Hilton Grand Vacations Inc

Good morning and welcome to the Hilton Grand Vacations third 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 13714035. At this time, all participants have been placed on 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 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 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 Vacation's third 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.hev.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. These statements are effective only as of today. We undertake 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 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 next press release and on our website at investors.heb.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 in the simplified discussion today, our comments on adjusted EBITDA and our real estate results are reported 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 third quarter 2021, and all comparisons are accordingly against third 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 excited to share our results with you today, which reflect two months of ownership of Diamond Resorts. I'd like to start by saying how proud I am of the combined HEV team. Not only did they come together to close a mid-quarter acquisition and get ready for the earnings results today, but they also maintained their focus on the business and execution, producing strongly in line with 2019's levels with record margins. To further put this into context, I'm even more impressed that we generated these accomplishments despite the Delta variant wave that started to take hold shortly after we closed the transaction. We've experienced several different COVID spikes over the past 18 months, and with each one, we've seen an uptick in cancellations early on, coinciding with an increase in media coverage. But we've noticed that with each successive wave, the impact of our business has lessened and our trends have normalized more quickly. The Delta wave fit into this pattern as well, with the impact largely confined to the month of August. And as infection rates dropped, we saw a rebound in trends, which continued through October. Before we get into the details for the quarter, I'm happy to report that the Diamond integration is moving full steam ahead and according to plan. As you know, we officially closed our acquisition in early August. Since the transaction closed, I've been on the road visiting our properties, holding town halls, and interacting with our team members, and I can say there's a tangible level of excitement across the organization right now. Our new team members have embraced the culture at HEV, and our legacy HEV team members have enthusiastically welcomed them, creating a positive environment to exchange ideas and promote best practices that sets the foundation for the future of HEV. At this early stage of integration, we've been intensely focused on the cost side of the equation, getting the human and capital infrastructure set, and extracting synergies to rebase the cost structure. We've made great progress on our cost savings initiatives and are already tracking at over half of the target run rate that we set out at the transactions announcement. Dan will get into more detail here, but it just underscores our dedication to being the most efficient operator in the industry. We'll continue focusing on this cost rationalization for the next several months as we finalize our plans for rebranding phases of the integration, which we'll begin to execute on next year. These initiatives will be the key to unlocking the revenue synergies that will maximize the potential of the combined company. There are three main components of the Revenue Synergy Plan. The first is rebranding our sales centers, which will allow us to sell all of our brands throughout our network of sales centers. This entails installing sales training, technology, and compliance in the diamond sales centers, as well as upgrading the physical layout to meet the HEV standards. We anticipate that these rebrands will proceed rapidly and that we'll be able to have nearly all of our sales centers rebranded by the end of 2022. This will significantly expand our distribution network, nearly tripling the number of sales centers and giving us the opportunity to engage with new buyers at locations across the U.S., Mexico, and Canada. The sales center rebrand will also coincide with the launch of our new membership program, which we'll announce to our members in early next year. The third element of our revenue strategy is rebranding Diamond's resorts, which will ensure that all of our properties provide a consistent, high-quality experience. The rebranded resorts will be introduced into our system in several ways over the next few years as they're completed. will come out of the gate strong with approximately 15 to 20 of Diamond's properties being ready to add to the HEV system in the next year alone. Importantly, nearly all of this first group will be in new markets for HEV. And I think our owners will be really surprised by how quickly the number of vacation options will grow. And we know that's what resonates with them. In fact, a recent survey we conducted with owners and prospects showed that our expanded portfolio was cited as the number one most appealing characteristic of the HEV and Diamond combo, followed closely behind by the benefits of the Hilton Honors Program. While we won't begin the rebrand in earnest until next year, we're already hard at work adopting some of the programs we believe will be successful with our HEV owner base as well. For instance, we've renamed Diamond's annual LPGA event to the Hilton Grand Vacations Tournament of Champions, which we'll host here in Orlando. This high-profile event will not only give us an enhanced brand exposure, but will also provide the first opportunity for HEV members to participate in our events of the lifetime program. Overall, I'm very pleased with how the integration of preceding which has contributed to another solid set of results. So let's talk through the details of the quarter. To make the trends easier to understand from here out, I'm going to refer to trends for a full three calendar months of both Legacy HCV and Diamond, even though we didn't own Diamond's business in the month of July. We've also provided some very detailed slides on our website with historical diamond information for your reference, which includes full calendar third quarter segment results. Our contract sales for the quarter continued to show improvement in the recovery pace against our prior peak. Legacy HCV sales of $290 million were 81% of 19s levels, 10 points ahead of where we were in the second quarter's pace. And Diamond was also strong at 88% of their 19s levels. After a strong July, we did experience a Delta-related pullback in August. But by September, sales had rebounded and continued to improve through October. In fact, our legacy HTV business just finished October at 94% of 19 sales levels. Since the end of September, we've also seen weekly improvements in our forward on-the-book occupancy rates at both legacy HTV and Diamond. As we look out at the rest of the year, our room nights on the books are up 3% against 19's pace, with a solid mid-single-digit improvement in December, and our cancellation rates have declined to levels below what we saw in June. Breaking down our contract sales components, door flow pace versus 2019 improved each month of the quarter and was supported by steady new buyer trends at both Legacy, HEV, and Diamond, even during the month of August. We saw VPG outperformance due to elevated close rates, along with another strong quarter in average price growth that was driven by sales of our new resort offerings in Maui, Sissoko, Charleston, and Cabo. The high flow-through of improved VPG, along with our cost efforts, underpinned a great EBIT result. At our legacy HGV business, we had another quarter of impressive EBITDA margin performance, which were the highest in the company's history at 27%. And our focus on efficiency produced EBITDA that was on par with the third quarter of 2019. Diamond also had a strong EBITDA performance for the calendar third quarter, with margins well ahead of their 19 levels. Looking at our geographic performance, we had encouraging results in the mainland both at Legacy HCV and Diamond. Our regional resorts across the system outperformed as they have throughout the pandemic, and we saw material contract sales benefit this quarter from both the addition of Diamond's regional portfolio as well as a contribution from our recently opened property in Charleston. Looking at our largest markets, Orlando was a standout this quarter and improved across multiple metrics for both legacy HEV and Diamond. Not only did Torflow recovery pace improve in both August and September, but VPG did as well, which drove contract sales gains against 2019 at both entities in the month of September. One other mainland market I'd like to highlight this quarter was New York. Results for the third quarter were also impressive, particularly relative to where we were a quarter ago. Our tours tripled sequentially, and we saw increased PPG that drove a substantial improvement in our contract sales recovery pace in each month of the quarter. The net result was that in Q3, we generated contract sales that were two-thirds of 19th levels on only one-third of tour flow. So a really good job by the teams there. Turning to white, we had success with our ability to drive visitation with our domestic guests. Our legacy HGV domestic tour flow finished a quarter above 80% of 19's levels, which is a full 20 points ahead of where we tracked in Q2. And with solid VPGs, we generated record contract sales to domestic guests at 122% of 2019's levels. So, the appetite to visit Hawaii is stronger than ever with our domestic guests and we'll continue to benefit from their increased visitations while we await the return of our Japanese travelers. To give you an update on Japan, we're still awaiting the removal of international travel testing and quarantine requirements by the national government that would encourage a return to Hawaii by the Japanese. And our current assumption is that we're unlikely to see the return of these travelers to the islands in time for the holidays. Given that Diamond doesn't have a Japanese business, we're now much less levered to these policy changes than we were at legacy HGV. But we're dedicated to remaining the leader in this market, and we're convinced that the demand to return to Hawaii will be strong once the restrictions are lifted. On a positive note, trends in our local Japanese sales centers have been very stable from a tour flow, VPG, and contract sales perspective, despite a prolonged countrywide lockdown. These restrictions have recently been relaxed as Japan has had success with their nationwide vaccination campaign and has had very low infections. Allowing people to travel more freely within Japan should help to support our local Japanese sales and it also aligns well with the October 5th opening of our new project on the island of Okinawa. So when I look across the different geographic regions of our business, there are some real bright spots. I'm really encouraged by the stability we had across our mainland portfolio and believe that we're already seeing some of the benefits of the increased portfolio diversification that Diamond brings. And importantly, we've seen some progress in both Hawaii and Japan. From a customer segmentation standpoint, our new buyer trends impressed again, both at HEV and Diamond. After strong growth in July, our new buyer tour flow recovery pace held those gains through both August and September. This is a really positive result as new buyers are generally a good indicator of overall travel sentiment along with being a key to our long-term value creation in our business. Driving net owner growth will remain a focus for the combined entity. Our legacy HDV NOG has continued to improve as sales have recovered and was 1.2% as of September. While we're not ready to apply the NOG concept to Diamond yet, since it's a 12-trailing-month metric, we're off to a solid start with nearly 2,500 net new members added during the calendar third quarter. Our legacy HDB new buyer, BPG, improves sequentially and year-over-year against difficult comparisons and is 15% greater than the same period in 2019. This was driven entirely by improved close rate, which was up sequentially and year-over-year in the third quarter and is 240 basis points ahead of our close rates in 2019. The addition of new buyers to our system is also a key driver of our other business segments, which now represent half of the EBITDA of the combined company. Increased revenue per member combined with expense controls at our club and resort management business enabled us to surpass our 2019 profit levels with margins 200 basis points ahead of where they were at that time. And with the addition of Diamond's substantially larger management business due to larger system size, this will further bolster our cash flow from this recurring V-string. Finally, our rental business surpassed 19's revenue levels by nearly 20% at both Legacy, HEV, and Diamond, owing to increased demand across the system and robust rental activity in higher dollar markets like Hawaii. So, when I look at our results in the context of both a transformative integration process and a pandemic, I'm proud of how well the team has come together and maintained their focus to drive the business forward. We saw trend improvements across multiple geographies and witnessed some initial benefits of our increased diversification and scale. We drove tour flow and generated net owner growth, and we did it efficiently to improve our flow through to EBITDA. To wrap up, I'm very pleased with our results this quarter and our first few months as a combined entity. Our integration is progressing well and according to plan. We've come out of the block strong on our cost synergy efforts and we're hard at work prepping for our rebranding launch and integration of our sales operation in early 2022. The team is energized. The travel backdrop continues to improve by the day, and we're seeing momentum return to the business that sets us up really well as we head into the next year. I'll now turn the call over to Dan to take you through the financial details. Dan?

Thank you, Mark, and good morning, everyone. As Melnick mentioned in his introduction to our call, our reported results for this quarter included deferred revenue and expense recognitions, which you haven't seen since the 2018 opening of our Ocean Tower project. This quarter had a revenue recognition of $241 million from the openings of our Maui, Phase II of Ocean Tower, Sissoko, and Central projects. Netting out the associated recognition of related direct expenses for those sales boosts GAAP-adjusted EBITDA and net income by $133 million for the quarter. Recall that the mechanics of ASC 606 require that presales and associated direct expenses of projects under construction are deferred until you receive your certificate of occupancy for the project, at which time GAAP treatment is that you recognize those deferred revenues and expenses all at once. In Q3, this results in our gap revenue, expenses, adjusted EBITDA, and net income being higher than the same stats on an economic basis, which is the metric that we use to manage the business since it more closely matches actual cash flows and which, as always, I'll refer to exclusively in my prepared remarks. It's important to note that deferrals and recognitions in the quarter only affect our legacy HEV results and do not impact Diamond's results at all. I'd also reiterate that you should download the slides we provided on our website this morning laying out historical segment financial information for Diamond Resorts. These financials have been remapped to conform with our business line detail and will provide you with a much clearer view of Diamond's historical performance than what was available with the first and second quarter Dakota holding financials filed earlier this year. Ultimately, these data points should provide you with a great base for financial modeling. In my prepared remarks on the quarter, I'll refer to both our reported Q3 results, including our 59 days of diamond ownership, along with trends for diamond full calendar third quarter that you'll find in the slides. In order to prevent confusion, I'll be clear which diamond numbers I'm referring to. With that out of the way, let's review the results for the quarter. Total revenue in the quarter was $687 million, excluding the aforementioned recognitions. Diamond contributed $245 million of revenue during the roughly two months of ownership, and at Legacy HDV, we again saw sequential improvements in all of our business lines, with a 25% sequential improvement in our real estate revenue. Q3 reported adjusted EBITDA was $207 million, of which Diamond contributed $89 million. As Mark mentioned, our HDV standalone economic EBITDA was $118 million for the quarter, which matched our Q3 2019 EBITDA. EBITDA margins in the quarter were 30%. This included record EBITDA margins of 27% at our legacy HEV business. And Diamond also generated record EBITDA margins of 36% during our two months of ownership, aided by strong operational performance, along with our success in achieving material cost energies during the quarter. Looking at those synergies, we've made great progress and have achieved a run rate savings of $70 million, more than halfway to our goal of achieving at least $125 million of savings within 24 months of acquisition close.