Hilton Grand Vacations Inc.
Q2 2021 Earnings Call Transcript

Published: 30 Jul 2021

[Operator:]

Good morning, and welcome to the Hilton Grand Vacations Second Quarter 2021 Earnings Call. A telephone replay will be available for 7 days following the call. The dial-in number is [phone] and enter pin 13714034. At this time, all participants have been place in a listen-only mode and the floor will be open for questions following the presentation. I would now like to turn the call over to Mark Melnyk, Vice President of Investor Relations. Please go ahead, sir.

[Mark Melnyk:]

Thank you, operator, and welcome to the Hilton Grand Vacations second quarter 2021 earnings call. Before we get started, please note that we 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 on our question-and-answer session.

[Mark Wang:]

Good 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 a 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.

[Dan Matthews:]

Thank you, Mark, and good morning, everyone. As Melnyk mentioned in his introduction to our call, our results for the quarter included $42 million in sales deferrals impacting reported revenue and net deferrals of $22 million, impacting both adjusted EBITDA and net income. All references to consolidated net income, adjusted EBITDA and real estate segment results on this call for the current and prior periods will exclude the impact of deferrals and recognitions. Let's review the results of the quarter. Total revenue in the second quarter was $376 million, up 41% sequentially from the first quarter. We saw sequential improvements in all of our business lines, led by an over an 80% sequential improvement in our real estate revenue. Q2 reported adjusted EBITDA with $92 million, which was up from $60 million last quarter. EBITDA margins for the quarter were 24.5% and were up 230 basis points from Q2 2019 levels. The improvement was driven by strong results from our real estate and rental businesses as top line trends improved, and we've maintained solid cost controls. As we noted in our press release, we had $2 million in COVID-related benefits in the quarter pertaining to employee retention credits stranded under government assistance programs in the U.S. and Japan that were included in adjusted EBITDA. Removing this benefit would put your comparable adjusted EBITDA for the quarter at $90 million. Net income for the quarter was $31 million. Within real estate, contract sales were $259 million or 71% of Q2 2019 levels on tour flow that more than doubled from the first quarter. VPG was just under $4,400 and remains elevated versus 2019 levels. But it has started to normalize and was down 6% sequentially and down 8% against all-time high levels we saw in the second quarter of last year. For the quarter, our total close rate was approximately 19%, down 360 basis points versus the elevated levels from the prior year. Although we anticipated this contraction as the business continues to recover towards historical levels, we are really pleased that we held new buyer close rates flat year-over-year against difficult comparisons and above levels achieved historically. That close rate performance drove a slightly higher mix of sales to new buyers this quarter, although it was roughly consistent with the mix of two-third owner sales we've seen since the start of the pandemic. Our fee-for-service mix for the quarter was 42%. On the consumer lending side, our provision for bad debt was $28 million, and our overall allowance on the balance sheet was $203 million or 18% of gross financing receivables. Real estate SMG&A was $90 million for the quarter or 34.7% of contract sales, which was down 500 basis points from Q2 2019. Real estate segment profit was $51 million, which was up substantially from the $21 million we reported in the first quarter. The strong contract sales performance, coupled with strict cost controls, drove profit margins of 29.1%, up 750 basis points sequentially and up over 75 basis points from Q2 2019 levels. So a great job driving improved flow through in real estate this quarter. In our financing business, second quarter segment profit was $26 million with margins of 70% versus a profit of $30 million and margins of 70% last year. Profit was lower based on a lower average receivable balance this year, although a receivables balance has bottomed and should continue to show sequential improvements from here. Our gross receivable balance was $1.1 billion. On average, cash down payment year-to-date is 10.8%, and our portfolio average interest rate has increased to 12.62% from 12.56% last year. Over the past three months, we've seen continued sequential improvement in our delinquency rate to 2% of our receivables portfolio versus 3% at the end of 2020. Delinquency rates are now lower than those experienced in both 2018 and 2019. Our annualized default rate was 6.5% versus 6.3% at the end of 2020. Turning to our resort and club business. Our member count was nearly 329,000 members and now returned to positive growth at 50 basis points as of June 2021. Revenue of $48 million was up 7% from the first quarter of 2021, driven by increased revenue per member due to higher levels of activity on the release of pent-up travel demand. This resulted in resort revenue of $19 million, which was up versus Q1 as well as versus the second quarter of 2019. Segment profit was $37 million with margins of 77% versus profit of $33 million and margins of 85% last year. The 2020 results benefited from lower resort expenses owned to the pause in operations in Q2 last year. Rental and ancillary revenues were $54 million, up nearly 70% from Q1, driven by significant improvement in demand for leisure travel. Although all markets experienced an uptick in demand, our properties in Hawaii and Las Vegas saw the most material increases from Q1 2021. Rental and ancillary expenses were $36 million in the quarter, with segment profit of $18 million and margins of 33%. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA. Corporate G&A was $21 million, which was up $6 million from last year's shutdown-influenced levels. License fees were $19 million, and JV income was $4 million. Our adjusted free cash flow in the quarter was negative $13 million, which included inventory spend of $47 million. As of June 30, our liquidity position consisted of $318 million of unrestricted cash, $189 million of availability under our revolving credit facility and $450 million of capacity on the warehouse. During the quarter, we completed several financing transactions to support our pending acquisition of Diamond Resorts. With strong support from the credit markets, we were able to upsize our planned $675 million senior unsecured notes offering by $175 million to $850 million while maintaining pricing at the tight end of expectations, 5%. On the same day, we successfully marketed a $1.3 billion term loan B at LIBOR plus 300, also at the tight end of expectations. This facility will be funded upon closing of the acquisition of Diamond. Two weeks later, we decided to launch a $425 million bond deal, which was upsized to $500 million and priced inside the $850 million notes at 4 and 7/8. This was driven by a solid order book that was just over 4 times oversubscribed. These transactions, coupled with our amended credit facility, have refreshed the balance sheet and will provide us with a solid foundation to support our integration efforts as well as setting us up for success as we operate the new combined business. Ultimately, our debt balance as of June 30, 2021, was comprised of corporate debt of $2.4 billion and a nonrecourse debt balance of $650 million. It is important to note that the cash associated with the two bond offerings, $1.35 billion, is on our balance sheet as a part of restricted cash. Turning to our credit metrics. At the end of Q2, our first lien net leverage for covenant compliance purposes stood at 1.69 times. Our interest coverage ratio for covenant combined purposes at the end of the quarter was 5.25 times. We will now turn the call over to the operator and look forward to your questions. Operator?

[Operator:]

Our first question comes from the line of David Katz with Jefferies. Please proceed with your questions.

[David Katz:]

I wanted to ask about your Diamond. We're obviously waiting with bated breath, as I'm sure you are to get Diamond closed. Can you just talk about the to-do list immediately upon closing and give us a sense for what that might look like once you get done?

[Mark Wang:]

Sure, David, this is Mark. Look, we are extremely excited about this opportunity. And the teams have been working tirelessly to develop our plans, and we have a very, very detailed integration plan that charts out how we're going to be integrating the two companies together. But probably -- let me provide a little bit of color on how we're looking at the rebranding process. And as you know, the rebranding of Diamond and launching a new membership offering are really essential to driving the revenue synergies. Our plan right now is that we're going to be introducing a new compelling membership offer as early as next year, the first part of the year. And the plan is really to position all of our consumer-facing promotions and all of our marketing to be all unified under the Hilton Grand Vacation Company brand. So as we talk to customers out there, as we promote our products and offerings, it's going to be all under the integrated brand. Today, as you know, Hilton Grand Vacations has its own point-based club membership program. Diamond has its own point-based membership program. It's early next year, we're going to be offering one new membership program under the HGV flag, and we're going to be using one consistent currency for points. And so that's going to really help us better manage the value proposition and importantly, create a lot of value in what we're going to be offering. From a property standpoint, HGV today has two brands. We've got the Hilton Grand Vacation brand, which is our upper upscale brand. We have the Hilton Club Grand, which is our luxury offering. As we announced earlier in the year, we are going to be launching and converting the Diamond properties over to our new upscale brand at Hilton Vacation Club. And so that will start in earnest as we -- as soon as we close, we're looking to have the first tranche of properties converted over the first half of next year. So anyways, similar to Hill Motors, just stepping back on the membership side, similar to how Hill Motors works and connects all the brands that Hilton has today, the 18 brands. We're creating this new membership program that's going to really improve the value proposition. And we're going to go to one single currency. It's going to allow us our members to have substantially more access and flexibility, more properties. So we'll go from 100 -- we'll go from 60 properties to 150 properties. Our customers are going to be up -- be able to upgrade across the brands and/or they can also own multiple brands. Other features, we have added Hilton features involved in this enhanced outers and Hilton usage. And we're going to be introducing events of a lifetime into the program, which we have not had in the past, and that's something that done that has been very proficient at. So we're really excited. So I'd say the bulk of the activity is between now and the beginning of next year as we relaunch and start rebranding the properties and we launch our new membership program. So hopefully, that gives you a little bit of color on how we're going to proceed on this.

[David Katz:]

It does. And while I have follow ups, I'm going to respect Mark's rules and get to the back of the line.

[Operator:]

Our next question comes from the line of Patrick Scholes with Truist. Please proceed with your question.

[Patrick Scholes:]

Not so dissimilar to the question I asked to Marriott Vacations and also, just to let you know, on the call yesterday. How should we think about the loan balance portfolio going into next year? And I guess, why don't we just use the legacy portfolio without the acquisition. How should we think about that balance versus what you were for 2019? And as it relates to expectations for the interest income from that?

[Dan Matthews:]

Patrick, it's Dan. Thanks. With regards to our portfolio balance, we're in a bit of a different dynamic than the two other individuals that you asked a similar question to. We're -- as you know, in 2018, we announced a large inventory investment in owned inventory, which was really shifting the mix of what percentage of our contract sales were fee-for-service to actually owned/developed. So from that perspective, remember that the portfolio under fee-for-service stays with the developer, we only service those portfolios. We do not garner the benefit of the financing than mortgages. So as we shift to owned, which started in 2018, you'll see our portfolio start to grow. And that will be consistent with Diamond because all of their inventory is actually owned as well. So what you'll see -- what I would say is we have officially bottomed out from our portfolio, and we expect to grow from here. Now 2021 -- and 2021 is clearly not going to be back to where 2019 was. If you're looking to the -- in a similar neighborhood in 2022, probably slightly below because you do have to build back up. As you'll recall, the pre-COVID portfolio balance is about $1.3 billion, and we're now down to $1.1 billion, but we anticipate growth going forward, especially on that front.

[Patrick Scholes:]

Okay. And then just a quick housekeeping follow-up. After the issuance of the shares with the Diamond transaction, just for modeling purposes, what would be the diluted share count? And I note in the earnings release, you didn't give it for what it was at the -- for 2Q. So what should we be ballpark using for modeling?

[Dan Matthews:]

Well, gosh, I want to say, which is round numbers, is $88 million plus $34 million.

[Operator:]

Our next question comes from the line of Brandt Montour with JPMorgan. Please proceed with your question.

[Brandt Montour:]

A quick follow-up, Mark, to your explanation of the new sort of umbrella membership program for the combined system. I guess the question is, does that program require legacy HGV deed owners to opt-in or upgrade into that program or trade in into that program? And do you need a certain level of that activity in, let's say, Hawaii for -- because there's a lot of Japanese owners in Hawaii for and OUS potential buyer to buy -- to build assets in Hawaii. Can you just explain that a little bit more because it's obviously pretty complex?

[Mark Wang:]

No, you're right. It is, Brad, anyway, very good question. It is complex. And obviously, I just touched on some of the complexity and some of the strategy. What's going to happen going forward is anybody that's bought in the past, whether it's an HGV member or a Diamond member, their rights to what they purchased in the past will not be disrupted at all. So they will continue to add their current rights under their current program, current membership. What we're launching is a new membership. So the new membership, the requirements to Diamond new membership is you can either buy the membership outright or if you upgrade going forward? Whether you upgrade into any one of our 3 brands, you will then get the new membership. So this is really incremental. So we're going to be basically starting from 0 and building a new member. We're going to be offering this new membership going forward. So hopefully, this will be an incentive to drive additional upgrades. We think the value proposition will be much better for our new buyers is we'll have wider price points. And we also know that this will help our ability to reach even deeper into the Hilton database.

[Brandt Montour:]

Okay. That makes a lot of sense. And then also on Diamond, just what you've learned over the last 3 months about their business. And I guess, specifically, you did mention that their recovery is mirroring yours. If you could add any color to that, how the Diamond consumer is faring and yes, how that business has performed over the last few months, that would be helpful.

[Mark Wang:]

Yes. We said it in our prepared remarks that they're performing very well. And the recovery is based on what we've heard over the last couple of days and really at the top of the industry. And I think a lot of it has to do with, first of all, great execution, but their footprint of drive-thru in regional markets. This is really playing out well in this recovery of the pandemic. Obviously, after we close, we'll be in a better position to share more on the business. And we look forward to really updating everybody on the progress going forward, but we're very pleased with the momentum of their business, and it really sets us up well as the momentum of our business has also been very, very positive to -- the timing couldn't be better really to put these 2 companies together.

[Dan Matthews:]

And Brandt, this is Dan. Just on that point, Diamond is planning to release their -- their second quarter earnings, I believe, tomorrow and posted on the website, very similar to what they did in the first quarter. So you'll be able to see that directly from them tomorrow.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back to Mark Wang for closing remarks.

[Mark Wang:]

All right. Well, thanks, everyone, for joining us this morning, and thanks again to all of our team members for their hard work and dedication and providing our guests with a safe and memorable experience when they're traveling with us, and we look forward to talking to you in a few months. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.