If you had bought shares of Wyndham Worldwide four years ago, you would be sitting pretty today. Since March 2009 the hospitality giant’s stock has grown more than 2,000%, and now trades around $60.
What accounts for the spectacular growth? The hospitality industry has recovered from the recession, for one. Also, about 60% of Wyndham’s revenues ($4.5 billion in 2012) is produced by fee-for-service businesses, and as a result the company generates strong free cash flow, which translates into rising dividends and share repurchases.
The company has three segments. Wyndham Hotel Group reaps royalties from some 7,400 franchised properties, including chains like Howard Johnson, Days Inn and Super 8. Wyndham Exchange and Rentals includes a time-share exchange business with 3.7 million fee-paying members. The third and largest segment, Wyndham Vacation Ownership, develops and acquires time-share resorts.
Given this diverse portfolio, “we have more levers to pull in managing our company,” says Tom Conforti. The 54-year-old CFO is comfortable pulling those levers. Before coming to Wyndham, Conforti was finance chief of DineEquity, franchisor of Applebee’s and IHOP restaurant chains. Earlier, he was CFO of the consumer products division at Walt Disney.
In August, Conforti talked with CFO about his work. “Wyndham is financially sophisticated, and it’s aligned around achieving financial goals,” he says. “So making a difference as a CFO is easier here than at most places.”
When you joined Wyndham in September 2009, the recession had just ended, and the company’s stock was trading in the teens. How did the situation look to you?
The worst part of 2008–2009 had passed, and there was light at the end of the tunnel. It was a period when the legitimacy of all business models were being tested, and each of our businesses demonstrated in that difficult time not only their legitimacy but also their very positive nature. The hotel business has been on a steady ascent. Our time-share exchange business continues to operate well. So does our vacation rental business, which is mostly in Europe.
Now Wyndham is riding high, with the stock trading around $60. The second quarter looked pretty good—revenues were up 10% from a year ago, adjusted earnings per share was up 13%. Are you happy with these results?
We’re very happy with our second-quarter performance. All of our businesses performed nicely. We were able to buy back $175 million of our stock. We generated a lot of free cash flow, comfortably above where we were last year.
How much free cash flow do you produce in a year?
We generate well over a billion dollars a year of what we call available cash, after capex and working capital. One of my biggest challenges is to help decide what’s the best way to spend it. It may sound a little odd, but it’s not easy to spend a billion dollars a year.
So how do you spend it?
In one of three ways: pay a dividend, buy back stock or engage in incremental M&A activity. Ourpolicy is to grow dividends at least at the rate of the growth of our business. Since I’ve joined the company we have tripled the dividend. So our dividend probably takes $150 million of the billion, billion-one dollars of available cash. That leaves us with around $900 million to spend between share repurchase and M&A. We like to do value-added M&A transactions if we can find them.
Our businesses are structured to be free-cash-flow positive, so we don’t have to retain any cash on the balance sheet. We’re happy where we are with our credit rating. We’re BBB-. That’s the optimal capital structure for us.
That’s right on the edge.
We’re happy with being on the last rung of investment grade. If something were to happen, we could easily manage to a higher rung by using cash in different ways. So we feel like we have a very conservative financial position.
How do you decide how much stock to repurchase?
Every quarter Steve [Stephen Holmes, CEO] and I sit with our board of directors and go through our “football field.” A football field is a list of conventional valuation methodologies that put a value on our company to justify continued share-repurchase activities. Every quarter we look at things like multiples on EBITDA, multiples on cash flow, multiples on earnings. We look at discounted cash flow, we look at what the market is saying we should be priced at, what the research community is saying we should be priced at. It gives us a good compass for our share-repurchase activity.
In fact, just before our second-quarter earnings release, we received authorization from our board for another $750 million of share repurchase.
What operating metrics do you pay particular attention to?
The standard in the hotel business is RevPAR — revenue per available room. It measures the year-to-year performance of revenue for each room that flies under your flag. We also look at net unit growth — how many new rooms are we adding? And one of the measures that I look at particularly is days sales outstanding, because I want to understand how effectively we’re collecting cash from our franchisees.
In our exchange and rental business we look at the overall number of members we have and how much each member spends, so we call it dollar per member or revenue per member. In our rental business we also look at the number of transactions that are done in a given year and the amount of revenue per transaction.
In the time-share business there are four or so important operating metrics. What is the number of tours that we’re organizing every year? The more people who are taking tours, the greater the possibility that they’ll buy. That’s a measure of how effective our marketing effort has been. We have a measure called volume per guest, which stands for the effectiveness of taking a tour and converting it into a sale. And then we’re looking at other things like how many new owners are we adding, and how is our loan portfolio doing. So we have certain portfolio measures.
How involved are the business units in deciding where to spend that billion dollars of cash?
Steve and I set financial goals in concert with the business units. Each unit has a strong finance team. One thing that has made my job so easy is that the business units are aligned and are supportive of our capital allocation. Our business guys understand that we’re committed to grow their businesses. They understand that we’re prepared to give them capital for commercially viable ideas. And so they can really focus on executing their businesses. They know they’ll have the support from the company to do that. The business units are always trying to achieve the highest level of return that they can for those investments.
Do you supervise the finance chiefs of the business units?
There’s a dotted-line reporting relationship, but I have a personal relationship with each of the CEOs and CFOs. Whenever anything comes up, I’m on the phone with them. Whenever there’s anything they need my help on, they’re on the phone with me. We want the operating executives to feel that my involvement or anyone else’s from corporate in the business units is a value-add, not an obstacle to their performing their businesses at the highest level.
So you’re not perceived as a “Mr. No,” then.
My goal is to help enable good decisions throughout the company. I think if you were to ask our operating executives, they would say they view me as a friend and a resource, not an impediment to good business-unit progress. But we do have a robust dialogue around questions or concerns.
We have an extraordinarily positive culture here. We call it a “count on me” culture. It’s a simple notion, but in my career I’ve found that simple labels that capture the essence of what you’re trying to do are the most effective labels. I have to say that when I came to the company, I wasn’t sure how legit it was. But people live it day in and day out, and they’re proud to be a part of it.