Wyndham Destinations, Inc. (WYND) Q1 2019 Earnings Call Transcript

Wyndham Destinations, Inc. (NYSE: WYND)
Q1 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Wyndham Destinations' first-quarter 2019 earnings conference call. [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.

Chris Agnew -- Vice President, Investor Relations

Thank you, Keith. Good morning, and welcome. Before we begin, we'd like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today.

We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings. And you can find a reconciliation of the non-GAAP financial measures discussed in today's call 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 objectives and our first-quarter results.

And 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 am pleased to turn the call over to Michael Brown.

Michael Brown -- President and Chief Executive Officer

Thank you, Chris, and good morning, everyone. We appreciate you joining us today for our first-quarter earnings call. Earlier this morning, Wyndham Destinations reported adjusted EBITDA of $205 million and adjusted diluted earnings per share of $1.03. We were very pleased with our operating performance, and we completed the quarter with increased confidence in our positioning for the remainder of the year.

Today, we are reaffirming the outlook for all of our key drivers and operating metrics. Our adjusted EBITDA guidance of $995 million to $1.015 billion remains unchanged, and our adjusted EPS guidance increases to $5.21 to $5.42 on lower share count. Our strong first-quarter performance was underpinned by good fundamentals. Gross VOI sales and adjusted EBITDA both increased 4% over the prior year.

And adjusted diluted earnings per share was 23% higher, aided by our strong share repurchase activity over the last 12 months. Our key operating metrics including Blue Thread, new owner mix and margins were all in line with the cadence we expected to achieve our full-year goals. Additionally, our work to increase owner utilization through targeted owner outreach is paying dividends. In the first quarter, we saw an increase of 13,000 owner arrivals to our resorts.

This drove a greater mix of owner sales in the first quarter, which was a key factor in our improved margins. At the same time, our new owner sales were at expectation and represented 37% of total sales. Adjusting for a higher owner occupancy and sales in the first quarter, new owner sales mix showed 120 basis point increase over the same quarter last year. Our earnings performance was led by strong VPGs and cost efficiencies.

VPG increased 4.5% year over year in the first quarter and tour growth was 1.4%. We expect VPG and tour flow to trend toward our full-year target ranges as we progress through the year with new sales center openings, Blue Thread growth and benefits from marketing partnerships driving the additional tour volume. Mike will discuss in detail our loan loss provision in a moment. I would like to share my perspective on the first-quarter performance.

Our provision of 22.5% was as expected when we offered our full-year guidance of 20.5%. And is why after the first quarter of the year, I am equally confident in our full-year projection. Additionally, the increase in owner arrivals, success in litigation and our refinement of underwriting standards all point to positive momentum related to our provision. With regard to capital allocation, we continue to demonstrate our commitment to returning cash to shareholders with $122 million in dividends and share repurchases through the end of April.

With leverage well within our target range, our capital allocation outlook remains the same. We are committed to our quarterly dividend, which expresses confidence in our ability to consistently generate and grow free cash flow. And in the absence of compelling transactions, we believe the best use of excess free cash flow remains share repurchases. Now I would like to shift gears from our financial performance to our most important work, our owners and their satisfaction.

A key initiative we began in 2018 is the implementation of a new customer relationship management system. This work will be transformative, and we have already seen glimpses of the fundamental improvements it will make to our business. We are investing to elevate our customer data intelligence through this CRM. We have contracted with Salesforce for the debut and rollout.

And in fact, Wyndham Destinations was recognized by Salesforce with a partner innovation award for the most creative implementation of a Salesforce solution in 2018 within the travel and transportation industry. This new platform will enable us to improve our engagement with guest and owners throughout the marketing, sales, booking and resort stay experience. We will have the ability to generate tours more efficiently, and estimate it will take less than half the time to book a tour once fully implemented. As well, we will test a self-service tour booking capability this year providing our owners and guests more convenience and flexibility during their stay.

Not only will this platform deliver a better customer experience through the entire sales and marketing process. But over time, it will enable us to aggregate data and improve our marketing initiatives and will improve owner utilization. We launched this automated sales and marketing technology in the fall of 2018. And following initial success, we are progressing with a much broader deployment bringing the CRM system to all sites and brands in the United States.

Prior to this roll out, our tour scheduling was manual and time-consuming. When compete, every tour in the United States will be booked through this system. To be clear, this multi-year capital commitment is fully incorporated in our financial projections and is a portion of our $120 million of annual capex spend. Shifting to exchange and rentals, we saw a positive start to the year.

With the segment posting adjusted EBITDA growth of over 3%, excluding the impact of currency. I am pleased to say that Olivier Chavy, our new president of RCI has hit the ground running. He brings energy and fresh ideas, which will augment the good initiatives already under way for the existing team. The team is looking into several medium- and long-term opportunities for the business.

In the meantime, some of the initiatives we put in place for 2019 to improve revenue per member are starting to gain traction, and excluding currency, we are already seeing some progress. Regarding the strategic review of our vacation rental business, there is nothing new to report at this time. We will share definitive news with you as soon as we can. Before handing over to Mike, who will go through the quarter and our guidance in more detail.

Let me take a moment to touch on the consumer and the overall environment for leisure travel, the primary topic among investors over the last several months. We see strength with the consumer. And in our view, the leisure traveler, in particular, remains healthy. Let me share a few data points to support that view.

First, as I have shared the metrics in our business that indicate the strength of the consumer were all comparable or stronger in the first quarter than the prior year. Second, North American tours increased just over 3% in the first quarter. And third is a data point using Orlando as a proxy for leisure travel demand. In the first three months of 2019, total airline passenger traffic increased 6% year over year, with domestic travel increasing 5% and international travel increasing 16%.

Although, we were -- we are mindful of macroeconomic strength and softness, it was important to note that timeshare industry has been resilient during prior economic downturns. Our direct marketing and sales teams are able to consistently generate tours in all economic climates. To continue with the Orlando example. In 2018, we generated close to 90,000 tours in our home market.

This year, Orlando is likely to receive close to 80 million arrivals. And we are confident that we can continue to generate our planned tour volume even if overall leisure travel were to decline. After all, our marketing universe will be to owners and nonowners who have already chosen to come to Orlando on vacation. In summary, our results today, once again, demonstrate the strength and durability of our overall business model and cash flows.

The resiliency of our top line is underpinned by recurring and predictable revenue streams and also by our direct marketing and sales approach, which even in an economic downturn we believe would still generated the tours which drive our sales. Our core strengths at Wyndham Destinations include our size and scale, the breadth and depth of our owner acquisition channels and our expansive brand portfolio. These four strengths continue to enable us to deliver industry-leading adjusted EBITDA margins of about 25%, and free cash flow conversion of around 60% of adjusted EBITDA or 120% of adjusted net income. With that, I would now like to turn it over to Mike Hug.

Mike?

Mike Hug -- Chief Financial Officer

Thank you, Michael, and good morning, everyone. Today, I'd like to discuss our first-quarter results and our 2019 outlook. My comment will be primarily focused on our adjusted results. We believe these metrics are more helpful in understanding how our business performed and how it will look on a go-forward basis.

You can find our complete results in our earnings release, including reconciliations of adjusted and further adjusted amounts to GAAP numbers. Our first-quarter adjusted diluted earnings per share was $1.03, an increase of 23% over the prior year. Adjusted EBITDA was $205 million, an increase of 4% over the prior year. Gross VOI sales increased 4% over the first quarter of last year to $484 million, with VPG increasing 4.5% and tours 1.4% higher.

Adjusted EBITDA margins improved 60 basis points in the first quarter to 22.3% on the strong VPGs and cost efficiencies. Note that in the quarter, we also had a small timing benefit of about $3 million for business interruption insurance recoveries that we had expected in the second quarter. First-quarter exchange and rentals revenue decreased 4%. On a currency-neutral basis, revenue would have declined 3%, primarily due to a decrease in exchange revenue per member, offset by membership growth of 1%.

The decline in exchange revenue per member was largely driven by member mix in inventory supply challenges. We are seeing modest improvement over last year's fourth-quarter performance as business initiatives start to gain traction. Excluding the impact of currency, exchange and rentals delivered 3% adjusted EBITDA growth, which includes favorable timing from cost-savings efforts. Shifting to our portfolio.

The provision for loan loss was 22.5% of gross VOI sales, slightly better than we expected when we had our fourth-quarter earnings call. We expect that second quarter will see sequential improvement in the provision and will be comparable to the second quarter of the prior year. We projected continued improvement throughout the second half of 2019. As such, we have continued confidence in our full year provision guidance of around 20.5% of gross VOI sales.

Our further adjusted free cash flow from continuing operations for the first quarter was $249 million. As is historically the case, first quarter free cash flow benefited from the closing of a securitization transaction in March, which was a $400 million term securitization with a weighted average coupon of 3.57% and a bench rate of 98%. We were very pleased with this transaction, which was multiple times oversubscribed. And we continued to see very strong interest in our ABS transactions.

First-quarter free cash flow increased a net claim from the same period last year, mostly due to the March securitization because last year, we were out of the market in the first quarter due to the spin. Timing of working capital and inventory spending also negatively impacted the prior year as compared to this year. In addition, we renewed our $800 million ABS conduit facility in April, establishing a new maturity date of August 2021, which is consistent with our goal of renewing this facility every year for a two-year term. Turning to our balance sheet as of March 31, we had $217 million of cash and cash equivalents with corporate debt at $2.8 billion, which excludes $2.5 billion of nonrecourse debt related to our securitized receivables.

Our net leverage of 2.7 times remained within our targeted leverage rate of 2.25 to 3 times. With respect to our dividend, we increased our quarterly cash dividend by 10% to $0.45 per share, which was paid to shareholders on March 29. As Michael mentioned, we continued with share repurchases in the first quarter. We bought back $60 million of stock at a weighted average price of $41.86 per share for a total of 1.4 million shares.

We have continued this pace of share repurchase through April, repurchasing another $20 million. Now let me turn to our 2019 outlook. As is industry practice, we only provide detailed annual guidance. The reason for this is that we manage the business for the full year.

Due to the fact that we generate our own demand, this can and does lead to some quarterly variability in items such as tours, VPG and a provision as a percentage of gross VOI sales. You should keep in mind that our full-year guidance reflects the quarterly details that we discuss on each call. For the full year of 2019, we continue to expect adjusted EBITDA to be in the range of $995 million to $1.015 billion. We increased our outlook for adjusted diluted earnings per share from continuing operations through a range of $5.21 to $5.42 for the full year.

As a reminder, our outlook for diluted earnings per share is based on a diluted share count of 94.6 million, which assumes no further share repurchases after March 31, 2019. For the second quarter of 2019, we expect adjusted diluted earnings per share from continuing operations to range from $1.34 to $1.41. We are reiterating our expectations for all of our key drivers. For the full year, we expect tours to increase 5% to 7% in 2019, and VPG to be up 1% to 3%.

For the exchange & rentals business, we continue to believe average exchange members will be flat to up 2%, and exchange revenue per member will be flat to down 2%. During the second quarter, exchange revenue per member will continue to be down as currency will continue to be a significant headwind, while the benefit from initiatives gradually builds over time. As mentioned earlier, we expect that our 2019 provision for loan loss will be similar to 2018, around 20.5% of gross VOI sales. The percentage of -- the provision as a percentage of gross VOI sales will improve sequentially in the second quarter.

And in the second half of the year, we continue to expect the provision for loan loss will further improve similar to last year. Our outlook for 2019 further adjusted free cash flow remains at a range of $540 million to $560 million. This excludes $125 million of cash payments predominantly related to the sale of our European vacation rental business, as well as $70 million of separation cost, but does include $12 million of cash to be paid for restructuring cost. Please note that we expect an effective tax rate in 2019 of 27% to 28%.

To conclude, we are very pleased with our performance during the first quarter and our outlook for the remainder of 2019. Our teams continue to do an amazing job of executing and delivered 4% adjusted EBITDA growth and 23% adjusted diluted earnings-per-share growth in the first quarter. With that, we would like to turn the call back to Keith and open it up for questions.

Questions & Answers:

Operator

[Operator instructions] We will take our first question from Chris Woronka with Deutsche Bank.

Chris Woronka -- Deutsche Bank -- Analyst

So Mike, I wanted to follow up on -- I think in the prepared comments you said that the new owner mix was up 120 basis points on some kind of adjusted basis, even though, I think, I guess as reported was 40 bps. So what's the main difference there?

Michael Brown -- President and Chief Executive Officer

The main difference is -- and it really gets to the other component that we mentioned in our prepared remarks is that owner arrivals were up 13,000 in the first quarter. That's a direct result of a number of our owner engagement initiatives, which really meant our owner business outperformed in Q1. So adjusting for that outperformance, that's the difference between the 40 and 120 basis points.

Chris Woronka -- Deutsche Bank -- Analyst

OK. Great. Understood. And then I wanted to kind of follow up on the comment about -- on capital return and with share buybacks kind of being priority unless there's a compelling acquisition.

Can you kind of talk about what -- if there's anything on your radar? Just generically, what kinds of things you might consider? And then if you did end up, hypothetically, disposing of the rentals segment, how do you think about proceeds -- use proceeds from that?

Michael Brown -- President and Chief Executive Officer

Well, there's no question that M&A will always be and has always been on our radar. When you look at our share price today, it's an extremely compelling use of our capital. And that's why we continue to reinforce that we think that is the best strategy for us at the moment. With that said, on the vacation ownership business, the -- it would have to align with our strategic objectives of really growing our new owners, getting us into new markets, and ultimately, growing our top line, and accretive to our earnings story.

At this point, although, we continue to evaluate opportunities, again, we see share repurchases as the better option. And that would equally go to the vacation exchange business RCI. They do a tremendous job. It's a great business.

We're very happy with it. They have a lot to offer, not only to the Vacation Exchange business, but more broadly, I think, there's opportunity in the travel and tourism. So as we look at M&A, we would look in both the segments of vacation ownership and vacation exchange.

Operator

Our next question comes from Patrick Scholes with SunTrust. Please go ahead.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Hi. Good morning.

Michael Brown -- President and Chief Executive Officer

Patrick, good morning.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Morning. Can you remind us again, why is it that the loan-loss provision percentage declines as the year progresses? Why is that -- what's driving that? Is it seasonality involved? And then I have another question after that.

Michael Brown -- President and Chief Executive Officer

Good morning, Patrick. This is Mike. Thanks for the question. As it relates to provision, the reason it's the highest in the first quarter is driven by couple of things.

First of all, you're coming up the holiday season. So you can see that delinquencies at the end of December were higher than what they are at the end of March. So part of it seasonality. Secondly, with our revenues being the lowest in the first quarter of the year, you're naturally going to have a higher provision as a percent of revenues.

So overall, when we look at the provision, the first quarter came in where we expected. Defaults were higher as we expected because of the higher delinquencies and as well as the portfolio continues to grow with the focus on new owners. Our portfolio is 5% larger at the end of '18 than it was at '17. So naturally that would lead to higher defaults.

But looking at it for the full year, as we mentioned in our comments, we're comped in the 20.5%. And you will see sequential improvement in the second quarter as compared to the first. And we saw the same trend last year where the provision was higher in the first half last year compared to the second quarter of last year.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

OK. Thank you. Very thorough answer. And then -- and I apologize if you did give out a dollar amount in your prepared remarks.

So you had mentioned currency headwind for the year. Are you able to quantify in the dollars, what that might be for this year?

Michael Brown -- President and Chief Executive Officer

I mean for the full year, I mean, it's maybe 1%. It's not really significant on the full year to our overall number.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

OK.Thank you. That is it. Thank you.

Michael Brown -- President and Chief Executive Officer

Appreciate Patrick.

Operator

Our next question comes from David Katz with Jefferies. Pleas go ahead.

David Katz -- Jefferies and Company -- Analyst

Hi. Good morning, all. I would consider most of what we've seen so far pretty straightforward. But I wanted to just go back to the Blue Thread.

And talk about what we've done -- what's been accomplished so far? And what we can reasonably expect going forward? And in that context, whether the inclusion of a whole bunch of La Quinta members now on that platform, whether that realistically makes a difference for you?

Michael Brown -- President and Chief Executive Officer

David, yes. I'm thrilled to talk about the Blue Thread because we didn't spend a lot of time on it in our prepared remarks. But it's one of the elements that I continue to remain extremely excited about. Let me get a few numbers on the table and then give you some qualitative perspective.

Through the end of April, today's May 1, so we have the benefit of April. Our Blue Thread volume is up 22% and our tour volume is up about 35% year to date. Those are greater numbers. And behind those numbers, we're seeing increasing momentum around the entire Blue Thread initiatives.

We've brought in a lot of really strong talent to lead the effort. And that talent along with the existing leadership has really created some good momentum around our Blue Thread initiative. So feel very positive about our ability to achieve our objectives of this year, if not exceed them. And as the Hotel Group mentioned yesterday, that 75 million loyalty guests coming out of Wyndham Rewards is very positive.

As it relates to La Quinta, in the last 30 days, we've begun to get data feeds as it relates to that La Quinta loyalty base. And have actually had our first sales in the last month. So will it make a difference? It already has. Obviously, not materially.

It's only been a few days. But really excited about what that demographic and what that customer base is going to add to the Blue Thread initiative. And then obviously feedback to the Hotel Group.

David Katz -- Jefferies and Company -- Analyst

All right. And I just want to make sure that we're clear and put it in a context of the total platform, right? I mean those are absolutely impressive statistics. But my sense is that it is relatively small within the context of the whole platform at this stage. What can we -- can you help us to color that in just a little bit?

Michael Brown -- President and Chief Executive Officer

Absolutely. So our -- we've laid out our full year gross VOI guidance, of which, new owners will be approximately 40% of that number. Our Blue Thread initiative this year should represent between $80 million and $90 million, roughly 25% increase from last year. So on the grand scheme of things, it's a smaller percentage, but it's an important one because it's not cannibalistic to our other new owner acquisition channels.

It's complementary. It provides higher VPGs, better margins. And ultimately, as time goes by, whether it's 2% of our total sales, 5% of the new owner that we incrementally grow at each year, it helps the overall equation of our long-term objective.

David Katz -- Jefferies and Company -- Analyst

I know I'm not supposed to follow it up. But just how accretive to probability are those sales, order of magnitude?

Michael Brown -- President and Chief Executive Officer

Well, that's -- I appreciate the question because I think their lies another really good story. Our VPGs are about 25% higher. So you're driving incrementally additional margin on every single Blue Thread sales. And what I'm encouraged by, it's so early in the process.

Tours tend to lead scale and VPG follows. So if we're seeing this 25% lift in Blue Thread tours this early on, it's really encouraging.

David Katz -- Jefferies and Company -- Analyst

Got it. Thank you very much.

Michael Brown -- President and Chief Executive Officer

Thanks, David.

Operator

Our next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.

Stephen Grambling -- Goldman Sachs -- Analyst

Hey, good morning. Two follow-ups. First on the loan loss. Maybe I missed this.

But how much is third-party defaults versus non-third party? And would you generally characterize the folks who are most susceptible to the third parties? Is it also being the most likely to have maybe defaulted at the environment -- macroenvironment where it got softened?

Mike Hug -- Chief Financial Officer

Good morning, Stephen. Thanks for the question. When we think about the provision, once again, we always talk about on the full year. We mentioned in the past that we believe the appropriate level for the provision is around 15% or 16%.

As we all know, we're running just north of 20%. So we view that differential between the 16% to 20% as the impact of the third parties. So you can't really look out on a quarterly basis, once again, because the provision as a percentage of revenue is -- can move based on revenues. But on annual basis, we would say that's the differential.

And that's really no change from what we've been talking about over the last year in terms of the impact of the third parties on portfolio performance. And on the second part, you're exactly right. We've seen situations in the past over the years where our defaults have risen. And then what we see is that the default curves let out faster because the people that are defaulting today, whether driven by a third party or other factors might be the ones that are most likely to default at some point in the future anyway.

So we do feel that as time passes, some of the accelerated defaults that we're experiencing today are individuals that would have been most likely to default at some point in the future anyway.

Stephen Grambling -- Goldman Sachs -- Analyst

That's helpful. And one other follow-up. Given Wyndham Hotels has completed the integration of the La Quinta systems. Are there benefits to you and/or initiatives that you can take to leverage that new group of people who maybe is being integrated into the broader loyalty system? And how would you characterize the La Quinta loyalty customer base versus Wyndham Rewards, if you have any idea?

Michael Brown -- President and Chief Executive Officer

Sure. Well, I think there's a few answers there. First of all, the La Quinta demographic, I think, is ideal for Wyndham Vacation Clubs and the match between the demographics, household income, etc., to Wyndham Vacation Clubs. So excited about that.

As far as marketing initiatives, I see a number of different areas that's going to be additive to our efforts. Everything we're doing along the lines of the original Blue Thread of call transfers, getting the La Quinta Vacation Clubs on the same rental platform, all drives incremental stays at our resorts. And ultimately, gives us more tour opportunities. As time goes on and our teams get scaled and more informed on the sales side, it gives us one more option to offer at the sales table in the way of sales incentives to bring them back either to Wyndham Vacation Clubs or any of the Wyndham Hotels, including La Quinta.

Stephen Grambling -- Goldman Sachs -- Analyst

Great. Thanks so much.

Operator

The next question comes from Ian Zaffino with Oppenheimer Funds. Please go ahead.

Ian Zaffino -- Oppenheimer and Company -- Analyst

Hi, thanks. As far as the new sales centers you've being opening up recently like Austin, Myrtle Beach, St. George. How have they been performing? Or how they've been tracking to kind of your expectations? And when do we expect to see them kind of contribute? And then, maybe the follow-up would be, the new sales centers, Portland, Nashville, San Antonio.

How are those openings coming along? Are the kind of on pace? And maybe give us kind of some color on that. Thanks.

Michael Brown -- President and Chief Executive Officer

Absolutely, Ian. First of all, the last year sales that are opened have been a nice surprise for us. When you enter new markets, you always go through a learning curve. The Austin opening and South Myrtle Beach have both been very strong performers from a sales perspective.

I would also add that on these calls that we tend to only talk about how it impacts our financials. I would also say that both of those resorts have been received extremely strongly from a customer vacation experience standpoint. Occupancies are high and we're getting a lot of demand in those markets. As it relates to the new sales center openings this year, I'm happy to be on this call and share with you that we recently opened the first timeshare resort in downtown Portland, Oregon.

And it has been an absolute home run. We don't have exact figures yet, but I think the first -- the upcoming nine months, the first nine months, it's almost completely booked. And we've only had it available for reservations a very short amount of time. Additionally, whether it's two days ago or two days from now, we're probably eclipse the first $1 million of sales coming out of that sales location.

Very impressive out-of-the-gate performance. And then right behind that, we've got Nashville coming down a little later this year, as well as San Antonio. So excited about what we have going. Very pleased with how quickly they've -- each of these sales centers both last year and this year have ramped to good performance.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Thanks. And then just, of course, a question on the provision. So second quarter, we're looking at kind of matching second quarter of 2018.

At what point do we start to see maybe the provision decline year over year? Not necessarily sequentially or quarter over quarter, but actually like a year-over-year decline? Thanks.

Mike Hug -- Chief Financial Officer

Thanks for the question, Ian. So when we think about the provision, decline on a year-over-year basis, if you think about the trajectory over the couple of years, right? We saw it go up from '16 to '17, '17 to '18, and then this year we're seeing -- basically, we're saying it's going to be flat year over year, 20.5%. So when we think about the provision, it was declining this year. We're expecting and projecting for it to be flat.

So we think it's on the right trajectory in terms of the increased stopping and now being flat for the first time on a year-over-year basis for the first time in several years.

Ian Zaffino -- Oppenheimer and Company -- Analyst

OK. Thank you very much.

Michael Brown -- President and Chief Executive Officer

Thanks Ian.

Operator

We'll take our next question from Brian Dobson with Nomura. Please go ahead, your line is open.

Michael Brown -- President and Chief Executive Officer

Good morning Brian.

Brian Dobson -- Nomura Instinet -- Analyst

Good morning. Your adjusted free cash flow performance in the quarter was very strong. Could you elaborate on the cadence of free cash flow through the balance of the year? And what perhaps are the puts and takes behind that?

Mike Hug -- Chief Financial Officer

Yes. Good morning Brian, obviously, I had to touch on that. You're right. First quarter was very strong.

Couple of reasons, great execution on our first securitization transaction of the year, which always closes March. But a $400 million term transaction that was significantly oversubscribed. So obviously, that was great with that 98% advance rate as well. Also when you look at the quarter, you look at our inventory spend, our capex spending.

It was the lowest that it will be for all four quarters of the year when you think about annual inventory of around $250 million, and capex of around $110 million. So really those three things were the big drivers for the great free cash flow in the first quarter. Second quarter will be our worst quarter as far as free cash flow because we don't have a term securitization that will close in the second quarter as well as you will see some higher levels of inventory spend in capex in the second quarter. Once again, full year all staying within our guidance of the capex and inventory spend that we've gathered.

And then you'll see increase in the third and fourth quarter as far as free cash flow. So really it's the second quarter where you will see the lowest level of free cash flow. Once again, no term transaction in the second quarter.

Brian Dobson -- Nomura Instinet -- Analyst

Great. thanks. And when do you think we might start seeing some of the benefit from the new CRM system?

Michael Brown -- President and Chief Executive Officer

We actually did a very limited rollout last fall to one of our brands and one of our regions. The impact that we saw from that was so clear that we push forward with an on-time delivery of Phase 2, and that's where we're going broad to all our brands in all our locations in 2019. So as it relates to the benefit, this year will be a transition year. I don't think we'll get the full benefit in 2020.

But I think we will start to realize partial benefits next year as that implementation completes. And then I think you get to a run rate in 2021.

Brian Dobson -- Nomura Instinet -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Joe Greff from JPMorgan. Please go ahead.

Joe Greff -- J.P. Morgan -- Analyst

Hi. Good morning guys.

Michael Brown -- President and Chief Executive Officer

Good morning Joe.

Joe Greff -- J.P. Morgan -- Analyst

Just with regard to the new sales center openings that you talked about earlier, Mike. Can you talk about the rollout there? I know you touched on it earlier. Are they disproportionally more favorable to VPG accretion and to new owner sales mix? How does that impact the economics relative to the existing portfolio?

Michael Brown -- President and Chief Executive Officer

Absolutely. It's supportive of our overall effort this year to get to 40% new owner sales mix. If you look at the new projects of new resorts that have joined our system in the last 24 months, the common thread on, I think, all the one is that they all are around having access to new owners, new leads and supportive of our strategic pillar of driving a new owner mix up to 45% over time. So when you look at a Portland, when you look at a downtown Nashville, Austin, South Myrtle Beach, all of those are markets that we were not accessing a natural tours and base.

And therefore, we went into them really with a goal of driving incremental new owners into our system to support our strategic direction.

Joe Greff -- J.P. Morgan -- Analyst

Great. And then switching over to the exchange and rental segment. Margins there up nicely, and I think you referenced cost savings or cost efficiencies in the press release. How much of those costs are permanent? Or was there a timing issue? And then just related to margins overall.

Mike, how do you mention that there was a small-time benefit of insurance recovery? And maybe you said it and I missed it, but what was the amount? And which segment did that benefit?

Mike Hug -- Chief Financial Officer

Yes. So on the insurance recovery, it was $3 million primarily been in the -- benefiting the ownership segment. And then when we think about RCI, when we look at our full year guidance, we expect that we'll be in the guidance that we put out there for the full year there. Was some timing in the quarter that will basically impact the later course, but I wouldn't say it was significant to the overall year.

Joe Greff -- J.P. Morgan -- Analyst

Great. And then just my third question here just with respect to loan-loss position. Can I have a -- couple of questions throwing the loan-loss provision in there. I think Mike you mentioned before that the seasonality will kind of be somewhat normal, maybe adjusted in the third party.

I think historically the seasonality is that the 2Q and 3Q, the percentage is higher than the 1Q and 4Q. So what you're saying is that the benefit of the third party is going to be significant in the 2Q, and then even more significant in the second half? Is that how we interpret the totality of your comment?

Mike Hug -- Chief Financial Officer

So I think the way I would look at it is, first of all, delinquencies at the end of 2018 were higher than what we normally see with them in the March results, we see delinquencies that are back down to regular levels. Also, we have visibility now through April. So I think what we're seeing is, our overall portfolio performance will continue to improve, not driven just by third parties, but there's other actions we can take and we are actually implementing other actions, for example, looking to collect more down payments. Being more restrictive in our underwriting as far as large balanced loans.

We all know, the larger the finance balance, the higher propensity for that loan to default at some point. So not only the actions that we're taking to reduce the third-party activity, but other actions that we always take in terms of looking at our underwriting will also drive continued improvement throughout the year. So you'll see better performance in the portfolio in 2Q as compared to Q1. And then in the second half of the year as compared to the first half of the year.

Michael Brown -- President and Chief Executive Officer

And if I can just add to that because I think what Mike points out is very important is there's a lot of that we can do internally as well as externally to help remain positive in the momentum we're seeing in the loan-loss provision. And I'd like to just point out, there's the idea of 13,000 initial owner arrivals, which translates this year to between 200, 300 basis points. Incremental occupancy is all about owner engagement, and that is one of the key efforts that we have that will ultimately be the difference in helping drive down the provision. Because when we put owners on vacation, they're very satisfied and we see great results in them staying in the portfolio.

But I think also -- we also remain extremely committed to a litigation strategy. It is not the core strategy. It's around owner engagement but we continue to see positive results as late as two weeks ago where another marketing exit company chose bankruptcy over the opportunity to defend their case inside of a courtroom. It was a big marketing company and again, faced with the courtroom, they chose bankruptcy.

And in that time between that bankruptcy and today, we filed suit again on another company that's clearly using its legal license improperly, and we're going to keep pursuing it until either companies act ethically or they're held accountable for their unethical actions. We're all for fair competition but it should be transparent and consumers should be protected. And our litigation will do not only that but will hold both marketing firms and law firms accountable.

Joe Greff -- J.P. Morgan -- Analyst

Thank you very much.

Mike Hug -- Chief Financial Officer

Thanks, Joe.

Operator

[Operator instructions] We'll go next to Jared Shojaian with Wolfe Research. Please go ahead.

Jared Shojaian -- Wolfe Research -- Analyst

Hi. Good morning everyone. Thanks for taking my question. So I'll take the provision question from a different angle, and I guess ask about the allowance balance because we've seen back-to-back quarters now where you've written off more than you've provisioned.

So can you just help me understand the thought process there? Are you provisioning less because you previously overprovisioned? Or because of some assumption that defaults of the future are going to improve or some of the reasons you cite, like I guess the third-party issues accelerating some of the defaults or some of the other things you've talked about?

Mike Hug -- Chief Financial Officer

Yes. A couple of things there. The default as you mentioned in the quarter were higher than the provision. So that's why, over time, we had been providing at a provision at a higher rate to make sure we had a reserve in place to absorb the higher level of defaults.

The other thing, with the growing portfolio as I mentioned, the portfolio is 5% higher at the end of 2018 than it was since 2017, and we would expected to grow throughout this year as we continue to drive new owners. We put that provision to maintain that reserve at a higher level. Once you have that reserve at that higher level, you're able to absorb the defaults that you'd been anticipating, and as we continue to make the positive changes to our underwriting, as we continue to impact the third parties and their ability to try to convince our owners to exit their contracts. As we take those positive actions, you can still see the provision come down because future portfolio performance will improve and with those defaults that we'd been expecting because of a larger portfolio will stay in place.

So I would say it's a mix of the fact that we do expect the portfolio to get better, performance to get better, that's why we have a full year provision guidance that we're holding at 20.5%. And we're confident that the changes we're making will make that happen.

Jared Shojaian -- Wolfe Research -- Analyst

OK. And then I just want to understand a little bit better on some of the cost timing you've talked because last quarter, I think, you were saying the first quarter would be comparable to the prior year on EBITDA, you ended up beating that by about $8 million. You called out the $3 million of business interruption. So I mean that's a $5 million difference there.

Is there any more cost timing we should be thinking of in the quarter? And I guess what I'm ultimately trying to get at is, any reason why you wouldn't take the full-year guidance up by about $5 million?

Mike Hug -- Chief Financial Officer

Well, you have the math exactly right, Jared. We agree with you. It was a strong quarter. And we overperformed really driven by strong owner arrivals to our locations which bring with it high margins and therefore, profit.

I think a few things to keep in mind here is, when you look at our overall guidance, the first quarter represents the smallest EBITDA quarter of the entire year and given the fact that it's very early in the year, we felt that Q1 be -- really gave us the necessary operational flexibility not only to achieve the financial objectives we laid out but as importantly, to make sure that we achieved with the operational goals that we've laid out there. The new owner mix, the Blue Thread growth, preserving our margins and that's how we're looking at Q1. You've mentioned and Mike's mentioned the $3 million timing benefit, which makes the beat a little bit smaller. And we had expected that in Q2.

So it's just arrived one quarter order -- one quarter early. And that's the reason that when you look at our strong first quarter, we left our guidance the same and feel that it really sets us up for the year to make sure that we're hitting our -- all of our strategic objectives.

Jared Shojaian -- Wolfe Research -- Analyst

Great. Thanks. And then just one last quick one, if I may. I didn't see any theme for service sales booked in the quarter.

And I know it's very small part of your business, but could you just talk about what happened there? Was that intentional? And how we should be thinking about that line going forward?

Mike Hug -- Chief Financial Officer

Yes. That was intentional. It's just the inventory pop on that we have available that's coming in at certain times of the year. We would expect on the full year, we'll do about $30 million of asset-light sales on a full-year basis.

Jared Shojaian -- Wolfe Research -- Analyst

OK. Great. Thank you very much.

Operator

And this will conclude today's question-and-answer period. I'd like to turn the call back to Michael Brown for closing remarks.

Michael Brown -- President and Chief Executive Officer

Thank you. And let me close by reiterating that we were very pleased with our first-quarter performance as we completed the quarter with increased confidence in our positioning for the remainder of the year. We have strong momentum starting the year and we're focused on the execution of our strategic plans. We have a great team, focused on delivering outstanding vacation experiences each and every day.

I want to say thank you to our associates for their hard work and focus on putting the world on vacation while delivering strong shareholder value. Thank you for joining us.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Chris Agnew -- Vice President, Investor Relations

Michael Brown -- President and Chief Executive Officer

Mike Hug -- Chief Financial Officer

Chris Woronka -- Deutsche Bank -- Analyst

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

David Katz -- Jefferies and Company -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Ian Zaffino -- Oppenheimer and Company -- Analyst

Brian Dobson -- Nomura Instinet -- Analyst

Joe Greff -- J.P. Morgan -- Analyst

Jared Shojaian -- Wolfe Research -- Analyst

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