Hilton Grand Vacations Inc

good morning and welcome to the hilton grand vacation second quarter 2021 earnings call a telephone replay will be available for seven days following the call the dial-in number is 844-512-2921 and enter pin one three seven one four zero three four at this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation if you'd like to ask a question please press star 1 on your touchstone phone 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 the signal to reach our equipment please limit yourself to one question and one follow-up to to ask questions. You may 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 Vacation second 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 the call or or on our question and answer session. As a reminder, our discussion 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 we expect to file 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 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 in our earnings release. For ease of comparability and to simplify our discussion today, Our comments on adjusted EBITDA and our real estate results refer to results excluding the net impact of construction-related deferrals and recognitions for all reporting periods. A complete accounting of our historical deferral and recognition activity can be found in Excel format on the financial reporting section of our investor relations website. Finally, unless otherwise noted, results discussed today refer to second quarter 2021, and all comparisons are accordingly against the second quarter of 2020. 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.

I'm happy to report another quarter of sequential improvement, strong results that we released this morning. We experienced a nice linear pace of contract sales recovery in Q2 with monthly sales versus 2019 levels improving each month of the quarter. That's a continuation of the trend we've seen so far throughout 2021 and into our current quarter. So we remain very optimistic about our business and our pace of the recovery. But what stands out this quarter is the driver of those contract sales. Specifically, it was the material improvement in Tour Flow that we saw in nearly all of our major markets. We've done a great job executing through the pandemic, and I'm very proud of our teams. But as I've said in the past, ultimately, Tour Flow and customer acquisition are key drivers of the business. So it's really encouraging to see a rebound in tours with the release of pent-up travel demand. There are still a few pieces left to solve for, namely the return of our Japanese owners and the recovery of our urban markets. But with each passing day, we become more confident that it's just a matter of time before we see a recovery there as well. And of course, We're maintaining our vigilance and cleaning procedures to ensure that our guests feel safe and comfortable as they return to our properties. I'm also excited to report the results of yesterday's shareholder vote, which was an overwhelming approval of the Diamond acquisition. We appreciate this vote of confidence from our shareholders, and we're looking forward to closing the deal in the coming days. With today's results and the strong momentum that Diamond is also carrying, We're in a terrific position to start our journey as a combined entity. So let's get into some of the results for the quarter. Our contract sales for the quarter were $259 million, up 86% versus last quarter. We saw improvements in our pace against 2019 in each month of the quarter, ending at 80% of 2019 levels in June, and we've seen a continuation of that momentum thus far in July. And if you exclude Hawaii and our urban markets, where we only recently reopened, our contract sales recovered to 92% of 2019's levels by June. BTG for the quarter was just under $4,400, up 29% compared to 2019, owing to process improvements and the mixed shift to owners. We also saw our first positive contribution from average transaction price since 2018 due to solid sales of our new projects, which are in higher price markets like Maui, Cabo, and Okinawa. These factors enabled us to drive strong flow through again this quarter, with EBITDA margins several hundred basis points ahead of where we were in 2019 on lower levels of contract sales. As I mentioned, the standout contributor to contract sales this quarter was our tour flow, which doubled from the first quarter levels. Average occupancy for the quarter was 81%. That's a big uptick from the 50% that we saw in the first quarter. And it isn't far below the 89% occupancy we had in the second quarter of 2019, which is a major accomplishment considering Japanese travelers haven't yet returned to Hawaii. As we look out to the rest of the year, occupancy trends remain very encouraging. In key markets like Orlando, Las Vegas, South Carolina, and even Hawaii, we're seeing on-the-book occupancy levels equal to 2019 through the rest of the year. So it's clear that the trend of people returning to travel that we saw exiting the first quarter continued into the second quarter, and in some cases, it accelerated. This is a great sign that bodes well for our business and the pace of the recovery. When we combine that with our continued execution driving VPG strength and our cost efficiencies, it leaves us confident that we'll achieve 2019's run rate EBITDA as we exit this year. Looking at our markets, our regional resorts continue to shine and we are performing well above 2019 levels on strong occupancy and tour flow. which we expect to continue. In our two largest markets, Las Vegas and Orlando, trends were similarly strong and by the end of the quarter had returned to 2019's pace of contract sales. In these markets, we typically have a pretty even level of occupancy across the quarter, but this year we saw a large step up in June. This coincided with the elimination of capacity restrictions in Las Vegas and the lifting of mask requirements at Disney during the month. These are good signs about where we are in the recovery cycle since people are willing to return so quickly to these high-traffic markets and are a positive indicator of future trends as attractions and entertainment options return. In Japan, we continue to engage our owners and drive contract sales through our in-market Japanese sales centers. To date, the government has maintained its strict stance around the pandemic, which we believe will remain in place at least through the Olympics. But even with this headwind, our contract sales in Japan have been consistent at about 70% of 2019's levels. Our new Sysoco project has had great traction since we launched pre-opening sales earlier this year. and intervals in Hawaii have remained popular with the Japanese buyers despite the current travel restrictions in place. Turning to Hawaii, similar to our other markets, we saw material improvement in our contract sales this quarter driven by strong domestic occupancy and tours. And we've had success with placing some of the tours that would have historically been filled by the Japanese guests. Our contract sales to domestic buyers in both May and June were record highs and well above the same period in 2019. That drove a nice improvement in contract sales at our Hawaii sales centers, which exited the quarter at two-thirds of our 2019 contract sales base. The Hawaii government has recently loosened restrictions as well. freeing up all inter-island travel and eliminating the testing requirements for vaccinated inbound visitors, which should make it even easier for domestic travelers to visit the islands. Regarding Japanese tourism in Hawaii, based on conversations with our Japanese owners, we're confident that after two years of being locked out of the islands, we're setting up for a big release of pent-up demand from Japanese owners and travelers once the restrictions are lifted, like we've seen with the robust trends in our other markets. Our best thinking today is that we'll see the beginning of return to the islands as we move into the fourth quarter, ramping up through the first half of 22. Finally, in our urban markets, we've seen some improved trends as restrictions have been eased although we still expect these markets to recover more slowly than the rest of our system. We have a few properties left to reopen in New York and expect them to be back online by the end of the third quarter, marking our return to full operating capacity as a company. Moving to our customer segment, both owners and new buyers contributed to the inflection in our tour flow as we saw throughout the quarter. New buyers were particularly strong, with tours up 120% from Q1 levels and returning to 50% of 2019's pace, while owner tours were up significantly from the first quarter to reach 75% of 2019's levels. This is a great sign as new buyers return, and we've got a robust pipeline of over 400,000 packages built up to drive further improvement in that tour flow. From a marketing perspective, our package sales pace has returned to 2019's levels, which fuels that new buyer tour channel and replenishes our pipeline even as we convert existing packages into tours. But we've also improved the quality of our pipeline over the course of the pandemic as we've learned to do more with less. We've focused on better segmenting our prospects and owners to make every one of those tours count. leading to both improved top-line efficiencies through better close rates and reduced expenses from removing less profitable tours. In fact, Q2 close rates for new buyers were still up nearly 175 basis points versus 2019's level, and our owner close rate was up 450 basis points. These efforts have driven the BPG outperformance we've seen in both segments, including this quarter. We faced very difficult comparisons to the record G2 VPGs last year, which were distorted due to the pause in the operations. But a strong contribution from average price in our owner segment and a solid close rate performance from new buyers were key to holding our overall VPGs to nearly $4,400. Looking forward, we still expect VPGs to normalize with mix as our new buyer trends catch up to others and trend back toward a more balanced mix of owners and new buyer sales. But this theme of sourcing efficiency will carry it forward into the post-pandemic world and will be a key driver of NOG, which this quarter returned to growth at 50 basis points. Looking at our other businesses, those new members and better activity levels drove higher revenues at our club and resort segments. although it was offset by higher expenses as we balance our staffing levels to service the increased demand that we're seeing. A rental business performed exceptionally well due to the uptick in demand. It was only a few million dollars shy of our 2019 revenue levels. Expenses remained higher over the medium term due to the elevated developer maintenance fees, but we've been happy with the margin performance in that business. and our forward bookings for the remainder of the year are still well ahead of 2019's levels, which should support trends for the rest of the year. Overall, we're carrying great momentum across our business, which aligns well with the anticipated closing of the Diamond Resort acquisition. We received regulatory approval from the SEC in June, along with structuring an upsized financing package at favorable rates, which Dan will cover in more detail. And yesterday, we received shareholder approval to proceed with the transaction, which leaves us on track to close the acquisition in early August. Our planning has progressed well, and the teams have been working diligently to prepare for day one and beyond. The longer-term integration plan focuses on two areas, which will progress on parallel tracks. The first area is cost efficiency, driven through consolidation with the standardization of our organization, systems, and processes. We expect to generate meaningful savings from the large amount of overlap between our business model, as we mentioned in our announcements. The second focus is to drive growth through expanded market presence and enhance consumer value proposition. We'll begin rebranding the Diamond properties under our new Hilton Vacation Club brand in the coming months, and we'll leverage this brand along with a wider range of price points and options to attract a broader market of new buyers. Importantly, The key is that we view these initiatives as creating material accretive growth in the coming years. Diamond has continued to outpace the industry in their recovery, and the strength they're seeing across their portfolio of regional properties mirrors the trends we're seeing at ours. So clearly, our goal is to minimize disruption and not impact their momentum as we integrate our two businesses. We'll provide additional details in the quarters ahead as we move through the process, but we're excited to be nearing the end.

In the finish line, I'm closing.