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Good morning and welcome to Wyndham Destinations' Second Quarter 2018 Earnings Conference Call. My name is Keith, and I'll be conference operator today. [Operator Instructions] As a reminder, ladies and gentlemen, this conference call is being recorded. If you do not agree with these terms, please disconnect at this time, thank you. I would now like to turn the call over to Chris Agnew, please go ahead.
Thank you, Keith. Good morning, and welcome to the Wyndham Destinations Second Quarter Earnings Call.
Before we begin, we'd like to remind you that our discussion 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 of our strategic initiatives and our second quarter results. And Mike Hug, our Chief Financial Officer, will then provide greater detail on our second quarter 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.
Thank you, Chris. Good morning, and thank you for joining us for our second quarter earnings call, our first earnings call as Wyndham Destinations. We are excited to begin this journey as a pure-play vacation ownership and exchange business, and to share our strong performance in the second quarter and over the first half of 2018. We delivered on our operating objectives while executing 2 major transactions: The sale of our European Vacation Rentals business in early May; and the spinoff on May 31. I would like to thank our more than 25,000 associates at Wyndham Destinations for their focus, hard work and commitment over the past year.
Let me start the overview of our business by saying we had an outstanding second quarter, and we are executing on our fundamental operating strategy. We delivered strong results with revenues up 3%, and EBIDTA up 7%, reflecting top line growth and strengthened margin in both our Vacation Ownership and Exchange & Rentals segments. Diluted earnings per share increased 14% on a further adjusted basis, reflecting our strong operating performance and our commitment to return capital to shareholders through share repurchases.
Our gross VOI sales increased 7%. We increased new owner sales percentage by 260 basis points, while increasing our Wyndham Destinations margin by 90 basis points in the second quarter. This, combined with a strong first quarter, puts us significantly ahead of our plan to shift our sales mix more in favor of new owners. Tours and VPG were both robust, and we finished the first half of the year with blue thread sales or our Wyndham Hotel related sales up 47% over the prior year.
We continue to stay focused on our loan loss provision, as defaults remain higher than we would like. As we have discussed in the past, we are addressing the issue through new and more robust owner outreach and a more aggressive and justified legal posture. We are confident that overall defaults will return to more moderate levels over time. Mike Hug will go into more detail on our loan loss provision in a few minutes. In the meantime, we are able to successfully manage the business to deliver strong results with industry-leading margins and strong free cash flow.
Overall, our results in the second quarter and so far this year, demonstrate that we are executing our strategy and we have great momentum. Stepping back a moment, for those new to our company, Wyndham Destinations is the world's largest vacation ownership and exchange company, which naturally provides size and scale advantages. Our core business is powered by a diverse marketing platform, a portfolio of brands that allow us to grow in existing markets and expand into new markets and a capital-efficient business model that delivers healthy cash flow.
Our owner demographic is clear: We serve the everyday traveler, the largest population of U.S. households with an average household income between $90,000 and $100,000. Recent trends indicate that the average age of our owner is getting younger. In 2017, 47% of our new owners were Gen Xers and millennials, and in the first half of this year, that number is nearly 60%. The credit quality of our owners is strong, with the average FICO score steady at 725 since 2010.
We have a strong growth story, grounded in a few key priorities. First is to utilize our brands to grow existing markets and enter new markets, which will help us grow tours and the top line. Next, to increase new owner sales as a percentage of total sales to 45%. And then finally, to leverage our relationship with Wyndham Hotels and Resorts to grow our Rental and Vacation Ownership revenues. The blue thread is our connection to Wyndham Hotels and the Wyndham Rewards loyalty program, which we will utilize to generate high-quality, new owner tours.
Let me take a moment to share what we are doing to execute these strategic priorities, starting with our brand portfolio. We have the broadest and most diverse brand portfolio in the industry, spanning both Vacation Ownership and Vacation Exchange. We have a brand and a location for everyone, and leveraging those brands provides a strong platform for growth. I shared during our investor roadshow 2 examples of how we leverage our brands to grow. Myrtle Beach is one, where the addition of a WorldMark by Wyndham Resort has supported the growth of sales in that market. WorldMark is a great drive-through offering with a heavy West Coast presence and now a growing East Coast footprint. Equally, our relationship with Margaritaville offers us access to development opportunities in their expanding hotel pipeline. We have signed a deal in downtown Nashville to open a Margaritaville Vacation Club in a new Margaritaville Hotel. This will add units in downtown Nashville and allows us to produce sales and tour generation in the booming market.
A couple of days ago, we announced our newest urban location, which exemplifies our strategy to utilize our brands to enter new markets. This dual-branded property will be in the heart of downtown Portland, Oregon and will bring on 75 timeshare units. The resort will include both WorldMark by Wyndham and Club Wyndham inventory, adding a new destination for both clubs. Portland will be an exciting new market for us, helping facilitate lead generation and new owner sales. Portland is scheduled to open in the first half of 2019.
The Nashville and Portland projects add to our already growing urban portfolio of 18 resorts, which includes destinations like Chicago, New York, New Orleans, San Francisco and our most recently opened resort in Austin, Texas.
At RCI, our business development efforts are paying off. Year-to-date, the team has signed 36 new affiliation agreements, adding 96 resorts to the system. This success includes new affiliations with industry-leading developers in Asia and South America, 2 markets where we are expanding our geographic presence.
Our next priority to increase our new owners sales mix is significantly ahead of our plan. Our targeted sales mix -- our targeted shift in mix is 200 basis points per year, and in the first half of this year, we were 320 basis points over the same period in 2017. As I mentioned earlier, we achieved this while increasing margins. We will continue to refine our marketing channels to balance the shift in owner mix and margin preservation. This is an effort that is ongoing as we pursue new marketing partnerships and continue to benefit from the blue thread initiatives. As a reminder, rebalancing our sales mix is an investment in building a pipeline of upgrade sales to ensure long-term, sustainable growth. Our target mix for new owner sales is 45% by 2022, and we're well on our way.
Finally, the blue thread remains important to our growth plans. We have a 100-year licensing agreement with Wyndham Hotels, which allows us to leverage extensive marketing opportunities and to better distribute our rental inventory.
We saw great progress in the first half of this year. Sales from blue thread tours are up 47% over 2017, and are generating VPGs that are more than 20% higher than non-affinity VPGs. Blue thread also supports our rental efforts. Wyndham Destinations room night rentals booked through Wyndham Hotel channels in the first 6 months is nearly triple the total room nights rented through those same channels in 2017.
In summary, it has been an outstanding quarter, and I would like to underline 3 key takeaways: First is our successful execution of our key operating strategies of blue thread, new owner sales mix, and margin preservation; second, the delivery of gross VOI sales and EBITDA growth in line with guidance; and third, our commitment to return capital to shareholders from Day 1. We have accomplished a lot to set our strategic direction in motion, but I want to be clear that as we move forward, our efforts will always come back to our central focus: To deliver great vacations and countless memories for our members and owners. Our growth and future success will be based on our commitment to those relationships, which in turn, will deliver strong returns for our shareholders.
Before I transition the call to Mike Hug for a detailed review of our financial performance, I would like to say once again that I'm thrilled, but not surprised, by our team's execution during a series of extremely complex transactions, and also having the opportunity to share with each of you the quality of our team through the lens of our second quarter results. With that, let me turn the call over to Mike Hug, our Chief Financial Officer.
Thank you, Michael and good morning, everyone. Today, I'd like to discuss our second quarter results and our 2018 outlook. The mid-quarter spinoff of the hotel business and the sale of the European Rentals business complicate the understanding of the underlying trends in the business and year-over-year comparisons. My comments will be primarily focused on our further adjusted metrics, presented in our financial results as if the spinoff and the sale of the European Rentals business had occurred on January 1 for each of the reported periods. We believe these metrics will be more helpful in understanding how our business performed and how it will look on a go-forward basis. You can find complete results in our earnings release, including reconciliations of adjusted amounts to GAAP numbers.
Our further adjusted results reflect full run rate expense for corporate costs and license fees and remove separation-related costs. Please refer to Table 8 in our earnings release for further details on our further adjusted results.
Our second quarter results exceed the midpoint of the estimates we provided in May, and are further adjusted diluted earnings per share exceeded the high end of the range. Further adjusted EBITDA was $249 million, which represents 7% growth year-over-year; and further adjusted diluted earnings per share was $1.25, an increase of 14%.
Gross VOI sales increased 7%, with tours increasing 3% over prior year, and VPG was up 5%. Consumer financing revenues also increased 5% year-over-year and service and membership fees increased 2%. Behind these numbers is strong execution on all fronts.
Our new owner VPG increased 8%, and our existing owner VPG increased 7%. Tour flow in the quarter increased 3% over the prior year.
Our gross receivables portfolio grew 5% year-over-year to $3.6 billion. Our provision for loan loss increased $16 million over the prior year to $126 million, with $7 million of the increase attributable to higher financing volume. The allowance for loan losses as a percentage of our loan portfolio was 19.5% at the end of the second quarter compared to 19.2% at the end of the first quarter.
As Michael mentioned, the provision for loan loss remains a central area of focus for us and we are committed to tackling this issue. With the initiatives we have had in place, we have seen a meaningful deceleration in the growth of the provision rate over the last 18 months. The growth of the provision rate was 6% in the first half of this year, down from 16% in the first half of last year, and we expect growth to be under 5% in the second half of 2018, down from 11% in the second half of 2017.
As a percent of gross VOI sales, net of fee-for-service revenues, the loan loss provision in the first half will be similar to the -- in the second half will be similar to the first half of the year, which was 21%. This is higher than we had hoped at the start of the year, but with strength in other areas of our business and cost efficiencies, we are able to reiterate our full year guidance.
Our free cash flow through the first 6 months of the year would have been $195 million, if not for transaction and separation-related costs, an increase from $165 million in the prior year. Our full year outlook for further adjusted free cash flow remains at $555 million to $575 million.
Our just-in-time inventory model and our access to the ABS markets, enabled us to consistently convert approximately 60% of EBITDA into free cash flow and to avoid large swings in cash flow.
We repurchased $42 million of stock during the quarter, $15 million of which was in June after the spinoff. We have also purchased another $15 million in July, underscoring our commitment to return capital to shareholders. We have $1 billion remaining under our current share repurchase authorization. In addition, as we have previously announced, we are paying a quarterly dividend of $0.41 per share.
We are reiterating our 2018 outlook, with revenues of $3.98 billion to $4.09 billion, and EBITDA of $955 million to $975 million. Our outlook for adjusted earnings per share has increased to a range of $4.74 to $4.94, on lower share count and lower stock-based compensation expense. As a reminder, our outlook for earnings per share excludes possible future share repurchases.
This year, we're also providing guidance on a quarterly further adjusted metrics basis because of the changes associated with the separation. Next year, we will only be providing annual guidance.
For the third quarter, we anticipate EBITDA in a range of $262 million to $272 million, net income of $137 million to $147 million and diluted earnings per share of $1.37 to $1.47, based on 101 million diluted shares outstanding. Note that all of our guidance metrics are on a further adjusted basis on our continuing operations.
Turning to our balance sheet. As of June 30, we had $155 million of cash and cash equivalents, with corporate debt of $3 billion, which excludes $2.1 billion of non-recourse debt related to our securitized receivables. Our net leverage was 2.9x, which was lower than anticipated due to taxes on the gain on the sale of the European Rental business of approximately $160 million, a portion of which will be paid in the fourth quarter this year, with the remainder due in the second quarter of 2019. Our target leverage rate remains at 2.25x to 3.0x.
Subsequent to the spinoff on May 31, we've quickly reentered the securitization market and we're very pleased with the results. The $500 million transaction that closed on July 18, was the largest timeshare ABS transaction since the financial downturn and had the tightest weighted average spread of any Wyndham securitization post downturn. After a long break from the public ABS market, this transaction puts us back on a normal cadence of 3 transactions per year.
To conclude, we were very pleased with the first half of the year. Our employees and associates have done an amazing job, being ready for Day 1, executing on our strategic priorities and delivering 7% further adjusted EBITDA growth. With that, we would like to turn the call back to Keith and open it up for questions.
[Operator Instructions] We'll take our first question from Stephen Grambling with Goldman Sachs.
I guess, first on capital allocation. You mentioned the $15 million in buyback in the current period, which seems to match the prior quarter. I guess, how do you think about the buyback going forward from here, kind of thinking through consistent repurchases versus maybe being more -- a little bit more opportunistic?
Stephen, this is Mike Brown. Thanks for the question on capital allocation. I think first and foremost, Wyndham Destinations will remain committed to returning capital to shareholders similar to the philosophy of Wyndham Worldwide. As Mike mentioned, we've already declared our dividend, again, which is consistent with the levels at -- previously at Wyndham Worldwide. And it was very important for us. There -- this complex transaction that we've just completed has had a lot of noise in it, obviously, in the financials and in cash flow. But it was very important for us, as we got into our first month of operations, to return capital to shareholders, really to be indicative of our commitment to that program. So as we look to the second half of this year, it is our intention that we would keep returning capital to shareholders, but we will always keep evaluating that in relation to what's the most accretive to shareholders. There's always a lot of options that you have, but at this stage, we feel that the dividend, obviously, and share repurchases was the best thing for us to do. And we wanted to do that in the first month of being a new publicly traded company at Wyndham Destinations.
And then you gave some interesting color on the blue thread impact on VPG, as well as to Rentals to a degree, but could you go into a little more detail on the overall growth in Rentals and how that may be impacting the cost of VOI? And then also, any additional color you can give on the customers you're bringing in from the blue thread, specifically how they may compare to the non-blue thread customers, either from a demographic basis, location, financial profile, et cetera?
Stephen, let me start with the second one first, because one of the great benefits of working within your hotel ecosystem is simply that you start with an affinity customer base. Demographically, they look very similar, both from household income and FICO score, to our existing new owners. However, hotel ecosystem, hotel affinity customers, bring with it a more sticky customer than someone who's not as familiar with Wyndham Hotels. The impact of that we're seeing from that is higher VPGs, which was one of the elements that helped preserve our margin and in fact, grow our margin in the second quarter, despite above our expectation performance on shift to new owners.
So it's one of the reasons we're very committed to the blue thread, is we know those elements will drive better margin, new owner sales, and it's a very significant pipeline for us in the future. As it relates to Rental and the blue thread, I mentioned that our room night rentals through the Wyndham channels were triple what we did in 2017. We began the program in May of 2017, and what those rental provides are, again, affinity guests that are choosing to stay in a Wyndham property, and once they arrive at the property, it gives us a greater opportunity to generate tour flow. And those rentals, what we call cross-sell and the call transfer program, have really driven that 47% growth in blue thread sales.
And as it relates to...
No, go ahead.
Sorry, Stephen, this is Mike Hug. As it relates to the benefit of the rental operations, one of the things that we talked about during our roadshows and investor meetings was using the benefit of blue thread rental channels to improve and hold our margins to offset the pressure related to change in sales mix. And in the second quarter, holding our margins, obviously, was one of the things we delivered on, the rental channel through the blue thread, wyndham.com, helped us improve those margins and contributed about 50 bps to our year-over-year margin improvement.
Right, that's super helpful. And I guess, one other follow-up, maybe going back to capital allocation. So with the announcement of the new Portland project and some of the inventory opening in Utah and South Carolina, I guess, how do you generally think about the need for new inventory as you think about the future growth of the business, and even as we think through free cash flow implications?
This is Mike Brown, Stephen. When you look at the last projects that we've announced: Austin, Texas; Nashville, Tennessee -- downtown, Nashville; Portland, Oregon; and South Myrtle Beach, those are not accidentally coming into new markets for us. We say we will utilize our brands to grow existing markets, Myrtle Beach, and enter new markets, Portland, Oregon; Austin, Texas; and Nashville. We see development as a great opportunity to provide a broader portfolio to our owner base, but it's also a tremendous opportunity for us to access new markets, and new lead generation opportunities for us. And when you start to think about those urban destinations, those are great opportunities with our marketing platform, entry into those markets does not require from Day 1, a Wyndham Hotel to be there for us to start generating new owners.
As it relates to the capital required, we've mentioned consistently over the past 6 months that we spend about $250 million per year in capital for new projects, most of them being just-in-time or capital efficient. All of these projects we mentioned are well within that plan that we have and are not incremental to any capital that we have mentioned earlier.
We'll take our next question from David Katz with Jefferies.
I wanted to, sort of, follow up on 2 things. Number one, the blue thread, where you have given us a fair amount of detail around the revenue impact so far. How should we think about over time, its benefit on the cost side? Does it -- intuitively, it would drive down some of the cost metrics in marketing, et cetera? And my follow up -- my one follow-up is on really the loan loss provision. Which at some point, I believe we should expect it to inflect and start to go down. How much of that can we attribute to the blue thread and other execution initiatives that you have? And when can we expect that to inflect?
Thanks, David, this is Mike Brown. Let me take the first on margin, blue thread, and then I'll hand it over to Mike and he can discuss the loan loss provision in a bit more detail. The blue thread tours or the affinity tours that we're generating, really come with a very similar cost of generation of that tour. Where the benefit occurs is we're seeing over 20% increase in the volume per guest. And that specifically is driving the margin improvement. Selling packages is a slightly more costly venture from a marketing standpoint, but when you blend the rental component, call transfer, the generation of an individual lead is very similar to our non-affinity. But when you get plus 20% VPG lift, that's really driving the margin. Which again, was one of the plans to help offset our shift to a greater level of new owner mix. Mike, do you want to take the loan loss provision?
Sure, on the provision, we were favorable in the first quarter compared to where we had guided a little bit worse in the second quarter, but I think I would point out, most importantly, that we aren't seeing anything unusual or alarming as it relates to the portfolio performance. I did note as well that we are seeing a decelerating rate of growth in the provision on a year-over-year quarterly basis. As it relates to the question on when we expect to see the inflection point, in our long-term model, just as we've discussed in the past, we're using that rate of 20%. We think that's the prudent rate to use based on current history. But rest assured that we don't view that as an acceptable rate. We'll continue to be aggressive in taking the actions to make sure that our defaults come down to historical levels, and that will occur over time. But at this point, we're assuming that 20% rate in our long-term models.
So you're not assuming any inflection -- or any meaningful inflection for the moment, but it's possible?
Well, I think, I would say that you're correct that we -- in our long-term models, we're sticking with that 20% provision as a percent of gross VOI revenues. But that doesn't mean that we're going to stop when we get to 20%. We feel that 20% is a higher level than it should be when you look at our historical norms, and we will work very diligently to bring it back to historical norms.
And David, this is Mike. I think that because this is such an important issue, I want to add to it, just -- just one brief comment, is that we're not trying to call a top or call a bottom of the trend, we are seeing the decelerating growth, as Mike mentioned. But what I can assure you is, especially in my role, is we are extremely committed to doing all that's necessary to bring the loan loss provision down, which is an output of simply very high owner satisfaction. We are very committed to owner outreach, to putting more people on vacation, higher utilization and higher satisfaction with their ownership. That, combined with a more aggressive legal posture, which we think is fully justified given what we continue to see in the marketplace, those 2 combined with just our daily focus on it, we absolutely think there will be an inflection point. We just don't want to be aggressive and call it. And we'll continue to execute the rest of the business as we did in the first half of the year until that inflection point occurs.
We'll go next to Patrick Scholes with SunTrust.
I just had a couple of additional questions on the loan loss provision uptick. Now regarding just the uptick itself, did you see any additional new pressure from the third parties? And then secondly, was there any -- on the new loans that -- or the new customers, is there any material difference between the new customers and sort of the legacy 725 FICO score customers?
Yes, I would think -- a couple things. And thanks for the question, this is Mike Hug. As it relates to the customers, we're continuing to see that average FICO of about 725, and that's what we'll continue to focus on when we look at our marketing channels and increasing our tour flow. We're very happy with the 725 area as it relates to the FICO and how those loans perform on a historical basis. So we'll continue to work towards maintaining that 725 FICO.
When you look at the increase in the provision quarter-over-quarter at $16 million, about half of that was due to a higher volume in VOI sales as well as a higher propensity to finance, which isn't unusual, because when we make this shift to a higher percentage of new owner sales, they do have a higher propensity to finance. So once again, not seeing anything unusual in the trend as it relates to the provision. And the half of the growth in the provision is just normal business in terms of the propensity to finance and a volume increase.
Okay. Just so I'm clear and maybe we could talk offline, but the percentage going up, is it these new customers have a, just naturally, a higher default rate? Am I thinking about that correctly?
I think the -- so the percentages going up is related to the new owner mix and naturally, they just finance at a higher rate. And that higher rate results in the provision going up.
Okay, just to be clear...
The higher propensity -- it's a higher propensity to finance as opposed to a higher propensity to default.
Okay. So higher rate of financing as opposed to a higher interest rate that they take out, correct?
Correct.
Then the second question, looks like the stock-based compensation guide dropped by about half. What's behind that?
So when we originally came out with Wyndham Worldwide guidance, that was based on our historical budgets, and those historical budgets had assumed that -- correctly assumed that there would be 25% vesting of historical RSU grants, which would've meant that 4 years of vesting at 25%. With the spin, the historical RSUs had accelerated vesting and that cost went to separation cost. Therefore, for the full year, we only have 5 months where you had that level of vesting, where you have 4 grants vesting at 25% each. And then for the last 7 months of the year, you only have, in essence, one grant vesting. That would be the founder's grant that was issued at the spin date on June 1. So really, just the fact that first 7 months of this year, we only have one grant vesting because of the accelerated vesting on the RSUs. It took the number for the year, the midpoint is at $18 million and that's the appropriate number, obviously, to use this year and also when you think about 2019.
Okay, so -- it wasn't like somebody missed their comp target -- or their metric target and you have to take the -- that...
No, that definitely wasn't a compensation issue, just an impact of the acceleration due to the spin.
We'll take our next question from Chris Woronka with Deutsche Bank.
Just a quick one for me. If you could maybe share with us as you kind of analyze this customer data and especially some of the new leads coming through the blue thread, are the demographics changing noticeably at all? And if so, how are they kind of fitting within your expectations going forward for what your new customer looks like?
Chris, this is Mike Brown. No, there has really been no surprises as far as the demographics of the customers coming through the blue thread. We knew that the opportunity was going to be there in the call transfer. And just a little bit of color on that. The call transfer program is a proven program in the industry. We are -- we not only have improved in that, in our execution of that program, but it continues to ramp up as we access data, as we improve our execution quarter-on-quarter. And we did see good execution improvement, not just in total volume, but our ability to sell packages in the second quarter.
The part that's really exciting for us is accessing the Wyndham Hotels rental platform. Those guests have definitely an affinity toward the Wyndham brand, and we've been very pleasantly encouraged by those numbers, as I said, triple the number of room nights. And I feel like we're just getting started in that program, and I think that has a lot of legs behind it. But demographically, it looks very similar to our existing owner base, $90,000 to $100,000. It's bringing in a slightly younger demographic, which is great in the sense of they're earlier in their vacation life cycle. They're early in their buying life cycle. And I think everyone's heard me mention more than once is what we know about our existing owner and what we're already seeing in the blue thread is, when those customers get to our resorts, enjoy their vacation, they love it and they buy more. And the fact that we have such a clear pipeline with a correlated demographic with Wyndham Hotels is very exciting for our future.
Okay, that's great color. Just a follow-up, maybe on the Exchange & Rentals business. Is that -- I know there's always going to be a little bit of fluctuation between, say, the member base and the spend. But are there any kind of discernible trends there? Anything you're doing intentionally? And are you seeing good take rates on the new member base that's coming in?
Again, this is Mike. I'll take that question. No, that team's done a phenomenal job. The number of affiliations and the number of new resorts that they have brought in, in the first half of this year is very encouraging. I think to a great extent, it is where size and scale matters: 3.9 million members and over 4,300 resorts around the world. People want optionality and flexibility in their vacations. And when our business development teams are out there and explain the benefits of being with RCI, you're seeing that come through with new affiliations and new resorts. As well, we've -- we're seeing some of the bigger -- some bigger clubs move over to RCI. And I think again, ultimately, individual developer affiliates are excited about giving their owners the most optionality for their vacations and we believe RCI does exactly that for the industry.
We'll take our next question from Ian Zaffino with Oppenheimer.
On the margin front, very good job there. Maybe you could help us understand what's driving that? Maybe if you can bucket it as far as your biggest gains, and really, maybe, what inning you are in, in each of those buckets as far as your ability to continue to drive the margins here?
Thanks, Ian. Let me start that and then I'll hand it to Mike Hug for some specificity on each of the buckets. But fundamentally, for everyone's -- just a reminder, our fundamental strategy here is to move 200 basis points of new owners per year as a percent of sales, preserve our margins and grow our EBITDA at the same time. And we jumped out of the gate in the first quarter, very much ahead, over 400 basis points on new owners. And we finished the first half of this year significantly up as well. In doing so, we knew at the very beginning that, that we estimated 50 basis points for every 200, we knew that we were going to have to aggressively approach every area of our ability to pay for that margin. And I think the team has done a phenomenal job executing against exactly that plan. And the 3 key areas from the very beginning were net interest income, our receivable portfolio has grown. And that has played a significant impact.
We've talked at length about our connection to the blue thread and our ability to drive higher-margin rentals. And then lastly, as you bring 3 business lines, North American Rentals, RCI and the Vacation Ownership business together, we worked very diligently, with a lot of discipline to eliminate duplicated cost and really just to find both revenue and cost synergies. And those 3 buckets have driven not only margin preservation but margin improvement. And as far as the baseball analogy, I think we are in early to -- I won't say late early, that's middle, but I think we're definitely in the early innings of realizing that. And more importantly, I don't think it'll run out in support of getting to that 45%, which we're ultimately looking to get to.
And as it relates to...
Go ahead, sorry.
Sorry about that. No, this is Mike Hug. As it relates to the buckets, I think when we look at the second quarter, we talked about the -- a benefit we're getting from the rental channels, that was probably the most significant. We continue to look at our overhead cost. And I think that's really, looking forward, that's where the biggest opportunity lies, because we're just now starting to integrate these 3 businesses, North American Rentals, RCI and Wyndham Vacation Ownership. So looking out over the next couple of years, I think as we sit down with the teams, put the organizations together, the back-of-the-house or overhead side of the business is definitely one of the most significant items that we have going forward.
Okay, perfect. And then just a follow-up on -- I think, it came up where you were talking about the increase in the percentage of new customers taking financing. Maybe you could give us an idea of what's driving that and the background on that.
It's just a change in mix. So historically, new customers or new owners have financed at a higher rate than upgrade transactions. So it's in par with historical levels, if you go back pre-2008, we were financing close to 2/3 of our business, but that was, once again, because the mix was much different, with a much higher percentage of new owner sales. Now we wouldn't expect to get back up to 2/3 because we will expect higher down payments than we did pre-2008, because we have a better quality consumer walking in the door. But it's just a mix issue and as we move to that 45%, new owner sales, we're not surprised by the higher propensity to finance. Keeping in mind, we will monitor that very closely. We'll monitor down payments to make sure that, that's a manageable increase in percent sales finance to allow us to still achieve our free cash flow targets.
Our next question comes from Cameron McKnight with Crédit Suisse.
Just to ask Patrick's question perhaps a little differently, in terms of new owners and Gen Xers and millennials, if you think of those 2 cohorts, are you seeing any difference in delinquencies or loan loss activity in those 2 cohorts versus the company average?
No, thanks for the question, this is Mike Hug. When we look at the performance of the portfolio, we really don't see any difference in terms of the age of the consumer driving different level of delinquency. It's really -- the best indicator we have is the FICO scores. That takes into account, obviously, all factors of a consumer, whether it's their debt levels, their income levels and things like that. So we really don't see a significant difference in the payment habits or the performance habits of a consumer based on their age.
Okay. And then in terms of the buyback, you bought back $15 million in July, how many days in July were you able to buy back stock?
We had put a plan in place, so basically we were buying consistently throughout the month.
Yes, we were in a blackout period at that point. So one of the considerations that we had right out of the gate in early June is we had a very short window to get into the market. But again, it comes back, we were very committed to be in the market; to put a plan in place in the first, really, 2.5 weeks of us being public. So that was our plan for July. It was really -- was made in early June. The consideration that we had to consider there is that, obviously, in the midst of this transaction, we had the separation cost and we had to move very quickly on understanding our cash flow and make sure that we could get into the market, which we were able to do.
Our next question comes from Jared Shojaian with Wolfe Research.
So I want to ask about cash flow. You called out further adjusted cash flow that was a lot higher than the actual cash flow, which obviously makes sense with the separation costs and all the other noise. So maybe you can just help me understand when we'll see the first clean quarter on cash flow? Is that going to be in 3Q or are there still some lingering issues that are going to flow through there? And then I think on your further adjusted cash flow, the guidance implies a pretty big ramp in the second half. Is that just the securitization that you just did or is there some seasonality to that?
This is Mike Hug. Two items as it relates to the cash flows in the second half of the year as compared to the first half. Our inventory spending of approximately $250 million that we've talked about, was weighted towards the first half of the year. And then you're spot on with your comment, when you look at our securitization activity, we had the $500 million transaction that closed in July, so a third quarter event. And then historically, our third transaction, obviously, has also been in the second half of the year. So it's a combination of the -- when the inventory spending occurred as well as the securitization activity being weighted towards the second half of the year.
As far as the first question on a clean quarter. To be honest, we still have separation costs that are going to be paid in the second half of the year; a little bit also into 2019. Those aren't significant really in 2019, but you will see some noise in the third and fourth quarter as a result of separation costs, and obviously, we will make sure we do the best we can to call those out and give you guys a clear view of what true cash flows would've looked like as a stand-alone company.
Okay. And just as my follow-up, I know you're saying you're confident in the defaults, that they will trend back down, I guess, the provision back to the 20% level. But maybe you can just elaborate a little bit, help me understand some of the initiatives that you cited. I get the blue thread and the better and stickier customer there, but you also cited some increased legal action. Maybe you can just elaborate a little bit on that and some of the things you're doing right now?
Let me just touch on 2 different areas. Let me start with our owner outreach. We continue to be committed to our owner outreach and we see positive trends in those efforts. I've mentioned previously, we've launched Wyndham Cares and an owner outbound campaign designed to increase both ownership utilization and ownership education. Those programs alone this year have resulted in over 5,000 vacations being booked so far this year. And although that hasn't shown through specifically on loan loss provision yet, we're confident that putting people on vacation and enjoying time at our resorts are definitely going to yield results in the future.
I did mention on the legal front, we're taking a more aggressive posture. I don't want to get too much into tactics, but let me just share with you an example. Because we are stepping up the legal action, because in our observation, there are tactics that we're seeing often seem less than legitimate. As an example, we're getting dozens of demand letters purporting to be from owners, but they're not signed, they are sent from the same ZIP Code, which does not match where the owners are living. This seems for us to be designed to get around state licensing requirements. And wherever possible, we're going to point that out. And where we can take action, we will. And where we can work with authorities to show that people are trying to get around state licensing requirements or other laws, we will be more aggressive on that front.
We'll take our next question from Edward Engel with Macquarie.
Are any of these timeshare attorneys actually helping owners get out of their contracts without ruining their credit scores?
Well, that's a -- it's a very broad question. I think a few things I would suggest. First of all, if there is a reason for someone to exit their ownership and they have a legitimate reason, first of all, we have a novation program and we would always encourage them to call us first. And I am very confident that we can do more than what they are promising without charging them an upfront fee of several thousand dollars. We'll do right by the client if there is a legitimate reason that they need to exit their ownership. We have programs in place. We've helped people exit their ownership in the past. And I'm -- yes, I'm sure there are some attorneys who have helped their clients get out. But what we are seeing is that is the vast minority of the cases we're seeing. You can really tell that it's become a letter mill from the attorneys, where it's cut-and-paste. Yes, we'll see a letter come in from a "extremely dissatisfied owner" that's just visited our resort and already had something booked for another vacation. So the tactic seems to be less than sincere and that's what we're looking to call out and address.
Ladies and gentlemen, this will conclude our question-and-answer period. I would now like to turn the call back to Michael Brown for closing remarks.
Thank you, Keith. Let me just close by saying how pleased we are with our first quarter as Wyndham Destinations. We're executing on our strategic plans and believe we are well-positioned to deliver our long-term goals. More importantly, we have a great team focused on delivering great vacations. Thank you for joining us, and enjoy the rest of your summer.
And this will conclude today's Second Quarter 2018 Wyndham Destinations Earnings Conference Call. You may now disconnect and have a great day.