Good morning, and welcome to the Hilton Grand Vacations Second Quarter 2021 Earnings Call. A telephone replay will be available for 7 days following the call. The dial-in number is (844) 512-2921 and enter pin 13714034. At this time, all participants have been place in a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions] I would now like to turn the call over to Mark Melnyk, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to the Hilton Grand Vacations second quarter 2021 earnings call. Before we get started, please note that we prepared slides that are available to download from a link on our webcast and also on the main page of our website at investors.hgv.com. We may refer to these slides during the course of the call or on our question-and-answer session. As a reminder, our discussion this morning will include forward-looking statements. Actual results could differ materially from those indicated by these forward-looking statements, and these statements are effective only as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our 10-Q, which we expect to file after the conclusion of this call and in any other applicable SEC filings. We'll also be referring to certain non-GAAP financial measures. You can find definitions and components of such non-GAAP numbers as well as reconciliations of non-GAAP and GAAP financial measures discussed today in our earnings press release and on our website at investors.hgv.com. As a reminder, our reported results for both periods in 2021 and 2020 reflect accounting rules under ASC 606, which we adopted in 2018. Under ASC 606, we're required to defer certain revenues and expenses related to sales made in the period when a project is under construction and then hold off on recognizing those revenues and expenses until the period when construction is 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 in 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 construction-related deferrals and recognitions for all reporting periods. A complete accounting of our historical deferral and recognition activity can be found in Excel format on the financial reporting section of our Investor Relations website. Finally, unless otherwise noted, results discussed today refer to second quarter 2021, and all comparisons are accordingly against the second quarter of 2020. In a moment, Mark Wang, our President and Chief Executive Officer, will provide highlights from the quarter, in addition to an update of our current operations and company strategy. After Mark's comments, our Chief Financial Officer, Dan Matthews, will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that, let me turn the call over to our President and CEO, Mark Wang. Mark?

Good morning, everyone. I'm happy to report another quarter of sequential improvement, strong results that we released this morning. We experienced a nice linear pace of contract sales recovery in Q2, with monthly sales versus 2019 levels improving each month of the quarter. That's a continuation of the trend we've seen so far throughout 2021 and into our current quarter. So we remain very optimistic about our business and our pace of the recovery. But what stands out this quarter is the driver of those contract sales. Specifically, it was a material improvement in tour flow that we saw in nearly all of our major markets. We've done a great job executing through the pandemic, and I'm very proud of our teams. But as I've said in the past, ultimately, tour flow and customer acquisition are key drivers of the business. So it's really encouraging to see a rebound in tours with the release of tenant travel demand. There are still a few pieces left to solve for, namely the return of our Japanese owners and the recovery of our urban markets. But with each passing day, we become more confident that it's just a matter of time before we see a recovery there as well. And of course, we're maintaining our vigilance and cleaning procedures to ensure that our guests feel safe and comfortable as they return to our properties. I'm also excited to report the results of yesterday's shareholder vote, which was an overwhelming approval of the Diamond acquisition. We appreciate this vote of confidence from our shareholders, and we're looking forward to closing the deal in the coming days. With today's results and the strong momentum that Diamond is also carrying, we're in a terrific position to start our journey as a combined entity. So let's get…

Thank you, Mark, and good morning, everyone. As Melnyk mentioned in his introduction to our call, our results for the quarter included $42 million in sales deferrals impacting reported revenue and net deferrals of $22 million, impacting both adjusted EBITDA and net income. All references to consolidated net income, adjusted EBITDA and real estate segment results on this call for the current and prior periods will exclude the impact of deferrals and recognitions. Let's review the results of the quarter. Total revenue in the second quarter was $376 million, up 41% sequentially from the first quarter. We saw sequential improvements in all of our business lines, led by an over an 80% sequential improvement in our real estate revenue. Q2 reported adjusted EBITDA with $92 million, which was up from $60 million last quarter. EBITDA margins for the quarter were 24.5% and were up 230 basis points from Q2 2019 levels. The improvement was driven by strong results from our real estate and rental businesses as top line trends improved, and we've maintained solid cost controls. As we noted in our press release, we had $2 million in COVID-related benefits in the quarter pertaining to employee retention credits stranded under government assistance programs in the U.S. and Japan that were included in adjusted EBITDA. Removing this benefit would put your comparable adjusted EBITDA for the quarter at $90 million. Net income for the quarter was $31 million. Within real estate, contract sales were $259 million or 71% of Q2 2019 levels on tour flow that more than doubled from the first quarter. VPG was just under $4,400 and remains elevated versus 2019 levels. But it has started to normalize and was down 6% sequentially and down 8% against all-time high levels we saw in the second quarter of last year.…

[Operator Instructions] Our first question comes from the line of David Katz with Jefferies. Please proceed with your questions.

I wanted to ask about your Diamond. We're obviously waiting with bated breath, as I'm sure you are to get Diamond closed. Can you just talk about the to-do list immediately upon closing and give us a sense for what that might look like once you get done?

Sure, David, this is Mark. Look, we are extremely excited about this opportunity. And the teams have been working tirelessly to develop our plans, and we have a very, very detailed integration plan that charts out how we're going to be integrating the two companies together. But probably -- let me provide a little bit of color on how we're looking at the rebranding process. And as you know, the rebranding of Diamond and launching a new membership offering are really essential to driving the revenue synergies. Our plan right now is that we're going to be introducing a new compelling membership offer as early as next year, the first part of the year. And the plan is really to position all of our consumer-facing promotions and all of our marketing to be all unified under the Hilton Grand Vacation Company brand. So as we talk to customers out there, as we promote our products and offerings, it's going to be all under the integrated brand. Today, as you know, Hilton Grand Vacations has its own point-based club membership program. Diamond has its own point-based membership program. It's early next year, we're going to be offering one new membership program under the HGV flag, and we're going to be using one consistent currency for points. And so that's going to really help us better manage the value proposition and importantly, create a lot of value in what we're going to be offering. From a property standpoint, HGV today has two brands. We've got the Hilton Grand Vacation brand, which is our upper upscale brand. We have the Hilton Club Grand, which is our luxury offering. As we announced earlier in the year, we are going to be launching and converting the Diamond properties over to our new upscale brand at…

It does. And while I have follow ups, I'm going to respect Mark's rules and get to the back of the line.

Our next question comes from the line of Patrick Scholes with Truist. Please proceed with your question.

Not so dissimilar to the question I asked to Marriott Vacations and also, just to let you know, on the call yesterday. How should we think about the loan balance portfolio going into next year? And I guess, why don't we just use the legacy portfolio without the acquisition. How should we think about that balance versus what you were for 2019? And as it relates to expectations for the interest income from that?

Patrick, it's Dan. Thanks. With regards to our portfolio balance, we're in a bit of a different dynamic than the two other individuals that you asked a similar question to. We're -- as you know, in 2018, we announced a large inventory investment in owned inventory, which was really shifting the mix of what percentage of our contract sales were fee-for-service to actually owned/developed. So from that perspective, remember that the portfolio under fee-for-service stays with the developer, we only service those portfolios. We do not garner the benefit of the financing than mortgages. So as we shift to owned, which started in 2018, you'll see our portfolio start to grow. And that will be consistent with Diamond because all of their inventory is actually owned as well. So what you'll see -- what I would say is we have officially bottomed out from our portfolio, and we expect to grow from here. Now 2021 -- and 2021 is clearly not going to be back to where 2019 was. If you're looking to the -- in a similar neighborhood in 2022, probably slightly below because you do have to build back up. As you'll recall, the pre-COVID portfolio balance is about $1.3 billion, and we're now down to $1.1 billion, but we anticipate growth going forward, especially on that front.

Okay. And then just a quick housekeeping follow-up. After the issuance of the shares with the Diamond transaction, just for modeling purposes, what would be the diluted share count? And I note in the earnings release, you didn't give it for what it was at the -- for 2Q. So what should we be ballpark using for modeling?

Well, gosh, I want to say, which is round numbers, is $88 million plus $34 million.

[Operator Instructions] Our next question comes from the line of Brandt Montour with JPMorgan. Please proceed with your question.

A quick follow-up, Mark, to your explanation of the new sort of umbrella membership program for the combined system. I guess the question is, does that program require legacy HGV deed owners to opt-in or upgrade into that program or trade in into that program? And do you need a certain level of that activity in, let's say, Hawaii for -- because there's a lot of Japanese owners in Hawaii for and OUS potential buyer to buy -- to build assets in Hawaii. Can you just explain that a little bit more because it's obviously pretty complex?

No, you're right. It is, Brad, anyway, very good question. It is complex. And obviously, I just touched on some of the complexity and some of the strategy. What's going to happen going forward is anybody that's bought in the past, whether it's an HGV member or a Diamond member, their rights to what they purchased in the past will not be disrupted at all. So they will continue to add their current rights under their current program, current membership. What we're launching is a new membership. So the new membership, the requirements to Diamond new membership is you can either buy the membership outright or if you upgrade going forward? Whether you upgrade into any one of our 3 brands, you will then get the new membership. So this is really incremental. So we're going to be basically starting from 0 and building a new member. We're going to be offering this new membership going forward. So hopefully, this will be an incentive to drive additional upgrades. We think the value proposition will be much better for our new buyers is we'll have wider price points. And we also know that this will help our ability to reach even deeper into the Hilton database.

Okay. That makes a lot of sense. And then also on Diamond, just what you've learned over the last 3 months about their business. And I guess, specifically, you did mention that their recovery is mirroring yours. If you could add any color to that, how the Diamond consumer is faring and yes, how that business has performed over the last few months, that would be helpful.

Yes. We said it in our prepared remarks that they're performing very well. And the recovery is based on what we've heard over the last couple of days and really at the top of the industry. And I think a lot of it has to do with, first of all, great execution, but their footprint of drive-thru in regional markets. This is really playing out well in this recovery of the pandemic. Obviously, after we close, we'll be in a better position to share more on the business. And we look forward to really updating everybody on the progress going forward, but we're very pleased with the momentum of their business, and it really sets us up well as the momentum of our business has also been very, very positive to -- the timing couldn't be better really to put these 2 companies together.

And Brandt, this is Dan. Just on that point, Diamond is planning to release their -- their second quarter earnings, I believe, tomorrow and posted on the website, very similar to what they did in the first quarter. So you'll be able to see that directly from them tomorrow.

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to Mark Wang for closing remarks.

All right. Well, thanks, everyone, for joining us this morning, and thanks again to all of our team members for their hard work and dedication and providing our guests with a safe and memorable experience when they're traveling with us, and we look forward to talking to you in a few months. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.