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Strong quarter, solid guidance

“In the first half of 2012 we achieved back-to-back 36% increases in quarterly adjusted EPS growth in an economic environment that remains uncertain.  Underlying this growth is strong execution from each of our businesses and diversified product offerings well positioned to capitalize on consumers’ desire to travel. In addition, we benefited from capital allocation that included the return of capital to shareholders.” 

-Stephen P. Holmes, chairman and CEO, Wyndham Worldwide

CONF CALL NOTES

  • Results came in 2 cents above the high end of their guidance due to strong results in their lodging and VOI segments
  • Rental & exchange produced stable results despite turmoil in Europe
  • Have repurchased 73.8MM since going public
  • Baseline FCF of $600-700MM assuming capex of $200MM (50% of which used to fund growth business - Apollo/Voyager, etc)
  • Signed a deal with HPT for 20 hotels/ 3,000 rooms.  Conversions are scheduled to occur next week and will add Wyndham hotels and Hawthorne hotels in the system.
  • They are working on signing more hotel deals and retaining existing franchisees.  Believe that Apollo initiatives are going to help with retention.  Bookings are up 24% as a result of better functionality and content.
  • Expect system growth in:
    • EMEA: 8%
    • Latin America: 15%
    • APAC: double
  • Continue to be confident in the resiliency of their rental business.  95% of their rental business comes from Landal, Novosol, Hoseason.
    • Most of the locations are drive to destinations for northern Europeans & Germans
  • Launched a new reservation system for their rental business for their UK cottage and parts brands
  • Consolidated 23 separate ResortQuest sites under the Wyndham Vacation Rental umbrella
  • Completed another successful release of RCI.com and added 75 resorts to their system mid-year 
  • As a result, 41% of total transactions in the quarter occured through the site
  • WAAM 2.0: sell 3rd-party inventory and offer consumer loans. Signed thier first deal late last year and started sales this quarter.
  • In litigation with the FTC in relation to data breaches at Wyndham Hotel properties. Believe that FTC claims are meritless and do not believe that there will be any material impact on the company.
  • Over 6 years they have reduced their share count by 29%
  • Expect that their available FCF will be $1BN in 2012 (assuming increased leverage per higher EBITDA)
  • Hotel group performance:
    • Adjusted EBITDA increased 5% excluding inter-segment fees
    • NA RevPAR improvement was primarily a result of higher ADR
    • International RevPAR was up 2% in constant currency
    • 16,400 terminations - higher than expected due to steps taken by WYN to weed out underperforming hotels
    • Pipeline activity is up 3% YoY and 5% QoQ
  • Exchange & Rentals performance:
    • Last year included a $4MM benefit from Gulf Spill settlement
    • Weak economic conditions, negatively impacted the number of transactions but higher prices due to mix change helped
  • VOI business performance
    • 13.500 new owners were brought into the system (annual goal of 27,000 new owners per year)
    • WAAM 2.0 accounting will run inventory through their balance on a just in time basis.  Will pay for the inventory shortly after the sale. They have $60MM of inventory on the balance sheet related to WAAM 2.0
    • WAAM 1.0+2.0 sales increased 58% YoY
    • Improvement in EBITDA reflects higher VOI revenues and would have increased 19% excluding inter-segment fees
    • Higher loan losses reflected higher sales and limited portfolio performance improvement.  Thought that they would have seen more improvement though. They were also impacted by a scam encouraging their owners to default on their loans.  
    • ABS capital markets remain robust
  • EBITDA of 6-8% for the next 5 years and sustainable FCF of $600-700MM, meaning that they should have a $1BN of FCF to return to shareholders each year
  • Guidance: 
    • Lodging and VOI to be at the high end of their ranges 
    • Rental and Exchange revenue to be a the low end of the range for revenue and mid-point for EBITDA
    • Corporate expense to be at the high end
    • 3Q12 EPS $1.07-$1.10 is below the street due to seasonality and share count differences 

Q&A

  • Thoughts on M&A opportunities in the current environment:
    • There is a small uptick in deals coming to the market.  Seller expectations are still high.
    • Pipeline is a little stronger than last year at this time
  • VPG continued to trend consistently throughout of the quarter.  Think that they will likely come in at the high end of the range of their guidance. Their team has done a spectacular job at driving tour flow.
  • HPT deal contribution:
    • Management deal but they aren't adjusting their guidance.  This was built into their rooms guidance and is why they are comfortable with their FY room guidance growth.
  • Vacation rental business: they did see changes in some trends within certain markets.  Weather in the UK has been just miserable and that impacts them as well.  There was no meaningful trends to point out though - some markets were stronger and some were weaker. If you remove the FX, pricing actually improved 4%. Feel really good about how the brands performed.  Bookings visibility in the summer suggests continued stability in the business. They have seen a compression into the booking window though. 
  • Is the strength in the securitization business helping smaller players sell their inventory and in turn boost RCI membership? 
    • They don't think so. Their stats are strong but don't see carryover to smaller developers.
    • There were 2 new groups that accessed the ABS market in the 1Q but no one in 2Q
  • Southeast was a little weaker this quarter than other segments. There were some weather related issues in the SE that impacted some travel. Orlando has been strong and Bonnet Creek is doing really well. 
  • Need to purchase about $150MM per year to complete certain projects and with that, they have about at least 4-5 years of inventory. In addition to that, they also increased their WAAM participation and also took some inventory back.
  • Why are consumer revenues flat with higher VOI sales?  Less consumers want to finance and they tightened lending standards.
  • They increased their inter-segment fees for their brand partly as a result of the MAR/VAC transaction 
  • Guidance on full year tour flow implies a sequential slow down in 2H.  Tour flow is something that they manage with marketing dollars.
  • Strategy for growing APAC rooms. Not all of their brands are in APAC. Have managed agreements for Wyndham and Ramada.  Expect a big pick up in business development in that region over the next 3-4 years. 
  • Dividend payouts vs. repurchases? 
    • Dramatically increased their dividend over the last 3 years and their intent is to increase it in line with their earnings growth but more actually since shares are decreasing
  • Any impact on change in the Pentacostal holidays in May and June and impact of the Olympics?
    • Not seeing any impact from the Olympics yet. They are starting in August and that's already a busy travel period for UK.
    • No impact that they could discern from the Pentacostal holiday shift
  • International RevPAR number is 2% in constant currency and with FX down 1.5%
    • China is growing fastest in terms of the unit count - but they have the lowest RevPAR and the highest concentration of economy brands. Therefore, international growth is impacted by mix shift 
  • Attrition in the system that has occured over the last few quarters
    • There is natural attrition and significant amount of self-inflicted attrition due to failure to meet brand standards
    • They have started to see an improvement in receivables from franchisees
    •  They have been adding a lot of franchisees though
  • Is there any reason to provide financing to franchisees to help them renovate?
    • No, they don't want to be a lender of last resort to drive system growth
    • In UUP hotels they do provide some construction financing, similar to other brands

HIGHLIGHTS FROM THE RELEASE

  • 2012 Guidance was raised for the outperformance in the quarter and the lower forward share count: 
    • Revenue: $4,425 to $4,600MM (Unchanged)
      • Street: $4,549MM
    • Adjusted EBITDA: $1,040-$1,055MM (increased low end of the range by $10MM)
      • Street: $1,054MM
    • Adjusted EPS: $3.10-$3.20 (vs. prior guidance of $3.00-$3.15)
      • Street: $3.14
    • Diluted share count: 147 (vs. 149)
  • During the quarter, the WYN repurchased 3.8MM shares of its stock for $190MM at an average price of $49.35
  • On July 19, 2012, WYN "completed a term securitization transaction involving the issuance of $300 million of investment-grade asset-backed notes at an advance rate of 90% and an overall weighted average coupon of 2.66%."
  • Lodging segment:
    • System RevPAR: +5%; domestic RevPAR +8% (hit low end of FY guidance of 5-8% RevPAR growth)
    • # of room declined 0.8% YoY (below FY guidance of 1-3% growth)
  • Vacation exchange and rentals
    • "In constant currency and excluding the impact of acquisitions, revenues were flat."
    • "In constant currency, exchange revenues were flat"
      • Average # members: -2.3% (below FY guidance of -2% to Flat)
      • Revenue per member in constant current: +2% (high end of FY guidance of 0-2%) 
    • "Excluding the impact of foreign currency and acquisitions, vacation rental revenues were flat"
      • Vacation rental transactions: -0.9% or down 3% on a SS basis (below FY guidance of 4-7% growth)
      • Net price per vacation rental in constant currency: +4% and down 4.5% in actual currency (above FY guidance of -3% to 0%)
    • EBITDA Margins were down 580bps YoY
  • Vacation ownership
    • Gross VOI Sales: +12% 
    • Volume per guest: +6% (above FY guidance growth of 2-5%)
    • Tour Flow: +5% (above FY guidance growth  of 1-4%)
  • Balance Sheet
    • Cash: $285MM
    • Debt: $2.3BN
    • VOI receiveables: $2.8BN
    • VOI inventory: $1.1BN
    • Securitized VOI debt: $1.9BN