Good morning, welcome to Wyndham Destinations' third quarter 2019 earnings conference call. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key on your telephone keypad. 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.
Thanks, Catherine. 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 third quarter results. 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.
Thank you, Chris. Good morning, everyone, and thank you for joining us today. We're happy to report the third quarter was another strong quarter, demonstrating the strength of our business model, cash flow generation, and commitment to returning cash to shareholders. This morning, we reported third quarter adjusted earnings per share of $1.57 versus our $1.46-$1.54 guidance. We reported adjusted EBITDA of $267 million and year-to-date adjusted free cash flow of $466 million. For the full year, we are increasing guidance for adjusted EPS and adjusted free cash flow. We are narrowing our adjusted EBITDA guidance after updating for the impact of Hurricane Dorian. Gross VOI sales in the third quarter increased 4% over the prior year on a 4% increase in tours. We also had sequential and year-over-year improvement in our loan loss provision to 20.3% of gross VOI sales.
Since our last earnings call, we closed on two strategic transactions. Last week, we sold Wyndham Vacation Rentals to Vacasa for $162 million. On August the 7th, RCI acquired Alliance Reservations Network, or ARN, for $102 million. ARN is a travel technology platform that will enable us to provide integrated travel services and value-added benefits to RCI and other closed user groups. This acquisition enables RCI to build a vertically integrated travel business by enhancing the value proposition of its core business and opening doors to business-to-business diversification and new channels of growth. These two transactions demonstrate our commitment to the growth of our core business by optimizing the allocation of resources strategically across the enterprise. We're very excited about the acquisition of ARN. The business provides the platform and technology to enable RCI to expand its membership business, which is core to our strategy.
The integration of ARN is well underway, and we continue to unlock new efficiencies and opportunities between our businesses. RCI already has programs in development to improve the customer experience. One such program we have implemented is our Deposits + Cash program, allowing greater flexibility for our exchange members. Deposits + Cash is a program where our RCI members can purchase accommodations through ARN with a combination of RCI currency and cash. RCI's other initiatives that focus on improving the customer experience by simplifying the booking process and offering more travel alternatives continue to gain momentum and helped improve the revenue per member trend. Let me now switch gears to discuss a key strategic partnership which is important for our growth. In September, we announced that we extended our marketing relationship with Caesars Entertainment through 2030.
Caesars is an outstanding partnership that supports our open market platform of nearly $800 million in new owner sales. This relationship has generated significant value to us over the 20 years Caesars has been a partner, and last year alone delivered approximately 40,000 tours to our Las Vegas sales offices. This 10-year renewal secures a significant new owner tour pipeline going forward. Our Wyndham Vacation Clubs' customer and owner engagement initiatives continue to progress and pay dividends. We saw growth in new owner transactions to the Gen X and millennial segments, continued growth in our Blue Thread initiative, and had consistent strong growth in owner arrivals and sales. Year to date, owner arrivals increased 41,000, which was 8% higher than the prior year. This success with owner arrivals does have a natural dilution to our new owner sales mix.
This was amplified over the important Labor Day weekend due to Hurricane Dorian. We remain confident in new owner sales and are generating enough new owners to achieve our long-term sales objectives. So far this year, we added 29,000 new owners and increased new owner tours by 4% in the quarter. 68% of new owner sales are to Gen X and millennials, which is 20% growth year-over-year in the quarter and 18% year-to-date. Last, BlueThread sales continue to be strong, increasing 24% in the third quarter and 29% year-to-date. This strategic partnership with the Wyndham Rewards program continues to drive more engaged customers who deliver over 25% higher VPGs than overall new owner VPGs. Our long-term strategy of new owner growth will continue to occur as new sales centers and marketing locations ramp.
Switching to capital allocation, we demonstrated once again our commitment to returning cash to shareholders with $371 million in dividends and share repurchases year to date through October the 29th. Since the spin in June of 2018, we have now returned 17% of our market cap to shareholders in 17 months. We are committed to our quarterly dividend, which expresses confidence in our ability to consistently generate free cash flow. In the absence of compelling transactions, we believe the best use of excess free cash flow remains share repurchases. Since we laid out our initial guidance in 2019, we have increased free cash flow twice, totaling $25 million. This encompasses our commitment to generate free cash flow while identifying efficiencies in our business. To conclude, I would like to reinforce three major takeaways from our recent performance.
First, we closed on two strategic transactions that were important milestones for RCI and Wyndham Destinations. Second, Blue Thread sales increased 24% in the quarter and are up 29% year-to-date. Lastly, regarding our outlook for the full year, we are increasing our adjusted net income, adjusted EPS, and adjusted free cash flow guidance. With that, I would like to hand the call over to Mike Hug. Mike?
Thank you, Michael, and good morning, everyone. Today, I'd like to discuss our third 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 amounts to GAAP numbers. Our third quarter adjusted diluted EPS was $1.57, an increase of 7% over the prior year. Adjusted EBITDA was $267 million, and adjusted EBITDA margin was 24.2% in the third quarter. Third quarter gross VOI sales increased 4% year-over-year to $663 million, with a 4% increase in tours and a 1% decline in VPG. Excluding the impact of Hurricane Dorian, we estimate year-over-year growth in tours would have been closer to 6%. Tough VPG comps in the prior year impacted the year-over-year comparison in the third quarter.
Adjusted EBITDA for the vacation ownership segment was flat over the prior year at $203 million, with revenue growth of 5% offset by higher cost of inventory and increased sales and marketing cost. As communicated on our second quarter earnings call, we expected the higher cost inventory in the third quarter, and we continue to expect this to be offset by lower product cost in the fourth quarter. In our exchange business, revenue increased 3%, driven by a 1% increase in the average number of members and the inclusion of ARN, which was slightly offset by a 1% decline in revenue per member. As expected, the revenue per member rate is tracking positively compared to historical trends and, excluding currency, was close to flat year-over-year. The exchange segment benefited from strong cost control as adjusted EBITDA increased 5% over the prior year to $83 million.
Turning to the provision for loan loss as a percentage of gross VOI sales, the provision again improved to 20.3% from 21.2% in the second quarter of this year and 20.8% in the third quarter of last year. We remain confident in the actions we are taking to continue to reduce the provision, and we anticipate further sequential improvement in the fourth quarter, allowing us to achieve our full year 2019 provision guidance. Our adjusted free cash flow for the first nine months of 2019 was $466 million, compared to $356 million in the same period of 2018. The increase was due to higher net income from continuing operations and higher net securitization activity. We are confident in our free cash flow for this year with the execution of three securitizations.
The third, which we completed last week, was a $300 million transaction with a weighted average coupon of 2.76% and an advance rate of 98%. We were very pleased with these terms, which again confirms our proven track record of being able to access the ABS markets. Turning to our balance sheet as of September 30th, we had $250 million of cash and cash equivalents with corporate debt at $3 billion, which excludes $2.5 billion of non-recourse debt related to our securitized receivables. With our net leverage at 2.9 times, within our targeted leverage of 2.25-3 times, our capital allocation remained consistent in the third quarter. By the end of the year, we anticipate net leverage will be around 2.8 times. We declared a cash dividend of $0.45 per share on August 15th, which was paid to shareholders on September 30th.
As Michael mentioned, we continued with share repurchases in the third quarter. We bought back $90 million of stock at a weighted average price of $44.45 per share for a total of 2 million shares. In the month of October, we continued with repurchases of $30 million. Now let me turn to our outlook for the remainder of the year. Adjusting for the impact of Hurricane Dorian, we are narrowing our adjusted EBITDA guidance to be in the range of $990 million-$1 billion. We are increasing our outlook for adjusted diluted EPS to a range of $5.54-$5.62 from $5.38-$5.58, primarily on lower interest and tax expense, as well as lower share count. As a reminder, our outlook for EPS is based on a diluted share count of 92.8 million shares, which assumes no further share repurchases after September 30th, 2019.
For the fourth quarter of 2019, we expect adjusted diluted EPS to range from $1.49-$1.57. The fourth quarter will benefit from strong tour flow, lower inventory costs, as well as a lower provision. This will be modestly offset by lower VPG, which is a mix impact from the stronger new tour flow expected in the fourth quarter. For adjusted free cash flow, we are increasing our guidance to $565 million-$585 million, which is $10 million higher than the prior guidance range. With respect to our key drivers for the full year, we now expect VPG to be in the range of flat to up 1%. We continue to expect tours to be at the lower end of our range of 5%-7%, in spite of the loss of approximately 6,000 tours from Hurricane Dorian.
For the exchange 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 third quarter, our improved outlook for full-year EPS growth of 15% at the midpoint, and our continued strong free cash flow. With that, we would like to turn the call back to Catherine and open it up for questions.
At this time, if you would like to register to ask a question, please press star and one on your telephone keypad. We do ask that you limit yourself to one question and one follow-up. Again, that is star and one. Our first question today comes from David Katz with Jefferies. Please go ahead.
Good morning, David.
Hi. Good morning, everyone.
Morning, David.
Look, I wanted to ask a kind of a bigger picture question and just to let you sort of take it where you want. I see the operational progress and the cash generation. That's impressive, that comes out of it. What I think we would probably agree is a valuation around the stock that doesn't necessarily capture all of that. Have you thought about things you could do, or other ways to kind of highlight that value, that are perhaps a bit more active or proactive about it, whether it's taking up leverage or what have you? I think we've sort of had this discussion a couple of times in the past. Good quarter.
David,
Again
it's a really important question, and I think there's a lot at play here. Let's step back because I think where you started the question itself is very important is at the same time, when we started our Wyndham Destinations as a public company, the questions were all around, can you generate cash flow? What will you do with your loan loss provision? Can you consistently deliver on the strategy you've laid out? As we've moved six quarters into our public forum, the questions don't seem to be around those elements. We're trying to consistently deliver our operating metrics. The reality is, and I don't think it's limited to our company, and I don't even think it's limited to our sector.
There's probably not many companies within the gaming, lodging, leisure sector that don't look at valuations at the moment and say, "This late cycle impact is not rightly justifying what everyone would view as the right value for our corporation." We think the best route to getting maximum value back to the shareholders is twofold. Number one is look at what we've done in the last four months between the ARN and the sale of our North American rentals. We're not waiting for the street to recognize our valuation. We're out there modifying our business and evolving it to be in the best position for long-term growth. These two transactions, in my opinion, do exactly that. We're not on the sidelines just trusting our core business will deliver. We will continue to modify and evolve.
To your question about what actions will you take, we will continue to look at all opportunities out there, and our two most recent transactions, I think, demonstrate our commitment to not simply being satisfied with status quo. In the meantime, we will continue to do what we said we would do when we came out as a public company is d eliver a lot of free cash flow back to shareholders in the form of dividends and repurchases, and continue to deliver very consistently the core of our operating strategy, which is cash flow, EBITDA growth, and consistent margins, which are industry leading.
Yeah, I would add one thing to that.
Go ahead.
On the leverage piece, leverage isn't the only way for us to increase the capital return to shareholders. I think if you looked at how we started the year, we were about $60 million a quarter in share repurchases. We've been able to consistently increase that through finding ways to generate cash, whether it's great execution on the ABS transactions, the sale of our ARN, the sale of the North America rental business, which generated over $100 million in cash. We are very focused on, even without levering up, doing the right things to generate cash out of this business, making sure we're utilizing every asset we have to drive cash, which has allowed us, once again, to continue to increase the level of share repurchases every quarter.
David, I think I heard a follow-up, David as well.
Yeah. Yes, just Mike Hug, I would ask how you think about where the top end of leverage really could be. There certainly aren't no circumstances where it doesn't make sense to take on a bit more leverage to buy back a little bit more stock under these kinds of circumstances.
Well, I think what we've said is we've set our range as two and a quarter, three times. We're at 2.9 times. I wouldn't expect us to go over that for share repurchases. Once again, we are doing all the right things to drive the cash to increase the level of share repurchases. At this point in the cycle, don't know that it would be smart to take leverage over three times to pick up additional share repurchase. I think we can, once again, accomplish additional share repurchases by things that we do in the business.
Got it. Thank you very much.
Thank you, David.
Our next question today comes from Chris Woronka with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Morning, Chris.
Chris, good morning.
Good morning. Wanted to ask on the kind of the new owner mix. I think third quarter was probably an example of a good problem to have in that you had a very strong response from your current owners. Obviously you still kind of have the long-term targets in mind to increase new owner mix. The question is really how much can you consciously pivot to get those new owners in, and does that kind of impact our thinking on sales and marketing going forward?
Chris, again, that has been one of the key pillars of our strategy and will remain a key pillar as we go forward. What we know about and the importance of new owners is that as new owners come into your system, they provide a very predictable future revenue stream for the business. Continuing to drive absolute numbers of new owners is very important. To get to the third quarter specifically, you phrased it, I think, absolutely correctly, which is it's a good problem to have. We have been out there really committed to increased owner engagement, and our owner engagement initiatives have led to 41,000 incremental arrivals through the first nine months of this year on an owner base of 880,000 members. We're putting a lot more people on vacation, and that naturally is driving more opportunities for our sales team on owner sales.
Those incremental sales is creating dilution in our percentage as a percent of the total sales, our new owner sales mix. It doesn't change our strategy, either in the short term or in the long term. We will continue to drive new owner sales so much the fact that when we were a little soft on new owner tours in the first half of this year, we've really put our foot to the pedal and are driving accelerated new owner tour growth in the second half of this year. We're excited about what the second half is going to prove out to be, we think we're going to have a very strong fourth quarter. We're committed to it. Keep in mind that we over exceeded that 200 basis points last year. I think we ended the year about 250 basis points up. This year, we're softer.
We're softer for the right reasons. The core element of driving incremental new owner tours is all still there. Our Blue Thread initiative's growing about 25%, where we said it would be. The issues we had in the first half of the year were singular. They weren't macro related, and we're committed to getting over 40% and then ultimately to 45% in new owner sales as a percent of total sales.
Okay. Very helpful. Just second on the ARN acquisition. I don't know exactly what the longer-term revenue and EBITDA impacts are vis-à-vis what you gave up with rentals, I guess do you think that vacation exchange unit is strategically complete, or do you see more out there that you could do? I think you've done a great job of getting margins up there and maybe a little commentary on whether there's still more you're looking to do on the margin front, but also whether that can still be a growth platform with acquisitions.
Chris, this is an area that I guess if I say I'm quietly excited on a quarterly earnings call, it's not so quiet anymore, but I'm really excited about this acquisition. For my two years with the company, we've always talked about RCI as the leader in the exchange business that generates great free cash flow with little capital investment. All of that is still true today. What this acquisition offers us is two things. It provides us more opportunity in our core exchange business. This Deposits + Cash that I mentioned, is it financially material today? Absolutely not. I think all of us who have booked a hotel room have not had enough loyalty programs to book that last night, and you've used cash. Well, why can't that be the case in the timeshare business?
It is just an example of how we can start to make exchange, make opportunities, make transaction possibilities in our core strategy a reality. It also, because of the nature of the technology platform ARN provides, it allows us to be a little more broad into the travel and tourism space. All of that is prologue to a very short answer, which is, yes, I think that you can start to think about, in the future, a growth component to a great cash flow and low capital business segment of Wyndham Destinations.
Okay. Very helpful. Thanks, Mike.
Thanks, Chris.
We'll take our next question from Patrick Scholes with SunTrust. Please go ahead.
Hi. Good morning, Mike and Mike.
Patrick, good morning.
Morning. I have a bit of, I would say, three-part question on how to think about certain items for modeling for 2020. The first part of that is with the acquisition of Alliance Reservations Network, how should we think about the full year EBITDA contribution for that? Does that essentially offset the lost EBITDA from the sale of Wyndham Vacation Rentals? Secondly, on Hurricane Dorian disruption this year, is it possible you're going to get any of that back through tour rebookings, or is that just completely out the door at this point? Lastly, I'm sorry, I'm throwing a lot at you here.
That's all right.
with the positive trajectory of the loan loss provision, is it fair to think that, at least preliminary, that next year's percentage will be a bit lower than this year's 20.5%? That's it.
Mike, why don't you take those?
Yeah, sure. On the first one, ARN and North America Rentals, basically on an annual basis, those numbers are comparable. When you're modeling and thinking about 2020, you can just assume that the ARN EBITDA offsets the North America Rentals. When we come out with our guidance next year, we'll help as far as the quarterly spread of revenues and EBITDA for ARN. On Hurricane Dorian, anything that we would've gotten back, we factored in. Potentially on the owner tours, you might get those back if they travel within now between and the end of the year. On the new owner side, usually that's a tour that's lost because school has started, and a lot of times people aren't getting back on vacation before the end of the year.
Anything we would get back would be pretty minimal and is considered in our guidance for the remainder of the year for the fourth quarter. As far as the loan loss provision, we're very excited about the progress we're making there. We were happy with the continued sequential improvement in the third quarter and would expect that in the fourth quarter. At this time, as it relates to 2020, we aren't providing guidance on really any aspect of the business. We'll provide our thoughts on that when we have our call in late February of next year.
If I could just add to that, because Patrick, one of the things I've consistently said about the loan loss in our efforts there is that owner engagement is the tip of the spear. It was as late or as early as this morning, you're just looking at trends on how our new owners are booking, how early they're booking, the level of first-year travel that we're seeing, and all of those signs are very positive. What everyone knows about this industry and what we definitely know about Wyndham Vacation Clubs is the more people use their ownership, the more satisfied they are, and the less likely they are to default. I'm very bullish on what I'm seeing on our owner engagement initiatives.
Okay, guys. Thank you for the detailed answers. That's all.
Sure. Thank you.
The next question comes from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, great. I also want to key in on sort of the loan loss provision. I guess, Mike, you kind of touched upon, I guess Wyndham Cares. Is that the main driver of the decline in the loan loss provision? Is it more of maybe, let's just say, customer selection? Is it efforts going after third parties? If you could kind of break it down a little bit deeper into what the drivers were. Thanks.
Absolutely. Let me start with just touching a little bit more on the owner and some underwriting, then I'll hand it over to Mike here. In the end, I absolutely believe that owner engagement is the start of where the loan loss reduction has occurred and will continue to occur. We've been very clear that our long term, at least in the model, is 20%, but we're not going to be satisfied with that %. We want it to continue to get lower. To the extent that we're driving incremental engagement, we think that's going to be the key driver in getting it down. We continue to have great engagement. We think we have best-in-class sales and marketing organization that's not just committed to incremental sales, but they're committed to working across the enterprise to what's best for not only the consumer but also for the provision.
Mike and his team has worked with that sales and marketing organization to continue to refine underwriting. Throughout the year, we've tested new elements to our underwriting. What you've seen as it relates to cash flow is you've seen incremental down payments that have driven more cash flow, which has also helped the provision. Mike, do you want to-
I mean, a couple of other things. Mike mentioned the tighter underwriting standards. We did, as we talked about in the second quarter, put in place programs related to more underwriting on the larger loan balances, drive higher down payments. On the owner side, obviously the Wyndham Cares is a big piece of that, but I think more importantly, things we're doing as far as outreach to owners to make sure that they are using their points, booking their vacations, continued improvements we're making to the reservation system to enhance search functionality so that when they go in and search, they get quicker returns in terms of the search they made, as well as more options.
I think it's really a combination of all the things that all aspects of the organization are focused on, whether it's on the consumer finance side, on the sales and marketing, on the owner engagement with the reservations agent. I think it's just focused by the entire organization on making sure we're doing all the right things to get people on vacation and be smart about who we sell to and how much we finance them.
Okay, thank you. Just a follow-up would be, I know you're not going to talk about 2020 until, I guess, February. Unfortunately, we on the sell side have to do some of our projections for 2020. As we look at the loan loss provision, is it right to maybe take the average of 2019 and project from there? Is it better to use, let's just say, this third and then even this fourth quarter number as kind of a baseline for projections, given how quickly loan losses have come down throughout the year? I want to adjust for maybe seasonality, but if you can kind of give us an idea of where we can maybe start as a baseline for our projections, and then we can do our own work and project from there.
Ian, you really hit the two ways to look at this issue, and we've tried to communicate over the past year or so that the loan loss provision, looking at it quarter by quarter, is a lot more volatile than looking at it over time. Earlier in the year when it was above everyone's expectation, I think there was a lot of nervousness around that. We said, "Don't worry, we have a fairly good outlook for the year." This quarter, I think we're pretty clearly below what everyone expected it to be, and we view it as a full year look. We've been reaffirming all along this year 20.5%. To sort of reiterate what I said to Patrick, which is our modeling is at 20%, but we're not satisfied that 20% is where we want to be for the long haul.
As you're looking into next year, I would not look at individual quarters. I would look at our full year projections and then the fact that we're not going to be satisfied with our long-term modeling at 20%.
Okay, yeah.
We'll be more precise when we get on the call in February.
Okay, thanks. Yeah, it seems like you're kind of hitting your stride with the customer engagement, so just kind of want to capture that trend. All right, thank you very much. I'll let someone else ask a question.
Thank you, Ian.
Our next question comes from Joe Greff with JP Morgan. Please go ahead.
Hey, good morning. Omer Sander on for Joe. You touched on it briefly, but on the new owner mix, how much of the negative variance was related to Dorian? In general, is it harder to grow new owner mix in seasonally stronger periods like the summer months or second quarter and third quarter, and easier in the shoulder periods, like the first or the fourth quarter?
Touch a little bit on cadence and a little bit on Hurricane Dorian. When you look at the new owner mix so far this year, on the second quarter call, we really talked about a slower ramp up with one of our marketing partners and a delay of opening of one of our sales locations as a reason that our new owner mix was down in the first quarter. Those are singular events, not a macroeconomic indication of what's going on with the consumer. We saw that happen. We knew that what's key to our strategy and core to it is that we want to grow new owners. Credit to our marketing team. They've really engaged knowing that that was our key platform, and they've driven 4% tour growth in the third quarter. That's adjusted for Hurricane Dorian.
Had that been not adjusted and we got those tours back, we'd be right at the midpoint of our guidance of 6%. You're going to see acceleration of new owner tours into the fourth quarter. When you look at where we are year to date, I would not put our new owner mix down to anything other than we have over performance on owner arrivals. We had some singular events in the second quarter, which we identified at the time, and the reaction from our organization to drive demand generators, i.e., tours, has been very clear in the third quarter, and we expect it to continue in the fourth quarter. As it relates to cadence, actually the middle two quarters of the year, the second and the third quarter, tend to be our higher new owner mix quarters.
When we look at the fourth quarter of this year, you should see an acceleration of new owner mix compared to 2018. That's the answer to your question. I would just add one piece underneath all of that, because that's the macro point of view on new owner mix. The underlying stat that I'm really encouraged by is, it wasn't too long ago that when we were on the road, we talked about BlueThread being 5% of our new owner sales mix. When we look at where we are, that should represent about 10% this year of our new owner sales mix. It shows that those tours and that program, which we said was core to our strategy, is continuing with its momentum, and we're very satisfied with the progress of that element of our new owner mix story.
Great. Thank you. Then your full-year tour growth guidance of 5%-7% implies pretty strong growth in the fourth quarter, like 10%, even to get to the lower end. How do you generate then? Presumably there's a lot of new owner tours in there, which will impact VPG. I guess the question is, what should we be anticipating for VPG in the 4Q?
Yeah, you're right. As it relates to the growth in tour flow in the fourth quarter, a couple things. Recall last year when we had our call, we did have some drop in new owner tour flow in the third and fourth quarters. Conscious decisions on our part, both here and internationally, to eliminate some new owner tour sources, because we didn't feel like they were the right long-term program. Most of the growth year-over-year is driven by the fact that the base was a little bit lower, as well as the fact that, as we talked about in the second quarter, we did have a tour provider who was a little late in terms of generating the committed number of tours. We have opened a couple of sales offices over the course of the last two quarters.
It's driven by artificially low base, if you will, as well as the right things happening with new sales offices and the tour flow generation. We did mention in our comments that, as you would expect, as the tour flow goes up in the fourth quarter, and the fact that a lot of that tour flow is new owner tours, you should see a drop in VPG on a year-over-year basis.
Okay. Awesome. If I could sneak in one last one. Buybacks accelerated nicely in the 3Q. Is $90 million per quarter the new kind of $60 million run rate?
Well, we don't provide guidance on our future share repurchases. I think what I would say is if you look at our history throughout each quarter this year, we have continued to increase that. As I talked about earlier, as we're doing things to drive more cash, we have put that to work in returning it to shareholders through higher share repurchases.
Thanks, guys.
Thank you.
Our next question comes from Brian Dobson with Nomura Instinet. Please go ahead.
Hey, good morning. Just quickly touching on the exchange business again, the acquisition of Alliance Reservation. I guess, how far are you looking to take that business in terms of vacation services? Are you looking to turn that into a full service one-stop shop for your closed user group? Do you think that you'll stay focused more on the timeshare aspect?
It's a little bit of yes and yes. The core reason to make that acquisition was to support our core business of timeshare exchange. It's the reason we started with an example of a program that provides more benefits, more flexibility, an easier transaction for timeshare exchange members. As a reminder, we have 4 million members within RCI. What it opens the door to and what we will speak more to in probably our next call or the one after that, is the long-term strategy for ARN. We've made the acquisition. The team's hard at work in the transition of integrating the business and for providing more options for the members and more services for our developer affiliates. Once we have that solidified, we will definitely, Brian, turn toward the broader travel and tourism space and see what opportunities lie there.
We want to get step one taken care of first. I can assure you, the team's already looking at what we believe step two is going to be.
That's exciting. All right. Thanks a lot.
Thank you.
As a reminder, that is star and one to ask a question today. Our next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.
Hey, thanks. One follow-up just on the VPG comments. I guess, can you just walk us again through some of the puts and takes within the quarter? I guess as new owner sales came down as a part of the mix, I would've thought that that would've been an offset to VPG pressure. Anything you can talk to in terms of maybe even VPG by existing versus new owners. Are you seeing any difference in trend by the cohort? Thanks.
Good morning, Stephen. This is Michael. I'll take that. A few things. First of all, There's really two components of that VPG in the third quarter, there's obviously a mixed component. Really, Stephen, as you move from where we were in the first half of this year on our tour growth, which as we said on the second quarter call, was muted, we've begun to ramp it up. We've ramped it up from a marketing standpoint, we will continue to do so in the fourth quarter. There is a little bit of inefficiency that comes with that. Your close rates get affected modestly. When I say modestly, they're nothing that give us any reason for concern or nothing that would indicate that there's any macroeconomic issue.
I keep referring to that because I think it's fair to say, over the last 12 months, everyone's looking for cracks in the consumer. We're just not seeing it. This is a normal cadence to the timeshare business. In the fourth quarter of last year, we were looking for weakness in the consumer because our new owner tours were down. In the third quarter of this year, as we've ramped back up our new owner tours to recover from what was a little bit of softness in the first half of this year, which we've talked about, is it now VPG that's the concern? I don't view it that way at all. I think this is normal cadence of the business. If you're looking at a football analogy, we went into the year with a very clear playbook. We got into the second quarter.
We saw that we needed to call a few audibles. For us, the core strategy is to win the long-term EBITDA, EPS, cash flow, and new owner tour generation strategy. As we ended Q2, we said, "Look, even if we struggle a little bit on VPG, it's important we continue to drive these tours for our long-term new owner growth." We've done exactly that. We've suffered a little bit on VPG, but keep in mind, the first half of this year, we were right at the midpoint of our VPG growth. I would say very specifically in the third quarter, you'll see it in the fourth quarter, the VPG softness is around our ramp of new owner tours, which is right where we want to be for our long-term new owner strategy.
Sorry, just one last thing, Stephen, then we'll come right back to you, is that keep in mind this year that even though that we've talked about a little bit of softness in our tours in the first half of this year, we've generated 29,000 new owners through the end of the first nine months. We're very pleased with that. Sorry, Stephen, I did cut you off. I apologize about that.
No, that's all helpful. Thanks so much. Another follow-up. On the provision coming down, I guess, what's the typical recapture and resale timeframe? As you had provision step up and you were recapturing inventory, I imagine from some of that, when was that inventory being sold, flowing through in terms of product cost and should that inventory continue to be sold? Is that impacting this year? Is that next year as well? Any color you can provide.
Yeah. Good question, Stephen. This is Mike Hug. On the inventory recovery, I would say on a year-over-year basis, it's probably going to be pretty comparable. It really depends on the inventory, the points-based product. The foreclosure process is very quick. If it's the UDI, the deeded product, that's a little bit longer. When you look on a year-over-year basis, I wouldn't expect a significant movement in our cost of sales as a result of the timing of the recovery of the inventory.
Great. Thanks so much.
Sure.
Thank you, Stephen.
I apologize. Our final question today comes from Jared Shojaian with Wolfe Research. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my question.
Good morning, Jared.
Good morning. I want to ask about your company-wide margins, because there's kind of an interesting trend that's developed where your margins are expanding during periods where your new owner sales mix is growing, and then conversely, they're contracting when your new owner sales mix is declining. Historically, that's not the type of relationship I would expect. Can you talk about that and maybe tell us what the difference in the margin profile is between a new owner and an existing owner? I would imagine the actual development margin is a lot lower with the new owner, but maybe more willing to take the financing and ultimately drive the entire margin up. Can you just talk about that a little bit?
Sure. Appreciate the question. As it relates to margins from quarter to quarter, I think it's important to understand, as we've talked about in the third quarter, our margins were definitely impacted by a higher cost of sales. Also to a certain degree, the hurricane, even though we have accounted for the lost revenue, it's important to understand that we do continue to pay our sales and marketing people, even if they are in markets where there's not tour generation during the period of the hurricane. Third quarter were artificially low, driven by those two factors. As we've talked about, that's one of the big reasons when you look at the fourth quarter, a big cost of sales benefit coming through, as well as the provision, which will help drive the fourth quarter profitability and the margin.
Once again, when we look at margins, we're managing the full year, third quarter an outlier because of the cost of sales and the hurricane. In terms of profitability between the two, you'll run margins that are one and a half to two times higher on the upgrade sale, primarily driven by the marketing cost and the higher VPG. Those are basically trends that have been pretty consistent throughout the business.
Okay. Thank you. Michael, I just want to go back to your prior comments on consumer trends, because it would seem like looking at your results, hearing what you're saying, overall trends within the industry and your business remain quite healthy. But a lot of the macro data, particularly in recent months, and some of the things we've heard from the hotel companies so far and just looking at the RevPAR data, doesn't exactly reconcile with that. Can you talk about that disconnect and maybe speak to how you think this illustrates the resiliency of the timeshare model?
Well, Jared, maybe I should let you say it because we believe it very strongly, and I think what you're saying is exactly on point. People going on vacation, even when you go back to 2008 and 2009, you still had people going on vacation. We very much believe this will remain a very resilient business in the downturns. Look, we definitely are watching the macro environment. We know manufacturing is extremely soft. September retail sales were not as strong as anyone would have expected. The reality is when you look at overall leisure travel, you look at what we view as our proxies, and we look at employments in Orlando, Vegas, Nashville, Austin, they're all up high single digits, low double digits.
We're seeing that leisure travel itself continues to stay strong in the macroeconomic environment, and when you combine that with a business model that is demand generation, we are a direct sales and marketing organization, and in good times and in bad, there are going to be 70 million-80 million people in Orlando. In good times, there'll be 80 million arrivals this year. In bad times, it'll be 72 million. That is plenty population, and when we are actively out there driving that demand in direct marketing, we can still be successful, resilient, generate cash flow. We will accept modulating metrics along the way, but the business model itself is very strong. If a downturn occurs in Q1 of next year or Q1 of the following year, we are not relying on a corporation to book group business into our properties.
80% of our owners already fully own their timeshare, and they're going to go on vacation, and they're going to be in the units. The people who don't own with us are already in the markets, and we do a lot of our direct marketing in markets. I think your statement is absolutely spot on is it is a little counterintuitive to big ticket item discretionary. The reality is people view their vacations as not discretionary and one of the last things they're going to give up in any type of softness or even in fact, a downturn.
Great. Thank you very much. If I could just sneak one more in, just on M&A. Obviously, you acquired ARN, which is sort of a smaller tuck-in kind of acquisition, but do you have any desire for much bigger, larger scale M&A? If so, is there an initial leverage level that you'd be comfortable dialing up to?
Absolutely happy to take that question. The answer that we would give is the answer we gave 12 months ago. We absolutely believe in our core organic strategy. We think the ability to grow our business, even at its size, to have top line and bottom line growth in the mid-single digits, generate 55%-60% cash flow is a business model we are super happy with. Jumping back to David's question is, at today's share price and our ability to generate cash, we're going to take advantage of that as much as we can. With that said, we have, we do, and we will continue to look at the entire travel and tourism landscape and look at any opportunity that's out there that would be accretive to the business and great for shareholders. We've always done that, and we will continue to do that.
Our answer as far as leverage is the same answer we've been giving out there. We would go up on leverage to do the right transaction, but there is an upper limit, and we would consider it as part of an overall strategic opportunity that would be accretive to shareholders.
All right. Thank you very much.
Thank you, Jared.
Thank you. That concludes our question and answer period. I would now like to turn the call back over to Michael Brown for closing remarks.
Thank you for that. I would like to close by just reiterating how pleased I was with our team's execution and the overall results in the third quarter. I would definitely be remiss if I didn't put a special thank you out there to our North American rentals team. This transaction was a great one, not only for Vacasa, the acquirer, but also for Wyndham Destinations, the seller. I think both companies will benefit greatly from the sale. The team that delivered that, led by Marilyn, Mike, and Kevin, they represented a great team of individuals who delivered a great result for both companies, and I'd like to put a special thank you out to them. I'm super pleased with the third quarter, excited how we're looking to finish the year, and look forward to our next call in a few months. Thank you very much.
Thank you. That concludes today's third quarter 2019 Wyndham Destinations Earnings Conference Call. You may disconnect your lines at this time, and have a wonderful day.