Hilton Grand Vacations Inc

Good morning and welcome to the Hilton Grand Vacations first quarter 2021 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 13714033. At this time, all participants 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 touch tone phone to enter the queue. If at any point your question has been answered, you may remove yourself by pressing star 2. If you should require operator assistance, please press star 0. If using a speakerphone, please lift your handset to allow the 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 first quarter 2021 earnings call. Before we get started, please note that we've 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 undertake no obligation to publicly update or revise these statements. For discussion of some of the factors that could cause actual results to differ, please see the risk factors section of our 10-Q, which you expect to file after the conclusion of this call, and in any other applicable ICC 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.asgv.com. As a reminder, our reported results for both periods in 2021 and 2020 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 the 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 of our earnings release. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA on 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 today refer to first quarter 2021, and all comparisons are accordingly against first quarter of 2020. In a moment, Mark Wang, our President and Chief Executive Officer, will report 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. I'm happy to share with you our first quarter results, which showed sequential improvements for the third straight quarter. We've seen a lot of progress over the past few months on vaccine rollouts, which has brought a steady recovery of domestic leisure travel trends, including in some of our largest markets. We saw sequential improvements in our key operating metrics each month of this quarter, leading into a strong March, and that trend continues into this month. This positive trend leaves us optimistic about our core business and even more excited about what the future holds regarding our recently announced transaction with Diamond Resorts which I'll touch on more in a moment. Let me first get into some of our results for the quarter. In open markets, our total contract sales for the quarter were up 6% sequentially to $138 million. We saw a strong pace of improvement through the quarter with system-wide occupancy of nearly 70% for the month of March and a tour flow pace that more than doubled over the course of the quarter. And our reservation activity showed strong improvement, with net bookings per day in the first quarter more than doubling from what we saw in Q4 and to nearly the same pace we had in 2019. VPGs in our open markets remained strong and helped us to capitalize on improved tour flow. Close rates were again the driver here at just over 20%. I think that's a testament not only to seeing increased demand for travel and our high-quality HCV products, but also to the process and execution improvements that our teams have made over the past year. The high flow-through of our VPG strength, coupled with our cost savings program, enabled us to drive significant margin expansion for the quarter to a level on par with those in the first quarter of 2019. As we move through the year, we'll face some difficult VPG growth comparisons, but our process improvements should allow us to sustain VPG levels this year above where we were in 2019. Turning to our markets, as you can see in the slides, our regional markets rebounded strongly with contract sales for the quarter nearly 15% higher than 2019's levels. Our largest markets, Orlando and Las Vegas, have continued to make steady progress. Orlando grew 16% sequentially on a surge in bookings and activity and solid execution. In Las Vegas, despite the market's 50% capacity restrictions, our properties recovered to nearly 40% of their 2019 contract sales levels for the quarter with a strong acceleration in March. And with the recent announcement that the City of Las Vegas will lift capacity restrictions on June 1st, we're optimistic that we'll see further improvements in trends. In Japan, our first quarter contract sales came in at 70% of 2019's levels. As we discussed last quarter, our tour flow in Japan has been impacted by a recent series of lockdowns and extensions of travel restrictions. Our teams did a great job of adapting to the environment. They focused on driving targeted tours through our network of local sales centers, which, coupled with the strong reception of our recently launched project in Okinawa, produced strong VPGs with exceptional close rates. We believe that the restriction in environment is likely to remain in place through the Olympics this coming summer, but having a new local resort option in Okinawa should allow us to maintain our sales momentum. Turning to Hawaii, we've continued to ramp after reopening our properties at the end of the year. Waikoloa saw improvements in each month of the quarter and March recovered to more than 50% of 2019 sales levels with 70% occupancy rates on a strong improvement in domestic traffic. Oahu's sales have ramped more slowly due to the travel restrictions I just mentioned along with reduced air capacity. limiting the arrivals of Japanese visitors to the islands. We've been working to fill some of that business with U.S. guests, and as those restrictions are lifted and airlift returns, we expect to see improvements in occupancy and tour flow. Finally, we've been pleased with the traction that we've had in presales for our upcoming Maui project and expect to open that property and sales center for occupancy later this year. So to summarize, Our drive-to markets with no restrictions are showing strong, great momentum and are back above peak sales levels. And we're very encouraged in our largest markets, which are making steady progress and are set to benefit from further loosening of capacity restrictions. Hawaii is expected to continue ramping and show sequential improvements with increased domestic travel, but we won't fully recover in that market until Japanese visitations resume And we expect we'll have our urban resorts in New York and Chicago back in full operation in the second half of this year. Turning to our customer segmentation, we're really pleased with behavior we're seeing out of both our owners and new buyers. From a recovery standpoint, owners are coming back more quickly. Tour flow levels have jumped higher each quarter since reopening. And we've continued to close nearly one out of every three owners who tour with us, driving strong contract sales. New buyers are returning at a slower pace, but there's been some very positive signs in the quarter. Our new buyer close rates improved again from the fourth quarter to the highest level we've seen since the global financial crisis. We also saw another strong quarter of marketing package sales conversion rates. And we've seen improved activation of those packages as well. They're up over 60% since the start of the year, indicating that more people are committing to travel in the near term. Those activations drove the mix of book packages to approach historical levels this quarter, which is a substantial improvement from the trends we've seen since the beginning of COVID. Our resort and club business also improved in the quarter as incremental activity drove growth in our revenue per member for the first time since the end of 2019. And the cost controls helped to drive growth in segment profits on a year-over-year basis with strong margin expansion. Looking ahead, we expect that our owner arrivals will reach 2019 levels in the second half of the year, supporting further improvements in activity levels revenue, and segment profit. Our NOG reflects four quarters of COVID-impacted results. Since our member base has grown each quarter since the initial fall-off in Q2 of 2020, we expect to return a positive NOG in the quarters ahead as we lap that fall-off. And finally, in our rental and ancillary business, increased leisure activities drove strong sequential improvement in revenue and a return to positive segmented profitability. And as we look further out, we remain optimistic about our rental trends with our rentals on the books in the back half of the year at nearly 150% of what we saw at this same point in the year during 2019. So overall, Trends are moving in the right direction. We expect to continue seeing favorable buyer behavior and vaccine rollouts should drive further improvements in our forward booking activity. We expect this will drive improvements in our tour flow and support higher close rates, driving our contract sales. And as Japan restrictions ease, we believe that Oahu will recover and set us up for a strong second half of the year. And most of all, the positive trends that we're seeing make us very optimistic about our combination with Diamond Resorts. With respect to the timing of the proposed transaction with Diamond, things are proceeding as planned. We filed our initial antitrust regulatory submission in the U.S. and internationally, as well as our preliminary proxy a few weeks ago. We're currently in the process of arranging our permanent financing for the transaction and we expect to complete that process along with our regulatory requirements and shareholder vote in time for a targeted closing this summer. In the weeks since our announcement, I've had the opportunity to speak with many of our owners, shareholders, and team members, and have been struck by the level of enthusiasm around the transaction. And I can tell you that we share that same level of enthusiasm. This transformational combination will bring a significant scale in product diversity with a complementary footprint that strengthens our regional presence and enables us to drive meaningful revenue and cost synergies, ensuring that we're well positioned to be the leader in the timeshare industry for years to come. We look forward to welcoming Diamond owners and team members to the HEV family and introducing our brand, culture, processes, and level of service to the entire Diamond organization. While I can't say much about the results, I can say they've continued to demonstrate very strong recovery trends. And we think that the timing of this transaction coupled with the recovery path that we're both seeing should leave HCV very well positioned going forward to capitalize on the return of travel. So to conclude, we're encouraged about the trends we're seeing and have a lot of momentum exiting the quarter. The U.S. has made steady progress with the vaccination, and many jurisdictions have solidified their plans to transition to a full reopening if they haven't done so already. While we aren't completely out of the woods yet, we feel confident that as we move through the year, things will continue to improve and set us up for a strong exit to this year. At the same time, we're making progress toward closing the diamond acquisition, and our teams have been working diligently to prepare to hit the ground running once we close the transaction and begin the integration process in earnest. So it's been an extremely busy time for us here, but it's also been an extremely exciting time, and I look forward to what's to come. Before I turn it over to Dan, I'd like to give a special thanks to all of our corporate and operational teams who've been sprinting flat out for the past several months on executing the diamond transaction while simultaneously navigating this difficult environment. With that, Dan will walk you through our financial details.