Hilton Grand Vacations Q3 Earnings Call Highlights

Key Points

• Sales weakness prompted lower guidance: Third-quarter contract sales fell 11% to $807 million as tours rose but conversion rates weakened, pushing Hilton Grand Vacations to reduce its full-year adjusted EBITDA outlook to $1.165 billion–$1.180 billion.
• Profit benefited from accounting and credit-related factors: Adjusted EBITDA rose 4% to $313 million, supported by Ka Haku revenue recognition and a lower bad-debt provision, though the company said excluding the accounting impact would have reduced EBITDA by $296 million.
• Recurring businesses and capital returns remained resilient: Financing revenue grew 16%, HGV Max membership surpassed 300,000, and the company repurchased $110 million of shares during the quarter while maintaining its $600 million full-year buyback target.

Hilton Grand Vacations NYSE: HGV reported third-quarter results that fell short of its prior expectations as contract sales declined 11% and sales-conversion challenges persisted across its Legacy and Bluegreen operations. The vacation ownership company reduced its full-year adjusted EBITDA outlook, citing weaker-than-expected sales performance and a slower ramp in initiatives intended to improve execution.

Chief Executive Officer Mark Wang said the company’s underlying recurring-revenue businesses and cash generation remained resilient, but sales teams did not convert customer tours into transactions at the expected rate. Contract sales fell to $807 million, while tours increased 2% to 236,000. Volume per guest, or VPG, declined 12% to approximately $3,400.

“Tour flow for the quarter was consistent with our expectations, as it's been all year,” Wang said. “But we didn't convert those tours into transactions at the level we should have.”

Sales execution drives guidance reduction

Wang said the company identified incentive alignment, recruiting and employee retention as key factors behind weaker closing rates, particularly at Bluegreen sales locations. The company took steps during and after the quarter to replace leaders at certain properties, update incentive plans and recruit experienced sales personnel.

At Bluegreen’s Orlando location, Hilton Grand Vacations installed a new leader, rebuilt the team and returned the site to sales growth in September, according to Wang. The company also made leadership changes in Myrtle Beach. Wang said sales trends reached their low point in August before improving in September and continuing to improve in October.

The company brought in more than 430 experienced salespeople during the prior four months, including 165 former HGV sales representatives, Wang said in response to analyst questions. It also added 350 employees with real estate experience. While newly hired sales representatives require time to ramp, management said turnover stabilized exiting the third quarter.

Hilton Grand Vacations also announced a sales leadership change, with Wang saying Mike Riley would lead the next phase of sales growth. Wang said the company is increasing its focus on more profitable lead channels and potential buyers with higher closing propensities, while considering new products and price tiers for certain customer segments.

The company now expects full-year adjusted EBITDA of $1.165 billion to $1.180 billion, down from prior guidance of $1.225 billion to $1.265 billion. Management expects full-year VPG to decline at a high-single-digit rate and contract sales to fall by a mid-single-digit percentage. For the fourth quarter, it expects VPG to decline in the mid-single digits and contract sales to decline in the low- to mid-single digits.

Quarterly profit supported by financing and accounting changes

Total revenue before cost reimbursements was flat from a year earlier at $1.3 billion. Adjusted EBITDA attributable to shareholders rose 4% to $313 million, while the margin excluding reimbursements increased 80 basis points to 25%.

The reported quarter included significant ASC 606 revenue recognition related to the company’s Ka Haku project after it obtained a certificate of occupancy. Hilton Grand Vacations recognized $536 million of previously deferred contract sales revenue and $240 million of associated direct expenses. Investor Relations Senior Vice President Mark Melnyk said excluding those net recognitions would reduce reported adjusted EBITDA attributable to shareholders by $296 million.

CFO Dan Mathewes said EBITDA also benefited from a lower provision for bad debt. The provision was 12.5% of owned contract sales, compared with 16.8% a year earlier. The result reflected improved credit performance and a consolidation of loan-loss allowance methodology following the integration of acquired businesses.

The methodology update resulted in a $55 million change in estimate to the company’s allowance for originated loans. Mathewes said Hilton Grand Vacations expects its provision rate to center around the mid-teens going forward, though it may fluctuate based on financing propensity, customer mix and underwriting factors. Under the prior methodology, the quarter’s provision rate would have been roughly 20%, he said.

Real estate profit increased 2% to $182 million, with the margin expanding 150 basis points to 28%, as the lower bad-debt provision more than offset sales-and-marketing deleverage. Real estate sales and marketing expense represented 51% of contract sales, up 440 basis points from the prior year.

Recurring businesses and member base expand

The company’s financing business posted 16% revenue growth to $149 million and $94 million in profit. Excluding amortization associated with acquired receivables portfolios, financing margins rose 300 basis points to 64%.

Hilton Grand Vacations’ resort and club business generated $196 million in revenue, up 2%, and $136 million in profit, with a 69% margin. The company’s consolidated member count was 716,000. Its HGV Max membership base increased 20% and exceeded 300,000 members.

Wang said the financing and club-and-resort businesses represent more than half of segment profit and provide high-margin, more predictable earnings streams. Rental and ancillary revenue increased 4% to $194 million, although developer maintenance fees contributed to a $7 million loss in that business during the quarter.

Management also highlighted inventory recapture as an increasingly important source of product. Cost of product was 9.4% during the quarter, supported by a higher mix of trust product sales from recaptured deeded inventory. Mathewes said the company now expects inventory spending of about $285 million for the year, $90 million below its prior estimate, and expects spending to remain below $300 million next year.

Cash flow, buybacks and balance sheet

Adjusted free cash flow was $63 million in the third quarter, representing a 20% conversion rate from EBITDA. Management maintained its expectation for full-year conversion in the lower half of its long-term 55% to 65% target range, supported by expected fourth-quarter securitizations and lower inventory spending.

The company repurchased 2.4 million shares for $110 million during the quarter and said it still expects to repurchase $600 million of shares for the full year. As of Oct. 22, it had $617 million remaining under its share repurchase plans.

As of Sept. 30, Hilton Grand Vacations had $684 million of liquidity, including $227 million of unrestricted cash and $457 million of revolver availability. Total net leverage was 3.87 times on a pro forma trailing-12-month basis, according to Mathewes.

About Hilton Grand Vacations (NYSE:HGV)

Hilton Grand Vacations Inc NYSE: HGV is a global vacation ownership company that markets and sells vacation intervals, points-based memberships and related travel experiences. Its portfolio includes branded vacation ownership resorts and accommodations in popular leisure destinations, with products designed to provide members with recurring access to vacation properties.

The company also provides resort management, reservation and customer services, financing for vacation ownership purchases, and exchange and travel-planning services.

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