Travel + Leisure Co (TNL) 2018 Q1 法說會逐字稿

Welcome to the Wyndham Worldwide First Quarter 2018 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to Margo Happer, Senior Vice President of Investor Relations.

Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO; and 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 Wyndham Vacation Ownership business. In addition, Mike Hug, CFO of Wyndham Vacation Ownership, is with us and will participate in the Q&A session.

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 a reconciliation of non-GAAP measures to GAAP metrics are provided in the press release, which is available on our Investor Relations website at wyndhamworldwide.com.

Steve?

Thanks, Margo. Good morning, and thank you for joining us today on what will be our last earnings call as Wyndham Worldwide. It has been an extraordinary 12 years, and I'm pleased that we can report a typical Wyndham quarter, with strong growth across our businesses, resulting in double-digit adjusted EBITDA and EPS growth. Our teams delivered these results while executing against several significant strategic initiatives. In January, we announced an agreement to acquire the hotel franchising and hotel management businesses of La Quinta. The addition of La Quinta's 900 hotel system will build on our strong midscale presence, expand our reach further into the fast-growing upper midscale segment and position us to be the preferred partner of developers and guests. We remain on track to close the transaction in the second quarter, and the financings to fund the acquisition are already in place.

In February, shortly after we reported our year-end results, we announced an agreement to sell our European vacation rental business to Platinum Equity for $1.3 billion in cash. We conducted a rigorous strategic review process that generated strong interest from multiple parties, which demonstrated what we already knew, these are great businesses. We are confident that this business will have a bright future and will provide significant opportunities for its associates and business partners as part of Platinum's portfolio. And, as important, we are progressing rapidly towards a spin-off of Wyndham Hotels and Resorts. License, cross marketing and transition services agreements are in place. We have established separate public company infrastructures, organizational designs and corporate identities. We have determined our go-forward capital structures, and both companies are ready and looking forward to telling their stories to the Street, a process that we expect to begin in a couple of weeks, with our plan still being to complete the spin-off by the end of the quarter.

As we move forward, I'm thrilled that both companies will begin this chapter -- this next chapter, with significant competitive advantages, proven best-in-class management teams and clear paths to superior value creation. And both companies will continue to benefit from the many blue thread initiatives that connect our various offerings, including the Wyndham Rewards program, which continues to be one of the world's leading and most generous loyalty programs.

I'd like to just take a moment to discuss a blue thread that while one of our most important seldom gets the attention it deserves, our culture. As those of you who have spent time with us know, we have an amazing culture here at Wyndham. This shows itself in a variety of ways from our high-employee engagement to the strong consistent results that we've delivered to our customers and our shareholders. A culture is not built by an individual or a small group of leaders. It is built by the associates. A leader can encourage and nurture a culture, but it's the belief system of the organization that will determine the culture of the company. The foundation of our culture and our success is a set of core values that encompass integrity, accountability and service. During my 12 years as CEO, I've been inspired every day by how our associates actualize these values, from small acts of consideration and kindness, such as how we greet each other in the hall, to heroic acts of serving guest, such as our efforts during the hurricanes last year. Our values are also reflected in our numerous industry awards and accolades, including recognition multiple times as a leader in diversity, sustainability, ethics and a great place to work as well as many others. I firmly believe our culture and values have also contributed to our financial results, enabling us to consistently execute at a high level and produce outsized shareholder returns. We became a public company in 2006 and have returned over $7 billion to our shareholders through dividends and repurchase of over 120 million shares of our stock at an average price of $149 per share. Our annualized returns to shareholders over the last 12 years has been 13% or nearly 55% higher than the S&P 500. That means the gain from investing in our stock has been double the market's gain over that period.

Our culture, more than any other blue thread, defines Wyndham Worldwide. It also will define Wyndham Destinations and Wyndham Hotels and Resorts. It's a culture that drives for results, delivers great experiences for guests, provides opportunity for employees, cares about our community and consequently builds significant shareholder value. I, for one, am incredibly proud of what this team has accomplished, and I look forward to continuing to help guide our process as these companies' nonexecutive Chairman going forward. In a moment, Geoff and Mike will tell you about how Wyndham Hotels and Resorts and Wyndham Destinations will -- are positioned to grow and deliver shareholder value. But first, I'll turn the call over to David to review our financial results and outlook. David?

Thanks, Steve, and good morning, everyone. Today, I'd like to discuss our first quarter results and our 2018 outlook for Wyndham Hotels and Wyndham Destinations. My comments will be primarily focused on our adjusted metrics, and you can find our complete results in our earnings release, including reconciliations of adjusted amounts to GAAP numbers. Results for both the first quarter of 2018 and the first quarter of 2017 reflect our adoption of the new revenue recognition standard under U.S. GAAP as well as the classification of our European vacation rentals business as a discontinued operation.

Our first quarter results exceeded the high-end of the estimates we provided in February. Our total revenues grew 3% in the first quarter due to growth across all of our businesses. Adjusted EBITDA increased 10%, reflecting the revenue growth and a $5 million or 2-point net benefit from hurricane-related insurance recoveries. Adjusted EPS rose 32% year-over-year or 10%, excluding the benefit of having a lower effective tax rate.

In our Hotel Group segment, revenue grew 4% year-over-year in the first quarter. Adjusted EBITDA increased 17% and was up 6%, excluding acquisitions, currency effects and $6 million of net insurance recoveries. Either way, this was a record first quarter for Hotel Group adjusted EBITDA. Our results reflected 8% growth in our core royalty and franchise fees streams, including a 3 point benefit from the AmericInn acquisition, partially offset by the continued hurricane-related disruption to operations at our own hotel in Puerto Rico.

Domestic RevPAR increased 5.6% in the quarter compared with the industry at 3.5%, with strong performance across many of our brands and scales and growth in nearly every region of the country. International RevPAR increased 3.6% in constant currency, reflecting strong performance in Canada, Spain, Turkey, Argentina and Brazil. Our global RevPAR grew 4.7% in constant currency.

Our system size is up 3% year-over-year, reflecting organic growth in addition to the acquisition of AmericInn. Our global pipeline grew 3% year-over-year, including a 5% increase in the U.S. From a strategic perspective, we agreed in April to sell our Knights Inn brand, which we determined was not a core part of our business. It was the lowest domestic RevPAR brand in our portfolio by a considerable margin and was responsible for only 1% of our Hotel Group's pro forma adjusted EBITDA. We have no plans to dispose of other brands.

In our Destination Network segment, which now excludes the European vacation rentals business, revenues grew 1%, and adjusted EBITDA increased 3%. The continuing effects of the hurricanes reduced available supply in several key destinations. We are actively working with our business partners to source more exchange inventory. Adjusted EBITDA benefited from cost savings and hurricane-related insurance recoveries.

In our Vacation Ownership segment, revenues grew 3%, and adjusted EBITDA was up 6%. Gross VOI sales increased 6%, propelled by tour growth of 8%, including a 15 point increase in tours to new owners. The hurricanes negatively impacted EBITDA on a net basis by an estimated $2 million.

Consumer financing revenues in our Vacation Ownership segment were up 6% to $118 million in the quarter. Our gross receivables portfolio grew 5% year-over-year to $3.6 billion, largely as a result of our sales growth.

Our prediction for loan losses was up $7 million year-over-year to $92 million. Overall, our loan loss reserve balance, at 19.2% of gross receivables, was consistent with the second half of last year.

Third-party induced defaults, so far this year, have been in line with last year. Nonetheless, they remain high by historical standards, so we still have work to do on this front.

In our Corporate and Other segment, Q1 expenses declined $2 million year-over-year. Free cash flow from continuing and discontinued operations was $99 million for the first quarter. It declined year-over-year, primarily, due to working capital timing differences and transaction-related costs.

We repurchased $75 million of stock during the quarter, despite the free cash flow decline, underscoring our continued commitment to returning capital to shareholders through buybacks and dividends.

Importantly, as Steve mentioned, we made significant progress on our plans to spin-off our Hotel Group later this quarter as Wyndham Hotels and Resorts. We have arranged for a 7-year $1.6 billion term loan and a 5-year $750 million revolving credit facility for Wyndham Hotels in addition to issuing $500 million of 8-year unsecured notes. Proceeds from the term loan and notes will be used to fund the La Quinta acquisition later this quarter. We expect the revolver to be undrawn at spin.

Our financing plans for Wyndham Destinations are on track, and we expect to put a new $1 billion revolving credit facility in place at the time of the spin-off. If we weren't separating into 2 independent companies, my comments on our outlook would be simple. There is no change to our adjusted EBITDA projections, either in total or by segment. There is no change to our projection of 2018 adjusted net income. Our forecast of adjusted diluted earnings per share is approximately $0.06 higher than it was previously, due to our repurchase of nearly 650,000 shares in the first quarter. And our revenue forecast is down around $65 million, which is entirely due to our required adoption of the new revenue recognition standard, the EBITDA impact of which, is immaterial. In short, there are no significant changes to Wyndham Worldwide's full year 2018 outlook. But with our separation into 2 independent public companies just around the corner, we think it makes sense to provide projections for each of Wyndham Hotels and Wyndham Destinations. To be clear, our base operating projections for the 2 companies are consistent with the segment guidance we provided previously. Our projections have, however, been updated to include the adoption of the new revenue recognition standard. Our pro formas include separation-related adjustments at both companies and a full year of La Quinta's results, with full synergies for Wyndham Hotels. Full details and reconciliations are provided in the materials on our website. We think this pro forma presentation of our numbers will be helpful to analysts and investors, and we plan for both of the post-spin companies to provide a reconciliation of actual to pro forma results in their quarterly earnings reports, so you can keep track of our progress.

For Wyndham Hotels and Resorts, on a pro forma basis, we expect full year revenues of $1.99 billion to $2.04 billion or growth of 1% to 3%., and we expect adjusted EBITDA of $590 million to $610 million or growth of 6% to 10%. Excluding the La Quinta acquisition and the Knights Inn divestiture, we expect organic room growth of 2% to 4%, and project global RevPAR to be up 2% to 3%, unchanged from our prior estimates. Our strong first quarter RevPAR has created some upside potential for full year RevPAR growth, but we would like to see some additional monthly data points before we make any adjustments to our full year projection.

We are not changing our adjusted EBITDA projection due to the sale of Knights Inn, but that transaction will reduce our room count by 3 points and will increase our full year average RevPAR by 1 point. We expect La Quinta to contribute about $8 million of EBITDA a month when we first acquire it, subject to some seasonality, growing to around $13 million a month by late 2019, as the business is fully integrated. We expect the La Quinta acquisition to close before quarter-end.

At Wyndham Destinations, we expect pro forma revenues of approximately $3,975,000,000 to $4,085,000,000 or growth of 4% to 7%., and we expect adjusted EBITDA of $955 million to $975 million or growth of 4% to 7%. Our key top line metric, gross VOI sales, is expected to grow 7% to 9% this year, reflecting overall tour growth of 5% to 7% and double-digit growth in new owner tours. We expect VPG to be up 1% to 3%.

Our guidance continues to assume that our loan-loss provision will be around 20% of sales. We expect both the average number of exchange members and exchange revenue per member to be up 1% to 3%. In addition to these full year estimates, we've provided second quarter EBITDA projections for Wyndham Hotels and Wyndham Destinations in the presentations posted to our website.

One other thing I want to note is that the new revenue recognition standard may add some quarter-to-quarter volatility to the adjusted EBITDA of the hotel business. In particular, GAAP now requires us to record quarterly income if our marketing and reservation costs are less than our marketing and reservation fee revenues, even if, over time, we're contractually obligated to spend all such fee revenue on related expenses. We will look to see whether a standard for addressing this issue in adjusted results develops in our industry.

Turning to our balance sheet. As of December 31, Wyndham Worldwide had net corporate leverage of 2.8x. We expect Wyndham Hotels, following the La Quinta acquisition, to have roughly $2 billion of net debt, and pro forma leverage of roughly 3.5x, near the middle of its targeted range of 3 to 4x. We expect Wyndham Destinations to have roughly $3 billion of net corporate debt, and pro forma leverage of 3.2x, just above its targeted range of 2.25 to 3x. We expect that the combined, quarterly dividends of Hotels and Destinations will initially be equal to the $0.66 per share that Wyndham Worldwide currently pays, with the exact split between the 2 companies still to be determined. We expect both companies to have significant share repurchase authorizations. We also expect that both companies will continue Wyndham Worldwide's philosophy of returning capital to shareholders. But repurchases in 2018 will be below 2017 levels due to the La Quinta acquisition, the Hotel Group spin-off and associated costs.

From a timing perspective, our goal is to set the record date for the spin-off dividend shortly to hold Investor Day-type meetings for institutional investors and analysts in New York on May 16, and for both companies to have one-on-one and group meetings with investors throughout the back half of May. We do not yet know when when issued trading will develop.

Lastly, while there is a lot of movement associated with our separation, the La Quinta acquisition revenue recognition and the Knights Inn and European vacation rental's dispositions, I want to highlight 3 things: our first quarter results were solid and above our expectations; our full year adjusted EBITDA outlook for our segments is unchanged from what we shared with you in February; and we continue to be enthusiastic about the La Quinta acquisition and our upcoming separation into 2 independent public companies.

And now I'll turn the call over to our Chief -- over to the Chief Executive Officer of our hotel business, Geoff Ballotti.

Thanks, David, and on behalf of the entire Wyndham Hotels and Resorts team, we would like to echo the excitement that both you and Steve have expressed this morning. We will begin our life on the New York Stock Exchange as the hotel company that franchises and operates more hotels than any other. Including La Quinta, our network has over 9,000 hotels in more than 75 different countries, with more than 810,000 hotel rooms, serving nearly 140 million guests annually, and a pipeline of another 170,000-plus rooms. We are targeting $590 million to $610 million of pro forma adjusted EBITDA, and $320 million to $340 million of pro forma free cash flow, on a pro forma revenue base of approximately $2 billion this year. We offer a compelling value proposition that helps us attract developers to our brands and retain them over time. We enable our single and multiunit franchisees, along with sophisticated real estate investors whose hotels we manage, to optimize their return on investment. We establish brand standards, provide operational training, ensure the consistency and the quality of our hotels. We offer state-of-the-art technology and revenue management solutions, and we enable our owners to reduce their costs by leveraging our significant scale and purchasing power. But most importantly, we drive direct contribution through our global reservations and online distribution channels. We have a strong portfolio of 20 well-known brands, from Super 8 and Days Inn, leading the economy segment, to AmericInn and La Quinta bolstering our midscale portfolio and our Dolce and flagship Wyndham Grand brands rounding us out in the upper upscale segment. Our portfolio enables us to operate at virtually any price point. Our flags represent roughly 30% of the global branded economy hotel inventory, 40% of the branded economy hotel rooms in the United States and, with La Quinta, nearly 40% of branded midscale hotel rooms in the U.S. We operate 4 of the top 5 brands tracked by J.D. Power in the domestic economy segment. And now, with the acquisition of La Quinta, 4 of the top 5 brands in the midscale segment. Our strength in these segments is attractive to potential franchisees and owners and positions us very well to benefit both domestically and internationally from the favorable demographics of the rising global middle-class that is expected to double over the next 10 years.

Our award-winning, industry-leading loyalty program, Wyndham Rewards, is building consumer and franchisee engagement, while driving more guest reservations directly to our affiliated hotels. Over 56 million people have enrolled in Wyndham Rewards, and we look forward to welcoming the over 13 million La Quinta Returns members to the Wyndham Rewards program in the coming months and offering these new members access to, not only over 9,000 hotels, but also the nearly 30,000 aspirational condominiums, homes and vacation villas available for redemption in some of the most sought-after travel destinations in the world.

Now, building on the strength of Wyndham Rewards, we recently announced a branding program to further unite all of our existing flags under the Wyndham umbrella by adding by Wyndham to the 12 economy and midscale brands, which do not currently use this powerful by Wyndham identifier. Our research has shown us that as guests look for brands they trust, this co-branding initiative will favorably impact [guest trial], along with both brand and loyalty awareness throughout our network, as our brands are collectively searched over 6 billion times annually. Moreover, approximately 80% of the U.S. population live within a 10-mile radius of 1 of our hotels, and our roadside signs generate more than 500 billion annual drive-by impressions in the United States alone. We've seen the benefit of this increased awareness when we added by Wyndham to the Microtel and Hawthorne Suite brands after their acquisition, and we will see it immediately with 12 much larger brands we are adding by Wyndham to from an unaided awareness, search, paper click and digital standpoint.

Over the last five years, our system size and our RevPAR have grown at 3% and 2% per year, respectively. In 2017, our system size grew 4%, and our global RevPAR increased 3%. Continuing the growth in these key drivers will remain our principal focus. Looking ahead, we have significant opportunity to supplement our organic growth with our proven ability to create value through tuck-in acquisitions. Over the last 30 years, we have averaged 1 brand acquisition every 18 months, and we have the capability to integrate these brands both quickly and seamlessly, providing owners with more distribution at a lower cost point, as we did last year for AmericInn and as we will do this year for La Quinta. We will continue to look to opportunistically acquire and integrate brands into our franchising platform, and for brand acquisition and hotel management opportunities in new and existing international markets.

As the industry's largest franchisor, we have a unique and very powerful business model that is easily adaptable to changing economic environments and yields attractive margins and predictable cash flows. Our model is asset light, with low operating costs, recurring fee streams and limited capital expenditures. We plan to deploy the cash we generate in a disciplined way, including acquisitions, and returning capital to our shareholders through dividends and share repurchases. All of this, coupled with our strong and experienced management team, positions us well to deliver superior value to our franchisees, our owners, stakeholders and, most importantly, our shareholders as an independent public company. We are ready and excited to take this next step in our evolution, and we are very enthusiastic about our prospects ahead.

Now it's my pleasure to turn the call over to my friend and colleague, the CEO of our Vacation Ownership business, Mike Brown.

Thanks, Geoff, and good morning. Like Geoff, I'm excited about the opportunity in front of us. Wyndham Destinations will be the world's largest Vacation Ownership company and will operate the world's largest vacation exchange network. To put some numbers around it, we will be a company targeting pro forma revenues of approximately $4 billion, pro forma adjusted EBITDA of $955 million to $975 million and pro forma free cash flow of $555 million to $575 million. We have 221 resorts, 878,000 owners and 3.9 million exchange members across 110 countries and territories. We believe our size and our strengths make us the partner of choice for developer affiliates and marketing partners.

As we prepare to become an independent company, we have continued our intense focus on delivering great vacations to our owners and members, we have strengthened our organization and we are making progress towards our key strategic priorities, which, we believe, will create shareholder value over the long run.

Let me share some examples of strategic progress in the quarter before moving on to why we believe we are well positioned for the future. First, new owner mix. New owner sales volume in the first quarter increased 19% year-over-year, and we improved our mix of new owners by 430 basis points to 37%. We did this while managing our overall margin, which improved almost 50 basis points year-over-year.

Second, blue thread, which is the term we use to describe how we derive value from our business relationships and cross marketing with our Wyndham businesses. We continue to see tremendous momentum on blue thread initiatives. Package sales through call transfer increased 48% year-over-year in quarter 1. Bookings through cross-selling initiatives surpassed the whole of 2017 within the first 4 months of this year. And VOI sales to Wyndham-affiliated customers grew 60%, albeit off a low base.

Third, tour volume in the quarter was strong. We delivered 8% year-over-year growth. Sales volume per guest, or VPG, declined 200 basis points because of mix with stronger new owner sales. Our new owner VPG was 3% higher year-on-year.

Finally, we continue to deliver on our commitment to owners with a variety of new programs we refer to as Wyndham Cares. We believe these initiatives will drive higher-owner engagement and, ultimately, mitigate the third-party default issue we faced the past couple of years. As part of Wyndham Cares' efforts, we have created a proactive vacation planning team that reaches out to owners who have not yet booked their vacations and assist them with personalized vacation planning services. We continue to believe that engaged owners who are utilizing their ownership, are happy owners.

Looking forward, we are excited about our future. Our mission is to own the relationship with our owners and members and to deliver their wish list of great vacations. We believe we are built to do just that. We are the largest timeshare company in the world, which yields size and scale advantages. We have significant geographic reach across our portfolio of Vacation Ownership brands, we have a commercial engine in our sales and marketing platform that we believe is unmatched. We property manage more than 200 resorts in our system, and we earn significant income on 3-plus billion book of consumer loans. This all combines, particularly, with the strength and stability of the RCI exchange business to produce diversified, predictable and resilient income streams and free cash flow. Our strategy to deliver steady, mid-single digit, EBITDA growth with strong free cash flow will be focused on 4 main components: first, we are focused on continued VOI sales growth, with an emphasis on achieving a sustainable sales mix that is 40% to 45% new owners; second, we will continue to deliver benefits from blue thread by leveraging our exclusive, long-term relationship with Wyndham Hotels to increase our affinity revenues; third, we will continue to expand in existing and new geographic markets by opportunistically leveraging our strong brand portfolio and marketing relationships; and fourth, we will drive efficiency throughout our operations, which will help pay for some of the investment we are making and rebalancing our owner mix.

I also want to touch on capital allocation and leverage. We are cognizant of our heritage, with Wyndham Worldwide having distinguished itself over time through the consistency of its capital allocation practices. And we know the strong free cash flow return to shareholders through dividends and share repurchase is attractive. We expect this to remain a key part of our DNA. Our pro forma net debt-to-EBITDA in the end -- at the end of 2017 was 3.2x, which we would like to see move below 3x. We believe we can delever, primarily, through EBITDA growth over the next several years to move into our 2.25 to 3x target range, while continuing to return cash to shareholders. We look forward to discussing our business model and strategic priorities in more depth with our -- with you over the next few weeks and long into the future.

With that, I will hand the call back to Steve.

Thanks, Mike.

(technical difficulty)

And Steve, we're unable to hear you.

Oops. I'm sorry, I had the mic off. Hopefully everybody -- not a lot of people heard that. Oh, I apologize. I had the microphone off. In closing, I want to thank everybody who has been involved in the worldwide journey these past 12 years. Our incredible team of over 39,000 associates, our strong and supportive board, our loyal guests and timeshare owners, our terrific franchisees, affiliates and business partners, and, of course, our shareholders, who have supported our strategy and provided valuable perspective along the way. Very soon, we will start a new journey. I am honored to continue that journey as Chairman of both companies. I am as excited about the prospects for Wyndham Destinations and Wyndham Hotels and Resorts as I was 12 years ago when we started Wyndham Worldwide. I'm confident Geoff, David, Mike and Mike, and their teams, will continue to deliver great opportunities for our associates, great results for our franchisees, partners and affiliates, great experiences for our owners and guests, and will drive significant value for our shareholders.

Thanks again. With that, we'll welcome your questions.

(Operator Instructions) And we will take our first question from Joe Greff with JPMorgan.

Just going through the Vacation Ownership segment, and you guys talked about it earlier, about the margin up a year-over-year. And there were 2 things there that I thought that [you'd make more impressive], the, obviously, the new owner mix, which I would think, in general, would have a drag on the margin mix and [up to the] loan-loss provisions. While consistent with the back half of the year, it was up a year-over-year. So can you talk about where are you finding these margin efficiencies? And are you finding that the margins relative to how you thought of that before on the new owner sale, are they coming in higher than what you originally anticipated?

Thanks, Joe. This is Mike. We did have a strong first quarter and, as you pointed out, our margins were up about 50 basis points. And the margins on the new owner generation were exactly as we expected. They do provide a level of margin pressure as we make this transition to new owners. As I shared earlier, we're looking to make about a 200 basis point shift annually, and the fact that we were able to increase our new owner mix by 400 basis points is obviously a very strong first quarter. We were able to offset those margin pressures through efficiencies in our P&L. We had positivity in our net income, we had good results in our rental operations and, as we will continue to do in the future, we'll look to control our cost wherever possible.

Okay. Great. And we were surprised to see the loan-loss provision where it was and we've heard anecdotally from at least one timeshare operator that they are seeing less pressure. Is there anything outside of third-party default that's kind of keeping it [suddenly] high here in that 19% to 20% range?

So. No. There's -- for us Joe, the loan-loss provision was at the expectation. And the reality is that we are the biggest player in the industry and we continue to pursue an aggressive approach to new owners as far as acquiring them. We do that outside the hotel ecosystem and we've developed a very successful marketing effort to generate nonaffinity guest. And if you look historically, our loan-loss provision has been in the mid-teens. And what we're seeing in their third-party defaults, we think, is really the delta between where it sticks today and where it traditionally has been. Our efforts are going to be, just like I mentioned on the last call, we are going to be committed to owning the relationship with our owners, continuing to engage them at every turn, put them on vacation, because what we know about our owners is when they use their ownership, they love their experience and they buy more. So for us, the whole message around loan-loss provision and third-party defaults will be around owner engagement.

And Joe, it's Steve. Just remember, this is a $3 billion portfolio we're talking about. So it takes a while to move the shift even if we are seeing some better things on the third-party side. It takes a little while for that to be reflected through the financials.

And we will take our next question from Stephen Grambling from Goldman Sachs.

I guess, sticking with timeshare business. I appreciate the comments on your leverage and it looks like you're still a little bit above peers in your range. Can you just remind us, I guess, at the spin initially you thought that consolidation was still a possibility? And you also highlighted that size and scale matters. So does the higher leverage change any of your thoughts about capital deployment and/or consolidation?

Good morning. This is Mike Hug. When we're looking at that -- the higher leverage that we've talked about, we don't expect it to change, long term, our plans related to capital allocation. As Mike mentioned, we do feel that over the next several years, we can deleverage into the range that we're targeting through EBITDA growth.

And then, I guess, turning to the hotel business, the supplemental deck includes some estimates for the contribution of La Quinta, looks like it's based on historical data as well as the prior synergies you laid out. I guess, as you look at your own business, particularly in some of the overlapping geographies, is there any color you can provide in what -- how that could shake out ultimately?

Yes. One of the things, Stephen, that we loved about La Quinta was just how it overlapped. We really do not have significant presence in the upper midscale space. It's a brand that has tremendous potential. I think as you know and you cover their company from a growth standpoint, when you look at the pipeline of La Quinta, when you look at their new Del Sol prototype, when you look at 90% of their business being able to grow on a new construction basis, in that space, it's really exciting. When you take their franchise sales team and combine it with our franchise sales team, they were all here together this week, talking about growth of that brand. And in our brand, as historically, from a growth standpoint in the economy stand -- in the economy space, our new prototype brands are really exciting. We've been adding '15, '16, '17, an 8% organic system size growth, and much of that has been in -- been new construction while we've been very focused on, from a quality standpoint, removing -- especially here in North America, over 80% -- I'm sorry, removing over 80,000 rooms over the last 3 years. And that's given us great support from our franchisees and given us the ability to do what we're doing now with our by Wyndham branding initiative. And so we're seeing a great growth from a pipeline standpoint in both the economy and the midscale. And when layered on top of what we now have with La Quinta and the upper midscale space, really exciting growth prospect from a new construction standpoint in the U.S.

And we can take our next question from Patrick Scholes with SunTrust.

My question relates to Table 4 in the back, with the free cash flow from a continuing operations coming in a negative here. As I look back historically for the first quarter, sort of, this is a lower number than has been historically reported for that quarter. I wonder if you could give us more color around why that number is negative.

Sure, Patrick. Free cash flow, in most of our businesses, tends to be seasonally low in the first quarter. And historically, the offset to that was in European vacation rentals, which has a, relatively, strong seasonal pattern for cash flow in the first quarter. And that's why in my comments, I focused on free cash flow from continuing and discontinued operations because I think that's a better comparison. Where it was around $200 million last year, it was $100 million this year, so it was still down at year-over-year, and that decline is, really, due to separation-related cost and some timing differences, not anything noteworthy in terms of how the business is performing. It's really just timing and separation-related cost. But the fact that free cash flow was flattish, slightly negative from continuing operations is really tied to the seasonality of the businesses that wasn't offset by the European vacation rentals business this year, since that's a discontinued operation.

Very good. That clearly explains it. My second question here concerns the investment-grade rating of -- I'm sorry, let me rephrase that here. You had stated that 2.25 to 3x is your target for net debt-to-EBITDA. Does -- is that an outline that was given to you by the rating agencies in order to maintain investment grade?

No. That reflects our target for leverage for the Wyndham Destinations business. And we would expect the -- based on the what the rating agencies have published, we would expect Wyndham Destinations to be noninvestment grade, following the spin-off of hotels.

And we can take our next question from Ian Zaffino with Oppenheimer.

Great. As far as the 400 basis point improvement in the new owner volume, where was most of that generated from? Was that generated from Wyndham Rewards? Or just may be give us an idea of the channel you're kind of tapping into to accelerate that tour volume?

Sure. In our comments, and I think one of the competitive advantages that Wyndham Vacation Ownership has is its diversified marketing platform. And when I mention that we have a large owner base, which, obviously, they could contribute to new owners, but then we have 3 other core marketing channels that we rely on. One is our local community marketing programs, which generated the majority of the new owner growth. We also opened 2 new sales locations: one in Myrtle Beach, which was a great opportunity for us because we used our brand portfolio to grow that market with our great team in Myrtle Beach; and then we became the first branded hospitality player to open a market in one of the U.S.' most hot markets in Austin, Texas. But I think most importantly, as we saw some really good growth in the blue thread initiatives, we saw positive moves in our call transfer programs that drove tours. And also, as I mentioned in my remarks, we saw cross-sell initiatives, which is putting our properties on the wyndham.com website, so we're getting rental guests arriving to our sites which, therefore, give us the opportunity for tour. So it really came from a combination of those 3 marketing channels.

Okay. And then what is the mix difference between a new owner and an existing owner? I'm just trying to figure out what the moving parts are here.

Well, when you mention mix, I think, there's 2 fundamentals of -- between owners and new owners. The owner business will drive a higher VPG at a greater margin, and new owners, obviously, will have a lower VPG and a lower margin. What we love about the blue thread initiative and our ongoing relationship with the license agreement with the Hotel Group is within the new owner category, affinity sales via the blue thread are better margins than open marketing. So that's why the ongoing relationship that we will have with Geoff's organization is so strong. And why we are so committed to rebalancing our mix to, over time, get to 45% new owners, is we know that an owner that buys today will generate very visible and predictable lifetime value through repurchases, and, obviously, health of maintenance fee payments and, ultimately, HOA. So the investment in new owners today will definitely be to our future benefit.

And our next question comes from Harry Curtis with Nomura Instinet.

Quick questions for Geoff. You kind of covered the landscape of what your objective was, and I'm wondering if we can drill down first of all, on growth and how you achieve it, whether it's -- whether you really favor internal development or growth through acquisitions, and what the returns are you would expect at this point in the cycle.

Thanks, Harry. Yes. Our first and foremost focus is always organic growth. And as I just mentioned, we've seen that from a growth system size in '15, '16 and '17 at over 8%. We've been adding 60,000 rooms, consistently, for the last 3 years. And that's all been our organic backing out M&A. And what it's allowed us to do is, as we've talked about, is focus on that 3% net room growth that we've been achieving and focus on quality, removing substandard rooms, removing those 80,000 domestic rooms from our system, which were hurting us. But as deals have presented themselves, and there's tremendous amount of chains out there today that are looking for distribution. If they make sense, many folks had never heard about AmericInn in the heartland of America. And it was so compelling for us that it made sense to pursue them, and we've been pursuing them for a while, and add them to our family and a similar fit with La Quinta and in space that we think from a new construction standpoint, we have a lot of upside to grow as we continue to push our new construction pipeline. But yes, our focus is on rooms growth, first and foremost, on RevPAR and doing everything we can to push and drive that and drive business direct as we've been doing with Wyndham Rewards. We had the best year Wyndham Rewards has ever seen in 2017 in terms of growth and just had the best quarter, where enrollments grew 30% quarter-on-quarter. And what that means in terms of driving RevPAR and -- RevPAR index, which we saw last year and which we saw in the quarter, is really important. And I guess, I'd just close by saying we're very focused on our brands internationally and expanding our brands internationally. Same dynamic overseas where folks are looking for great distribution and great business coming direct through a strong loyalty program, and we've been seeing double-digit growth internationally and overseas.

Very good. And the second part of the question is if you could walk us through your appetite to expand into the upscale or the upper upscale segments? And are the return on invested capital dynamics there any different? Would you pursue those developments as aggressively as you would the midscale?

We're really happy with our upper upscale brands. I mentioned, our Dolce acquisition was a great acquisition for us and is continuing to grow for us. We've had some great success there in the upper upscale segment with our Dolce acquisition. Since acquisition, we've opened 3 new, very strategic meeting destination resorts. Most recently, the Dolce Cheyenne Mountain Resort in Colorado and have 4 in the pipeline. And the Wyndham Grand flagship brand, I mean, really when you look at how it's been performing whether you look here in the United States and in a market, take Florida, where we've opened, in addition to our Wyndham Grand in Bonnet Creek, a Wyndham Grand in Clearwater, a Wyndham Grand in North Palm Beach, but taking a brand like that internationally and seeing what's happened -- happening to the Wyndham Grand brand in markets like China, where we have opened a dozen Wyndham Grand brands in major key capital cities like the Wyndham Grand Xian China, which, out of 2,200 hotels is operating as the #1 hotel against just about every luxury competitor in that market. We think we have 2 great brands in the upper upscale space right now, with an ability to continue to grow. And our focus, first and foremost, on organic growth.

And we can take our next question from Jared Shojaian with Wolfe Research.

I just want to understand the mechanics of the Knights Inn transaction a little bit better. So based on your comments, I'm backing into a multiple of round of 4.5x EBITDA. So first, can you just tell me, is that accurate?

I'll take the first part, and then turn it over to David in terms of the sale of the brand. As David mentioned, it represents around 1% of EBITDA. But it is the first time, as I think David also mentioned, that we've ever considered the sale of a brand. It is our deep-budget brand, with a domestic RevPAR roughly 50% below our lowest-economy brand. And a loyalty rate, which is several hundred basis points below. And with the change in our by Wyndham naming convention, our push for Wyndham Rewards engagement, we felt that this was a great time to entertain an offer for a brand that does not enjoy the same level of awareness that some of our economy brands do.

And the multiple is higher than the one you calculated, closer to 7x. What I -- well Knights -- well I said that Knights contributes only 1% of our EBITDA, it actually rounds up to 1%. So the contribution it makes is slightly less than 1%. So the multiple is a little bit higher than what you expected. As Geoff mentioned, what really drove this transaction was how we wanted to strategically position the portfolio rather than the multiple associated with the transaction. We think it's a good transaction from our perspective, primarily, because of what it does for us strategically.

Got it. Okay. And I mean, when you I look at some of your other economy brands whether that's Howard Johnson or some of the other lower end brands, I mean, the RevPAR is not really that different. I think on percentage terms its -- looks like a large number just because we're talking about just a low absolute number. But I think, we're really only talking about $5 to $10 here. So what gives you the confidence that your other economy brands, again, be it Howard Johnson or some of these others are worth more than 7x EBITDA?

Yes. The -- first of all, I think when you look at how our brands compare to comparable companies that are out there, we feel really good about our portfolio, the quality of our brands and the growth opportunities associated with those. And so that's the -- that certainly is a principal driver from our perspective. And the second issue is that when you look at some of the numbers that we publish on a global basis, some of the brands that have significant international presence have lower RevPARs internationally. So when you look at Knights Inn compared to other brands, our other brands have RevPARs that are 30% or more higher than where Knights Inn was positioned on a domestic basis. And as a result, Knights Inn, I would describe as an outlier in our portfolio in terms of how it was positioned. And as we looked at the by Wyndham co-branding, the by Wyndham tagline we put in, that's really a core part -- that's a key part of how we determine that Knights was not going to be a core part of our business going forward, and from that perspective, we feel it really was an outlier, and that's why its valuation in that transaction would be a little bit different than what we'd expect -- quite a bit different than what we would expect for our business overall. You can see this in terms of the impact that removing Knights Inn has on our overall RevPAR, where overall RevPAR will be up 1 point for us as a result the sale of the Knights Inn brand.

And we can take our next question from Dan Wasiolek with Morningstar.

So just as curious, don't have the numbers in front of me but it seems like over the last several years, call it, that you've been closing less profitable rooms, just kind of wondering where we are in the cycle of that. Is there a point where maybe the amount of room deletion starts to slow a little bit, maybe aiding net room growth?

Yes. This is Geoff. Thanks for the question. That is a -- that is actually happening. And happened in 2017, our termination -- North American terminations from a substandard quality standpoint came down. And happened again in the first quarter of -- for our North American room. You'll see terminations up in the first quarter. And what's driving that is a very large termination, 5,000 rooms in China by a master license franchisee that is focused on the same thing, but terminations are coming down, came down in '17, it came down again in the first quarter of '18 in North America, and that should help in our largest region where we're looking to grow.

Okay. And then, just as a quick follow-up. Are there any, I guess, brands that, specifically, still have some terminations that you're kind of looking at as we look forward? Any particular brands?

Yes. I think what you'll see in terms of what happened to property count is there is still work to be done in some economy brands, our Howard Johnson's our Days, our Super 8, we're continuing to focus on and will throughout this year.

And we will take our next question from Edward Engel with Macquarie.

So just a quick one on the timeshare business. Is there any specific inventory coming online this year that might have a meaningful impact on your average transaction price?

This is Mike. As I mentioned, we opened in Austin this year and we used the Worldmark brand to expand our presence in Myrtle Beach. Those will be the 2 primary inventory adds this year, but neither then will have an impact on the average transaction price.

So for your VPG expectations, is that just higher overall pricing per point, kind of offsetting the shift to new owner tours?

Right. So our overall outlook for the year is to stay focused on that 200 basis points move shift. And what we're going to evaluate, as we get for the -- get going it through the remainder of this year is if we can continue to accelerate the move at the rate that we did in the first quarter, while maintaining EBITDA and margins, we'll do so. But the projections of the higher VPG reflects that we should end the year at a 200 basis point move. And so that's the basis of our projection.

Okay. And then quickly, I'm sorry, did you mention your write-off rates in the first quarter?

Sorry. Could you repeat the question? Our write-off...

I'm sorry, did you note your first quarter write-offs? The nominal value?

So defaults, for the quarter, came in at $98 million in the first quarter of 2018.

And we will take our final question from David Hargreaves with Stifel.

So the 3.2x leverage target looks consistent with what was factored into S&P's provisional ratings. One of the things they have commented on though is they said that they thought the revolver was likely, or whatever credit facility you were going to put in place, would be pari with the notes. I'm wondering if that's sort of consistent with your expectations because it seemed like one of the provisions that they were looking to when they issued the BB- expected rating.

That's correct. We are expecting for Wyndham Destinations that security will be provided to the notes such that the revolver and the notes will be pari passu following the spin.

Are you getting any indication from Moody's as to when you might see a rating from them? Or have they given any preliminary indications?

Yes. We expect to have ratings for both -- S&P and Moody's ratings available for Wyndham Destinations later this month.

Would that be by your Investor Day perhaps? Or...

Very possibly. Yes.

Last question. When we look at some of the specific bond tranches, I guess your step-up bonds are getting more expensive, and we're wondering if that is a potential conflict? Or is there other covenant-related conflicts that may cause you to want to address these early? Or if you expect everything to sort of remain as is in the capital structure?

At this point, I think Wyndham Destination's go-forward capital structure is one that -- the [they] and we will be comfortable with. We are expecting some step-up in the interest rates associated with the bonds that have step-up provision in them. And that's been part of our thinking throughout the process so it doesn't change the way we're looking or thinking about things. And we feel that the debt stack associated with destinations is appropriate. And we feel really good about how the weighted average cost of capital numbers look for both businesses. We're slightly above the theoretical minimum, which is consistent with our approach of giving both businesses some room to pursue acquisitions going forward, but we feel good about the capital structures that we're putting in place and how the businesses are going to be positioned post-spin.

This does conclude our Q&A session, I'd like to turn the program back over to our presenters for any additional comments.

Well, thank you all very much for joining us today. And I know that Wyndham Hotels and Resorts and Wyndham Destinations look forward to speaking to you on the second quarter call. Thank you. Buh-bye.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.