Good morning, and welcome to the Hilton Grand Vacations Second Quarter 2023 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 number 13735180. 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 Instructions] I would now like to turn the call over to Mark Melnyk, Senior Vice-President of IR and G&A. Please go ahead, sir.

Thank you, operator, and welcome to the Hilton Grand Vacations second quarter 2023 earnings call. As a reminder, our discussions this morning will include forward-looking statements, actual results could differ materially from those indicated by these forward-looking statements. 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 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. 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 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 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 construction related deferrals and recognitions for all reporting periods. The complete accounting of our historical deferral and recognition activity can be found in the Excel format on the Financial Reporting section of our Investor Relations website. In a moment Mark Wang, our President and Chief Executive Officer will provide highlights from the quarter in addition to an update of our current operations and company strategy. After Mark's comments, our Chief Financial Officer, Dan Mathewes will go through the financial details for the quarter. Mark and Dan will then make themselves available for your questions. With that let me turn the call over to our President and CEO, Mark Wang. Mark?

Good morning, everyone, and welcome to our second quarter earnings call. I'm happy to report we had another solid set of results. Contract sales were $612 million, and EBITDA was $252 million with margins of 25%. Tour flow growth of 21% continues to stand out in this environment, which is critical to growing our member base and embedding future value into the business. And our investment to drive new buyer demand is paying off with new buyer transactions and the mix of tours at their highest level since the beginning of the recovery. For demand indicators also remain robust, suggesting ongoing support for leisure travel. Arrivals remain ahead of last year and should support further occupancy improvements in the back half of the year. We've made additional progress with our package sales, setting new records in both the size of the pipeline and the number of activated packages and the growth in new buyer tours continues to outpace that of owner channel. So the demand indicators that we see in our business remain healthy and point to the prioritization of leisure travel and a growing share of consumer wallet. The consumer macro environment is a bit more uncertain today, but with our large base of members and ability to source from the growing Hilton Honors database, we have the advantage of generating our own tour flow from a high-quality source, and we're further refining our approach to driving additional tour growth with new initiatives like the expansion of our digital sourcing capabilities and HGV Max platform. So overall, I remain confident in our focus on driving tour growth at NOG, and I'm really happy with the execution and our ability to adapt to the environment. Before we get into details of the quarter, let's start with an update on our…

Thank you, Mark, and good morning, everyone. Before we start, note that our reported results for this quarter included $6 million of sale deferrals, which reduced reported GAAP revenue associated with the presales of the newest phase of our Sesoko project. We also recorded $2 million of associated direct expense deferrals, resulting in a net benefit of $4 million to our reported EBITDA for the quarter. In my prepared remarks, I'll only refer to metrics, excluding the impact of 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 in the second quarter grew 6% versus the prior year to just over $1 billion. All segments again showed year-over-year top-line gains led by strength in our financing and Club and Resort segments. Q2 reported adjusted EBITDA was $252 million with margins of 25% or 28% excluding cost reimbursements. Turning to our segments. Within real estate, total contract sales of $612 million were just shy of last year's levels, which was encouraging given that we were lapping another very difficult comparison with record KPIs. Core growth of 21% continues to be very strong overall, and our efforts to drive new buyer tours resulted in another impressive quarter of growth, with tours up nearly 30% in that channel. We also saw further improvement in the size of our tour package pipeline and the mix of activated packages, which will help to sustain a solid pace of new buyer tour growth. For the quarter, new buyer contract sales made up 32% of the total, which was the highest mix of new buyer sales since the third quarter of 2019. VPG was just over $3,700 for the quarter, which was down against the near-record VPGs of the prior year,…

Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Patrick Scholes with Truist Securities. Please proceed with your question.

Hi, good morning Mark and Dan.

Good morning.

Good morning. Mark one thing I found very interesting in your prepared remarks. And sometimes what you don't say as opposed to what you do say, and I'll compare and contrast this to other hotel companies or some other timeshare vacation ownership companies that have reported. You really didn't call out tough comps for the back half of the year as it relates to domestic leisure. I'm wondering what's different for you folks. Is it the fact that the Japanese is still coming back, never certainly fully return back? Or what might be different for you folks? Thank you.

Yes. Well, I think, Patrick, you hit on [Technical Difficulty] we are seeing a recovery, especially in the back half of the year of our Japanese owners coming back. But I think when I look at just kind of the outlook, first of all, everything we see on the books is really strong. Arrivals on the books are up 10% versus the same time last year, right? And so we feel really good. Our owners are booking. Our owners are up 108%. Our marketing packages are up 114%, and that's really due to the great work our teams have done, activating our package pipeline. We have the industry-leading pipeline of over 560,000 packages sold to-date, and those are all sourced through Hilton. So that gives us a really good line of sight. So all in all, I think we're in a really good position to grow our tour flow. And capitalize on the opportunity with the great inventory we have and HGV Max has surely been a great success for us. We exceeded over 100,000 members in just a year now. So I'd say we feel really good about tour flow and our expectation is new buyer tour flow will continue to grow faster than our owners. We are seeing that there's going to be a moderation in VPG that we saw in Q2, and we still think it's around that 10% to 15% range. So there are difficult comps there, but they do get a little easier on the VPG side as you go through the year. But as a reminder, look, we're focused on recovering our new buyer tours, because it's such an important part of our long-term strategy. When you think about the valued embeds into our system, it's really important. Approximately 32% of our revenue is captured on that first sale. So in essence, we get 68% of the value add owner that's tied to -- after that initial sale, and we know it's really important to continue driving those new buyers through the system. And I think last quarter, we were about 36% of our transactions. So we're -- our goal is to get back up to 40%. Diamond, when we acquired them, they were about 80-20, and they had taken out 40,000 tours. So we had a steep climb and then we are climbing it. And so all in all, I feel pretty good about the back half. I don't know if that really covers what you're looking for. And Dan can give you a bit more color…

A little more color on the Japanese...

Sure. Before we jump the Japanese, just to cover off on arrivals. Mark mentioned club arrival is being up over 100%, 108% and marketing arrivals being up 114%. The rental arrivals are also up. They're up 105%-plus. So we're seeing all arrivals up for the back half of the year when you compare it to 2022, just to shore off the three components. Yes. And then on the Japanese side, it's really -- we're seeing a recovery both in Japan and our Japanese coming to Hawaii. Now I made a -- I provided a data point, I think, a call or two calls ago that we were seeing about 25% of all Japanese arrivals into the Island of Oahu were HGV-related. This last quarter, it was 16%. Pre-pandemic, it was at just under 10%. So the good news, our owners are coming back faster than the general population of the Japanese. Now we obviously want to get more Japanese traveling to Hawaii, because we do a good business, a good amount of new buyer business there. But it's going to come back. It's just going to take longer. Our expectations now is it's going to be well into '24 before that fully recovers. But we did see some really good movement in the quarter and by year's end. We're expecting to be almost back to 2019 levels for arrival. So really pleased with what we're seeing there. And then the Japanese business in Japan is also recovering. There's a lot of domestic. It's not like the Japanese aren't traveling. They're just traveling heavily domestically. And so with our new property in Sesoko, Okinawa, that's -- that we're seeing great occupancies there. So all in all, we're happy to see that business coming back finally.

Okay. Thank you. Certainly, impressive trends for a domestic leisure company, you listen to a lot of earnings calls so far this quarter. And I would say, next to the cruise lines, which have probably the easiest of easy comps. To me, it sounds like you have the best going for you, at least for the back half of this year for a domestic leisure company. My follow-up question. When I think about historically the Diamond customer and the legacy HGV customers, certainly, the legacy HGV customer higher financial demographic, more mass market for legacy Diamond. Any differences right now in propensity to spend or take a tour? And anything you're seeing in the spending -- the leisure spending habits between sort of those two legacy customers? Thank you.

Yes. I would say there is -- we're not seeing a whole lot of difference. I think we're -- there's pretty good consistency on the purchase trends across those two customer sets. I would say that we're probably seeing a stronger occupancy of owners coming back to on the HGV side coming back to the property and maybe less -- a little bit less demand for the diamond members coming back at this point. But what's really encouraging is we've seen now 90,000 room nights through MAX where HGV members are taking advantage of the new destinations that MAX offers across the portfolio. So really encouraged about that. But all in all, I think from a propensity-to-buy standpoint, we're seeing pretty similar trends across the board. I don't know, Dan, is there any differences on the delinquencies?

No, I was just going to add what we're also very pleased with, and I've said this on previous calls, but it's definitely worth repeating. When we look at the Diamond portfolio versus pre-acquisition, it's improved materially 500, 600 plus basis points from a default rate perspective. And even if you look sequentially on default greater than 30-days on the Diamond portfolio, it's actually improved, not much. It's relatively flat, but you see improvement sequentially. So that, combined with our propensity to borrow on the HGV side being back to historical norms is encouraging. On the diamond side, it still trails pre-acquisition, but that's really driven virtually 100% by the fact that we've eliminated our low down payment program. So we are enforcing the 10% down payment upon original purchase rather than allowing people to do a low-turn down payment program, which historically has just underperformed from a delinquency default perspective. So the resiliency on the diamond side is really strong and very much akin to HGV just from a movement perspective. So that's encouraging.

Okay. That’s it from me. Appreciate the color. Thank you.

Thank you. Our next question is coming from the line of Brandt Montour with Barclays. Please proceed with your question.

Hey, everybody. Thanks for the comments and taking my question. Just one for me. One of your timeshare peers had called out close rates that were softening throughout the quarter and into July. It felt like maybe a normalizing common versus last year, your VPG was down a lot. It looks like it was more due to mix. So I'm just curious if you want to comment on sort of -- just sort of owner close rates versus owner close rates throughout the quarter and then new owner close rates versus new owner close rates throughout the quarter?

Yes. So look, I think, Brandt, we don't really break that down, but I will say that owners continue to trade up at a very robust rate above what we saw in 2019 at historical levels, right? And then I'd say new buyers are really moderating quicker back down to what you would call historical levels. So -- but still, all in all, very healthy VPGs, we're still 17% above where we were in ‘19. And so yes, it's -- look, it's a bit harder today with the new buyers. And if it took us nine new buyer tours to generate a sale today has taken us approximately 10 new buyers. And obviously, the backdrop is -- continues to evolve right now in the environment it evolves. But I think, all in all, still very pleased with the performance. It's nice to be in a full-employment environment. Even though you have a lot of noise out there. But all in all, I think we feel pretty comfortable that we're going to still fall in that range. It will probably settle in that 10% to 15% range that we've been talking about for a while. And really the biggest driver on overall close percentage will be the cadence of new buyer tours. And based on the way we see the forward bookings we're going to continue to see new buyer tours grow at a pretty material difference than our owner tours. Even though with one tours last quarter grew at 10%, we had significant growth on the new buyer side.

Okay. That's super helpful. And then just sort of a follow-up. Was it consistent, sort of, throughout the quarter, the close rates? Or do you see sort of an exit at a more normalized rate than when you came in?

Yes. So we actually saw an acceleration coming out of the quarter. And I think one of the things too, Brandt, that I really want to point out is we're willing to trade off a little bit of close rate in the short-term as we ramp up these new channels and then make them more efficient over time, like in our digital channel, I talked about in my prepared remarks, it's our second largest new buyer tour channel now, and it has grown significantly. And we continue to work that channel. We think it's got great potential. But it's also -- it has challenged us a little bit on VPG, but the cost of generating that tour is lower than it is to generate it in other channels. But at the end of the day, this is an investment. And so like I said, we're going to make some trade-offs sometimes to get that ramp. And that's kind of the period we're going through right now.

Great. That’s all helpful color. Thanks a lot.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from the line of Rita Chan with Jefferies. Please proceed with your question.

Hi, thank you for taking my questions. I’m just wondering if we can come back and talk a little bit more on the consumer travel trends that you've seen, particularly dynamics around inbound and outbound travel?

Yes. Look, I think what I can -- I think when you think about -- what we're seeing is we are seeing arrivals on our books for the balance of the year, up 10% versus the same time last year. And I think, I already talked about the fact that owner tours are actually back at historical levels, and that's because arrivals are back above historical levels. Our new buyer tours are approaching 90% of where we were in '19, and that is again a reflection of the fact that we keep building our pipeline and our activation continues to grow. So all in all, I feel like the backdrop for leisure travel remains very strong. And our teams have done a really good job on the rental side. When you look at the rental side, we have seen some leveling off on rate gains after some big growth over the last year. But our ADRs in Q2 were still up over last year. And you have to remember, our model always creates its own limited supply for rental inventory. And when you look at our performance, we tend to outperform on STR. We track our STR and we almost -- we tend to outperform almost in every market. And that's -- part of it is because we were able to manage our supply by, we've got this built-in demand from our owners that are looking up 50% of our room nights, and then we have our marketing pipeline that's taking another nice piece of the supply there. And then we're able to yield better on the remaining room nights we have. But on the books, we're showing, I think, 108% in the second half for rental. And again, some pressure on ADR and where we saw ADRs in the highest markets. But ultimately, demand looks fine still.

Yes. And I think the only thing I'd add to that is even if you look at the various geographies, nothing really stands out or as really good or really bad. It's relatively consistent. And Mark talked about the packages. I mean, the one thing that we haven't highlighted -- I may have had this in my prepared remarks, but just the activated packages year-over-year, those improved 66%, which obviously is a leading indicator that people are willing to utilize those packages and year-to-date, it's up 66%. So some really strong growth there and some really good solid demand.

Yes. And I'd argue that our packages, right, these vacation packages are even more compelling in this high -- inflationary high rate environment today. And I think the value proposition of those packages are stronger than they've ever been.

And that pipeline of $560,000, the percent activated is actually the highest level of spend since 2017, just to put things into perspective.

Great. Thank you so much for the color.

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

Yes. Well, thank you, and thank everyone for joining us today. I want to give a special thanks to our team members for going above and beyond to deliver outstanding vacation experiences to our members and guests, and we look forward to speaking with you soon. Thank you.

Take care.

Thank you. Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.