Travel + Leisure Co

NYSE:TNL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to Wyndham Destinations 2019 Earnings Conference call short [Operator Instructions] As a reminder, ladies and gentlemen, this conference 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.

[Christopher Agnew, executive]

Thanks, 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 second quarter results. And Mike Hug, our Chief Financial Officer, will then provide greater detail on our 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.

[Michael Brown, executive]

Thank you, Chris, good morning, everyone and thank you for joining us today. As we celebrate our 1-year anniversary, this call marks our fourth at Wyndham Destinations. We are proud of the progress made since the spin was announced in 2017 and the accomplishments achieved in our first year as a public company.

The progress confirms that we are executing our strategy to put owners and members on great vacations, to deliver mid-single-digit organic growth, to generate a strong and consistent free cash flow and to return significant capital to shareholders. On this last point, we have now returned $585 million in capital to shareholders since the spin in June of 2018.

Earlier this morning, Wyndham Destinations reported another strong quarter with adjusted EBITDA of $255 million, and adjusted EPS of $1.45. EPS was above our guidance range and 16% higher than the prior year. We were pleased with our operating performance, in particular, the strength in owner rivals, the growth of Blue Thread sales, and the year-over-year and sequential improvement in our loan loss provision rate. We are increasing our full-year outlook for adjusted free cash flow to a range of $555 million to $575 million, and we are also increasing our adjusted EPS guidance range to $5.38 to $5.58.

Our new EPS range represents 13% year-over-year growth at the midpoint, and we are reaffirming our outlook for full-year adjusted EBITDA guidance of $995 million to $1.15 billion. As we announced this morning, we concluded our strategic review of Wyndham Vacation Rentals. The sale of this business to Vacasa for $162 million is expected to close in the fall. We believe Vacasa is the ideal buyer of the business, and as a result, we will receive a small equity interest in their company as part of the transaction.

The sale will be comprised of $45 million cash at closing, up to $30 million of Vacasa equity and the remaining balance at either seller financing or cash at closing. As we previously discussed, the rationale for the strategic review was to allow a dedicated focus on growth in our core business of vacation ownership and exchange. Our strong financial performance this quarter was a result of solid and gross VOI sales growth up 4% in total and 5% in North America. We also benefited from increased owner engagement, which delivered significantly higher owner arrivals and increased owner sales. Furthering their performance in the second quarter was a slightly better than expected loan loss provision and consistent RCI performance.

Let me now turn to discuss the provision. I continue to believe we are making all the right decisions to reduce loan loss provisions for the long-term. This quarter affirms that fact and although this is not best measured quarter-to-quarter, our full-year guidance demonstrates the progress we are making.

You have heard me discuss at length, the importance of owner engagement. Our numerous efforts have led to second quarter net occupancy being 400 basis points higher than the prior year, and also resulted in an increase of 17,000 owner arrivals in our North American resorts. This is on the back of 13,000 more arrivals in the first quarter. We also saw excellent performance in our Blue Thread initiatives this quarter. Sales volume increased 50% year-over-year driven by a 37% increase into tour flow. Year to date, Blue Thread sales are 33% higher than prior year. Speaking more broadly about total tour flow, tours increased 3% in the quarter over the prior year and 4% in North America. Tour flow has been slightly lighter in the first half due to a delay in our new Nashville sales site, an intentional change to our international tour mix, which we began in the fourth quarter of 2018 and underperformance from one of our marketing partners. These are finite impacts as we have since opened Nashville, we will lap international mix issues in the fourth quarter, and we are working closely with our marketing partner to realign tour flow expectations.

We are confident that growth will accelerate in the second half, and we are now likely towards the lower half of the 5% to 7% growth that we guided for the full year. One of the outcomes from stronger owner arrivals and sales is a natural reduction in our new owner sales mix as a percent of total sales. We expect a new owner sales to be up year-over-year, and over a 2-year period, that being 2018 and 2019, we expect new owner sales mix to increase 300 basis points. We continue to see strong sales to Gen Xers and Millennials, which combined for 62% of our second quarter new owner sales. This represented an increase of 500 basis points from the prior year.

One of the strategies we have in place to continue to attract new owners is to establish more distinctly each of our vacation clubs brand identities. Powerful brands deliver great development opportunities, but they also drive increased owner engagement. At the end of May, we launched new brand identities with an exciting modern look and feel that brings the essence of being an owner to life for our flagship timeshare clubs. Club Wyndham and WorldMark by Wyndham. We have refreshed the brands through a lens that appeals to our owners at every touchpoint across their life cycle from both a creative and digital perspective. The tagline for Club Wyndham is live your bucket list and speaks to how the brand is now -- it's not just about owning a timeshare, it connects owner's passion for travel with exciting new destinations. For WorldMark owners, vacations serve as the backdrop for ongoing traditions and the catalyst to create new ones, which leads to the brand's tagline of more time to share. In fact, I recently attended the grand opening of our WorldMark by Wyndham in Portland, Oregon and had the opportunity to speak directly with our owners. The feedback was overwhelmingly positive. We are the first timeshare company in this urban market, and it was great for us to see the new branding come to life at this location. These brand changes, along with the CRM initiatives we discussed on the first quarter call, will continue to enhance our owner engagement efforts.

In exchange in rentals, the announcement of the sale of Wyndham Vacation Rentals was a key initiative, and I would like to thank everyone on our team who worked on this strategic review of the business.

We are also making tremendous strides on the exchange side of our business. RCI is investing as part of its existing capital plan and supply and technology enhancements that focuses on improving the member experience. Several initiatives have taken hold with more to come in the second half of the year. In addition, RCI continues to look for new options for its members, and in the second quarter added 21 new affiliates or 42 new properties to its destination portfolio.

Lastly, with regard to capital allocation, we continued to demonstrate our commitment to returning cash to shareholders with $240 million in dividends and share repurchases year-to-date through the end of July. Our capital allocation outlook remains the same. We are committed to our quarterly dividend, which expresses confidence in our ability to consistently generate free cash flow, and in the absence of compelling transactions, we believe the best use of excess free cash flow remains share repurchases.

To conclude, I'd like to reinforce 3 major takeaways from our second quarter: first, the quarter delivered very tangible results around increased owner engagement; second, the announcement to sell Wyndham Vacation Rentals highlights our focus on optimizing our balance sheet and driving incremental free cash flow; lastly, regarding our outlook for the full year, we are reaffirming our adjusted EBITDA guidance and increasing adjusted EPS and adjusted free cash flow guidance.

With that, I would like to hand the call over to Mike Hug. Mike?

[Michael Hug, executive]

Thank you, Michael, and good morning everyone. Today, I'd like to discuss our second quarter results and our 2019 outlook. My comments will be primarily focused on our adjusted results. You can find our complete results in our earnings release, including reconciliations of adjusted and further adjusted announcer to GAAP numbers. Our second quarter adjusted diluted EPS was $1.45, an increase of 16% over the prior year. Adjusted EBITDA was a $255 million, an increase of 2% over the prior year, and adjusted EBITDA margin was 24.5% in the quarter.

Year-to-date, our adjusted EBITDA increased 3% and adjusted EBITDA margin increased 20 basis points over the prior year. Adjusted EPS increased 19% in the first half over the prior year. Second quarter gross realized sales increased 4% year-over-year to $626 million with a 3% increase in tours and a 1% increase in the BPG. Adjusted EBITDA growth of 3% in our Vacation Ownership segment was driven by net revenue growth of 5%, partially offset by higher marketing cost.

On a rate basis, marketing costs slightly increased as the ramp-up in a tourists lagged increases and fixed cost associated with certain marketing channels. As Michael mentioned, we expect tour growth to accelerate in the second half of the year.

The provision for loan loss as a percentage of gross realized sales improved sequentially in year-over-year to 21.2% in the second quarter. Our gross receivables portfolio increased 5% year-over-year to $3.8 billion and our provision for loan loss increased $3 million over the prior year with the entire increase attributable to higher VOI sales. We remain confident in the actions we are taking to continue to reduce the provision, and we expect sequential improvement in the second half of the year, allowing us to achieve our guidance of around 20.5% for the full year.

Exchange & Rentals revenue decreased 3% in the quarter due to a decrease in revenue per member, partially offset by member growth. Adjusted EBITDA increased 3% over the prior year, due to lower G&A expense.

The decline in revenue per member continues to be driven largely by member mix, lower other product revenue and inventory supply challenges. Although revenue per member continues to be down, we saw a sequential improvement in the year-over-year trend in the first half of 2019 compared to the second half of last year. We expect continued improvement in this trend for the remainder of 2019, and going forward, as a result of some of the initiatives Michael mentioned. Our adjusted free cash flow from continuing operations for the first half of 2019 was $298 million versus $195 million in the first half of 2018.

We are confident in our outlook for free cash flow this year with 2 additional securitizations, one in the third quarter and one in the fourth quarter. Last week, we completed the third quarter securitization, a $450 million transaction with weighted average coupon of 2.96% and advanced rate of 98%. Based on investor demand, the transaction size was upsized by $50 million. We were very pleased with this execution, which is multiple times oversubscribed. This transaction confirms again our proven track record of being able to access the ABS markets.

Turning to our balance sheet, as of June 30, we had $257 million of cash and cash equivalents with corporate debt at $3.1 billion, which excludes $2.4 billion of nonrecourse debt related to our securitized receivables. With our net leverage at 2.9x, within our target leverage of 2.25x to 3x, our capital allocation remain consistent in the second quarter. The increase in leverage was expected with the second quarter being our lowest free cash flow quarter, and with the payments related to the sale of the European vacation rental business that we identified on our first quarter call. By the end of the year, we anticipate the net leverage will be around 2.8x.

We declared a cash dividend of $0.45 per share on May 16, which was paid to shareholders on June 28. And as Michael mentioned, we continue to do share repurchases in the second quarter. We bought back $65 million of stocks at a weighted average price of $42.74 per share for total of 1.5 million shares. In the month of July, we continue to do share repurchases of $30 million.

Now let me turn to our outlook for the remainder of the year. We are reaffirming adjusted EBITDA guidance to be in the range of $995 million to $1.15 billion. We are increasing our outlook for adjusted diluted EPS from continuing operations to a range of $5.38 to $5.58 from $5.21 to $5.42, primarily on lower interest expense and share count. As a reminder, our outlook for diluted EPS is based on a diluted share count of 93.4 million shares, which assumes no further share repurchases after June 30, 2019.

For the third quarter of 2019, we expect adjusted diluted EPS from continuing operations to range from $1.46 to $1.54. A couple of items to call out on the third quarter. First, our third quarter cost of sales will be 250 basis points higher year-over-year driven by the higher cost inventory that we are selling in the third quarter. The higher cost inventory was expected and will negatively impact third quarter adjusted EBITDA by approximately $17 million and adjusted EPS by approximately $0.13. For the full year, the more expensive third quarter inventory will be offset by lower product cost in the fourth quarter.

Second, we expect the loan loss provision will be down sequentially, again in the third quarter and similar to the prior year. For adjusted free cash flow, we are increasing our guidance to $555 million to $575 million, $15 million higher than the prior guidance range.

With respect to our key drivers. For the full year, we expect VPG to increase in the range of 1% to 3%, and we now expect tours to be at the lower end of our 5% to 7% range. For the Exchange & Rentals business, we continue to believe average number of members will be flat to up 2% and revenue per member will be flat to down 2%.

To conclude, we are very pleased with our performance during the second quarter, our improved outlook for full year EPS growth of 13% at the midpoint and our continued strong free cash flow.

Michael and I are extremely proud of our associates and leaders who continue to do a stellar job executing on our fundamental operating strategy.

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

[Operator]

[Operator Instructions] We'll take our first question from David Katz with Jefferies.

[David Katz, analyst]

I wanted to ask the -- one of the questions that hangs on us, is we see the securitization terms and obviously, what that investor base thinks of the business and how it thinks about the business relative to where we see the equity, which is -- I think most would agree is trading at a low-ish multiple. From your purview and the feedback that you're getting, how do we reconcile that difference, right? Because one continues to improve the values it sees in the business and the other has been on a stable or flattish?

[Michael Brown, executive]

David, it's a great question, one we seem to hear more and more recently as we get a little further away from the separation. We have just completed our first year. And as we came out, the reality is, we're new management team without a track record in the public market as Wyndham Destinations. As we came public, I think there were -- there was an issue that continued to raise questions, specifically the loan loss provision. And I think as time has progressed on, people have seen very clearly what our core strategy is. That it's a consistent strategy of delivering new owner growth, Blue Thread, consistent single mid-digit growth, and we're turning -- generating free cash flow, we're returning cash to shareholders. And I think every quarter that goes by, that consistent unchanging approach is getting recognized and being appreciated. So I do think the delta between where the debt markets and where the equity markets see us, we believe we'll continue to close as we continue to deliver our core strategy, which again -- and I think, the second quarter really proves it, returning capital to shareholders.

[David Katz, analyst]

Okay. And then as my follow-up. With respect to the Vacasa, I hope I am pronouncing that correctly. And that's the essence of my question is I'm not familiar with them. What can you tell us about sort of who they are and where they came from? And obviously, we hear your enthusiasm about it. How big a population was there of parties interested in this business, and how competitive was it? I guess and that's a whole bunch of follow-ups in there, but we'd love to hear about that deal.

[Michael Brown, executive]

What -- there is a lot there. Let me start, it was a very robust process with a lot of interest both from strategics and private equity. But in the end, North American rentals came with Wyndham Destinations because: number one, we believed in the business; and number two, we saw some strategic opportunities that the vacation ownership and exchange business could leverage by having North America rentals inside of Wyndham Destinations. As we went through the strategic review, we felt that we could retain a lot of that strategic relationship as Vacasa takes over ownership and one of the major reasons we wanted to continue to have an equity stake. Vacasa is a great company. It's been in business for a decade now, and has been a strategic in this space with expertise in really technology-driven revenue generation. They do a phenomenal job on the demand side of the equation. They've got a great scale, and this only adds to the strength of what I consider as I've got to know their management team, their business model and their direction for the future. As we are the industry leader in the vacation ownership and exchange, we believe Vacasa is the right buyer because we believe that they are the right leader for the vacation rental space and have done a great job over the last decade building their model, growing it and putting themselves in the position to make this type of transaction.

[Operator]

And we'll take our next question from Chris Woronka with Deutsche Bank.

[Chris Woronka, analyst]

Question for -- and I know you mentioned that the -- one of the factors that's going to impact the new owner mix this year is the international side of things and how you're going to kind of remix that business. Can you maybe tell us a little bit about profitability of the international guests versus your domestic guests?

[Michael Brown, executive]

Sure. I'll take that, this is Michael. In the fourth quarter of last year, no different than we do in North America, we looked at our marketing channels and found that a number of our new owner marketing challenges were not creating profitability and made the decision at that point, and I remember we had questions on the fourth quarter call around tour flow in the fourth quarter. We made the decision that we were better off limiting our marketing channels and focusing on more profitable marketing operations in the international arena. That's why I said, we will lap that decision in October of last year in this fourth quarter. As far as VOI margins between international and domestic, they're pretty much the same, Chris. And if I can scale the operation, we do about 10% of our sales internationally and 90% of North American, and that 10% really is in the South Pacific between Australia and our New Zealand operations and more recently we ventured up into Thailand. So about 10% of our mix is in international and it's primarily in those countries.

[Chris Woronka, analyst]

Okay. Very helpful. And my follow-up would be on the -- now that you're exiting the Vacation Rentals business, can you maybe tell us a little bit about how that maybe reenergizes the growth profile of the exchange business? And maybe kind of going along with that, how you look at -- I know we don't have maybe the exact EBITDA and growth rates from the 2 combined businesses, but how you think maybe that can improve the growth profile at the -- on the exchange side?

[Michael Brown, executive]

Absolutely. And I do want to come back to the answer I gave to David just a second ago is, although we're exiting the business, we are retaining an equity stake in Vacasa and it comes back to what we believe in that business, number one. But number two is, I think there is a lot of strategic relationship opportunities that we can have with Vacasa, both in our vacation clubs and exchange business that warrants both of us staying there engaged together to help grow each other's business mutually. So that's -- I just wanted to clarify that. Secondly is, what does it do for our remaining business? It really allows us to stay focused on the vacation ownership and exchange business. The Rental business was not core, and brought with it lower margins. So for us, it's an ability to secure the promise that we made about retaining if not growing margins in the long haul. This transaction allows us to; a, keep a strategic relationship; b, generate cash flow; c, focus on our core business; and then lastly, make sure that our reinvestment back into the business will help reenergize the exchange business. I'm very pleased with the progress that we're seeing on the RCI side, and feel that the projections we've laid out for the remainder of this year really should play out and feel they're headed in the right direction with their new initiatives.

[Operator]

Our next question is from Patrick Scholes with SunTrust bank.

[Charles Scholes, analyst]

Question for you. The other day I heard a -- I think it was ESPN radio, actually an advertisement from you folks. Yes, I don't ever recall hearing a timeshare company advertising there on the radio obviously, we only hear the third-party companies. I'm wondering what sort of feedback have you gotten from that. What's the intention on that, is it drive sales or is it to counter some of these third-party advertisements? And then is that something that would be, I assume, included in that higher marketing cost that you've talked about?

[Michael Brown, executive]

Patrick, the short answer on your last question is, no, it's not part of the incremental spend. The -- we have made a commitment as we've talked about is having a stronger more positive narrative around the -- not only the industry but our place in the industry. The reality of ownership is that the satisfaction rates, as we've talked about many times, is very high. The churn in our owner base is extremely low. You have heard me mention before 700,000 of our 880,000 owners are fully paid off with their ownership and enjoying great vacations for the price of a maintenance fee. And we've been less than proactive in sharing the good news and making people proud of their ownership. Richard Petty has been an owner with us for a long time, has a very strong appeal with a lot of people. And this was not a sales presentation or really marketing, it was simply general awareness, positivity and talking about the virtues and the benefits of vacation ownership. He's been a strong endorser of our product along with many other individuals. But I think it's long overdue that we're more vocal in expressing the positive nature of timeshare in the general marketplace so that you can hear not only a certain type of advertisement but some real positive messaging.

[Operator]

Our next question is from Joseph Greff with JPMorgan.

[Joseph Greff, analyst]

On the increased adjusted free cash flow guidance for full year 2019, it looks like some of it's from lower interest expense, can you allocate how much is coming from other sources?

[Michael Hug, executive]

Yes. I think when we look at our adjusted free cash flow, obviously, we're very happy with the benefit we have received as it relates to both the securitization, the improvement in interest expense and some opportunities that we've taken advantage on the working capital side of the business. So I think it was a combination of those 3 things that really gave us the confidence in raising the guidance of the cash flow midpoint by $15 million.

[Joseph Greff, analyst]

Got it and just to clarify some out-of-pockets here. Your EBITDA guidance was reaffirmed for the year. How much of that EBITDA relates to what you're selling here this morning? I believe last year, maybe last quarter, you said something in the neighborhood of $10 million of EBITDA, what is it in terms of revenues as well?

[Michael Hug, executive]

Yes. I think what we plan to do is obviously, the full year financial impact resulting from the sale will be driven in part by when the transaction closes and the proceed receives. So we would expect after the closing of the transaction to come out with more details as it relates to the financial impact under your -- from the sale that your -- of the North American Rental business.

[Joseph Greff, analyst]

Okay, great. And then my final question. The -- of the $162 million sale price, $45 million is going to be cash at closing, the $30 million of equity or up to $30 million of equity and then the balance of it either cash or you're providing financing. What's the determinate for the balance of that $87 million either you're financing or cost of finding other sources to close the transaction for the remaining balance?

[Michael Brown, executive]

This is Michael. Let me just take that one. Vacasa is going to be going to the market for a fund raise very soon, and has done and been successful with a number of previous raises. For those following the space, there has already been a significant amount of capital raise in this sector over the last several months. And with Vacasa being the market leader, we feel good about their opportunity to get into the market with a successful fund raise. The structure that's laid out is simply -- was simply put in place to provide some flexibility for closing depending on market conditions.

[Joseph Greff, analyst]

Okay, great. And then my one final question. Just going back to the adjusted EBITDA guidance being reaffirmed. Did you actually net-net raise it from -- with some impact rather from the sale of Vacation Rentals? Or it's -- everything is in there for the full year not since that's coming out for a close in the fall?

[Michael Hug, executive]

Yes. All of the guidance that we've provided today assumes the North American Rental business remains with us for the entire year. Obviously, the transaction will close sometime in the fall. And at that point, we will update the guidance as it relates to EBITDA and cash flow for the year.

[Operator]

Our next question is from Ian Zaffino from Oppenheimer.

[Ian Zaffino, analyst]

Can you guys just touch on what you're seeing on the ground from the consumer? Also tour volumes, I guess you said you're going to be kind of near the low end. What's driving that? Is that a cautious decision? Is there something that you're seeing from the consumer out there? Or just try and give us a little color there.

[Michael Brown, executive]

Ian, appreciate it. This is Mike Brown. Really there is no change that we're seeing on a consumer standpoint traffic into the major markets remain strong. We're obviously, very much closing second quarter reports on a macro basis and see very consistent evidence that the consumer remains strong specifically, and it's why we wanted to call out a little bit of detail what we saw in the second quarter. Those were very finite issues, as I mentioned Nashville, we had a slight delay in opening that specific sale site. Our first location in downtown Nashville, we remained with a little bit of a headwind over the international tour mix. But we do have -- we have a lot of marketing partners. It's one of the natures of our very diversified marketing platform. And had a reliance on one of them to ramp their tour flow in the first half of this year. They're simply behind on their ramp, a little bit more than what showed in our softness. But the strength of our Blue Thread, the strength of our owner arrivals really help to mitigate that. And obviously, we're working with the partner to help them ramp their tour flow. So all that's been taken into account for the second half of this year, but nothing macro that's causing what you saw. And again, it's only 1 percentage point in the second quarter as our North American tour flow was 4% up year-over-year.

[Ian Zaffino, analyst]

Okay. And then also I know you guys talk about the channels where you're getting a lot of the leads and Caesars is always one you mentioned and I guess there's a change of ownership there. Can you maybe touch on what we should expect from that relationship?

[Michael Brown, executive]

And we have a long and very mutually beneficial relationship with Caesars, and the reason is because we create value for them and vice versa. We have had that conversations. I would not expect any change in that relationship, and we're hopeful that we can even grow it with the new ownership.

[Operator]

Our next question is from Stephen Grambling with Goldman Sachs.

[Stephen Grambling, analyst]

So on vacation, how do you think about the use of proceeds in the rental sales similar or different than the cash generated from core business? I think you mentioned in your opening remarks that there are some opportunities for acquisitions. Is that driven by where your stock is, assets on the market or seller expectations?

[Michael Hug, executive]

This is Michael. I'll take the first part as it relates to the use of the cash that we receive and then I'll -- Mike will take about the M&A activity . When we think about the cash that we received, I think we've demonstrated that absent any M&A opportunities out there the best use of our cash is return to shareholders through increasing the dividend as we did already this year or share repurchases. So once again, absent in the M&A opportunities, I would've expect that excess cash received from the sale of the North American Rental business will be used in ways that are consistent with what we've done since June of last year.

[Michael Brown, executive]

And I'll just touch on the M&A side. No different from our previous stances. We are always going to be looking for the right M&A opportunity if it's there and is a better use than share repurchases. What I would say is, yes, we are very conscious in watching the economic cycle. Opportunities seems to be better when there is a downturn, and we believe very much in the consistency of our free cash flow generation and the resiliency during a downturn. We think opportunities will continue to get better and better depending on where the ultimate economic cycle goes. But we will continue to evaluate if there is any either tuck-in or midsized M&A that would support the growth of vacation clubs or the exchange side of the business.

[Stephen Grambling, analyst]

And I guess a follow-up, changing gears to the loan loss provision. I guess what are the big factors that will dictate how quickly that provision comes down and how should we interpret the write-off ticking up a bit on an absolute basis and as a percentage of financing receivables?

[Michael Hug, executive]

So a couple of things there. As it relates to write-offs, 2 things. One, our portfolio has grown so you'd expect that the write-offs would grow. In addition, we had expected higher write-offs, which is why we've been providing at a high rate over the last year or 2 because of the trends we're seeing. So the higher write-offs are not a surprise to us. And I would also point out that the increase in the write-offs in the second quarter of the year were actually lower than the decrease in the write-offs year-over-year in the first year. So we feel that the changes that we are making are benefiting the portfolio, and the drivers of those benefits are really several things. First of all as we've talked about in the previous call, higher down payments and being -- taking a good look at the underwriting standards that we have in place and tightening those up. So we institute those changes in the second quarter, which means we didn't get any benefit in the first quarter of the year and only a partial benefit in the second quarter. So through the second half of the year as those changes continue to take hold, those will really be the key drivers to the sequential improvement in our provision in the second half of the year.

[Stephen Grambling, analyst]

Got it. And so just to be clear, the provision then should lead the write-off trajectory?

[Michael Hug, executive]

Yes. I think right -- that's right. I mean once again, the trends, when we look at our loss curves, would indicate right that losses were going up, which is why we would have provided a higher rate and then as the provision comes down over time. Keep in mind the life of portfolio is on average 7 years, so we would expect that as the provision comes down in the future, we would see lower defaults, but once again that's 7-year portfolio, I wouldn't expect lower defaults in the second half of this year on a year-over-year basis.

[Operator]

Our next question is from Jared Shojaian with Wolfe Research.

[Jared Shojaian, analyst]

So just sticking with that same line of questioning here. Recently we've seen perhaps some more tangible evidence of your pushback against the third-party firms with some of the recent court rulings and bankruptcies. Is that enough to move the needle on write-offs? And do you think you've seen any tangible evidence of maybe some reduction from some of the third-party issues that you've been facing?

[Michael Brown, executive]

Jared, litigation is not our core strategy. When we talk about our overall effort regarding the portfolio and the loan loss provision, it always starts with our owner engagement. We talk about owner engagement, presence on digital and social media, and the Internet continuing to refine our underwriting, as you mentioned, litigation and then lastly, support of consumer advocacy legislation and regulation. To me the key is the owner engagement piece. We are seeing tangible evidence of greater utilization, not only in the form of the owner arrivals that we mentioned as part of the prepared remarks, but we're seeing a sharp increase in our reservations immediately after purchase, our contact contract rates are significantly up, and you've heard me discuss over the last few years the discussion around Wyndham Cares and our Ovation program. So yes, litigation is the right thing to do when we see either the consumer or our company being disinformation about us or misinformation about us or harm being done to the consumer, we will litigate but that is not our core strategy. It is really around the owner engagement piece, and we're seeing tangible evidence of improvements in the engagement metrics.

[Jared Shojaian, analyst]

Got it. thank you. And then just switching gears here. Mike, you said that tour is likely coming toward the lower end of the range for the full year. You kept the EBITDA guidance unchanged, were there other offsets that you would call out there? Or is it just not really enough to move the needle?

[Michael Hug, executive]

No. It's not really enough to move the needle. And obviously, we're focused on achieving our full year numbers. As we talked about, if we do have a slight miss as it relates to tours, we can definitely do the things that we need to do to make sure that we hit the EBITDA number for the year. So it's just making sure that we are looking at the organization on an overall basis and finding the right places to cover any shortfalls that we might have if we end up at the low end of the tour range.

[Jared Shojaian, analyst]

Thank you and just 2 quick housekeeping items, if I may. Is your expectation that you're still going to be about 40% range for the full year on new owner sales mix? And then on the provision, I think you said that third quarter provision rate will be similar year-over-year. Is the assumption that the fourth quarter is also going to be similar year-over-year? Do you think the fourth quarter steps down? I know you're reiterating the full year as kind of in line with last year, but if it's off by 1/10 basis points or so it can move the needle a little bit. So curious specifically how you're thinking about the fourth quarter on the provision?

[Michael Brown, executive]

This is Michael. I'll take the first question and then hand that over to Mike for the second question. On the new owner mix, no, I don't think we'll be at 40% for the year, I think we'll be somewhere in the upper 38%, right around 39%. Just by context, in 2016, that 5-year average was at 33%. We've made significant changes to move our new owner mix up and are very pleased with where we're going to end this year. The reality is, on a very positive front, our owner arrivals were up, and therefore, natural increased sales on the owner side dilutes the new owner mix as a percent of sales, and that -- and we also wanted to call out in second quarter being behind on those new owner tours has also diluted that. So we wanted to reset those expectations. Very comfortable with the change. And as we called out in the last 24 months, we're expecting about 300 basis points increase in new owner sales mix, which really is right on the trajectory to get us where we ultimately want to be in the mid-40s for new owner source sales mix, Mike?

[Michael Hug, executive]

And on the provision trend, you're right this third quarter this year will be comparable to the second -- the third quarter of last year, and we will see a more significant decline in the fourth quarter consistent with what we saw in 2018, confidence in those numbers is really what allows us to reaffirm the 20.5% for the full year.

[Jared Shojaian, analyst]

Got it. So the fourth quarter steps down obviously from the third quarter, but are you saying fourth quarter down more year-over-year than like what you're seeing in the third quarter?

[Michael Hug, executive]

Yes.

[Operator]

We'll next go to Brian Dobson with Nomura Instinet.

[Brian Dobson, analyst]

So you mentioned that Blue Thread tours were up roughly 33% in the quarter, how do you see that -- or rather, how do you project that trajectory through the balance of the year? And what percentage of tours do you think Blue Thread will generate next year?

[Michael Brown, executive]

So as you look at Blue Thread for the remainder of the year, we talked about tours and we talked about a really strong second quarter. The way the Blue Thread mix works is we do -- we have a combination of in-hotel marketing, we have call transfer. And then we have rentals through the Wyndham website that ultimately come to our resorts and convert to tours. The hotel portion in the rental is very straightforward to project, and we feel confident that what we've laid out for our full year projections, we have good line of sight on that. The encouraging number in Q2, which we had not included in our prepared remarks was that our call volume in the second quarter on Blue Thread was up 17%, and when call volumes are up that much, that's a precursor for future packages and therefore, future arrivals for tour. Those typically come 6 to 18 months after the call. So the fact that we saw such an increase in call volume in the second quarter around the Blue Thread really is encouraging for us as we move forward for the remainder this year. At this stage, although I do anticipate Blue Thread increasing as a percent of our new owner mix, we're going to wait till later this year to fine tune and actually put a precise range for that number.

[Brian Dobson, analyst]

All right, understandable. And then you referenced radio advertising a little bit earlier in the call, could you talk about other marketing channels you are using in terms of consumer outreach and improving consumer perception of the product?

[Michael Brown, executive]

Absolutely. And I would start on the Internet. The changes that we've implemented and the efforts we've put forward, we have a world-class digital team that's really laying out for us the perception of Wyndham Destinations, Wyndham Vacation Clubs and now with the launch of 2 new brands, a greater presence. It's all around the enjoyment and in the value of owning timeshare, and that's where the vast majority of our energy and money is going to all within our existing budgets today. The radio is simply one more avenue, I would not anticipate it being the majority of it, it's just one more avenue that we want people to hear positive messaging about their ownership. We see it in the actual results one by one and in our owner base. But you don't really hear that positive messaging until now, and we just wanted to be out there in one more medium to present that positive message. And Brian, one other thing which is not directly answering your question, but it does -- the other thing that I think is really important where we're putting money is what I mentioned in the second quarter -- or first quarter which is around our CRM system. We are putting a significant amount of investment in our CRM system where we're partnering Salesforce. We communicated in the first quarter that we would be fully rolled out by the end of this year to all of our -- the sales locations in North America, and we are on track a quarter later for that to be done. And that will be not only efficiency on the back of house, but really improve the customer experience from a marketing and sales standpoint.

[Operator]

Next we have a follow-up from Stephen Grambling with Goldman Sachs.

[Stephen Grambling, analyst]

So you mentioned acquisition opportunities to get better and better in the cycle through Axon or even deteriorates. One question we continue to get is just the resilience of the free cash flow stream across cycles. Can you just remind us what drove some of the big swings in free cash flow last cycle in the business and how the model has changed now that could and should smooth that out?

[Michael Hug, executive]

This is Mike Hug. Really the big drivers of the free cash flow swings prior to 2008 and 2009 were 2 things, one, the way we procured the inventory. As you guys know, we did self development of inventory which means in some years we were putting a lot of money into development, especially if you were doing about 200, 200 unit tower. We've obviously switched that model to a just-in-time model where we're working with partners, we take the inventory down as we need it to sales plan, which allows for very consistent spending on inventory of about $250 million per year. The other big driver was, we did quite a bit pre-2008 to sub-600 FICOs, they were very reliant on financing when it came to the purchase and the attractiveness of that to the ABS market, it wasn't always at the level that we would've liked it to be, which is why we eliminated the sub-600 FICOs beginning in January 2009 that resulted in higher down payments. So more cash at the sales table as well as consistent ABS transactions as we've demonstrated, really since 2010 and especially since our spend over the last 12 months where we've been able to go down to the BB Tranches and increase that advance rate to 98%. So consistent inventory spending due to the just-in-time model and then making sure we mentioned quality in terms of who we market to and the underwriting standards that we have in place.

[Operator]

And this will conclude our question-and-answer period. I'd like to turn the call back to Michael Brown for closing remarks.

[Michael Brown, executive]

Thank you. And let me close by reiterating how pleased we are with our team's execution in the second quarter. Our progress thus far would not be possible without the dedication and enthusiasm of our nearly 25,000 associates who are committed to our mission to provide our owners, members and guests with great vacations. I personally like to thank them for all their hard work during our first year as a public company. We are excited for the rest of the year and we -- as we continued to put the world on vacation. Thank you for joining us, and we look forward to updating you next time.

[Operator]

And this will conclude today's program. Thanks for your participation. You may now disconnect.