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Edited Transcript of WYN earnings conference call or presentation 26-Feb-19 1:30pm GMT

Q4 2018 Wyndham Destinations Inc Earnings Call

PARSIPPANY Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Wyndham Destinations Inc earnings conference call or presentation Tuesday, February 26, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Agnew

Wyndham Destinations, Inc. - SVP, IR

* Michael A. 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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* Brian H. Dobson

Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs

* Cameron Philip Sean McKnight

Crédit Suisse AG, Research Division - Research Analyst

* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., 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

* Jared H. Shojaian

Wolfe Research, LLC - Director & Senior Analyst

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* 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 Wyndham Destinations' Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this call 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.

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

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Thank you, Keith. Good morning, and welcome.

Before we begin, we'd like to remind you that our discussions 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 fourth quarter results. And Mike Hug, our Chief Financial Officer, will then provide greater detail on our fourth 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 Brown.

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

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Thank you, Chris, and good morning to each of you. We're pleased to report fourth quarter results with further adjusted EBITDA of $240 million and further adjusted EPS of $1.27, both above the midpoint of our guidance. For the full year, we are pleased to finish with further adjusted EBITDA of $957 million, reflecting 5% year-on-year growth and further adjusted EPS of $4.84, representing 13% growth.

As we close out our first year as Wyndham Destinations, we are proud to have delivered on the earnings goals we laid out in March of 2018. Our team was ready from day 1 and executed on our strategic objectives and key operating metrics.

Wyndham Destinations remains the leader in both vacation ownership and vacation exchange with over $2.3 billion in gross realized sales and nearly $1 billion in Exchange & Rentals revenues. We are incredibly proud of all the hard work by our associates and leaders, and we entered 2019 with confidence that we will build on our momentum from 2018. Let me share a few of our operating highlights.

We delivered on our commitment to shift new owner mix while maintaining margins. Our new owner sales mix improved 240 basis points over the prior year, and we finished with just under 38% of total sales being to new owners. And our further adjusted EBITDA margin increased 40 basis points year-over-year to 24.4%. 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. Of the new owner purchases in 2018, nearly 20% were to millennials and 55% were to millennials and Gen Xers combined. By the end of 2019, new owner sales will be close to 40% of total sales, well on our way to our goal of 45%.

In 2018, we delivered a 6% increase in gross VOI sales through a 2% increase in VPG and a 4% increase in tours. Supporting the top line growth, our development pipeline continues to put us in great markets for tour generation. In June of this year, we will open our newest urban resort, which will be located in Portland, Oregon. Our capital-efficient inventory sourcing helped deliver strong and consistent free cash flow in 2018. For the full year, further adjusted free cash flow came in above the high end of expectations at $580 million.

We demonstrated our commitment to returning cash to shareholders with $221 million of share repurchases and $124 million of dividends in the first 7 months following the spin. With leverage within our target range, our capital allocation outlook remains focused on several elements. First, our announced dividend increase demonstrates our commitment to return cash to shareholders and expresses confidence in our ability to consistently generate and grow free cash flow. Second, we believe at this time, in the absence of extremely compelling transactions, the best use of excess free cash flow remains for share repurchases.

Underpinning our focus on increasing new owners is our commitment to the Blue Thread, our connection to Wyndham Hotels and their award-winning Wyndham Rewards loyalty program. The demographics of the hotel guest loyalty members are highly correlated to our own customer demographics, making this a powerful new owner marketing pipeline.

We are utilizing this connection to generate new owner tours and I'm pleased to share that our Blue Thread sales grew 50% year-over-year. The Blue Thread is important to our margins because in 2018, these new owner tours generated more than 25% higher VPGs than nonaffinity new owner tours.

One important and, in our view, underappreciated aspect of our business is the strength of our marketing channels. Let me share why our diversified marketing platform is a significant competitive advantage. There are 3 primary marketing channels that timeshare developers utilize to generate sales. The first is sales to existing owners. We have the largest owner base in the industry with 880,000 owners. Even after we increase the mix of new owners, this will continue to be our largest sales channel at around 55% of total sales. Of these 880,000 owners, about 700,000 of them, representing 80% of our owner base, have fully paid off their loan. The second marketing channel is affinity marketing. Hospitality companies alone have the opportunity to market to their loyalty databases. We at Wyndham Destinations have begun that effort in the last several years and see this as a great opportunity for growth known as our Blue Thread. And third is the open market channel, where we are acquiring leads and tours from our partners in casinos, hotels, theme parks, malls and other high-traffic vacation destinations. This is our largest new owner channel and one of our core strengths, which requires scale to operate profitably. We have that scale. We're the only company with a significant presence in all 3 of these channels and this is a competitive advantage for us.

We have shared on several occasions that Wyndham Destinations' competitive strengths include the ability to develop meaningful marketing partners and the ability to leverage multiple brands to grow markets. We have established strong, long-term relationships with key partners to support this growth. For example, we've extended our relationship with the Margaritaville brand by another 10 years through 2028. This relationship will help us secure and enhance our ability to grow new owners and grow our portfolio of resorts.

Shifting to our Exchange & Rentals business. Revenue underperformed this year, particularly in the fourth quarter, led by lower exchange revenue per member. Mike will provide more detail momentarily, but I want to point out that we are committed to reigniting the strong cash flow business that we believe has untapped growth potential. In that spirit, I'm delighted to welcome Olivier Chavy as the new President of RCI. Olivier joined us as the former CEO of Mövenpick Hotels & Resorts and prior to that, he was a Senior Executive with Hilton Worldwide and Hilton Grand Vacations. Olivier has a proven track record of dynamic leadership and the ability to grow businesses. I've personally known Olivier and watched his successes over the past decade and am confident he will ignite this great business.

While 2018 was a challenging year for top line growth at Exchange & Rentals, we remain focused on optimizing profitability and cash flow. Through cost initiatives, we delivered 9% further adjusted EBITDA growth in the quarter and 4% further adjusted EBITDA growth for the full year. In addition to strong cost performance, there were other notable achievements. 2018 was a strong year for business development as RCI added 172 new affiliated resorts, a 22% increase over 2017. Not only did we recently add blue-chip clubs in the U.S. like Welk Resorts and Shell Vacation Club, but our expansion in Asia and India has been noteworthy with 58 new affiliated resorts added this year in that region.

We also announced this morning that we are exploring strategic alternatives for our Vacation Rental business, the leader in professionally managed vacation rentals in North America. This is a great business with a collection of distinctive brands and a diversified national footprint. This opportunistic review is intended to allow us, over time, to more fully focus on other aspects of our company that are at the core of Wyndham Destinations' identity. We will not be commenting in detail today on the next steps other than noting it is a fulsome review of all value-creation alternatives. We hope to have more to share in the near future.

In summary, we delivered against our goals this year and have entered 2019 confident and excited about our future. I'd like to reiterate our key messages. 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 and EBITDA growth. And third, our commitment to return value to shareholders by maximizing cash flow.

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 A. 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 fourth quarter results, our 2018 full year results and introduce our 2019 outlook.

As we have previously noted, the spin-off of Wyndham Hotels makes the year-on-year comparisons and our financial reported results more difficult. Therefore, my comments today will be primarily 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. We believe 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 fourth quarter further adjusted EBITDA exceeded the midpoint of the guidance we provided during our third quarter call and our further adjusted diluted earnings per share came in at the high end of the range. Further adjusted EBITDA was $240 million, an increase of 3% over the prior year, and further adjusted diluted earnings per share was $1.27, an increase of 14% over the prior year. For the full year 2018, we reported further adjusted EBITDA of $957 million, a 5% increase over the prior year, and further adjusted diluted earnings per share was $4.84, an increase of 13% over the prior year. Gross VOI sales increased 5% over the fourth quarter of last year to $564 million, with VPG increasing 3% and tours 2% higher. Exchange & Rentals revenue declined 5% with membership growth of 1%, offset by exchange revenue per member declining 7%. We had a number of headwinds all year at RCI, including political and economic challenges in Latin America, foreign exchange, reduced supply and member mix. These were compounded in the fourth quarter with weaker-than-expected sales of add-on products. As Michael mentioned, we are taking very active steps to reignite our exchange business.

Further adjusted EBITDA margins improved 40 basis points in 2018 to 24.4%. Growth in our portfolio, operational efficiencies and cost savings helped offset margin pressure from sales mix and a higher provision. To further support our cost savings initiatives, we recorded $16 million of charges related to restructuring initiatives in 2018, all of which were personnel-related, including severance cost, and's for which $12 million will be paid out of 2019 free cash flow. This action was primarily focused on enhancing organizational efficiency and rationalizing operations. We continue to look at ways to optimize the performance of our business.

Shifting to our portfolio. It performed well in the quarter with provision at 19.3% of gross VOI sales. For the full year, the provision was 20.5%, favorable when compared to the 21% that we had anticipated on our third quarter call. Our further adjusted free cash flow from continuing operations for 2018 was $580 million, ahead of our guidance range of $555 million to $575 million. Our just-in-time inventory model and our access to the ABS markets enable us to consistently convert EBITDA into free cash flow and to avoid large annual swings in cash flow.

Turning to our balance sheet. As of December 31, we had $218 million of cash and cash equivalents with corporate debt at $2.9 billion, which excludes $2.4 billion of nonrecourse debt related to our securitized receivables. Our net leverage of 2.8x remains within our target leverage rate of 2.25 to 3x.

During the fourth quarter, we closed 2 securitization transactions. The first was a $350 million term securitization with a weighted average coupon of 4.02% and an advance rate of 98% that closed in October. The second occurred in December as we closed on our private ABS term transaction to leverage receivables that were not eligible for our normal public transactions. The transaction size was $279 million with a coupon of 4.73% and an advance rate of 70%. We were pleased with this transaction as a previous deal similar to this one was in late 2014 and had an advance rate of 58%.

With respect to our dividend, our Board of Directors authorized a 10% increase in our quarterly cash dividend to $0.45 per share from $0.41 per share beginning with the dividend that it is expected to be declared in the first quarter of 2019. We repurchased $100 million of stock in the fourth quarter at a weighted average price of $38.73 for a total of 2.6 million shares. We continued share repurchases into the first quarter of 2019, repurchasing another $40 million in the first 2 months. Since the spin-off of Wyndham Hotels, Wyndham Destinations has repurchased $261 million of stock through February 25, 2019, which is 6% of the shares that were outstanding on our first day of trading on June 1, 2018.

Inclusive of our 2019 repurchases, we have returned $385 million or approximately 9% of our market capitalization to our shareholders through share repurchases and dividends since the spin-off, including the most recent dividend payment of $40 million or $0.41 per share in December.

Now let me turn to our outlook. As is industry practice, we plan to only provide detailed annual guidance going forward. The reason for this is that we manage the business for the year but because we generate our own demand, this can and does lead to some quarterly variability in items such as tours, VPG and the provision as a percentage of gross VOI sales. We saw this in 2018 as we started the year stronger on some metrics, weaker on others but finished in line or ahead of most of our guidance metrics for the full year. In order to help navigate this in the context of our full year guidance, we will provide some color on the upcoming quarter. You should keep in mind that our full year guidance reflects the detail we will give about each quarter.

For the full year 2019, we anticipate adjusted EBITDA to be in the range of $995 million to $1,015,000,000, and we expect 2019 adjusted earnings per share to range from $5.15 to $5.35. As a reminder, our outlook for earnings per share assumes no additional share repurchases using the share count as of December 31, 2018. We expect tourists to increase 5% to 7% and VPG to be up 1% to 3%. For the Exchange & Rentals business, we believe average exchange members will be flat to up 2% and exchange revenue per member will be flat to down 2%. Our 2019 provision is expected to be similar to 2018, around 20.5% of gross VOI sales. We anticipate that the provision as a percentage of gross VOI sales will follow a pattern similar to 2018. It will be higher in the first half of the year, particularly in the first quarter of this year, while we expect it to be lower in the second half of the year.

For the first quarter of 2019, we expect adjusted earnings per share to range from $0.88 to $0.92. Tours will be below our full year expectation in the first quarter, growing 1% to 2%. We scaled back a number of less profitable marketing locations at the end of last year and our new sales centers in Portland, Nashville and San Antonio won't ramp-up until April, May and August, respectively. As a result, tour growth is weakest in the first quarter and strongest in the fourth quarter of this year.

Exchange revenue per member will see improvement from the fourth quarter but the year-over-year growth rate will still be down similar to the third quarter of 2018. As a result, and also because of the provision, we believe total revenue will be flat to up 2% in the first quarter and adjusted EBITDA will be comparable to further adjusted EBITDA in the prior year. Our outlook for 2019 adjusted free cash flow is $540 million to $560 million. As a reminder, we anticipate cash payments of approximately $125 million in 2019 related to the sale of our European Vacation Rental business with approximately half impacting free cash flow. We also had separation cost of about $70 million as well as a $12 million in restructuring cost mentioned previously. Please note that we expect an effective tax rate in 2019 of 27% to 28%.

To conclude, we are very pleased with our performance during 2018 and our outlook for 2019. Our teams continue to do an amazing job of executing on our strategic initiatives and delivered 5% further adjusted EBITDA growth and 13% further adjusted earnings per share growth in our first year as a separate public company.

With that, we would like to turn the call back to Keith 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 Joe Greff with JPMorgan.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [2]

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Great job on the margin side and Vacation Ownership, particularly in light of the new owner focus. How do you see EBITDA margins in VO this year? I know you have sort of a segment outlook. But do you think you can continue the progress on margins even with the continued push on new owner mix?

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

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Thanks for the question. That's really at the core of everything we're doing. And when we came out as Wyndham Destinations, our 3-legged stool was really to grow new owner mix, preserve margins and maintain our EBITDA guidance. And we do believe that we can maintain flat margins year-on-year and support our new owner growth. I think the evidence you can see through the second half of 2018 was we were proactive in bringing 3 organizations together in order to find those cost efficiencies to pay for this strategic shift. So I do see opportunities going forward to execute the new owner shift mix while preserving margins.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [4]

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Okay, great. And then, my follow-up question. Can you just give us a sense LTM/EBITDA for the north -- the Wyndham Vacation Rentals North American segment and just talk about the exploration of strategic alternatives for that segment? And that's all for me.

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

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I think the question was what's the order of magnitude in our business, which is -- it represents about 6% of our total revenue and about 1% of EBITDA. As I mentioned in my remarks, I do really like this business and if you were to go back to our separation, we had 3 tremendous -- 3 large transactions happening at the same time. We had the separation of the company, the acquisition of La Quinta and the sale of the European Rental business. We really wanted the opportunity to evaluate all strategic alternatives post-spin because there are some real natural synergies between the Vacation Ownership and Exchange business and the Vacation Rental business and that's why we wanted to have a thoughtful chance to evaluate it instead of in a rush fashion. And that's really the process that we are in at the moment. We will review all strategic alternatives and make the right decision at the end of our process to determine what ultimate action we're going to take. This is an opportunistic review, and we think it's the right time early in Wyndham Destinations' life cycle to have this review.

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Operator [6]

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And we'll take our next 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 [7]

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I wanted to just go back to the loan-loss provision. I've heard the message that the line downward may not be straight over time, but downward nonetheless. I wonder how much color you could share with us or explain to us, what exactly or what dynamics have to occur in order for that particular line item, which consumes a bit more of everyone's attention. What do you have to do or what has to line up in order for that to start moving down consistently and staying down?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [8]

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David, I think -- this is Michael. I think there's a few elements of that and some are directly within our control and some are -- some involve actions we're taking. The first and most important element is, again, I laid out on the last call, our 5-point plan to really address how to reduce our loan-loss provisions, which we're partially and primarily putting our own owners on vacation and having a larger voice in the exit space. But the reason it's a challenge to really lay it out linearly is there are third parties involved in this activity and what we need to do is be proactive and positive in looking after our consumers and the proper way to exit through both litigation and legislation. But I think more importantly, our business strategically is around putting people on vacation and having all the initiatives around maximizing owners' utilization. And also, it's a reason that I did spend some time today talking about our marketing channels because getting more affinity owners, who are already familiar with the Wyndham name, having a bigger reliance on new owners in the short term to allow our owner base in effect to refuel itself are all different components that will each individually help to drive that number down. Unfortunately, it's not a linear process, but I do believe that all the efforts we're making have taken it from a commentary 2 years ago of, it's just going up and we don't see a top to it, to a nice leveling off and, as you saw in the fourth quarter, an actual decrease in the number. So I think all the trends are heading in the right direction to support the fact that the efforts we're making are going to get us to the ultimate conclusion.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [9]

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If I can just follow that up. If we were to divide the events of default into 2 buckets, those that have come through the what we'll call the Blue Thread channel and those that have come through your other marketing platforms. Is it fair to assume that there's a significant difference in how those defaults are occurring? And obviously, I'm -- what the point I'm getting at is, as the Blue Thread becomes a more and more meaningful piece, that should impact that metric as well. Correct?

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

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David, this is Mike Hug. As it relates to how we expect the Blue Thread receivables to perform a couple of things, first of all, remember that we're fairly early in the life of the origination of a significant amount of Blue Thread receivables, but you are correct in that we would expect that these receivables, similar to how they run a higher VPG when the tours show up, will perform better than the receivables that we generate through non-Blue Thread marketing channels. It will take time for that to play its way through the portfolio, but we would expect in the future, as that portion of portfolio grows, to see improved performance from those compared to non-Blue Thread channels.

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Operator [11]

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And our next question is from Brian Dobson with Nomura.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [12]

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Just a follow-up on your marketing channels. So first on the Blue Thread leads. I guess, how -- what do you feel is your ability to scale that? And how quickly could those affinity leads become a more important part of your business? And what kind of technology partnerships are you working on developing, be it either website-based transfer or mobile app transfer? And then I have one follow-up.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [13]

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Great, Brian. So Blue Thread first and then we'll get to digital. This year, as I mentioned, we grew 50%. That represented about $66 million of sales this year, which on the grand scheme of things, is not a large percentage of our total sales. However, our commitment to really begin to grow this channel started only 2 years ago. We think that in the mid to long term, sort of 3 to 4 years, we can get in that $200 million to $300 million range. We think all the potential and the data opportunities are absolutely there. And what we're very encouraged by is the execution and the KPIs we look at, either through call transfer or through the rental of our over 200 properties on the Wyndham Hotel website, has really proven that this is a sustainable channel for us that has a good amount of headroom ahead of it. As for digital, I think that is one of the most important elements of what we're doing as an organization today. On the digital platform, on our ease of ownership to book and to access their ownership through a digital platform, our digital and marketing team are working with a number of world-class operators to really implement enhanced systems to grow our business. We've recently contracted with Salesforce to really lead our charge on our CRM system and then we are working with a variety of different web services and web Internet providers to really improve our digital presence. I think when you look at 4 to 5 years ago, it's a little under-invested. But as the consumer has changed so dramatically, we're disproportionately favoring this area of investment within our operating capital because we know it's the key to success going forward. And Brian, I think you had a follow-up question, Brian?

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [14]

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Yes, that's right. So in terms of your open channel marketing, as VAC pulls out some of its ILG legacy brands from open channel, do you think that, that gives you a better opportunity to find high-quality marketing partners? And then finally, on your free cash flow, you outlined 2 major cash expenses this year. Should we expect anything like that in the following year? Or do those onetime expenses sunset and you see a resumption of the normalized organic growth rate of free cash flow?

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

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Brian, let me take the open channel question first, and then I'll hand it to Mike for the cash question. I think there are plenty of marketing opportunities around the United States for our ability to continue to grow the open channel. And I think one of the benefits of Wyndham's history is Wyndham began as an organization as an unbranded hospitality company and only became Wyndham in 2016. That really created a DNA in this company of execution without the reliance of a hospitality brand. In the course of that time up until 2006, the company really created scale in this open marketing channel. Now fast-forward into 2019, we still have that DNA. We still have an incredible marketing footprint around the U.S. with great marketing partners. And most importantly, and that's why we've taken some time to talk about it this call, we do have that scale because it is a lower margin -- open market channel is a lower margin source of generating new leads. So with nearly $800 million of sales in that channel, we have that scale. And therefore, when we go to negotiate with larger partners, we bring with it the ability to match their distribution with ours and our ability to support their business through premiums and room nights, unlike any other competitor in this space. So we love this competitive advantage, and we believe that it is a long-term advantage for us as we look to continue to grow it along with our Blue Thread to source new owners. Mike, for the cash question?

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Michael A. Hug, Wyndham Destinations, Inc. - Executive VP & CFO [16]

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Yes. Brian, on the free cash flow, we don't expect much impact in 2020 from these continuing payments. It will be less than $10 million. As far as the long-term free cash flow, I'll start with 2018 and our 2019 guidance. If you look at the 2 years combined compared to our 2018 EBITDA and the midpoint of our 2019 EBITDA guidance, we're at a 58% EBITDA to free cash flow conversion. And we believe that over a long-term basis, as we've discussed since the spin, that we will continue to convert EBITDA to free cash flow at the 58% to 60% rate.

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Operator [17]

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Our next question comes from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [18]

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You guys covered a lot of specifics on this call so far. I wonder if I can maybe take a step back and ask you about how you see kind of your core customers. You talked to them through the fourth quarter, and we had a lot of stock market volatility and other kind of noise going on. And as you give these folks tours and the salespeople interact with them, were you able to pick up on anything that's changed in terms of their core outlook or propensity to buy or anything like that?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [19]

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Chris, the short answer to that is no. There hasn't been any noticeable change of what we're seeing from the consumer. And it's tough to balance that against, as you point out, the volatility in the stock market, and you read the headlines every day. But what we're seeing in our consumer, when you look at our key KPIs, whether it be tour flow, conversion rates or even average transaction price, all of those have stayed really consistent. And although we don't provide guidance, one of the really encouraging components of this is our new owner metrics are really positive. So we're not seeing weakness in the consumer. Obviously, that can change at any point. I think for us, as a management team, what has heightened our awareness is preparation and really started to look out a year, 2 years for when the next dip does occur. We're really spending a lot of time on the capital side of our business, trying to prepare ourselves to be fully ready and to be maybe even opportunistic as we head into the next downturn.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [20]

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Great. That's helpful, Mike. And then I just want to ask another inventory question. I know a lot of your peers have -- I think they turned a little bit more towards some of these hotel conversions. Is that something -- as you look out across, whether it's a Wyndham portfolio or other maybe independent hotels, is that something you guys think about doing more of possibly?

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

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Thanks for the question, Chris. This is Mike Hug. When we think about our inventory, we will continue to acquire inventory in the capital-efficient method that we've been talking about, just-in-time methods to make sure that we hold our free cash flow at the levels that we've committed to. As it relates to the particular product, it's really going to be dependent on the product we sell. For example, the great property that we have in New York City, Midtown 45, was a hotel conversion. The property we have in Austin is new construction. So it's really going to depend on the opportunity that presents itself in that market. And we're open to whatever the right opportunity might be. Once again, most importantly, from our perspective, it being the right product could bring us additional marketing channels and can be delivered to us in a capital-efficient method.

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Operator [22]

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And our next question is from Stephen Grambling with Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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I guess, a couple of quick follow-ups. You alluded to 700,000 owners who have already paid off their loan being an opportunity, I think, to sell into. I guess, what percentage of those owners have not upgraded? And then can you talk about just the general puts and takes to net owner growth? Because it seems like you've successfully ramped up new customer sales, but the owner base has generally kind of held relatively flat.

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

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Why don't I hand the first part of that to Mike and then I'll take the second half of that.

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Michael A. Hug, Wyndham Destinations, Inc. - Executive VP & CFO [25]

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So when we look at upgrade opportunities across our owner base, we really look at the potential revenue opportunity in total. There'll be some owners that will never upgrade and there'll be some owners that will upgrade multiple times. So rather than looking at the percentage that have or have not upgraded, what we do is we take our historical upgrade trends on average across the owner base and roll that out in the future. And in doing that, we're very comfortable that over the next 5 to 6 years, we have, on average, well over $1 billion a year available to us in upgrade sales. And then obviously, as we add 38,000 to 40,000 new members a year, that base will continue to grow. So once again, look at it on an overall average as opposed to a percentage that have or have not upgraded, but very comfortable with the future pipeline that we have from a revenue standpoint associated with our current owner base.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [26]

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And Stephen, I think one of the major reasons that I really wanted to point out the 700,000 have fully paid off their loans, it goes well beyond the conversation about their potential to buy more. It's -- I feel that over the last year, there's been a misperception out there that the vast majority of our owners have loans and, therefore, are susceptible to this loan-loss provision conversation. 80% of our owners are fully paid off, enjoying their ownership and going on vacation with us every single year. To your question about new owners, we're growing new owners. It's an increasing piece of our mix. Our total owner base is relatively flat. I would invert the curve to what you're seeing on the loan-loss provision. Over the past several years, when you exclude acquisitions, you would see a reduction of our owner base. And I think that was very natural because we've been in the industry the longest. We've got the largest owner base. People do come to the point that they naturally need to leave their ownership. We're supportive of that. We were the first in the industry to create an exit program called Ovation, no fees required and very clear representations on how to eventually leave your ownership. However, what you're starting to see in our curve now is that, that number is flattening and the new owner initiative that we have in place are allowing owners who should naturally leave their ownership, and combine that with the fact that we're growing our new owners, you're seeing a leveling off of the decline. And you actually saw in the third quarter of last year, the first signs of new owner growth come back into our total owner base.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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That's super helpful color. And then one other follow-up. You mentioned scaling back some sales centers that are less profitable. Is there anything to read into what was impacting those centers?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [28]

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No, not at all. We have about 100 sales centers, and each one has 4 to 6 marketing channels. So there is going to be constant ins and outs as far as new marketing channels that we're announcing and negotiating and ones that are less profitable. It's part of our normal course of business of saying goodbye to channels that aren't profitable.

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Operator [29]

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And we'll take our next question from Cameron McKnight with Crédit Suisse.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [30]

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Mike, just to follow up on an earlier question. Did close rates or sales growth change pace through the quarter at all? And in particular, did things change in the dark days of December?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [31]

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No, not at all. The impact on tour growth in Q4 and in Q1 is a combination of 2 items. And just to amplify a little bit is, yes, we began to pare back on some marketing programs and keeping in mind that December and January are not, especially January, are not big new owner tour opportunities for us. And that -- the reflection of tour growth is simply that. And in Q1, you have to combine that with in 2018, you've heard us talk about Myrtle Beach. You heard us have talked about -- talk about Austin, Texas as being new marketing opportunities. And we also had an initiative that we ramped up in South Florida in the first quarter of 2018. Those same dynamics don't exist in Q1. But as Mike mentioned, we have 3 new sales operations that we'll be opening in Q2 and Q3, and that's where you'll get the tour dynamic really coming into play. So nothing in the consumer, more just a fact of quarter-to-quarter business news and new location openings.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [32]

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Got it. And then secondly, on the rental business. What's prompted the review? Is it just that it's a smaller business, lower margin and you're evaluating return on management time? Or is there something else?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [33]

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That's -- Cameron, that's a good portion of it. But the reality is, is prior to the separation, we began to just talk about what's the best way to integrate this into Wyndham Destinations. We began to really look at where the synergies could lie, not only cost synergies but revenue synergies. And again, with 3 huge transactions happening together, La Quinta, European rentals and the separation of the 2 entities, it wasn't the right time to make a thoughtful decision. So we've actually been looking at what was the right strategic fit for the Vacation Rental business for almost a year now. It's only in the last few months that we've decided to put it through a strategic review alternatives to really look at how to maximize the value of this business. And we'll see where that review takes us. But it's a great business. It's got 9,000 units in North America. And the timing of it simply is a matter of when -- as the new Wyndham Destinations, we felt coming out of the gate it was the right time to do that proper review.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [34]

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Got it. And has that $10 million of EBITDA from the rentals business been reasonably consistent over time?

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

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This is Mike Hug. Yes, it has. It's been growing over the last couple of years. But yes, it's been reasonably consistent, growing in part because of acquisitions and then just continuing to drive operating performance.

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Operator [36]

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And our next question is from Jared Shojaian with Wolfe Research.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [37]

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So on the 2 securitizations you did during the fourth quarter, the December transaction came in at a higher coupon and a lower advance rate. Is that just specifically because of the nature of it being a private transaction? Or did you feel any sort of pressure in the securitization market during December with all the market turmoil that we had in the month?

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Michael A. Hug, Wyndham Destinations, Inc. - Executive VP & CFO [38]

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Jared, thanks for the question. This is Mike Hug. So absolutely no pressure on the December transaction. In fact, we made sure we pointed out in my comments that the last transaction that we did of this type had an advance rate that was south of 60%. So we felt that the execution at the 70% advance rate was a great sign that we had partners that are out there to -- willing to take on this portfolio. The nature of the transaction is a little bit different because what we're doing is taking receivables that have built up over the last few years that for one reason or another aren't eligible for a public transaction. There might be a document, for example, that wasn't signed by both parties on note or things like that. It's a little bit of a scratch and dent, if you will. But we were very pleased with the execution. And the 70% advance rate was a nice improvement over the last one we did in late 2014. So in our opinion, it was actually an indication that people believe in our portfolio performance, and we were very pleased and actually very happy with that. And that was part of the reason that our cash flow guidance was over for the year was being able to take that up to $279 million. So great execution by the team.

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Jared H. Shojaian, Wolfe Research, LLC - Director & Senior Analyst [39]

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That's helpful. And then, I guess, just going back to the question on the tour growth and the sales centers. Can you just maybe elaborate a little bit more on what drove your decision to scale back some of those tour locations from the last time we heard from you? Because I guess, back in November, when you had reported, you were guiding your tours still to be at that 5% to 7% level. So what really changed for you, I guess, from -- in the last 2 months of the quarter to drive that decision?

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

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There's a number of elements that we're constantly balancing. We've said that we're going to try to drive new owner growth above the 200 basis points, maintain margins, grow our EBITDA. And as you do your monthly reviews of where your opportunities are and what you're facing in a given quarter, we knew that we had higher cost of goods sold coming into the fourth quarter, we looked at what marketing programs weren't performing. And in the end, we just had to make some decisions about where we thought the best decisions would be made in order to hit our full year numbers and continue to drive the right level of new owner growth, maintain the margins and ultimately deliver the EBITDA. So I think that gets back to just what Mike had mentioned in his prepared remarks is this is a dynamic business that has a lot of moving parts. And although we will provide the full year guidance and try to be as very preemptive with everyone on the phone as to what we expect in the quarter ahead, within the quarter, we're very dynamic because we're always striving for that full year result and to hit the KPIs that we're going to be communicating to you in The Street. And in the fourth quarter, we just saw that -- we felt that we wanted to be more proactive in changing our marketing mix to ensure we hit our margins and ultimately our full year EBITDA.

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Operator [41]

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(Operator Instructions) And we'll go next to Patrick Scholes with SunTrust.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [42]

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I just want to talk about the exchange in rentals business. Looks like you had a pretty large miss on that one. Can you be a little more granular on what exactly other product revenue inventory supply challenges and negative impacts of member mix were?

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

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Yes. Patrick, this is Mike Hug. The other products that we referred to are a number of things. We'll sell a travel insurance if you book an exchange. If you have utilized a portion of your RCI points and want to carry them forward into the next year and you want to combine them with other points that you have, there's a product that we have where consumers are able to do that. And obviously, we charge them a fee for that. So those are probably the 2 biggest things. There are also various tiers of ownership. And so if you want to get into additional levels of benefits with the company, you can buy additional tiers of ownership and things like that. So those are the primary -- the most significant other revenue sources. When we think about what happened during the quarter, we were impacted by the fact that there was a price increase that had been announced that was going to take effect late in the year. And that resulted in some of our members taking advantage of the lower price earlier in the year and basically pulling the transactions into the first half of the year. So that was really the big driver of the miss in the quarter as it relates to the all other products that we referred to.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [44]

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Okay. So it sounds like there was some pull forward there in revenue. How is that -- how did you do in January and February? How is that looking?

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Michael A. Hug, Wyndham Destinations, Inc. - Executive VP & CFO [45]

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Well, obviously, we aren't able to discuss results as it relates to 2019. We've given our guidance. And that's, at this point, the most we can commit to.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [46]

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And Patrick, just to add to it because as it relates to revenue per member, there are -- we saw -- we've obviously had headwinds throughout 2018, and our team at RCI has been quite aggressive in developing new initiatives to support revenue per member and to ultimately get it back to where we want it to be. They've got 3 key initiatives in place that will begin to take effect this year. We've seen early signs of success of that, but we really expect those initiatives to take hold in Q2 and Q3. It's really about increasing supply opportunity for transactions to occur. We've made some investment in the systems to increase the speed of when the demand is made, meaning the request is made in order to fulfill that request and put people on vacation. So the team's been very proactive, started their efforts in the latter half of last year. And we think we're going to see some benefits from that as we move through 2019.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [47]

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Okay. Then one last question here. On the recent ARDA initiatives on helping people understand their timeshare and perhaps giving it back, have you seen any impact on that, what ARDA's doing on changes to your business from loan-loss provision?

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [48]

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The ARDA effort, first of all, we think it's a great effort. It's not about our loan-loss provision and it's not about anything else other than education and supporting a very transparent and clear way for owners to get the information that is accurate and correct and that will protect the owner. That website, in my opinion, which I'm very supportive of and the initiatives ARDA are going through, are about transparency and about consumer advocacy. We're very supportive of that. And although it will ultimately lead owners back to the right place to exit -- and it doesn't have to be to their developer, it just needs to be to someone who will represent correctly the opportunity to exit. But I think more importantly, it also represents to the general business community and also to regulatory authorities and legislators that this industry is about putting people on vacation, consumer advocacy and ultimately taking care of what should be the right way to exit when the time is right, not induced or not being led into exit so that companies can collect an upfront fee.

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Operator [49]

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And it does appear we have no further questions. I'll return the floor to Michael Brown for closing remarks.

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Michael D. Brown, Wyndham Destinations, Inc. - CEO, President & Director [50]

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Thank you. Thank you, Keith. Let me just close by saying how pleased we are with our 2018 results and how excited we are about the momentum we have heading into 2019. We delivered great operational results, found ways to drive incremental free cash flow to return to shareholders and remain focused on the execution of our strategic plans. As a result, we are 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 vacations while delivering strong shareholder value. Thank you for joining us today.

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Operator [51]

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And this will conclude today's Fourth Quarter and Full Year 2018 Wyndham Destinations Earnings Conference Call. You may now disconnect your lines, and have a wonderful day.