Travel + Leisure - Earnings Call - Q2 2020
July 30, 2020
Transcript
Speaker 0
Good morning and welcome to Wyndham Destinations Second Quarter twenty twenty Earnings Conference Call. After the speakers' remarks, there will be a question and answer period. As a reminder, 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.
Speaker 1
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 in the earnings press release available at our website at investor.wyndhamdestinations.com. Also available on our website, you'll find a supplemental presentation for this call. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our second quarter twenty twenty results in addition to an update of our current operations and company strategy. And Mike Hug, our Chief Financial Officer, will then provide greater detail on our results, our balance sheet and liquidity position. Following these remarks, we'll be available to respond to your questions.
With that, I'm pleased to turn the call over to Michael Brown.
Speaker 2
Good morning, and thank you for joining us on the call today. This morning, we confirmed our second quarter results following the preliminary second quarter release on July 20. We reported adjusted EBITDA of $16,000,000 and adjusted free cash flow of 166,000,000 The second quarter highlighted the strength and resiliency of our business model. And although the majority of our resorts were closed for much of the quarter, we delivered $343,000,000 of revenue and produced positive free cash flow and EBITDA. The second quarter saw two significant macro events.
The global call for greater social justice and racial equality in the wake of George Floyd's death, as well as the economic crisis created by the coronavirus pandemic. I am proud of how our organization has responded to both and want to reaffirm our unwavering commitment to address both events head on. Knowing that our culture of diversity and inclusion and economic performance will prove this out in the months and years to come. Our resorts and sales operations were for all intents and purposes closed in April and May. The reopening phase began at the May and progressed throughout June, and we ended the second quarter with 85% of our U.
S. Resorts and 56% of our sales locations reopened. Similar reopening timelines were seen by RCI and its developer affiliates. In the second quarter, key metrics in both business segments, vacation clubs and vacation exchange performed well during the reopening phase. With that said, we saw consumer sentiment declined at the June, which continued into July.
The spike in new COVID cases has resulted in consumer sentiment retracing back near April lows. This became evident as short term vacation cancellations increased in June and July. To give you a sense of the magnitude, at the peak of the closure period, our reservation cancellations were nearly double the level in 2019. As we reopened in June, those cancellations began to moderate. But as COVID cases accelerated from around twenty thousand cases per day to more than sixty thousand in July, cancellations returned to April levels at Wyndham Vacation Clubs and a similar trend emerged at RCI.
We do not believe the underlying demand for leisure travel declined. However, the short term willingness to travel diminished and resulted in the pullback we saw in late June and July. To highlight the headwinds we saw, it's best to look at several key markets. First, our expectations of reopening in Hawaii, California and New York have all been delayed due to COVID. Second, the surge in cases occurred in five key states, Florida, Texas, Arizona, South Carolina, and Tennessee.
These states represent just under 40% of our annual VOI sales, and the surge has negatively impacted arrivals. Third, while we are raising credit standards, we are seeing a higher number of new owner prospects in some of our larger markets who fall below qualification criteria. However, there is a silver lining. The elements of our business that we control performed well during the reopening phase. Let me share a few proof points.
VPGs in July are more than 30% higher than prior year, and close rates across all channels are up nearly 300 basis points as we benefit from putting our best salespeople in front of our better quality leads. Blue Thread sales have represented 17% of new owner sales. FICO scores are up just under 10 points and our mix of 700 plus FICO scores is up more than 700 basis points. 93% of owner arrivals were by car, up from around 70% previously. Loan deferments peaked in early April and have decreased every week except one through the July.
RCI North America booking volume was clearly rebounding throughout the second quarter and achieved 5% year over year growth for the month of June before the COVID resurgence in the Sunbelt States at the July. Although this pandemic has created unprecedented uncertainty, the green shoots we are seeing in our underlying business are indicative of the stronger business we can expect in the future. Current headwinds are directly tied to COVID, and it is a matter of time before consumer sentiment returns to historic levels, resulting in an increase in quantity of owner arrivals and improvement of credit quality for non owner prospects. I would now like to talk about how we have used the last few months as an opportunity to accelerate some of our investments and strategic initiatives. Reignition of our exchange business has been a key strategic focus, and we are making great progress.
Earlier this week, we announced the launch of the new parent brand for our exchange and travel business. The new segment called Panorama will include our timeshare exchange companies, including RCI, the world's largest vacation exchange network, Seven Across, formerly known as DAE, and the registry collection. Panorama will also feature our travel and leisure businesses, Love Home Swap, Trip Beat and Extra Holidays, as well as leading property management and travel technology platforms at Work International and Alliance Reservations Network or ARN. Panorama, with its breadth of membership assets, expertise in commercial relationships, coupled with its strong leadership, has a great opportunity to broaden its scope within the travel and tourism market. Olivier Shaveh, who joined us in 2019 and brings global travel industry experience, was named President of Panorama.
The Panorama expansion plans will pursue three paths. First, we plan to offer nearly 4,000,000 members more ways to utilize their memberships, allowing them to use their exchange currency for rich experiences and meaningful travel all year long, not just for a week or two week period every year. Our goal is to serve as a true end to end travel provider across the full spectrum of travel and vacations. Second, our Club three sixty five membership product sold by RCI affiliates as a trial product will be greatly enhanced on the ARN platform. And third, the ARN platform will allow for travel membership expansion opportunities outside the traditional timeshare ownership.
Our existing direct to consumer business lines will be converted to the new platform with significant brand, marketing and business development focus for expansion. The first significant expansion beyond the timeshare space will be the launch of Panorama Travel Solutions, a new travel services business powered by ARN to provide customized global discount travel membership clubs and travel technology solutions to affinity partners, including large employers, banks, retailers, trade associations, and others in The US and abroad. We have also been accelerating innovation within our Wyndham Vacation Club segment. These innovations not only make for a better vacation experience, but also provide our guests with more ways to social distance in today's COVID environment. We have reimagined our check-in process, innovated the on-site experience with RFID wristbands to increase engagement with our guests, and went live with our new Club Wyndham website in May to ensure our owners can plan and book their next adventure.
Looking ahead, let me share some thoughts on the 2020. We expect tours to be down 60% from the prior year, with 80% of this reduction coming from lower margin new owner tours. We expect VPGs to be 30% higher than the prior year. We expect Wyndham Vacation Clubs, owner arrivals and Panorama bookings to improve through the fourth quarter, but not to 2019 levels. We anticipate access in the ABS market when terms are most favorable, and we expect our provision to be below 20% benefiting from the improvements in credit quality we have made this year.
And finally, more than 50% of our normalized adjusted EBITDA will continue to come from predictable hospitality, net interest income and membership revenue streams. Against the backdrop of an unprecedented economic environment, our second quarter performance highlighted the strength and resiliency of our business model and its strong free cash flow generation. While the range of outcomes remains broad, our priorities remain unchanged. Our underlying business is performing, and we have a much clearer line of sight to the 2020 than we did when we last spoke to each of you in May. With that, I would like to hand the call over to Mike Hug.
Mike?
Speaker 3
Thanks, Michael, and welcome to everyone joining our call. Before I discuss our financial performance, I would like to thank our teams for their tremendous efforts in helping the company manage through this challenging time while remaining focused on emerging stronger on the other side. I've been very impressed and energized by how our colleagues have come together to understand and swiftly address current challenges and adapt to our new ways of working with a focus on customer obsession, one of our strategic pillars. Today, I want to discuss our second quarter results and also provide you with more color on our balance sheet, liquidity position and cash flow outlook. My comments will be primarily focused on our adjusted results.
As previously mentioned, we reported second quarter adjusted EBITDA of 16,000,000 with $15,000,000 of timing favorability on items we'd expected to be realized in the second half of this year. For the second quarter, we reported a loss per share of $1.11 compared to earnings per share of $1.45 in the prior year. Wyndham Vacation Clubs reported revenue of $239,000,000 with gross VOI revenue of $18,000,000 and an adjusted EBITDA loss of $17,000,000 Tours and VPG were heavily impacted by the closure of our resorts for the majority of the quarter. VPGs in June, however, were 8% higher year over year and as Michael mentioned, VPGs have been even stronger in July. The higher VPGs reflect both the increased mix of owner sales and higher quality leads sitting in front of our best salespeople.
Our underlying portfolio continues to perform well with delinquencies performing a little better than normal for this time of year, driven in part by deferral programs. Request for deferrals were the highest in the April and have trended down nicely since that time. At the peak, 6% of our loans were in deferral, but that number is down to 3% of loans outstanding as of the July as some owners are now exiting their deferral period. We have remained in close contact with these owners and are seeing the majority of them return to making payments. We remain comfortable with our overall allowance on our receivable portfolio considering the continuing uncertainty around the duration of the pandemic and its economic impact.
Our newly branded Panorama segment reported second quarter revenue of $100,000,000 In the prior year, Panorama reported a comparable $164,000,000 For comparability, we excluded the North America Vacation Rentals business, which we sold in October and the acquisition of ARN, which occurred last August. Panorama adjusted EBITDA was $40,000,000 in the second quarter compared to $68,000,000 in the prior year. With the expansion in the breadth of Panorama's business, exchange revenue per member will become less relevant as a revenue driver as our growth will increasingly be driven by non exchange member transactions. As a result, we are tracking two new metrics, Panorama transactions and average revenue per transaction. In the second quarter, all of our revenue drivers were negatively impacted by COVID.
In the future, we expect to see robust transaction growth for the segment, partially offset by a decline in average revenue per transaction given an increased mix from ARN. In total though, this will net to positive revenue growth. Year to date, ARN has added more than 130,000 transactions, nearly 30% of Panorama's volume. We plan to report on these metrics more broadly once we lap the ARN acquisition later this year. During the quarter, we had $106,000,000 of total COVID charges with $87,000,000 added back to EBITDA.
Dollars 46,000,000 of those charges were related to our decision to exit our leased space in New Jersey, with the remainder related to employee compensation and severance and impairment of other assets. Turning to our balance sheet, as of June 30, had over $1,000,000,000 of cash and cash equivalents with corporate debt at $3,900,000,000 which excludes $2,500,000,000 of non recourse debt related to our securitized receivables. Our net leverage for covenant purposes at the end of the quarter was 3.4 times. It should be noted that as is often the case in the defined covenants, items such as one time charges, expenses, as well as run rate cost savings associated with the reorganization can be added back to consolidated EBITDA in calculating the ratio. Two weeks ago, we amended the financial covenants for our revolving credit facility through 03/31/2022.
The covenant relief provides flexibility by raising the first lien coverage ratio while allowing us to maintain our ability to pay our dividend subject to a $250,000,000 liquidity covenant, which increases by $0.50 for every $1 of dividends paid. We also retained some flexibility to act on acquisition opportunities up to $250,000,000 We proactively amended our revolver due to the continuing and potentially extended uncertainty in The United States around the timing and magnitude of the economic recovery. We have the right to elect out of the credit agreement at our discretion at which time any restrictions resulting from the amendment would be lifted. We paid our second quarter dividend of $0.50 per share on June 30 and the company expects to recommend a third quarter dividend of $0.30 per share for approval by the company's Board of Directors in August. We are paying a dividend because we believe in the underlying strength of our business, cash flow and liquidity.
We believe the dividend at this level is attractive to both current and potential shareholders and is sustainable. In July, we issued $650,000,000 of senior secured notes with an interest rate of 6.625%. We were pleased with the transaction, which strengthened our balance sheet. We used $350,000,000 to pay down our corporate revolver and intend to use $250,000,000 for the repayment of our secured notes due in March 2021. Back in March, we withdrew our normal comprehensive earnings guidance.
We did however provide an outlook for adjusted free cash flow for the full year of 100,000,000 to $150,000,000 on our first quarter call. With a continued wide range of outcomes at the end of the year, we expect to be adjusted free cash flow positive. Our previous guidance was based on pre opening projections with our revised guidance based on current trends, including the continued uncertainty around COVID and related impacts to leisure travel. Our new guidance assumes a 60% reduction in tour volumes in the second half over the prior year and reflects increased volatility of vacation cancellations. Let me conclude by saying that we continue to be confident that we can manage the business to deliver on our objectives through the end of the year.
With that, Keith, can you please open up the call to take questions?
Speaker 0
Limit yourself to one question or one follow-up and re queue with any others. Thank you. We'll take our first question from Chris Woronka with Deutsche Bank. Please go ahead.
Speaker 4
Hey. Good morning, guys.
Speaker 5
Good morning, Chris.
Speaker 4
Thanks for all the morning. Thanks for all the the helpful data points and other information. I wanted to ask you on the what you're you know, what you're kind of seeing on the with the increased cancellations. I mean, you tell when those folks made reservations? I mean, this something where they kind of saw what was happening in March and April, they planned to go in July and then obviously, caseloads went up?
Or is the booking activity much closer in and people are just kind of making aspirational bookings and then kind of canceling them last minute? Is there
Speaker 3
any way to kind
Speaker 4
of delineate between those two?
Speaker 2
Absolutely, Chris. And it's it's one of the key metrics we're watching every single day because, on the gross booking side, we saw, relative consistency, heading into the reopening phase. There seemed to be that consumer sentiment heading to a more positive direction, gross bookings went right with it. Then what happened as we got to the June and COVID cases began to spike, you would see the cancellations coming in against that. So we've almost had two phases of gross booking trends.
First was what was already on the books before the March. Many of those fell off in April. And then as the national conversation moved to a reopening phase, generally, consumer sentiment moving moving upwards, those gross bookings picked up again and then have have fallen off. The gross bookings haven't fallen off, but cancellations increased against that, as cases spiked. So, as we look forward, we're looking for gross bookings to continue to follow what happens in the general trend around daily new cases.
Speaker 4
Okay. That's helpful. And then as as a follow-up, curious as to whether you're seeing any change in the in the in your primarily owners who are transacting right now, any change in their behavior in terms of are they buying bigger units? Are they buying more or, you know, equivalent of bigger units? Are they buying more points?
Are they lower or higher propensity to finance? And just how you think about that if your owner mix is going to be changed for a little while, what kind of impacts that has maybe beyond just the VPG?
Speaker 2
So so as as we went into this closure period, probably the biggest question for us and and and maybe for everyone in the industry was what would the behavior look like as the reopening phase began? And that has been one of the clearest indicators that we saw in June is that the buying behavior from our owner base is is going to look very, very similar to what we saw back in January and February. The transaction prices are very similar. Our closing rates are up, and our VPGs are up. And of all of the elements that we were the most anxious to see, it was exactly those metrics.
And those metrics are performing, very similar to, the pre COVID shutdown and gives us a lot of confidence going forward. And that's why we've tried to gear our remarks toward the ebb and flow of the remainder of this year is really gonna be tied to what we see in COVID because that's driving that is the clear driver of consumer sentiment today. But a lot of confidence in what we're seeing on key purchasing metrics. And I would say the one thing that's that we've we've spoken about that we were gonna do during the shutdown period was strengthen our our marketing and and and look for a stronger quality. That is clearly showing up in in the in the FICO statistics and our closing statistics and our VPGs, and that will all ultimately lead to good margins for our business going forward.
Speaker 3
Okay. Very, very helpful. Thanks, guys.
Speaker 2
Thanks, Chris.
Speaker 0
The next question is from Ben Chaikin with Credit Suisse. Please go ahead.
Speaker 6
Hey, how's it going?
Speaker 2
Morning. Great, Ben.
Speaker 6
Hey, it sounds like July exchange revenues accelerated meaningfully in the quarter from presumably down below 40% at the trough to minus 23% in June, I think you called out. Are you seeing that trend continue? Kind of can you help describe maybe what's driving that?
Speaker 2
So so we we definitely saw that as we no different than Wyndham Vacation Clubs as we saw the, the reopening phase begin and consumer confidence begin to pick up. We saw bookings increase as we moved into June. No different than Wyndham Vacation Clubs. We've seen that pull back. At at one point in June, we saw bookings pretty much equivalent to prior year, and we've seen that move, slightly down in July to roughly 15%, decline from prior year.
So the the trend that we saw when in vacation clubs, it we view as a little bit more of a macro trend of that recovery started, came out, good heading in that sort of Nike swoosh direction and then, stalled to a certain degree in July, but but stalled at that higher level.
Speaker 6
Gotcha. And then just just one more. It sounds like delinquencies might be better than you were thinking. Sounds like the deferrals were 6% and then down to 3% at the July. Is there any difference that you see today versus maybe what you've seen in past cycles from a consumer behavior standpoint?
Any reason, maybe why?
Speaker 3
Yes. And this is Mike. I'll take that one. We've been very pleased with the way the portfolio performed. Our delinquencies are just barely over twenty nineteen levels, about eight bps over twenty nineteen levels as of the June.
So overall portfolio performance we've been very pleased with. And I think what we're seeing is that, one, the deferral program has helped. And we're also pleased with as these people are coming off deferral, they do appear to have the cash to continue with making their payments. I do think obviously the hope is that this pandemic I think in other cases, maybe the economic outlook has been for a longer term in terms of when the recovery comes.
So I think the consumer still remains optimistic and as a result is continuing to pay on their obligations. Overall, once again, pleased with the performance of the portfolio.
Speaker 5
Got you. Appreciate it. Thank you.
Speaker 0
Our next question is from Joe Greff with JPMorgan. Please go ahead.
Speaker 7
Good morning, everybody. Can you hear me okay?
Speaker 5
Yes. We can hear
Speaker 2
you great. Thanks, Joe.
Speaker 7
Great. You may have said this, I may have missed it. But I was hoping in the Wyndham Vacation Club segment, if you can give us EBITDA generation by month. I'm presuming June was some degree of positive EBITDA versus larger EBITDA losses in the first two months of the 2Q.
Speaker 3
Yes, you're exactly right. We did start to trend positive in June. The first two months were losses, as you would expect, because, we really didn't have any, other resorts open or our sales operations. Definitely a positive trend in terms of, this last month being, more profitable than the first two.
Speaker 7
You wanna give us the first couple of months of of EBITDA generation just to give us a sense of, you know, what the base is from here and how to think about it for the second half of the year?
Speaker 3
Yeah. We'll have to get back to you, with that.
Speaker 7
Okay. And and what you're seeing in July sequentially, is that EBITDA generation in Vacations Club stronger than what you've seen in June presumably so with, you know, resorts more fully open?
Speaker 2
Yeah. This is Mike. Good morning, Joe. That's that's absolutely the case. And, when you when you look at the second half of this year, the the generation and and overall, and it ties even to cash flow, is gonna be really heavily tied to VOI.
We had a reopening phase. I've called it a transition phase in June. We opened July with roughly 85% of our resorts reopened, and therefore, our VOI generation has been much better in the month of July. And therefore, that segment of our business, has improved. So, we're seeing sequential, improvement in in both the Wyndham Vacation Club's EBITDA as well as our overall EBITDA, And we would expect that as consumer confidence continues to grow.
Speaker 7
Got it. And then just one follow-up going back to the cancellation activity that you've seen. I mean, you feel, and I'm looking at your slide nine, when you look at, you know, beyond, you know, the next month, so starting in September through the end of the year, when you look at what you have as of July 28 on this slide, do you feel that those net reservations have been, I don't know, I guess, derisked a little bit with cancellations? Or is it really the cancellations that you've seen in in sort of July, obviously, and August? So I guess when we look at this, should we kind of take sort of the 2020 net reservation activity with a grain of salt given your cancellation commentary?
Speaker 2
No. I don't think so because what we've tried to do is adjust for the current environment in our latest outlook in in during our prerelease. Our underlying assumption going forward is that, well, let me just step back. When we made our projections back around Memorial Day, the national COVID cases rolling seven day average was eighteen thousand, and it was there at in at the May and then early June. And then as it progressed to the July, that same rolling average was three times as high in in in the mid fifties, as far as daily new cases.
So as we projected out the remainder of this year, we've tried to take in account the fact that that COVID cases will remain elevated. We haven't anticipated they're going to a hundred thousand. We haven't anticipated they're going back to twenty in the near term. So we've tried to take into account that ultimately a more modest rebuild of consumer confidence than we last expected in the May. And when you look at net arrivals for the remainder of this year, we're expecting them to be just under 80% of what they were in the second half of this year compared to 2019.
A little softer in the third quarter and a little stronger than that in the fourth quarter. So just a general steady improvement in consumer confidence for the remainder of this year, but nothing dramatic in either direction.
Speaker 7
Thank you very much, Mike.
Speaker 3
Joe, getting back to you on the adjusted EBITDA for Wyndham Vacation Clubs for the segment for the quarter, they had $17,000,000 loss in adjusted EBITDA. Basically in June, they had a profit of $28,000,000 So you can see the difference would be the losses that were incurred in April and May.
Speaker 7
Excellent. Thanks so much.
Speaker 5
Sure.
Speaker 0
Our next question is from Ian Zaffino with Oppenheimer. Please go ahead.
Speaker 8
Hi, great. Can you guys just touch upon what's going on in the third party default side, as far as activity there, what you're seeing, how that's sort of changed with COVID now? Thanks.
Speaker 2
Good morning, Ian. Thanks for that. It's definitely even even though, the pandemic, has preoccupied everything we're doing. We we we are still continuing to pay attention to everything happening on the third party side. A few things.
First of all, really not related to window vacation culture, window destination, but there has been a lot of state activity as it relates to pressing exit companies for their business practices. In effect, questioning them and and either filing complaints or raising concerns in the courts related to their activity. We're we're continuing to watch watch those cases as they unfold. I believe it's now up to three different cases against three different companies in three different states, maybe more by now. I as I know there's been some recent action.
So, what we have felt is the case in many of our individual corporate, suits, seems to be playing out now at the state level, especially in an environment where consumer protection is is is even more important when people are are looking to survive this pandemic. They I I think the state's offices are are really wanting to take a closer focus on consumer protection, and, obviously, we're supportive of that. I think as Mike has shared, we're seeing nothing unusual in our portfolio. And, you know, as he shared in delinquencies and deferments, we don't we have not seen any uptick or, any new, concern as it relates to third party impact to our portfolio.
Speaker 8
Okay. Great. And then, you know, just a follow-up on the, I guess, increases in cancellations. I was wondering if maybe you could delineate. It sounds like you believe a lot of that was driven by, let's just say, consumer sentiment.
Is that more so the case than, let's just say, additional travel restrictions being put in? I know Hawaii, there's difficult travel restrictions that might lead to the cancellations there. But if you look at sort of the KUS48, is that, you know, driven by sentiment, which just sounds like you were saying versus, travel restrictions or self quarantines or forced fourteen day quarantines? Is that kinda correct? Maybe delineate for us.
Thanks.
Speaker 2
Well, Ian, it's really an important question because I I I think it really should shape the way we look at the second half of this year. First of all, I absolutely believe the the demand for people to take leisure travel is is very high. We've said throughout this, and and I think there was even an article in the Wall Street Journal today about leisure demand is and will be the first to return. And we still believe that to be the case. We've we've shown in the reopening that, the metrics are going to be strong, when the quantity picks up.
And although we're talking about headwinds to arrival, our occupancy in the month of July was between 6070% even though the month's not done. We know that that's going to be the case. So I think a lot of leisure travel, a lot of hospitality would want it to be at those levels. So despite a tripling of COVID cases, the underlying metrics we feel are very strong. And I apologize for the long preamble to answer your question, but I think that's an important component.
We we we see the biggest impact to arrivals to be daily cases. Yes. Hawaii, has delayed until probably September. Yes. You know, San Francisco is likely to be September.
New York will be reopening in the month of August. But but I the self quarantining and the market closures, we think, are are relatively isolated. And we think the number one driver of cancellations is the consumer sentiment and what's showing up in daily cases.
Speaker 8
Okay. That's really helpful. Thank you very much.
Speaker 2
Appreciate it, Ian.
Speaker 0
Our next question is from Jared Shojaian with Wolfe Research. Please go ahead.
Speaker 9
Hi. Good morning, everyone.
Speaker 8
Good morning, Jared.
Speaker 9
Good morning. Can you give us a sense for how much daily tours are running down year over year right now? Just so we can have some context for the down sixty percent second half guide? And then in that thought process, did you assume the daily decline continues through year end? Or are you assuming a ramp up as we get into later into the fourth quarter and by year end?
Speaker 2
Absolutely, Jared. It's I would put it very similar to what we're seeing in net arrivals. As we mentioned, we expect it to be 60% down in the second half of this year, of which 80% of that 80% of that 60% is is on the new owner side. We expect it to be a little more, than that 60%, here in the third quarter and a little less so in the fourth quarter. All that's to say that we expect a sort of, I won't say a slow grind, but a steady increase in confidence, as the year plays out.
And that's how we've projected both the third and the fourth quarter. Just to give you a sense of July, we expect to be somewhere around $75,000,000 of VOI sales with very strong VPGs. So once you get quantity back, that should all play out very well in margins because we've not only improved our segment results, but as we've discussed on multiple occasions, we continue to, make our overall infrastructure more efficient, and and we believe those infrastructure, takeouts will, are sticky, and and we will be able to keep, those cost reductions into 02/2021.
Speaker 9
Okay. Thank you. And just a a clarification. Did I hear you say that the July VPG down 30%, that's also your expectation that the second half will be down 30%?
Speaker 2
No. No. The July
Speaker 9
Or July 30%. I'm sorry.
Speaker 2
Yes. The July VPGs, we expect the second half of this year to be over 30%, VPG lift from prior year and not too dissimilar than than the, the commentary on on, arrivals. We we think July might be a bit stronger than that. But at the end of the year, the second half of the year being 30%, at least 30% up on VPG compared to prior year.
Speaker 9
Thank you. That's helpful. So my question on that then is if tours and VPG often are inversely correlated and you're expecting to see tour flow really build throughout the second half of the year, is there anything specific that's giving you that confidence that you're still going to be able to maintain that up 30% that you were seeing in July as tour flow continues to build?
Speaker 2
I do. A number of elements. First of all, what we've done as it relates to our overall marketing criteria will is new in the reopening phase and will continue throughout the remainder of this year. Because volumes, you know, we are not in a top line chase at this point. We're in a build back scenario.
We have our best talent, now now speaking to higher quality, tours as far as marketing qualifications. And, and thirdly, is you're getting some some form of mix effect by the fact that as we as we said going into the reopening phase that we would be, more weighted toward owner tours for the second half of this year.
Speaker 9
Okay. Thank you very much.
Speaker 2
Thanks, Jared.
Speaker 0
Next question is from Patrick Skol with SunTrust. Please go ahead.
Speaker 10
Hi. Good morning, Michael and Mike.
Speaker 2
Good morning. Good
Speaker 10
Good morning. Taking a little bit of a step back, know, thinking about that extraordinary large loan loss provision you took in 1Q, you know, in hindsight, how do you feel that that was too conservative, the right amount of conservatism, or not conservative enough now that the dust is starting to settle a little bit?
Speaker 3
Yes, I think when we sat down and looked at it at the end of the second quarter, obviously we didn't make any adjustment to it. So I think we feel the reserve is still appropriate in terms of whether it's too conservative or not. Keep in mind that when we put the reserve in place, we really took an eighteen month outlook, really kind of projecting what we expected through the 2021. We're really just kind of three months into that eighteen months. So we are very pleased with the way the portfolio is performing.
I would say it's too early to say it's conservative, but I would say the trends are positive in terms of looking at delinquencies, looking at how people are returning and making payments when they come off deferrals. The fact that deferrals have almost completely gone away as far as new requests. Yes, I think we're happy. We acknowledged when we talked about the reserve in the first quarter that it was at the higher end of the range when you compared it as a percentage to what some other companies with consumer portfolios had booked. But too early at this time to say that the number was too large.
We'd like to think that over the next fourteen to fifteen months the portfolio continues to perform well, we'll just need more history, especially in these uncertain times.
Speaker 10
Understood. Thank you. And my follow-up question, in your prepared remarks, you had talked and I apologize if I didn't get this correct about seeing a larger but not qualified folks who wanna take a tour. Could you give a little more color on that assuming I assuming I got that correctly? What's what's behind seeing that that increase?
Speaker 2
Well, Patrick, you you you heard that. We we didn't expand on it, but, it it's it's more of a broader common commentary on what we're seeing as far far as the first returnees to many of the mega markets, such as the Vegas or Orlando is is, I would say the FICO scores have been disproportionately at the lower level, than we would have typically seen in in sort of an up market. So that's also driven some of our decisions not to pursue, as aggressively the new owner marketing return is. It's just general market conditions seem that, the FICO scores have been a little lower. The the the lower FICO scores have been a little higher percentage of the tourist, or prospects that we're seeing in the market.
So that that's what that was referring to. And and, again, I think as tourism picks up and and you have more quantity of travel, that will that will naturally self correct.
Speaker 10
You say that's reflective of not having much much if any fly to customers coming in with the assumption being that customer perhaps is in a better FICO or financial position than a drive to customer?
Speaker 2
Do do you know, Patrick, it's it's a great question. I'm I honestly, I don't know that I have the answer to that. I I, you know, I listened to your your, questions to our our sister company at Wyndham Hotels yesterday, and and I'm always listening for what everyone else is seeing as well. It it could be, or it could just be, you know, it's it's very early in the reopening and people that are anxious to get out have gotten out. So I I I wish I could give you a clear answer.
I I'm not sure. But what I if if I could just pivot here for a second, I I did notice on the call yesterday, you all were talking about occupancy, and it and it to me is just a reminder, that although, you know, we've spent a lot of our time talking about headwinds and cancellations and, you know, we're we're not we would have wanted a stronger rebound. But when you really distill what's happening in the timeshare space today and and, well, specifically with us, our occupancies are mid sixties. And to me, it it really gets back to the fundamental point that leisure travel, time share, space, you own your vacation, you wanna get back to normalcy as quick as possible. All those macro trends we talk about are playing out.
And, you know, our starting point was to get back to eighty, eighty five And think the difference of what you're seeing between us and the hotel space today is the starting point was different. As a timeshare provider, we wanna be consistently in that 80% space in this in the summer season, and we're at 65 roughly. That's still great, and it shows the strength of our business. But, you know, our expectation coming into the reopening was just a little bit higher, but but we're pleased where we are, and we think that that number is only gonna grow from where it is today.
Speaker 10
Okay. Fair enough. Thank thank you. That's everything for me.
Speaker 2
Thank thank you, Patrick.
Speaker 0
Our next question is from David Katz with Jefferies. Please go ahead.
Speaker 5
Hi, good morning everyone. You obviously have covered a lot of the detail that's important. So I'll apologize for going back to it. But you talked, Mike Brown, about your sideline for the rest of the year. How have you been look, irrespective of where our optimism baseline might be, we do need to consider, you know, what a bit more bearish case could be.
And, you know, given the fact that we're seeing, you know, cases increase in certain places really on a weekly basis, if you could just talk about how contemplated, you know, the bear case of cases resurging or appearing for the first time to be significant in new places that we haven't discussed yet. Just help us understand how you process that that side of it.
Speaker 2
Absolutely, David. And feels like we've been bear case scenario scenario now for for going on four or five months and and and trying to stay attuned to what's going on. Obviously, the majority of our EBITDA is US centric, so we start there. And and, let's start with what we're seeing today. I I think both after the Memorial Day in July 4 holiday, you you saw spikes and you saw them in Sunbelt States.
And and what we're watching right now is is really, are you seeing a plateauing of daily cases, which, you know, it's early, but it appears to be. And and you're seeing, it looks like a lot more, consistency on messaging as to mask wearing and social distancing. And we look at transmission rates in the Sunbelt States and, you know, states that have now, you know, under one to one transmission rate has gone from roughly five to six two weeks ago to now nearly 20. In in key in our key markets, Florida, South Carolina, Texas, and I believe California. I know Arizona has as well.
So those are at least early signals that there could be some positivity as it relates to the singular biggest issue that we think is affecting travel. But as to bear case, we absolutely are scenario planning against that. We continue to evaluate our operating, capital. We continue to in our our operating, cost structure, and we'll make decisions according, to how that changes. And, you know, given that we've weathered, think, quite well, a tripling of daily cases, we hopefully think we've moved through the worst, but we remain flexible to continue to to, take risk off the table either through our operating capital or expenses as we move forward.
Keep in mind that we feel confident with our liquidity over a billion dollars, that hasn't changed. I think Mike and his team have executed fantastically both in the in the in the debt market as well as as this amendment. And we'll continue to evaluate what's out there in the ABS market as we as we move. And our our peer set has done a fantastic job in the ABS market. So we think that that liquidity is gonna be available to us as well.
Again, we think our underlying business is strong, and we have the optionality and flexibility to react to whatever the environment gives us, including if consumer confidence comes back very strong, we think we're in a position to ramp up quickly.
Speaker 5
Understood. And if I can just follow-up with one housekeeping item. I know you indicated earlier what the senior note proceeds. Would you mind my colleague repeating what you said about that, please? Sure.
Speaker 3
Yes. With the proceeds, used $350,000,000 to pay down the corporate revolver. And then we would expect to use $250,000,000 to pay the maturity that's due next March.
Speaker 5
Got it. Okay. Thank you very much. Good luck all. David,
Speaker 2
thank you.
Speaker 0
We'll go next to Steven Grambling with Goldman Sachs. Please go ahead.
Speaker 11
Hey, good morning.
Speaker 2
Good morning, Stephen.
Speaker 11
So the first half of the year, you were pretty much in line with free cash flow despite what was ultimately an unprecedented shutdown. So When we think about the back half and then an ultimate recovery in free cash flow, what are some of the big moving parts? Are there any one time things or calendar shifts that we should be thinking about particularly relative to an EBITDA recovery?
Speaker 3
Yes. And this is Mike. I'll take that one. When we think about the cash flow in the second half of year, there's really a couple of items that are impacting us. As our portfolio decreases in size, we actually have cash taxes that are occurred because we've deferred those taxes until the principal is collected.
We are seeing a situation in the second half of the year where we will have cash taxes that are going to be paid. The other nuance that's happening is because we haven't had sales and the sales are going to be weighted towards the last half of the year and even the last quarter of the year, those receivables that are generated at that time won't go into our conduit or won't go into a term transaction until 2021. So we're kind of getting hit with a timing issue, if you will, where the receivables once again aren't converted to cash until next year.
Speaker 11
Got it. Helpful. And then on Panorama, can you just expand on the comments that you made specifically about expansion into non timeshare? Just trying to understand what new avenues could be under consideration, what maybe is out of bounds, and how to think about trying to size that opportunity.
Speaker 2
Absolutely. The the idea here is is that I mean, if we just start with travel and tourism, it's an enormous space. But between the size of our member base and the relationships we have as far as a a purchaser of travel services, we believe that there's a starting off, there's a lot of b two b opportunities that, for discount travel programs, affinity groups, whether whether they be corporations, membership
Speaker 4
clubs,
Speaker 2
pro sports teams that that have a need for travel, yet, you know, they're not a timeshare purchaser because they're entities. So our our opportunity, we think, initially is to offer a form of a b to b discount travel program. We're in pretty in-depth discussions with a number of groups today and, expect to be announcing a few of relationships here in the near future. Our ultimate objective, Steven, is is, to begin to transition, formally RCI, now Panorama as the umbrella brand, to have more avenues to grow. And grow is the keyword.
I think most people have been looking at RCI as a no to low growth vehicle, but with little capital and therefore was attractive for its cash flow. We think by adding a growth element within our core competency being travel and membership clubs that, it'll be a nice, second leg to our growing Wyndham Vacation Club business to provide holistic growth as opposed to simply, you know, a complimentary brand to the timeshare industry.
Speaker 11
And as a very quick follow-up on that, so do does that would that shift change the cyclicality or volatility of that stream and and or the capital intensity?
Speaker 2
I no. I don't think so. I think if anything, it reinforces steady cash flows through membership programs. And the capital component, we think, will remain low. You saw we basically acquired technology through the acquisition of ARN last year, and that provides the fuel or the baseline that's allowing us to move in this direction.
So, you know, nearly a year after we, concluded that transaction, you're starting to see those, that strategic intent come to life.
Speaker 11
Helpful. Thanks so much.
Speaker 2
Stephen, I appreciate it.
Speaker 0
And this will conclude today's question and answer period. I'd now like to turn the call back over to Michael Brown for closing remarks.
Speaker 2
Thank you. And, I'm going to conclude today by doing what I absolutely think is most important, and that's thanking our associates who have worked tirelessly through this pandemic to not only adapt to an extremely uncertain environment, but to innovate our business and to serve our owners and our members exceptionally. Their efforts and performance has been truly amazing and it makes me extremely proud to be the leader of Wyndham Destinations. We are continuing to innovate to be ready for the full recovery. And while its timing is uncertain, what we know for sure is that Wyndham Destinations will be ready.
Thank you and stay safe.
Speaker 0
And that will conclude today's second quarter twenty twenty Wyndham Destinations earnings conference call. You may now disconnect your lines, and have a wonderful day.