Funko Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2025

There are 10 speakers on the call.

Operator

Good morning and welcome to the Hilton Grand Vacations Fourth Quarter twenty twenty four Earnings Conference Call. A telephone replay will be available for seven days following the call. The dial in number is (844) 512-2921 and enter pin one million three hundred and seventy five thousand one hundred and sixty five. 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. I would now like to turn the call over to Mark Melnick, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome to the Hilton Grand Vacations fourth quarter twenty twenty four earnings call. Before we begin, I'd note that we've uploaded slides to our IR website detailing our financing business optimization program, which are available for download at investors.hgv.com. 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 it is today.

Speaker 1

We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our SEC filings. We'll also be referring to certain non GAAP financial measures. You can find definitions and components of such non GAAP numbers as well as reconciliations of non GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgb.com. Our reported results for all periods reflect accounting rules under ASC six zero six, which we adopted in 2018.

Speaker 1

Under ASC six zero six, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is completed. For ease of comparability and to simplify our discussion today, our comments on adjusted EBITDA and our real estate results will refer to results excluding the net impact of construction related deferrals and recognitions for all reporting periods. To help you make more meaningful period to period comparisons, you can find details of our current and historical deferrals and recognitions in Table T1 of our earnings release and a complete accounting of our historical deferral and recognition activity can also be found in Excel format on the Financial Reporting section of our Investor Relations website. In a moment, our Chief Executive Officer, Mark Wang, will provide highlights from the quarter in addition to an update on our current operations and company strategy. After Mark's comments, our EVP of Finance and Acting CFO, Aaron Day, will go through the financial details for the quarter.

Speaker 1

Mark and Aaron will then make themselves available for your questions. With that, let me turn the call over to our CEO, Mark Wang. Mark? Good morning, everyone, and welcome to our fourth quarter earnings call.

Speaker 2

I want to give a special thank you to our team members across the globe for making 2024 another productive year for HCV. We closed our Bluegreen acquisition and completed a significant amount of integration work, adding nearly 200,000 members and expanding our portfolio to more than 200 properties. We made substantial progress against our goal of realizing $100,000,000 in cost synergies. We made meaningful organization changes, leveraging the strength of our combined teams to improve sales and marketing execution. We launched HGV Max to our Bluegreen members, providing them with access to more properties and more destinations.

Speaker 2

And we generated record free cash flow, while returning a record amount to shareholders. This was on top of the work we've been doing to continuously enhance the value of HGV ownership for our members. The teams have a lot to be proud of. And while our path in 2024 was not without its challenges, I'm pleased that we finished on a strong note in the fourth quarter. Our new organizational structure and strategic initiatives have been producing further results and we got off to a great start with the introduction of HUV Max to our Bluegreen members.

Speaker 2

As a result, we saw growth in transactions, EPGs and contract sales even after adjusting for some of the non reoccurring impacts we saw during the fourth quarter of both 'twenty three and 'twenty four. From a macro perspective, the consumer environment remains consistent with the past few quarters as inflation and elevated interest rates continue to impact spending and sentiment. But we're pleased to see that travel intentions have remained strong and we're optimistic that our operational adjustments and initiatives will help to insulate us from those two broad macro factors. As we look ahead, our 'twenty five guidance reflects the view that these initiatives will further enable growth in contract sales and EBITDA along with strong free cash flow generation as we continue to build on those improvements. And that growth comes despite the addition of $25,000,000 of additional consumer finance interest expense associated with our financing business optimization, which we expect to materially improve our future capital returns.

Speaker 2

So while there's more work remaining, I'm pleased with the significant progress we made to regain our momentum, which positions HEV for success in 'twenty five and beyond. Turning to an overview of the fourth quarter results. Reported contract sales were $837,000,000 and adjusted EBITDA was $289,000,000 with margins excluding reimbursements of 23%, which came in ahead of our expectations. Contract sales in the quarter were driven by strong VPG performance, which more than offset a decline in tours. Tour growth was primarily impacted by back to back hurricanes that hit the Southern U.

Speaker 2

S. At the start of the quarter, along with our initiatives to improve tour efficiency and the removal of a new buyer channel on the Bluegreen side that we made earlier this year. Controlling for those effects, our channel trends remain consistent with past several quarters. We continue to see strength in our owner tours aided by our launch of HUV Match for Bluegreen owners. New buyer tour growth has been more muted as we continue to improve the efficiency of those channels along with the removal of a third party channel on the Bluegreen side.

Speaker 2

We expect these trends to continue throughout the year, which should drive further improvements in VPG mix. These dynamics played out during the fourth quarter with VPG of $4,026 over 20% ahead of pro form a 'nineteen and at the best levels since the highs we saw in 'twenty two. Geographically, it's worth noting the strong performance out of our APAC region in the fourth quarter. As we lapped the Maui wildfires, we saw high demand for both the remaining inventory at our Okinawa project as well as initial sales launch of our new Kahaku property in Waikiki. Kahaku will be our first Hilton club offering in Hawaii.

Speaker 2

And like our other Hilton club offerings, this boutique luxury property will include exclusive amenities and meticulous attention to every detail, which we think will be very popular with our high end net worth members. We've already seen strong upgrade activity in Kahaku, which has added benefit of freeing up additional inventory at some of our other highly desired properties in the islands. Looking at our demand indicators, occupancy of 82% was slightly up in the quarter. Our rental arrivals looked very strong for the first half, in particular in the first quarter. And our package pipeline also remains robust at over 710,000 packages.

Speaker 2

We have great partners like Hilton, Bass Pro and Choice that have access to a huge pool of quality customers to enable us to continue building that pipeline. And as a result, we continue to be optimistic about the leisure travel environment. Turning to our non real estate business. Our member count stood at 724,000 at the end of the quarter and NOG was 1.1%. HGV Max members growth remains well ahead of overall NOG as we continue to see strong owner upgrade demand with our Max member base growing 34 this year to more than 193,000 members.

Speaker 2

Our rental business is showing good top line trends, although its profitability is being masked by seasonality and the addition of the Bluegreen rental business, which Aaron will speak to shortly. On the cash flow front, we had a record year in adjusted free cash flow generation at $837,000,000 And we also set a record in the amount of capital return to our shareholders this year at over $432,000,000 Building on that momentum, I'm also excited about our financing optimization, which will unlock additional cash flow this year and will allow us to return a record $600,000,000 to shareholders. Aaron will provide more details here in a few minutes. Now let me provide an update on our integration and strategic initiatives. Starting with Bluegreen, we achieved some significant milestones with our integration over the last year.

Speaker 2

We officially rolled out HGV MAX in our rebranded Bluegreen sales centers in early November and received a strong initial reception from both members and sales teams. We added nearly 5,000 new HV Max members in less than two months post launch, which was a quicker uptake than we saw with the initial launch of MAX in early 'twenty two. There was a lot of anticipation building ahead of the launch and we're pleased to see that excitement convert into new memberships. Looking at cost synergies related to the integration, we're well on track to achieve our $100,000,000 goal this year and with a significant amount of headcount and organizational work completed in 'twenty four, our integration efforts this year will turn more towards rebranding. In the fourth quarter, we rebranded Bluegreen sales centers ahead of our Max launch.

Speaker 2

On the whole, their sales centers were already in great shape, which enabled us to move very quickly to get them rebranded. On the property side, we have a detailed rebranding plan for approximately 30 Bluegreen properties. We expect a roughly even split of those rebrands to be completed over the next three years with work commencing this spring. On the operational side, we have several initiatives to further improve our tour efficiency and enhance our value proposition of our offerings. We continue to optimize our staffing coverage to better service our tour flow, particularly in some of our regional markets, and we're continuing to evolve our tour scoring models with additional filters and data points to ensure that we're prioritizing our best tours at any given time.

Speaker 2

We also have several additional value enhancements planned for this year in addition to expanding our ultimate access offerings, which have been incredibly popular with our members. Taken together, the goal of these efforts will be focused on improving tour quality and tour outcomes to drive growth in transactions rather than absolute tour volume growth. Ultimately, those transactions are what will drive improved EBITDA generation, margins and cash flow. Moving to our partner programs. In the fourth quarter, we started introducing our brand into locations within the Bass Pro network.

Speaker 2

We completed a handful of locations during the quarter. And over the course of twenty five, we plan on introducing our brands into nearly 125 additional stores. So far, we're very pleased with the results in these first locations and we're seeing an increase in comparative traffic levels. We're also working with Bass Pro to evolve the in store presence and deliver an experiential interaction that reflects the value of our brands coming together. The Great Wolf partnership is also producing solid results, exceeding projected expectations in room nights, call transfer and member feedback.

Speaker 2

The rollout remains on schedule with 14 retail locations currently active. Finally, we're pleased to solidify our long term partnership with Choice Hotels in the fourth quarter. Historically, Choice was a material source in new buyer tours for Bluegreen, and we see further potential to grow lead flow as we expand our existing marketing channels and launch new channels. Overall, we're very pleased with the success of our partnership model, and we continue to scout for new partners that can expand our reach and enhance our owner experience. So in summary, it was a strong end to a busy year for HCV, and I'm optimistic about our momentum coming into 'twenty five.

Speaker 2

We're in the middle innings of our integration work with solid line of sight on the remaining milestones. Our sales teams are excited about selling HUV Max across all our brands. And we have a great set of initiatives to drive another strong year of EBITDA and cash flow generation this coming year. Before I turn it over, I'd like to note that per our eight K earlier this month, our President and CFO, Dan Matthews, has taken a temporary leave of absence for personal reasons. And our EVP of Finance and Acting CFO, Erin Day, is stepping in for on today's call.

Speaker 2

So with that, I'll turn it over to Erin to talk you through the numbers.

Speaker 3

Erin? Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter include $90,000,000 of sales deferrals, which reduced reported GAAP revenue and were related to presales of our newest project, Kahaku. We also recorded $41,000,000 of associated direct expense deferrals. Adjusting for these two items would increase the EBITDA reported in our press release by a net $49,000,000 to $289,000,000 In my prepared remarks, I'll only refer to metrics excluding net deferrals, which more accurately reflect the cash flow dynamics of our financial performance during the period.

Speaker 3

As Mark mentioned, this was a very impactful year for HGV. We ended the year on a strong note exceeding our prior expectations and finishing in the upper half of our revised guidance range. We generated contract sales of $3,000,000,000 and adjusted EBITDA up $1,100,000,000 And we converted 76% of that EBITDA into a record $837,000,000 of adjusted free cash flow, enabling us to repurchase a record $432,000,000 of stock, reducing our diluted share count by 10. Now let's turn to our results for the quarter. Total revenue excluding cost reimbursements in the quarter was $1,200,000,000 and adjusted EBITDA was $289,000,000 with margins excluding reimbursements of 23%.

Speaker 3

EBITDA included just over $17,000,000 of Bluegreen cost synergies recognized during the quarter for a run rate of $75,000,000 annualized on target with our plan for $100,000,000 of cost synergies within twenty four months. Turning to our segments, within real estate contract sales grew to $837,000,000 for the quarter, up 9% year over year on a pro form a basis with Bluegreen contributing $2.00 $8,000,000 of sales and new buyers comprising 25% of total contract sales. If you recall, we faced several headwinds in the fourth quarter of twenty twenty three, including the continued impact of the Maui fires along with a system outage impacting our ability to convert tours into contracts. In the quarter, we also experienced a significant impact from the dual hurricanes that affected the Southern States and cost us nearly $23,000,000 in lost contract sales and $11,000,000 in EBITDA. Adjusting for these one time impacts in both periods, I'm pleased to note that we returned to solid contract sales growth for the quarter, including double digit year over year growth from Bluegreen, which benefited from the launch of HCD Max in early November.

Speaker 3

Tours were nearly 207,000 with Bluegreen contributing just over 54,000 tours for the quarter. If we adjust for the one time impact of Q4 both this year and last, tours declined roughly 1%, which reflects efforts made during the quarter to focus on to our efficiency. As Mark mentioned earlier, this will continue to be a key focal area for us in 2025 as we push to drive improvements in our BPG. On a pro form a basis, BPG for the quarter rose 13% to April which was over 20% ahead of pro form a 2019 level. Both our owner and new buyer channels showed strong growth during the quarter and we still experienced high single digit VPG growth even after adjusting for the one time headwinds experienced this and last year.

Speaker 3

The introduction of HTV Max to our Bluegreen members and the launch of sales at Kahaku were significant drivers of VPG during the quarter, reducing our highest close rate since the record levels of 2022 and enabling us to drive solid transaction growth despite tours being slightly lower year over year. Cost of product was 15% of net BOI sales for the quarter and our provision for bad debt as a percent of owned contract sales was 13% in the quarter. Real estate sales and marketing expense was $387,000,000 for the quarter or 46% of contract sales. Real estate profit for the quarter was $167,000,000 with margins of 26%. In our financing business, fourth quarter revenues was $153,000,000 and segment profit was $93,000,000 with margins of 61%.

Speaker 3

I'd like to take a moment here to highlight the slides that we have on the IR website detailing our financing business optimization that we launched in the fourth quarter. That initiative aims to increase both the level and consistency of our non recourse borrowing activity, generating additional adjusted free cash flow during the program ramp and enabling incremental shareholder value creation from both capital return and business reinvestment. The goal is to increase the amount of current receivables that we are regularly securitizing to between 7080% from the historical run rate, which was closer to mid-50s. We began the first stage of the program late in the fourth quarter and will continue to ramp it over the next eighteen months. Our business is well positioned today to execute on this initiative.

Speaker 3

We have significant excess liquidity of over 2,000,000,000 We've become a programmatic ABS issuer with a record of strong execution, which will support our access to the securitization market. And we recently completed extensive work to enhance our credit and consolidate our warehouse facilities, providing us with additional flexibility and a solid platform for this optimization effort. As shown on slide five, our goal in 2025 is to increase our non recourse rate to between 6570% with the ultimate goal of holding our rate in a range of between 7080%. When comparing to our baseline at full run rate, this will unlock an additional $700,000,000 of cash versus our prior securitization strategy, which we can use for additional capital returns and business reinvestment. At full run rate, we anticipate the program will result in a step up in our consumer financing interest expense of $39,000,000 versus our pre optimization level, which reduces our adjusted EBITDA due to being reported as an operating expense.

Speaker 3

Importantly, however, the tax shield and incremental securitization activity to maintain our new higher rate means the optimization will have minimal impact to our underlying cash flow, while still being highly accretive to our equity value. We'll use that incremental cash to support additional capital returns increasing our share repurchase goal by 50% to $600,000,000 for an average of $150,000,000 per quarter. As I mentioned, we expect to take roughly eighteen months for us to fully achieve full run rate where we're holding our 70% to 80% target range throughout the year. And in 2025, our current expectation is that we'll achieve an average securitization rate between 6570%, which will increase our consumer financing interest expense by $25,000,000 and consequently reduce our adjusted EBITDA by that same amount. That $25,000,000 impact is currently included in the guidance range we issued this morning.

Speaker 3

Turning back to our portfolio metrics, our originated weighted average interest rate was 14.95%. Combined gross receivables for the quarter were $4,000,000,000 or $2,900,000,000 net of allowance. Our total allowance for bad debt was $1,100,000,000 on that $4,000,000,000 receivable balance or 27% of the portfolio. Our annualized default rate for our consolidated portfolios inclusive of Bluegreen stood at 10.8% for the quarter. Our provision was 13.3% of owned contract sales in the quarter.

Speaker 3

Finally, I note that our other financing expense increased this quarter owing in part to an additional reserve of $13,000,000 primarily on the acquired Bluegreen portfolio. This is similar to the approach we used with Diamond, where we acquired a portfolio of mortgage receivables that will continue to pay off over time and we've taken a reserve against it as we work overtime to migrate the underwriting and sales processes to legacy HDB. Also similar to Diamond, early indications are the originated portfolio is performing better than the acquired portfolio, reflecting the higher value proposition of HGV's network, HGV MAX and improved underwriting standards. In our resort and club business, our consolidated member count was approximately $724,000 and our NOG was 1.1% at the end of the quarter. Revenue was $2.00 $6,000,000 for the quarter and segment profit was $147,000,000 with margins of 71%.

Speaker 3

Rental and ancillary revenues were $174,000,000 in the quarter with segment loss of $11,000,000 Revenue growth was driven by the addition of Bluegreen along with an increase in available room nights at our legacy business, offset by a mix driven decline in RevPAR. The mix impact on RevPAR was driven by an increased number of room nights in our Hawaii market being dedicated to member stays rather than rental this quarter, as we lap the wildfire related to disruption in the region. Given that Hawaii carried the highest ADR in our portfolio, this created a negative mix impact when looking at system wide RevPAR. But when looking at same market basis, our RevPARs increased versus the prior year in each of our major markets during the quarter. Expenses in the period were elevated primarily due to the addition of Bluegreen's rental business, which operated at a loss along with continued elevated developer maintenance fees associated with our unsold inventory.

Speaker 3

During the fourth quarter, we also saw strong usage of points for stays at Great Wolf Lodge through our new partnership program with associated point conversion expense showing up in our rental segment. Over time, we expect annual segment profitability to improve, mainly as a result of selling through our unsold inventory, which reduces the burden of developer maintenance fees. But the addition of Bluegreen's business will continue to weigh on segment profits and rental, mainly in the seasonally slower first and fourth quarters. Bridging the gap between segment adjusted EBITDA and total adjusted EBITDA, JV EBITDA was $6,000,000 corporate G and A was $46,000,000 license fees were $47,000,000 and EBITDA attributable to non controlling interest was $5,000,000 Our adjusted free cash flow in the quarter was $883,000,000 which included inventory spend of $159,000,000 I note that this is materially higher than our initial expectations. We elected to take advantage of tax deferrals in The U.

Speaker 3

S. And Japan at the end of the year, coupled with the timing shift on some of our anticipated inventory spend in the quarter. We expect that both of these items will instead be paid in 2025. In addition, we had a significant level of securitization activity in Q4, which contributed to the strong cash flow in the quarter. For the year, we produced adjusted free cash flow of $837,000,000 or 76% of our adjusted EBITDA, which was materially higher than our long term target range of 55% to 65%.

Speaker 3

Excluding the deferral items I mentioned above, our conversion rate in the quarter would have been in the high 50 Looking forward, our cash conversion rate will also be elevated as we ramp our financing optimization program before reverting back to our long term target range of 55% to 65. As we look at 2025 specifically, by the inclusion of the tax deferrals and deferred inventory payment, our optimization benefits will still enable our cash conversion rate for the full year to be in a range of 65% to 75%. During the quarter, the company repurchased 3,150,000.00 shares of common stock for $125,000,000 And through February 20, we repurchased an additional 1,600,000.0 shares for $66,000,000 dollars leaving us with $361,000,000 of remaining availability under our share repurchase plan. Turning to our outlook, we are establishing our 2025 adjusted EBITDA guidance to be in a range of $11.25 to $11.65 dollars When contemplating this range, there are several important expense items embedded into the guidance that should be noted. The first is the $25,000,000 increase in our consumer financing interest expense due to our financing optimization program.

Speaker 3

Excluding this expense, our guidance would have been in the range of $11.5 to $11.9 But as I detailed earlier, we believe this program will be accretive to our cash flow and our equity value. The second item is regarding our license fees. The overlap of our final license fee rate step up on our diamond sales and our first rate step up on our Bluegreen sales makes 2025 uniquely high with respect to year over year change in our license fee. If we assume no change in sales from 2024 levels, this change in rate would be a $30,000,000 EBITDA headwind in 2025. As it relates to our liquidity, as of December 31, our position consisted of $328,000,000 of unrestricted cash and $715,000,000 of availability under our revolving credit facility.

Speaker 3

Our debt balance at quarter end was comprised of corporate debt of $4,600,000,000 and non recourse debt balance of approximately $2,300,000,000 At quarter end, we had $423,000,000 of remaining capacity on our warehouse facility. We also had $1,200,000,000 of notes that were current on payments, but unsecuredized. Of that figure, approximately $749,000,000 could be monetized through either warehouse borrowings or securitization, while another $291,000,000 of mortgage notes we anticipate being eligible following certain customary milestones such as first payment and recording. Turning to our credit metrics at the end of Q4 and inclusive of all anticipated cost synergies, the company's total net leverage on a TTM basis was 3.77 times. Finally, I'm happy to announce that we've remediated the material weakness that we previously disclosed in our 2023 Form 10 K.

Speaker 3

We will now turn the call over to the operator and look forward to your questions. Operator? Thank

Operator

you. The first question comes from the line of Patrick Scholes from Truist Securities. Please go ahead.

Speaker 4

Great. Thank you. Good afternoon or good morning. A number of questions here for you. How should we think about some of the puts and takes as far as growth rates between balancing off tour flow and DPG as it relates to your 2025 outlook?

Speaker 4

Certainly in the most recent quarter, saw this massive year over year acceleration in BPG, does that flow through? If you could give a little more color on that. Thank you. And then I'll have a follow-up question.

Speaker 2

Yes, sure. Thank you, Patrick. So maybe I'll touch on just kind of a high level and then I'll have Aaron provide a little bit more detail here. But look, I think as you saw, we finished the year strong with really good momentum. Teams did a great job, improved execution from all the initiatives that we put in place last year.

Speaker 2

So we expect strong top line revenue driven by growth in contract sales this year. And we've talked about the rollout of MAX and importantly Ultimate Access, we're going to be rolling that out. That's our experiential platforms, blue green. We'll continue to benefit from the launch of Kahaku, especially in our APAC region. So and our focus around customer conversion, we talked about it not just around the quality of the tour, but our staffing ratios, getting our staffing ratios and the teams have done a great job.

Speaker 2

Our recruiting team, our sales leadership done a good job getting us in a better position there. So to kind of get into what we're thinking here and what we're guiding to is tours, we see in this low to mid single digit and we think that BPG will be in kind of the same range. We do have some unique expense headwinds impacting EBITDA this year. Aaron covered off and talked about it in our prepared remarks. So you're going to see revenue will outpace EBITDA this year, but expect solid growth in our underlying business including strong free cash flow generation.

Speaker 2

And Erin, if you like, you can probably provide a little bit more detail on that.

Speaker 3

Yes. Thanks, Mark. So, as Mark mentioned on the top line, if you take that tour flow, at that low to mid and the VPG at mid single digit, we really expect to be mid to high single digit, overall. As Mark mentioned that we are going to see a slight margin contraction, primarily related to items I mentioned in my prepared remarks. So that's around the additional interest expense from our financing optimization business, as well as a license fee headwind and some rental pressures around recovered inventory.

Speaker 3

So from a cadence standpoint, just thinking about the year, Q1 will be the lowest from a growth and margin perspective. And that's mainly due to some of those cost headwinds lapping throughout the year. But on the sales side, we also had easier comps. We will have easier comps in second quarter, third quarter. So we really should see some better flow through in those quarters.

Speaker 3

And then once Mark mentioned as well on the cash flow side, we're expecting 65% to 75% conversion rate. And that's really, that benefit of the financing optimization program we announced today.

Speaker 4

Okay. Thank you. And then my follow-up question really just relates to this optimization program. It seems you know, it seems pretty straightforward. I guess it's a very simplified way of describing it.

Speaker 4

Essentially, you're just picking up the pace of securitizations and because you're doing that you'll receive less immediate income from that. But the trade off is you get more cash infusion from doing the actual securitizations which you could use for share repurchases.

Speaker 5

Is that

Speaker 4

a very simplified way of high level of describing it?

Speaker 3

Yes, Patrick. I think that's a good way of describing it. I think one thing to know is just that, remember the program is going to ramp over the next eighteen months to get to that full $700,000,000 we announced. So probably when you just think about 2025, if we focus there, we really anticipate generating $800,000,000 at the midpoint of our cash flow guidance for the year in 2025. So that, and that also includes absorbing those timing impacts of that Q4 cash benefit.

Speaker 3

So, and then of that 800,000,000, we're going to commit 600,000,000 to the share repurchase program that we upped from 100 to 150 per quarter. So overall we're targeting our non recourse borrowing in '25 to be in that 65 to 70% range. I think we were, ended Q3 right around 55%. We did start this program a little bit in Q4. So you see a little bit of benefit there, both on the non recourse borrowing side and then consequently on the share repurchase.

Speaker 3

But this will ultimately ramp to 70% to 80% as we, ramp up for the next eighteen months.

Speaker 2

Yes. And just to maybe finish up on that. Look, our priority is the return cash to our shareholders. And when ramped, the program is really going to have minimal impact or underlying go forward cash flow. And we as we've talked about in the prepared remarks, we see this as highly accretive to our free cash flow in the near term as well as to our equity values.

Speaker 4

Okay. That makes sense. And I certainly found over time shareholders like the cash infusion used for share repurchases as the preference. I have more questions, but I'll hop into the queue. Thank you.

Operator

Thank you. The next question comes from the line of Brandt Amontore from Barclays. Please go ahead.

Speaker 6

Good morning, everybody. Thanks for taking my question. So maybe for Aaron, the loan loss provision, you did give a lot of detail and I apologize if I missed this, but the as a percentage of owned, it did bounce around a fair amount in last year. And I know there was some volatility market wide in terms of delinquencies. But maybe you could just help us understand how to think about 2025 at least qualitatively versus the numbers that we saw in 2024?

Speaker 3

Yes. So you're right, it did bounce around a bit. So if you remember Q1, we were around 12% and that started ticking up in 2Q and 3Q. So we did mention on last November's call that we always expect seasonally it's a bit lower in Q4. And so that pretty much came in as expected.

Speaker 3

Overall, book is holding up really well, delinquencies are stable. So we look into next year, I think you're going to see some headwind in Q1 as we talk about that mid teens and we still think that's a good number. So we're going to see that stabilize in that area and it's really going to be like on an annualized basis. So if you think about it from a cadence perspective, the provision typically takes up throughout the year with a decline in Q4. So Q1, you're going to see a little bit of headwind.

Speaker 3

We still expect to be on an annualized basis in that mid teens when we're looking at 25% and what we've assumed in our guidance.

Speaker 6

Okay. That's super helpful. Thank you for that. Okay. And then maybe for Mark, the blue green HGmax sort of pent up demand where they were waiting for that to roll out and they were kind of waiting all year.

Speaker 6

And it sounds like you saw what you wanted to see in November when you launched that to all those folks in the Bluegreen system that were waiting for it. Can you help us understand a little bit about the sales cycle length, meaning that we're sitting here in February. Are all those folks have you gotten through to all those folks that were waiting? Or does that take a lot longer? And is that a tailwind for the next few quarters?

Speaker 2

Yes. So great question. Actually, I'm glad you asked that, Brent. So look, super excited about the launch and the uptick is much stronger than we initially launched back in 2022. And we talked about it last year.

Speaker 2

There was some hesitancy. We saw it in the performance in Bluegreen ahead of the launch as people as the members were kind of waiting to find out what the benefit of the acquisition of Bluegreen from Pilgrim Vocations was going to be, right? So what we saw is we saw this great uptick. And so as you think about the cadence here, it will take us a good eighteen to twenty four months really to get in front of all the members. So when we talk about a launch, we launch it within the sales center.

Speaker 2

This isn't we're mailing out or emailing or doing a lot of transactions telephonically or digitally. What we're doing is we introduce it into our sales centers. We wait for our members, in this case the Bluegreen members to arrive at the property and those that are interested to learn about HGV Max then are invited to come in and go through sales presentation. So great question. It will take us a good eighteen to twenty four months to really I think get to a good meaningful amount of these members.

Speaker 4

Great. Thanks everybody.

Operator

Thank you. The next question comes from the line of Stephen Grambling from Morgan Stanley. Please go ahead.

Speaker 5

Hey, thank you. You may have addressed a little bit of this in the opening remarks, but I guess

Operator

what have you seen

Speaker 5

in terms of changes in customer behavior across the different segments that you now have across the portfolio kind of post election? And maybe another way of asking this is if we were to have the guidance conversation a quarter ago, what would have changed?

Speaker 2

Yes. So, Steve, I'd say number one, I think trends remain broadly the same, particularly around this the pressure on just cost of living, right, inflation. And we talked about it throughout 2024. We saw that pressure, especially in our new buyer close rates. The KPIs for the bottom third net worth customer was the one that we were really struggling with.

Speaker 2

But I can tell you today that bottom third tier has really stabilized. And if you think about that bottom third, the top half of that bottom third is definitely stabilized. So, I can tell you though leisure travel remains strong. We saw it in the fourth quarter improvements across the board. And when you look at the performance across all of our brands and new buyers and owners, VPGs and closing rates were up solid across all of them.

Speaker 2

VPGs for new buyers were up 8%, for owners thirteen percent. I think for us what we've been able to control have been the improved execution and getting really this new organization aligned around our brand, our company strategy. And then we talked about the Max launch already. Kahaku is a big one. If you look at who led performance for the company, it was APAC.

Speaker 2

Hawaii had an outstanding quarter. We saw great growth there. We saw it in Oahu. We saw it in Maui. We saw it in the Big Island.

Speaker 2

And we also saw growth in Japan as our new buyer tour flow is ramping up there. So I guess to answer your question, people are engaged in travel. I think things have stabilized and I think our execution and our focus around what's important and what we can control has improved. So all in all, I feel good about the momentum that we came out of Q4 with.

Speaker 5

That's great color on what's going on in Hawaii. An unrelated follow-up, and I know you talked a little bit about the free cash flow conversion, but maybe if we can just drill down into the inventory investment that you're anticipating in 2025? I may have missed that. Thank you.

Speaker 3

Yes. So thinking about 2025 on the inventory side, we are looking at, so I think when we had, HTV as a standalone company, we were talking $250,000,000 to $350,000,000 and that was roughly to support, $2,500,000,000 or so of sales. So Bluegreen, when we bought them, they operated right around the run rate of 100,000,000. So, they're being invested every year a little bit because they came with a bit lower inventory than we had with the Diamond acquisition. So for '25 and '26, we expect to be at the high end of the combined range.

Speaker 3

So the combined range being $3.50 to $4.50. So when you think about '25, it's going to be circa $4.50 give or take a little bit. Let's talk about a bit of inventory spend that got delayed from Q4 into '25. So it mainly that's really finishing off these pre COVID projects, primarily in the Hawaii market. Mark just talked about Kahaku, that's going vertical right now.

Speaker 3

So that's a big portion of the spend. So, we're going to see it ebb and flow a little bit throughout the year. But, as we lap over the next two years, we expect a longer term outlook to be more near the low end of that combined range of $3.50 to $4.50.

Speaker 2

Yes. And then Steve, I'd just add that look, I think we're in a very favorable inventory position, right? We have good availability. We have high quality across all our segments. And when you look at the Diamond acquisition, it came with ample inventory.

Speaker 2

So we haven't spent any capital since that acquisition. And Bluegreen is very similar. So it came with ample inventory. This elevated spend that we're seeing now is really, as Aaron alluded to, is finishing up on these projects that we announced back in 2018 that got delayed through COVID. So great position for inventory, four years on hand, a bit more than we would typically want for our long term target.

Speaker 2

But we were committed to finishing these projects off. They're good projects and they will we believe have compelling returns for us.

Speaker 5

Excellent. I'll jump back in the queue. Thank you.

Operator

Thank you. The next question comes from the line of Ben Cheikham from Mizuho Securities. Please go ahead.

Speaker 7

Hey, thanks for taking my questions. The legacy Bluegreen ownership, does that convert at one to one or is it on a case by case basis when people are upgrading to HGV Max? And then are consumers proactively seeing that value proposition? Or do you need to flag it to them to your point around this taking eighteen to twenty four months ramping up? And then I have one or two quick follow ups.

Speaker 2

Yes. I'm not sure, Ben, that I understand the first part of the question.

Speaker 7

Sure. Yes. So I would assume that I well, maybe I'll ask the question. When Bluegreen customers purchase when legacy Bluegreen customers upgrade to HDB Max, does their legacy ownership in Bluegreen also now apply at some exchange ratio to the HTV Max system? I get you.

Speaker 2

Okay. Yes. So look, we have a conversion. As far as our points go in Bluegreen. So they own points at Bluegreen, in the Bluegreen Club.

Speaker 2

They will continue to have those benefits and be able to use that within that system. But there's a conversion rate as a max member. So the benefit for them is now they have the ability when they join HGV Max, you have to upgrade into additional purchase, but you get cross booking activities. So now you can go from the 40 some Bluegreen properties across 200 properties within MAX. You also get Hilton Otter status.

Speaker 2

You get discounted stays at Hilton Hotels. And you also add on that the travel services that we have. You can exchange your points for cruises, flights, rental cars, etcetera. So, yes, so there to be able to take advantage of the max benefits you have to upgrade into the max system and you don't lose any of the benefits you had at Bluegreen. As far as timing goes, the timing is really like I think I talked about just a few minutes ago.

Speaker 2

The introduction of Max was introduced into our sales centers, right? And so the ability for people to learn about HGV Max, now of course it comes in there on the website. We talk about it there. But to really purchase it and upgrade, it's done at the sales table. So again, it's going to take a good eighteen to twenty four months before we can get this program, this value proposition presented in front of a customer.

Speaker 7

Got it. That makes sense. And have you done any work on similar transactions regarding the potential upgrade propensity or proportion of the owner base over time, maybe looking at past transactions in the industry?

Speaker 2

Yes. Look, we track that daily and monthly. We have a static pool on upgrade propensity. And so one of the things that we really liked about Bluegreen is their upgrade propensity wasn't or hasn't been historically at the same level as HTV nor at the levels that Diamond had. And we think part of it is because there really wasn't a compelling new story and compelling new value proposition that was put in front of those customers.

Speaker 2

And so our expectations is while we underwrote it to be lower than the propensity at HEV legacy, we still see the VPGs at right around $2,000 to $2,500 stronger than they've historically been, but still below historic HTV, owner VPGs.

Speaker 7

Got it. And then just squeezing one more quick one in. The securitization, financing update is very straightforward and appreciated. I guess the question would be, why not do the securitization all at once? Is it just a market demand dynamic that takes eighteen months or so to move the ratio higher?

Speaker 3

Yes. So we're really thinking about the remember we talked about we kind of started this in Q4, but we're thinking about the ramp from a couple of different reasons. But the ramp really will allow us to continue to execute a tighter spread versus doing it all at once. And so the ramp is really somewhat the timing is a little bit dependent on the securitization market, but we do expect to be there at the run rate as we the first half of twenty twenty six. So, the ramp is just a, we want to do it over time.

Speaker 3

And so for this year, we're going to be that 65%. So we're going to get a lot of it this year and then we'll finish up with the expectation is in that first half of twenty six when the full non recourse percent will be there on a kind of a stabilized basis.

Speaker 4

Got it. Thank you. Thank you.

Operator

The next question comes from the line of David Katz from Jefferies. Please go ahead.

Speaker 8

Good morning. Appreciate all the copious detail and the prepared remarks and the deck and appreciate you taking my question. So, look, I do want to get a sense for your updated geographic distribution and how you look at it on a combined basis. Just remembering some of the concentration that was Hawaii early on, looking at sort of where the company is able to touch today and where might be future places for you to grow into? Thank you.

Speaker 2

Sure. No, thanks, David. I'd tell you, we're such a different company since 2019 when you think about just our platform and when you look at what a much wider reach we have geographically. I would say when you looked at our business back in 2019, we were very focused around four big core markets with a couple of regional markets. Today, we still have those four core markets that are even bigger than they were in 2019, but we now have 44 new regional markets.

Speaker 2

So geographically, we've added places like Savannah and Virginia Beach and Sedona and Scottsdale and Palms Desert in Lake Tahoe. So we have completely changed the dynamics of the value proposition from a ability to travel to different locations. So excited about that. Now as far as how we've organized the business, we've reorganized the business into five regions where before we had two regions. And so and I can tell you geographically I talked about it.

Speaker 2

APAC had a very outstanding quarter. Japan showed up well. Our JV with Bass Pro and our East teams did a really good job. So all in all, performance has been improving. And the opportunity now for us, when you think about Nashville, for instance, we have a small footprint there.

Speaker 2

The opportunity to expand in Nashville is a great opportunity for us. There's 12 Hilton branded hotels in that market for instance. Texas, we have a small footprint through the acquisition of Bluegreen in San Antonio. Texas happens to have the third largest members for HGV combined. So Texas is another market that we see that's compelling.

Speaker 2

And then we announced Kyoto last quarter and we think domestic we were the first company, first international company to develop a purpose built timeshare resort in Japan. It was so successful. We're almost sold out ahead of our underwrite and that pushed us into buying Kyoto. So we think there's going to be good domestic demand for us in Japan and we see a lot of greenfield opportunities in Japan. So this whole new platform gives us the opportunity to really expand in some of these regional markets.

Speaker 2

Now when I talk about expansion, these will not be Vegas markets. They won't be Orlando markets. But these are incremental markets that I think where we can grow in the high single digits to low double digits. Whereas our big core markets are probably more going to be more strained to mid single digits. So I think a great opportunity for us, it's going to take time for us to unlock this.

Speaker 2

But we are working through a plan to focus on how that expansion will work. And importantly, the spend as we look at the investment in those markets will be much more incremental. We're not going to be building necessarily big towers. We'll also look to do capital efficient deals on a just in time basis.

Speaker 8

Thank you very much.

Operator

Thank you. The next question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my question. Mark, you talked earlier about improving the efficiency, right, the close rates. And I'm curious as to whether that's going to have any potential impact on the financing business in terms of either propensity to finance or maybe lower LPs. Is this a higher quality customer that you think you can get the higher close rates on?

Speaker 2

That's an interesting question. We haven't seen any material change in the propensity to finance. It's when we are seeing higher quality customers. So I would say today that we have not seen any material change in that.

Speaker 9

Okay. Fair enough. And then, yes, I know you mentioned I think you've kind of re upped with Choice. Can you maybe without coding any specifics you don't want to go into, can you let us know if there's any difference in economics there? Or how much uplift you expect from the renegotiated relationship?

Speaker 9

Thanks.

Speaker 2

No, thanks. Look, pleased we solidified our partnership with Choice. They are a great partner with Bluegreen. They did a really good job driving new buyer transactions. Look, this is part of our new business.

Speaker 2

We've really diversified our new buyer lead sources. We with the Bluegreen acquisition, Bass Pro, Choice, but Choice had a really nice call transfer program that's performed well. And where we see the opportunity with this partner is in the digital side and other consumer facing marketing opportunities. So excited about this. It took a while for us to get it get things figured out when you're dealing with two hospitality brands.

Speaker 2

But the Choice customers will be focused on the Bluegreen product and will not be focused on the Hilton product. So we will keep those separate going forward. We need to be mindful around the brand integrity and so we'll have dedicated sales centers for Choice leads going forward.

Speaker 9

Okay. Super helpful. That's it for me. Thank you.

Operator

Thank you. The next question comes from the line of Patrick Scholes from Truist Securities. Please go ahead.

Speaker 4

Great. Thank you. Just a quick follow-up question. On an earnings call this morning, one of your peers had somewhat cryptic comments about softness in sales beginning in February, which subsequently stabilized. I'm curious if you saw anything similar along those lines.

Speaker 4

Thank you.

Speaker 2

Yes. We haven't seen anything similar to that. We had very similar momentum that we saw in the fourth quarter roll through January. And so right now that momentum continues. So we haven't seen that softness.

Speaker 4

Okay. Thank you. That's it.

Operator

Thank you. Ladies and gentlemen, this concludes our question and answer session. And before we end, I will turn the call back over to Mark Wang for any closing remarks. Mr. Wang?

Speaker 2

All right. Well, thanks, everyone for joining us today. I also want to thank all of our team members again for going above and beyond to provide outstanding vacation experiences for our members. And we look forward to speaking with you on our next call. So thank you.

Operator

Thank you. Ladies and gentlemen, the conference of Hilton Grand Vacations has now concluded. Thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Funko Q4 2024
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