Hilton Grand Vacations Inc

Good morning and welcome to the Hilton Grand Vacation's second quarter 2020 earnings conference call. A telephone replay will be available for seven days following the call. The dial-in number is 844-512-2921 and enter pin number 136-97042. At this time, all participant lines have been placed in a listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question, please press star 1 on your touchtone phone to enter the queue. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. If you should require operator assistance, please press star 0. If using a speakerphone, please lift your handset to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up to allow the opportunity for everyone to ask questions. You may then re-enter the queue to ask additional questions. I would now like to turn the call over to Mark Melnick, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Operator, and welcome to the Hilton Grand Vacations second quarter 2020 earnings call. Before we get started, please note that we have prepared slides that are available to download from a link on our webcast and also on the main page of our website at investors.hgv.com. We may refer to these slides during the course of our call or question and answer session. As a reminder, our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, and these statements are effective only as of today. We are going to take no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the risk factor section of our 10-K. as well as similar sections in our 10-Q, which we expect to file soon after the conclusion of this call and in any other applicable SEC filings. We'll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers, as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com. As a reminder, Our reported results for both periods in 2020 and 2019 reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in a period when a project is under construction, and then hold off on recognizing those revenues and expenses until the period when construction is completed. To help you make more meaningful period-to-period comparisons, you can find details of our current and historical deferrals and recognitions in Table T1 in our earnings release. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and our real estate results will refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. Finally, unless otherwise noted, results discussed today refer to second quarter 2020 and all comparisons are accordingly against second quarter of 2019. In a moment, Mark Wang, our President and Chief Executive Officer, will provide highlights from the quarter in addition to an update of our current operations and company strategy. After Mark's comments, Our Chief Financial Officer, Dan Matthews, will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our President and CEO, Mark Wang. Mark? Morning, everyone.

Earlier today, we released our second quarter results. Over the past several months, we acted decisively to respond to the global pandemic with an emphasis on protecting our owners, guests, and team members along with making critical decisions to support our business model. We've reopened many of our properties and are beginning to see positive signs that our customers are responding favorably, as evidenced by recent conversion trends. Our contractual recurring revenue streams continue to generate meaningful income, and while we're cautiously optimistic, We're being prudent in our evaluation of travel environment and the fact that it will take time to fully recover. We're prepared to sustain the business during this period of uncertainty by effectively managing our cost structure to ensure we're protecting cash flow and by taking necessary actions to preserve our liquidity. And we've kept an eye on the long term to make sure we're well positioned to lead the travel industry out of the crisis and return to a path of sustainable growth and cash generation. First, I'd like to cover the status of our resorts and sales centers, along with some of the initial results that we've seen since opening. We've reopened our first major resorts on May 21st, welcoming guests back to our properties in South Carolina, Orlando, and Utah, and subsequently opened their on-site sales centers in the weeks that followed. We heard great feedback on our HDV enhanced care initiative, and our guests were overwhelmingly positive that the guidelines made them feel safe without feeling constrained during their vacation. We saw solid levels of occupancy at our South Carolina and Utah resorts, particularly over the Memorial Day and Fourth of July holidays. Our South Carolina occupancy levels have consistently held in the 70% to 90% range since we reopened, and Utah has been in 85% to 95% range. Orlando occupancy levels have remained in the 30% to 40% range, down from prior levels as some popular tourist attractions either remain closed or were running at reduced capacity. In mid-June, we opened our Las Vegas properties and sales centers, where we also saw occupancies in the 30% range. However, similar to Orlando, many casino destinations are currently operating with significant capacity constraints. We expect that we'll see improved trends in these markets as restrictions are lifted and utilization rates improve. As of today, approximately three-quarters of our resorts have resumed operations. We continue to monitor the situation in Hawaii, New York City, and Chicago, and anticipate rolling openings of our sales centers in those markets based on factors including government restrictions and more normal levels of travel demand. Overall, since we began reopening, we've seen our members returning and our occupancies improving. And we've got a robust pipeline of over 400,000 marketing packages that we sold to potential new buyers and that we've recently started to activate. Ultimately, increases in occupancy will lead to more tours, which in turn drives our sales cycle. In the weeks following our resort reopenings, we also resumed operations at several of our sales centers, although they've initially been running at lower levels of utilization as we reengage our marketing efforts. We'll continue to ramp our sales operations in response to tour flow levels, and we believe the process improvements we've made over the past few months will enable us to service The same level of tours as we did in 2019 with a leaner and more efficient team. Yet, despite lower tour flow, our sales execution in this challenging environment has been commendable. Our close rates improved significantly for both owners and new buyers, driving a mid-teens improvement in our new buyer VPG and a nearly 20% gain in our owner VPG for the quarter. Those improvement in close rates combined with a mixed shift to owners drove overall VPG up 41% to over $4,700. As a result of these efforts, during the month of June, our teams were able to generate contract sales at 21% of last year's levels on only 14% of last year's tour flow. We anticipate our VPG to trend toward more historical levels as we add back additional tours and sales staff, although the process and organizational changes we made as part of our strategic priorities should result in a sustained improvement in our efficiencies. The defensive characteristics of our business model were also evident this quarter. The EBITDA of our financing business was relatively flat despite carrying a lower receivable balance. In our cost savings program, allowed us to grow our club and resort EBITDA despite a revenue headwind from lower transaction-related fees. These stable sources of EBITDA are one of the key differentiating factors of our business model. So, there were some nice positive trends to point to, but there are also clearly challenges that remain outside of our control that are a drag on our tour volumes. Travel restrictions remain in place in a number of markets, and others have various limitations on businesses that appeal to travelers. New York and Hawaii, for instance, accounted for over a quarter of our tour flow last year and will likely see limitations on travel through the rest of the year. And nearly half of our tour flow was generated in Las Vegas and Orlando, which are still experiencing capacity limitations on their key tourist attractions. We've recently seen upticks in COVID cases in several key markets, including Florida, South Carolina, and Nevada, and the news cycle has continued to focus on hotspots in various areas of the country. And while we'll continue to do our utmost to provide a safe environment for our guests and team members, we think that consumers will continue to show varying levels of comfort with travel, particularly among new buyers. We do believe that as we progress through the pandemic, we'll see our KPIs return to normal run rate levels, although the timing remains uncertain. With that said, our strategic priorities have guided our approach leading up to and during our opening process. And while there's more work to be done, adhering to these priorities as we navigate through this crisis will set us up for strength as we complete our property reopenings and proceed through the period of recovery. The first priority is to safeguard our owners, guests, and team members. We've been extremely focused here, and along with social distancing and free PPE for our guests, we've rolled out our enhanced care program in alignment with Hilton's own Clean Stay initiative. The program further elevates our already rigorous cleaning and hygiene process in a way that is thorough, visible, and continuous. And as I mentioned earlier, We've heard great feedback from our guests about the enhancements. The second priority is to streamline our operating and capital spending. Last quarter, we shared the steps we took to bolster our balance sheet and provide 22 months of available liquidity. And we made further strides this quarter with a credit facility amendment and securitization, as Dan will share with you shortly. Turning to our operating expenses, we've been laser-focused on controlling costs and reducing our cash burn to a minimum. And we were nearly break-even on an EBITDA basis in June, despite contract sales being only a fraction of last year's levels. We're in the process of identifying additional permanent cost savings. As I indicated earlier, we won't be able to fully optimize our expense structure until we return to more normalized operations But we do know that we'll come back even more efficient than we were prior to the crisis, bolstering our historical record of margin outperformance. Our capital spending plans on inventory, development, and technology have also been revamped to strike an optimal balance between returning to growth and preserving capital. The third priority is to protect our recurring revenue and embedded value. Our teams have been working tirelessly with our member base to assist them with rebooking or changing their vacation plans this year, and we've made sure that none of our members lost any of their point values due to travel disruption related to COVID-19. We've begun to reengage our members with special offers and highlighted our enhanced care guidelines to promote a return to travel, particularly at 70% of our locations that are drive-tos. The results of these initiatives is that the attrition rate within our owner base remains low. All of these efforts are in support of our fourth and final priority, which is, of course, to grow our business. We've introduced several new projects this far in 2020, starting with Ocean Tower Phase 2 in the Quinn, followed by Maui in June, and our Cabo project in coming months. As we've reopened our resorts, we've begun to activate packages from our marketing pipeline to drive new buyer tour flow. And as I just mentioned, we're working with our owners to preserve their ability to travel when they're able to do so. We've paired these efforts with promotional offerings and enhanced value to encourage upgrades and new sales. At the same time, we've embraced the evolution of the Timeshare business model during this pandemic having successfully expanded our virtual sales process and transitioned some of our staff to a more efficient work-from-home model. And we continue to evaluate distressed opportunities with a number of new and familiar fee partners, although it's still too early in the cycle to see compelling assets hit the market. Focusing on our strategic priorities has enabled us to concentrate our efforts during this unique time by giving us shorter-term objectives and guidelines as we navigate our way through the recovery. To sum up, I'm proud of our teams and our execution today. While Q2 likely marked the bottom, the path to truly unrestricted travel and increased consumer comfort remains uncertain and will require patients to return to our prior run rates. As we've seen in past crises, it's not a matter if our owners and guests will return, but when. In addition, our customers have a strong affinity for the HEV brand, and our owners, 70% who own their intervals outright, have a prepaid vacation waiting for them. We continue to see a desire and willingness to travel under the right circumstances as evidenced by our booking data. Forward bookings are down just 9% compared to last year, and first quarter bookings for 2021 are actually ahead of where they were at the same time a year ago. While not necessarily indicative of future occupancy, these trends give me confidence that our owners and guests are eager to return. And we're better positioned than any other time in our history to withstand the current environment and lead the travel industry on the path to recovery. As I mentioned earlier, we have more than 400,000 packages in our pipeline. near the most we've had in our history, and the vast majority of these package holders have not yet booked vacations. And we have nearly 330,000 owners, an all-time high that is the result of decades of focusing on NOG. Ultimately, this means we have three-quarters of a million opportunities to engage and win new business in the coming quarters as travelers return. In the meantime, we've shown that we can operate efficiently and approach breakeven in a low-volume environment. And we've also proven we can flex our business quickly to respond to different levels of demand. In closing, my conviction in our operating model is as strong as it's ever been, led by our multichannel marketing strategy, embedded owner base, and strategic competitive advantage of our Hilton relationship. I'll now turn the call over to Dan.