Travel + Leisure Co (TNL) 2016 Q4 法說會逐字稿

Welcome to the Wyndham Worldwide fourth-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 all for joining us today.

I'm going to start by discussing some 2016 highlights and our expectations for 2017 and then Tom will provide you more detail on the quarter and our guidance for this year. As you saw from our release 2016 was a solid year for our Company with earnings growth and free cash flow generation both in line with our commitments. These results reflect strong execution, careful expense management and continued disciplined capital allocation offsetting higher loan losses and unfavorable foreign exchange rates.

Based on our performance, our long-term growth prospects and our consistent free cash flow our Board of Directors has approved a 16% increase in our quarterly dividend to a targeted annual payout of $2.32 per share.

Regarding our outlook for 2017, we expect EBITDA growth of approximately 3% to 5%. Our long-term goal for compound annual EBITDA growth remains 6% to 8%.

However, we expect 2017 to be below that range, primarily reflecting flat to modest EBITDA growth at Wyndham Vacation Ownership for the following reasons. First, we plan to aggressively accelerate new owner growth this year. New owner sales are lower margin than upgrade sales but critical to the long-term health of the business. Each new owner yields an estimated $20,000 in lifetime EBITDA including finance income and resort management fees creating long-term growth with some annuity-like components.

Second, we offset unanticipated increase in loan loss provision this year with reductions in variable compensation which creates a $30 million cost headwind companywide in 2017, largely at Wyndham Vacation Ownership. It is worth noting that absent this headwind we would be within our target growth range in 2017.

Finally, we are modeling a higher provision for loan loss based on a higher percentage of sales financed and continued pressure from defaults.

For the past six years our compounded EBITDA growth rate is over 8%. I am confident we will return to our 6% to 8% EBITDA growth target in 2018, and the confidence for that in 2018 and beyond is based on the following.

First, our Hotel Group has significant opportunities despite a lower growth RevPAR environment. We opened over 60,000 rooms and grew our hotel portfolio to over 8,000 hotels in 2016. That's nearly two hotel openings every day.

Our pipeline increased 16% to over 138,000 rooms. We opened hotels in six new countries, bringing our total country count to 77 and creating a great platform for long-term growth.

We are improving the overall quality of our system. We continue to terminate rooms that fall below our standards and we are adding higher-quality hotels.

Customers are seeing it and owners are seeing it. This shows up in our customer surveys, TripAdvisor scores and J.D. Power scores which showed strong regional and brand gains in 2016.

Rounding out our hotel transformation and future growth is our investment in technology platforms. Our new cloud-based property management system coupled with revenue management and new cloud-based reservation system will make our franchisees more profitable, supporting their bottom line and our value proposition.

The second reason I'm confident in the future growth is our improved top-rated industry-leading Wyndham Rewards loyalty program. This touches all of our businesses. Wyndham Rewards is the best hotel rewards program as ranked by U.S. News & World Reports.

Engaged loyalty members stay more and spend more. We added nearly 5 million members to this program last year.

It's not just the frequent guest program. Wyndham Rewards gives us tremendous cross-business potential. This past year Wyndham Rewards became the first loyalty program to include vacation ownership and vacation rental properties.

Wyndham Rewards members now have close to 30,000 redemption options and the opportunity is significant. Who else but Wyndham can give you over 120,000 places to stay around the world?

The third reason for my confidence is Wyndham Destination Network which had a great fourth quarter and full year and is perfectly positioned for the rise in the experiential traveler. Through our network we offer vacation properties to a growing group of travelers who are seeking unique accommodations from a company they trust. Last year we sent nearly 14 million people on vacations of their dreams.

In 2016 we increased the size of our network by over 8%. We added 9,000 vacation rental properties. We expanded RCI, our vacation exchange network, by adding 76 vacation ownership affiliates and 171 vacation ownership resorts.

We now have over 121,000 properties in over 110 countries across six continents.

In 2017 Wyndham Destination Network will continue to invest in distribution technology, accelerate the integration of our Wyndham Rewards program, increase the utilization of cross-branded inventory and continue the development of next generation of RCI, ensuring continued growth well into the future. Our Destination Network helps set Wyndham Worldwide apart as an integrated hospitality Company with one of the most diverse portfolios in the world.

The fourth reason I'm confident in our future is that we are recharging our Wyndham Vacation Ownership business which is already an absolute powerhouse. Let me put that into perspective. While the business had some challenges in 2016, gross VOI revenue exceeded $2 billion. That's a first for any developer in the history of the timeshare industry and double the size of our nearest competitor.

We opened six new resorts, bringing the total number to 219 across 32 US states in seven countries. We conducted over 800,000 timeshare tours through 113 sales sites sourced primarily through guests, our community marketing programs and alliance partners. These efforts helped us bring roughly 33,000 new owners into the system, an increase of 10% over 2015.

And close to 25% of those consumers were under the age of 40. So we know the timeshare product has broad appeal.

As you know, in November we announced Franz Hanning's departure. Franz was instrumental in building Wyndham Vacation Ownership into the force it is today and we thank him for his 34 years of success. We are making great progress in our search for the new leader of this business.

During the search process I have been serving as interim CEO. I am more excited than ever by the opportunities I see in Vacation Ownership. As I mentioned earlier our primary focus this year will be on dramatically accelerating new owner growth to ensure long-term success of this business.

Our goal is to bring over 40,500 new owners into the system this year. That's a 23% increase from 2016.

As I mentioned earlier, these owners contribute great long-term EBITDA beyond sales including financing income which will support higher EBITDA growth in 2018 and beyond. We will focus on key markets such as New York and Chicago and we have some exciting plans for new centers as well.

We recently opened a mixed-use resort in Clearwater Beach, Florida and have signed an agreement in Austin, Texas, an urban market highly desired by our owners.

Earlier I mentioned the cross-business potential of Wyndham Rewards. This is especially compelling as it relates to Vacation Ownership. We believe that the majority of new owner tours at our hotel-branded timeshare competitors are sourced through their hotel loyalty and related channels.

We are underachieving in this area and are focused on connecting our hotel and vacation brands through Wyndham Rewards and other hotel channels. This is a great growth opportunity for us.

So to sum up, we expect to make real progress on our many growth initiatives in 2017. Our unmatched distribution at every price points makes Wyndham Worldwide unique in the hospitality industry. With a focus on asset-light fee-for-service business models, our suite of brands that have grown into category leaders we are making bold moves today to meet the needs of tomorrow's travelers.

Simply put, we need to make travel more accessible to more people to travel to more places than any other hospitality company in the world. Wyndham Worldwide is beginning its second decade embracing the needs of the everyday travelers like no one else.

With that I'd like to turn the call over to Tom to walk you through more details in the quarter results and what we expect in 2017.

Thanks, Steve, and good morning everybody. As Steve noted, 2016 was a solid year for Wyndham Worldwide. Adjusted EBITDA increased 6% over the prior year or 7% excluding the impacts of foreign exchange and acquisitions, consistent with our long-term compounded annual growth rate target of 6% to 8%.

Our overall fourth-quarter financial performance was in line with our estimates as well with adjusted EBITDA increasing 16%. For the year we generated $782 million of free cash flow which included a reduction of $48 million in operating cash flow related to foreign exchange. This was up from $769 million in 2015.

In addition, our plan to modestly lower down payment targets to credit-worthy timeshare customers reduced free cash flow by another $55 million. However, it's a very short-term use of cash. Let me remind you why.

First, the loans are monetized in a conduit facility shortly after origination at an advance rate of approximately 60% and then several months later placed into a term securitization, effectively monetizing the receivables at about a 90% rate. This monetization takes place outside of our definition of free cash flow.

Our public company timeshare peers include the securitization proceeds in their definition of free cash flow.

During the quarter we repurchased 2.1 million shares of stock for $150 million. We reduced our weighted average share count by 7% year over year. In addition, we've repurchased 956,000 shares for $75 million so far in the first quarter of 2017.

We have a long track record of returning cash to shareholders. Since our spinoff a little more than 10 years ago, we've reduced our diluted share count by 48% by repurchasing 113 million shares for $5.1 million at an average price point of $45.47.

Let's take a look at the fourth-quarter performance of each of our business units. At our Hotel Group, revenues increased 1% and adjusted EBITDA increased 8% on a currency neutral basis, reflecting higher franchise fees and growth in Wyndham Rewards credit card program. Growth in revenues was offset by the loss of pass-through revenues from two managed hotels that are no longer in our system.

System-wide, global RevPAR increased 2.7% in constant currency and on a same-store basis in quarter four, reflecting modest growth in most major international regions and a 110 basis point unfavorable impact from domestic and Canadian oil markets. Domestic RevPAR increased 2.9%, reflecting both higher room rates and higher occupancy. Performance was particularly strong in the South Atlantic region due in part to Hurricane Matthew offset by an 8% decline in oil-producing regions.

Excluding these oil regions, domestic RevPAR grew 3.7%. It's worth noting that we saw continued improvement in the oil regions throughout 2016 which started down 28% in the first quarter.

Net system size grew 2.9% year over year as we continue to manage net growth against our goal of improving the overall quality of our system by adding higher-quality rooms and terminating substandard properties. Room growth is supported by a development pipeline of over 138,000 rooms. That's a 16% increase against 2015.

Now moving on to Destination Network, which ended a strong year with a solid fourth quarter. On a currency neutral basis and excluding acquisitions revenues increased 3% and adjusted EBITDA increased by $9 million to $52 million. In addition to strong top-line growth in vacation rentals adjusted EBITDA benefited from lower expenses and the recovery of legal costs primarily incurred earlier in 2016.

At RCI exchange revenues increased 1% in constant currency, reflecting modest increases in revenue per member and average number of members which benefited from continued growth in the Americas. Vacation rentals revenue for the quarter increased 5% in constant currency and excluding acquisitions. A 5.3% increase in transaction volume reflected continued benefits from our dynamic pricing initiative which typically results in higher occupancy for 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. Transaction and unit growth was strongest in our UK-based Hoseasons and Denmark-based Novasol brands. Average net price per rental was flat.

At our Vacation Ownership business total revenues for the fourth quarter were flat and adjusted EBITDA increased 10%, reflecting lower costs due to expense management and reductions in variable compensation. Gross VOI sales were flat, reflecting the closure of four sales offices due to our previously discussed restructuring efforts and the temporary closure of 14 sales offices due to Hurricane Matthew.

Results reflected a 0.4% increase in VPG offset by a 1.5% decrease in tour flow. VPG growth was adversely affected by sales mix with proportionally higher sales to new owners. As Steve mentioned, growing new owners is priority number one for our timeshare growth strategy, but these sales generate lower VPG than upgrade sales.

As it relates to tours, tour flow would have been up approximately 1.5% if not for the closed sites that I just mentioned.

The number of new owners increased 8% in the fourth quarter and 10% for the full-year 2016 to nearly 33,000 new owners. The provision for loan loss was $86 million, an increase of $22 million, but that was in line with our expectations. Defaults increased $18 million to $84 million, also in line with our expectations.

Corporate expenses declined $13 million due to expense management initiatives including a reduction in variable compensation. Net interest expense declined by $3 million.

Although our overall debt levels were approximately $300 million higher, as planned proportionally more of our borrowings were through our lower-cost commercial paper and term loan facilities. Depreciation increased $4 million as expected, resulting from new long-term technology projects coming into service.

Now let's turn our look to 2017 and to review guidance. We are going to post our full guidance details to our investor relations website following the call.

We expect revenue and EBITDA of $5.8 billion to $5.9 billion and $1.41 billion to $1.44 billion respectively. As usual, we are most comfortable with the midpoint of the ranges.

We acknowledge that the implied 3% to 5% EBITDA growth range is below our 6% to 8% long-term compounded annual growth rate target, but we believe this to be a one-year event for the reasons that Steve touched on earlier. We expect to return to our target growth rate range in 2018 as we will lap the variable compensation headwind. In addition, the timeshare business is expected to benefit from the new owner strategy and interest income increases from higher financings.

The hotel business is expected to benefit from improved system quality, branding initiatives and technology platforms that will be completed this year. And the destination network business will benefit from continued strong momentum in our rentals business.

Today's guidance is based on foreign exchange rates as of the end of January 2017. We expect adjusted diluted earnings per share of $5.90 to $6.10. This is based on a diluted share count of 108 million shares which per our standard guidance practice assumes no share buybacks in 2017.

I would note that many analysts' models do include some level of share buybacks. We expect depreciation and amortization of $263 million to $268 million. That's up approximately 6% over the prior year as additional capitalized technology projects come online.

Many of these projects had long buildout periods and were held on our balance sheet until completion. We expect this spike in our depreciation growth rate to be a 2017 event with more normalized growth in 2018 and beyond.

We expect net interest expense of $134 million to $138 million. That's approximately 6% higher than last year as rates on our variable debt are expected to rise in our status quo case. And we expect to have higher debt outstanding, though still within our investment grade target leverage ratio range.

Please note that we will likely term out up to $400 million of our short-term borrowings and have a $300 million 2.95% note maturing in March. Depending on the scenario, these refinancings could increase our interest expense by $6 million to $10 million above our current guidance range in 2017.

We expect a consolidated tax rate of 36.6%, 80 basis points higher than 2016. That increase primarily relates to decreased earnings in lower tax jurisdictions. We expect corporate expenses of $118 million to $124 million, which will be flat to 2016.

Now let's take a quick look at guidance for each of our business units. Starting with our Hotel Group we expect revenues of $1.33 billion to $1.37 billion, we expect room growth of 3% to 5% and global RevPAR to be flat or flat to up 2% in constant currency, reflecting the latest industry forecasts. We expect the Hotel Group adjusted EBITDA will be $410 million to $420 million.

At Destination Network we expect revenues of $1.64 billion to $1.68 billion and adjusted EBITDA of $405 million to $415 million. We expect the average number of exchange members to be flat and exchange revenue per member to grow 1% to 3%. We expect vacation rental transactions to grow 7% to 9% and average net price per rental to decline 3% to 1% or be flat to up 2% in constant currency.

For Vacation Ownership we expect revenues of $2.9 billion to $2.98 billion and adjusted EBITDA of $710 million to $730 million. That's relatively flat to 2016.

Our key top-line metric gross VOI sales is expected to grow approximately 7% to 9%, reflecting tour growth of 6% to 8%, capturing the expanded tour expectations related to our new owner growth goals that Steve touched on earlier. We also expect VPG to be flat to up 2%.

The increase in our new owner target will have a dampening effect on VPG. Our timeshare guidance assumes a provision rate of 18% to 20% of sales due to a higher level of financings and continued pressure from defaults.

Our neighborhood target for 2017 free cash flow will remain at $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 the $800 million number as a neighborhood target rather than exact figure.

Our long-standing capital allocation philosophy is to invest or free cash flow in the business where opportunities warrant and then return capital to shareholders through dividends and share repurchases. Absent M&A opportunities, you can expect we will return at least $600 million to shareholders this year through share repurchases. In addition, based on the Board's decision to increase our annual dividend to $2.32 per share, we will return approximately another $250 million to shareholders through dividend payments.

Now turning to the first quarter, we expect adjusted diluted earnings per share of $1.08 to $1.11. Remember that we don't budget repurchases -- prospective repurchases into our guidance. Interest expense and depreciation and amortization will be slightly lower than the quarterly average implied run rate.

Keep in mind that the first-quarter comparisons will be particularly difficult as we will be lapping some nonrecurring benefits from 2016 at Wyndham Destination Network and Wyndham Vacation Ownership. And we are expecting lower EBITDA from our owned hotel in Puerto Rico due to the impact from the Zika virus. We expect the provision for loan loss to be consistent with our 18% to 20% full-year guidance range.

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

Thanks, Tom. In closing, let me reiterate that we have a wide range of initiatives underway and our teams are working with energy and focus to drive strong growth, profitability and free cash flow. As always, you have my commitment that we will remain disciplined in deploying our capital to drive shareholder value.

Thank you all again for joining us for the call today and thank you for your continued support and confidence in our Company. With that we will take some questions.

(Operator Instructions) Joseph Greff.

Good morning guys. Steve, with respect to filling Franz's spot in Vacation Ownership, can you talk about the progress in that search? And then maybe focusing on that search, how important is the new person having public Company or public Company timeshare experience?

Sure, Joe. The search is going very well. It's in line with our timing expectations.

We've seen some great candidates and we continue the process of meeting people and doing second interviews. So I would say I'm very pleased by the interest in the opportunity but also with the quality of people that we are seeing.

The second part of the question is an interesting way of asking the same question you asked last quarter about the spin, I guess. Very clever way of doing it. The answer is it's important that somebody has public Company experience.

I'm not saying that we're looking for someone necessarily who's been a public company CEO, but certainly as the Board has directed me we want to keep our optionality open. So we want to be able to bring somebody in who is capable of leading an organization if that's what the Board chooses to do. But that's, again, not making any more statement than I made last time about how the Board is looking at all its options and will continue to do so.

Okay great. Thank you for that.

Then with respect to the loan loss provision, what you did in the 4Q and what you are talking about in your outlook for 2017 is in line with what we are expecting. Can you talk about how much of that is being driven by mix versus how much of it is these third parties contributing to that? And then where are you in trying to find a way to remedy the third-party impact of things here?

Tom, do you want to take the metrics and I will talk about what we're doing?

Joe, for 2016 about one half, a little less than one half of the incremental increase in provision came about from what we'll call third-party activity. And, Steve, he then asked about the steps that we are taking.

Yes, what are we doing. Well, we are doing a lot. I don't think that you can say that you've seen great results from everything we are doing.

But let me just step back for one minute, Joe. This is not just a WVO issue. This is an industry issue.

And not saying that every business in our industry is seeing it, but a majority of them are. In fact, ARDA, our industry association, has been relatively active in trying to better understand the situation and organize efforts so that we are addressing it.

In the end of the day we don't make excuses, we make commitments and we deliver on them and we owned this as being an issue that we can do better with by having more and frequent and better communication with our owners. If we had super happy owners they wouldn't default even if somebody were giving them an inappropriate pitch.

So we need to make sure our owners understand the value of what they have. And they do because the majority of them are very happy, are thrilled with the product and use it extensively, but there is a small number that are prone or, I guess, suspect of being given a pitch. And so we need to do a better -- or susceptible, I meant. So we need to be better at communicating with our owners, and we do own this issue and we will improve on and when we do you will see improvement in that provision number.

Great. Then my final question, Tom, you mentioned 3% to 5% net rooms growth for 2017 at the midpoint.

It's a bit better than what you've done the last bunch of years. How much of that is a function of you are at the point now where the removals are plateauing or dare we say moving in the other direction?

Joe, and Steve you will probably want to weigh-in on this, but it's probably more of a reflection of how much our pipeline has grown over time. I think that's really the impetus for having a slightly more bullish perspective on our prospects for 2017. But Steve, I don't know if you want to --

Yes, I attended a kickoff meeting for the franchise development group a few weeks ago now and there's tremendous excitement. The fact is, Joe, there may be some that's because we are not going to have to terminate as many but more importantly, we have given fantastic tools to our development team to sell.

That includes the various technology initiatives that we have and the results we're seeing. And as I mentioned we are not only seeing TripAdvisor and J.D. Power increases, but we are seeing incredible increases in net promoter scores. And I don't know if that's --

What you can do is just chat it. Thank you.

I'm not sure if you are familiar with Net Promoter Score, but it's a way of judging how consumers view our Company. And we saw really strong Net Promoter Score improvement in 2016. So I think we've got a lot of momentum that's building up in that business. And that's I'd say that's more the reason than the lack of terminations, quite frankly.

Good enough. Thanks so much, guys.

Chris Agnew, MKM Partners.

Thanks for a much. Good morning.

Also wanted to touch on timeshare first. And fully aware that the value of a new owner is much greater over the lifetime, but since you pointed it out can you highlight what the margin delta is between new and existing timeshare owners in the first year?

It's about 4 to 1, Chris, and it all comes down to really one component that's different which is there is a lower close rate on new owners which means that we have to spend more marketing funds to get them. That's really the big difference. It's about a 4 to 1 ratio, margin ratio differential between an upgrade and a new owner.

Got it. Given the commentary you had about 2017 and the loose commentary around 2018 coming back closer to your long-term targets, should we expect that 2017 sees a big push for new owners and then that dissipates in 2018? Or was it just that you keep it at the same level and you start to benefit from the longer tail as you mentioned on the lifetime benefit from these new owners?

No, Chris, that's a great question and I may not have been real clear with that. We are looking at roughly a 23% increase this year, and then I would expect to see more of an increase going forward. We are not going to be backing off of our new owner growth.

And for those who are not as familiar with our story, back in 2006, 2007 and 2008 we were doing a million tours a year and we were closing more new owners than upgrade owners. When the financial crisis hit, we changed our business a bit to accommodate for the ABS markets being closed and we swung more towards upgrades. The fact is we've been moving back towards new owners but, quite frankly, not at the pace that I think we need to, so we are ramping that up.

And the organization is 1000% behind it. They are excited by it. As I said I've been serving as interim CEO, and they are without exception people are very excited about the refocus on new owners and bringing new people into the fold.

So I would not anticipate that we ramp up and then ramp back down. I think the real big difference in the growth 2018 and beyond is we are not having to face this variable compensation headwind that we have which, as I said, is about a $30 million headwind this year.

And our portfolio will continue to grow as we sell more new owners, as we are lending a little bit more to those owners and that will give us some work interest income spread. So there are several things that are built into that confidence in the growth. And all of our businesses have such terrific initiatives going on right now that I feel we are really in a good place.

Thank you. If I could squeeze one little last one, the tour flow guide of 6% to 8% in Vacation Ownership, can you share some color on the first quarter and any seasonality or comp issues we need to be aware through the year? Thanks.

Sure. Well, there certainly is seasonality to our tour flow and Q1 is usually the lightest quarter for a variety of reasons. So I would not expect the tour flow in Q1 to be up to that 6% to 8% but over the year, we will get there.

In part that's because we are just opening some new sales offices. We shut down some sales offices at the end of 2016, if you recall, I think about six or seven sales offices. And we were hit by Hurricane Matthew.

So we are ramping back up from that. But you will see definitely an increase during the year. We've got a lot of different initiatives that we have in place to drive that, not just the opening of the Clearwater Beach sales center or the Austin sales center but also change in our marketing approach in New York, changes in things in Chicago and in Southern Florida and also ramping up in Las Vegas.

So we have a number of different initiatives that we are going after. But I would say that that is going to build as the year goes on, and that's also a reason that I'm feeling good about continuing to grow into 2018 because we are really changing the mindset.

And the mindset is not just the mindset that the organization has but also the mindset of compensation. So we've changed some of our comp programs to focus on new owners which will help us achieve those goals at the sales level.

Excellent. Thank you.

Patrick Scholes, SunTrust.

Good morning, thank you. Let's talk a little bit about inbound international travel. Since the Trump immigration executive order's been sort of a fiasco, have you seen any hiccups in inbound international and particularly in your Orlando area?

Interesting. So you're asking Orlando, so you're asking on the timeshare side?

It could be, yes, it could be -- let's talk about timeshare but then everything else.

Okay. We are really not. We are not seeing any impact from it.

Obviously, we don't see a lot of tours on the timeshare side from those seven countries. We don't have linguistics in every country down in Orlando or in any of our sales centers. So we would not necessarily be touring people from the countries that have now been put or were put on the frozen zone.

So we have not seen anything. Frankly, our whole philosophy as a business is inviting everybody in. So we have a very broad view of the world traveler that we bring into our hotels and into our timeshare.

Okay. Two more questions.

The first is in your quest to make new owner sales great again you talk about being aggressive in market. Just a little bit more color on exactly what that means, what you will be stepping up as far as your marketing or anything new, creative efforts in that regards?

Yes, I'm not going to have a hat made up for it, though, Patrick just so you know. The change is really more on the marketing side than anything. It's not in our sales process.

Because we've got a great, very compliance-driven sales process that we do with our podium presentations and everything. It's really on the marketing side, and if we generate -- last year we generated about 800,000 tours. We are going to, obviously, generate more than that this year.

Part of it is just where are those tours coming from and how are we deploying the resources we have which includes our salespeople to address those tours that are coming in? So really it's just a bit of a shift in focus on marketing to new owners. And as I said, the organization is embracing and excited by the opportunity.

And then just a last question here, for the fourth quarter the G&A run rate was well below the $30 million to $35 million historical run rate. Just to be clear, was that due to the decrease in bonus payouts?

Largely that was it, Patrick. Yes.

Okay, thank you. That's all, thank you.

And Patrick, just going back to your other question, one thing that I mentioned in the script that you were asking that last question I thought about was we are putting a big focus on Wyndham Rewards on our Hotel Group and driving more tours from that area. As I said, I think we underperformed there.

We have big opportunities, particularly as Wyndham Rewards has improved and, frankly, the technology in the Hotel Group is improving to provide better transfers and better opportunities. So we are super excited about that.

Thank you.

Jared Shojaian, Wolfe Research.

Hi, good morning. Thanks for taking my question. Steve, you talked about pre-financial crisis you guys did more new owner sales, so I guess I'm wondering is 60/40 still the right mix on upgrade sales versus new owners or are you reevaluating that with the management change? And then where will you be at year-end 2017?

It's probably a pretty good broad guidance on it. I think that the focus will be on driving new owners, but we are not deemphasizing upgrades because we still have a ton of people, we have 900,000 members in our system. They are coming in to visit with us and they want to hear what we are doing and how we are improving our network.

So we will continue to talk to them and we will continue to sell upgrades. And as we add more new members it gives us a new pool of people to talk to about upgrade, as well. So I think that probably 60/40 is a pretty good estimate of where we will be at, and if anything over time we may see that go more new owner, but that's probably a pretty good estimate.

Hey, Jared, it's Tom. Let me give you just a little perspective on 2016 where we ended up.

About 45% of our tours were upgrade and 55% were new owners, yet our revenue for 2016 was still 66/33 upgrade new owners. So to get to 60/40 would show a bit of a realignment from where we ended 2016.

And I think you were asking the long-term view, right? That was your point?

Right. That was my question, but also at year-end 2017 presumably you are not going to be at 60% by the end of 2017, or is that your expectation?

Not going to be at what percent? Sorry?

60%?

60%. Probably not. We are probably going to be more between 60% and 65%.

I don't want to get too precise on it because we could do better in our close rate in new owners and all of a sudden new owners are up. So we are targeting something that's between 60% and 65% but, again, this is not a precise science and I'd be thrilled if it were higher. It means we are closing at higher rate and that's a good thing.

We are heading to 60%. We may not get there in 2017.

Okay. So based on those comments it sounds like you are going to have the mix headwind again in 2018 and then probably 2019 and who knows how much further out, but I guess the question is why do you feel confident with 6% to 8% growth going forward if 6% to 8% has been the historical longer-term number that you've hit when you've had growing higher-margin upgrade sales hoping that mix?

So I guess now if you don't have that you actually have the opposite occurring. Why do you feel like you can still get 6% to 8%?

Well, I'd say there's a couple of things, and Tom may want to add on, as well. Clearly we are going to have an increase in interest income going forward because our portfolio is growing and that will add some. And as you are all aware, interest income and interest expense for the ABS financing flow through above our EBITDA line for the timeshare business. So that certainly helps grow it.

The other thing is we were dealing this year and we think we are going to deal with in 2017 to a smaller degree the provision pressure that we've seen. And so that is something that we've been dealing with that I don't think is a long-term systemic issue of having a growing provision. I think we may have a higher provision than we've had historically.

Who knows whether we will return to the old levels that we had. Then the third I would think is really that in 2017 we are not going to be dealing, in 2018 rather we are not going to be dealing with this pressure of lapping our variable compensation which is not an insignificant item and we feel is absolutely appropriate given the pressure, given the fact that we think every one of our associates should have an opportunity a target compensation at the level that they are expecting and for good performance that should absolutely be the result. Is there anything else, Tom?

I would just say look, 2016 was an interesting year because it really was if you look at the reason why the business didn't reach the goals that we had set it had everything to do with provision. So bonus payments were a reduction and bonus payments were used to offset that.

Had it not been for this extraordinary provision movement, the business would have had a familiar year to us. It would have had revenue growth. And so sometimes these provisions have a pretty volatile effect on earnings, but absent that when you look at the rest of the performance of the business it was a familiar performance level for us.

And absent the variable comp in 2017, we'd be right at the growth levels that you are accustomed to. So I don't think it's any sort of a stretch. It's in how you build your program and build the business.

Okay, thank you. And if I could just sneak one quick one in, you touched on the possibility of a timeshare spinoff, I guess the possibility of that. But what prohibits a sale to a competitor as another option? Would you just be faced with a big tax consequence or is there something else that I am missing?

Well, yes, we'd have a big tax consequence, frankly, for all of our businesses because our basis is not all that high. You'd have to have a willing buyer who's interested in buying a business unit. We don't preclude anything, quite frankly.

That's just our model is we look at all opportunities. As I said the Board asks me to produce optionality for the business and for the shareholders, and so that is the model that we are living under. But we would have a significant tax issue if we tried to sell a particular business unit or part of a business unit.

Okay, thank you.

David Katz, Telsey Advisory.

Hi, good morning everyone. I wanted to ask about the hotel business and I appreciate your commentary and perspectives about it.

But one of the observations we make about other branded hotel companies is, and I know you touched on it just a little bit about forcing out underperforming owners, but we've seen other companies go through a more formal process of reestablishing a brand and a new set of standards and along with that having a really a meaningful campaign toward upping the level of specific brands. Have you contemplated that with any of the larger brands that you have at something just a little bit more meaningful than what you've done so far?

Well, two comments on that, David. And thanks for the question.

The fact is I think before you covering us we went through that with Ramada. We did a complete redo of the Ramada program, took out about 30,000 rooms from that system and reset it.

We do focus on the brands. Just in 2016 we reimagined what all the brands look like and what they should feel like. In that regard, we also developed new prototypes for the brands that are driving more new construction for the brands.

So we do a lot for -- to hit a reset button and completely wipe out a brand is a dramatic step to take. And I'm not saying that we are thinking about doing that.

We think that we have been successful in moving the needle by just holding very firm to our quality standards and terminating properties that don't hold up to those standards. We will continue to improve the brands, and we will continue to focus on adding more attributes for those brands. But I don't think that we are going to be looking to do a complete reset.

So if I can follow that up, Super 8 and Days Inn, which are the two that are larger than Ramada, have they gone through a remodel-like cleansing, if you will, or a repositioning as you describe it? When was the last time they did that?

No, I wouldn't say that they have. They have gone through periods of refreshing and changing things up and redesigning the properties and changing standards. But we do those things all the time for our brands.

So no, I wouldn't say that there has been -- we haven't hit the reset button on either of those brands. Those brands are very powerful. Days Inn and Super 8 are two of the most powerful economy brands in the industry.

Right. Okay, I appreciate the answers. Thanks for taking my question.

Stephen Grambling, Goldman Sachs.

Good morning, thanks for taking the questions. Just to follow up on the Wyndham Rewards you've mentioned a few times as being a key tool to drive multiple segments, as the program has continued to grow with relatively recent improvements are seeing any difference in the type of customer that you are attracting or how they leverage the loyalty program? And how does that customer compare with a typical timeshare customer?

Great questions. The fact is we haven't seen a big change in the type of customer taking Wyndham Rewards, but we have seen a change in the way they use Wyndham Rewards. Historically the Wyndham Rewards program, which was not a powerful loyalty program, was more of a rewards program.

People would use their points to get things like Home Depot cards and it was more focused on what they could get short term. There has been a dramatic shift in that towards using our product, which is the whole purpose of a loyalty program. So I think the reset that the team did there was brilliant.

It's drawn a lot of attention because it's been ranked very highly, but more importantly it changed the way people use the program. So yes, we are seeing a dramatic increase, and I don't have numbers to quote you right now, but a dramatic increase in the usage of our product, our hotel product versus people using the points for something outside of our ecosystem. I'm sorry, was there another question there, as well?

Well I guess a follow-up would be what percentage of tours are sourced from either Wyndham properties or that could be identified as Wyndham Rewards members? And how do they overlap a timeshare?

The short answer is too low. It's an area that I think we have enormous room for improvement. We don't drive a lot of our tours from our Hotel Group which we should and which we will.

And doing a redo of Wyndham Rewards was one step in that process. Having technology improvements is another step in that process. So we are doing the things we need to to make that a more effective tool for us.

That's great. Thanks. One last follow-up if I can, a lot of the focus has been on separating out the businesses, but certainly with the Wyndham Rewards it sounds like there's more opportunity to connect them. If you think about the M&A environment more broadly, how do you evaluate acquisition, specifically maybe in the hotel space versus growing organically and has that changed?

Well, we'd like to do both. We will continue to grow organically. But in M&A it's all about the opportunity and then the valuation that that opportunity is presented at.

We are very disciplined. As we've said numerous times, as we've shown, we are not going to do a deal just for the sake of adding more brands or more units.

But we do look at everything that comes out and if it makes sense, we will take advantage of it. We think that we have the unique capability of moving a brand more than anyone else. So we will look at every brand that comes on the market.

Fair enough. Thanks so much. Best of luck.

(Operator Instructions) Harry Curtis, Nomura.

Good morning. I wanted to go back to your comment, I was interested on the timeshare side your reference to sourcing the hotel channel. Can you give us, for new customers can you give us a sense of from a historic perspective of to what degree you've used that as a resource?

We've used it but as I said, Harry, we just haven't used it effectively and as efficiently as we should. And part if that was system constraints that we had that we are resolving and part of it was just the focus, quite frankly. It is getting a lot of attention right now and it will become a bigger part of it.

I don't know what others do. We hear rumors of what other companies do in their connection to their hotel brands.

We do not achieve anywhere near what we understand others are doing. And we think that's a result not of the demographics of our hotel customers, because they are exactly the right demographic, but it's more a focus and attention to driving new owners. And we used to do better, in fact, in our call transfer and other programs, but when we started to shift the focus to upgrades we lost that muscle and we are rebuilding that muscle now.

And my follow-up question is in reference to your tax rate. It's still early in the discussion about lowering corporate tax rates, but if that does happen, have you guys spoken about what you would do with the incremental free cash flow, whether it would be applied to growth or returning cash to shareholders?

No, it wouldn't change at all. Tom said it wouldn't change.

We would love to find more opportunities to grow the businesses. And if we could we would be investing in them as long as there is an adequate return, which is how we always view our capital allocation. But absent those opportunities it would be sent back to shareholders.

Very helpful. Thanks, guys.

Carlo Santarelli, Deutsche Bank.

Hey guys, thanks for taking my questions and good morning. Just quickly, and I think this is just more housekeeping than anything else, but the free cash flow growth year over year looked like it was up maybe 1%, 1.5% or so relative to the 6% growth of EBITDA.

Tom, you mentioned $55 million headwind to free cash flow from lower down payments. Is that at least partially responsible for the disconnect between those two items?

I'd say it was foreign exchange and the higher financing that we are doing, so those are the two things. But, Carlo, our view on the higher financing is it's a short-term use of cash. We are not building brick and mortar.

We are taking the cash, we are recycling it. That was my explanation. In a matter of months we are recycling it and we are getting cash back.

It just doesn't hit our definition of free cash flow. It falls into financing on the cash flow statement, which is not part of our definition of free cash flow. So it's just a definitional explanation really.

Right. Okay, I understand that.

So just as I try and look at 2017 guidance, and I look at your Vacation Ownership margins and it looks at the midpoint they are down maybe 100 basis points or so with respect to your guidance, when I think about everything going on in the business it looks like loan loss provisions have been guided up a little bit. You are going to increase the mix of new owners, which as Steve, I think, mentioned earlier are basically one fourth the margin power of an upgrade sale. You have this variable compensation headwind.

I'm just trying to understand how you keep the margins that tight? As in, only down 100 bps year over year. Does that mainly come from inventory sourcing, and maybe if you can give a little snapshot of what 2016 looked like from an inventory sourcing point of view?

It doesn't have anything to do with inventory sourcing. I think we, our COGS is in a pretty tight spot as it is, meaning we have a very good COGS rate. And most of the downside is coming from the two issues that you raise which is bonus we hope will be achieved and, therefore, it will erode margin and then the higher emphasis on new owners.

Offsetting that will be some improvement in VPG. In tours we still have upgrade assumed in our -- growth in upgrade assumed in our numbers, so it isn't as if upgrade is declining. And we have a small margin increment, positive margin increment with consumer finance, our consumer finance business, as well.

But those are the components that we see now. I think we are projecting about 130 basis point decline in 2017 based on the guidance that we've given you. 130 basis point decline, again most of it coming from bonus and new owners, but being offset in part by other items including consumer finance.

Great. And then just on that $30 million, the headwind, could you just explain a little bit more the mechanics of that in 2016? And is that just simply targets weren't achieved so those bonuses don't get paid, your guidance assumes targets for next year or are the targets for next year to achieve and hence you would bring that back?

Yes, exactly. That's the way it works. We have a base bonus assumption for every employee who is bonus eligible, and we reestablished that base level in 2017 and in 2016 we paid out below that base level, and that's what the headwind that Steve described is.

Great, thanks so much.

Dan Wasiolek, Morningstar.

Hey guys, thanks for taking the question. I just wanted to ask a little bit more about the pipeline growth that's picked up the last several months or really through 2017.

So you already mentioned the technology in cross-sell momentum that is benefiting that. But any particular brands or regions that are seeing particular strength that's aiding that pipeline growth?

Pipeline, probably international would be the largest if you are looking at regions. China has been a big contributor to that, but we've also seen growth in Europe. And I think that's it.

For the most part I don't want to overplay our pipeline situation because as largely a conversion Company, we do a lot of very quick conversions of an independent hotel into one of our brands. So pipeline for us is helpful because it shows probably an increase in new construction somewhere around the world and that's mostly in Europe, mostly outside of the US but I wouldn't read too much into that.

Okay, and then maybe just one follow-up. You mentioned as far as gauging the strength of a brand some J.D. Power and TripAdvisor metrics.

I'm wondering if you could maybe provide some metrics with regards to RevPAR index for brands and which brands are performing above that and below that? Thanks.

Yes, we have not given RevPAR index by brand or by region or by anything else. That's a level of detail, quite frankly, that I think it would be impossible for us to keep up with.

So we, obviously, use that internally and we've seen increases in our indexing. But there's domestic international issues, so there's a lot going into that. So I wouldn't hold your breath waiting to see that information.

Okay, understood. Thank you.

Michael Millman, Millman Research.

Thank you. You had talked about it in the past what was going on in the oil regions. Can you talk about what you are seeing, what the trends you are seeing this year in the oil regions?

And, secondly, regarding vacation rental, can you talk about what if any concern you have about the tremendous technology strength that Expedia and Priceline seem to have and the amount of money that they are spending to expand that, as well? Thank you.

Mike, it's Tom. I will handle the first question which was the effect of oil regions. We started the year, first quarter of 2016 the oil region was down almost 30%.

In the fourth quarter that number dropped, the effect dropped to 8%. And in January so far we've seen a similar effect as we did in the fourth quarter. So there doesn't seem to be, at this early point there doesn't seem to be any significant shift from that 8% level, at least in the first quarter of 2017.

Steve?

As for the OTAs and their advertising levels and driving rental volume, they've been around as has the HomeAways and Airbnbs and our European rental business just marches on. There is something to be said for trust and confidence in where you are renting. Your vacation is a very important part of your annual activity, and there's a tremendous level of comfort with our European brands and with the Wyndham brand in the US.

So we feel comfortable and confident. We've seen the growth despite massive overspending by others, overspending above our levels by others. So we feel very good with our positioning.

Great, thank you very much.

All right, well I think Erica said that was the last question. So I will thank everybody for joining us and we look forward to talking to you on the next call. Thank you.

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