking at different opportunities. And that is something that we have talked about before and we will probably talk about in the future, but if we had anything to announce, we would announce it today.

We are constantly looking for ways to drive more shareholder value and more than that I can't say because the Board has to deliberate and we have to all decide what the right thing is for the Company. We feel we have a great Company with great growth prospect so we feel very comfortable with the Company.

Chris Agnew, MKM Partners.

Thanks, very much, good morning. First question or a couple questions actually around timeshare. First, VPG you talked about it being impacted by a mix, but if you look at it within perspective cohorts of new and existing members, are you seeing closing efficiency rates starting to decline?

Closing efficiency declining in perspective cohorts, not really, no, we haven't. In fact, VPG in each respective area was reasonably consistent with the past, 2015.

Chris, one thing on that I will add though is that new owners close at a slower rate than upgrade owners. So when we go to sell new owners I think it's about half the close rate or little bit. So from a mix standpoint as we add new owners, yes, close rate for the combined would go down but we look at the very separately. We monitor new owner sales and upgrade sales separately and those have been fairly consistent.

Thanks, and then on the provision, the $26 million increase I think year-over-year, is it right to think that $8 million of that was due to third-party defaults? And then so the rest was driven by the I think increased in financing. Can you share what the propensity of finance is -- has increased and are you putting out incentives to drive that increase in financing propensity? Thanks.

Yes, Chris, it's a little complicated but directly to your question about the propensity of the finance, that affect was $4 million of the $26 million.

Patrick Scholes, SunTrust.

Hi, good morning. Just following up on the guidance or lack of guidance questions on 2017. I look back historically at least for the last five or six years, you've given some sort of outlook. What has changed? Has your budgeting process has that been moved back versus prior years or is it something else in there?

It's really just the process, Patrick, that's what it is. Every year we struggle trying to give any sort of guidance on this call because we just are not through our budget process. And this year in fact neither Tom nor I have sat for any budget reviews for any business units. So for us to be giving out guidance, in the past, guess maybe we have seen a budget review or two before we've given guidance but this year we haven't.

So we just thought it was imprudent and we looked at our peers and nobody else is giving it, so we're kind of putting our foot out there and in all truth we don't think we need to. Because we've been very consistent with our delivery of results for the last 10 years. So we reinforced our long-term growth targets and we'll come out with guidance after we have gone through our budget process and I would suggest that is the way we will be doing it going forward as well.

Okay. Next question, on the third-party induced defaults, as I recall in the past you've said that you believe that these uptick in activity for defaults is a pull forward of defaults that would've happened in future years. Is that still what you are thinking here?

We suggested that as a potential but I think what I've said specifically, Patrick is every situation is different, but when we experienced this similar activity in 2012, 2013, what we saw was compression of default activity early on and then a more immediate leveling to a normal state.

We didn't say that was certain to happen in this case. We presented that as a scenario that could happen given what's happened previously. And so I don't think either Steve's crystal ball or my crystal ball is insightful enough for us to make an immediate statement now that will be the case in situation.

David Katz, Telsey Group.

Good morning, all.

Good morning.

I wanted to just go back to the loan loss provision which was a little bit higher than what we had in our model. And are you touched on it in your prepared remarks, Tom, but if you could just give us a sense for what's in there this quarter or little more color on what's in there for this quarter and why it was so high and paint us a picture going forward qualitatively if you can?

Yes, David. So look the third quarter came in lower than our expectations for the quarter. So I'm not quite sure what was working with your specific model, but let me just generically comment on some of the components that are included in that provision. One is the effect of defaults directly related to PP activity. The other is the effect that activity might have on our curve, on our loan loss curves.

We have, as the earlier question implied, when we decided to lower our down payment, we've increased our financing propensity and therefore that fact alone means for the same sales you have to reserve a higher percentage because you are financing higher percentage. So part of it has to do with percentage of sales financed and then some of it is just the volume of the business I think was another component.

And then there are small things here and there that aren't essential for me to explain, but I think those are the major categories. And I think in general the quarter came in below what our expectations were, not substantially below, but below what we believe the number was. We have a pretty good predictive value of this third-party related default activity because we get letters early on that we can judge are eventually going to lead to defaults. So I think those are the buckets that exist within the portfolio -- excuse me, the provision.

And as we think about this number going forward, I assume the expectation is that we are still going to lap next year the default issue that you are dealing with this year. As a percentage or in relation to gross VOI sales, which is one of the ways that we measure it, is there any insight you can give us about what you expect that trend line to look like?

I will make two points. One, a pretty good visibility so fourth quarter. I've given you a specific number which I think is $23 million or $24 million ahead of where it was last year. So that fourth quarter number is pretty accurate.

But beyond 2017 as Steve said, we haven't gone through our budget reviews yet and I think our working assumption will be we can discern a change for the better or the worse. So my guess is the assumptions we will hear from our operating team is that going into next year we are going to be in the comparable neighborhood, but I haven't seen the plans so I don't know. Steve?

The only thing we've seen is a slight improvement over the first half of the year going into the second half of the year, but whether that will stick or whether it will go down further or it'll tickup, Tom is right we're not sure yet, we will know more as we go through the process.

Stephen Grambling, Goldman Sachs.

Thanks, good morning. I have two quick follow-up to chose follow-ups to Joe's earlier questions and then one clarification. On the follow-ups, can you just talk a bit about the puts and takes to think about for free cash flow specifically in 2017 and beyond and how that is sensitive to the macro? And then the other follow-up is just on splitting the segments off, where do have plans in place to leverage the resources of the overall organization across the three segments? Do you want me to handle the free cash flow?

Okay. So Stephen on free cash flow, we're not going to give you any commentary on 2017 again because Steve and I haven't sat through the budgets, but as Steve said, as least as relates to free cash flow our neighborhood target is $800 million and Steve and I are committed to try to deliver that in 2017 if we can. But we haven't reviewed budgets so I just say that.

But in general over the longer term, the puts and takes are, our CapEx is one of the factors that applies against free cash flows and we believe we are in a comfortable CapEx zone at this point which is in the low $200 millions. And our expectation would be we have talked to the business unit about down payments. That was an initiative this year as well about lowering down payments.

I'm sure that will be a discussion topic in the budget review but other than that, we expect that the free cash flow trends over the longer term should mirror the EBITDA trends. Because we feel like we have reached steady-state working capital, we've talked about how much we had to invest in product.

We don't have a different point of view on that as we sit here today. We feel our CapEx numbers on comfortable zone so there's no reason to believe that the longer-term trend shouldn't mirror the EBITDA long-term trends. But Steve, do you have a perspective on it?

No I think you nailed that one. I will just respond to the other question about following up on Joe's question regarding splitting of the Company. As we've said in the past we believe there are a lot of advantages to having these businesses together. The most recent and notable example of that is the Wyndham Rewards program, which is really becoming a blue thread that runs through all of our businesses.

That is something that we think will drive value to all business units and that is a powerful, powerful product. It's only been around in its current form for about a year and half and it's already setting top levels in all types of ratings for loyalty programs. So we are very proud of what the group has done and it is being as I said in my comments, it's being embraced by the timeshare business as well as by the vacation rental business to drive more business between the three initiatives.

And that is going to be a major factor going forward that we see will be a positive impact. The other positive impact is our technology. We have a terrific IT group across all the business units and they share ideas and those ideas result in things like the yield management system at the vacation rental business. That came out our exchange business and was kind of that technology and know-how was transferred over and applied there.

So there's a lot of elements within a Company that work well together. But as I said, we look at whatever we believe as a Board will drive greatest shareholder value for the shareholders and we will look at all the options that are out there.

That's helpful. The one clarification is you mentioned the lower than expected upgrades in the timeshare business. What percentage of existing owners have upgraded in some form and how has that ratio evolved over the past years?

I don't think I have the data at my fingertips, Stephen, but one of the sort of rules of thumb on an analysis we did a few years ago was that the average new owner will buy the equivalent of 110% of his original purchase. 150% of the -- okay. 1.5 times their original purchase. So that analysis done a few years ago, but it's a good question and it's a point that we will do some analysis on.

The other thing Stephen, on upgrades, we had a little softness in the third quarter but bear in mind, we had a fantastic third quarter in 2015 that we're comparing to and for full-year we still expect upgrades to be ahead. So we have one quarter where there was some lightness but doesn't mean that's necessarily a trend or that's what's happening in the industry. So stay tuned, we're working hard to deliver on everything we say we're going to deliver on.

Harry Curtis, Nomura.

Good morning. Quick question on the provisions. If the provision in fourth quarter is coming down, do you believe -- is that an indication that you feel more confident that the third-party activity has peaked?

I wouldn't say that we're confident that it has peaked because it's not a completely predictable thing that's within our control. So we are doing everything we can to reach out to our customers to try and get them to not go and pay somebody else to do something that they could do directly with us. And that's a challenge because we've got 1 million customers out there who are being targeted on a regular basis. So we have to be very diligent on that.

We saw an improvement in the third quarter from the first half of the year and we see it lowering in the fourth quarter, but I'm not going to right now call a real steep decline going into 2017. As Tom mentioned before, what we saw with the last go around of this is it was more of accelerating people who might have been planning on defaulting anyhow and so we did see a decline but it's just too early for us to make that call now and we'll give you more information as we see it rolling and.

Okay. That's helpful. Can you share with us just the strategies that you are using to counter this activity?

Well it's kind of two-pronged. One is on the legal front. We are pursuing those people who have inappropriately gained access to our customer list and we will pursue that as we did in the past and also pursue those people who are pitching inappropriate offerings to our customers. Again, it's something that will take time because the courts work slowly and we will continue that process.

We did that last time we had success by directing prosecution towards a few of the bad guys who are out there. But really I do want to some of the victim because that's just out there happening and we have to deal with it. Really what we have to do is improve our communications with our customers. We know for the most part they are very happy. As I said, 80% have enjoyed their vacations this year.

I would love it if 80% of people who stayed in our hotels enjoy their vacation because I think our timeshare satisfaction rates are probably higher than our hotel satisfaction rates, but the fact is, that means 80% are happy, 20% are not as thrilled. So how do we connect with them to make sure they're getting what they want out of their vacation?

People love timeshares, that's why as Tom mentioned that's why they buy more and half the people who own timeshare end up buying more, but we have to work really hard to make sure that they have a great experience. If they don't want to hear about it. We want the feedback so that we can address that.

And just my follow-up is since you have changed the minimum down payment on timeshare purchases, has there been any change in your FICO scores, average FICO scores on the new owner sales?

Yes, Harry, it remains around 725.

Very good, thanks very much.

And just Harry, just reinforce the quality of that, the ABS transaction I recently did was received terrifically by the market and our execution on that was great which points to the quality of what we are putting out to the Street.

Carlo Santarelli, Deutsche Bank.

Hi, guys thanks for taking my question. I know you guys obviously made it clear on 2017 in terms of guidance but if we could just talk about maybe the fourth quarter. Tom, could I clarify something I thought you said? Did you note that Vacation Ownership for the year was looking more like $710 million or did I mishear something?

No, that was correct.

The implication then would be meaningful growth in both the lodging and vacation exchange and rentals segments and I just wanted to better understand where that would come from. Is it more of a margin initiative, or other revenue things?

Or are there some favorables there in the comp that maybe I have forgotten possibly? But it looks like overall adjusted EBITDA growth in the range of about 18% for the 4Q. I just wanted to better understand the drivers there.

Well, Tom, I will give one response which is on the Hotel side, we are going to have the advantage of lapping the oil-producing markets, which were down. Those markets were down like 30% in the fourth quarter of last year, weren't they?

That's correct.

So we will be lapping over that and we're working very hard to improve our margins in all the businesses. So I don't think there's any -- I know the third quarter of 2005 we had a very tough comp on VBG so at WVO I think it was flat to down in the fourth quarter so there's little things but it wouldn't say there's anything that comes to my mind --

Expense reductions largely Steve. Mostly margin, Carlo and the growth that we are going to expect is not anywhere next to 18%. For the fourth quarter we have a different target. We believe it's an achievable target and some of it is going to come, a good portion of it is going to come from expense management.

Sorry, I was referring to the full year guide of $1.375 billion. I thought that kind of implied an adjusted EBITDA growth for the Company of like 18%. That was what I was referring to.

Yes, okay. It's somewhere less than that but we just have a slightly different number but most of that activity is going to come from expense reductions. We do expect some recovery of revenue for the Hotel business that Steve touched, WDN will have solid revenue as well in the fourth quarter.

Got it, thanks Tom, thanks Steve.

As you know Carlo, the third quarter is much, much bigger and more impactful than the fourth quarter just in size.

Jared Shojaian, Wolfe Research.

Good morning, thanks for taking my question. I realize you don't want to give guidance on 2017, that's obviously clear, but is there anything unique about 2017 that we should be aware of? I mean we've got currency which is looking to be another headwind, presumably you won't have the provision headwind again, but can you just share any headwinds or tailwinds that we should be aware of?

I don't think we view foreign exchange or provision as a headwind for 2017. At least -- again, we have reviewed plans.

Just on a macro basis, no.

We don't know where foreign-exchange is going so neither of those are headwinds. I think what Steve mentioned in his comments was decelerating RevPAR trend potentially.

Based on everything we are seeing so far RevPAR is going to be a little lighter, but on the other hand we are going to be completely lapping the challenges from the oil-producing markets. The other thing which I don't know if this is a headwind or not we will have to manage and talk through it is we are committed to increasing new owners at WVO.

As we saw this quarter, that had unintended impacts which we need to manage better, quite frankly and we're confident that we will. But that is something that overall, if you're looking at a bunch of statistics like VPG, VPG could be impacted by new owner mix, but that's not -- I don't view that as a headwind, I view that as an intended effort to build for the future.

Okay. Thank you. And Steve, just bigger picture here, as we think about the world slowing, is it possible that timeshare today is just a more cyclical business then it has been in the pass? I would imagine that part of the reason it's been less cyclical historically is just because it's been underpenetrated and you also didn't have the short-term rental competition that we have today. So I would love to hear any thoughts that you have on that. Thanks.

Sure, I think it continues to be an underpenetrated product. As you saw in this quarter, we increased our new owner number by 10% so getting new owners is not a massive challenge. We just have to decide that we are focused on that and when you focus on that with a ship the size of our ship, you don't just shift gears immediately, you need to bring on the sales people who are more accustomed to new owner sales, you have to modify things like your commission program.

So it's not a simple flipping of a switch. It's an effort and effort across the organization. So no I don't think there's anything larger scale that if for some reason timeshare is less attractive. As we've seen in the past it was sold during the downturn very effectively and it continues to be a product that is welcomed by consumers to this day.

And also, notably, because people have asked us about this, I put in my script, 25% of the people who have bought this year are below the age of 40. So this isn't just a product for baby boomers. It's a product that is attractive to many different segments of the demographic profile.

Okay. Thank you.

Sure.

Dan Wasiolek, Morningstar.

Good morning, thanks for taking the question. You mentioned in the prepared remarks sharing the loyalty membership program across your three segments. Just wondering if you could give an update on the number of vacation rental rooms and ownership rooms that you are offering on the network?

And then just a clarification question. You mentioned loyalty members up 7 million. Is that over the past two years or is that year-over-year figure? Thanks.

The 7 million figure is from when we revised the Wyndham Rewards program to be about a year and half or two years over that period of time. With respect to the number of offerings, I can't give you specifics. I know we're going up to 25,000 different units that are available for Wyndham Rewards redemption.

There will be certain properties that we pull out that are going to be kind of termed as our featured favorites, which are ones that will be made available to owners. But the way it is basically going to work is and this technology will improve over time, if you want to redeem points, you go online, you look at what you can redeem for and then you're going to need to be directed to the various sources of booking for right now.

In the future it will be all automated, but for now if you want to do a WVO unit you will be directed over there and they have a team that is set up specifically to handle that. The same thing with our Vacation Rentals. So it's a large number and it's a great variety of product and we'll have ones that are really quick to get to, which will be our featured favorites that will be a mix of vacation product in Europe and in the US, as well as vacation ownership product at our timeshare business.

Great and the going back to the 7 million number since you launched the Wyndham Rewards, where is overall loyalty membership I guess before you launched the Rewards reinitiative?

I don't have that number of fingertips. I know that not only have we launched program, but we've also cleansed our member roles to make sure we are counting just active people. So honestly I don't remember what it was. I know we added 7 million good active engaged members, but we can certainly get that. Our Hotel Group has that at their fingertips.

Michael [Millen, Millen].

Thank you. You talked about RevPAR seeing a little growth slowing. Were you talking about just talking about the US or internationally?

And is it related do you think in different places to the economy, related to particularly overseas, to concern about terror related to just a lot of new building or something else that you think might be affecting the pricing? And maybe in fact the travel to hotels in different parts of the world?

Sure, Mike, it's a good question regarding what I'm referring to because really I am more referring to domestic RevPAR than international RevPAR. We've seen pockets of positive in positive and pockets of negative RevPAR performance internationally and that is very much driven by local economic conditions. With respect to US specifically on terrorism, where terroristic activities have occurred, we've seen immediate impact on occupancies, but then they do bounce back.

So I wouldn't say that there's a continued impact from the terrorist activities and we certainly couldn't pull that out of any numbers that we look at. So I'm referring more to domestic, but I think across the board, there are concerns. Obviously if you look at our rental business in Europe, we had a fantastic third quarter so clearly people in northern Europe, which is where most of our businesses are based, they were traveling, they were going out, they were visiting family, they were having vacations.

So it was very, very strong in Europe. And yet you could look at some European economies and say that they are down and yet people are still traveling. So it's not as black and white maybe as the question you asked, Mike, because it's a little bit blurred in different areas but my remarks about softening are really just we've had a number of years of really terrific RevPAR growth and now we're getting back to that more normalized inflation plus type levels of RevPAR growth, in my opinion.

Appreciate it, thanks, Steve.

Sure.

I would like to now turn the call back over to Mr. Steve Holmes for closing remarks.

Thank you very much, Erica. Thanks to everyone for joining us 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.