Welcome to Wyndham Destinations' second quarter 2019 earnings conference call. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time, simply press star and one 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, Keith. Good morning, and welcome. Before we begin, we'd like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings, and you can find a reconciliation of the non-GAAP financial measures discussed in today's call and our earnings press release on our website at investor.wyndhamdestinations.com. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview on our strategic initiatives and our second quarter results. 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. As we celebrate our one-year anniversary, this call marks our fourth as Wyndham Destinations. We are proud of the progress made since the spin was announced in 2017 and the accomplishments achieved in our first year as a public company. The progress confirms that we are executing our strategy to put owners and members on great vacations, to deliver mid-single digit organic growth, to generate strong and consistent free cash flow, and to return significant capital to shareholders. On this last point, we have now returned $585 million in capital to shareholders since the spin in June of 2018. Earlier this morning, Wyndham Destinations reported another strong quarter with adjusted EBITDA of $255 million and adjusted EPS of $1.45. EPS was above our guidance range and 16% higher than the prior year.
We were pleased with our operating performance, in particular, the strength in owner arrivals, the growth of Blue Thread sales, and the year-over-year and sequential improvement in our loan loss provision rate. We are increasing our full year outlook for adjusted free cash flow to a range of $555 million-$575 million, and we are also increasing our adjusted EPS guidance range to $5.38-$5.58. Our new EPS range represents 13% year-over-year growth at the midpoint, and we are reaffirming our outlook for full year adjusted EBITDA guidance of $995 million to $1 billion and $15 million. As we announced this morning, we concluded our strategic review of Wyndham Vacation Rentals. The sale of this business to Vacasa for $162 million is expected to close in the fall.
We believe Vacasa is the ideal buyer of the business. As a result, we will receive a small equity interest in their company as part of the transaction. The sale will be comprised of $45 million cash at closing, up to $30 million of Vacasa equity. The remaining balance in either seller financing or cash at closing. As we previously discussed, the rationale for the strategic review was to allow a dedicated focus on growth in our core business of vacation ownership and exchange. Our strong financial performance this quarter was a result of solid gross VOI sales growth of 4% in total and 5% in North America. We also benefited from increased owner engagement, which delivered significantly higher owner arrivals and increased owner sales. Furthering the performance in the second quarter was a slightly better than expected loan loss provision and consistent RCI performance.
Let me now turn to discuss the provision. I continue to believe we are making all the right decisions to reduce loan loss provision for the long term. This quarter affirms that fact, and although this is not best measured quarter to quarter, our full year guidance demonstrates the progress we are making. You have heard me discuss at length the importance of owner engagement. Our numerous efforts have led to second quarter net occupancy being 400 basis points higher than the prior year and also resulted in an increase of 17,000 owner arrivals in our North American resorts. This is on the back of 13,000 more arrivals in the first quarter. We also saw excellent performance in our Blue Thread initiatives this quarter. Sales volume increased 50% year-over-year, driven by a 37% increase in tour flow. Year to date, Blue Thread sales are 33% higher than prior year.
Speaking more broadly about total tour flow, tours increased 3% in the quarter over the prior year and 4% in North America. Tour flow has been slightly lighter in the first half due to a delay in our new Nashville sales site, an intentional change to our international tour mix, which we began in the fourth quarter of 2018, and underperformance from one of our marketing partners. These are finite impacts as we have since opened Nashville, we will lap international mix issues in the fourth quarter, and we are working closely with our marketing partner to realign tour flow expectations. We are confident that growth will accelerate in the second half, we are now likely towards the lower half of the 5%-7% growth that we guided for the full year.
One of the outcomes from stronger owner arrivals and sales is a natural reduction in our new owner sales mix as a % of total sales. We expect new owner sales to be up year-over-year and over a two-year period, that being 2018 and 2019, we expect new owner sales mix to increase 300 basis points. We continue to see strong sales to Gen Xers and millennials, which combine for 62% of our second quarter new owner sales. This represented an increase of 500 basis points from the prior year. One of the strategies we have in place to continue to attract new owners is to establish more distinctly each of our vacation clubs' brand identities. Powerful brands deliver great development opportunities, they also drive increased owner engagement.
At the end of May, we launched new brand identities with an exciting modern look and feel that brings the essence of being an owner to life for our flagship timeshare clubs, Club Wyndham and WorldMark by Wyndham. We have refreshed the brands through a lens that appeals to our owners at every touch point across their life cycle from both a creative and digital perspective. The tagline for Club Wyndham is "Live your bucket list" and speaks to how the brand is not just about owning a timeshare, it connects owners' passions for travel with exciting new destinations.
For WorldMark owners, vacations serve as the backdrop for ongoing traditions and the catalyst to create new ones, which leads to the brand's tagline of "More time to share." In fact, I recently attended the grand opening of our WorldMark by Wyndham in Portland, Oregon, and had the opportunity to speak directly with our owners. The feedback was overwhelmingly positive. We are the first timeshare company in this urban market, and it was great for us to see the new branding come to life at this location. These brand changes, along with the CRM initiatives we discussed on the first quarter call, will continue to enhance our owner engagement efforts. In exchange and rentals, the announcement of the sale of Wyndham Vacation Rentals was a key initiative, and I would like to thank everyone on our team who worked on the strategic review of the business.
We are also making tremendous strides on the exchange side of our business. RCI is investing as part of its existing capital plan in supply and technology enhancements that focus on improving the member experience. Several initiatives have taken hold with more to come in the second half of the year. In addition, RCI continues to look for new options for its members, and in the second quarter, added 21 new affiliates or 42 new properties to its destination portfolio. Lastly, with regard to capital allocation, we continue to demonstrate our commitment to returning cash to shareholders with $240 million in dividends and share repurchases year to date through the end of July. Our capital allocation outlook remains the same.
We are committed to our quarterly dividend, which expresses confidence in our ability to consistently generate free cash flow, and in the absence of compelling transactions, we believe the best use of excess free cash flow remains share repurchases. To conclude, I'd like to reinforce three major takeaways from our second quarter. First, the quarter delivered very tangible results around increased owner engagement. Second, the announcement to sell Wyndham Vacation Rentals highlights our focus on optimizing our balance sheet and driving incremental free cash flow. Lastly, regarding our outlook for the full year, we are reaffirming our adjusted EBITDA guidance and increasing adjusted EPS and adjusted free cash flow guidance. With that, I would like to hand the call over to Mike Hug. Mike?
Thank you, Michael. Good morning, everyone. Today, I'd like to discuss our second quarter results and our 2019 outlook. My comments will be primarily focused on our adjusted results. You can find our complete results in our earnings release, including reconciliations of adjusted and further adjusted amounts to GAAP numbers. Our second quarter adjusted diluted EPS was $1.45, an increase of 16% over the prior year. Adjusted EBITDA was $255 million, an increase of 2% over the prior year, and adjusted EBITDA margin was 24.5% in the quarter. Year to date, our adjusted EBITDA increased 3% and adjusted EBITDA margin increased 20 basis points over the prior year. Adjusted EPS increased 19% in the first half over the prior year. Second quarter gross VOI sales increased 4% year-over-year to $626 million with a 3% increase in tours and a 1% increase in VPG.
Adjusted EBITDA growth of 3% in our vacation ownership segment was driven by net revenue growth of 5%, partially offset by higher marketing costs. On a rate basis, marketing costs slightly increased as a ramp-up in tours lagged increases in fixed costs associated with certain marketing channels. As Michael mentioned, we expect tour growth to accelerate in the second half of the year. The provision for loan loss as a percentage of gross VOI sales improved sequentially and year-over-year to 21.2% in the second quarter. Our gross receivables portfolio increased 5% year-over-year to $3.8 billion, and our provision for loan loss increased $3 million over the prior year, with the entire increase attributable to higher VOI sales.
We remain confident in the actions we are taking to continue to reduce the provision, and we expect sequential improvement in the second half of the year, allowing us to achieve our guidance of around 20.5% for the full year. Exchange and rentals revenue decreased 3% in the quarter due to a decrease in revenue per member, partially offset by member growth. Adjusted EBITDA increased 3% over the prior year due to lower G&A expense. The decline in revenue per member continues to be driven largely by member mix, lower other product revenue, and inventory supply challenges. Although revenue per member continues to be down, we saw sequential improvement in the year-over-year trend in the first half of 2019 compared to the second half of last year.
We expect continued improvement in this trend for the remainder of 2019 and going forward as a result of some of the initiatives Michael mentioned. Our adjusted free cash flow from continuing operations for the first half of 2019 was $298 million versus $195 million in the first half of 2018. We are confident in our outlook for free cash flow this year with two additional securitizations, one in the third quarter and one in the fourth quarter. Last week, we completed the third quarter securitization, a $450 million transaction with a weighted average coupon of 2.96% and an advance rate of 98%. Based on investor demand, the transaction size was upsized by $50 million. We were very pleased with this execution, which was multiple times oversubscribed. This transaction confirms again our proven track record of being able to access the ABS markets. Turning to our balance sheet.
As of June 30th, we had $257 million of cash and cash equivalents with corporate debt at $3.1 billion, which excludes $2.4 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 second quarter. The increase in leverage was expected, with the second quarter being our lowest free cash flow quarter and with the payments related to the sale of the European Vacation Rental business that we identified on our first quarter call. By the end of the year, we anticipate net leverage will be around 2.8 times. We declared a cash dividend of $0.45 per share on May 16th, which was paid to shareholders on June 28th. As Michael mentioned, we continued with share repurchases in the second quarter.
We bought back $65 million of stock at a weighted average price of $42.74 per share, for a total of $1.5 million shares. In the month of July, we continued with share repurchases of $30 million. Now let me turn to our outlook for the remainder of the year. We are reaffirming adjusted EBITDA guidance to be in the range of $995 million-$1,015 million. We are increasing our outlook for adjusted diluted EPS from continuing operations to range of $5.38-$5.58 from $5.21-$5.42, primarily on lower interest expense and share count. As a reminder, our outlook for diluted EPS is based on a diluted share count of 93.4 million shares, which assumes no further share repurchases after June 30th, 2019. For the third quarter of 2019, we expect adjusted diluted EPS from continuing operations to range from $1.46-$1.54.
A couple of items to call out on the third quarter. First, our third quarter cost of sales will be 250 basis points higher year-over-year, driven by higher cost inventory that we are selling in the third quarter. The higher cost inventory was expected and will negatively impact third quarter adjusted EBITDA by approximately $17 million and adjusted EPS by approximately $0.13. For the full year, the more expensive third quarter inventory will be offset by lower product costs in the fourth quarter. Second, we expect the loan loss provision will be down sequentially again in the third quarter and similar to the prior year. For adjusted free cash flow, we are increasing our guidance to $555 million-$575 million, $15 million higher than the prior guidance range.
With respect to our key drivers for the full year, we expect VPG to increase in the range of 1%-3%, and we now expect tours to be at the lower end of our 5%-7% range. For the exchange and rentals business, we continue to believe average number of members will be flat to up 2%, and revenue per member will be flat to down 2%. To conclude, we are very pleased with our performance during the second quarter, our improved outlook for full-year EPS growth of 13% at the midpoint, and our continued strong free cash flow. Michael and I are extremely proud of our associates and leaders who continue to do a stellar job executing on our fundamental operating strategy. With that, we would like to turn the call back to Keith and open it up for questions.
At this time, if you'd like to ask a question, please press star and one on your touch-tone phone. You can remove yourself by pressing the pound key. We do ask that you limit yourself to one question and one follow-up. Thank you. We'll take our first question from David Katz with Jefferies. Please go ahead. Your line is open.
Hi, good morning, everyone.
Good morning, David.
I wanted to ask, one of the questions that hangs on us is we see the securitization terms and obviously what that investor base thinks of the business and how it thinks about the business relative to where we see the equity, which I think most would agree is trading at a low-ish multiple. From your purview, and the feedback that you're getting, how do we reconcile that difference, right? One continues to improve the value it sees in the business, and the other has been kind of stable or flattish.
David, it's a great question, one we seem to hear more and more recently as we get a little further away from the separation. We have just completed our first year. As we came out, the reality is we're a new management team without a track record in the public markets as Wyndham Destinations. As we came public, I think there was an issue that continued to raise questions, specifically the loan loss provision. I think as time has progressed on, people have seen very clearly what our core strategy is, that it's a consistent strategy of delivering new owner growth, Blue Thread, consistent single mid-digit growth, and generating free cash flow and returning cash to shareholders. I think every quarter that goes by, that consistent, unchanging approach is getting recognized and being appreciated.
I do think the delta between where the debt markets and where the equity markets see us, we believe will continue to close as we continue to deliver our core strategy, which again, and I think the second quarter really proves it, returning capital to shareholders.
Got it. As my follow-up, with respect to Vacasa, I hope I'm pronouncing that correctly.
Yes. Vacasa.
That's the essence of my question is I'm not familiar with them. What can you tell us about sort of who they are and where they came from and obviously we hear your enthusiasm about it. How big a population was there of parties interested in this business? How competitive was it? I guess that's a whole bunch of follow-ups in there, but we'd love to hear about that deal.
Well, there is a lot there. Let me start with, it was a very robust process with a lot of interest, both from strategics and private equity. In the end, North American Rentals came with Wyndham Destinations because number one, we believed in the business, and number two, we saw some strategic opportunities that the vacation ownership and exchange business could leverage by having North American Rentals inside of Wyndham Destinations. As we went through the strategic review, we felt that we could retain a lot of that strategic relationship as Vacasa takes over ownership, and one of the major reasons we wanted to continue to have an equity stake. Vacasa is a great company. It's been in business for a decade now, and has been a strategic in this space with expertise in really technology driven revenue generation.
They do a phenomenal job on the demand side of the equation. They've got great scale and this only adds to the strength of what I consider as I've got to know their management team, their business model, and their direction for the future. As we are the industry leader in vacation ownership and exchange, we believe Vacasa is the right buyer because we believe that they're the right leader for the vacation rental space and have done a great job over the last decade building their model and growing it and putting themselves in the position to make this type of transaction.
Got it. Thank you very much.
Thank you.
We'll take our next question from Chris Woronka with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Hey, morning. Question for you, I know you mentioned that one of the factors that's going to impact the new owner mix this year is the international side of things and how you're going to kind of remix that business. Can you maybe tell us a little bit about profitability of the international guests versus your domestic guests?
Sure. I'll take that. This is Michael. In the fourth quarter of last year, no different than we do in North America, we looked at our marketing channels and found that a number of our new owner marketing channels were not creating profitability, and made the decision at that point. I remember we had questions on the fourth quarter call around tour flow in the fourth quarter. We made the decision that we were better off limiting our marketing channels and focusing on more profitable marketing operations in the international arena. That's why I said we will lap that decision in October of last year in this fourth quarter. As far as VOI margins between international and domestic, they're pretty much the same, Chris.
If I can scale the operation, we do about 10% of our sales internationally and 90% in North America, that 10% really is in the South Pacific between Australia and our New Zealand operations, more recently, we ventured up into Thailand. About 10% of our mix is in international, and it's primarily in those countries.
Okay. Very helpful. Thanks. Then my follow-up would be Now that you're exiting the vacation rentals business, can you maybe tell us a little bit about how that maybe re-energizes the growth profile of the exchange business and maybe kind of going along with that, I know we don't have maybe the exact EBITDA and growth rates from the two combined businesses, how you think maybe that can improve the growth profile on the exchange side.
Absolutely. I do want to come back to the answer I gave to David just a second ago is, although we're exiting the business, we are retaining an equity stake in Vacasa, and it comes back to what we believe in that business, number one. Number two is, I think there's a lot of strategic relationship opportunities that we can have with Vacasa, both in our vacation clubs and exchange business that warrants both of us staying very engaged together, to help grow each other's business mutually. I just wanted to clarify that. Secondly is what does it do for our remaining business? It really allows us to stay focused on the vacation ownership and exchange business. The rental business was not core, and brought with it lower margins.
For us, it's an ability to secure the promise that we made about retaining, if not growing margins in the long haul. This transaction allows us to, A, keep a strategic relationship, B, generate cash flow, C, focus on our core business, and then lastly, make sure that our reinvestment back into the business will help re-energize the exchange business. I'm very pleased with the progress that we're seeing on the RCI side, and feel that the projections we've laid out for the remainder of this year really should play out and feel they're headed in the right direction with our new initiatives.
Okay, very good. Thanks, Mike.
Chris, I appreciate it.
Our next question's from Patrick Scholes with SunTrust Bank. Please go ahead.
Hi. Good morning, Mike and Mike.
Thanks, Patrick.
Thank you. Question for you. The other day I heard, I think it was ESPN Radio, actually an advertisement from you folks. I don't ever recall hearing a timeshare company advertising on the radio. Obviously, we only hear the third party companies. I'm wondering, what sort of feedback have you gotten from that? What's the intention on that? Is it to drive sales or is it to counter somebody's third party advertisements? Is that something that would be, I assume, included in that higher marketing cost that you've talked about? Thanks.
Patrick, the short answer on your last question is no, it's not part of the incremental spend. We have made a commitment, as we've talked about, is having a stronger, more positive narrative around not only the industry but our place in the industry. The reality of ownership is that the satisfaction rates, as we've talked about many times, is very high. The churn in our owner base is extremely low. You've heard me mention before, 700,000 of our 880,000 owners are fully paid off with their ownership and enjoying great vacations for the price of a maintenance fee. We've been less than proactive in sharing the good news and making people proud of their ownership. Richard Petty's been an owner with us for a long time, has a very strong appeal with a lot of people, and this was not a sales presentation or really a marketing.
It was simply general awareness, positivity, and talking about the virtues and the benefits of vacation ownership. He's been a strong endorser of our product, along with many other individuals. I think it's long overdue that we're more vocal in expressing the positive nature of timeshare in the general marketplace, so that you can hear not only a certain type of advertisement, but some real positive messaging.
Okay. Thank you.
Thanks, Patrick.
Our next question's from Joe Greff with J.P. Morgan. Please go ahead.
Good morning, guys. On the increased adjusted free cash flow guidance for full year 2019, it looks like some of it's from lower interest expense. Can you allocate how much is coming from other sources?
Yeah, I think when we look at our adjusted free cash flow, obviously, we're very happy with the benefit we've received as it relates to both the securitization, the improvement in interest expense, and some opportunities that we've taken advantage of on the working capital side of the business. I think it was a combination of those three things that really gave us the confidence in raising the guidance of the cash flow midpoint by $15 million.
Got it. Just to clarify, since I'm out of pocket here, your EBITDA guidance was reaffirmed for the year. How much of that EBITDA relates to what you're selling here this morning? I believe last year or maybe last quarter, you said something in the neighborhood of $10 million of EBITDA. What is it in terms of revenues as well?
Yeah, I think what we plan to do is, obviously the full year financial impact resulting from the sale will be driven in part by when the transaction closes and the proceeds received. We'd expect after the close of the transaction to come out with more details as it relates to the financial impact on the year from the sale of the North America rental business.
Okay, great. My final question, of the $162 million sale price, $45 million is going to be cash at closing, the $30 million of equity or up to $30 million of equity, the balance of it, either cash or you're providing financing. What's the determinant for the balance of that $87 million, either you're financing or Vacasa finds other sources to close the transaction for the remaining balance?
This is Michael. Let me just take that one. Vacasa is going to be going to market for a fundraise very soon and has done and been successful with a number of previous raises. For those following the space, there's already been a significant amount of capital raised in this sector over the last several months. With Vacasa being the market leader, we feel good about their opportunity to get into the market with a successful fundraise. The structure that's laid out was simply put in place to provide some flexibility for closing depending on market conditions.
Okay, great. My one final question. Just going back to the adjusted EBITDA guidance being reaffirmed, did you actually net raise it with some impact rather from the sale of vacation rentals or everything is in there for the full year, not some stuff coming out for a close in the fall?
Yeah. All of the guidance that we've provided today assumes the North America rental business remains with us for the entire year. Obviously, the transaction will close sometimes in the fall, and at that point, we will update the guidance as it relates to EBITDA and cash flow for the year.
Great. Thanks, guys.
Sure.
Our next question is from Ian Zaffino with Oppenheimer. Please go ahead.
Hi, great. Thanks. Can you guys just touch on what you're seeing on the ground from the consumer? Tour volumes, I guess you said you're going to be kind of near the low end. What's driving that? Is that a conscious decision? Is this something that you're seeing from the consumer out there? Or just try to give us a little color there. Thank you.
Ian, appreciate it. This is Michael Brown. There's no change that we're seeing on a consumer standpoint. Traffic into the major markets remains strong. We're obviously very much closing second quarter reports on a macro basis and see very consistent evidence that the consumer remains strong. Specifically, it's why we wanted to call out a little bit of detail what we saw in the second quarter. Those were very finite issues. As I mentioned, Nashville, we had a slight delay in opening that specific sales site, our first location in downtown Nashville. We remained with a little bit of headwind over the international tour mix. We have a lot of marketing partners. It's one of the natures of our very diversified marketing platform, and we had a reliance on one of them to ramp their tour flow in the first half of this year.
They're simply behind on their ramp. A little bit more than what showed in our softness. The strength of our Blue Thread, the strength of our owner arrivals really helped to mitigate that, and obviously we're working with the partner to help them ramp their tour flow. All that's been taken into account for the second half of this year. Nothing macro that's causing what you saw. Again, it was only one percentage point in the second quarter because our North American tour flow was 4% up year-over-year.
Okay, thanks. I know you guys talk about the channels where you're getting a lot of the leads, and Caesars is always one you mention, and I guess there's a change of ownership there. Can you maybe touch on what we should expect from that relationship?
We have a long and very mutually beneficial relationship with Caesars. The reason is because we create value for them, and vice versa. We have had conversations. I would not expect any change in that relationship, and we're hopeful that we can even grow it with the new ownership.
Okay. Thank you very much.
Thank you, Ian.
Our next question is from Stephen Grambling with Goldman Sachs. Please go ahead.
Hey, thanks. On allocation, how do you think about the use of proceeds from the rental sale, similar or different than the cash generated from the core business? I think you mentioned in your opening remarks the dearth of opportunities for acquisitions. Is that driven by where your stock is, assets on the market, or seller expectations?
Good morning, Stephen. This is Mike Hug. Thanks for the question. I'll take the first part as it relates to the use of the cash that we'll receive, and then I'll let Mike talk a little about the M&A activity. When we think about the cash that's received, I think we've demonstrated that absent any M&A opportunities out there, the best use of our cash is to return to shareholders through increasing the dividend as we did earlier this year, or share repurchases. Once again, absent any M&A opportunities, I would expect that excess cash received from the sale of the North America rental business will be used in ways that are consistent with what we've done since June 1st of last year.
I'll just touch on the M&A side. No different from our previous stances, we are always going to be looking for the right M&A opportunity if it's there and is a better use than share repurchases. What I would say is we are very conscious in watching the economic cycle. Opportunities seem to be better when there is a downturn, and we believe very much in the consistency of our free cash flow generation and the resiliency during a downturn. We think opportunities will continue to get better and better, depending on where the ultimate economic cycle goes. We will continue to evaluate if there's any either tuck-in or midsize M&A that would support the growth of vacation clubs or the exchange side of the business.
I guess as a follow-up, changing gears to the loan loss provision, I guess what are the big factors that will dictate how quickly that provision comes down? How should we interpret the write-offs ticking up a bit on an absolute basis and as a percentage of financing receivables?
A couple things there. As it relates to the write-offs, two things. One, our portfolio has grown, so you'd expect that the write-offs would grow. In addition, we had expected higher write-offs, which is why we've been providing at a higher rate over the last year or two because of the trends we're seeing. The higher write-offs are not a surprise to us. I would also point out that the increase in the write-offs in the second quarter of the year were actually lower than the increase in the write-offs year-over-year in the first quarter. We feel that the changes that we are making are benefiting the portfolio. The drivers of those benefits are really several things.
First of all, as we talked about in the previous call, higher down payments and taking a good look at the underwriting standards that we have in place and tightening those up. We instituted those changes in the second quarter, which means we didn't get any benefit in the first quarter of the year and only a partial benefit in the second quarter. Through the second half of the year, as those changes continue to take hold, those will really be the key drivers to the sequential improvement in our provision in the second half of the year.
Got it. Just to be clear, the provision then should lead the write-off trajectory?
Yeah, I think that's right. Once again, the trends when we look at our loss curves would indicate that losses were going up, which is why we have provided at a higher rate. As the provision comes down over time, keep in mind the life of the portfolio is on average seven years. We would expect that as the provision comes down in the future, we would see lower defaults. Once again, that's a seven-year portfolio. I wouldn't expect lower defaults in the second half of this year on a year-over-year basis.
Thank you. I'll jump back in the queue.
Our next question is from Jared Shojaian with Wolfe Research. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question. Just sticking with that same line of questioning here. Recently, we've seen perhaps some more tangible evidence of your pushback against the third-party firms with some of the recent court rulings and bankruptcies. Is that enough to move the needle on write-offs? Do you think you've seen any tangible evidence of maybe some reduction from some of the third-party issues that you've been facing?
Jared, litigation is not our core strategy. When we talk about our overall effort regarding the portfolio and the loan loss provision, it always starts with our owner engagement. We talk about owner engagement, presence on digital and social media and the internet, continuing to refine our underwriting, as you mentioned, litigation, lastly, support of consumer advocacy legislation and regulation. To me, the key is the owner engagement piece. We're seeing tangible evidence of greater utilization, not only in the form of the owner arrivals that we mentioned as part of the prepared remarks, We're seeing a sharp increase in our reservations immediately after purchase. Our contact rates are significantly up, You've heard me discuss over the last few years the discussion around Wyndham Cares and our Ovation program.
Yes, litigation's the right thing to do when we see either the consumer or our company being disinformation about us or misinformation about us or harm being done to the consumer, we will litigate, but that is not our core strategy. It really is around the owner engagement piece, and we're seeing tangible evidence of improvements in the engagement metrics.
Got it. Thank you. Then just switching gears here, Mike, you said the tours likely coming in toward the lower end of the range for the full year. You kept the EBITDA guidance unchanged. Were there other offsets that you would call out there, or is it just not really enough to move the needle?
No, it's not really enough to move the needle, and obviously we're focused on achieving our full-year numbers. As we've talked about, if we do have a slight miss as it relates to tours, we can definitely do the things that we need to do to make sure that we hit the EBITDA number for the year. It's just making sure that we're looking at the organization on an overall basis and finding the right places to cover any shortfalls that we might have, if we end up at the lower end of the tour range.
Great. Thank you. Just two quick housekeeping items, if I may. Is your expectation that you're still going to be at about the 40% range for the full year on new owner sales mix? Then on the provision, I think you said the third quarter provision rate would be similar year-over-year. Is the assumption that the fourth quarter is also going to be similar year-over-year, or do you think the fourth quarter steps down? I know you're reiterating the full year is kind of in line with last year, but if it's off by a tenth of basis points or so, it can move the needle a little bit. Curious specifically how you're thinking about the fourth quarter on the provision?
This is Mike. I'll take the first question and then hand that over to Mike for the second question. On the new owner mix, no, I don't think we'll be at 40% for the year. I think we'll be somewhere in the upper 38s, right around 39%. Just by context, in 2016, that five-year average was at 33%. We've made significant changes to move our new owner mix up and are very pleased with where we're going to end this year. The reality is on a very positive front, our owner arrivals are up and therefore, natural increased sales on the owner side dilutes the new owner mix as a percent of sales, and we also wanted to call out in second quarter, being behind on those new owner tours has also diluted that. We wanted to reset those expectations. Very comfortable with the change.
As we called out in the last 24 months, we're expecting about a 300 basis points increase in new owner sales mix, which really is right on the trajectory to get us where we ultimately want to be in the mid-40s for new owner sales mix. Mike?
On the provision trend, you're right that this third quarter of this year will be comparable to the third quarter of last year, and we will see a more significant decline in the fourth quarter consistent with what we saw in 2018. Confidence in those numbers is really what allows us to reaffirm the 20.5% for the full year.
Got it. The fourth quarter steps down obviously from the third quarter, but are you saying fourth quarter down more year-over-year than what you're seeing in the third quarter?
Yes.
Okay, great. Thank you so much.
Sure.
Thank you, Jared.
We'll go next to Brian Dobson with Nomura Instinet. Please go ahead.
Good morning. You mentioned that Blue Thread tours were up roughly 33% in the quarter. How do you see that, or rather, how do you project that trajectory through the balance of the year? What percentage of tours do you think that Blue Thread will generate next year?
As you look at Blue Thread for the remainder of the year, we talked about tours, and we talked about a really strong second quarter. The way the Blue Thread mix works is we have a combination of in-hotel marketing, we have call transfer, and then we have rentals through the Wyndham website that ultimately come to our resorts and convert to tours. The hotel portion and the rental is very straightforward to project, and we feel confident that what we've laid out for our full-year projections, we have good line of sight on that. The encouraging number in Q2, which we had not included in our prepared remarks, was that our call volume in the second quarter on Blue Thread was up 70%. When call volume's up that much, that's a precursor for future packages and therefore future arrivals for tour.
Those typically come 6 to 18 months after the call. The fact that we saw such an increase in call volume in the second quarter around the Blue Thread really is encouraging for us as we move forward for the remainder of this year. At this stage, although I do anticipate Blue Thread increasing as a percent of our new owner mix, we're going to wait till later this year to fine-tune and actually put a precise range for that number.
All right. Understandable. You referenced radio advertising a little bit earlier in the call. Could you talk about the other marketing channels you're using in terms of consumer outreach and improving consumer perception of the product?
Absolutely. I would start on the internet. The changes that we've implemented and the efforts we've put forward, we have a world-class digital team that's really laying out for us. The perception of Wyndham Destinations, Wyndham Vacation Clubs, and now with the launch of the two new brands, a greater presence. It's all around the enjoyment and the value of owning timeshare, and that's where the vast majority of our energy and money is going to, all within our existing budgets today. The radio is simply one more avenue. I would not anticipate it being the majority of it. It's just one more avenue that we want people to hear positive messaging about their ownership. We see it in the actual results one by one and in our owner base.
You don't really hear that positive messaging until now, and we just wanted to be out there in one more medium to present that positive message.
All right, thanks.
One other thing.
Yeah
The other thing that I think is very important, where we're putting money, is what I mentioned in the first quarter, which is around our CRM system. We are putting a significant amount of investment in our CRM system, where we're partnering with Salesforce. We communicated in the first quarter that we would be fully rolled out by the end of this year to all of our sales locations in North America, and we are on track a quarter later for that to be done. That will be not only efficiency in the back of house, but really improve the customer experience from a marketing and sales standpoint.
All right. Excellent. Thanks so much.
Thank you, Brian.
Next, we have a follow-up from Stephen Grambling with Goldman Sachs. Please go ahead.
Yeah. I don't know why. Hey, thanks for sneaking me back on. You mentioned acquisition opportunities should get better and better as the cycle drags on or even deteriorates. One question we continue to get is just the resilience of the free cash flow stream across cycles. Can you just remind us what drove some of the big swings in free cash flow last cycle in the business, and how the model has changed now that could and should smooth that out? Thanks.
Thanks for the question, Stephen. This is Mike Hug. Really, the big drivers of the free cash flow swings prior to 2008 and 2009 were two things. One, the way we procured inventory. As you guys know, we did self-development of inventory, which means in some years we were putting a lot of money into development, especially if you were doing a large 200 or 300-unit tower. We've obviously switched that model to a just-in-time model where we're working with partners. We take the inventory down as we need it to support the sales plan, which allows for very consistent spending on inventory of about $250 million per year. The other big driver was we did quite a bit of marketing pre-2008 to sub-600 FICOs.
They were very reliant on financing when it came to the purchase. The attractiveness of that to the ABS markets wasn't always at the level we would have liked it to be, which is why we eliminated the sub-600 FICOs beginning in January of 2009. That resulted in higher down payments, so more cash at the sales table, as well as consistent ABS transactions, as we've demonstrated, really since 2010 and especially since our spend over the last 12 months where we've been able to go down to the BB tranches and increase that advance rate to 98%. Consistent inventory spending due to the just-in-time model, and then making sure we maintain quality in terms of who we market to and the underwriting standards that we have in place.
Clear enough. Thanks so much.
This will conclude our question and answer period. I'd like to turn the call back to Michael Brown for closing remarks.
Thank you. Let me close by reiterating how pleased we are with our team's execution in the second quarter. Our progress thus far would not be possible without the dedication and enthusiasm of our nearly 25,000 associates who are committed to our mission to provide our owners, members, and guests with great vacations. I'd personally like to thank them for all their hard work during our first year as a public company. We are excited for the rest of the year as we continue to put the world on vacation. Thank you for joining us, and we look forward to updating you next time.
This will conclude today's program. Thanks for your participation. You may now disconnect.