Hilton Grand Vacations (HGV) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Club and resort revenue reached a record $155 million, driven by new buyer growth and increased member activity [1] - Contract sales for the year were a record$2.4 billion, with EBITDA of $1 billion, nearly 40$563 million, significantly ahead of pro forma 2019 cash flow, with a return on invested capital of over 20% [7] - Total revenue in Q4 was just under $1 billion, with year-over-year growth in all segments, led by real estate and financing [8] - Q4 adjusted EBITDA was$253 million with margins of 25% [8] - VPG (Volume per Guest) for the quarter was $4,350, growing against prior year and 2019, and finishing 31$243 million, or 38% of gross contract sales [13] - Real estate profit for the quarter was $172 million, with margins of 36$71 million, with segment profit of $34 million [14] - Combined gross receivables for the quarter were$2.5 billion, or $1.8 billion net of allowance, with interest income of$65 million [15] - Annualized default rate for consolidated portfolios was 7.9%, over 100 basis points lower than last year [17] - Provision for bad debt was $39 million, or 9$160 million in the quarter, with segment profit of $7 million [19] - Adjusted free cash flow in Q4 was a use of$92 million, including inventory spending of $73 million and excluding acquisition-related costs of$40 million [23] - For 2023, total inventory spend is expected to be approximately $400 million versus$175 million in 2022 [26] - The company repurchased 2.5 million shares of common stock for $100 million in Q4, and 7 million shares for$272 million for the year [27] - Liquidity position as of December 31 includes $223 million of unrestricted cash and$959 million of availability under the revolving credit facility [29] - Total net leverage at the end of Q4 was 2.4 times [35] Business Line Data and Key Metrics - Within real estate, total contract sales were $634 million, with strong sales momentum in the owner channel and a recovery in the new buyer channel [9] - New buyer tour flow and contract sales pace improved significantly from the first half to the second half of the year, driving NOG (Net Owner Growth) of 3.9$34 million in Q4, with a one-time non-cash true-up adjustment of $9 million related to the acquired Diamond portfolio [14] - Consolidated member count in the resort and club business was 519,000, with NOG of 3.9$155 million for the quarter, with segment profit of $112 million and margins of 72$160 million in the quarter, with segment profit of $7 million [19] Market Data and Key Metrics - System occupancy was 79$14 million in Q1 due to timing shifts in Diamond's member benefit expense, which will reverse in the second half of the year [21][22] Company Strategy and Industry Competition - The company has built a strong foundation for 2023 and beyond with new membership, programming, destinations, and rebranded resorts, enhancing its value proposition [3] - The company is focused on creating shareholder value through operational improvements and capital returns [3] - The company has successfully integrated Diamond, achieving cost synergies ahead of schedule and creating real economic value [6][105] - The company is committed to driving new buyer sales and NOG, with a focus on tour flow growth in 2023 [46][107] - The company has rebranded Diamond's largest properties and plans to rebrand nearly a dozen additional properties in 2023 [103][107] - The company is leveraging its direct sales approach and high-quality customer base from Hilton Honors to drive transactions [64][65] Management Commentary on Operating Environment and Future Outlook - Management is proud of the progress made on integration and the creation of shareholder value through the Diamond acquisition [6] - The company expects continued normalization of VPG performance against 2019, with a decline in Q1 2023 compared to the record VPG in Q1 2022 [12] - The company is optimistic about 2023 and beyond, with strong demand for leisure travel and a high level of engagement from its member base [100] - The company is monitoring the macro environment but believes its leisure focus and strong value proposition position it well for ongoing shifts in consumer spending preferences [97] - The company has set 2023 adjusted EBITDA guidance to a range of $1.09 billion to$1.12 billion, implying EBITDA growth of 4% to 7% [33] Other Important Information - The company identified a material weakness related to Diamond's internal controls, but it does not impact business operations, financial results, or historical financials [30][70] - The company has a remediation plan in place and expects to resolve the material weakness expeditiously [30][73] - The company has repurchased an additional 1.8 million shares for $80 million through February 24, with$148 million remaining under the $500 million repurchase plan [32] Summary of Q&A Session Question: Feedback on rebranding sales centers and properties - The company has rebranded all legacy Diamond sales centers and implemented HGV's selling technology and approach, with positive results in tour flow and revenue synergies [39][40] - The company has started marketing rebranded properties to Hilton Honors members, with 72,000 packages sold and guests beginning to arrive [40] Question: Fee-for-service mix and outlook - The fee-for-service mix is expected to decrease to 20%-25% in 2023, driven by the pipeline being primarily owned inventory [41] Question: Granularity on forward trends - New buyer tour flow is outpacing other channels, with expectations of strong tour flow growth in 2023 [46][47] - VPG is expected to moderate as the mix shifts to more new buyers, with a target of 10%-15% above 2019 levels [50] Question: Contingencies and sensitivities in a potential recession - The company is mindful of macro impacts but sees strong demand for travel and prioritizes NOG as core to its strategy [61][63] - The company believes its direct sales approach and high-quality customer base provide resilience in any environment [64][65] Question: Balance sheet and leverage management - The company is currently 2.4 times levered and plans to maintain leverage in the range of 2-3 times, with flexibility to adjust inventory spend if necessary [66] Question: Material weakness related to Diamond - The material weakness is related to Diamond's lack of investment in internal controls, particularly user access controls, but does not impact financials or operations [70][71] - The company has a remediation plan and expects to resolve the issue expeditiously [73] Question: Close rates and provision for bad debt - Close rates have been running approximately 400 basis points ahead of 2019 levels but are expected to moderate as the mix shifts to more new buyers [76][78] - The provision for bad debt was 9% in 2022 and is expected to increase but may not fully reach 15%-16% in 2023 [80][81] Question: Quarter-to-quarter volatility in adjusted EBITDA - The company does not provide specifics on quarter-to-quarter volatility due to the timing of specific feed projects and consumer choices [84]