Yahoo Finance Hilton Grand Vacations Inc. (NYSE:HGV) Q1 2024 Earnings Call Transcript
Hilton Grand Vacations Inc. (NYSE:HGV) Q1 2024 Earnings Call Transcript May 9, 2024
Hilton Grand Vacations Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.87. Hilton Grand Vacations Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Hilton Grand Vacations First Quarter 2024 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 13743185. 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. [Operator Instructions] I would now like to turn the call over to Mark Melnyk, Senior Vice President of Investor Relations. Please go ahead, sir.
Mark Melnyk : Thank you, Operator, and welcome to the Hilton Grand Vacations first quarter 2024 earnings call. 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 the 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 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.
Our reported results for all periods 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. 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. To help you make more meaningful comparisons you can find details of our current and historical deferral and recognitions in Table T1 in our earnings release and complete accounting of our historical deferral and recognition activity can also be found in Excel format on the financial reporting section of our investor relations website.
In a moment, our Chief Executive Officer, Mark Wang will provide highlights from the quarter in addition to an update of our current operations and company strategy. After Mark's comments, our President and Chief Financial Officer, Dan Mathewes 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 CEO, Mark Wang. Mark?
Mark Wang: Morning, everyone and welcome to our first quarter earnings call. Reported contract sales in the quarter was $631 million and EBITDA was $270 million with margins of 24%, which includes just over two months results from our recently closed Bluegreen acquisition. I'm happy with the results overall, and I'm even more encouraged when looking at the momentum that we built over the course of the quarter. Recall that in fourth quarter we adjusted some marketing channels that our legacy business to optimize our tour flow, which we expected would create some follow on effects in the first half of ‘24. We came into the year with a goal to dial up some of our marketing activities in a thoughtful way and accelerate package activations of our tour pipeline, and these efforts began to yield results as we moved through the quarter.
While we started with a modest year-over-year decline in tours in January, we saw an acceleration each month of the quarter exiting with a low-single-digit positive tour growth in March, which put us solidly on track relative to our expectations for the full year. We also added more packages this quarter than any other quarter since mid ‘22, and our mix of activated packages is back to record levels we saw in the first half of ‘23. These trends speak to a consumer that remains committed to travel, despite some of the macroeconomic pressures that have built up, particularly in regards to inflation. While those pressures are still leading to some hesitancy at the sales tables, our sales teams have made adjustments to help highlight the value proposition of ownership, which should result in improved close rates as we move through the year.
It's also important to note the continued resilience of our owner business, which saw an acceleration in tour growth compared to the fourth quarter, along with improved close rates. The repeat nature of our dedicated owner base is a key feature of our business that drives stability and embedded value creation in our model over time. Our owners love the level of HGV service and the benefits offered by our max membership. They want to use the product more, and ultimately that drives additional upgrade business. Nearly a third of our members are HGV Max only two years after our launch, indicating how successful the program has been at attracting existing members as well as new buyers, and as we welcome our new Bluegreen owners into the HGV system over time, we're confident that the HGV max benefits and service levels will resonate with them all very well.
Speaking of Bluegreen, since closing our acquisition in January, we've been hard at work on our rebranding plans and integration. A lot of great work has been done by our teams and I'm very pleased with how they're executing and coming together over the last few months. There's still a lot of work left ahead of us, but the foundation of our business is better than ever. I'm also excited about our recently announced partnership with Great Wolf Lodge, which will create a new source of lead flow that we think will be a great fit with the HGV family of brands. So we have a number of positives coming out of the quarter that leaves us optimistic. While we're still a few quarters out from reaping the benefits of dialing up our activations over the last few months, I'm happy with the trends we're currently seeing out of the business and our team's execution, and we remain confident in our guidance for the year.
Turning to our integration efforts, let's start with a quick update on Diamond. Through the end of the first quarter, we rebranded 36 properties representing over 9,600 or 2/3 of the total keys. We expect that we'll rebrand 12 properties this year for an additional 2,500 keys, bringing us to over 70% of the total by year end. The remainder of the properties will be completed between 2025 and ‘26. We're happy with the results of the rebrand thus far, but more importantly, our guests are happy. We continue to receive positive feedback and our occupancy levels and package sales trends remain strong at those rebranded resorts. We're also making steady progress integrating our technology with several key module launchings this year that will move us toward a unified system for our deed and trust products, which will also leverage as we move through the Bluegreen integration process.
These enhancements will not only enable our sales teams to transition more seamlessly between product offerings, improving efficiency and the likelihood of conversion, but they'll also enable us to seamlessly grow in the future. And importantly, they'll also create a smoother customer experience helping owner’s engagement and retention. Moving to Bluegreen, as I mentioned, we've been working diligently to integrate our teams over the past several months. Throughout the process, I've been thoroughly impressed with the Bluegreen team at all levels of their organization. At the same time, we've been fully engaged in giant growth with our new partners, Bass Pro, Choice and NASCAR, and have also continued working toward finalizing our rebranding plans ahead of a kickoff later this year.
I also want to spend a minute talking about our new relationship that we announced a few weeks ago with Great Wolf Lodge. Partnerships are a critical component of our strategy to engage new customers and deepen the relationship with existing members through experiential offerings. And this partnership with Great Wolf furthers that proposition serving over 10 million guests annually with a focus on families with young children, which is a priority growth segment for us. Together, we're able to engage a broader spectrum of vacations and age ranges, as well as provide HGV families with increased flexibility and their vacation options. In the coming months, HGV members will begin the vacation at Great Wolf Lodge Resorts using their club points, while also benefiting from exclusive discounts during their stay.
In addition, Great Wolf Lodge guests will have the opportunity to receive curated offers to explore HGV network of properties. HGV will have a presence in 18 Great Wolf Resorts with more locations to be added as Great Wolf continues their expansion. The partnership also includes call transfer and digital marketing programs enabling us to generate new lead flow across multiple channels. Above all, these partnerships are about bringing people together to create memorable experiences and I'm thrilled to be collaborating with CEO, John Murphy and the entire Great Wolf team who share a similar passion for hospitality and for delivering high quality vacations that bring families together. Now let's take a look at our operational performance, assuming that we own Bluegreen for the entire quarter to make things simpler.
Combined contract sales, using that full quarter basis were $656 million with steady tour growth and a decline in VPG. Both HGV and Bluegreen demonstrated very similar growth trends for tours and VPG, and were largely in line with our expectations. As I mentioned earlier, I was very pleased with the trajectory of our tour flow as the quarter progressed along with the resilience of our owners, and as we move into the back half of the year, we expect to see our pipeline continue to drive improved tour trends as well. Combined, VPG for the full quarter was $3,575, down about 5% driven by lower close rates. However, close rates in our legacy business improved from the fourth quarter, leaving us optimistic that our efforts and initiatives are producing results and leave us on track for the year.
Looking at our four demand indicators, occupancy in the quarter was flat at 79%, although last year's numbers included the full complement of Maui rooms. As I mentioned, we make great progress with our package activations this quarter, and our arrivals on the books for the rest of the year are ahead of ‘23 with strength in our marketing and rental arrivals owing to our success in driving increased package activations. Moving to our non-real estate segments, we continue to see great trends in our transient rental business led by higher available room nights and higher ADRs. Our rental nights on the books remained very strong through the rest of the year, and some regions where we had seen softer trends such as Orlando and Hawaii also showed signs of improvement this quarter, which also bodes well for future performance.
In our recurring club and resort business NOG at our legacy business was 2%, and the addition of Bluegreen enabled us to reach a member count of 718,000, which led to another strong quarter of EBITDA generation. And our financing business had a solid quarter of growth with improved margins owing to the addition of the Bluegreen portfolio and good receivable generation. We also maintained our commitment to capital returns this quarter, repurchasing 2.3 million shares for $99 million. So all in all, I'm very pleased with this quarter. We performed in line with our expectations and our trends through the quarter, leave us optimistic that we're on track to achieve our guidance for the year. More importantly, I think we're really set up well for the long term.
I believe that we're building the most talented team that we've ever had in my 25 years at HGV, and I'm excited to share our Bluegreen integration plans with you as we get them finalized. Before I turn it over to Dan, I'd like to congratulate him on being named President along with continuing his duties as CFO. He's done a great job over these last five years, helping them navigate our business through markets that were turbulent at times, all while maintaining a commitment to shareholder value creation and risk management. And I know that he'll continue to maximize the value of our business and financial model in the years ahead. So with that, I'll turn it over to Dan and talk you through the numbers. Dan?
Dan Mathewes: Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter included $2 million of sales recognitions, which increased reported GAAP revenue and were related to opening the most recent phase of Sesoko project. We also recorded $1 million of associated direct expense recognitions. Adjusting for these two items would decrease the EBITDA reported in our press release by $3 million to $270 million. In my prepared remarks, I'll only refer to metrics excluding net deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. I'd also note that our results today also include the financial results of Bluegreen, which we acquired on January 17th.
Turning to our results for the quarter. Total revenue excluding cost reimbursements in the first quarter was $1.03 billion and adjusted EBITDA was $270 million with margins of 26%. Also excluding cost reimbursement. EBITDA included $11 million of Bluegreen cost synergies recognized during the quarter for a run rate of $53 million annualized, putting us nicely on the path of achieving a targeted $100 million of cost synergies within 24 months. Turning to our segments within real estate reported contract sales were $631 million for the quarter, including a partial quarter of Bluegreen ownership. Assuming that we own Bluegreen for the entire quarter, contract sales would've been $656 million versus pro-forma combined sales in the prior year of $692 million.
Bluegreen produced $161 million of that $656 million in sales on the full quarter basis. New buyers comprised 27% of legacy contract sales in the quarter, improving nearly 200 basis points from the fourth quarter level. Reported towards for the first quarter, were just over 174,000. Assuming a full quarter of Bluegreen ownership tours of 182,000 were roughly flat in the quarter on a pro-forma basis with owner tours, again growing in a solid mid-single-digit rate offset by a decline in new buyer tours. As Mark mentioned, the decision to pull back on some channels in the fourth quarter also had an effect on our tour pace in this quarter, but having re-accelerated our packages and our tour efforts in Q1, we do expect to see a benefit from those efforts later this year as they cycle through our marketing pipeline.
Bluegreen's tours for the full first quarter of just under 52,000 displayed similar trends to our legacy business during the quarter with flattish growth and tours driven by low-single-digit owner tour growth offset by a similar level of decline in new prior tours. Reported VPG for the quarter was $3,600. Assuming a full quarter of Bluegreen ownership VPGs were $3,575. For a legacy business, VPG was about 6% ahead of 2019 levels roughly in line with the trend that we saw in the fourth quarter. As Mark mentioned, our expectation is that we move through this year, we'll see an improvement in our VPG that will help to support low-single-digit growth in VPG for the full year. Reported cost of product was 11% of net DOI sales for the quarter, and our provision for bad debt as a percentage of owned contract sales was 12% in the quarter.
Real estate sales and marketing expense was 320 million for the quarter, or 51% in contract sales. Sales and marketing dollars and percentage were elevated in the quarter owing to seasonality along with the addition of Bluegreen. But we expect to see operating leverage on this expense as we begin to recognize additional cost synergies through this year. Real estate profit for the quarter was $131 million with margins of 26%. And our financing business first quarter revenue was $104 million and segment profit was $65 million, with margins of 63%. Interest income and segment profit for the quarter were impacted by $10 million contra revenue for the amortization of a non-cash premium associated with the portfolio of receivables that we acquired from Bluegreen in the acquisition in addition to the premium still being amortized for the diamond transaction.
Excluding this non-cash amortization, interest income was $112 million and margins were 69%. %. The bond gross receivables for the quarter were $3.8 billion or $2.9 billion net of allowance. Our originated portfolio weighted average interest rate was 15.1%. For context, our diamond acquired portfolio had a weighted average interest rate of 15.7% while our acquired Bluegreen portfolio had an average interest rate of 15.2%, our total allowance for bad debt was $900 million on that $3.8 billion receivables balance or 23.6% of the portfolio. We continue to evaluate the Bluegreen allowance through our purchase accounting process and any additional changes to the allowance we expect the flow through the balance sheet as an opening balance sheet item.
Our annualized default rate for our consolidated portfolios inclusive of Bluegreen stood at 9.7% for the quarter. As previously discussed, we continue to see normalizing credit trends with the termination of certain government stimulus plans, but we believe our current loan loss provision is adequate. Going forward, we expect our provision to migrate towards a mid-teens percentage of contract sales on a normalized basis. I also want to highlight our strong capital markets execution with our recent $240 million ABS deal of Bluegreen Legacy collateral. The deal highlights the strength of our brand and market position as we nearly quadrupled Bluegreen Vacation's historical investor base on HGV’s first securitization of Bluegreen Vacation collateral.
The total coupon was 6.42%. In our resort and club business our consolidated member count was 718,000, and our legacy NOG was 2% at the end of the first quarter. Revenue was $166 million for the quarter, and segment profit was $112 million with margins of 68%. Rental and ancillary revenues were $181 million in the quarter with segment profit of $8 million and margins of 4% slightly ahead of last year. Revenue growth was driven by higher available room nights and RevPAR growth underpinned by continued travel demand. As Mark mentioned, we continue to see strong arrivals through the rest of the year, which should support the continuation of trends. Expenses on our legacy business continue to be elevated due to the inclusion of developer maintenance fees on unsold inventory, along with the inclusion of Bluegreen's much lower margin rental business.
As you can see from the financial information we uploaded to the IR website last quarter, Bluegreen's rental business ran at a loss, but we believe this provides us an opportunity for improvement over time as we integrate them into the Hilton system. Bridging the gap between segments adjusted EBITDA and total adjusted EBITDA corporate G&A was $35 million, license fees were $35 million. EBITDA from unconsolidated affiliates was $5 million, and EBITDA attributable to non-controlling interest was $3 million. Our adjusted free cash flow in the quarter was a use of $374 million, which included inventory spending of $105 million. I'd note that the cash flow usage this quarter was entirely the result of timing as we paid down the balances on our warehouse facility ahead of our most recent securitization, as well as to capture capital market synergies by closing multiple ADS facilities associated with the acquisition.
With the successful completion of that offering a few weeks ago and another one planned during the summer, we expect to see a cash flow benefit in the quarter, in the quarters ahead, and we're still expecting an EBITDA conversion rate slightly ahead of last year's 52%. During the quarter the company repurchased 2.3 million shares of common stock for $99 million and through April 30th, we repurchased an additional 1 million shares for 47 million, leaving us with $213 million of remaining availability under the 2023 repurchase plan. We expect to continue our current trend of approximately a hundred million dollars in share repurchases per quarter. Turning to our outlook, we are reiterating our guidance for full year adjusted EBITDA of $1.2 billion to $1.26 billion.
As of March 31st our liquidity position consisted of $355 million of unrestricted cash and $293 million of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of $5.1 billion and a non-recourse debt balance of approximately $1.5 billion. At quarter end, our legacy business had $460 million of remaining capacity in our warehouse facility, of which we had $455 million of notes available to securitize and another $321 million of mortgage notes we anticipate being eligible following certain customary milestones such as first payment, deeding, and recording. From a timing perspective, we expect to bring another deal to the market in the summer. Turning to our credit metrics at the end of Q1 and inclusive of all anticipated cost synergies, company's total net leverage on a TTM basis was 3.74x.
We are also recommitting to our long-term leverage target of 2x to 3x total net leverage. We'll now turn the call over to the operator and look forward to your questions. Operator?
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