Travel + Leisure Co (TNL) 2017 Q3 法說會逐字稿

Good day, everyone, and welcome to the Wyndham Worldwide Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, 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 David Wyshner, our CFO. I'm also pleased to announce that we have 2 additional speakers today, Geoff Ballotti, CEO of Wyndham Hotel Group; and Mike Brown, CEO of our Vacation Ownership business. 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 and other filings 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, which are -- and that is available on our Investor Relations website at wyndhamworldwide.com.

Steve?

Thanks, Margo. Good morning, and thank you for joining us today. Given our announcement in August of our plan to become 2 publicly traded companies, we have changed our format for this morning's earnings call. I'll start with a few remarks on the separation process and our third quarter results, then turn the call over to Geoff Ballotti and Mike Brown, who will share their perspectives on the opportunities for the companies they will lead following the separation; and then David Wyshner, our Chief Financial Officer, will provide financial highlights of the quarter. At the end of the prepared remarks, we will take some questions. Before I give a few comments on the separation process, I want to highlight that the Board of Directors took a decision to increase our repurchase authorization. This reflects confidence in our ability to grow and to generate ample cash to both invest in the business and return to shareholders. Now onto the spin. We're moving quickly and remain on track for completion in the second quarter of 2018. The board and I remain confident that the spin-off of our hotel business, that leaves our Wyndham Vacation Ownership and RCI timeshare exchange businesses under one umbrella, is the best structure to unlock shareholder value, and enables strong long-term growth across the businesses. The transaction is expected to increase the fit, focus and strategic flexibility of the 2 post-spin companies. The separation will allow each company to concentrate on growing its core business and facilitate future capital raising. In addition, we will maintain the synergistic blue threads, such as Wyndham Rewards, between the businesses. While both companies will provide more detail on their strategies and priorities as we move through the separation process, I want to assure you that the shareholder value principles that drive us at Wyndham Worldwide will also guide the new companies. These are, first, a focus on fee-for-service business models that produce consistent, reliable earnings growth and generate strong free cash flows; second, a capital structure that is efficient without taking on undue risk; third, a capital allocation philosophy that invests in the business and returns excess cash to shareholders; fourth, a disciplined M&A approach that results in acquisitions that are both strategically and financially attractive; and finally, a fundamental belief that we work for the shareholders, and that the best way to deliver for you is to maintain an innovative and inclusive culture that fosters employee engagement and delivers excellent value for our franchisees, partners, owners and consumers.

As part of the separation, we announced that we will explore strategic alternatives for our European vacation rentals organization. This business operates leading brands in the European vacation rental space, generates about $750 million of revenue at attractive margins and are somewhat underappreciated by our largely U.S. investor base. Since our announcement, we received considerable interest in this business from potential buyers, and we are responding to that interest. As a result, we are optimistic about this process. With that being said, you should expect that it will take several months before we have something more definitive to say about the outcome of these efforts. Now let me take a few minutes to put the third quarter and our outlook for the remainder of the year into perspective. First, I want to comment on the devastating hurricanes that hit Texas, the Caribbean, Florida and surrounding areas in recent months, and the also recent devastating earthquakes in Mexico as well as the wildfires in California. First, and most importantly, our thoughts are with the families who lost loved ones or homes and those who face a long period of rebuilding and recovery before they will be able to resume their normal lives. Second, we are hearing countless examples of our people doing amazing things to serve guests, protect our properties and help each other. I want to publicly acknowledge and thank all of our associates and affiliates who have gone above and beyond during these events. These events put the -- but the hurricanes in particular have had a meaningful impact on our business, which we will -- which we've detailed in the press release. We've reduced our full year guidance based on our current estimates and the storms' financial effect on our business. Otherwise, our outlook is positive. Our third quarter results were strong despite the hurricanes, and we would -- and we would have held our original guidance. David will give you details on the quarter and on our outlook in a few minutes. But first, we're in the process of separating Wyndham Worldwide into 2 great companies, let me turn the call over to the President of our -- and Chief Executive Officer of our Hotel Group, Geoff Ballotti.

Thanks, Steve. I am thrilled to be joining the call today to talk about the Wyndham Hotel Group as a soon-to-be public company. We've grown to become the company that operates more hotels than any other organization in the world, with over 8,300 franchised hotels operating under one of our 20 well-known brands today. We have an exceptionally strong footprint with 40% of the economy hotels in the United States flying one of our flags. We have significant opportunity for continued growth and great momentum. As Steve mentioned on the last call, our recent acquisition of AmericInn, which we closed this month, speaks to this runway as we expand our base in the midscale segment with over 200 high-quality hotels. In addition, the Trademark Hotel Collection just launched in June already has over 50 hotels live on our distribution platform. Our value proposition is straightforward. We enable our franchisees, who are predominantly single property owners and, frequently, when they sign with us, new to the hotel business, to optimize their return on investment. We establish brand standards, provide operational training. We ensure the consistency and the quality of their hotels. We offer state-of-the-art technology and revenue management solutions, and we enable our franchisees to reduce costs by leveraging our significant purchasing power. Most importantly, we drive guests to their hotels through our global reservations and online distribution channels. In the process, we provide everyday travelers around the globe with exceptional value through what are some of the most recognized and established brand names in our segment. Our largest and most international brands are Super 8, Days Inn and Ramada, which in aggregate operate in 68 countries around the world and enjoy brand awareness of over 75%. And we have great under-penetrated growth brands, such as Microtel by Wyndham and Wingate by Wyndham, which are both consistently ranked at the very top of their categories by J.D. Power.

By way of background, I joined Wyndham in 2008 from Starwood Hotels & Resorts after 20 years in various leadership roles in both Europe and North America. I came to run what is now Wyndham Destination Network, and I was excited by the opportunity to grow our managed alternative lodging accommodations while using technology to enhance service delivery at RCI and the many great brands at Wyndham Vacation Rentals. Steve asked me to run the Hotel Group in 2014. And since then, our incredible teams around the world have been laser-focused on 3 areas: quality, technology and loyalty. First, quality. We have strengthened our brands with new brand positioning, new standards, design prototypes, marketing campaigns and websites. And we have removed -- our teams have removed over 80,000 substandard domestic rooms over the past 3 years. And we're just now starting to see results. Last year, we saw very strong gains for our brands across our J.D. Power, TripAdvisor and net promoter ratings. In addition, our domestic new construction pipeline is now up 35% over the last 3 years. Second, technology. We invested heavily in our websites, enhancing our digital and mobile experiences for consumers, while transforming the technology we provide to our owners. This is a very big deal for us as it allows us to leapfrog legacy industry systems, creating a competitive advantage to drive market share. We're now in the process of rolling out an integrated cloud-based central reservation system, connecting our franchisees to a myriad of new distribution channels. And to connect our hotels to this industry-leading CRS, we have completed the installations of over 4,300 new cloud-based property management systems with the first truly automated yield management system in the economy segment. And third, we have developed the very best loyalty program at a time when loyalty has never mattered more. We've completely reimagined and relaunched Wyndham Rewards with great results. Research tells us that what our hotel guests want most is an easy way to earn a free night. And so we've made Wyndham Rewards the simplest and the most generous program in the industry according to IdeaWorks for 2 years running now, as you may have seen recently reported in the Wall Street Journal and Forbes Magazine. Unlike competitive programs that have multiple tiers requiring more points for each quality tier, we have one simple and straightforward award night redemption level that appeals to the everyday traveler. All 8,300 of our hotels are available for only 15,000 points per night, with no blackout dates even at our most expensive and most aspirational upper upscale Wyndham Grand resorts. Our franchisees have never been more engaged, enrolling 55% more members at their front desks than they did before the relaunch. Most importantly, since the relaunch, Wyndham Reward redemptions for free nights have increased from 64% to over 80% of all redemptions, delivering more room nights and more revenues back to our franchisees. And now we're expanding redemption opportunities to over 20,000 of the most aspirational Vacation Ownership and vacation rental properties in the WDN and WVO portfolios that will remain in the Wyndham Rewards program post-spin. Our business model is so simple and so ingenious. In exchange for the services and reservations we provide to hotels that operate under our brands, we collect a percentage of each property's hotel room revenues. Our ability to have a diversified share of revenue fee stream from thousands of hotel properties without owning those physical assets represents an incredibly attractive value proposition for shareholders. To sustain and advance this business model, we will continue to be laser-focused on quality, technology and loyalty. We'll be committed to investing in our businesses and to pursuing acquisitions when it makes strategic and financial sense to do so, and to returning excess cash to shareholders. We look forward to telling you more about this in the months and years ahead. And with that, I will now turn the call over to our new President and Chief Executive Officer of Wyndham Vacation Ownership, one of my most important customers for so many years while at RCI, who I'm now very proud to call my colleague, Mr. Michael Brown. Mike?

Thanks, Geoff, and good morning. Like Geoff, I'm excited to share with you the great assets and opportunities we have at the business I'll be leading. We're the global leader in timeshare and vacation exchange. Timeshare is a multibillion-dollar industry with a clear consumer value proposition. Timeshare provides great vacations today and in the future at today's prices. The product is flexible, enabling consumers to choose a wide array of locations and accommodations throughout the year. The fact that nearly half of timeshare owners plan on buying more over the next 2 years is evidence of the power of the value proposition. Wyndham Vacation Ownership has 221 resorts and 25,000 units across North America, the Caribbean and the South Pacific with an established base of nearly 900,000 owners. We have 3 principal revenue streams: vacation ownership sales, consumer finance and property management, each of which contribute significantly to our profitability. Our multiple brands, wide geographic reach and variety of offerings enable a highly flexible vacation for the broadest demographic in the industry. RCI operates the world's largest vacation exchange network with 3.8 million members in over 4,300 affiliated resorts in more than 110 countries. RCI enables timeshare owners to exchange their points or weeks for stays at other properties. The product gives them enhanced flexibility at a nominal cost, which is why RCI has customers who have been members for 20, 30 or even 40 years. With 6 months on the job, let me share with you why I'm so excited to lead this business. I joined Wyndham Vacation Ownership in April from Hilton Grand Vacations, where I'd spent 9 years and was most recently Chief Operating Officer, following 16 years at Marriott International and Marriott Vacation Club. I have a deep respect for both companies, for their business models and for their strong management teams. At the same time, I had long admired Wyndham's reputation for innovation, its diversified marketing platform and the quality and scale of its brand and resort network.

Since May, I've been traveling throughout the organization visiting my fellow team members and our owners. I've been especially impressed with the quality and focus of the team, the breadth of our brand portfolio, our significant scale and product offering, which, as I said earlier, reaches a broad consumer demographic.

Combined, these attributes will deliver dependable growth for shareholders and produce significant cash flows. Steve laid out the strategies and growth initiatives to the team at the beginning of the year, the most significant 2 of which are to grow new owners and to closely partner with the hotel company, which includes fully leveraging Wyndham Rewards. His directive and direction was perfect, and I fully endorse it. Let me explain. Similar to Wyndham Hotel Group, our owner base is the everyday traveler. We are the largest branded vacation ownership company targeting this section, and we are able to do so with a product suite that encompasses a wide range of price points and markets, supported by over 100 sales offices. The breadth and depth of this scale is critical to our commitment to growing new owners. With over $2 billion in annual gross VOI sales, roughly equal to the combined sales of the next 2 largest timeshare companies, we are the undisputed leader at selling vacation ownership. This is especially compelling since unlike most branded timeshare companies, the majority of our tour sources have historically been unrelated to our hotel business. We have built this tremendous base through strong marketing alliances with other great consumer branded companies, such as SeaWorld, Caesars and Margaritaville, and a wide variety of local marketing programs. The diversity and scale of our marketing programs is unrivaled in the timeshare industry, and we intend to nourish this highly valuable capability.

Now in addition, as Geoff noted earlier, Wyndham Rewards provides a significant marketing universe, as members are a strong demographic fit and have an affinity for our brand. With less than 5% of our VOI sales generated last year from Wyndham Hotel Group, we see significant untapped potential to grow this channel through enhanced call transfers, online marketing, rental cross-sell opportunities and more. We saw signs of that growth in the third quarter with increased call transfer leads and package sales. As with all marketing, leads are the key. And in fact, through the third quarter, our hotel-related leads are up 48% from the same time last year. And those packages will tour in the upcoming 8 months, supporting the new sales next year. Steve mentioned on the second quarter earnings call that the fundamentals of our business strategy are strong. In the third quarter, they remained strong, with gross VOI sales up 7%, even taking into account the challenges from hurricanes Harvey, Irma and Maria. Excluding the impact from hurricanes, we estimate that gross VOI would have been -- would have increased over 8%. We're making strong progress in bringing new owners, with a 16% year-on-year increase in North American new owner sales in the third quarter. We did this while holding VPG relatively flat. It's a significant achievement and reflects our focus on quality, long-term sustainable growth. Our sales mix over recent years has been about 67% owner upgrades and 33% new owners. We'd like to see that move to 45% new owners over the next 5 years. While the mix is important, in my mind, how we get there is critical. We are focused on innovative and efficient marketing with great sales to deliver high-quality owners that will look to us to fulfill their lifetime vacation goals.

Let me take a moment here to talk about RCI and its growth strategies. While our Destination Network business will continue to report until spin to CEO, Gail Mandel, who is a great leader and partner, I will cover the business for her today. RCI's primary strategies are to offer new membership and exchange options to grow its member base. We've added great new alternative lodging options and member models with recent acquisitions. And with a proven track record of many innovative firsts in the timeshare industry, the team is focused on using analytics and technology to facilitate and enhance the exchange process. This dovetails nicely with our collective vision of delivering great vacation experiences. Finally, before turning the call over to David, I want to note that we expect a core part of our investment thesis to be the generation and smart deployment of strong free cash flow. Wyndham was the pioneer of just-in-time, capital-light and capital-efficient timeshare inventory development. Close to 80% of our sales last year were from capital-efficient sources. Through smart, efficient inventory sourcing and effective monetization of our robust consumer finance portfolio in the ABS market, we expect to have strong EBITDA to cash conversion. And similar to Wyndham Worldwide, our capital allocation philosophy will be a combination of investing in organic growth, making disciplined accretive acquisitions and returning capital to shareholders. I look forward to discussing our achievements and results with you in the years to come. And with that, I'll turn the call over to Wyndham's Chief Financial Officer, David Wyshner.

Thanks, Mike, and good morning, everyone. I'm thrilled to have joined Wyndham Worldwide at such an exciting and important time. I have long been familiar with many of Wyndham's businesses as a result of my work with and for its predecessor companies from 1993 to 2006. As Steve, Geoff and Mike have discussed, our operating segments have compelling business models that generate stable and recurring cash flows, while also providing platforms for growth and expansion. I've been incredibly impressed by the teams running these great businesses, and I believe there's a significant opportunity for us to increase shareholder value through and following the separation.

Today, I'd like to discuss our third quarter results, the impacts of the recent hurricanes on our businesses, our cash flows and liquidity and our full year outlook. My comments will focus on our adjusted results, which are reconciled to GAAP numbers in our earnings release. Results for the quarter reflect the punishing impact of several hurricanes, which we estimate reduced revenues by $13 million, adjusted EBITDA by $9 million, net income by $6 million and adjusted EPS by $0.06. Our total revenues grew 4%, reflecting higher services and membership fees and higher vacation ownership interest sales, partially offset by the impact of the storms. Adjusted EBITDA increased 3%, reflecting the revenue gains as well as weather impacts and a tough year-over-year comparison we faced because of an $18 million reduction in incentive compensation, driven by a reversal recorded in third quarter 2016.

Nonetheless, solely excluding hurricane impacts, in Q3, our revenues grew 4%, our adjusted EBITDA grew 5% and our adjusted EPS grew 10%. In our Hotel Group segment, revenue grew 1%, and adjusted EBITDA increased 4% year-over-year. Our results reflected a 9% increase in our core royalty and franchise fees and growth in other revenue due to the Wyndham Rewards credit card program. The revenue gains were partially offset by the absence of $13 million of global conference revenues that we had last year and lower managed hotel cost reimbursements. Both are pass-through revenues that are fully offset by expenses.

Domestic RevPAR increased 3% in the quarter compared with the industry at 1.9%. Performance benefited modestly from higher demand due to the hurricanes and the solar eclipse in August. International RevPAR increased 4.1% in constant currency, reflecting strong performance in a variety of locations, including Canada, Germany, Turkey and Argentina. Net system size was up 3% year-over-year, primarily reflecting growth in all of our international regions, specifically the Wyndham Hotels and Resorts brand in South America, Europe and China as well as the Baymont brand in North America.

In our Destination Network segment, revenues grew 5%, and adjusted EBITDA increased 6%. The recent hurricanes reduced segment revenues and EBITDA by an estimated $5 million and $4 million, respectively, primarily at our RCI exchange business. Within WDN, Vacation Rentals grew 8%. Transaction volume increased 4%, including 2 points from tuck-in acquisitions. And average price per rental rose 3%, partly due to currency movements. RCI exchange revenues declined 1%, reflecting the net impact of a 1% increase in revenue per member and a 2% decline in the average number of members. Revenue per member benefited from increased pricing and favorable currency movements, but was reduced by around 3 points due to the travel disruption from the recent hurricanes. The average number of members declined due to member attrition in our lower transacting clubs. In our Vacation Ownership segment, revenues increased 4%, and adjusted EBITDA declined 3%, with the recent hurricanes reducing revenues and EBITDA by an estimated $7 million and $4 million, respectively. In addition, year-over-year EBITDA growth was impacted by $16 million of incremental variable compensation expenses due to the reduction in such costs last year. Despite the storms, we had our strongest gross VOI sales quarter ever, with sales growing 7% year-over-year to $602 million. This included a 16% increase in sales to new owners, consistent with our strategic focus on this customer segment. Results reflect a 7% increase in tour flow, partially offset by a slight decline in sales volume per guest, reflecting the mix effect of pass-through new owner growth. Tour flow in North America and the Caribbean were suppressed -- was suppressed by sales office closures due to the hurricanes. Consumer financing revenues were up 6% to $119 million in the quarter. Our gross receivables portfolio grew 3% to $3.5 billion, largely as a result of our sales growth. The provision for loan losses was up $19 million year-over-year to $123 million, in line with, but at the high end of our expectations. Defaults increased $12 million to $83 million. As I mentioned, the recent hurricanes reduced our tour flow and VOI sales by 2 points and $9 million, respectively. Major sales sites we have in Florida and South Carolina were closed for several days due to the storms. Even more importantly, we have a large sales site in St. Thomas as well as a sales site in Puerto Rico that will likely be out of operation until early next year. Certainly, weather events happen from time to time, but the number and magnitude of events in the third quarter were unusual. All in, we estimate that we lost around 5,000 tours in Q3 as a result of the hurricanes.

Turning to our cash flows. We have generated $541 million of free cash flow year-to-date compared with $650 million over the first 9 months of 2016. The decrease primarily reflects timing differences and growth in our receivables portfolio. Our liquidity position remains strong with more than $1 billion of liquidity available as of September 30. In addition, we signed a new asset-backed facility earlier this month that gives us an incremental $750 million of borrowing capacity. We continued to use a substantial portion of our free cash flow for share repurchases in the third quarter, buying back 1.5 million shares at a total cost of $150 million. Year-to-date, we've deployed $185 million of capital for acquisitions, including the purchase of AmericInn in early October. And in the first 9 months of the year, we've returned $635 million to shareholders through $450 million of share repurchases and $185 million of dividends.

Now let's turn to our outlook, a summary of which was in the earnings release, the details of which will be posted on our website after the call. As we look at the fourth quarter, we expect that the recent storms will impact results in all 3 of our segments. In our Hotel Group, Hurricane Maria left our Rio Mar property in Puerto Rico needing significant repairs, and the rooms we currently are able to use are primarily occupied by emergency relief workers, which is lower-margin business. In our Destination Network operations, many affiliated properties throughout the Caribbean, South Florida and elsewhere have been damaged, reducing the inventory we have available to satisfy exchange requests. And in our Vacation Ownership business, fourth quarter tour flow has been negatively impacted at a number of sites. And we also think that the economic disruption in Puerto Rico, Texas, Florida and the Virgin Islands could potentially have some impact on our consumer finance portfolio. Our associates and our management teams have been working to mitigate the financial effects of the storms on our business. Nonetheless, as we disclosed in our earnings release, we estimate that the hurricanes will negatively impact our fourth quarter revenues by $20 million to $30 million, our adjusted EBITDA by $15 million to $23 million and EPS by $0.09 to $0.14.

Therefore, as a result of the storms, we're reducing our full year 2017 projections. We now expect revenues of $5.8 billion to $5.85 billion, adjusted EBITDA of $1.38 billion to $1.395 billion and adjusted net income of $618 million to $628 million. Adjusted diluted EPS, which benefited from our share repurchases in the third quarter, is now expected to be $5.95 to $6.05 based on a tax rate of just under 36% and a diluted share count of 103.9 million.

For the fourth quarter, we expect adjusted diluted earnings per share of $1.27 to $1.37 on a share count of 102.4 million, excluding the effects of any fourth quarter share repurchases. Other than the effects of the storms, our businesses are continuing to perform well and in line with our earlier projections. We are increasing our forecast of 2017 global RevPAR growth to up 1% to 2%, and we expect full year room growth of 4% to 5%, including the AmericInn acquisition. In Vacation Ownership, we expect tours to grow 6% to 7% this year, with the hurricanes having a roughly 2-point negative impact. VPG should be up slightly for the year as a whole. We now estimate our full year free cash flow to be approximately $700 million to $725 million. The decline from our prior projection is driven entirely by hurricane impacts and separation costs. We're working through our 2018 budget right now, and we plan to share thoughts about our outlook for 2018 and more information about the 2 post-separation companies on our February call. In summary, our third quarter results were solid and in line with our expectations despite the hurricanes. While we've modified our full-year outlook to reflect the effects of recent weather events, the momentum across our business is strong. We have continued to return cash to shareholders through both dividends and repurchases. The separation process, including our evaluation of strategic alternatives for our European Vacation Rentals business, is progressing well, and we remain enthusiastic about the longer-term prospects for our businesses. With that, I'll turn the call back to Steve.

Thanks, David. I hope you come away from the call with this clear sense that after the separation, we will be moving forward with 2 strong businesses that have significant competitive advantages, clear strategies, exciting opportunities and best-in-class management led by Mike and Geoff. As the chairman of both businesses, I will remain engaged in each businesses, with a particular focus on delivering value for shareholders through smart capital allocation decisions and on delivering value to franchisees and customers through the blue thread initiatives that we've been developing. We're confident that you will see in these 2 companies the powerful combination of Wyndham DNA and a strong energy and focus, a great formula for short shareholder value creation. Finally, a corporate separation, like the one we're doing, is a massive undertaking that requires coordination across many functions and locations. I want to thank all of our associates for their focus and commitment in executing this separation plan while, at the same time, not missing a beat on providing our guests the [economy of] service they have come to expect from Wyndham. With that, Geoff, Mike, David and I would be pleased to take your questions. Please bear in mind that we may not be able to answer all question about the 2 companies following this spin until the Form 10 is filed. Keith?

(Operator Instructions) We'll take our first question from Joe Greff with JPMorgan.

Steve, a question for you on European rental business. Obviously, we heard your earlier comments about the level of interest in buyers of that business. Can you talk about your timing expectation? I mean, would you expect that to be a signed deal somewhat ahead of when this spin is completed? Or you look at those things as coterminous?

Well, the -- thanks for that question, Joe, because I -- that those businesses are fantastic businesses, and they have great management over there. So the amount of interest in those businesses is reflective of how strong the businesses are. So we're very proud of those businesses. As to timing, a normal M&A process like this, which we kicked off once we saw the level of interest that existed, would probably take us to completing it before the spin. That is our hope, the hope not being a good plan, of course, but we would hope to be able to get it done. It all depends on how quickly things move. But we have done everything we can to keep the process running slightly ahead of the spin, and we've got a great team working on it. So I'm sorry I can't give you any more detail, but M&A deals are always a little difficult to put a specific timeframe to.

Got it. And then I have a couple of smaller questions here. The first is with the updated full year EBITDA guidance. If I look at the midpoint now versus the midpoint a quarter ago, and then I look at the midpoint of the weather impact, it appears to me that there's some incremental EBITDA reduction outside of weather. What is that? And then also, two, can you just discuss, I know it's not a large amount, how much is the AmericInn acquisition contributing to the fourth quarter?

Joe, it's David. With respect to EBITDA guidance, I think the key issue, as you go from midpoint-to-midpoint, other than the hurricanes, is that the loan-loss provision has been running at the high end of our expectation for the year. There have been a number of other puts and takes, but the one that stands out as driving us probably toward the lower half of the original guidance, excluding hurricane impacts, has been the loan loss provision running a bit higher. And then with respect to the AmericInn acquisition, given the timing and some of the integration costs that we'll have this quarter, we don't expect it to have a -- any significant impact, a positive or negative, on EBITDA this year, but we do expect it to be a pretty significant contributor next year.

Okay. So the incremental loan loss provision is -- I'm guessing it's something around $13 million to $14 million incrementally for the fourth quarter?

Yes, it really is -- it's over the course of the year, particularly in the third and fourth quarters. And what you could see is that our guidance early in the year was to be in the 18% to 20% range. And year-to-date, we're at almost exactly 20%.

Okay, great. And then 2 final questions or one final question, 2 parts. In the fourth quarter, the $15 million to $23 million of EBITDA impact, how is that broken out between the business segments? And then part 2, with respect to your free cash flow comment of $725 million, you mentioned hurricane impact, which we get, and then a separation cost. What's the component or the total related to separation cost? I see in the press release separation cost for the 9 months of this year is $24 million. I guess, what's the increment in the 4Q? And then that's it for me.

Okay. Working backward, with respect to free cash flow, we expect the separation costs and hurricane impacts are each going to be in about the $30 million to $40 million range. And that's the reason for the reduction in the free cash flow projection. And with respect to segments, as I mentioned during my comments, we really do expect all 3 of our segments to be affected by the hurricanes. I think the largest impact potentially, about half of the total impact will be in the Vacation Ownership business. And the rest will be split between the Hotel Group and the Destination Network, with the Hotel Group impact driven primarily by the Rio Mar property in Puerto Rico and Destination Network being challenged by just having less inventory available to satisfy exchange requests this quarter.

(Operator Instructions) We'll go next to Patrick Scholes with SunTrust.

You noted that the blue thread is starting to have a positive impact. I think the figure was sales were driven by 5% last year. What is that this year? Has it improved from that 5%? And related to that, I believe you've taken up your expectations for sales to new owners. I believe it was 40% previously. Now it's -- or expectations in the future, now 45%. Is blue thread impacting that change? That's my first, and I'll have a follow-up.

Patrick, this is Mike Brown. So just, I guess, a little broader on the blue thread, and then directly to your question, is we are very focused on the alignment with the Hotel Group. We have a number of initiatives underway, such as the call transfer, increasing our on-property presence, online presence and getting our properties on to the rental platform for the Hotel Group. In fact, this year, we've already put since May 93 properties onto that rental platform. We've made a number of changes in the call transfer program, and that's what's leading to the increase of leads that I referenced of 48%. So this year, the number is marginally up as a percentage of new owner sales, but I don't think that's much of a surprise, because keep in mind, our platform will do close to $700 million of sales this year through non-blue thread local marketing efforts to new owners. So we've got a big base, and our current sales of the blue thread is a relatively small percentage. But that increase of leads that we're seeing from the Hotel Group will translate to an increase in our overall percentage going forward. And I would expect, as you see the new owner percentage move, what you'll see is that move to a greater percentage of our new owner sales going forward.

Okay. And then a follow-up question here on the loan loss provision. You had briefly noted you expect part of the increase due to those who have taken out loans, who are domiciled in the -- in hurricane areas. Outside of that, have you seen any noticeable trends that are causing it to go to the higher end of your expected range?

We've been running a bit higher because third-party defaults continue to put some pressure on that. And that's really been the only thing other than the hurricanes that's impacting our loan loss provision. I think the silver lining there is that we've seen a flattening out of third-party-produced defaults, and that's a positive that those aren't really growing at this point compared to what we were seeing earlier in the year. But the principal driver there has been on the third-party default issue. The other thing I would mention is that our -- the quality of our portfolio actually continues to increase. Our average FICO scores are up compared to where they've been historically and where they were a year ago.

We'll take our next question from Chris Agnew with MKM Partners.

Can you share your thoughts around the license fee paid to Wyndham Hotels from Wyndham Vacation Ownership? As it appears to be lower than the license fee paid by the publicly traded time-share peers. What are the puts and takes as you're thinking about that going forward?

Chris, it is something we're looking at as we go through the spin process. I think you're right, in that the current level of less than 3% is below what others are doing. And we do intend to look at that as we work through the process of preparing for the separation. And looking at the comparables as well as other factors is going to be part of that process.

And we we'll take our next question from David Katz with Telsey Advisory Group.

I wanted to ask Geoff about one number that he gave out, which was that the pipeline on the hotel side was up 35%. I wanted to make sure that I heard that correctly, and if you could talk about what you attribute that to. Are there inducements involved? Is that personnel changes? How has that come about, please?

Sure. We will be as creative as we can be for the right hotel and the right market for the right brand in terms of key money or developer advance notes or mezzanine. But most often, we don't need to use those vehicles. The pipeline number that I referenced being up 35% was over the past 3 years. We continue to see very strong growth in our pipeline. We had a great quarter, as you saw, with the overall pipeline up 10% versus where we were last year. But I think what excites us the most right now about our pipeline is that our pipeline is growing more quickly. Domestically, in the United States, you saw an 18% growth in our pipeline in the quarter. And right now, what again really excites us is that the brands that are growing, the brands that we want to see grow, the Microtel by Wyndhams, the Hawthorn by Wyndhams, the TRYP by Wyndhams, the Wyndham Gardens, our higher-fee par brands in the United States are growing and growing quickly.

Understood. And if I can just ask Mike one very quick question. Within the Vacation Ownership business, there's obviously a lot going on between hurricanes. We've been discussing some of the third-party inducements for a while now. And I think this is one of the first chances we've had to maybe ask this question, but within all of that noise in Vacation Ownership, what could you direct us to, to measure and keep an eye on as we go forward in terms of improved execution within that business so that we can keep tabs on progress?

Well, there has been a lot of noise and, sometimes, it's easy to confuse all of it. What I would say is I would -- and I'll share a few areas to look at. But what you should be focused on is what we're focused on, which is, first of all, we're #1 focused on the consumers. And when you look at this industry over time, it's been an extremely resilient industry because people love the value proposition and love the product offering that is Vacation Ownership, whether it's Wyndham Vacation Ownership or anyone in the industry. So to the extent that we can execute that business plan and put people on vacations at the highest rate possible, we're going to be doing the best thing we can for our consumers and create long-term sustainable growth. Our business and one of my primary focuses in the first 6 months has been about getting our owners on vacation to as great extent as possible and maximum utilization of their ownership. With that said, the way to do that and the way to support growth is actually what we've shared until now. Growing our new owners, that is the lifeblood of our business. We've been in business for the longest of any of the branded players. And therefore, we are uniquely ahead of the life cycle of the owner base. And therefore, we're deeply committed to growing our new owners. And that conversation is super important. And working with the Hotel Group to grow that segment of the business because it provides higher VPGs and better margins. So if we can get people on vacation supported by new owners and a closer hotel affiliation, those are the points of reference you can be looking for.

We'll take our next question from Stephen Grambling with Goldman Sachs.

Maybe just tacking on to the last question there for Mike. I guess, given your experience at Hilton Grand, which clearly leveraged the Hilton Honors program, not only to target customers, but in the timeshare offer itself as an added level of flexibility and breadth, how do you assess the current use of and potential opportunity from the Wyndham loyalty program in the Vacation Ownership business?

We'll use the word, and I will fully agree with it. It's a tremendous opportunity. You will have noticed, Geoff used the term, everyday traveler, and so did I. And that is an extremely large demographic in the American population. And for all the right reasons and timing, it hasn't been fully leveraged until now. We will be leveraging that for years to come in every aspect. And simply the fact that we put 93 of our properties on the rental platform, it's not just about sales and marketing, it's about growing the Wyndham Rewards opportunities, growing the cross-marketing between the properties and growing the intelligent and strong use of our data. That's the greatest opportunity we have, and I think it's been an underutilized asset until now that, collectively, as we sit around this table is one we want to fully nourish and grow as we move forward.

And then 2 related follow-ups maybe for Steve. And I realize it's been early, but as you look at 2018 and thinking about the combined entity, are there any puts and takes to think about that could push you into or out of the longer-term EBITDA growth framework of 6% to 8%? I think you also mentioned last quarter that you expect some limited G&A slippage with the spin. Is that still the expectation?

Yes. Hitting the second one first, the -- we don't expect a lot of slippage from a G&A standpoint. The business is kind of being re-crafted if European rentals is taken out of the picture, but we would expect there might not be a lot of G&A slippage. With respect to growth rates going forward, again, we will give more detail after the Form 10 is filed and we're actually out talking to people about these 2 businesses, but I don't have a view or a vision that tells me that the businesses should grow any slower on their own than they do as part of our enterprise. And as I said, a big part of doing this transaction is the fact that it allows the focus of management to drive their businesses harder. So I would not expect slippage on that, absent something happening in the macroeconomic environment, the long-term growth the same or better.

We'll take our next question from Dan Wasiolek with Morningstar.

So going back to your comments of U.S. pipeline growth of 18% this quarter, is that organic or does that include the AmericInn? And then additionally, with the reservation system now that you've rolled out, can you maybe just talk about some of the potential benefits that you think that system will give Wyndham, whether it's a potential RevPAR uplift or a franchisee unit growth potential?

Sure. No, that does not include the acquisition of AmericInn. The 18% growth domestically in the quarter was all organic. To your second question in terms of system contribution, we've seen great, great growth. In fact, this was the first quarter that our total system contribution domestically increased to a number over 60%, and 50% globally. And I think a big piece of that has been the success, as Mike was just talking about, with Wyndham Rewards. Our share of occupancy from our Wyndham Rewards members that have been checking into the hotel across North America has never been higher and continues to grow and has tremendous upside.

Yes. I guess, I was with the reservation system. I was speaking to the Sabre system, I believe, that you guys have been rolling out, and just kind of long-term potential from having that system in place, whether that there's any benefits through yield management or anything that you would highlight.

Sure. Great question. We -- when we look at the technology initiatives that we have, the biggest potential we have right now is moving all of our brands from legacy systems. Recall that all of these brands have been -- with the exception of 2, have been acquired over the years, and we've acquired with each acquisition a legacy central reservation system. We made the decision several years ago to migrate off of those systems, and decided to move everything onto one cloud-based central reservation system platform. To date, we have moved 9 of our 20 brands onto that central reservation platform. And what that provides each brand with is global 2-way connectivity they've never had before. So in terms of our ability for each brand, and we're seeing that today with the brands that we moved on like Ramada internationally, they're now all on a central reservation system that's more connected than what they were on previously. And we've seen significant share growth and contribution growth most importantly for the brands that have moved on. Our big brands, Days Inn and Super 8, will move on. Days, later this year, we're targeting that for November. Super 8, the first quarter of next year, we'll begin to really see an impact in contribution from having a -- what we believe to be one of the industry's leading central reservation systems that is more connected than any other central reservation system out there right now, and also not having to ourselves develop the technology and the expense associated with that.

And ladies and gentlemen, we have time for one more question, and we'll go to David Hargreaves with Stifel.

I just wanted to confirm whether I'm right about this. It appears to me that in your debt agreements, there's nothing that specifically guarantees attachment to any specific assets. So when you're determining how things are going to go through during the split, it appears that you have a lot of latitude. I'm just wondering if you have that same read. And then, also, in looking at the 2 businesses, it looks like the percentage of debt, the bonds are about 75% of the debt, seems to line up with the timeshare and exchange business being about 75% of the EBITDA. It just seems like those conveniently match up, and I'm just wondering if you're noticing that or you have a similar view or a different view.

As we look at the debt, we view it as part of the current legal entity. And as a result, we would expect that the outstanding debt stays with RemainCo. With that being said, as we look at the capital structures of both businesses, there will almost certainly be some amount of leverage added to the Hotel Group. That money ends up getting transferred or dividended up to the legacy parent entity. And as a result, that provides some opportunity for debt paydown relative to the amount of debt that's currently outstanding, and that will be outstanding at RemainCo at the Vacation Ownership business post-spin. So I think the right way to think about it is that the debt does stay with the Vacation Ownership and RCI business after the spin, but that amount will be adjusted based on leverage that we put on the hotel group. The other thing to consider, as you think about that issue, is that we are pursuing strategic alternatives for the European Vacation Rentals business, and that could give rise to proceeds that impact the debt or net debt associated with each of the businesses as well. And we'll have more to say about these issues once we file the Form 10 and establish the capital structures for the companies post-spin.

Is there any updated expectation as to when you're going to file the Form 10?

I think the Form 10 will be filed on a confidential basis this quarter and will be publicly available at some point in the first quarter.

Okay. Well, thank you very much, and I think we've kind of run through our time. We had a lot of comments early on. So if people didn't get questions in, we apologize, but we'll be following up with everyone. Thank you very much for joining the call and your support of our company, and we look forward to talking to you as we have more information. Thank you.

And this will conclude today's Wyndham Worldwide Q3 2017 earnings call. Thanks for your participation. You may now disconnect. Have a great day.