Hilton Grand Vacations Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 7 speakers on the call.

Operator

Good morning. Welcome to the Hilton Grand Vacations Third Quarter 2023 Earnings and Acquisition Announcement Conference Call. The telephone replay will be available for 7 days following the call. The dial in number is 844-512 2921 and enter the PIN 13,735,181. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation.

Operator

To allow the opportunity for everyone to ask questions. You will then reenter the queue to ask additional questions. I would now like to turn the call over to Mark Melnick, Senior Vice President of Investor Relations.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, operator, Welcome to the Hilton Grand Vacations 3rd quarter 2023 and acquisition announcement call. Please note that we've uploaded slides to our Investor Relations website that are available for you to follow along. As a reminder, our discussions this morning will include forward looking statements. Actual results could differ materially from those indicated by these forward looking statements. These statements are effective only as of today.

Speaker 2

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 Thank you, Mr. Chairman. We'll also be referring to certain non GAAP financial measures. You can find definitions and components of such non GAAP numbers as well as reconciliations of non GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.

Speaker 2

Hgv.com. Our reported results for all periods reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related Sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is completed. To help you make more meaningful period to period comparisons, you can find details of our current and historical deferrals and recognitions in Table T1 of our earnings release. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and our real estate results will refer to results excluding the net impact of and Financial Reporting section of our Investor Relations website.

Speaker 2

In a moment, Mark Wang, our President and Chief and Executive Officer, will provide highlights from the quarter In addition to an update of our current operations and company strategy and today's acquisition announcement. After Mark's comments, our Chief Chief Financial Officer, Dan Matthews, will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our President and CEO, Mark Wang. Mark?

Speaker 3

Well, morning, everyone, and thanks for being flexible and joining our earlier call this morning. As you've seen from our announcement today, We have a lot of things to go through. The first is that I'm happy to announce our definitive agreement to acquire Bluegreen Resorts along with a 10 year exclusive marketing and JV agreement with the nation's premier outdoor and conservation company, Bass Pro Shops. We're really excited about this transaction and think that it will open up new avenues for growth, while also enhancing resilience of our business and building long term value. We'll get into those details shortly after I walk through our Q3 earnings.

Speaker 3

Before we get started, I'd like to extend my best wishes to our team members and the people of Maui as they continue their recovery efforts From the devastating wildfires in August, we're committed to providing our support to the local community during the rebuilding process, including Our many team members who live and work on the island. Turning to our results, contract sales in the Q3 were $603,000,000 And EBITDA was $276,000,000 with margins of 27%. Tours grew 15% for the quarter And our VPG was 10% ahead of 20 nineteen's levels within our target range despite some of the unique challenges we saw in the quarter. The first was the devastating wildfires that impacted our Maui business directly. Additionally, we believe that the macroeconomic crosscurrents Played more of a role in our Q3 results than they have in prior quarters.

Speaker 3

In the face of these challenges, Our owner business was resilient during the quarter and has remained a source of strength for our business. HGV MAX has continued to resonate with our owners And our MAX membership growth has exceeded our overall member growth as we attract more owners to upgrade into the program And deepen our member engagement. On the new buyer side, our performance for the quarter was solid in absolute terms with mid teens growth in tours driving positive growth in transaction and contract sales. But after a solid start in July, we saw softening in the segment as we move through the quarter, resulting in tours, VPG and contract sales coming in Short of our expectations. We believe the compounding effects of inflation and interest rates affected the mentality of our new buyers However, the good news is that we still grew transactions as we saw more people touring and previewing our offerings.

Speaker 3

We remain committed to growing our new buyer channel and believe That it's the right thing to do for the long term health of the business. That said, given some of these near term headwinds, Along with some ongoing Maui impact in Q4, we updated our guidance to better align our expectations with the trends we're seeing. Dan will share more details on our outlook in here in a few minutes. Now let's take a look at our performance in the 3rd quarter. Contract sales in the quarter were driven by growth in tours, which offset the expected declines in VPG.

Speaker 3

Our new buyer tours again grew faster than our owner tours with year over year growth of more than 17%. And I'm really pleased with how our owner channels remain resilient despite the unforeseen headwinds from losing tours in Maui for most of the quarter. Owner tours showed an acceleration in growth versus Q2 on a year over year basis as well as further exceeding our pace against 2019. As I mentioned earlier, we saw softening of our tour trends as we move through the quarter, particularly in August, Although trends stabilized in September, VPG for the quarter was just over $3,600 which was within our expected range despite the loss of high VPG Maui sales. And our close rates were roughly in line with Q2 levels And remain nicely ahead of 2019.

Speaker 3

Turning to our demand indicators, occupancy for the quarter was 81%. Our arrivals in the Q4 are ahead of the prior year and are currently indicating a step up in growth in the first half of next year that will support occupancy levels. And I'm also encouraged that our marketing pipeline and activations remain near record highs to build a solid base of tour flow growth going forward. Moving to our non real estate segments, our rental club finance business showed solid growth in the quarter. Rental revenues were nearly on par with Seasonally stronger second quarter and we maintained double digit margins.

Speaker 3

Club profits continued to benefit from both improved revenue and margins along with new member growth and our financing team executed On an oversubscribed securitization with great pricing. And finally, during the quarter, we repurchased $64,000,000 worth of shares demonstrating our ongoing commitment to returning capital to our shareholders. With that, I'll turn it over to Dan to talk you through the numbers. Dan?

Speaker 4

Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this Included $7,000,000 of net deferrals related to presales of the newest phase of our Sysopco project, which reduced reported EBITDA. Adjusting for these deferrals would increase the EBITDA reported in our press release by $7,000,000 to $276,000,000 In my prepared remarks, I'll only refer to metrics excluding debt deferrals, which more accurately reflects the cash flow dynamics of our financial performance during the period. Turning to our results for the quarter. Total revenue excluding cost reimbursements in the quarter was down about 2% against the prior year at $933,000,000 We saw strong growth in our financing, resort and club and rental and ancillary businesses that was offset by a reduction in real estate revenue.

Speaker 4

Q3 reported adjusted EBITDA was $276,000,000 with margins of 27% or 30% when excluding cost reimbursements. Coming to our segments. Within Real Estate, total contract sales of $603,000,000 were down 3% versus the prior year. Tours were up 15% against another tough comparison despite the loss of over 2,000 tours directly attributable to the property closures in Maui. And our new buyer channel continued to show tour strength with tours up 17% in the quarter and positive contract sales growth versus the prior year, reflecting just over 30% of total sales in Q3.

Speaker 4

VPG was just over $3,650 quarter and 10% ahead of 2019 levels, still within our expected range despite the drag from losing roughly $15,000,000 of high VPG MAUI sales during the quarter. Cost of product was 12% of net BOI sales for the quarter, lower versus last quarter and last year owing to favorable sales mix. Real estate sales and marketing expense was $273,000,000 for the quarter or 45% of contract sales. This is in line with the sales and marketing expense ratio in Q2 and was higher than our expectations due to carrying the same level of fixed expense in our Maui operations with no offsetting revenue, along with new buyer sales that were below our expectations, which created operating deleverage on our marketing expense for the quarter. That being said, we are still expecting a sequential improvement in our sales and marketing expense ratio in Q4.

Speaker 4

Real estate profit of $167,000,000 had margins of 34%, which improved against our Q2 and first half twenty twenty three margins despite some of the headwinds in the quarter. In our financing business, 3rd quarter revenue was $75,000,000 and segment profit was $50,000,000 with margins of 67% versus margins of 63% in the prior year. Combined gross receivables for the quarter were $2,520,000,000 or $1,820,000,000 net of allowance and our interest income was $68,000,000 Our allowance for bad debt of $731,000,000 included $258,000,000 related to the acquired Diamond portfolio, which has a balance of $539,000,000 Our annualized default rate for our consolidated portfolios, including the diamond acquired and underwritten portfolios, was 8.53% compared to 8.68 percent in the prior quarter. Our provision for bad debt was $46,000,000 or 11% of owned contract sales. As previously discussed, we continue to see normalizing credit trends with the termination of certain government stimulus plans, but we believe our current loan loss provision is adequate.

Speaker 4

In our resort and club business, our consolidated number count was 526,000 and our consolidated NOG was 2.1% at the end of the 3rd quarter. Revenue of $138,000,000 was up 6% for the quarter and segment profit was $95,000,000 with margins of 69% showing 200 basis points of improvement sequentially. Rental and ancillary revenues were $171,000,000 in the quarter Segment profit of $17,000,000 and margins of 10% versus 9% last year. Revenue growth was driven by ADR gains in most markets, offset by slightly lower occupancy and the loss of high dollar rental room nights in our Maui properties due to the wildfires. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, corporate G and A was $27,000,000 license fees were $37,000,000 and JV adjusted EBITDA was $2,000,000 Our adjusted free cash flow in the quarter was 2 $37,000,000 which included inventory spending of $36,000,000 and excludes acquisition related costs of $25,000,000 The adjusted free cash flow conversion rate for the quarter was 93% due to the timing of cash flows associated with our recent securitization.

Speaker 4

And we remain confident in achieving the low end of our target 50% to 60% conversion range for the year. During the quarter, the company repurchased 1,500,000 shares of common stock for $64,000,000 And through October 30, we have repurchased additional 690,000 shares for $26,000,000 leaving us with $432,000,000 of remaining availability under our 2023 repurchase plan. Year to date, we have repurchased an average of $90,000,000 per quarter, which is in line with our goal of roughly $100,000,000 per quarter. Turning to our outlook. As you saw in the press release, we are lowering our 2023 adjusted EBITDA guidance to $1,000,000,000 to $1,020,000,000 from our prior guidance of $1,090,000,000 to $1,120,000,000 There are two drivers of the adjustment, the impact of the Maui wildfires in Q3 of 10,000,000 along with an expected further drag of $7,000,000 to $10,000,000 in Q4 for a total impact of $17,000,000 to $20,000,000 including the Q3 impact, and an adjustment to our expectation of contract sales growth for the Q4.

Speaker 4

As of September 30, our liquidity position consisted of $227,000,000 of unrestricted cash and $866,000,000 of availability under our revolving credit facility. Our debt balance at quarter end was comprised of corporate debt of 2 point $7,000,000,000 and a non recourse debt balance of approximately $1,000,000,000 At quarter end, we had $750,000,000 of remaining capacity in We anticipate being eligible following certain customary milestones such as first payment, deeding and recording. Turning to our credit metrics. At the end of Q3, the company's total net leverage on an LTM basis was 2.56 times. With that, I'll turn the call back over to Mark to walk through this morning's transaction announcement.

Speaker 4

Mark?

Speaker 3

All right. Thanks, Dan. And now That we discussed our results, I'm excited to share our other announcement today and that's our definitive agreement to acquire Bluegreen Resorts along with a 10 year exclusive marketing and JV agreement with the nation's premier outdoor and conservation company Bass Pro Shops. This acquisition gives us the unique opportunity to create the industry leader in vacation ownership and experiential travel. Bluegreen is the highest quality independently branded vacation ownership operator and it's one more critical piece of the strategic journey of expansion and diversification that we started 2 years ago with the acquisition of Diamond.

Speaker 3

With nearly 50 resorts and over 200,000 members, we'll add scale that would have taken us a decade of growth to do organically. It will enable us to solidify our leadership in the industry, while positioning us to win in the experiential membership space where we see a growing convergence between the travel and leisure sector. And it will create value for our shareholders adding resiliency to the business by increasing recurring EBITDA and adjusted free cash flow. Turning on Slide 2, let me take a moment to walk you through the key highlights of the transaction. 1st, we'll add scale to the business and drive additional growth.

Speaker 3

Bluegreen has a large base of loyal members, many of whom haven't yet upgraded that we think would be a great fit with our HEV brands. This acquisition will also expand our reach With enhanced sales distribution in new key locations, enabling us to engage additional new buyers With attractive price points at an earlier stage in their lives, providing additional opportunities for upgrades and improving lifetime value. And with our robust suite of brands backed by the power of our Hilton partnership, we'll give members plenty of options to upgrade through their years of membership 2nd, our partnership with Bass Pro allows us to expand our lead generation, which is critical to driving tour flow, Net owner growth and ultimately embedded value. And importantly, it also adds a source of leads This is not lever to lodging, diversifying our lead generation and improving our resilience across cycles. We see this transaction as a perfect complement to the business evolution that we have undergone over the last 2 years And it will enable us to fully leverage all the amazing programs and infrastructure we created with our Hilton Vacation Club brand, HGV MAX membership program and ultimate access experiential platform.

Speaker 3

On the cost front, we expect to generate a $100,000,000 in cost synergies within the 1st 2 years of operations.

Speaker 4

We have

Speaker 3

a proven track record of executing on synergy capture As demonstrated by outperforming our synergy estimates with the Diamond acquisition and doing it earlier than expected. And finally, Bluegreen's trust structure and efficient inventory model will also add additional recurring EBITDA And strengthen our free cash flow conversion, further improving the resilience of our business and financial model. I'll turn it over to Dan to walk you through the transaction on the next slide. Dan?

Speaker 4

Thanks, Mark. Let me start with a quick overview of the transaction. This is an all cash deal and we're acquiring Bluegreen for $1,500,000,000 or 6 times the pro form a EBITDA including identified cost synergies. The HEV management team will run the combined entity with Mark Wang as CEO, Gordon Kurniak as COO and myself as CFO, and the composition of the Board will remain unchanged. This transaction is double digit accretive on an adjusted free cash flow per share basis.

Speaker 4

Pro form a leverage as of ninethirty was 3.4x and we will return to our target range of 2x to 3x within 18 months of close. We also expect to realize $100,000,000 in run rate cost synergies within 2 years of transaction close, along with future revenue synergy opportunities. Regarding timing, we anticipate closing the transaction And the first half of twenty twenty four. I'll now turn it back to Mark to talk a little bit more about Bluegreen.

Speaker 3

All right. Well, thanks, Dan. So looking at Slide 4, We view Bluegreen as a highly successful operator that has achieved unique scale in the vacation ownership marketplace, And we believe it will be a great complement to HGV's overall brand portfolio. They have a large geographically diverse base of over 218,000 members, over 75% of whom are Gen X or younger with strong FICO scores. And Bluegreen has historically also stood out with the industry for its focus on new buyers, which has also been a key strength of HEV.

Speaker 3

Perhaps most importantly, they've outshone others with their innovative marketing programs. Through their network of partnerships, They've built a robust pipeline of over 165,000 vacation preview packages to enhance visibility and support tour growth, which will build upon the nearly 550,000 packages that we have at HEV. You turn to the next slide, we have 48 resorts throughout the country, including 14 geographies in 8 states that will be new to HGV. Nearly 90% of their members live within a 4 hour drive of a Bluegreen Resort, which Complements our portfolio with additional drive to properties. We've been impressed with the consistent high quality nature of the resorts And we believe they'll be readily able to convert over to HCV Brands.

Speaker 3

And as you see on Slide 6, once rebranded, the addition of Bluegreen will enable us to expand the entire breadth The Hilton offering providing us with additional scale and creating synergy with our key partner and their Hilton Honors membership. From a people perspective, we believe their teams will be a great cultural and business fit, and we think they'll quickly integrate into the culture here at HEB. They're focused on providing exceptional experiences through a commitment to service and quality as we've seen throughout our interactions with their leadership. Talk Slide 7. We see this acquisition as very synergistic to HGV, adding scale to our member base, Package pipeline and resort network, while enabling us to leverage our key partnerships to drive additional growth, reinforcing our leadership position in the vacation ownership space.

Speaker 3

Now if you turn to Slide 8, As I mentioned, a key contributor to Bluegreen's organic growth has been their partnership with leading brands, including Choice Hotels, NASCAR and most importantly with Bass Pro, the nation's leading outdoor retailer. Bass Pro currently has over 200 destination superstores across the U. S. Where they serve more than 200,000,000 visitors per year. And their customer base is a dedicated group of outdoor enthusiasts for whom the outdoors is very much a lifestyle.

Speaker 3

Bass Pro's passion about their product, culture of service and dedication to their customers drives tremendous loyalty and engagement And it aligns with the values that guide us here at HGV. That's why I'm also really excited to announce a new 10 year Strategic partnership with Bass Pro, along with the extension of the Bluegreen joint venture featuring for high end wilderness resorts under the Big Cedar Lodge brand. This partnership will provide us with a source of high quality leads from a loyal customer base and will generate that lead flow outside the lodging channel providing us with additional Diversification in our marketing efforts. Looking at the strategic rationale for this deal, It really enhances the vision that we had with the Diamond acquisition, leadership and not just vacation ownership, but also providing unforgettable experiences For our members, it's a strategy that drives engagement and builds loyalty with our members by catering to more than just a great stay. Additionally, looking at Slide 9, our focus will be expanding on the aspects of our relationship with Bass Pro.

Speaker 3

We'll benefit from the growth in their store network and customer base with increased and diversified lead flow That's incremental to our existing channels with Hilton. And our relationship with Bass Pro also enhances our credibility and experience offerings In the outdoor space, opening up a new avenue growth for our ultimate access platform and increasing the attractiveness of the HGV membership for the adventure seeking traveler. We've already seen great success with Ultimate Access, and we think that providing unique And memorable experiences to our guests is a key differentiator that drives owner engagement and supports the health and long term value of the business. We know that the HGV's quality of service and network of properties will be appealing to Bass Pro customers, And we know that we can go further expand the program by combining an elevated in store experience with our digital marketing and analytics capabilities. We also see a lot of potential in the JV, building on the 4 existing properties And adding new locations with a club formula that highlights Bass Pro's connection to the outdoor lifestyle and targets the outdoor experiential market.

Speaker 3

I've met several times with our founder, Johnny Morris, and we're both excited about bringing together the quality of HGV's offering and the Power the Hilton brand with the outdoor expertise of Bass Pro to create a high quality platform of experiences for their customers and our members. On the next few slides, you'll see how we'll benefit from the programs and processes we've already developed, derisking the integration process while enabling additional growth by leveraging their proprietary platforms. Over the past 2 years, we've transformed our business, launching a new brand with Hilton Vacation Club, a new membership club with HEV Max and a new experiential platform with Ultimate Access. We've also integrated our sales forces, team members and systems and built the capabilities to sell deed and trust across a wide range of price points. The acquisition of Bluegreen furthers this evolution, Leveraging the strength of the Hilton brand with these best in class offerings and differentiated capabilities, including our marketing expertise, Enabling better personalization of offerings and driving net owner growth.

Speaker 3

We'll also add scale by building upon the solid foundation that Bluegreen's team has laid out through their years of steady organic growth and focus on new buyers. As I mentioned earlier, Bluegreen's base of over 200,000 owners is less penetrated than ours from an upgrade perspective, And we see a lot of opportunity to leverage our key partnership with Hilton and the compelling value proposition of HEV Max and ultimate access to realize that embedded value. We'll also add additional distribution by expanding into new states and destinations. States like Texas, which has our 3rd largest member base yet where we don't currently have resort or sales presence, Along with sought out leisure destinations like Nashville, Vail, Colorado and additional beach locations along Florida and East Coast, We'll leverage its transformative infrastructure to accelerate the integration of Bluegreen and unlock additional sources of growth that would have been difficult to achieve without the benefit of those programs and capabilities. Now I'll turn it over to Dan to talk you through some of the Financial merits of the acquisition.

Speaker 3

Dan?

Speaker 4

Thanks, Mark. Looking at Slide 12, we've identified $100,000,000 in cost synergies in this transaction with savings in G and A and headcount along with additional operational and financial efficiencies. Given our recent track record, we are very confident in our ability to realize those synergies and Expect to do so within 24 months of closing the acquisition. In addition, if we turn to the next slide, we think there are a number of attractive financial aspects 1st, Bluegreen's robust member base and financing business create additional sources of recurring EBITDA, which will further enhance the resilience of our business. Next, as Bluegreen is a Trust product, it carries many of the same attractive capital efficient features as we noted when we acquired Diamond.

Speaker 4

In general, the inventory carries a lower cost of product and increased pricing incrementality, enabling us to offer more attractive price points to consumers, Growing HEV's member base and fueling embedded value creation. It also allows efficient recapture of inventory, reducing the level of maintenance inventory spending required to drive sales growth. Those two factors will support increased conversion of EBITDA into adjusted free cash flow. That cash flow will allow rapid deleverage following the close of the transaction. Pro form a leverage is 3.4 times and we expect to reduce our leverage to under 3 times within 18 months, and we are maintaining our target leverage of 2 to 3 times.

Speaker 4

And importantly, this transaction will not impact our ability to cash to shareholders through share repurchases, preserving our capital allocation strategy and enabling us to maintain our focus on maximizing shareholder value. Mark?

Speaker 3

All right. Well, thanks, Dan. So in conclusion, with this acquisition, we'll not only solidify our position As a leader in the vacation ownership industry, but will also expand our corporate vision to providing exclusive Memorable experiences to our members. Bluegreen has a complementary asset that will add scale to our business. Our strategic partnership with Bass Pro will expand and diversify our lead flow channels, opening new avenues for growth, will unlock additional upside by leveraging the strong value proposition of HEVMAX and Ultimate Access and will improve the financial resilience of the business by strengthening our sources of recurring EBITDA and our free cash flow generation.

Speaker 3

We have a track record of achieving our cost synergies and building upon the processes and tools from our successful integration of Diamond Resorts. We're confident in our ability to execute on this transaction. So with that, I'll I'll turn the

Speaker 4

call back over to the operator to open

Speaker 3

the line for questions. Operator?

Speaker 1

Thank you.

Operator

At this time, we'll be conducting a question and answer session. And a confirmation tone will indicate your lines in the question Thank you. And our first question today is from the line of Patrick Scholes with Tuohy Securities. Please proceed with your questions.

Speaker 5

Hi, good morning, everyone. I suspect I'll probably be reentering the queue here with any questions. But Mark, congratulations on the acquisition and Alan, I believe you're on the line, congratulations as well. Mark, first, let's talk about the acquisition. Certainly, with the recent Diamond acquisition, Is it fair to almost categorize this as now that you've done Diamond that this would be called something plug and play for you at this point?

Speaker 5

And then related to that, if you could summarize maybe your top 2 or 3 lessons learned from the Diamond acquisition that you would be applying to this? Thank you.

Speaker 3

Sure. Well, thanks, Patrick. And yes, so We're very, very excited about today's announcement. And we think it's the perfect complement to what we've built It's HGV, and it is clearly an evolution of where we've been focused on in the last 2 years and what we've been able to accomplish with the Diamond acquisition. With Bluegreen, we did what We think it's a great and very innovative company.

Speaker 3

We've known them obviously for a long time. I've known Allen For a long time, the industry is very aware of Bluegreen and what they've done. We think from a strategic standpoint, it made a lot of sense for us to pursue this opportunity. And obviously, the scale and the diversity is important, Right. And with over 200,000 members, an additional 50 properties, That really improves our overall scale and we are getting new distribution.

Speaker 3

We are going to have over 10 new distribution centers In 8 new states, and this partnership, the partnership, these guys have been super innovative. No one When you think about their pipeline of new buyers, they've got 160,000 people on their pipeline for new buyers. That's the 3rd largest in our space. And you add that to our 550,000, we have 700,000 New buyers in our pipeline on a collective basis. So and they've really been able to do this with 3rd parties because they haven't been able to leverage like the Hilton database like we have.

Speaker 3

So Bass Pro Clearly has been the biggest generator of those, but they also have a relationship with Choice and NASCAR. With Bass Pro, Super excited to work with them and we have some really big plans, I think, ahead with them. But Anyways, I think it fits perfectly. As I said, I think it's an evolution of what we've achieved. And as you mentioned, Patrick, it really plugs into all the things that we did to stand up Diamond.

Speaker 3

We were fortunate to be able to create a new brand with Hilton under Hilton Vacation Club. We created a whole new membership program, which we'll be able to apply to this acquisition. And Ultimate Access, our experiential platform, We're going to be able to expand that, especially with this Bass Pro, new announcement with the new agreement with Bass Pro. So all in all, it really derisks our deal. And when I look at Bluegreen, I really look at Bluegreen as kind of like legacy HGV, Very focused on new buyers.

Speaker 3

They've been very, I think, Strategic in their growth. Their properties are very consistent. So all in all, very, very happy. Look, I think Always lessons learned when you do a transaction. I think a lot of the lessons that We've learned through the Diamond transaction we can apply here.

Speaker 3

I think the biggest one is just continuing To work extremely hard to integrate the teams, I think we did a good job with Diamond and we're going to even do a better job with Bluegreen.

Speaker 5

Okay. Thank you. Has this been approved by Hilton Corporation or does it need to be approved?

Speaker 3

It does need to be approved and it was approved yesterday. So we're really thankful for Hilton's Cooperation and most importantly their investment into this transaction. We're very aligned with Hilton. They are Our biggest partner and will always be our biggest partner and we appreciate all their support.

Speaker 5

Okay. Let's move on to the Quarter and to the guidance. You called out some macroeconomic and cross All right. Concerns beginning, I think it was after August. Specifically, where are you seeing this?

Speaker 5

Is this going to be in your Your legacy higher end business or more of the mass market diamond, is this are you seeing this in a hit To your core flow, your close rates, your VPG, where if you can drill down a little bit more on that. Thank you.

Speaker 3

Yes. So with in the Q3, new buyer sales and transactions actually rose year over year, right? And And ToreFlo grew by 15% versus where we were last year for new buyers. And that said, though, we had high expectations And we had high expectations for the second half of the year. Look, I think the consumer is now finally behaving more in line with what You'd expect given the rapidly rising interest rates and sustained inflationary periods.

Speaker 3

And then obviously the unexpected pressure we've had from Maui in that unfortunate situation. But we're focused on controlling what we can control and that's our execution. And maybe I'll have Dan kind of walk you through a little bit more detail

Speaker 4

Yes. Thanks, Mark. So the other thing I would add, Patrick, is when you take a look at the portfolio, We've seen actually some bit trends sequentially, just trying to break it out against the legacy Diamond portfolio versus the HEV HGV is in line slightly ahead of where we were in 2019. Sequentially, some modest movement up, Nothing material, but nonetheless a little bit movement up. Now when you look at the Diamond, we've talked historically at various points in time about how they have been significantly underperforming 2019 levels and that holds true today as well sequentially they've actually Modestly improved.

Speaker 4

So you're not seeing from an annualized default rate material movements between The different consumer bases, if you will. From the guidance, to Mark's point, a lot of this, what you're seeing is We are still anticipating heavy tour flow growth on the new buyer side that clearly It causes compression in upon itself that coupled with the macro size is really driving a lot of this. When you look at the balance of the segments, you'll see some margin compression in finance because As you saw, just recently, we completed the new securitization and that's just under 6%, but that will clearly impact financing margins in Q4, on the benefit side though, Q4 for Resort and Club is really strong because that's when a lot of transaction fees come into play. So Q4 historically has always been our strongest on that front. And then when it comes to rental, you'll have some seasonality.

Speaker 4

So it'll be In line with prior year margin levels, slightly down to where we finished Q3. Okay. So So when you look at Q4, the implied guidance obviously gives you a number that's lower than the previous guide, but We've got a lot of things going on in addition to the Maui fires, right.

Speaker 5

And I have a follow-up question on that, and then I'll come back and put myself back in the queue here. 1 of the other major players here had a sizable charge in the loan loss provision. Am I correct? It didn't sound like that you're seeing similar issues in delinquencies. Is that correct?

Speaker 5

And am I correct that you did not take any material charge at this point?

Speaker 4

No, we definitely didn't take a material charge at this point. I mean, If we look at delinquencies and we look at the annualized default rates, they're very consistent with the trends that we've been talking about all year, some modest reversion to the mean. Our provision as Percent of contract sales was just north of 10%. We do not see at this time any reason to take a material charge against our portfolio.

Speaker 5

Okay. And another major trend here sort of long lines of normalization, do you think it's just sort of Normalization also being caused by Americans traveling abroad, you're Primarily a domestic company or taking cruises, do you think that's also a driver of that and that was maybe more impactful than you Initial thoughts?

Speaker 3

I think Patrick, the bottom line is we our expectations was an acceleration into the back half of the year. And what we saw is we saw some softening in arrivals, But still strong arrivals, better than we saw in the previous year. And as I mentioned earlier, I think there's some compounding That's with the consumer right now around just all the information out there. So there's a bit of moderation In our VPGs and our conversion rates and we expected that moderation, but not to the level that we saw now. We saw stabilization early in October and we also saw it in the back half of September.

Speaker 3

So, yes, all in all, I think it was just Very high expectations, still performing well from a relative standpoint when you look at Overall transactions in TourFlow, but I think at the end of the day was just very high expectations.

Speaker 5

Okay. Thank you. I'll hop back in the queue while others ask questions. Thank you.

Speaker 3

All right. Thank you.

Operator

The next question comes from the line of Brandt Montour with Barclays. Please proceed with your questions.

Speaker 1

Hey, good morning everybody and congrats on the announcement. So curious on how if you're willing to share, Mark or Dan, how you sort of got to the price Premium and if there was sort of a process that was ran for Bluegreen's or how that sort of came together between you two organizations?

Speaker 3

Yes, there was a process. And I think when we went through that process and we've known Bluegreen for a long time. And As I mentioned earlier, we think they're very innovative operator and we think this deal has a lot of strategic value for us. And I talked about a lot of The value, the pipelines, the new buyer, the Bass Pro deal, etcetera. We value the business on a future cash flow and EBITDA, Inclusive of the $100,000,000 in cost synergies.

Speaker 3

So That's how we got to the basis on the value. But Dan, if you want to lean in here?

Speaker 4

Yes. Brian, just to add a little color to that. Look, when you look at Bluegreen's stock, how Historically, they've got the AB structure, which always had some kind of impact to where it trades. When we went through a valuation process, it was Based on a classic discounted cash flow structure, that then translates into the multiple that we disclosed today on the synergies basis. But as you can see, the synergies play a key role in the valuation.

Speaker 4

I think we're very happy where we landed at 6 Times LTM-nine thirty on a synergized basis and it's actually almost actually a full turn less than what We acquired Diamond4 on a synergized basis. And when you look at our 2 transactions, they are by far the lowest multiple pay for any entity in the last five To 7 years. So we're pretty pleased with where we ended up.

Speaker 1

That's excellent color guys. Thanks for that. And then On the synergy number, is the how do we think about the 700 well, dollars 750,000,000 odd Bluegreen LTM sales BOI and how that would how would that How do we calculate fees to Hilton on that hitting the system? And is that included in the $100,000,000 cost synergies?

Speaker 4

The cost synergies does not include the license fees. So there's okay. So there's a couple of components here, right. So cost synergies Of roughly $100,000,000 and then there's revenue synergy opportunity between $75,000,000 $100,000 which more than offset the license fee increase to Hilton. The license fee increase at the low end of that revenue synergy would be floating around the mid-40s, just to give some color on that perspective.

Speaker 4

Mark mentioned earlier that Hilton did invest in this transaction and they did it in a very similar fashion that they did with the Diamond transaction and that's what the fee ramp. And to oversimplify it because there's a lot of ins and outs, but to oversimplify it is effectively a 4 year ramp At 3%, 3%, 4%, 5%, which is consistent when you hit run rate where we are today. There's some ins and outs on different pieces, but That's where it boils down to.

Speaker 3

Yes, and they also invested in the Bass Pro and other Partnership relationships where we have a lower license fee for Those partnerships because there obviously are cost related to those partnerships that drive the deal. And I think the actual performance we've seen with Diamond obviously informed us around these estimates, especially around the cost side.

Speaker 1

Great. Thank you. Best of luck.

Speaker 4

Thank you. Thank you.

Operator

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Speaker 6

Hey, good morning guys and also congratulations on the announcement. I guess a higher level question for you, Mark, is when you looked at this when you looked at Bluegreen and the customer and kind of similar to what you did a few years back with Diamond. Is there any, I guess, correlation with the Fact that Hilton is also kind of shifting some of its unit growth initiatives into the, I guess, what we call kind of the more mid scale Area of the lodging business, I mean is that kind of where you see the biggest buyer pool opportunity growing, if that makes sense?

Speaker 3

Yes. No, great question. I think, look, when we looked at this deal, one of the things that was very attractive to us was The demographics, right. It's a younger owner. 75% of the members are At Bluegreen or Gen X or younger, still very good FICO score above 725.

Speaker 3

For us, attracting solid customers earlier in the stage of their life is important. And we have With HGV Match and Ultimate Access, we have over time the ability to grow them through our system and move them through our brand portfolio. From a property perspective, one thing that we really like about Bluegreen is just the consistency of the quality of the properties. And they do fully align with the growth of Hilton's portfolio as you mentioned earlier as well as the Otter member base. So And Hilton, as you know, they Chris and Kevin announced last week, they have now 173,000,000 Members, it's still the fastest growing hotel loyalty program.

Speaker 3

So we thought it made a lot of sense strategically and it will really Our net owner growth and allow us to continue to build embedded value in the business.

Speaker 6

Okay. Appreciate that color, Mark. And then kind of another, I guess, somewhat theoretical question or higher level question for you. Obviously, Bass Pro, that's a very unique asset. But at a higher level, Do you think maybe going forward there's more focus on some of these retail partnerships With companies that maybe have that, whether it's an outdoor angle or travel angle, it seems like this is kind of becoming a new way to source customers in it, Maybe in an indirect way, but any thoughts on that as to whether that's going to be a new, I guess, secondary avenue for Customer acquisition?

Speaker 3

Yes. Look, well, look, Bass Pro is extremely unique in itself, right. And I don't know if you've had the opportunity To visit one of their destination superstores, but they are a destination unto themselves, right. And as I mentioned earlier, I've had the opportunity to meet with Johnny and his teams and they've done amazing At their big Cedar Lodges, in their stores, the quality of commitment, their focus on conservation, it's just it's so impressive. And for us, we think it's just a massive opportunity with the marketing pipeline and Now being able to leverage our brand with them and they're excited about that.

Speaker 3

And we believe we're going to be able to do much more with Bass Pro Then Bluegreen was because of our portfolio and diversification of our platform and then our And access experiential platform. So yes, there could be other opportunities out there. But we think we have found and are acquiring the best one for sure.

Speaker 6

Okay, fair enough. Thanks, Mark. Just I guess kind of a quick follow-up to the quarter now, if I could. Is there any common theme and this is probably more as we look out the Q4 than kind of dissect Q3, but On the lower outlook for Q4, is there any common theme geographically or if you look at the customer Where they're not showing up or where the conversion rate is lower, whatever it might be, and maybe we need to strip Hawaii out of that, even though it's obviously a big piece. Just trying to get a sense as to whether Zanthe can pinpoint to identify as the one specific area of softness.

Speaker 3

Yes, I would say that Orlando has been off more than We had expected, right. There's been some softening there. And I we think it's Partially just driven around just some of the noise around Dizzy and what's going on there. But Overall, when you look at our Mainland business though, it is strong. TorFlo has essentially recovered And we're at historical levels for owners, VPGs.

Speaker 3

The real impact, one of the drags for us is unfortunately has been APAC. And We've talked about Maui, so I won't dive into that. But we're also continuing to wait for the Japanese To come back to Hawaii, which is really important. Now our owners are coming back pretty well, and but the Japanese in general Are still down 65%, 70% from pre pandemic. And really part of that It's less about the pandemic now.

Speaker 3

It's more about the currency. So all in all, I would say our mainland business is Generally in good shape other than a little softness in Orlando. It's really more around our APAC business And it will come back and it's just going to take longer than we expected.

Speaker 6

Okay. Very good. Very helpful. Thanks, guys.

Speaker 3

Thank you.

Operator

The next question is a follow-up from the line of Patrick Scholes with Truist. Please proceed with your questions.

Speaker 5

Okay. Thank you. Right now, Bluegreen has a licensing agreement with Choice Hotels. I wonder How much longer does that agreement last for? And is it realistic to expect when that expires you'll You're dropping that agreement?

Speaker 3

Yes. We're not going to talk about the agreement Yes, in detail here. But I would say, look, we're excited to work with Choice. And we believe they've been A good source of incremental and diversified lead flow for Bluegreen. And we've been in active discussions with them about the And we look forward to sharing more with you as we get closer to the deal closing.

Speaker 3

And But Bluegreen formed a nice partnership with them and they've built a nice little pipeline of tour flow. And on a relative basis and Put it in context of the combined company, it's small. It's about 5% to 6% of What the combined company will be, but we've got a plan to accommodate those leads and we're going to have the appropriate guardrails in place around The customer and the brand and all the partners are aware of this structure. And again, we'll share more, Patrick, as we go further down the road here.

Speaker 5

Okay. Fair enough. And then my last question here. I would say the other major competitor last week Talked about their maintenance fees going up mid teens for next year. And that will be a higher cost for them for any unsold Inventory, curious what you think your maintenance fees might be going up next year and would that be a similar challenge for you folks as well?

Speaker 4

Thanks. Look, we anticipate maintenance fees going up driven by various cost pressures, most notably property insurance. But ours will not be going up mid teens, probably mid single digits plus in that ballpark.

Speaker 5

Okay. Okay. So more in line with inflation as opposed to much higher than inflation?

Speaker 4

That's correct.

Operator

Okay. I think

Speaker 5

I'm all set for the moment. Thank you.

Speaker 3

Great. Thanks, guys.

Operator

Our next question is from the follow-up from the line Brandt Montour with Barclays. Please proceed with your question.

Speaker 1

Hi, good everybody. So I just had another one. I wanted to dig in a little bit more on the synergies. The cost synergies of 100,000,000 And I think Diamond was $125,000,000 at announcement and Mark kind of made it sound like you feel a little bit better about these ones This time around because you have the integration platform ready to go, you've got all these learnings And like someone else said, it was more plug and play. But is the but it also sounds like the Bluegreen system is the owner base is undersold, Whereas we could probably argue that Diamond was oversold.

Speaker 1

And so that's an interesting sort of dichotomy. Is that Firmly on the revenue synergy side, I would expect though. So I guess do you agree with that assessment?

Speaker 3

No. Yes, I totally agree that the revenue synergy opportunity really lies in VPGs around owners, their new buyer of VPGs actually hold out pretty well against ours. When I think about R VPGs to owners are almost double what Bluegreen is generating today and We're not looking to double those. We're taking a kind of a conservative approach and somewhere in between that. On the cost synergy side, I think we think these cost synergies are achievable in to 24 months, and we have a pretty good track record now of being able to achieve those Through the Diamond acquisition and we've looked at it very, very carefully and I think we've been very thoughtful in our approach.

Speaker 4

Yes. I think the only thing I'd add, Brandt, is going through the Diamond transaction, obviously, we learn different lessons. But When we talk about roughly $100,000,000 in cost synergies with regards to Bluegreen, cost synergies still require a lot And you have to have a thoughtful process, but roughly 65% of the cost synergies is driven by headcount, which When you think about cost synergies, it's probably the easier ones to garnish, if you will. But the thought process around who is where the redundancy is identified, that's where the Diamond history plays in well, right? Now we've learned, hey, in Diamond situations, we had made certain estimates where we cut too deep here and not too much there.

Speaker 4

And We applied those learnings here and we're really comfortable that we're going to get to that $100,000,000 in cost synergies, really confident. So that's good.

Speaker 1

Okay. That's helpful. And then for those of us that don't cover Bluegreen or maybe know that asset as well, And again contrasting with Diamond, is it fair to say that There's no friction that you expect from the removal of the Bluegreen brand from the consumer process, right? The consumer is always sensitive to sort of confusion and brands change around, but the Bass Pro is really where the consumer affinity lay. And so Hilton sort of cutting Bluegreen out of that process

Speaker 4

is sort of

Speaker 1

a no risk situation. Is that right?

Speaker 3

Yes. We believe when the members at Bluegreen understand that They're being acquired by Hilton that they're going to be very excited about what that means for them and what that means for their club going forward. When you think about Hilton is just such an iconic lodging brand and Bluegreen has done a great job Taking care of their customers, building loyalty within their brand. But when you think about the opportunity to be able to Prove your value proposition and this kind of goes back to the revenue synergy question. Part of the reason we think there's going to be good revenue synergies on the owner side Is the ability to move across 200 properties versus 50 properties and the ability to move into the Hilton Ecosystem and utilize those properties, those are powerful, right?

Speaker 3

And then you put on top of that the ultimate access program and those are really compelling for them. And the other thing I would say, Brad, is Bluegreen is actually simpler business model than Diamond was. And I say that because Bluegreen has 1 trust and Diamond had like 7 trusts. And so there was a lot more complexity and the reason Diamond had so many more trust product is because Diamond's strategy was acquisition of various companies, right. So that was M and A and tuck in.

Speaker 3

And Bluegreen has been 100 percent organic from day 1. They weren't acquiring any other companies. So in a way, we're the company is much, I wouldn't say cleaner, it's just it's a lot simpler and it's a lot more in tune the way HGV Was born with 1 club at one point starting forward. It's just going to be a lot simpler for us to connect this all together.

Speaker 1

Great. That's all for me. Thanks again.

Operator

Thank you. Our next question is a follow-up from the line of Chris Sironka with Deutsche Bank. Please proceed with your questions.

Speaker 6

Hey, guys. Thanks. Just a quick follow-up and apologize if I may have missed it. But is it possible to know Kind of what percentage of Bluegreen owners today are already Hilton Honors members and maybe how that compares to what percentage of Diamond members were Honors members at the time of that announcement or acquisition?

Speaker 3

No, don't We don't have that information in front of us and we haven't we really haven't looked into that. So But there's obviously going to be some crossover when you have when Hilton has 173,000,000 members out there. And as you know, people are Typically, our members of various hospitality and loyalty programs, but Our goal though is going to be getting all of those Bluegreen members to be Hilton Honors members going forward.

Speaker 6

Sure. Okay. Fair enough. Thanks guys.

Operator

Thank you. Before we end, I will turn the call back over to Mr. Mark Wang for any closing remarks. Mr. Wagner?

Speaker 3

Thank you. I want to reiterate how excited I am about the opportunity in front of us and my confidence in our strategy. I want to also thank Alan Levine, Ray Lopez and his entire leadership team. I also want to thank the Bluegreen team and we look forward to working with you. I'd also say Thank you to Johnny Morris and the entire Bass Pro Shops for their warm welcome.

Speaker 3

We look forward to an exciting future working with these great organizations and thanks Thank you, everyone, for joining us this morning.

Operator

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.

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Earnings Conference Call
Hilton Grand Vacations Q3 2023
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