Wyndham Worldwide (WYN)

Q2 2011 Earnings Call

July 27, 2011 8:30 am ET


Stephen Holmes - Chairman, Chief Executive Officer and Chairman of Executive Committee

Margo Happer - Senior Vice President of Investor Relations

Thomas Conforti - Chief Financial Officer and Executive Vice President


Michael Millman - Millman Research Associates

Christopher Agnew - MKM Partners LLC

Amanda Bryant - Susquehanna Financial Group, LLLP

Joseph Greff - JP Morgan Chase & Co

Charles Scholes - FBR Capital Markets & Co.

Robert LaFleur - Rodman & Renshaw, LLC



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Welcome to the Wyndham Worldwide First Quarter Earnings Conference Call. [Operator Instructions] Also the call 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. Ma'am, you may begin.

Margo Happer

Good morning. Thank you for joining us. With me today are Steve Holmes, our CEO; and Tom Conforti, our CFO.

Before we get started, I just want to remind you that our remarks today contain forward-looking information. This information is subject to a number of 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-Q filed April 29, 2011 with the SEC. We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to GAAP is provided in the tables to the press release. It is also available on our Investor Relations website at wyndhamworldwide.com. Steve?

Stephen Holmes

Thanks, Margo, and good morning, everyone. I'm pleased to report we had another great quarter as we continue to execute our operating and capital deployment plans. Second quarter revenues increased 13%, and adjusted EBITDA was up 17%. Adjusted EPS for the quarter grew 25% and came in $0.08 above the top end of our guidance range. Each of our businesses delivered growth in adjusted EBITDA and performed ahead of plan with particular strength this quarter in lodging and vacation ownership. This strong performance and further visibility into the second half of the year is allowing us to raise our guidance for 2011. Tom will go through the details in a few minutes. In addition, free cash flow is robust in the first half of the year coming in at $3.42 per share. We continue to implement our capital deployment strategy in a disciplined fashion to drive value for our shareholders. In the second quarter, we invested $200 million in share repurchases and July to date, we invested another $50 million. So far this year, we have spent nearly $425 million on share repurchases. Our weighted average diluted share count is down by $17 million from a year ago. This contributed $0.06 of earnings in the second quarter compared with last year. Our results this quarter, combined with our confidence in the short-term and long-term growth and cash flow potential of our businesses, convince us that share repurchase is a very solid investment. Having said that, our first priority is the continued investment in our business to drive earnings growth and increase cash flow in the years to come. Our baseline sustainable free cash flow guidance of $600 million to $700 million a year assumes continuing investment in existing growth projects such as Apollo and our hotel business, RCI.com and our vacation exchange business and voyager and our vacation ownership business.

We also continue to selectively evaluate potential acquisitions, which we will only pursue if they are strategically compelling and earnings accretive. Now moving to our business unit review. The Wyndham Hotel Group had a great quarter, exceeding our expectations with almost a 10% increase in RevPAR. Most significantly, we are seeing rate improvement across all chain scale segments in the U.S. The lodging recovery is continuing, and I believe we are exceptionally well positioned to capture more than our fair share of that recovery. The development environment is improving, but financing still remains tight. Developers are looking to diversify the composition and geographic reach of their portfolios to include economy and midscale properties outside major city centers, which is where the majority of our brands are positioned. And of course, the conversion market is always important in a tight credit environment. Both of these dynamics work to our benefit. We have a well seasoned development team able to capture opportunities both new build and conversion. We are the world's largest hotel franchisor based on a number of hotels with over 7,200 properties, which translates to almost 613,000 rooms in our system. We offer individual franchisees as well as multiproperty developers a strong network of market-leading brands. Our brands cover every segment, and we have a broad geographic reach. As we have discussed before, we are strengthening this exceptional base through a series of technology and business enhancements we call Apollo aimed at further improving the value proposition to our hotel owners. We recently began an effort with our franchisees to improve the content and navigation of our websites. We launched our first beta test with the Baymont brand in June. Our early results are encouraging. Response times improved threefold, and conversions were up 30%. In another hotel group highlight, J.D. Power and Associates recently released the results of its annual guest satisfaction survey. For the 10th consecutive year, Microtel leads the economy/budget segment. In fact, Wyndham Hotel Group's economy/budget brands took the first 3 positions in the segment.

Now moving to Wyndham Exchange and Rentals. From a rental industry perspective, we were pleased with the enthusiasm of investors over the recent HomeAway IPO. As a reminder, there are 2 operating models in the vacation rentals market. First, there's a rent-by-owner or listings model used by HomeAway and others. In this model, the vacation homeowner lists his or her property on a website for a listing fee. The listing company refers the potential renter back to the homeowner to inquire about availability, make the reservation and then process the payment. The second model is the professionally managed model. This is primarily how our business operates at Wyndham Vacation Rentals. Approximately 60% of our bookings are transacted online. We, rather than the homeowner, control the inventory. We have uploaded in our system on a live and realtime basis. We hand-select and inspect the inventory. Homeowners provide homes to us primarily on an exclusive basis. We process the payments and handle the customer service. And unlike the listings model, the consumer rarely deals with the homeowner. We are the world's largest company in this professionally managed segment of this growing market. We expect 2011 revenues from our vacation rental business to be over $700 million and transactions to exceed 1.3 million. We have approximately 93,000 properties in 32 countries, representing over 51,000 homeowners. We have tremendous scale, which we continue to expand. Integration of our most recent acquisitions, James Villa Holidays and ResortQuest, is progressing very well with both businesses ahead of our earnings expectations. We are making great progress on integrating our systems and leveraging best practices in the inventory distribution strategies across all of our businesses. We are also the market leader in the exchange industry. While tempered growth in the timeshare industry has produced some headwinds for our exchange business, we have been able to drive growth through innovation resulting in a stable high free cash flow business. Through the end of 2010, our migration to online transactions has improved our exchange margin by over 130 basis points. The enhanced online experience also increases the overall value proposition to our members through greater flexibility, functionality and better online content. Online transactions in the second quarter of 2011 were 38% of total transactions, compared with 27% in the second quarter of 2010.

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