Wyndham Worldwide Corp., (WYN)
Q2 2010 Earnings Call
July 28, 2010 8:30 a.m. ET
Stephen Holmes – Chairman, Chief Executive Officer, and Chairman of Executive Committee
Thomas Conforti – Chief Financial Officer and Executive Vice President
Margo Happer – Senior Vice President, Investor Relations
Kevin Milota – JP Morgan
Bob LaFleur – Hudson Securities
Steve Kent – Goldman Sachs
Ryan Meliker – Morgan Stanley
Michael Millman – Millman Research Associates
Chris Woronka – Deutsche Bank
Previous Statements by WYN
» Wyndham Worldwide Corporation Q1 2010 Earnings Call Transcript
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» Wyndham Worldwide Corporation Q3 2009 Earnings Call Transcript
Good morning. Thank you for joining us today. With us are Steve Holmes, our CEO, and Tom Conforti, our CFO.
Before we get started I want to remind you that our remarks today contain forward looking information that is subject to a number of risk factors that may cause our actual results to differ materially from those results expressed or implied. These risk factors are discussed in detail in our Form 10-Q filed April 30th, 2010, with the SEC. We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to the comparable GAAP measure is provided in the tables to the press release and it’s available on the Investor Relations of our website at www.wyndhamworldwide.com.
Thank you, Margo. Good morning, everyone, and thanks for joining us today. As you saw from the press release we had a terrific quarter with operating results in each of the business units better than our expectations. We delivered adjusted EPS of $0.51, significantly above the high end of our $0.38 to $0.42 range, reflecting continued strength in growth across the three businesses as well as a change in our tax rate and some favorable impact of foreign currency.
When evaluating 2010 Q2 comparisons to 2009, remember that last year’s results included approximately $37 million roll-in of previously deferred time share revenue which contributed approximately $17 million in EBIDTA. Excluding that, as well as excluding the favorable net impact of foreign currency, Q2 2010 adjusted EBIDTA increased by 14%.
We continue to see improving business momentum, especially in North America which accounts for over 80% of our EBIDTA. Domestic rev par was flat for the quarter, turned positive in June and is stronger yet in July. This improvement is being led by occupancy gains over last year. Vacation exchange remains within our expectations and quarterly close rates and Vacation Owenership have never been higher.
In Europe, which has been an area of investor focus over the recent months, remains stable. These trends, coupled with continued strong execution by our businesses and a favorable tax rate give us confidence to raise our full year revenue, EBIDTA, and EPS guidance. Tom will cover the details a little bit later.
We recently completed the formal stage of what is essentially an ongoing strategic planning process. Our five main strategic initiatives remain the same, with the top three being to increase market share, grow cash flow, and rebalance our portfolio to emphasize our fee for services business. Since we established these strategic initiatives in 2009 we have remained on course and have delivered, again, each of them.
Let me highlight some of the improvements coming from our strategic planning process. In addition to our core organic growth, cash flow will continue to be an enabler for incremental growth. In that regard I am pleased to share that our free cash flow projections beyond 2010 have us in the neighborhood of $600 million to $700 million annually, instead of the $500 million to $600 million we’ve previously shared with you. This increased cash flow is a result of growth in EBIDTA, the favorable flow-through characteristics of our fee for services business models, and lower cash taxes. It will be applied to growing our business and increasing shareholder value.
Next I want to spend a few moments to update you on what WAM, our alternative timeshare business model, will look like in the future. We have shared previously that over the next few years as we streamline our timeshare balance sheet we will limit the size of our WAM business to approximately 15% to 20% of total Vacation Owenership revenue. Moreover, once our balance sheet reached our desired level we would explore expanding the WAM business model to a higher level. As we examine the various impacts on returns, free cash flow, and EBIDTA of different levels of WAM activity, we have concluded that WAM should continue to be viewed as a complementary business to our traditional timeshare business.
By the way, we continue to gain traction with WAM. Sales in Myrtle Beach, our first WAM project, remain robust and ahead of plan. In addition we will begin sales next week on our second WAM deal, as we become the exclusive sales and marketing agent for the sale of Vacation Owenership interest of up to 275 recently-constructed units at the Reunion Resort in Orlando.
Finally, I would like to spend a couple of minutes discussing our growth plans, which were a key focus during our strategic planning process. We discussed during our last quarterly call that we are expecting EBIDTA in our core business to grow at a compound annual rate of 7% to 9%. That was confirmed in the strategic planning process. If we simply keep our free cash flow and our balance sheet, EPS would grow at 12% to 14%. With a more active deployment of cash through share repurchases, additional investment in our core business, and acquisition of fee for service businesses, we can yield total earnings growth approaching 20%. Our management team is focused on finding the right opportunities to complement and enhance our organic growth and through the action of our board of directors we now have additional capacity to repurchase our shares.