Q3 2021 Hilton Grand Vacations Inc Earnings Call
Good morning, and welcome to the Hilton Grand Vacations third quarter 2021 earnings Conference call.
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I would now like to turn the call over to Mark Melnyk, Vice President of Investor Relations. Please go ahead Sir.
Thank you operator, and welcome to the Hilton Grand Vacations 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 HGV Dot com made refer to these slides during the course of our call or question and answer session. As a reminder, our discussions this morning will.
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 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.
Today in our earnings press release and on our website at investors <unk> 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 complete.
To help you make more meaningful period to period comparisons you can find details of our current and historical deferrals and recognitions in table one of our earnings release for ease of comparability and to simplify our discussion today our comments on adjusted EBITDA in our real estate results were Florida results, excluding the net impact of construction related deferrals and recognitions for all reporting periods are complete accounting of our here.
Store called 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 of the 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 <unk> Mark.
Good 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 HEB chain not only did they come together to close mid quarter acquisition and get ready for the earnings results today, but they also maintained their focus on the business and execution producing strong EBITDA in line with 2019 levels with record large eyes.
To further put this in the context I'm, even more impressed that we generated these accomplishments. Despite the delta variant wave that started to take hold shortly after we close the transaction.
We've experienced several different cobot spikes over the past 18 months and with each one we have seen an uptick in cancellations early on coinciding with an increase in media coverage, but we've noticed that with each successive waves the impact of our business is lessened and our trends have normalized more quick.
Clay.
The delta waves fit into this pattern as well with the impact largely confined to the months of August.
And as infection rates drop 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 close I've been on the road visiting our properties holding town halls, and interacting with our team members and I can say there is a tangible level of excitement across the organization right now.
Our new team members have embraced the culture at HCV and our legacy HGV team members have enthusiastically welcomed out correct, creating a positive environment to exchange ideas and promote best practices that sets the foundation for the future of HCV.
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 targeted run rate that we set out at the transactions announced with.
Dan will get into more detail here, but it just underscores our dedication to being the most efficient operator in the industry.
We will continue focusing on this cost rationalization for the next several months as we finalize our plans for rebranding phases of the integration, which will 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 sale 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 HCV standards.
We anticipate that these re brands will proceed rapidly and that will be able to have nearly all of our sales centers rebrand. It by the end of 'twenty two.
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.
This sale 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 strategies rebranding diamond resorts, which will ensure that our 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 are completed we'll come out of the gate strong was approximately 15 to 20 of diamond's properties being ready to add to the <unk> system and then next year alone.
Importantly, nearly all of this first group will be in new markets for the age for HCV.
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 HCV and diamond combo.
I would closely behind by the benefits. So they felt the honors program.
While we won't begin to rebrand in earnest until next year, we're already hard at work adopting some of the programs. We believe we will be successful with our HCV on our base as well.
For instance, we've renamed Diamonds annual APE LPGA event to the Hilton Grand Vacations tournament of champions.
Which will host here in Orlando.
This high profile that will not only give us enhanced brand exposure, but will also provide the first opportunity for HCV members to participate in our events with a lifetime program.
Overall, I'm very pleased with how the integration of proceeding which has contributed to another solid set of results.
So let's talk through the details of the quarter to.
To make the trends easier to understand from here out I'm going to refer to trends for for a full three calendar months at both legacy HEV and diamond, even though we didn't own diamond 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 their recovery pace against our prior peak.
Legacy HCV sales of $290 million were 81% of 19th levels 10 points ahead of where we were in the second quarter's pace.
Diamond was also strong at 88% of their 19th levels.
After a strong July we did experience a delta related pullback in August led by September sales had rebounded and continued to improve through October in fact, our legacy HCV business. Just finished October at 94% of 19 sales levels.
Since the end of September we've also seen weekly improvements in our forward order book occupancy rates at both legacy HCP and Diamond.
As we look out at the rest of the year our room nights on the books are up 3% against 19th 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.
Flow pace versus 2019 improved each month of the quarter and was supported by steady new buyer trends at both legacy HCV and diving even during the month of August we.
We saw <unk> <unk> 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 Charles standing Cabo.
The high flow through of improve APG, along with our cost efforts underpinned a great EBIT result.
At our legacy HCV 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 produce 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 EMEA led both at legacy HCV and Diamond.
Our regional resorts across the system outperform as they have throughout the pandemic and we saw a 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 HCV and diamond.
Not only did tour flow recovery pace improve in both August and September.
But <unk> 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 CPG 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 Hawaii, we have success with our ability to drive visitation with our domestic gas or legacy HCV domestic tour flow finished the quarter above 80% of 19th levels, which is a full 20 points ahead of where we tracked in Q2.
And with solid <unk>, we generated record contract sales to domestic gas at 122% of 2019 levels.
So the appetite to visit Hawaii is stronger than ever with our domestic guests and we will 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 corn team requirements by the National government government that would encourage I return to Hawaii by the Japanese <unk>.
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 word of mouth now much less levered to these policy changes than we were at legacy HCV.
But we are 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 at our local Japanese sales centers have been very stable from a tour flow VP GM contract sales perspective, despite a prolonged countrywide locked out.
These restrictions have recently been relaxes, Japan has had success with their nationwide vaccination campaign and has had very low infections allow.
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 were 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 brands 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 HCV 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 on our business.
Driving net owner growth will remain a focus for the combined entity. Our legacy HCV NOG has continued to improve as sales have recovered and was one 2% as of September.
While we're not ready to apply the NOG concept of diamond yet since its a 12 trailing month metric we're off to a solid start with nearly 2500 net new members added during the calendar third quarter.
Our legacy HDD, new buyer <unk> improved sequentially and year over year against difficult comparisons and it's 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 segment, which now represents 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 substantially larger management business due to a larger system size. This will further bolster our cash flow from this recurring fee stream.
Finally, our rental business surpassed 19 revenue levels by nearly 20% at both legacy HEV and diamond owing to increased demand across the system and robust rental activity and higher dollar markets like Hawaii.
So when I look at our results in the context of both a transformative integration process and the pandemic I'm proud of how well the team has come together and maintained their focus to drive the business forward we.
We saw a trend improvements across multiple geographies and witness some initial benefits of our increased diversification and scale. We drove tour flow and generated net on our 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 blocks strong on our cost synergy efforts and we're hard at work prepping for a rebranding launch and integration of our sales operation early 'twenty two.
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.
Thank you Mark and good morning, everyone as mountain had mentioned in his introduction to our call. Our reported results for this quarter included deferred revenue and expense recognition, 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 two of Ocean tower, Sissoko and central projects netting.
Netting out the associated recognition of related direct expenses for those sales boosted GAAP adjusted EBITDA and net income by $133 million for the quarter.
Recall that the mechanics of ASC 606 requires that pre sales and associated direct expenses of projects under construction and 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.
In Q3 this results in a GAAP 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's more closely matches the 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 <unk> 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 result resorts.
These financials have been remap to conform with our business line detail, who will provide you with a much clearer view of Diamond 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.
Mike.
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.
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 HCV, 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 HCV 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% of our legacy <unk> 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 synergies during the quarter.
Looking at the 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.
Like to pause here to highlight a few things about our cost synergies.
First recall that the 125 plus million that we laid out was based off of 2019 cost structure of the comp of the combined entity, which is important to remember as you model the synergy path.
In addition, as you can see on our slides online I would note that we made material progress on our G&A initiatives out of the gate, which are largely related to head count changes I'd consider this to be a reflection of quicker timing than we had modeled in our initial thoughts around synergy capture.
Other than a change in the size of the G&A bucket that we see at this time.
Turning to our segments within real estate total contract sales were $433 million, which includes $143 million contributed by diamond during the two months of ownership.
Legacy ATV contract sales of $290 million or 81% of 2019 levels, demonstrating continued progress and return and returning to our prior P contract sales levels.
This result was driven by a strong improvement in our recovery pace in July followed by a delta related pull back in August and a recovery in September.
Our mainland resorts performed admirably during the Delta wave and largely held onto July pace through the quarter owned a strong regional trends.
Our APAC region saw some pullback in September owing to the confluence of Delta is the impact on the continued lack of Japanese visitation, although trends. There have also rebounded in October driven by an improvement in domestic travel and.
In fact for the month of October and walks Aloha. We finished 13% ahead of our contract sales in October of 19.
If we were to look at Diamond Standalone calendar third quarter their contract sales were $220 million, which was 88% at 2019 levels.
Diamond also experienced a delta related to slowing in August although a strong September rebound drove them back to a level nearly even with where they were in 2019.
Turning to <unk> legacy HEV had <unk> $4320 up 3% year over year and up nearly 30% over 2019.
Average transaction price played a major role in the BTG growth. We saw this quarter with sales of our new higher end projects in Maui to soco, Cabo and Charleston, contributing to over 10% year over year growth in our ATB.
And we've continued to outperform on close rate, which was down only slightly on a sequential basis driven in particular by strength in our new bio close rates.
Owner sales were 71% of our contract sales for the quarter owing to the addition of diamond for legacy HCV, our owner sales mix in Q3 was steady at roughly two thirds of sales.
Diamond has historically had a much higher skew towards owners, which were nearly 80% of contract sales for the quarter.
But they also had success with new buyers in Q3 with consistently strong close rates driving new buyer contract sales growth over 2019 during the month of September.
Our fee for service mix for the quarter was 29% strong performance from our recently opened six project in Charleston, where offset strictly by mix as diamond does not have a fee business.
Real estate sales and marketing expense, excluding recognitions was $139 million for the quarter or 32% of contract sales, which included $40 million of contribution from two months of Diamond.
At legacy HCV sales and marketing expense of $99 million was 34% of contract sales, which is 400 basis points better than we were in 2019 due to cost reductions and our focus on efficiencies as our business recovered.
And diamond cost structure reflected the benefits of both a focus on efficiency and our cost synergy recognition.
Real estate segment profit was 124 million, which included 48 million contribution from Diamond. This record segment profit reflected the additional diamond resorts and substantial progress against our cost synergy goals along with a continued focus on efficiency across the combined organization.
In our financing business third quarter segment profit was $34 million with margins of 64%, which included $10 million of contribution from Diamond.
Margins reflect the addition of diamond along some organizational expense allocations that we performed as we align diamonds business with ours.
Looking at legacy Hev's portfolio, our gross receivables balance was $1 2 billion our portfolio weighted average interest rate was 12, 7% over the past three months. We've seen continued sequential improvement in our legacy ACB delinquency rate to one 6% of our receivables portfolio versus 3% at the end of 2020 and they remain.
Lower than delinquency rates, we experienced in 2018 and 19.
Our annualized default rate was five 7%, reflecting continued improvement versus Q2s rate of six four and six 3% at the end of 2020.
Turning to diamond and I'd like to take a minute here to talk through some key characteristics of their portfolio, which reflects several acquisition related considerations.
Easiest when thinking about diamond to separate their portfolio into two pieces. The legacy the legacy acquired portfolio assets and the go forward portfolio that will construct under our ownership as we generate contract sales and create new receivables.
On the first piece note that when we acquired Diamond we also acquired their existing $1 $1 billion timeshare receivable portfolio.
And like all assets and the acquisition. This portfolio was mark to market as a result of the acquired portfolio will have a minimal impact to our P&L from a provision standpoint, although we'll still benefit in our financing business from the spread between the borrowing in the lending rates.
More important to understand is the characteristic of diamond's portfolio on a go forward basis, which will integrate into our underwriting and sales practices average FICO scores are a healthy 720, the financing propensity among diamond customers is approximately 84%. These are 10 year loans and were lending at approximately 15%.
Consumer interest spread is similar across the company's Ellington diamond to legacy higher cost of funding in term ABS markets, but over time, we expect to bring that cost of funds down as the portfolios are integrated.
Regarding our related provisioning activity, our provision for bad debt was $50 million and our overall allowance on the balance sheet was $248 million or 19% of gross financing receivables.
The provision at legacy HEV was $27 million or 16% of contract sales.
Although COVID-19 infection trends of declining recently, we're maintaining vigilance around the roll off of various stimulus programs establish established over the past 18 months, we expect to see gradual improvement in our provision from Q3 level as trends continue to normalize over time.
Diamond's provision was 16% for contract sales made in the 59 days of our ownership. This reflects only the provision related to the partial quarter of sales activity for diamond in the period.
As the portfolio of Diamond loans originated following the acquisition date agents the impact of optimizing the static pool will begin to layer into the provision as well.
Taking both of these pieces into consideration, we expect that the near to medium term, we will provision diamond in the high teens.
Note that this reflects a material improvement from the mid 20% provision that diamond was taken back in 2019, and we also believe that under our ownership will be able to further improve upon this provision rate overtime.
Turning to our resort and club business. Our consolidated member Count was 462000, which includes 131000 Diamond club members.
At HCV legacy business or NOG accelerated to a positive one 2% and as Mark mentioned Diamond also added nearly 2500 net new members during the quarter.
Revenue of $99 million was split roughly evenly between legacy HCV and inclusion of diamonds two months.
Legacy HCV. This reflects both the addition of new members as well as increased revenue per member as travel activity improved during the quarter.
Diamond their revenue contribution for the quarter reflects theyre materially larger resort management business, owing to the size of their network versus out of legacy HGV.
And as you can see on the slides showing their calendar third quarter results. Their resort management business has also been remarkably steady underscoring the attractiveness of this recurring line of business.
Our consolidated profit margin and our resort and club business, including two months of Diamond contributions were 74% with legacy HEV margins that we're 200 basis points above their 2019 levels.
Rental and ancillary revenues were $112 million, including $52 million in diamond.
With legacy HCV and Diamond saw a solid uptick in business during the third quarter as travel trends continue to improve and both businesses remained well ahead of their 2019 levels.
Segment margin of 25% reflects another sequential improvement in the legacy HCV to 38% along with the addition of diamonds business, which register as a significantly lower margin.
Recall, the diamond lots of hotel partner and use more extensive OTT listening channels for that inventory and they historically ran their rental business at a loss as.
As we rebrand properties, we expect that we can improve both the top line and expense structure at diamond under our ownership by leveraging our relationship with Hilton, which should result in improved trends in this business over time.
Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA corporate G&A was $26 million, which was up 11 million from last year's shutdown influence levels license fees were $24 million in JV income was $1 million.
We paid no licensing fees on the Diamond business is we haven't yet rebranded any resorts that activity will kick off in the spring of next year, but given the timing of the rebrand and the ramp of the license fee structure in depth Diamond resorts. We also currently anticipate that we will pay a minimal amount of license fees in 2022.
Our adjusted free cash flow in the quarter was negative 33 million, which included inventory spend of $119 million. This is before acquisition related expenses of $55 million.
As you would expect there were significant acquisition related expenses and charges this quarter, including the discrete costs related to our cost synergy capture.
I think this is a great place to share with you our view of these costs and the role they play in enabling our synergy path to create material value in the business the.
The first group of expenses are the acquisition related charges that I mentioned, including head count and severance expenses integration costs and other typical merger related items.
These expenses are our focus right now as we seek to create the asset base and expense structure necessary to support the growth path ahead.
We expect to spend approximately $125 million on these one time costs enable over $125 million of recurring savings and should largely complete that spend within the same 24 months timeframe over which we anticipate recognizing our cost synergies.
As I mentioned, we've already made significant progress on this front and are on a great path with our cost synergy realization, giving us a lot of confidence in our ability to realize the savings that we're targeting.
Second group of discrete costs are rebranding expenses as.
As Mark mentioned in his remarks, we will begin to spend on some of our sales center rebrand as this quarter, but these expenditures will begin in earnest in the early part of next year as we start to rebrand diamond properties.
We expect to spend approximately $200 million to $250 million on rebranding over the next several years and we will have that effort completed by 2025 and.
And I am happy to report that we received strong support from our HOA is to proceed with the rebranding plans. So our owners are excited as we began the process.
We remain very confident in our goal of reaching 50% to 60% run rate adjusted free cash flow conversion of our economic EBITDA and we expect to ramp steadily to that level over the next several years.
As of September 30th our liquidity position consisted of 334 million of unrestricted cash and $499 million of availability under our revolving credit facility.
We also have 629 million of capacity in our warehouse facilities.
Currently have a $180 million of securities that are currently available to be securitized and another $149 million of securities that will become eligible as soon as they need typical milestones including <unk>.
Received the first payment dealing in reporting et cetera.
Our debt balance at quarter end was comprised of corporate debt of $2 9 billion and a nonrecourse debt balance of $1 3 billion.
Turning to our credit metrics at the end of Q3, the company's total net leverage on a pro forma TTM basis was four two times, not giving effect to anticipated synergies.
Including intensive anticipated synergies our leverage at three six times on a pro forma TTM basis.
Now I'll turn the call over to the operator and look forward to your questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
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Our first question comes from the line of Stephen Grambling with Goldman Sachs. Please proceed with your question.
Hey, good morning.
If you could provide a little more color around the existing versus new customer growth within each of the the kind of legacy businesses and any thoughts on how each of those customer bases are expected to trend as you think about the potential trajectory laid out in the proxy.
Okay.
Good morning, Steven Yeah, So look I think.
First I'd say trends around new buyers are really encouraging.
We saw a sequential new buyer transactions were up 16%.
Our legacy HEV in Q3 versus Q2, and that's after doubling from.
In Q2 Q2 versus Q1 so.
We're seeing meaningful VP G levels actually historical levels for us.
And in Q3.
40% of the transactions were to new buyers so all in all.
Transaction wise, we've gotten back up to where we were historically, but it's moving definitely in the right direction. So we're seeing a lot of.
We're seeing a lot of buildup in AR and.
And new buyers coming through on the Diamond side.
They had great execution from a really strong team a team that we inherited.
On a go forward basis.
We're seeing package sales are now on par with 2019.
Our expectation is that will we will enter next year.
Continue to see new buyer tour activity improve and we will.
Continue to see strong trends in the leisure travel side.
You know I believe.
Over the long term, there's definitely upside in our V. P G with new buyers from.
From 2019.
M a C.
Especially around some of the great work, we've been doing and a great investment our team's been doing.
Around data and AI.
<unk> been improving our overall tour quality.
And so and what do I mean by that so virtually every tour.
Or every package holder in every owner that we have moving through our sales funnel is is actually modeled based on unexpected PPG and with this ranking from highest to lowest we can prioritize our activation so.
So long term I think we're.
We're going to continue to see.
Improved <unk>.
For new buyers and that will also be the case with owners. So anyways very very encouraged with what we're seeing overall with new buyers.
Great and I guess.
One follow up there then just to make sure I'm clear if we take that all together I guess is there any way to ascertain how much of the V. P. G. Uplift we've seen it's maybe been driven by changes in that existing versus new mix and then also how you think about the sustainability.
<unk> V P g's going forward.
Yeah.
Yes, so well.
Well anyway, so obviously.
We're at historical levels right now for BPA and that's across the industry. In a couple of dynamics are really playing into that owners are coming back faster than new buyers right.
And they have a much higher <unk>.
Others have a much higher PPG to new buyers, but as we progress and move into 'twenty, two and 'twenty three.
Going to continue to drive.
Focus around new owners and as we always have and with that PPG will moderate some.
That being said as I.
As I just mentioned I think the tools and the modeling we're doing right now will have long term impact on.
Having.
Moving up our overall <unk> on a historical level.
As you know our belief that we'll continue to <unk>, probably about 10% to 15% higher on new buyers than we have historically seen in the past.
Great and maybe one other quick one to follow up maybe I missed this in the opening remarks, but did you talk about what you would generally think of it as being the timing for securitization.
Going forward from here is I know you're kind of rebuilding.
Financing receivables book Thanks.
Hey, Stephen It's Dan Great question, when we take a step back and we look at this where we're going to be in the process of integrating the portfolio is at some point initially on the outset.
Would expect to see is in HCV.
Hey, the FPL, followed by Diamond deal and perhaps a combined deal after that point.
The trajectory or the timing of that is most likely the first one would be late Q1 early Q2.
And then potentially.
Depending on how everything falls out either two more next year or one in Q3 with one rolling into early 2023 just from a.
Trajectory standpoint.
Great. Thanks, so much I'll jump back in the queue.
Our next question comes from the line of Patrick Scholes with tourists Securities. Please proceed with your question.
Hi, good.
Good morning, Mark and Dan Good morning.
Couple of questions for you Mark high level question here about.
About 20 years ago as I recall.
Marriott vacations had tried to go after more of the mass market customer.
With their horizons brand and as I recall, it just didn't work out for them as it cannibalize their existing customers.
Have you folks thought about.
Perhaps how to avoid some of the pitfalls that Marriott vacations did a win that brand didn't work out for them in <unk>, how your acquisition might be different from what they did or we're trying to do thank you.
Yeah.
Patrick This is mark.
Yeah look I've been been around long enough to actually remember marriott's launch of the horizon brand, but look I can't speak for Marriott vacations and their experience on that but I do think there are some fundamental differences between the approach we're taking versus.
What they were doing in regards to launching an entirely new brand and in our case.
Rebranding a business that has 92 properties and over 120000 members and then you've got another 200 legacy owners. There. So so we're expanding both our reach and our scale and.
And we're also we also have the power to the Hilton legacy name in the actual brands. So.
So I guess.
Back to the rationale of why we're making this move.
As we've grown HCV over time, we've been very successful in high dollar markets like New York, Hawaii, Japan, and we've really been developing and bringing on some really high quality product.
Across the U S and now in Japan, and so on.
But if you look at Hilton Hilton has grown a great deal over the past decade across really all segments of the market, but the real engine of.
There are overall growth has been in the upscale side.
And so our rebranding of diamond.
Hilton vacation club, we believe is going to allow us to target that segment of the Hilton database that has grown the most over the last decade or so.
So I think we're going to be better positioned to leverage our relationship with Hilton will be able to improve the yield from their base of Hilton honors members.
And also I think as.
As we talked about and the rationale.
We're adding reach so we're adding 20 new markets. In this reach is really going to allow us to better penetrate into new geographic markets. So we're very confident in our ability to drive incremental demand with the introduction of <unk>.
This new complementary property portfolio and with really significant scale. So.
I think just really two different dynamics when you compare it to.
That was trying to do with horizon 20 years ago.
Okay.
For some color on that.
My next question for Dan.
I have my notes back in 2019.
Companies target net debt to EBITDA was one five to two times, you're roughly at a four two times now.
First question is your long term target still one five to two times and what are your thoughts as you approach that level what are your thoughts about.
Various priorities of returning cash to shareholders. Thank you.
Great question I think.
Obviously, we've got a lot of dynamics going on that some of our peer set do not obviously you're right in the middle of an integration that is.
Large cash outlay just to meet the savings the permanent savings that we anticipate coming into the business and then obviously trading a lot of value and then we also had the rebranding strategy thats going on that is also another $200 million to $250 million. So we're cognizant of that use of cash.
To your point, though a few years ago, our leverage targets. We're one five to two times you may recall during the pandemic when we.
The amended our debt agreements, we actually took a step to permanently increase certain covenant requirements.
In general signaling that we would be more apt to have a higher leverage target, we haven't officially come out with anything.
But it would be more in line with the peer set so.
Generally speaking, we would look to increase that.
And as we've proven in the past we are not in order of cash we do things prudently.
And between 2018 19, and early 2020, we were buyers of our stock has spent north of $300 million in share repurchases and we would expect from a capital allocation strategy that that is a key component of our strategy is still.
Be it some form of return of capital to shareholders share repurchases <unk> dividends, which we have not done in the past the latter of that as dividends, but as this year progresses, and we see that leverage ratio improve I would look to us to revisit that.
But just from a trajectory standpoint, that's probably back half of 2022.
Just to put things in perspective, when we would look to review that again lots of digesting. The next couple of quarters. I guess is what I'm really trying to stay on the.
Rebranding front.
Okay Fair enough. Thank you I'm all set.
Okay.
Our next question comes from the line of Brent <unk> with J P. Morgan. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking my questions and thanks for these slides, they're very helpful. I have a quick question on the rebranding.
<unk> strategy I was hoping.
And Andrew Marc you could flush it out a little bit more for us in the 'twenty three 'twenty four time frame is the strategy to do it in waves.
Is there an opportunity within this plan to.
To speed it up at all or is it sort of said I guess, what I guess, what I'm trying to get at it is I'm trying to figure out why 'twenty four is the big year in 'twenty three isn't the big year, but I don't want to undermine obviously, how heavy to lift is so anything on that would be helpful. And then the last part of this question is just do you expect how much of it should flow through capex versus opex.
Or how should we think about that thanks.
Yeah, let me.
Maybe Brad I'll take the first part of that and I'll, let Dan talk about the where that flow through is going to happen but.
Look I think.
We actually.
I think it does.
<unk>, a really robust plan about rebranding to diamond properties in <unk> and.
And we've always said that the rebranding of the properties as well as launching the new membership are really essential to driving our revenue and.
We're going to begin rebranding properties this fall to the Hilton vacation club.
And.
And the way we're looking at is to really optimize the synergies we're going to prioritize a larger higher quality properties and our expectations is that we'll complete the first tranche in.
The first half of 2022 so.
And I think we've said in our prepared remarks, approximately 15 to 20 properties will be.
Rebranded over so.
<unk> be the benefit for the getting the whole entire portfolio.
Rebranded over is going to be more around the synergies we're going to drive around rental so we'll want to want to push as fast and as hard as we can.
But at the end of the day.
When we launch our first set of properties that really sets the stage for us to start selling our new membership, which is really going to be I think the is going to drive the biggest benefit from a revenue standpoint. So.
And this new membership will.
As we look at it is going to increase the overall consumer value proposition and it can provide significantly more options as we've been talking about.
And so so.
So anyways.
I think we have a really good plan and I think that.
We will start seeing the revenue benefits to revenue synergies start to play out.
Early part of next year, and we'll continue to roll out really.
Past the point in time, where we get the rebranding of the property start.
Dan I don't know if you want to talk about the flow through of peace.
So when you look at that spend I mean, we've talked about $125 million to get the cost synergies and then another $200 million to $250 million in rebranding costs and rebranding costs at the property level as well as sales centers as mark alluded to.
Earlier that is predominantly Capex and then when you look at the integration costs of the 125 some of that is capitalized.
Kind of split it depends on how much work you do upfront in and before you finalize plans, but the majority would be capex, what we will do on a go forward basis is to make sure that we call that out for you. So you can get appreciation on distillate, but it's more capex than P&L.
Generally speaking.
Okay.
Follow up Mark was the timing of revenue synergies linked to these.
Phases of your plan, but you answered the question. So that's it for me appreciate everything guys. Thanks, Okay.
As a reminder, ladies and gentlemen, it is star one to ask a question.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Alright, well. Thank you operator before we go I'd like to say how honored we are to have.
Then ranked <unk> on the Newsweek top 100, most loved places workplaces list it.
It recognizes companies, who put respect carrying an appreciation of their employees at the center of their business model and it reflects our commitment to creating a supportive culture, where our team members can thrive.
Energy and passion shows and the exceptional vacation experiences we create for our owners and guests.
And I'd like to say, thank you to all of our team members for their commitment to sustaining such an amazing culture.
Have a great day.
Yeah.
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.
Okay.