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Edited Transcript of WYN earnings conference call or presentation 1-Nov-18 12:30pm GMT

Q3 2018 Wyndham Destinations Inc Earnings Call

PARSIPPANY Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Wyndham Destinations Inc earnings conference call or presentation Thursday, November 1, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Agnew

Wyndham Destinations, Inc. - SVP, IR

* Michael Hug

Wyndham Destinations, Inc. - Executive VP & CFO

* Michael D. Brown

Wyndham Destinations, Inc. - CEO, President & Director

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Conference Call Participants

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* Brandt Antoine Montour

JP Morgan Chase & Co, Research Division - Analyst

* Cameron Philip Sean McKnight

Crédit Suisse AG, Research Division - Research Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Edward Lee Engel

Macquarie Research - Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Jared H. Shojaian

Wolfe Research, LLC - Director & Senior Analyst

* Patrick Scholes

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Wyndham Destinations' Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded. If you do not agree with these terms, please disconnect at this time. Thank you.

I would now like to turn the call over to Chris Agnew. Please go ahead, sir.

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Christopher Agnew, Wyndham Destinations, Inc. - SVP, IR [2]

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Thank you, Tony, and good morning.

Before we begin, we'd like to remind you that our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings, and you can find a reconciliation of the non-GAAP financial measures discussed in today's call and our earnings press release on our website at investor.wyndhamdestinations.com.

This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview on our strategic initiatives and our third quarter results. And Mike Hug, our Chief Financial Officer, will then provide greater detail on our third quarter results and discuss our outlook. Following these remarks, we will be available to respond to your questions.

With that, I'm pleased to turn the call over to Michael.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [3]

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Thank you, Chris. Good morning, and thank you for joining us for our third quarter earnings call and our first full quarter as Wyndham Destinations.

Before I discuss the strength of our day-to-day business, I want to share that our transition into Wyndham Destinations has gone extremely well. Our #1 priority in separating Wyndham Destinations and Wyndham Hotels and Resorts was to ensure that our core business will continue to operate and perform without skipping a beat. With that as a measure, the transition has been a success. Our leadership team was in place before separation, our transition of operations from Wyndham Worldwide to Wyndham Destinations has been seamless and the alignment around our core mission to put the world on vacation has never been stronger.

In fact, in August, we brought our senior leaders from around the globe to Orlando to share the vision and strategy of Wyndham Destinations for the upcoming years. The summit was an important milestone and one that gave me great confidence that our organization is aligned and more focused than ever on our vision and on delivering results.

That brings me to our performance in the third quarter. We had a very strong quarter, delivering on our key operating metrics. Solid execution by our leaders allowed us to deliver further adjusted EBITDA and further adjusted EPS at the high end of our guidance range in the third quarter.

Further adjusted EBITDA in the quarter was $271 million, 5% higher than prior year. The $271 million of further adjusted EBITDA includes a $10 million negative impact from Hurricane Florence. We were able to more than offset the impact of the hurricane in the quarter with 2 items. The first is operating over performance of $7 million; and second, timing favorability of $5 million. Gross Vacation Ownership sales grew 7% over the third quarter of 2017, led by 5% increase in tourists.

Top line growth flowed to the bottom line as we continued to manage cost in a very disciplined manner. This resulted in further adjusted EBITDA margins improving 20 basis points year-over-year to 25.5%.

Diluted earnings per share was $1.47 on a further adjusted basis in the third quarter, a 15% increase year-over-year, reflecting both strong operating performance as well as our commitment to return capital to shareholders through share repurchases. In the quarter, we repurchased $106 million of stock and post-spin, through the end of October, we have repurchased $153 million in total.

I mentioned Hurricane Florence. The hurricane impacted third quarter results and will have a trailing impact in the fourth quarter. We will also have an impact from Hurricane Michael in the fourth quarter. The hurricanes hit our Myrtle Beach and Florida Panhandle markets where we have concentrated locations for resorts, sales offices, exchange destinations and vacation rental operations. We estimate the full year EBITDA impact from these 2 hurricanes will be $16 million, $10 million in the third quarter and $6 million in the fourth. These storms, however, should not distract from the underlying performance in our business. As you will see in our full year guidance, we have mitigated nearly half of the hurricane impact.

I would like to take a moment to thank our associates and recognize the hard work of our teams who care for our owners and guests while dealing with difficult personal circumstances.

In addition to our strong growth in gross VOI sales, EBITDA and EPS, we also had growth in tours, VPG, Blue Thread sales and above targeted shift in new owner sales mix in a series of RCI resort affiliations. We saw a reduction in the loan loss provision compared to the last quarter, and we were below our third quarter expectation. The third quarter is historically the highest quarter in the year for loan loss provision. We came in below 21%, which gives us a high degree of confidence that we will finish the year below 21%, an improvement from our Q2 call.

Mike will go deeper into several of these metrics, but let me touch on new owner mix, our commitment to margin preservation and our Blue Thread initiative.

New owner sales represented 41% of our total sales mix in the third quarter, a 330 basis point improvement from the same quarter last year, consistent with performance in the first half of the year. Year-to-date, we are 130 basis points ahead of our annual target. The investment in this strategic shift is impactful because it creates a more robust pipeline for future incremental sales from owners and provides strength to our underlying portfolio. We are targeting new owner sales mix to be in the mid-40s in the next several years.

I've also shared that we will make the strategic shift while maintaining overall margins, which we did in the quarter. In fact, we have not only preserved our margins, but improved them by 20 basis points. On a year-to-date basis, our further adjusted EBITDA margins have improved 50 basis points to 24.1%.

We continue to be confident that we can maintain margins throughout the shift with a combination of revenue synergies and strong cost management. As we bring our Vacation Ownership, Exchange and Rental businesses into one, we have and will continue to find ways to make Wyndham Destinations more efficient. These operational changes are normal course of business that we began immediately after the spin.

Underpinning our shift to more new owners is our commitment to the Blue Thread. Blue Thread is our connection to Wyndham Hotels through the Wyndham Rewards loyalty program and rental platform. We are utilizing this connection to generate new owner tours, and I'm pleased to share that our Blue Thread sales performed well in the quarter, with sales increasing 56% year-over-year, accelerating from 47% growth in the first half of 2018. Blue Thread growth is important to our margin efforts because these new owner tours generate 20% higher VPGs on average as compared to non-affinity new owner tours.

Let me now shift gears to the most important part of our business, our 881,000 Wyndham Vacation Club owners and our 3.9 million RCI members. As you have heard me say before, what we know about our owners and members is that when they use their ownership, they love their vacations and ultimately buy more or renew their memberships at a high rate. We have an owner base of 881,000, with an annual retention of 96%. Of this base, nearly 80% or close to 700,000 have no loan outstanding. These fully paid-off owners have an average retention of 98% over the last 10 years. This indicates high levels of satisfaction and also represents a very strong platform upon which to build on our owner engagement initiatives.

We serve the everyday traveler, which are households that have an average income of $91,000. Our new owners' household income is approximately $100,000 and is, on average, 50 years of age. For the first 3 quarters of 2018, 55% of new owner purchasers were millennials and Gen Xers. The credit quality of our owners remained strong, with the average FICO score steady at 725 since 2010.

At RCI, member retention is also strong, averaging 88% over the last 5 years. Our team has executed well in the first 9 months, growing average members 1% over 2017. Year-to-date, RCI has added 128 new resorts to its more than 4,300 vacation options. RCI affiliated some outstanding new clubs during the third quarter, including 2 leaders in their respective markets, Hard Rock Resorts' entry into Brazil and Southern Sun Resorts in South Africa.

I'd like to note that at the end of this year, we will be transitioning our Shell Vacation Club members to RCI. On behalf of RCI, we are proud to serve our developer affiliates, who also delivered great vacations to their individual owner basis.

In summary, it has been another outstanding quarter, and I would like to reiterate our key takeaways: first, successful execution on our key strategic initiatives of increasing new owner sales mix, strong growth in the Blue Thread and overall margin preservation; second, the delivery of strong operating metrics, specifically gross VOI sales, tour growth, execution on the loan loss provision and EBITDA growth; and third, our commitment to return value to shareholders by maximizing cash flows.

With that, I would now like to turn it over to Mike Hug for a detailed review of our financial performance and outlook. Mike?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [4]

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Thank you, Michael, and good morning, everyone.

Today, I'd like to discuss our third quarter results and our 2018 outlook. As noted in the last quarter, the spin-off of Wyndham Hotels makes the year-on-year comparisons in our financial reported results more difficult. Therefore, my comments will primarily be focused on our further adjusted metrics, presenting our financial results as if the spin had occurred on January 1 for each of the reported periods. These metrics are more helpful in understanding how our business performed and how it will look on a go-forward basis. You can find complete results in our earnings release, including reconciliations of adjusted amounts to GAAP numbers.

Our further adjusted results reflect full run rate expense for our corporate cost and license fees and remove separation-related costs. Please refer to Table 8 in our earnings release for details on our further adjusted results.

Our third quarter results exceed the midpoint of the estimate we provided on our second quarter call, and our further adjusted diluted earnings per share came in at the high end of the range. Further adjusted EBITDA was $271 million and further adjusted diluted earnings per share was $1.47, an increase of 15% over the prior year. These strong results included an approximate $10 million negative impact from Hurricane Florence, about half of which was offset by some timing favorability between third and fourth quarters. Excluding the hurricane and the timing favorability, we delivered $7 million above our guidance midpoint and have carried this into our revised full year guidance, which I will touch on in a moment.

As Michael mentioned, gross VOI sales increased 7% to $640 million over the third quarter of last year. Behind this number was steady execution, with VPG increasing [2% over the prior year] (corrected by company after the call) and tours 5% higher. Year-to-date, VPG and tours increased 2% and 5%, respectively, right in line with the growth objectives that we laid out at our Investor Day in May.

Our new owner sales mix improved 330 basis points over the prior year in the third quarter, with new owner tours up 6% and new owner VPGs 9% higher.

In addition, our portfolio performed well in the quarter. VOI sales showed growth in our receivables portfolio of 5% over the prior year to $3.7 billion. The provision for loan loss increased $9 million to $132 million, with the entire increase driven by increased VOI sales growth. The provision as a percentage of gross VOI sales was 20.8% in the third quarter compared to 21.4% in the second quarter. We were pleased with these results, given that the provision as a percentage of gross VOI revenues is typically at its highest during the third quarter of each year. We now expect that provision will come in just under 21% in the second half and for the full year.

Charge-offs in the quarter were $94 million, a 10% decrease from the second quarter. Looking forward, we expect defaults to increase sequentially in the fourth quarter over third quarter levels, as this has been the case historically. Portfolio performance remains a central area of focus for us, and we are committed to continuing to drive improvements in this area.

Our further adjusted free cash flow from continuing operations for the first 9 months of the year was $356 million. Our full year outlook for further adjusted free cash flow remains at $555 million to $575 million.

Our just-in-time inventory model and our access to the ABS markets enables us to consistently convert approximately 60% of EBITDA into free cash flow and to avoid large swings in cash flow.

We repurchased $106 million of stock during the quarter at a weighted average price of $43.39 for a total of 2.4 million shares. We've also repurchased another $32 million in October, underscoring our commitment to return capital to shareholders. Share repurchases are benefiting from acceleration of cash availability, partly due to tax liability associated with the gain on sale of the European rental business of approximately $125 million, which will not be paid until the second quarter of 2019, as well as separation cost of approximately $60 million, which is primarily employee-related and will be paid over a 12-month period.

As we look for opportunities to create incremental cash availability, we generated $11 million in additional cash in the quarter from the sale of a parcel of land, which is not part of our development plan. And for the first time since 2013, we issued a BB tranche in our Sierra 2018-3 transaction, which increased our advance rate to 98%, releasing incremental cash of $24 million.

In total, since the spin-off of Wyndham Hotels, we returned $237 million or approximately 7% of our market capitalization to shareholders through share repurchases and dividends, with the most recent dividend payment of $40 million or $0.41 per share made in September.

Now let me turn to our outlook for 2018. We are updating our full year guidance to reflect the negative impacts of both Hurricanes Florence and Michael, which we estimate will have a full year EBITDA impact of $16 million. Mitigating the full impact of the hurricanes is stronger third quarter performance of $7 million, which carry into our revised full year guidance.

Our full year further adjusted EBITDA guidance moves to a range of $952 million to $960 million from the prior range of $955 million to $975 million. Our midpoint moves from $965 million to $956 million. Further adjusted EPS moved to a range of $4.77 to $4.85 per share from the prior range of $4.74 to $4.94 per share. Our new fourth quarter further adjusted EBITDA guidance is [$235 million to $243 million] (corrected by company after the call) from a prior range of $245 million to $255 million, which reflects a $6 million negative impact due to the hurricanes and the $5 million of timing favorability between third and fourth quarters. In Table 8 of our press release, you will find a bridge between our previous further adjusted EBITDA guidance and our revised guidance for both the quarter and the full year.

Our new fourth quarter further adjusted earnings per share is $1 to $1.28 per share from a prior range of $1.26 to $1.36 per share. As a reminder, our outlook for earnings per share excludes share repurchases occurring after September 30, 2018. This year, we're also providing guidance on a quarterly further adjusted basis because of the changes associated with the separation. Next year, we will only be providing annual guidance. We plan to provide you with our full year guidance for 2019 during our fourth quarter earnings call in February.

Turning to our balance sheet. As of September 30, we had $164 million of cash and cash equivalents, with corporate debt at $3 billion, which excludes $2.2 billion of nonrecourse debt related to our securitized receivables. Our net leverage was 2.9x and remains within our targeted leverage rate of 2.25 to 3x.

We continued to demonstrate our ability to access strong ABS markets with our $350 million Sierra 2018-3 transaction, which closed on October 17, 2018. As previously noted, this was our first transaction since 2013 that included a BB tranche, allowing us to generate $24 million in additional cash. Our continued success in this market is also reflected in the pricing of the AAA tranche, which was at the tightest spread of any timeshare securitization bond postcrisis.

To conclude, we were very pleased with our performance and our outlook. Our team is continuing to do an amazing job of executing on our strategic priorities and delivered 5% further adjusted EBITDA growth in the third quarter, despite the impact of the hurricanes.

With that, we would like to turn the call back to Tony and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [2]

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So look, I think, the 1 metric or the 1 issue that we probably discuss the most with investors is the loan loss provision, which was down sequentially and year-over-year, but I did hear your commentary, Mike, that seasonally, it may tick up in the fourth quarter. I just really want to get a sense -- and I'll come straight at it. Is this thing starting to head down or trend downward? Is that what we should expect? Or should we be thinking more of a choppy line for the next 4 quarters or so?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [3]

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David, thanks for the question. A couple of things. First of all, a clarification. What we expect to increase in the fourth quarter is our charge-offs. We expect them to be higher than they were in the third quarter, which historically has been the case. When we think about the provision, you're spot on in that. We were very pleased with the performance of the portfolio in the quarter, saw a downtick in the provision compared to the prior year and the prior quarter. And we would expect to be well within that 21% for the full year and the provision in the fourth quarter to trend down. Once again, it's charge-offs that will be up, but the gross provision, we would expect to be down in the fourth quarter compared to the third. But overall, a solid quarter as it relates to portfolio of performance and feel that all the things we're doing to reengage our owners are continuing to make the product valuable to them, which means they're paying for it, and we see great provision in portfolio of performance results.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [4]

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Great. And if I may push just a tad bit harder. This is something that if we're thinking about our model should be starting to tick downward next year as well, correct? Is that the expectation?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [5]

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David, this is Michael Brown. Let me just tag on to what Mike was sharing and touched on next year. Just, I think, a little more color as well on the third quarter. 100% of our loan loss provision in the third quarter was due to volume, and none of it due to third party. We specifically wanted to call out that the third quarter is historically the highest quarter to being below just a touch 21%. It was a very good sign for us, and that's what gives us confidence for the full year. As it relates to next year, we're going to hold on to full year guidance until the end of -- until the quarter 4 earnings call. But what I would say, both the portfolio and the operating efforts that we're putting forth to improve that provision and to continue to drive it down give us confidence that, first of all, our long-range projection is exactly where we want it to be. It's moving in the direction, and we feel the multiple tactics that we're putting in place, starting with owner engagement will be -- will continue to push it in the right direction going forward.

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Operator [6]

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We'll take our next question from Patrick Scholes with SunTrust.

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Patrick Scholes, [7]

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Great. A couple of questions here. Just on the hurricane specific here. Correct me if I'm wrong, that was mostly for your -- as you're taking down your full year number, it's mostly just related to the RCI business. Is that correct? As opposed to the sales of Vacation Ownership units?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [8]

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I think when we look at the impact of the hurricane, the biggest impact is actually driven by the Vacation Ownership side of the business. The markets that were impacted, Myrtle Beach, Williamsburg, represent about 13% of our volume in the months that we're impacted. So it's primarily the VOI sales that are the biggest driver of the revenue impact and the earnings impact due to the hurricanes.

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Patrick Scholes, [9]

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Okay. And then secondly, you did roughly a little over $100 million of repurchases in the quarter. Barring any M&A activity, is that a fair run rate to think of going forward? Again, you mentioned some sort of one-time items for next year as well, but ballpark, is that a fair run rate?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [10]

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So as it relates to share repurchases, we were very happy with our ability to repurchase at the level we did. I'll also point out, as we noted in our script, that we're doing things to drive incremental cash to sell the land at BB tranche. It was $35 million in incremental cash. So I think we would expect for the remainder of 2019 -- I'm sorry, 2018 to continue to be in the share repurchase market. And we'll be as aggressive as possible, keeping in mind that the goal of the leverage ratio is to remain at that 2.9x. But we should have cash availability to continue to repurchase shares through the end of 2018.

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Patrick Scholes, [11]

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Okay. And then lastly, as we think about the dividend historically, the parent company, Wyndham, would raise its, come February, earnings by about the rate of the earnings growth. Is that a fair assumption to make for you folks? How are you thinking about that?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [12]

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Yes. We've been pretty consistent since Investor Day that when it comes to our dividend, we definitely appreciate the expectation of our investors. And we would expect that as we grow the company, we would look to grow the dividend at a similar rate. I pointed out there, right now, our dividend yield is a very healthy 5%. So we definitely appreciate the value that brings to our shareholders. And as I mentioned, we'll grow that as we grow the company.

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Operator [13]

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We'll take our next question from Ian Zaffino with Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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Did you guys say that you didn't see any third-party defaults in the quarter? There was a comment about volume versus third party, maybe just clarify that a little bit for us.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [15]

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Absolutely, Ian. This is Michael. Thanks for the question. As it relates to the third-party defaults, no, we didn't see any incremental defaults related to third parties beyond our expectations. What we were mentioning is that the full increase to the loan loss provision, the absolute dollar, was driven 100% by volume and not by third parties. In fact, what we're seeing, the trends that we're seeing in the third-party defaults, we're seeing positive trends as a result of all our activity, not just in owner engagement, but a number of other operational actions that we've put in place to not only counteract third parties, but really to regain our voice with the consumer and make sure that they contact us when they have questions. We feel we're by far the best and most clear in how to help owners should they wish to exit their ownership, should they have questions or need clarification. Maybe I should just take a moment and share with you a few points that we speak to in parts. But holistically, to address the third-party challenge we've had over the last year or so, I've consistently talked about our efforts to increase our owner engagement. Those continue, and we're seeing good success there. Secondly is we continue to evaluate our portfolio in ways of lending, 725 FICOs. It's a strong portfolio, but there are always things that we can be improving on our portfolio to strengthen it and to lower the provision, which we will continue to do. Third, we're very active on the Internet and on the digital platform. We're trying to regain our voice, so that the first port of call for any question, positive, negative, anywhere in between, is to the Wyndham through our Wyndham Cares program. And then proactively, we've become very active at both the state and federal level on regulation. We welcome competition, but we think it should be regulated. And the secondary market is not regulated the way it should be today, and we're very supportive of increasing the regulation associated with that market. And then lastly, you probably would have seen several results, both by the industry and by Wyndham in the third quarter related to litigation, that really points out what's going on in the secondary market and the schemes that some companies are trying to employ to lure existing owners to their scheme.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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Okay. And I guess, just one follow-up would be, given the successful actions that you've had against third party or the industry's had against third parties, how long do you think it will take to kind of get back to where you are, let's just say, 3 or 4 years ago, as it relates to what you'd be seeing on the third party? Or how close are you already to achieving that level?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [17]

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Ian, this is Michael again. Just this is -- we've always said and we continue to believe this is going to be an ongoing effort. And those 5 items that I listed out to you are our efforts that we're committed to for the long haul. Since I began being on the cause as a part of Wyndham Worldwide initially and Wyndham Destinations today, is we've seen that number go from an upward trajectory fairly or moderately steep. Now what we're talking about here in the third quarter is a provision that's both down sequentially and year-on-year. So I think we're making progress. We've indicated a full year -- sorry, long-term projection for our provision, which we're staying with. But we will not be satisfied with that long-term projection that we have in, and we're starting to see a few green shoots across the portfolio that would indicate we're on the right track.

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Operator [18]

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

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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I guess, first, what's the typical FICO score of the third party-induced owners who had defaulted? And then a separate question, how are the new owners that you're getting compared to the existing base, either by age, geography or otherwise? Perhaps I missed that.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [20]

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Well, let me take the second question, and then I'll hand that to Mike for your question on average FICOs. From the new owner standpoint, we're -- keep in mind, we're trying to drive more new owners from our Blue Thread, which we did successfully in the quarter as well as entering new markets, as we shared last quarter, in places like Portland and Nashville, Austin and South Myrtle Beach. The demographic and the look of that consumer on the Blue Thread component highly correlates to what you see in the Wyndham Rewards database, whether it be households, home ownership, age, household income, they look extremely similar. I mentioned in my remarks that the new owners, what we're seeing is a stable FICO score, about 725. We're seeing the average age of the new owners starting to move down to around 50 years of age. And then you're seeing the household income move from an average over our total owner base of $91,000 up to about $100,000. So demographically, I think, everything is moving in the way that we would hope and want it to move. And with that, I'll hand it to Mike for the FICO question.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [21]

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Yes. Stephen, when we look at the FICO and really, all the stats related to the PPA activity, what we see is the PPA activity is pretty representative of all the demographics of our portfolio, whether you're looking at average loan balance, average age, new owner versus existing owner. So the FICO is pretty consistent with the loans that we're originating in the current period.

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Operator [22]

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And next, we'll move to Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [23]

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Maybe we could zoom in a little bit more on Blue Thread and a two-part question. One, how is the progress you've made kind of to date? How would that compare to your maybe initial expectations that you laid out during the spin process? And the second part of it is, is there any data you have regarding penetration of the La Quinta customers that are coming over to the Wyndham brand? And is there any -- do you have any information there as to whether their prospects for those folks are greater than maybe your existing base?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [24]

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Great. Thanks, Chris. The Blue Thread and the connection with our Hotel Group, which had its call the other day, is as strong as ever. I'm very pleased with the progress in the third quarter. We said that we would be somewhere around 50% growth on VOI sales through the Blue Thread this year. To see 56% come through in the third quarter, it was extremely encouraging, not just because it's above 50%, but we began this effort in earnest early last year, which means you can easily argue that the comps were more difficult in the second half of last year. What I see in the Blue Thread is that we've brought on the right people that know how to execute this program. This is a day-to-day effort. It's having close relationships with the hotel groups and getting as many tie-ins as possible. The Hotel Group has been fantastic and continues to be supportive. And the team that we've brought on here at Wyndham Vacation Club really knows how to execute, and it's showing through in the numbers. I'm also -- I've also been extremely pleased in how we've been able to grow the rental platform. We always talk about VOI sales as it relates to Blue Thread, but the rental platform and using the Hotel Group reservation system is driving more qualified leads that will generate a 20% higher VPG to our sales locations, and they do it at a much cheaper rate because we're not moving through OTAs. So very pleased with the Blue Thread. As it relates to La Quinta, as you heard on their call, they're still working through the integration. They're making tremendous progress. La Quinta remains an opportunity for 2019.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [25]

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Okay. Great. And then I want to go back on the new owner question. Can you talk maybe a little bit about any differences in propensity to finance? And then also kind of with the interest rates moving a little bit, is there any, I guess, implied or implicit change in your guidance as it relates to spreads on finance income for this year?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [26]

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Chris, this is Mike Hug. As it relates to propensity to finance, the new owners do have a higher propensity, which is as we've talked about why in the third quarter, we normally have that higher provision because of the higher propensity. And we think about the interest expense that we incur on the ABS transaction, which is the above the line EBITDA impact. When we look at our guidance, we haven't modified guidance for any increase in rates this year. When we look at our long-term plan, a 50 bps increase in interest rates, result in about $5 million in EBITDA exposure on the new ABS transactions that we'll issue on an annual basis. Keep in mind that our current ABS transactions obviously are fixed rate. So when we look at our long-term plan, $5 million in EBITDA risk, if the rates do move up 50 basis points on those transactions, and we feel that we'll be able to mitigate that risk, either through passing on the consumer or other areas of the business.

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Operator [27]

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And our next question comes from Cameron McKnight with Crédit Suisse.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [28]

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A question for Mike Brown. In terms of the decrease in the provision rate, can you perhaps give a little more color in terms of the efforts you've made around both -- around defaults, collections, underwriting and third parties?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [29]

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Look, let me start, and then let me hand it to Mike for the default component of that. What this team has done in the first 9 months of this year is we're continuing to look at our underwriting of the loans. Our sales team and our consumer finance team have -- speak weekly to figure out what's the best way to continue to drive lower defaults, which means the credit and sales and marketing team, they continue to refine their marketing programs, eliminating either unprofitable, the ones that are generating low FICOs business, asking for higher down payments wherever possible and as well looking at size of loan balances as well. If you were to look into each of those metrics, you can see improvements in each of them across the portfolio. And the result is each of them incrementally are making an impact to the underwriting and the overall health of the consumer finance portfolio. And maybe Mike can provide a little more color on the default question.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [30]

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Sure. On the default in our collection practices, Cameron, what we do is we have the information to be able to identify when somebody -- those 1-day delinquent, their ability to pay based on FICO loan balance and things like that. So we stratify our calling efforts or mailing efforts or our collection efforts based on things like that. So if you have a lower FICO and a higher loan balance and you go 5 days delinquent, we'll start calling you then as opposed to if you have an 800 FICO and a lower loan balance, we'll wait until it gets a little bit more delinquent before we start making calls and things like that. So by doing that, we're able to touch base with the highest risk consumers earlier in the delinquency process, giving us more time to work through whatever challenge they might be having and making sure they get their loan brought current. One of the things we do as well, not just try to collect their money, but one of the very effective ways we have is also to try to get them on vacation. Obviously, they have to be paying to go on vacation. So talk to them about using their product, get them on vacation. And obviously, with getting them on vacation, it means they're paying for their product. So stratifying our efforts and our resources based on the highest-risk contracts earlier in the delinquency process.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [31]

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Right. And just as a follow-up. I'm assuming the answer is no. But any change in the methodology or the assumptions that you've used around calculating the loan loss provision?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [32]

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No. We continue to be consistent. We have been for years in terms of how we calculate our loan loss provision using 10-year loss curves. We do that every month and are consistent in our methodology for calculating the required reserve for the portfolio.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [33]

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Okay. Fantastic. And one last one if I can. In terms of the hurricane impacts, can you quantify the number of sales centers that are out? And how long the impact should last? Will that likely spill into Q1 or Q2 of next year?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [34]

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So just as a reminder, the 2 markets where we have very concentrated positions are Myrtle Beach and the Florida Panhandle. Myrtle Beach has a number of different sales centers, but really it was that market primarily that was impacted. There were some ancillary effects to Williamsburg in Washington, D.C., but Myrtle Beach was the primary impact. And the issue, Cameron, was not only that we had to close the sales offices for a period of time, but flow back into the market was slow -- has been slow and continues to be slow in getting our owners back there. And then you have the Panhandle, which we again have a number of different sales locations both in Panama City and in Destin. And as a result of that, they are back, open and operational. However, getting our owners back to those locations is very important. And I like to reiterate 1 statistic that Mike mentioned earlier. 13% of our sales in September and October come from Myrtle Beach and the Florida Panhandle. So we uniquely get hit with those 2 concentrated markets when a hurricane comes through.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [35]

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And a final point. I think all of those sales centers, we would expect to be open and operational in January. Actually, most of them are open now. So a little bit of impact in the fourth quarter as we've talked about. But by the beginning of the year, it will be back to full force.

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Operator [36]

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And our next question will come from Brandt Montour with JPMorgan.

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Brandt Antoine Montour, JP Morgan Chase & Co, Research Division - Analyst [37]

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So great job on the Blue Thread initiative thus far. I was just wondering what percent of your tour mix at this point is Blue Thread. I know this was in the mid-single-digits range back when you started the Blue Thread. And then secondarily, what are you thinking you could get to on that to achieve that end game of 45% in new owner mix?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [38]

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Well, let me just start with total volume, if I could, and we can move to tours. So we'll do this year approximately $60 million in Blue Thread sales on a new owner base of approximately 800 million. So that's the math that's getting into the high single digits. And as it relates to tour flow, we will do about 30,000 to 35,000 tours, Blue Thread tours, out of our total tour mix of around 900,000. Our goal is to continue to grow that. Growing it off a higher base of 50% is not where we're projecting that. We will continue to move down as a percent -- annual percent growth. But when you look across the industry and those who've been in this space for some time, we believe the opportunity will be in several hundred million level. But that will take time and take execution and obviously maintaining the great relationship we already have with the Hotel Group. So we're about $60 million once we get through this year, and then we want to get it up to several hundred million over time.

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Brandt Antoine Montour, JP Morgan Chase & Co, Research Division - Analyst [39]

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Great. That's helpful. And then recognizing that there weren't any incremental loan loss provisions relating to just general pressure on the consumer, I was just wondering if you think you're seeing any early signs of weakness on your customers around the consumer from rising interest rates and/or gas prices.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [40]

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The short answer to that is no. The consumer today, we really look closely at tour flow and transactions to see if there's any signs of weakness in those areas. Our total was at expectation, and we're maintaining our full year direction on tour flow. That's a great sign. If you look at our volume per guest and our tour flow, both new owners and owners, and they're showing no signs of weakness whatsoever. So we continue to remain positive. Our full year guidance is really only negatively impacted through the hurricane, and we're flowing through the performance we had in Q3. So we're excited about where the consumers are going. And I think, more importantly, everyone does love to go on vacation, and this is a great way to vacation. And when weakness eventually comes, hopefully, several years out, what we saw in the last recession is they'll continue to vacation with us. They may just change their vacation pattern.

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Operator [41]

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(Operator Instructions) Next, we'll move to Jared Shojaian with Wolfe Research.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [42]

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So on your guidance, you lowered the exchange revenue per member growth by about 300 basis points at the midpoint. And in your release, you have a table where you can sort of back into the full year EBITDA impact of about $21 million. And then you're also calling out about $16 million from the hurricanes. So can you help me understand those impacts in relation to the full year guide because you only cut the guide by $9 million at the midpoint? And then you also reiterated the tours and the VPG, despite some of the issues we've seen from the hurricanes. So I guess, what is sort of offsetting those declines there?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [43]

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So this is Mike Hug. Thanks for the question, Jared. I think when we look at the full year guidance, the midpoint previously was $965 million, as you know. Hurricane impacts brought it down by $16 million, and the operational overperformance in the third quarter of $7 million would carry through to bring our guidance down to $956 million. As it relates to the RCI side of the business and the impact that, that's having on our operations, I think you can see it from our results that we've done a good job of making sure we're controlling our overhead costs, continuing to see good performance out of the VOI side of the business. And then as I mentioned, as we've talked about, the provision was slightly favorable as well. So I think it's all the other aspects of the business combined that are, in essence, to really hold and actually increase our guidance if you back off the impact of the hurricanes on a full year basis.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [44]

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Okay. And just to switch gears here and, I guess, ask a macro question. From a bit of a different perspective, because there's obviously been a lot of concerns that we're late in the cycle and, right or wrong, timeshare, I think, is perceived to be more economically sensitive than perhaps other consumer sectors. So can you talk about that? And maybe more specifically, what you've seen in historical recessions, excluding '08, '09? I think we can all agree that was a little bit unusual. So maybe you can just talk about what you would usually experience in more of a normal downturn.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [45]

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Well, this is Michael. The way that Wyndham went into the '08 recession compared to how we will eventually go into the next recession, I think, looks completely different. I think we looked more like a homebuilder in '07, and we looked more like a hospitality company whenever the next recession occurs. And the reason I say that is because the team here has done a lot of work over the last decade to realign its business model. First on the capital side, we've moved to a very capital-efficient business where we highly correlate our sales to our inventory spend, allowing more flexibility and more visibility as to when outlays are matched with sales. As well, there was a dramatic shift in the overall marketing makeup of the organization, so that should we move into a recession, we would not have to change our underlying business model. And I'll let Mike just talk about some of the things we changed out of the last recession. But going into the next recession, we will be able to maintain our full marketing platform, continue to generate demand and the adjustments that we will make into the next recession will ultimately be on the cost side. You always will compress margins, but we believe we can maintain our business model, maintain our focus on new owners and the Blue Thread and react to any downturn through moving the cost side of the equation as opposed to fundamental business model. I would say that with 60% of our EBITDA moving to free cash flow conversion, we have a tremendous amount of cash that we -- that provides us cushion within our targeted leverage levels to be able to be in a great position as we move into the next recession. And Mike, maybe if you could just talk about the marketing programs and underwriting from the last recession, that'd be helpful.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [46]

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Yes. I think the key points from where we were back in 2007, '08 to where we are today as it relates to underwriting is approximately 13% of our sales back in 2008 were the sub-600 FICOs, and we've eliminated all those sub-600. You see our FICO scores now averaging 725. We used to get about 12% down. Now we're getting north of 25% down on an overall basis. So when we look at how we generate, we also have more significant underwriting standards for large balance loans. We do analysis on owners and if they -- we don't believe they have the ability to borrow more as it relates to their vacation ownership, we won't market to them. Even if we do market to strong consumers and they borrow above a certain level, we will put them through additional underwriting. So the underwriting process and, in fact, who we market to has improved greatly since 2007, 2008. And then what that has led to is significantly improved margins over the last 7 or 8 years. We're now, on the Vacation Ownership side of the business, we're running 24% and 25% margins. So the way we operate the business is much healthier, and we wouldn't have to make significant changes to our underwriting and our marketing standards if a downturn were to occur as compared to what we had to do back really in January of 2009 when we made the big shift.

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Operator [47]

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Next, we'll move to Edward Engel with Macquarie.

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Edward Lee Engel, Macquarie Research - Analyst [48]

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If you were to try to strip out the third-party defaults, what do you believe your core default rate on the loan portfolio would be? I remember back in 2015, it was 7.5%. I was just kind of working where you think it would kind of trend there ex these defaults.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [49]

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Yes, thanks. If we were to back out the impact of the third-party activity, we would expect a provision of around 15%. So a 25% reduction from where we're at today with a 20% provision. So I think that would basically then translate into a similar level of defaults being reduced by that same level. And keep in mind that the -- I'm sorry, go ahead.

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Edward Lee Engel, Macquarie Research - Analyst [50]

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Keep going. I'm sorry.

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [51]

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I just want to say, keep in mind, defaults on an annual basis tend to be around 8%.

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Edward Lee Engel, Macquarie Research - Analyst [52]

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Okay. And then in regards to provision, I remember last quarter, if I recall correctly, you said in 2019, you would get back to 20% of VOI sales. Are you still on track to get there? And I guess, what's driving that? Is that an assumption of a lower default rate? Or is that changes to your financing that it could be that you do it earlier?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [53]

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To think, like we said on this call and I believe we did on Q2 as well, our long-term trajectory and projection is to be at 20%. As we've seen Q3 and Q4 and we'll see Q4 come in, we'll put out our official 2019 guidance at the end of Q4. We are seeing the positive trends, but like with the rest of our business, VPG, Blue Thread sales, tour growth, EBITDA and loan loss provision, we will put a finer -- sharpen our pencil and put a finer point on the actual projection in that call. But we're confident in our long-term projection, and that in the immediate term, the trends are moving in the right direction.

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Operator [54]

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And our final question is a follow-up from Stephen Grambling with Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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I guess a quick follow up to your response to Jared's question. Just on the shift to a more just-in-time capital approach versus the last downturn, how much of these just-in-time projects have a fixed capital requirement over certain periods versus just being adjustable to sales? Or in other words, if sales were soft then for whatever reason, what percentage of your projects would you still be on the hub for?

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Michael Hug, Wyndham Destinations, Inc. - Executive VP & CFO [56]

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So when we look at our inventory top line and the average $250 million that we've mentioned we'll be spending over the next several years, when we think about the closer in you get, right, 2019, the majority of that is committed. But then when we get out to 2020 and 2021, that rate drops pretty significantly. So we're being smart in terms of making sure we don't overcommit and leaving some flexibility. Once again, the further out we get, the more flexibility we have. But I would just say for 2019, probably 80% of that $250 million is committed to it.

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Operator [57]

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This does conclude our question-and-answer period. I would now like to turn the call back over to Michael Brown for closing remarks.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [58]

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Thank you. Let me close by saying how pleased we are with our first full quarter of Wyndham Destinations as a stand-alone company. We delivered great operational results, found ways to drive incremental free cash flow to return to shareholders and remained focused on the execution of our strategic plans. As a result, we're well positioned to deliver our long-term goals. More importantly, we have a great team, focused on delivering outstanding vacation experiences each and every day. I want to say thank you to our associates for their hard work and focus on putting the world on vacation while delivering strong shareholder value. Thank you for joining us today.

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Operator [59]

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Thank you. This does conclude today's conference. You may disconnect, and have a great day.