Q4 2022 Hilton Grand Vacations Inc Earnings Call
Good morning, and welcome to the Hill in Grand Vacations fourth quarter 2022 earnings conference call a telephone replay will be available for seven days following the call. The dial in number is 84451 to two years.
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Using a speaker phone please lift your handset to allow the signal to reach our equipment. Please limit yourself to one question and one follow up question to allow the opportunity for everyone to ask questions. You made then reenter the queue to ask additional questions I would now like to turn the call over to Mark Melnyk.
Senior Vice President of I R. N G N. A please go ahead sir.
Thank you operator, and welcome to the Hilton Grand Vacations fourth quarter 2022 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 these statements are effective only as of today we own.
Undertakes 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-K or 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 measure.
<unk> discussed today in our earnings press release.
Website at investors HGV Dot com.
Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018.
Under ASC 606, we are 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.
Help you make more meaningful peer to peer comparisons you can find details of our current and historical deferrals and recognitions in table T. 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 refer to results. Excluding the net impact of construction related deferrals and recognitions for all reporting curtains, 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.
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 Mathews, who 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.
Good morning, everyone and welcome to our fourth quarter earnings call. This past quarter was a great finish to a standout year contract sales of 634 million remained nicely ahead of 2019, and EBITDA of $253 million was nearly 25% higher than our pro forma <unk>.
19 with margins nearly 300 basis points higher.
We had a solid contribution from new buyer channels, which has been a key area of focus and investment with continued strength in leisure demand and good execution from our teams we've been successful in activating our package sales pipeline to drive tour growth, which generates NOG and importantly, embeds future.
Value into the business I'm extremely proud of our entire team and what they accomplished in the past year, we laid the groundwork for our combined organization through the launch of major programs and integration initiatives and due to their efforts we hit several milestones faster than we initially modeled.
Well outperforming our initial underwriting expectations.
We've also continued to benefit from consumers pivot toward experiences and leisure travel in particular.
And while we are monitoring the macro environment, our leisure focus and strong value proposition leaves us well positioned for these ongoing shifts in consumer spending preferences.
Earlier this quarter, we wrapped up another successful LPGA tournament of champions, which was the second held under the HCV Brad.
We had great attendance during the week and our media exposure was up dramatically across all channels. This year with social media impressions tripled to over $750 million and active.
<unk>, it's up six fold to one 2 million on top of expanded international television and media coverage.
The tournament also serves as our marquee ultimate access had been at a year and we kicked off this calendar with exclusive programming setup for our members throughout the week.
As a result, we generated 40% more tours from the tournament this year with new buyer tours more than doubling versus last year.
During the tournament I spent a lot of time with our owners and guests and I can say that the energy around our brand and the engagement of our member base is really high which leaves us optimistic about 'twenty three and beyond.
We're confident in our business as evidenced by our guidance and we're committed to enhancing shareholder value through continued capital returns.
Now before I get into the details of the quarter.
I'll start by taking a quick look at what we accomplished over the past 12 months.
It was around this time last year that I said 2022 would be a transformational year for HCV and that certainly proved to be the case.
We launched HCV maps, our new membership offering that links our resort collections and was also the first major club redesign in our history.
We launched HCV ultimate access or exclusive experiential platform and hosted over 100000 members and guests at over 3000 events, including private concert culinary experiences shows excursions and sporting events.
We rebranded our sales center to provide a dramatically improved experience to our marketing gas and trained our sales staff to uphold H T v's rigorous standards of integrity.
We also rebranded diamond largest properties, adding nearly 5700 cheese in new markets like Sedona Lake Tahoe Palm Desert in Virginia Beach.
We also merged our financial and HR systems and integrated the former D. Our it teams to unify the organization under HGV culture and values.
From a financial perspective, we produced a record cash flow and EBITDA exceeding our initial underwriting expectations. We built the largest new by our pipeline in our history, which will provide a source of tour flow in coming years, and embed additional value into the business for years to come.
And we achieved an upsized cost synergy goal several quarters ahead of schedule.
But equally as important for our shareholders. However is that the diamond acquisition has created real economic value.
Dan will get into the details here in a minute, but our cash flow returns on capital and member base.
Oh, well ahead of pro forma combined entity pre acquisition metrics.
And these improvements were the results of longer term value creation initiatives like cost efficiencies process improvements and enhancing our product offerings, rather than just taking outsides pricing.
So after a year of hard work, we've laid a strong foundation to continue growing our long term value of the business.
Looking forward 2023 will be a year for further execution of our integration plans.
And we will build upon the successful launch of both ultimate axis and HCV, Max with new programming and features well.
We will rebrand nearly a dozen additional diamond properties to add to the Hilton vacation club collection.
And as we've done throughout our history, we'll maintain our focus on driving new buyer sales and net owner growth.
Now let me take you through a more detailed look at our performance in the fourth quarter.
Contract sales strength was driven by the continued improvement in tour flow, which more than offset the expected normalization of B P. J.
Tourists were nearly 85% of 2019, demonstrating continued progress in our pace of recovery.
New buyer tours drove the improvement showing the positive results from our investment efforts.
Additionally transaction volumes were exceptional this quarter driven by the tour flow of improvements and a close rate remains near all time highs.
That close rate drove V C. G SIB $4350, which remains well ahead of 2019 and decelerated only modestly from the recovery pace, we saw in Q3.
Turning to the demand indicators our system occupancy was 79%.
Seasonally lower than Q3 and in line with fourth quarter of last year.
We saw some softening of occupancy at the end of the quarter that coincided with the holiday airline disruption and unusual storm activity in some markets, but believe that those were isolated issues.
Looking forward on the book arrivals are nicely ahead of 2019 through the entire first half of 'twenty three with particular strength in our rental arrivals.
I'm encouraged that our marketing package pipeline ticked up slightly from Q3, but more importantly.
Our number of packages was set travel dates also grew.
Which will drive additional new buyer tour flow in the months ahead and support net owner growth.
We ended the year with 519000 members and NOG is three 9% on a combined basis, having grown our member base at both HCV and diamond throughout the year.
This is the highest NOG we've generated since we reopened our properties in mid 2020, and I'm really pleased with the results of the investments we've made to drive new buyer channel.
This combination of new buyer growth and increased member activity drove club and resort revenue to a record 155 million.
And finally, our rental business produced solid revenue result, owing to the strong leisure travel environment.
To summarize we feel great about how we closed out a transformational year for HCV.
Teams executed against an ambitious and complex plan that involved a lot of heavy lifting and I'm proud to say, we accomplished even more than we anticipated at the close of the acquisition.
We've built a strong foundation to build upon in 2023 and beyond.
With our new membership new programming, new destinations and rebranded resorts, we think that our value proposition is as strong as it's ever been.
Which is why we're seeing such a great response from our owners and new buyers.
And we're continuously focused on creating value for our shareholders through operational improvements of the business as well as our commitment to capital returns.
With that I'll turn it over to Dan to talk you through the numbers.
Dan.
Thank you Mark and good morning, everyone before we start note that our reported results for this quarter included $3 million of sale deferrals, reducing reported GAAP revenue associated with pre sales of the next phase of our Maui project.
We also recorded an associated $2 million of direct expense deferrals, resulting in a net benefit of $1 million to our reported EBITDA for the quarter.
In my prepared remarks, I will only refer to metrics, excluding the impact of deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period.
We had a very strong 2022 in the midst of them material amount of integration work and major initiatives launches. So we're very proud of everything that the teams have accomplished contract sales for the year were a record $2 4 billion and EBITDA of $1 billion was nearly 40% ahead of pro forma 2019.
As a margin improvement of nearly 600 basis points to 28%.
And as Mark mentioned, we're extremely proud of the progress we've made on our integration and we've created real shareholder value with the acquisition.
Our 2022 adjusted free cash flow of 563 million was significantly ahead of the pro forma 2019 cash flow we've.
We've maintained our exceptional return on invested capital of over 20%.
Much higher capital base, creating additional value annually.
And despite several years of a pandemic, we still drove net owner growth ending 2022, but the member base roughly 25000 members higher than pro forma 2019, which will drive additional future value creation.
Now, let's review the results for the quarter total revenue in the fourth quarter was just under $1 billion, we saw year over year revenue growth in all of our segments led by strength in real estate and financing segments.
Q4 reported adjusted EBITDA was 253 million with margins of 25%.
Turning to our segments within real estate total contract sales were $634 million sales momentum in our owner channel has remained strong and ahead of 2019 levels and we also saw a nice jump in the recovery pace of our new buyer channel with sales quickly approaching 2019.
We're pleased with the initial results of the recent investments in our new buyer channel from the first half of the year prior to our investment through the second half of the year. We saw strong improvements in new buyer tour flow and contract sales pace against 2019 that well exceeded the growth from our own channel and helped to drive solid growth.
Growth of three 9%.
We've been monetizing our package pipeline and are activated packages are at the highest level since 2019.
And our investments should continue paying dividends as Marc mentioned, we're seeing very strong arrival growth in our marketing channel as we look out over the coming months.
<unk> was $4350 for the quarter, which grew against prior year and 2019.
For the year BTG finished 31% to 31% ahead of 2019.
Looking at 2023, as we've said for a number of quarters. We expect to see continued normalization of V. P. G performance against 2019, as we move through the year.
For your modeling purposes, it's important to note that in the first quarter of 'twenty three we're lapping the highest V. P. G. In the history of the company and thus we anticipate that while V. D. G will be ahead of 2019, it will decline against that record from Q1 of last year.
Cost of product was 19% of net VOI sales for the quarter real estate as an M expense of $243 million for the quarter was 38% of gross contract sales.
Similar to third quarter levels, and reflecting our investments in the new buyer channel.
Real estate profit was 172 million for the quarter with margins of 36%.
And our financing business fourth quarter revenue was $71 million in segment profit was $34 million.
I'd note that financing expenses. This quarter included a onetime noncash true up adjustment to the premium amortization associated with the acquired diamond portfolio of approximately $9 million.
Brian Krebs receivables for the quarter were two and a half billion or $1 8 billion net of allowance and our interest income was $65 million.
Our originated portfolio weighted average interest rate was 14, 3%, while our acquired portfolio had a weighted average interest rate of 15, 6% and includes a $6 million Contra revenue for the amortization of noncash premium associated with the portfolio of receivables receivables that we acquired from diamond during the acquisition.
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Our allowance for bad debt was $742 million on that two and a half billion dollar receivable balance of these amounts the acquired diamond portfolio, which you use diamond underwriting standards was $338 million on a portfolio balance of $709 million.
Our annualized default rate for our consolidated portfolio, including the Diamond acquired an underwritten portfolios was seven 9%.
This is over 100 basis points lower than last year with both the acquired and originated portfolios continuing to demonstrate substantial outperformance from our initial underwriting assumptions.
Our provision for bad debt was $39 million or 9% of owned contract sales, which remains below our steady state expectations of a normalized provision driven by higher down payments and continued levels of elevated prepayments.
In our resort and club business, our consolidated member Count was 519000 or <unk>.
Consolidated NOG was three 9% at the end of the quarter, which I'd note now includes both HCV and Diamond members.
Revenue was $155 million for the quarter and segment profit was $112 million with margins of 72%.
Rental and ancillary revenues were $160 million in the quarter with segment profit of $7 million fourth quarter margins reflect additional expenses associated with the seasonal effect of member points conversion activity along with the continued elevated developer maintenance fees associated with the unsold inventory from our recently opened projects.
For your modeling it is important to note that due to the changes made to unify the reporting of HCV and diamond, there's a timing shift associated with diamond member benefit expense that will cause rental and ancillary expenses in the first half to be up materially versus the first half of 2022.
For Q1, specifically, we expect that this will result in a year over year impact of roughly $14 million, which will impact our reported rental and ancillary profit as well as our overall adjusted EBITDA I'd emphasize that this adjustment is only timing and it reflects a change in the seasonality of expenses in the rental and ancillary.
<unk> segment.
This year over year impact will reverse through the year to become a fully offsetting benefit in the back half and we will not itself have any impact to rental and ancillary profit or just adjusted EBITDA for the year.
Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA Corporate G&A was 47 million license fees were $34 million in JV income was $3 million.
Our adjusted free cash flow in the quarter was a use of $92 million, which included inventory spending of 73 million and excludes acquisition related cost of $40 million.
As we mentioned on our prior call in Q4, we had additional contractual inventory spending for a sofa project along with the payment of our cash taxes, which drove the negative adjusted free cash flow in the quarter.
For the year I'm really happy to say, we generated adjusted free cash flow of $563 million, which is a record for the company.
We converted 54% of our economic EBITDA into adjusted free cash flow, which was nicely inside of our 50% to 60% target range and we expect to maintain this conversion rate range in the years ahead.
It is important to note however that in 2023, specifically, we do have an additional just in time inventory payment for the Central and New York are roughly $140 million, which includes a payment that was deferred during the pandemic.
Considering this additional payment total inventory spend for 2023 is expected to be approximately $400 million versus $175 million in 2022.
Despite that however, we still anticipate achieving the low end of our 50% to 60% target EBITDA conversion range.
During the quarter the company repurchased two 5 million shares of common stock for $100 million and average price of $39 88.
For the year, we repurchased 7 million shares of stock for $272 million.
So on top of spending on our integration funding our growth and paying down our debt. We retired nearly half of our adjusted free cash flow to our investors through share repurchases.
And we're continuing that trend thus far in 2023.
Through February 24th the company has repurchased an additional one 8 million shares for $80 million. We currently have $148 million remaining of the $500 million repurchase plan approved by the board in May of 2022, and we remain committed to enhancing the total return for our shareholders by returning capital.
Turning to our outlook, we are setting our 2023 adjusted EBITDA guidance to a range of one point out of $9 billion to $1 one $2 billion.
Excluding the special reserve release that benefited our third quarter.
This implies EBITDA growth of 4% to 7%, which is a great result on top of the strong EBITDA growth. We produced this year.
For your modeling I would note that from a seasonal perspective Q1, EBITDA is typically lower than the preceding fourth quarter and it is also typically the lowest EBITDA quarter for the year.
Q1 of 2023, we'll also have the timing impact of the $14 million expense impact in our rental and ancillary segment that I mentioned earlier.
As of December 31, our liquidity position consists of $223 million of unrestricted cash and $959 million of availability under our revolving credit facility.
Our debt balance at quarter end was comprised of corporate debt of $2 7 billion.
Non recourse debt balance of $1 1 billion.
At quarter end, we had $652 million remaining capacity in our warehouse facility of which we had $279 million of notes available to securitize and another $338 million of mortgage notes, we anticipate being eligible following certain customary milestones such as the first payment dealing and recording.
Turning to our credit metrics at the end of Q4 of the company's total net leverage was two four times.
Finally, before we wrap up our prepared remarks I wanted to address an item that you will be seeing our 10-K. Once it is filed later today.
We have identified a material weakness related to a diamond.
These items did not impact our business operations or reporting processes in anyway.
So did not impact our current financial results or our historical results nor will they result in any revision or restatement of historical financials.
We already have a remediation plan in place and we'll provide additional updates through the year, but we fully expect to have these items resolved expeditiously.
Now I'll turn the call over to the operator, and we look forward to your questions operator.
Thank you as he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Ben Chaiken with Credit Suisse. Please proceed.
Hey, good morning.
If I'm not mistaken I think theres kind of two initiatives underway with the rebrand I guess, one is updating and rebranding the sales centers, which I think you noted on the last calls completed towards the end of 'twenty. Two and then second is updating and rebranding the diamond properties themselves.
On this first part the sales centers is there any type of feedback whether anecdotal or otherwise to help us understand the benefit so far and then on part two the property rebrand have you started to market those properties to Hilton honors members, whereas this further down the line.
And I have one follow up thanks, Yes, sure Ben Yeah. So.
On the rebranding front.
We basically have rebranded all of the legacy Diamond sales centers.
And implemented our HCV selling technology, our sales approach our new training.
And of course, we've now introduced.
<unk> Max and those sales centers so.
A lot of heavy lifting a great work by the team to get get all that done.
As far as.
Marketing into those sales centers utilizing the Hilton.
Database or Hilton customer base.
We sold 72000 packages.
Two of these locations and we're starting to see those tourist out now rights to the property and as you recall these packages vacation packages, we sell have a.
They they they have a 12 to 18 month window for travel.
So we started selling these are probably at the beginning of the second quarter of last year. So we're starting to see those those guests travel. So we're starting to see some revenue synergies there and I think some of the benefits.
That we've seen in.
And our outside.
<unk> <unk> last year have come through.
The work we've done in repositioning these sales centers.
And lifting up this new membership program.
Got it that's very helpful and then.
Switching gears, a little bit fee per service mixed moved higher in the quarter sequentially. I think we think you called out the pipeline is 85% and if I'm not mistaken in the press release, how do we think about the mix and in our 23 and 24 for that matter.
Ben.
Excuse me Dan here, just the easy way to think about it to your point most of the inventory that's coming online is owned most of the pipeline is our own. So I would look for the fee for service to decrease in 2023 to be more in that range of 20% to 25% you know it ebbs and flows because obviously when a consumer comes in the door.
We take the time to really.
Get to know them and.
Some people are just interested in a deeded product that happens to be fee for service. So there is a bit of that play, but with the dynamic of the pipeline being primarily owned Hum owned inventory it should decrease of that 20% to 25% range.
Got it thank you very much.
Our next question is from Patrick shows with true Securities. Please proceed.
Hi, great. Thank you good morning, everyone.
Couple questions here.
You would use the adverb on some of your forward trends that are being.
Nicely ahead at nicely. The average can you give a little more granularity, perhaps percentages and some of those metrics that you.
Brought up.
Okay.
Hey, Patrick it's Dan any particular metrics.
I think I think you were referring to I think it was owner visitation and tour packages.
Those were the ones you were referring to.
Yeah. So.
Patrick This is mark so as it relates to a.
Tour flow. So 23 is going to be really the year for tour flow growth and we've had some really good tour flow growth last year, we continue to see strong demand from leisure travel standpoint.
Uh huh owners and rental guests on the books or above what we saw at 19, but the real growth is going to come from our new buyer from a new buyer perspective, you know total packages inactivated packages are at record high and just to give you a kind of a sense of how that's been trending.
If you look at our new buyer tour flow compared to 19 in Q1, we're at 60% Q2, 68% Q3, 74% Q4, 78% and our expectation is that that trend is going to continue building.
Because our activations have really picked up.
And our package pipeline is well over a half a million packages that we have in the pipeline.
Importantly, the note is our new buyer.
Our new buyer sales.
Are actually back up to 94% of where they were at 19.
Because of the you know.
Better closing percentages and better V. P. G. So we're seeing out there.
So all in all.
Our expectation is strong tour flow growth this coming year.
I would have to I should note, though that if you remember coming out of the pandemic. Our owners came back first with elevated tour flow of transactions and close rates.
You know the pent up demand for travel from our most committed owners really led this high BTG, especially in Q1 of 'twenty, two which I think Dan noted in his prepared remarks was our record P. G for us so important to know that you know, we're coming up against a tough CPG cough in Q1.
So as we've indicated for several quarters, we think the mix shift as we shift into more new buyers will moderate our V. P. G from these 22 highs.
More on a glide path to what we've been saying for a number of quarters now to about 10% to 15% above what we saw at 19.
Patrick just to add that.
Just to give you another nicely.
[laughter] Advair.
You know as Mark was talking about the package sales were well over half a million dollars year over year, that's increased 18%, but the investment we've made to activating those packages I think is really underscored by the fact that the.
Percent activated has grown 80% year over year. So I think that just speaks to that but it also talks to that moderation in BTG right as new buyers come on as Mark just went over obviously <unk> will moderate and that will ultimately have an impact on the margins. The EBITDA margins that we see for the overall business.
Now this.
This is the same story, we've been talking about for a number of quarters.
No surprise.
That moderation should ultimately fall out to be ahead of where the pro forma was in 2019, obviously, we've capitalized on a lot of cost synergies.
Well that normal moderate normalize in 2023 criteria in the 'twenty 'twenty four but that's 100 to 200 basis points something of that nature, where it ultimately falls out.
But avoid any confusion that's a percentage moderation from an absolute dollar earnings keep in mind, new buyers, we sell new buyer a new buyers at a profit. So we're not talking about lack of earnings growth. Its just a margin percentage moderation.
Okay.
A follow up questions regarding all that you know certainly it sounds like new buyers in the packages and pipeline.
High percentage, it's a target.
Is it target actually it's a target.
Still 40% for new buyers actually buying by the end of 'twenty three it sounds like it might be ahead of that.
Yeah look I think that that's our targeted goal.
You have to remember new buyer.
Sales are growing and tour flowers or growing accelerating faster than we're seeing owner tour flow growth, but you have to remember the PPG and close rate is considerably less than owners. So our goal is to get us back up to 40% I'm not sure if we'll get to that level by the end of the year, but.
That's our ultimate goal look at the end of the day.
NOG is core to our strategy.
We know that the lifetime value to customer so important in and we know since 2016 that every new buyer that we we we generate we generate an additional 1.7 additional transactions.
So not always at embedding recurring revenue from management and.
In club fees and any mortgages that we may initiate but it's also embedding future high margin sales, so a very core to our strategy.
Early on when the pandemic.
Began we really focus on our owners because that made the most sense from.
From a standpoint of generating as much cash and margin is possible that we are now back on course, and this year will be the year of tour flow growth and particularly around new buyers.
Okay. Thank you Oh, you have more questions, but I will.
Go to the end of the queue I'd much rather have people ask questions. Thank you.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from David Katz with Jefferies. Please proceed.
Hi, Good morning, everyone. Thanks for taking my questions and you given I have a couple of going on this morning.
I hope I'm, not asking something twice.
But my my most important issue.
It was just figuring out how you think about the contingencies and sensitivities and leverage as you know.
As we get through this year end and potentially get into a recession that still has yet to.
Sort of be defined as to what that would look like you know help us walk through you know a range of scenarios if he can.
Well.
Look David I think you know, obviously, we're aware and mindful of potential impacts of macro environment. It and clearly there's you know there's a lot of crosscurrents on the consumers are out there, but you know what we're seeing right now as consumers continue probably prioritize travel and.
We're seeing more owners of rental guests on our books and we saw a 19 and so that's a great indicator.
We just.
Just to answer a question earlier around new buyer tour flow New buyer tour flow is really outpacing all of our other channels and we continue to activate.
Those tours and it had a very.
Healthy pace.
So.
All in all the activity all of this activity is increasing traffic and our sales centers and it's going to drive transactions.
And so you know I do think we have some distinct advantages in our model with our direct sales approach.
Which allows us to engage with our owners and prospects in pretty much any environment you saw how fast our industry in particular hgv's come back from the pandemic.
We've got this high quality pool of customers from from Hilton Hilton honors member base, who have a high affinity to travel and so again.
Packages remains strong we drove increases in tour flow I just gave out some numbers. If you. If you go back and listen to the transcript I gave out some detailed numbers on the sequential growth of our new buyer tour flow.
Our inventory position is really good.
And while you know look we're certainly not immune from macro pressures, we do believe will hold up well, even if we face some incremental headwinds on VP GM margin.
Understood and can I just ask for a quick comment with respect to the balance sheet and how you think about not not that leverage is a challenge for you in any way, but how do you think about kind of managing your leverage levels as you progress through this year as well.
Hey, David It's Dan Thanks.
Look great question, we are right now 2.4 times Levered I think when we work our way through Covid, we've proven that we tend to be a little bit conservative on the balance sheet in preparation for you know macroeconomic events that being said I think of it also proved out that.
Ourselves as well as.
The vast majority of time tracking operated significantly higher leverage if necessary.
Ultimately, what you would see us do barring some kind of <unk>.
Material caused great financial crisis type recession.
See us continue down the path that we're on right now and that's actively returning capital to shareholders continuing to do that and maintaining a leverage ratio of sometime someplace in the range of two to three times.
We've been able to pull back on inventory spend where necessary and if something material were to happen, we'd probably look at pulling that lever again as well.
Understood Thanks very much.
We have a follow question from Patrick Scholes with true Securities. Please proceed.
Okay, great. Thank you I I definitely you have some more questions here.
You know at the end of the prepared Mark throw a little curve ball there with.
Talking about material weakness I'm wondering if you'd give us any more color whatsoever that might mean or what it might referred to at all thank you.
Hey, Patrick it's Dan. Thanks, That's a great question was a little bit vague the disclosure in our form K under item nine today will be a little bit more transparent, but oh, well, we'll be more transparent, but just to give you. An example, or maybe some background as you know diamond was taken private in 2016 and to be perfectly honest there was a.
Lack of investment in infrastructure associated with our internal controls as you would expect that's very typical of any private organization.
One of the items just to give an example was a shortfall in user access controls associated with their property management system as well as our tour system et cetera. So what we had to do was literally go in and clean up every single user that had access defined the roles and responsibilities every single users and those controls needs.
To be in place for a specific amount of time in order to avoid a material weakness if you will.
No one.
Don't don't confuse me I'm not trying to be dismissive no one wants to have a material weakness but.
This is the one that you would take especially since it has no financial impact, but it should be we are.
We fully expect to be on track with regards to internal controls at both HCV keep in mind no material weakness on the legacy HEV side. This was strictly diamond and we believe both entities will be in a solid position for this year's audit that progresses.
It starts to progress in Q2.
Okay.
They are maybe summing that up.
We'd be they didn't follow the required best practices, where you folks do you have the best practices you identified it and you are working on rectifying it and is that a good summary, so that would be a nice summer yes. Okay.
Okay. Okay. Good okay.
Just a couple of follow up questions that you had.
And our.
Conversation earlier I had mentioned our close rates.
Can you tell us what the close rates were.
Either year over year <unk> versus 2019, thank you.
Yes.
Yeah, So look where we are.
What we can tell you is that our close rates have been running in approximately 400 bps ahead of where they were.
In 19, and that's that's been pretty well.
That was pretty consistent it happened pretty quickly right after the reopening.
Again, it's interesting because our close rates. If you go back over multiple decades has been pretty stable.
You know for US clearly, we benefited from the pent up demand.
I don't know if you want to really call it revenge travel or what you know.
Clearly the consumer's balance sheets were in really good shape and.
And so but at the end of the day, you know our expectations as those close rates would moderate back down.
Just like our V. P. J M. <unk> is really an outcome of close rate and average transaction price. So at the end of the day you know our expectations is close rates will moderate back down, especially as we shift our mix.
Back to more new buyer tour. So all in all you know her expectations. It won't go back to where it was in 19, it'll still hover above that.
As we think our overall value proposition has improved.
We've added new product and new markets and we continue to really enhance our precision around finding the best customer shifts our product.
Okay. Thank you and then one last question I promise here.
Vision.
Did you say, you're trying to take it sub 10%, but I.
I remember my notes, you said targeting 15% to 16% can you clarify where you are and where you want to be with that thank you.
Yeah, Hey, Patrick so the provision in 2022 was.
We had as you may recall a benefit in Q3.
All in it was right around that 10% level.
With regards to where is it going at some point in time, you're going to have a more normalization in credit trends right now we haven't seen that to date and what I mean, what we're very happy about is if we look at our default rate on the legacy Diamond side and the delinquency rate on the legacy Diamond side pre our.
<unk> to post our acquisition, where our underwriting and sales practices standards have kicked in it is materially down its outperforming our underwriting.
Our underwrite anticipated that provision.
Holiday is a basis to be north of 15%.
Not ready to ring, the bell that where you know we've changed things permanently, but it's significantly outperforming the underwrite on the HCV side.
We see the delinquency rates and the default rate is very consistent with 2019, which we're also pleased with.
Ultimately you're going to see that provision as a percent of contract sales increase this year, we anticipate it to increase this year.
Don't think it will fully get to 16% or 15%, but it will begin to normalize we believe.
Okay.
Okay. Thank you actually just got one last question here a modeling question anything we should think about when sort of quarter to quarter volatility than expected.
A recognition of a net deferrals when we're modeling that.
The deferral of excuse me adjusted EBITDA by quarter. Thank you.
Yeah, Patrick we've actually you know I think we may have discussed this before we've actually shied away from giving specifics because it all associates. It's all associated with the timing of specific deeded product projects that are sold and as I mentioned earlier, we do allow the consumer choose exactly where they want to buy right. So I would assume to zero by quarter and well okay.
It plays out.
Okay, No that's great.
Recall, a number of years ago that definitely created a lot of volatility. So that's great great to hear that I'm all set thank you.
Thank you thanks Patrick.
This will conclude our question and answer session, but before we end I will turn the call back over to Mark Wang for any closing remarks, Mr. Wang.
Thanks, everyone for joining us today I want to give a special thanks to our team members for.
For going above and beyond to deliver outstanding vacation experiences to our members and guests.
We look forward to speaking with you again soon have a great day.
Thank you. This will conclude conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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